Neutral Citation Number:
[2002] EWHC 2227 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts
of Justice
Strand, London, WC2A 2LL
Monday 4th November 2002
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Before:
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Between:
Claimant
- and -
Defendants
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Mr Hodge Malek Q.C.
and Mr Tony Oakley instructed by Russell-Cooke for the Claimant
Miss Amanda Tipples instructed by Wright, Son & Pepper for the 3rd Defendant
Mr M. Wonnacott instructed by IBB Solicitors for the Fifth and Sixth Defendants
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1. From September 1999 a solicitor, Richard Michael James Prentis, practising as a sole practitioner in Sheffield under the name of Richard Prentis & Co., caused advertisements to appear in the Yorkshire Post, the Daily Mail, The Daily Telegraph and the Financial Times. They described what he called the 'Secured Property Investment Plan'. That 'plan' ('the SPIP') offered a fixed return of 15% per annum on sums invested. Mr Prentis drew attention to the fact that he and his firm were regulated by the Law Society in the conduct of investment business. The advertisements and the SPIP attracted over £6m from between 400 and 500 investors. A number of the advertisements, with a candour that may have disarmed some of those responding to them, asked, of the 15% annual return, whether it was 'too good to be true?'. That, unfortunately, proved to be the case. The Law Society intervened on the 2nd June 2000. Looking at assets and obligations globally, there are very substantial short-falls, both as to capital and income. New trustees were appointed and these proceedings began. This hearing has been concerned with some questions of broad principle, answers to which are needed to assist the present trustees to determine how the assets now held are to be distributed. It is recognised that there will need to be one or more further hearings to deal with distributions in more detail once the practical effect of the answers given in this judgment have been worked out.
2. I will need to look at Mr Prentis' publicity in more detail later but will first describe how, in general, the SPIP worked.
3. At first those learning of the offer were not invited to send money with their initial response; later they were. But, in either case, prospective investors would have received a brochure (with or including a 'question and answer' passage) before parting with their funds. Money thus received went into the Prentis No.2 Client Account, a Solicitor's client account. A letter of receipt would be given to the investor, who would by then have completed a simple application form. The receipt gave the investor a 'roll number'. The form of the receipt letter varied but suggested that an 'allocation and registration' process would be completed within 17 days of the investor's cheque clearing, that during that period the money would be in a client account attracting 2% per annum interest but that once the investment was 'utilised and registered' interest would accrue at 15% per annum.
4. The intention, not by any means always implemented (as I shall later explain) was then that the sum received from the investor would be allocated (alone or, more generally, after aggregation with sums received from one or more other investors) to a short term loan made to an identified borrower, who was to give a first legal charge (either on its own or with other security) charging his or its property with repayment of the loan and of payment of interest in the meantime at 15% per annum.
5. Whilst the investors were told that no deductions would be made from the 15% interest paid by the borrowers but that it was the borrowers who would be charged legal fees, arrangement fees and administration fees, a feature of the operation of the SPIP, of which the investors were not made aware, was the sheer scale of the deductions made from the gross sums charged by the borrowers on their properties. Out of gross loans of £5.56m some £969,000 was deducted as financing fees, broker's fees, legal fees, life cover and insurance premiums and as interest prospectively payable on the gross advance made. Needless to say, borrowers willing to pay 15% per annum and to suffer deductions on such a scale, despite their being able to offer first legal charges, were likely often to be borrowers little short of desperate and who were likely to have been spurned by more orthodox financiers.
6. A completion statement would be sent to the borrower and the deduction of the gross amount of the loan would be made from the No.2 client account.
7. A Deed of Legal Charge would be prepared in respect of the gross sum of the loan. In the case of the first eight of the twenty loans and also in the case of the 18th loan (SPIP 1039), all made before the Law Society intervened, the Legal Charge expressly identified one or more named investors as chargees. Such charges make no mention of Mr Prentis or his firm and provide for payment of interest to 'the Mortgagee', effectively therefore to the named individuals identified as chargees (or, if there were more than four, to the first four of the named individuals). For the ninth and subsequent loans, (the 18th apart), that system was not adopted; in these cases the mortgagee was described as 'Richard Prentis & Co., Solicitors' with a form of words added such as '(acting on behalf of its clients details of whom are shown in the attached schedule)'. It cannot be said in every case that there was, at the point of the completion of the legal charge, an attached schedule giving details of clients, or indeed, any attached schedule at all. Such legal charges as I have seen make no reference to the SPIP or to shortfalls or surpluses arising in relation to other chargees or other investors.
8. In all but one case, that being the case where the investor was a Mr O' Dwyer, the investors were not consulted nor gave directions as to the particular property over which a charge to secure their investment or, as the case might be, a part of their investment, would be taken. Save in the O' Dwyer case, investors did not have details of their security until each respectively received a copy of the relative Legal Charge or a 'Certificate of Mortgage Investment', to which I will refer in more detail below.
9. Where interest prospectively due had been deducted from the gross sum advanced, (as it was in all but four loans), it was, in general, taken from the sum advanced out of the client account No.2 and paid into Client Account No.3, which was an account intended as a vehicle for the receipt and distribution of interest paid by borrowers and due to investors.
10. A 'Certificate of Mortgage Investment' with an accompanying letter would be sent to the investor whose investment had been allocated. It indicated the name and address of the investor, the amount of his investment and the address or addresses and Title Numbers of the property or properties within the charge or charges taken as security, the date or dates of which were given in the certificate. Such Certificates (at any rate, one might think, in cases after those in respect of the first eight loans) included a passage saying:
This Certificate confirms that the investor has invested the above sum which is secured by way of legal charge over the secured property address. The Legal Charge will be held in the name of Richard Prentis & Co. solicitors on behalf of the investors. The firm of Richard Prentis & Co. retains the legal charge.
It may have been that, even in the case of the first eight loans, some such a Certificate was used.
11. There was no strict correlation between the aggregate of the sums described as the investment in such certificates and the amounts charged by the chargees described in the legal charges there referred to; it cannot be taken, for example, where the investment is described as £10,000 in the Certificate and where a charge was identified in the certificate referring to particular identified charged property, that that investor had truly had £10,000 of his investment allocated to the loan secured by that charge. The sum described as the investment was, at least in some cases, the total invested by that investor, whose investment had in fact been allocated to more than one loan and who had received more than one certificate in respect of it. An investor who had provided £10,000 might thus end up with a number of certificates, say three, each giving details of legal charges and each describing the amount invested as £10,000, thus giving the appearance of a total investment of, in that case, £30,000.
12. Interest was paid to investors on the sum invested. Most commonly it was paid monthly. From the date of receipt of the investor's cheque the first five days attracted no interest, the next 17 attracted interest as 2% per annum and thereafter it was paid at 15% per annum. There was no strict correlation between interest received or deducted in advance from a particular borrower and interest paid to the investor or investors to whom a charge from that borrower had been allocated. Nor was such prospective interest as had been deducted from the gross loans immediately paid on to the investors allocated such loans. Interest was paid at 15% per annum after the initial period whether or not a particular borrower had paid it (either in advance or at all) and, indeed, whether or not the investor had had his investment allocated to any particular loan or loans. By the time of the Law Society's intervention, no-one in respect of whom the initial period had elapsed had not been sent interest calculated at 15% per annum.
13. Neither Mr Prentis nor his firm kept a cash book for any of the relevant bank accounts, nor a day book of receipts from investors, nor a complete list of investors, nor a ledger record for each investor; borrowers' ledgers were kept for only 13 of the 20 loans. The Prentis records include no record or reconciliation between the investors' moneys allocated to each particular loan and the amount of the loans to particular borrowers. Such records have been the subject of a comprehensive analysis by Mr Simon Marsh B.A., A.C.A. on instructions from the Trust Company and the Law Society. His report of 4th September 2002 ('the Accountant's Report') is the source of many of the facts to which I refer. He has traced £6,324,720.35 as investors' monies deposited in accounts in the names of Richard Prentis & Co. and the associated company (to which I need not otherwise refer) of Richard Prentis & Co. Ltd. As at 2nd October 2002 the best estimate was that in relation to what by then were debts to investors of £7.8 million there would be a likely deficiency of £3.66 million. Apart from the many specific conclusions in the Accountant's Report, a more general one was that the SPIP and the Prentis records were not in the state that might reasonably be expected to enable the SPIP to be fully and adequately recorded and properly controlled either for the investors or the borrowers.
14. The 'plan' operated by Mr Prentis was, unhappily, not unique. It was believed to have been inspired by a not wholly dissimilar plan operated by or under the control of another solicitor, Allen Phillip Elliott. In the Elliott case the Law Society had intervened on 20th March 2000. Proceedings - HHC-OO-01425- in relation to Mr Elliott's dealings were heard by Laddie J. in March 2001 and July 2001. I shall later be referring to some conclusions in the judgments given in the Elliott case.
15. To revert to the Prentis case, the Law Society intervened as to the practice of Mr Prentis and his firm on the 2nd June 2000, as I have already noted. At first, the initial intervention was challenged. There was a second intervention on 23rd August 2000. Later the challenge to the first intervention was dismissed. Mr Prentis has been struck off the roll of solicitors of the Supreme Court. The effect of the intervention was, inter alia, that Mr Prentis' Practising Certificate was suspended and he and his firm were unable to act as trustees in relation to trusts conducted by them in connection with their practices as solicitors. By orders and directions given by the Court which are in no way disputed and which I therefore need not describe in any detail, the Russell-Cooke Trust Company, a custodian trustee company, has (with only limited exceptions) become trustee of all assets, including money and trust accounts, for the time being representing or attributable to the SPIP and is claimant before me.
16. As claimant, that Trustee Company, in proceedings begun on 13th December 2000, sought directions and was directed to raise particular issues (which I shall later identify) and to circulate investors. Later, representation orders were made. The chief issue directed to be ruled upon is whether the SPIP created (i) one investment scheme or (ii) as many investment schemes as it made loans or (iii) some investment schemes, with remaining loans forming one composite investment scheme.
17. The present position is as follows. Mr Hodge Malek QC and Mr Tony Oakley appear for the claimants, the Trustee Company. As counsel, they had a similar role in the Elliott litigation. The first and second defendants, Mr Prentis and his firm, have taken no part before me. The third defendant, Mr K.P. Wright, represents all investors who contend that the SPIP created one investment scheme. He appears by Miss Tipples. The fifth defendant, Mr J.R. Adams, represents all those who contend that the SPIP created as many investment schemes as there were loans. He appears by Mr Wonnacott. The sixth defendant, Mr M.S.P. Gardner, represents all those who contend that they had uninvested funds at the date of the Law Society's intervention on 2nd June 2000. He, too, appears by Mr Wonnacott. The fourth defendants, Mr and Mrs A.J. Booth, were originally joined to represent those investors who contended that the SPIP created both some independent investment schemes and a remaining composite scheme, but it was later ordered that they need not be represented by independent counsel at the hearing and they have not, in fact, appeared or have been represented at all. It was, it seems, felt that to the extent, if any, that the argument for Mr Wright or Mr Adams failed, the position that Mr and Mrs Booth would have argued for was already covered. The outcome, unsatisfactory in my view, has been that there has been no positive and independent argument for the position which Mr and Mrs Booth would have contended for. Finally, defendants 7-20 inclusive are investors who, by the date of an order of the Court made herein on the 20th December 2001, had not indicated that they agreed to accept and be bound by the outcome of these proceedings. In the event, none has taken any part and each will be bound accordingly.
18. These are identified in the very thorough skeleton argument lodged by Mr Malek and Mr Oakley as follows:-
(i) the chief issue already referred to, namely how many investment schemes were created by the SPIP?
(ii) which, if any, of the investment schemes so created amount to collective investment schemes within Section 75 of the Financial Services Act 1986 (now Section 235 of the Financial Services and Markets Act 2000)?
(iii) who beneficially owns the funds in the Prentis client account No.2 at the point of intervention on 2nd June 2000 (and the assets for the time being representing the same)?
I will take these questions in turn.
19. I share Mr Wonnacott's doubt that this is an appropriate question, especially in the absence of any definition having been given for this purpose to the term 'investment schemes'. Rather the question should be upon what trusts are held the SPIP assets now in the custody or control of the Trustee Company (save for the bank balance on the No.2 client account as at 2nd June 2000 and the property representing the same)? It is, though, convenient to use the question as framed as a convenient shorthand way of referring to a choice between the three possibilities contended for, namely, firstly, as already foreshadowed and as Miss Tipples argues, that, overriding any allocations made to or for identified or identifiable chargees, all securities and other assets received under the SPIP (leaving aside true uninvested No.2 account funds as at the date of intervention) and all assets derived therefrom amount, so to speak, to one composite pool to which all investors are beneficially entitled rateably according to the respective amounts of investments paid into the SPIP. I will call that answer to the question 'the pool solution'. Secondly, as Mr Wonnacott argues, each separate security and the sums derived therefrom are held for and only for those to whom that security has been allocated, so that the trustee company holds upon a series of separate and distinct trusts. I will call that the ' ;separate trusts solution'. Thirdly, as would have been argued for by Mr and Mrs Booth, there is a position under which the trusts are in some cases separate, (as under the separate trusts solution) and partly as under the pool solution. I will call that 'the intermediate solution'.
20. It is first necessary to establish to what material one is to look to produce an answer to those questions. No-one argues that the subjective intentions of the investors are of any relevance to the questions and Mr Wonnacott refers me to Twinsectra Ltd. v. Yardley & Others [2002] 2 WLR 802 HL at 806 para. 12, page 807, paragraph 17 and page 822 paragraph 71 to underline the irrelevance of investors' subjective intentions. Instead, both he and Miss Tipples refer me to the material which invited investment and explained its intended fate. That material is wholly written; whilst there were in some cases calls or meetings with investors, it nowhere appears (save perhaps in Mr O'Dwyer's case) that anything was said or done that negatived or qualified the terms as held out in the written material, nor does any investor claim that his investment was elicited without reference to one or other of the brochures and other publicity which I shall shortly describe.
21. The first brochure ('B1') was used from September 1999 to February 2000. It refers to the (singular) 'Secured Property Investment Plan'. Peace of mind, it says, is achieved:-
... by your investment being fully secured on a portfolio of commercial property ... all funds are held in a plan controlled by an experienced leading firm of solicitors who are in turn governed by the Law Society ... the investments will be held and administered by Richard Prentis & Co. solicitors ... upon completion ... [that firm will] on behalf of the plan register any security necessary to protect the investment ... our interest rate for investors is fixed permanently at 15% per annum.
22. So far, the brochure may be thought to be tending to point to the pool solution but, sent with the brochure, were three pages of questions of a kind which Mr Prentis anticipated investors would wish to have answered and his answers to them. Amongst such passages are these:-
Funds for every loan transaction pass through the firm's client account ...
Q. Are funds ever combined with those of investors?
A. As the minimum loan [i.e. to borrowers from the SPIP] is £25,100, smaller investments are combined with the other investors' funds and each investor appears as joint first mortgagee.
Q. If my funds are combined, would my rights be affected?
A. No. The combining of funds does not affect the individual investors rights in any way. However, if a joint investment decision is ever required, the majority decision, by value, will prevail ...
Q. What do I receive to show my investment is secure?
A. You will receive:
A client account receipt issued by Prentis & Co
A mortgage investment certificate
A copy of the Charge Certificate from [HM Land Registry] showing you as first mortgagee ... in the unlikely event of default by the borrower, we take the necessary action required to repossess and market the property. All costs are paid by us in the first instance and are then recovered from the borrower ... unless otherwise agreed all mortgages are for a short term period ... demand for short term bridging loans has always exceeded the supply of funds but in the unlikely event of a delay in repaying a loan, the investors capital would be placed in our client account to your order earning interest at the current rate paid by our bank on this account until a new loan is available ... income derived from this plan can fall as well as rise.
23. Miss Tipples emphasises that, as it seems, 15% per annum was to be paid irrespective of default by a particular borrower, that security was on a portfolio, that there was nothing to suggest an investor could choose which property or even which type of property or of borrower would be within any particular charge in his favour, nor would know, in advance of the allocation, what particular charge would emerge in support of his investment. She emphasises that the plan was administered, and interest was to be dealt with, by the Prentis firm rather than by individual chargees.
24. Mr Wonnacott adds, as part of the relevant material to which reference needs to be made, the blank form of Mortgage Investment Certificate. That form (as completed) was expressly identified as one of the documents an investor would receive. An investor could, of course, have asked for a copy of the blank form in advance of his making his investment but, whether he did or not (and it is not suggested that any did so ask), that blank form is relevant material in much the same way as, for example, says Mr Wonnacott, are a railway's full terms and conditions referred to in a railway ticket, terms which are contractual whether the traveller takes the trouble to refer himself to them or not. I accept that the blank form is thus material to be taken into account.
25. The form, as explained earlier would, by its blank form, suggest that an expressed amount described as investment would become charged by way of a legal charge of a specified date upon specifically described property. That, coupled with the reference to each investor appearing as a joint first mortgagee, with the decision of the majority in value of chargees prevailing, points only, says Mr Wonnacott, away from the pool solution. As to the investors having no role (generally) in selecting the property which was to fall within any particular charge and as to the management being with the Prentis firm (to the extent that it was) that, says Mr Wonnacott, is no support for the pool solution. It is common, he urges, even in the most separate and specific of trusts, for a trustee to have wide powers of investment and management without requiring the trustee to give notice to or to obtain the approval of beneficiaries and it cannot be said that the absence of provisions, or the absence even of a practice, as to the giving of such notice or the obtaining of such approval, is in any way inconsistent with the separate trust solution or is support for the pool solution.
26. As to the 15% being payable irrespective of default, Mr Wonnacott notes the reference to income from the plan being capable of falling and rising. He also asserts that a distinction is to be drawn between contractual rights against Mr Prentis or his firm (for 15% interest to be paid irrespective of default) and the question of whether there is any proprietary right, where there is a shortfall in the interest received by one investor, against property within charges allocated to other investors in order to make up that shortfall. The existence of such a contractual right (which he accepts may exist) does not, of itself, he says, indicate the existence of such a proprietary right, which would require some description of a practical divesting from some chargees of some kind in favour of some others, a divesting nowhere even hinted at as to be included within the intended forms of legal charge, nor in fact found within the charges granted. There was nothing in B1 or the material it referred to, says Mr Wonnacott, to forbid express allocation of particular legal charges with a view to their being separate securities available to support only those to whom they were allocated and, indeed, read as a whole, B1, he urges, pointed to an obligation on the administrators of the SPIP so to allocate.
27. I accept Mr Wonnacott' s arguments as to B1 and associated material; read as a whole it at least authorises and probably requires allocation of particular legal charges to particular investors and does so without contemplating that any one chargee's rights should be either diminished or enhanced by possible reference to shortfalls or surpluses under other charges allocated to other investors. So far as concerns investors whose investments were elicited by reference to B1, I thus reject the pool solution.
28. During the rest of the period during which the SPIP operated, the publicity available as to the plan consisted of a rather grander brochure ('B2' ) in a different form and incorporating questions and answers within the brochure itself. Again there is reference to a security 'on a portfolio of commercial property' and to interest at 15% per annum. As to peace of mind, it said:-
This plan provides this by fully securing each investment on a commercial property from our portfolio. Occasionally funds may be secured on more than one property, but always by way of legal charge.
29. Investments, it said, were held in the Richard Prentis client account 'until they are secured by way of legal charge against an approved commercial property from our portfolio'. Of Richard Prentis & Co., a sole practitioner firm in which Mr Prentis was assisted by his wife and one other assistant, B2 said:
Their portfolio managers are responsible for allocating investor's funds to properties which satisfy their lending criteria.
30. In describing the sequential dealing with money received, B2, after indicating there would be placement within the solicitor's client account 'in accordance with the strict and proper accounting rules with which all solicitors practices must comply' went on to indicate that 'the funds are next allocated to an approved mortgage from our portfolio ... at this stage the investor is issued with a certificate of mortgage investment which includes all relevant information about the property, borrower and terms of the loan. Loans secured under the terms of the Plan are made to registered companies and individuals. In all cases a first legal charge is secured on the borrower's property in the name of the investor. The charge is registered at HM Land Registry and a copy is issued to the investor by Richard Prentis & Co'.
31. A little later it was said:-
Whilst the allocation and registration process is taking place the investor's funds are held in the firm's client account. As soon as the necessary legal work has been completed the investor will receive interest payments at the rate of 15% per annum during the lifetime of the investment.
There was reference to an initial period of five days given to investors' cheques to clear. The provision continued:-
In the first month of any investment term, invested funds will attract interest at the rate of 2% per annum until allocated to an appropriate secured loan transaction within the stipulated 17 day period ... On repayment of any secured loan to which funds have been allocated within the term of an investment, the capital sum is reinvested subject to the same safeguards and the same annual return of 15%.
Later in the brochure, it was said:
An investor is always entitled to the return of capital once a loan is repaid.
The incorporated questions and answers include the following:
Q. Do you allocate individual investments to separate loan transactions?
A. This depends on the amount of an individual investment. But investors funds may be combined with the funds of other investors where the advance to the borrower so requires but, in such cases, each investor is registered as joint first legal mortgagee.
Q. Could my investment be less secure if my funds were combined with those of other investors?
A. No. The joint mortgagees have exactly the same protection in law as individual mortgagees. If however a joint investment decision needs to be taken, the decision of the majority of investors by value will prevail.
32. The question as to how an investor would know that his funds had been securely managed in accordance with his expectations was given the answer, as had been the case with B1, that every investor was to receive a client account receipt, mortgage investment certificate and a copy of the charge certificate from HM Land Registry confirming the investor's registration as first legal mortgagee.
33. As to what would occur if a borrower defaulted, again, as in B1, the answer given was that 'we take the necessary action' and in B2 the answer continued:
In the meantime, interest payments to the investor are maintained at the rate of 15% per annum. These payments would be made from a contingency fund, which is an integral part of the plan.
There is no reference anywhere else to a contingency fund or how it was to be set up and from what resources. The question 'How will my investment be returned to me' was answered:-
All investments are for a term of twelve months, at the end of which your fund may be returned to you or reinvested in accordance with your instructions to us.
The earlier reference to the possibility of income from the plan falling as well as rising was omitted.
I cannot see Miss Tipples' argument on B2 to be any stronger than had been the argument on B1 Indeed, her argument that the holding-out of a constant rate of 15% per annum itself suggested the pool solution was, under B2, if anything, weakened by the reference to the wholly unexplained contingency fund which, had it been intended to be some part of a composite pool scheme, would surely need to have been expressly explained and provided for. Accordingly, so far as concerns investors whose investments were elicited by reference to B2, I reject the pool solution.
34. As an alternative route to the pool solution, Miss Tipples relies upon a notion describable as 'Common Misfortune'. So far as can be seen from the authorities cited to me on the issue, the notion derives from a dictum of Judge Learned Hand in Re Walter J. Schmidt & Co. ex parte Feuerbach (1923) 298 F 314 at 316, referred to by both Woolf L.J. and Leggatt L.J. in Barlow Clowes International Ltd (in liquidation) v. Vaughan & Ors [1992] 4 All E.R. 22 CA . The dictum was commenting on how a depleted fund had to be divided between claimants and, in particular, with whether or not the Rule in Clayton's case (which I shall come on to) was to be applied. The dictum, cited in full at Barlow Clowes at page 44D-F and in part at page 35 D-E is as follows:
The rule in Clayton's case is to allocate the payments upon an account. Some rule had to be adopted, and though any presumption of intent was a fiction, priority in time was the most natural basis of allocation. It has no relevancy whatsoever to a case like this. Here two people are jointly interested in a fund held for them by a common trustee. There is no reason in law or justice why his depredations upon the fund should not be borne equally between them. To throw all the loss upon one, through the mere chance of his being earlier in time, is irrational and arbitrary and is equally a fiction as the rule in Clayton's case. When the law adopts a fiction, it is, or at least it should be, for some purpose of justice. To adopt it here is to apportion a common misfortune through a test which has no relation whatsoever to the justice of the case. [My emphasis]
35. In Barlow Clowes (supra) Woolf L.J. referred to common misfortune at p.35(e-h) and at 41(f) to (g). He had earlier referred to Morritt J's comment in re Eastern Capital Future Ltd (in liquidation) [1989] BCLC 371 at 375 where that judge had referred to there being no suggestion in that case that any client or class of client was more or less innocent than any other and that the equities between them were thus equal. Woolf L.J. referred to the shared misfortune again at page 42(h). Leggatt L.J. returned to the subject of common misfortune at 46G-H. However, such references cannot be enlarged into support for a proposition that, wherever there is a shared common misfortune, clearly discernible separate property rights are to be surrendered or overridden. Investors may, so to speak, be in the same boat but that, of itself, does not require anyone to give up the life jacket which he is already plainly wearing.
36. As I shall come on to when examining the argument for the separate trusts solution, there were undoubtedly some cases of the specific allocation of some assets - legal charges - to specific and identified investors in proportions inter se that were ascertained or ascertainable. Ms Tipples' argument, based on common misfortune, would require that even those specific allocations were to be overridden by reference to such a misfortune having befallen all investors. As I have said, her argument, as Mr Wonnacott urges, would require some form of divesting of those specific property interests in favour of the pool. Indeed, even to suppose that the misfortune was common to all may be unjustified in some cases, where the charged property specifically allocated might prove sufficient to meet the specific debt for which it was given as security. There is, in my judgment, no way in which the invocation of a 'common misfortune' can lead to a pool solution such as to require all charged properties to be SPIP assets from which all SPIP liabilities are to be met.
37. There is no other or further argument in favour of the pool solution and accordingly I reject it.
38. I next turn to Mr Wonnacott' s argument for the separate trusts solution. It is first necessary to have in mind the methods used as to the allocation of investors' funds to particular borrowers and the state of the company's records. Allocation was intended to be by way of legal charge and by Mortgage Investment Certificate, the latter recording details of the former. One might reasonably expect, in a properly conducted scheme where the investments of several investors were aggregated to make up any one particular loan, that the Mortgage Investment Certificates in respect of that loan would in total exactly equal the amount of the loan, that references in the Mortgage Investment Certificates or the legal charges would indicate or make ascertainable the respective contributions of each investor to that loan and that the charge granted in respect of the borrowing would identify as chargees or beneficiaries of the charge only the investors whose funds had been allocated to it. That, unfortunately, is only rarely the case. For example:
(i) As I have already mentioned, Mortgage Investment Certificates not uncommonly record not the investors' contributions to a particular loan but the totality of that investor's investment whether or not to that particular loan. Ms Mistry, for example, invested only £10,000 but got three separate mortgage investment certificates, each describing her investment as £10,000 and giving details of three separate charges. The Mortgage Investment Certificates, in other words, in her case give the appearance of an investment in total of £30,000 having been invested in three separately secured tranches, each of £10,000. That, however, was not the case. Indeed, in 12 cases investors files contained more than one Mortgage Investment Certificate and it is impossible to say, in 11 of those 12 cases, how much of each investor's investment was allocated to each respectively of the loans described in the Mortgage Investment Certificates in his or her file.
(ii) In the case of two loans - SPIP 1023 (a tranche of £350,000) and SPIP 1049 (£52,000) - there is no evidence whatsoever of which investors' funds were used to enable that advance to be made.
(iii) In 14 of the loans the total amount recorded in Mortgage Investment Certificates as contributing to the respective loans described does not coincide with the amounts of the respective gross advances, with the disparity sometimes being such that too much was apparently allocated, sometimes too little. Thus the Accountant's Report states that, leaving aside only 3 cases where the total apparently allocated equalled the amount of the loans, in 8 cases the amount allocated was in excess of the loans to a total of, in aggregate, of £253,647 (with variations, loan by loan, of between £3,747 and £67,350) and in 9 cases less than the loan, to a total of £598,287 (with variations from £27,000 and £284,000 loan by loan).
(iv) There were very many investors whose investors files contained no Mortgage Certificate Investment at all.
39. Despite such inconsistencies, there are some cases in which specific property was clearly allocated as security to specific investors in such a way that, without more, the investor's respective contribution to the relative loan can readily be ascertained or is ascertainable. Thus:-
(i) SPIP 1001:£13,800 from Mr J.K. Read. Mr J.K. Read's investment was the only sum allocated by way of Mortgage Investment Certificate to the gross loan of that amount advanced to and covered by the charge given by the borrower, Merchant Properties Ltd. As this was the very first loan made, I apprehend that Mr Read was named in the charge as chargee and was the only chargee named. The charge, I apprehend, gave no powers to Mr Prentis or his firm as to management or otherwise. A Mortgage Investment Certificate accurately identified the investment.
(ii) SPIP 1005: £300,000 of the larger total amount of Mr J.P. O'Dwyer's investment was the only sum allocated by way of Mortgage Investment Certificate to the gross loan of that amount and the only sum covered by the charge given by the chargor, Brightpack Ltd. The charge given gives no powers to, nor, indeed, even mentions Mr Prentis or his firm.
Less clear cases nonetheless identified by the Trustee Company as single investor loans are:
(iii) SPIP 1006: of the £100,000 invested by Mr Trevor Shaw, £35,150 was allocated to the gross loan of that amount to A.J. and R.E. Cole and was the only sum covered by the charge given in respect of that loan. As this loan was within the first eight I shall assume that Mr Shaw was named as the only chargee and that no mention was made in the charge of Mr Prentis or his firm. The Accountant's Report's Schedule of individual investor-loans does not indicate that a legal charge was given or whether a Mortgage Investment Certificate was given but I shall assume that there is good reason to accept that a legal charge or a Mortgage Investment Certificate adequately identifying Mr Shaw in relation to this particular gross loan has been found.
(iv) SPIP 1039: of the £30,000 of Mr C.C. Ling's investment, £25,600 was, I am told, allocated to a gross loan of that amount to MacKnight. Again, although the Accountant's Report mentions no legal charge I am told Mr Ling was named as the Mortgagee. The report does not mention a Mortgage Investment Certificate but I shall assume that the Accountant has been able adequately to establish the clear allocation of £25,600 from Mr Ling as the only contributor to the gross loan of that amount.
(v) SPIP 1025. Twenty eight investors were, presumably by way of either Mortgage Investment Certificate or by way of being named in a schedule to the charge or both, allocated as contributors to the gross loan of £465,000 to Day-by-Day Ltd.
40. Although, given the unreliability of the Mortgage Investment Certificates I am hesitant to regard an allocation that relies only on such certificates as acceptable for this purpose, I hold that the five cases I have referred to above are such that separate trusts exist in relation to the respective charges granted and the property from time to time representing the same. To that extent, at least, the separate trusts argument succeeds.
41. But does it succeed further? In respect of all cases save the five I have described, it is either impossible to say, in one case (SPIP 1049), which investors' respective contributions were allocated to the aggregate of the gross loan made or, in all other cases, in what several amounts each respective investor was to be taken to have contributed to the aggregate of the gross loan. The legal charges give names but not amounts respectively contributed or allocated and the Mortgage Investment Certificates, for the reasons I have given, cannot be relied upon to establish respective allocations. Nor, in these cases, can one assume that the whole of each investor's investment was allocated wherever he or she is named as, again, that leads to inconsistency between the aggregate amounts of the loans and the aggregate of such total investments.
42. At this point the question thus arises of whether, merely by reference to his being named in a Mortgage Investment Certificate or in a legal charge or in the schedule to a legal charge (but where none such can be taken to be a reliable indication of allocation or contribution) an investor acquires a specific beneficial interest clear enough to displace such more general trusts that might otherwise apply. It is to be remembered that the contest is not between, on the other hand, no trust at all and, on the other, specific and separate trusts but between the latter and the more general pooling of assets and obligations for which Miss Tipples argues. Any particular investor's funds may have been used or allocated to some particular loan but the amounts in which they were, assuming they were, is neither ascertained nor ascertainable. No 'first in, first out' system has been argued for in relation to this problem.
43. Nor is it the case that all the named investors allocated to any one particular loan or charge (either by way of having been named in the charge or by Mortgage Investment Certificate) have together agreed that they together should take, globally, the beneficial interests in the charge in respect of that loan, leaving them to settle their respective entitlements between themselves. There is thus no body of otherwise separate investors who, by having so agreed together, are in a position to demand of the trustees that they alone, globally, should be entitled to the beneficial interest in some particular charge or charges.
44. I can quite see, in the cases where Mr Prentis or his firm implemented the SPIP much as it had been indicated that it would be implemented, that the relatively clear property interests thus created (the five cases I have described) must be respected and cannot be altered by reference to some notion of common misfortune. However, where, for the reasons I have given, one cannot say that the intended implementation was adopted and where each separate investor's respective contributions to the respective loans and their corresponding security interests are in quantum unascertainable, different considerations apply. Given that some trusts in favour of investors apply in respect of the assets representing all but the five separate cases I have identified, but, given also that, save in those 5 cases, one cannot ascertain the respective size of the beneficiaries' interests by reference to the various charges or Mortgage Investment Certificates concerned, one must find some alternative form of quantifying the beneficial interests. The only alternative argued for is that proposed by Miss Tipples, which I accept in relation to cases outside the 5 cases identified.
45. I thus, save in the five cases identified, reject the separate trusts solution and, with those exceptions, hold in favour of the intermediate solution. The investors acquiring specific interests in the five cases may, in relation to the recovery of principal sums described in those five cases, look in the first place only to the specific legal charges respectively identified as their security and to the assets representing the same. Correspondingly, any interest identifiable as paid or payable in respect of those specific legal charges but not yet paid to such investors is to be applied to them. They may not look to the pool I shall next describe for recovery unless and until (as seems wholly improbable) the claimants on the pool have been paid in full.
46. Leaving aside, for the moment, truly uninvested monies in the No.2 client account, all other assets held or to be held for investors as representing principal money are to be regarded as amounting to a pool which is to be held for all investors (except, in relation to their specific interests, the five cases already separately identified) rateably, according to their respective contributions of principal.
47. I have not heard argument as to how, separately, (leaving aside the 5 separate cases), monies for the time being representing interest should be dealt with although it may assist if I indicate that my provisional view is that interest and funds for the time being representing interest should also be pooled and held for investors rateably according to the principal sums respectively invested by them but reflecting also the length of time expired since the principal was invested. That would be to reflect that early investors have been unable to invest their contributions at interest elsewhere for longer than have been later investors. If it becomes necessary, questions as to interest may be restored to me for further argument.
48. In his judgment delivered in the Elliott case on 16th July 2001, Laddie J. dealt fully with the question of whether, on the facts of that case, there were created one or more 'collective investment schemes' (CISs) within the meaning of the Financial Services Act 1986, a question the answer to which had important tax consequences on the trustees and investors involved in that case. In the Elliott case the Commissioners of Inland Revenue had indicated that they did not wish to be joined as parties but would accept the Court's determination on the point. They have done the same, correspondingly, in this Prentis case. For the detailed reasons given by Laddie J. in his paragraphs 12-38 in the transcript provided to me, the learned Judge concluded that save only in the case where (on the facts of that case) the investor concerned had himself selected the loan to which his investment was to be appropriated, all other loans and the arrangements made in connection therewith were CISs. Whilst the Elliott case was different in many respects and while my conclusions in relation to the SPIP has, on the different facts, differed at points from the conclusions in the Elliott case, there is a great deal of common ground between the two plans. T he position is such that Mr Malek and Mr Oakley, having given careful attention to the issue, have felt unable to argue on this point for any construction or effect other than one corresponding to the conclusions reached by Laddie J. They urge me to decide the questions as to CISs accordingly.
49. No relevant difference between the Financial Services Act Section 207 and the current definition of CISs in Section 235 of the Financial Services & Markets Act 2000 has been drawn to my attention. Moreover, (to meet the only other argument I have received on the point), I do not see Mr Wonnacott' s reference to the first four or first eight loans as having created specific trusts of which the Trustee company is not trustee as in any event avoiding the statutory definitions which are concerned not with trusts as such but with 'arrangements'. I see no reason why the 'arrangements' falling to be considered should not, for example, include the arrangements as to Mr Prentis or his firm collecting interest and replacing loans that had been repaid early or as to payments being made into and out of the Prentis No.2 client account, the account intended to be, and in fact used as, a vehicle for the reception of SPIP investments and for later allocation to SPIP loans. I thus respectfully adopt the conclusion reached by Laddie J. and in consequence hold, in all cases save that of SPIP 1005 and the investment of £300,000 made in connection therewith by Mr J.P. O'Dwyer, that the investments created CISs.
50. As for the O'Dwyer case, it is far from clear to me at present whether his case represents an exception such as to make his case alone not a CIS. Whilst solicitors acting for him on 23rd November 1999 made direct contact with Richard Prentis & Co., Mr O'Dwyer himself then made direct contact with Mr Prentis or his firm and he seems to have submitted himself to arrangements common to other investors whereby, for example, interest on an SPIP loan would be paid in the first place to the Prentis No.2 client account and whereby interest prospectively payable would have been deducted out of the gross loan and put for the time being into the Prentis No. 3 client account. I am, on the argument so far and the material to which I have been so far referred, far from convinced that the simple fact, if such it be, that Mr O'Dwyer had found a borrower for himself before investing in the SPIP is sufficient to take him out of what would otherwise be a CIS. One is bound to wonder, if Mr O'Dwyer's investment was intended to be no other than his loan to a borrower whom he had identified already and was in return for a legal charge which he alone was to take, with the interest to be collected directly by him and with whatever other management was necessary also to be conducted by him, why he would have used the SPIP at all. However, it would not be fair to Mr O'Dwyer to decide the point without his having an opportunity specifically to address it and I shall leave Mr O'Dwyer's position to be restored by the trustees for further argument should Mr O'Dwyer wish to argue that SPIP 1005 was not a collective CIS.
51. As for some deductions from the No.2 client account, whilst it was intended that interest received or deducted from loans should be paid into the No.3 client account, there were some cases where the Accountant's Report establishes sums representing interest being put or remaining in the No.2 account. Where interest can be seen to be attributable to any one or more of the five cases of separate trusts identified above, the sums so identified should be taken out of the No.2 account and held for the respective benefit of whichever beneficiaries are so entitled. Where the interest can be seen to be attributable to some loan outside those five separate cases, the sum should be taken out of the No.2 account and put into the pool emerging as part of the intermediate solution described above.
52. Another possible type of deduction to be made out of the No.2 account arises in cases where sums deducted as legal or other fees or expenses out of a gross loan were not paid on to the intended recipient thereof and instead found their way into or remained in the No.2 client account. However, the circumstances in which such fees and expenses were deducted give rise to very many serious questions and it is far from plain to me on the information that I have at present that the nominal claimants of such fees and expenses are truly entitled to the same. Accordingly I see no good reason, on present information, why such sums should be paid out of the No.2 account to such possible claimants.
53. As for another adjustment to the No.2 account, there are a number of cases, before the Law Society's intervention, in which no record can now be found of an allocation of a particular investor's investment to some particular loan or loans but where it can be seen that 15% per annum interest was nonetheless paid to that investor in his or her capacity as a person who had entered the SPIP as an investor. The indications given in the publicity to which I earlier referred as to what interest would be payable after the expiry of the first 17 or 22 days was not unambiguous but the better reading, which also accords with commercial sense, is, in my judgment, that only after allocation would the 15% be paid. Accordingly, when, by reason of records being missing or otherwise, no allocation can be found but where, nonetheless, 15% per annum was paid to an investor who can be identified as having entered the SPIP, that investor's investment in the SPIP should be treated as if it had been allocated and hence is to be part of the pooling to which I have referred in relation to the intermediate solution rather than being treated as uninvested funds remaining in the No.2 client account.
54. Even with those adjustments made to the No.2 account there will, as I understand the matter, be more moneys claimed by investors to be uninvested sums in the No.2 client account as at 2nd June 2000 than was in fact to be found there. How is the deficiency to be borne? Neither Miss Tipples nor Mr Wonnacott nor any other respondent has argued for any particular approach to that question but Mr Oakley has carefully laid before me three options whilst, as junior Counsel to the Trustee Company, being careful to remain neutral as between the three. The first is that the so called Rule in Clayton's case (first in - first out) should apply; secondly, that what is called the 'North American' method should be applied to the No.2 account and, thirdly, that the No.2 account should belong to the contributors to it pari passu to their respective contributions.
55. In jurisdictions unbound by Clayton's case (Devaynes v. Noble (1816) 1 Mer 572; 35 ER 781) and by subsequent English authorities on the subject, Clayton's case has very often been roundly criticised - see Hagan v. Waterhouse & Ors. (1991) 54 NSWLR 308 at 358F-359H per Kearney J; In re Esteem Settlement [2002] Jersey Law Reports 53 at paras 108 and see the dictum of Learned Hand J. in the United States cited above, where he described the rule as having no relation to the justice of the case. The modern approach in England has generally not been to challenge the binding nature of the rule but rather to permit it to be distinguished by the reference to the facts of the particular case. Thus in Barlow Clowes (supra) Woolf L.J. after a full citation of the authorities -pages 36-39F and 39H-40G - held that the rule did not apply where circumstances from which a counter intention might be presumed were found - page 41. Such relevant circumstances could include acts and omissions after the investor had made his investment and also the injustice between investors if a rule so arbitrary in its effects were to be imposed - page 42E-H. Leggatt L.J. also saw the rule as capable of being displaced by a presumed intention - page 46B-C. He regarded it as capricious, arbitrary and inapposite - page 46F-J. It is plain from all three of the judgments in Barlow Clowes, the third being that of Dillon L.J., that the rule can be displaced by even a slight counterweight. Indeed, in terms of its actual application between beneficiaries who have in any sense met a shared misfortune, it might be more accurate to refer to the exception that is, rather than the rule in, Clayton's case.
56. Here, in the Prentis case, there is, in my view, an available counterweight; it is quite plain that payments out of the No.2 account over the period of its operation showed a pattern of allocation or appropriation such that one could not say that payments - in led to allocations by way of payments - out in the same sequence. On the contrary, allocation was on occasion completely out of step with the sequence in which payments in had been made. That, as it seems to me, was only to be expected and could reasonably have been foreseen by investors from the publicity material I have described. If, say, a given loan of £100,000 was intended to be made by the SPIP but that investments of only, say, £95,000 were currently available, then, if two further investments were expected of, say, £15,000 and £5,000 respectively, they being expected shortly, it would surely have been foreseen to make more sense to await that of £5,000, even if it came in second, rather than dividing the £15,000 first received over two or more loans. Whilst the brochures made it plain that investments might be combined, nothing indicated combinations would be made up in a strict temporal sequence and a moment's reflection by an investor or, indeed, an inquiry into what, in practice, was done, would have been likely to lead to a conclusion that there would be no such strict sequence. It is, as I see it, one thing to apply a 'first in - first out' rule where it might have been expected or intended by the investors to be applied and where nothing is known inconsistent with its being so expected or intended but quite another to presume it as an intention where both a reasonable contemplation of what was intended and the known facts can be seen to be inconsistent with it. On that ground I shall not apply Clayton's case to payments in and unallocated payments made out of the No.2 account.
57. As for the 'North American' method, this is described by Dillon LJ in Barlow Clowes (supra) as a system used to avoid a loss falling first on the depositor who happened to have made the first deposit in point of time - page 27H-28AB. If that reason does not exist where, as here, Clayton's case is not being applied in any event, that prime reason to adopt the method falls away. The method is, in any event, complicated and may be expensive to apply.
58. Accordingly, I prefer a pari passu system, as was the solution adopted in Barlow Clowes. It is, to my mind, the system least unfairly distributing loss on an account that should have been dealt with in accordance with the Solicitors Accounts' rules.
59. Whilst the Trustees' Counsels' skeleton argument refers to an order for costs of a particular kind, no party has addressed me on the subject. I have therefore assumed that neither Miss Tipples nor Mr Wormacott nor any of the unrepresented individual defendants wishes to oppose the order for costs which the skeleton argument proposes and accordingly I order that the costs of this hearing are to be costs of the intervention, such costs being subject to a detailed assessment if not agreed and that the caps on the costs of representative parties that has earlier been agreed should be applied. If, contrary to my assumption, any party wishes to argue to the contrary, then he is at liberty to raise the subject with me when one of the later detailed applications, which I referred to at the outset, comes to be made. There is to be a general liberty to apply included within a minute of order to be prepared by junior Counsel for the Claimant Trustee Company and circulated to Miss Tipples and Mr Wonnacott. If difficulty is encountered in agreement of the minute, the matter can be restored to me.