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The Financial Conduct Authority v Capital Alternatives Ltd & Ors [2015] EWCA Civ 284
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The question in this case is whether four different schemes constituted "collective investment schemes" ("CISs") within the meaning of section 235 of the Financial Services and Markets Act 2000 ("FSMA"). On the trial of a preliminary issue in an action brought by the Financial Conduct Authority ("the FCA") in July 2013 against the promoters and operators of the schemes, Nicholas Strauss QC, sitting as a deputy judge of the Chancery Division, held that they were. The appellants contend that he was wrong to do so.
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Two types of scheme are in issue: (1) the African Land Scheme; and (2) the Carbon Credits Schemes. The African Land scheme involved the exploitation of a rice farm in Sierra Leone. It had been promoted since about November 2009 and, at the time when proceedings were brought in July 2013, had attracted investment totalling some £ 8.1 million from some 1,160 investors.
The Carbon Credit Schemes related to forest areas in Australia, Sierra Leone and the Amazon. The aim was to generate tradable carbon credits, which could be resold at a profit. This required the scheme to obtain accreditation from the relevant accrediting body. The Australian scheme involved reforestation; the other two schemes involved the preservation of existing forests. These schemes had attracted investments totalling some £ 8.8 million from 919 investors.
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"[14] The 1st to 5th defendants are the "Capital" companies, which are directly or indirectly involved in the promotion of alternative investments, including the schemes described above, or as receiving agents for operators. The 1st defendant ("CAL" or "Capital Alternatives" or "D1" promoted a large number of schemes, including the African Land and CCC schemes, and featured in early brochures for them. The 2nd defendant ("CS" or Capital Secretarial" or "D2") acted as agents to receive investors' funds. The 3rd defendant ("COL" or "Capital Organisation" or "D3") is said also to have received investors' money and to be responsible for the overall organisation of the Capital companies. The 4th defendant ("CAS" or "Capital Administration" or "D4") and the 5th defendants ("MH Trustees" or "D5") also acted as receiving agents at certain times. All these companies, apart from D5, are balance sheet insolvent, according to their latest available accounts.
[15] The 6th to 8th defendants ("Ms Hargous", "Mr Haddow" and "Mr Henstock" or "D6" "D7" and "D8") are individuals involved in the running of the Capital companies. Ms Hargous (who gave evidence) is a director and sole shareholder of Capital Secretarial, Capital Administration and MH Trustees, a director of Capital Organisation and formerly a director of Capital Alternatives. She is a solicitor, and is in effect the in-house solicitor for the Capital companies. She was a straightforward and truthful witness. Mr. Haddow, who is subject to a disqualification undertaking which precludes his acting as a company director, is nevertheless alleged by the FCA to have had a leading role in the running of these companies. Mr. Henstock is a director of Capital Alternatives. Neither gave evidence.
[16] The 9th defendant ("African Land", formerly Agri Capital Limited or "D9") is the operator of the African Land scheme (sometimes referred to as "the Agri Capital scheme"). Early brochures for the scheme referred to Agri Capital as a "division" of Capital Alternatives. There is also a Sierra Leone company called Agri Capital Sierra Leone Limited ("ACSL"), which was incorporated on 12th September 2011 and is owned as to 80% by African Land and as to 20% by a local businessman, Mr. Abdul Hamid Fawaz. The precise division of responsibility for the African Land project between African Land and ACSL is not entirely clear, but D9-11 conceded in the course of the hearing that the project is operated by or on behalf of African Land. African Land is balance sheet insolvent according to its latest available accounts.
[17] The 10th and 11th defendants ("Mr. McKendrick" and "Mr. Meadowcroft" or "D10" and "D11") are both directors of African Land, and Mr. McKendrick is also a director of ACSL. Both gave evidence. Mr. McKendrick has had a varied career. He worked as a geologist in South Africa for some years and then in the family textile business and in the property market. He has considerable experience of West Africa, having interests in a mine in Sierra Leone and iron ore exploration in Liberia. He decided to set up the rice farming project at Yoni Farm in 2009, and it is clear from his evidence that he is deeply attached to it. Mr. Meadowcroft is a management surveyor with experience in construction and property development and was asked by Mr. McKendrick to become involved in African Land because of his project management expertise, and in particular to oversee the development of the infrastructure of Yoni Farm. In and after 2012, he became more generally involved with farm management and other issues. Both Mr. McKendrick and Mr. Meadowcroft were straightforward and truthful witnesses. Mr. McKendrick was not always accurate on detail and, by his own admission, accounting matters are not his forte.
[18] Ms. Hargous was also a director of African Land from 26th August to 28th September 2009. She is also a director of ACSL, having agreed to be appointed because it was thought that a third director was needed. However she played no part in its affairs and had no recollection, when she gave evidence, of her appointment.
[19] The 12th defendant ("Regency Capital" or "D12") is now the promoter of the African Land scheme, instead of Capital Alternatives, following disputes which arose between African Land and the Capital companies. It may also have some involvement in the CCC schemes. D12 has net assets of £1,336 according to its latest available accounts.
[20] The 13th defendant, previously Capital Carbon Credit Limited ("Reforestation Projects" or "D13"), is the operator of the CCC schemes.
[21] The 14th and the 15th defendants ("Mr. Ayres" and "Mr. Gibbs" or "D14" and "D15") are or were involved in the running of Reforestation Projects. Mr. Gibbs is, and Mr. Ayres was until December 2012, a director, and Mr. Gibbs is a director of Climate Care Global Limited ("CGL"), the Accreditations Specialist for the Sierra Leone and Brazil schemes. According to its latest available accounts, for the year ended on 31st December 2011, Reforestation Projects has net assets of £40,485.
[16] The 16th defendants ("D16") are the personal representatives of Mr. Waygood, who was a director of Alternatives, Organisation and Administration."
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In the African Land case, the arrangements in question were those made in relation to the cultivation of rice at Yoni Farm. Those were the arrangements relating to the management of the property from which profits or income were expected to be generated. In asking whether these arrangements had the characteristic of Yoni Farm being managed as a whole, the whole gamut of cultivation activities had to be considered, such as purchasing of seed and other materials, the use of machinery, crop management generally, decisions on the use of fertiliser, chemical treatments and irrigation, and the timing of the harvest, in addition of course to the processing and sale of the crop. This was, in effect, the exercise that the judge undertook in reaching the conclusion that the arrangements made in relation to the African Land scheme did have the characteristic provided for in section 235(3)(b) and that the property in question was managed as a whole. The fact that the judge thought a "substantiality" approach was appropriate does not seem to have prevented his consideration of the appropriate factors. In any event, even if he did not, on the facts he found, I would, like Christopher Clarke LJ and for the reasons he has given, have reached the same conclusions in respect of both the African Land scheme and the other schemes with which this case is concerned. Each of them was properly to be regarded as a collective investment scheme.
The question in this case is whether four different schemes constituted "collective investment schemes" ("CISs") within the meaning of section 235 of the Financial Services and Markets Act 2000 ("FSMA"). On the trial of a preliminary issue in an action brought by the Financial Conduct Authority ("the FCA") in July 2013 against the promoters and operators of the schemes, Nicholas Strauss QC, sitting as a deputy judge of the Chancery Division, held that they were. The appellants contend that he was wrong to do so.
................
Two types of scheme are in issue: (1) the African Land Scheme; and (2) the Carbon Credits Schemes. The African Land scheme involved the exploitation of a rice farm in Sierra Leone. It had been promoted since about November 2009 and, at the time when proceedings were brought in July 2013, had attracted investment totalling some £ 8.1 million from some 1,160 investors.
The Carbon Credit Schemes related to forest areas in Australia, Sierra Leone and the Amazon. The aim was to generate tradable carbon credits, which could be resold at a profit. This required the scheme to obtain accreditation from the relevant accrediting body. The Australian scheme involved reforestation; the other two schemes involved the preservation of existing forests. These schemes had attracted investments totalling some £ 8.8 million from 919 investors.
....................
"[14] The 1st to 5th defendants are the "Capital" companies, which are directly or indirectly involved in the promotion of alternative investments, including the schemes described above, or as receiving agents for operators. The 1st defendant ("CAL" or "Capital Alternatives" or "D1" promoted a large number of schemes, including the African Land and CCC schemes, and featured in early brochures for them. The 2nd defendant ("CS" or Capital Secretarial" or "D2") acted as agents to receive investors' funds. The 3rd defendant ("COL" or "Capital Organisation" or "D3") is said also to have received investors' money and to be responsible for the overall organisation of the Capital companies. The 4th defendant ("CAS" or "Capital Administration" or "D4") and the 5th defendants ("MH Trustees" or "D5") also acted as receiving agents at certain times. All these companies, apart from D5, are balance sheet insolvent, according to their latest available accounts.
[15] The 6th to 8th defendants ("Ms Hargous", "Mr Haddow" and "Mr Henstock" or "D6" "D7" and "D8") are individuals involved in the running of the Capital companies. Ms Hargous (who gave evidence) is a director and sole shareholder of Capital Secretarial, Capital Administration and MH Trustees, a director of Capital Organisation and formerly a director of Capital Alternatives. She is a solicitor, and is in effect the in-house solicitor for the Capital companies. She was a straightforward and truthful witness. Mr. Haddow, who is subject to a disqualification undertaking which precludes his acting as a company director, is nevertheless alleged by the FCA to have had a leading role in the running of these companies. Mr. Henstock is a director of Capital Alternatives. Neither gave evidence.
[16] The 9th defendant ("African Land", formerly Agri Capital Limited or "D9") is the operator of the African Land scheme (sometimes referred to as "the Agri Capital scheme"). Early brochures for the scheme referred to Agri Capital as a "division" of Capital Alternatives. There is also a Sierra Leone company called Agri Capital Sierra Leone Limited ("ACSL"), which was incorporated on 12th September 2011 and is owned as to 80% by African Land and as to 20% by a local businessman, Mr. Abdul Hamid Fawaz. The precise division of responsibility for the African Land project between African Land and ACSL is not entirely clear, but D9-11 conceded in the course of the hearing that the project is operated by or on behalf of African Land. African Land is balance sheet insolvent according to its latest available accounts.
[17] The 10th and 11th defendants ("Mr. McKendrick" and "Mr. Meadowcroft" or "D10" and "D11") are both directors of African Land, and Mr. McKendrick is also a director of ACSL. Both gave evidence. Mr. McKendrick has had a varied career. He worked as a geologist in South Africa for some years and then in the family textile business and in the property market. He has considerable experience of West Africa, having interests in a mine in Sierra Leone and iron ore exploration in Liberia. He decided to set up the rice farming project at Yoni Farm in 2009, and it is clear from his evidence that he is deeply attached to it. Mr. Meadowcroft is a management surveyor with experience in construction and property development and was asked by Mr. McKendrick to become involved in African Land because of his project management expertise, and in particular to oversee the development of the infrastructure of Yoni Farm. In and after 2012, he became more generally involved with farm management and other issues. Both Mr. McKendrick and Mr. Meadowcroft were straightforward and truthful witnesses. Mr. McKendrick was not always accurate on detail and, by his own admission, accounting matters are not his forte.
[18] Ms. Hargous was also a director of African Land from 26th August to 28th September 2009. She is also a director of ACSL, having agreed to be appointed because it was thought that a third director was needed. However she played no part in its affairs and had no recollection, when she gave evidence, of her appointment.
[19] The 12th defendant ("Regency Capital" or "D12") is now the promoter of the African Land scheme, instead of Capital Alternatives, following disputes which arose between African Land and the Capital companies. It may also have some involvement in the CCC schemes. D12 has net assets of £1,336 according to its latest available accounts.
[20] The 13th defendant, previously Capital Carbon Credit Limited ("Reforestation Projects" or "D13"), is the operator of the CCC schemes.
[21] The 14th and the 15th defendants ("Mr. Ayres" and "Mr. Gibbs" or "D14" and "D15") are or were involved in the running of Reforestation Projects. Mr. Gibbs is, and Mr. Ayres was until December 2012, a director, and Mr. Gibbs is a director of Climate Care Global Limited ("CGL"), the Accreditations Specialist for the Sierra Leone and Brazil schemes. According to its latest available accounts, for the year ended on 31st December 2011, Reforestation Projects has net assets of £40,485.
[16] The 16th defendants ("D16") are the personal representatives of Mr. Waygood, who was a director of Alternatives, Organisation and Administration."
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In the African Land case, the arrangements in question were those made in relation to the cultivation of rice at Yoni Farm. Those were the arrangements relating to the management of the property from which profits or income were expected to be generated. In asking whether these arrangements had the characteristic of Yoni Farm being managed as a whole, the whole gamut of cultivation activities had to be considered, such as purchasing of seed and other materials, the use of machinery, crop management generally, decisions on the use of fertiliser, chemical treatments and irrigation, and the timing of the harvest, in addition of course to the processing and sale of the crop. This was, in effect, the exercise that the judge undertook in reaching the conclusion that the arrangements made in relation to the African Land scheme did have the characteristic provided for in section 235(3)(b) and that the property in question was managed as a whole. The fact that the judge thought a "substantiality" approach was appropriate does not seem to have prevented his consideration of the appropriate factors. In any event, even if he did not, on the facts he found, I would, like Christopher Clarke LJ and for the reasons he has given, have reached the same conclusions in respect of both the African Land scheme and the other schemes with which this case is concerned. Each of them was properly to be regarded as a collective investment scheme.
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