England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE QBCOF 96/1777/D

(DIVISIONAL COURT )

Royal Courts of Justice

Strand

London WC2

Thursday, 4 December 1997

B e f o r e:

LORD JUSTICE BELDAM

LORD JUSTICE POTTER

SIR JOHN BALCOMBE

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JOSEPH GERALD TAYLOR

APPLICANT

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INVESTORS COMPENSATION SCHEME

RESPONDENT

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(Transcript of the handed down judgment of

Smith Bernal Reporting Limited, 180 Fleet Street,

London EC4A 2HD

Tel: 0171 421 4040

Official Shorthand Writers to the Court)

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MR N KITCHENER (Instructed by Messrs Robinson, Derby DE1 1FL) appeared on behalf of the Appellant

MR J R McMANUS and MR A SHARLAND [4-12-97 ] (Instructed by Messrs Wilde Sapte, London EC4M 7WS) appeared on behalf of the Respondent

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J U D G M E N T

(As approved by the Court )

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©Crown Copyright

Thursday, 4 December 1997

J U D G M E N T

LORD JUSTICE POTTER:

This is the judgment of the Court.

This appeal is brought by the appellant ("Mr Taylor") with the leave of the Divisional Court, which on 29th November 1996 dismissed Mr Taylor's application for judicial review in respect of a decision by the Investors Compensation Scheme Limited ("ICS") that Mr Taylor was not eligible for compensation under the Investors Compensation Scheme ("the Scheme") in respect of his claims for the loss of an investment made through Beechcroft Insurance Brokers ("Beechcroft"), the trading name of a Mr Barrett who was authorised to carry on investment business under that name by the Financial Intermediaries, Managers and Brokers Association ("FIMBRA").

The following facts are not in dispute between the parties either on the basis of the evidence before us or as a matter of concession.

Mr Taylor is a farmer. In March 1986, he inherited £5,500 which he wished to invest. On the invitation and advice of Mr Barrett, he handed him a cheque for £5,500 in April 1986 on terms that Mr Barrett would arrange an investment which would yield a return of 9.5% per annum at compound interest for a fixed term of five years and that interest could be withdrawn as and when it accrued. Mr Taylor's mother decided to invest further sums of £2,000 and £9,000 with Mr Barrett on the same terms a week later. The total sum invested by Mr Taylor and his mother was thus £16,500 in all. In April 1987 following the death of Mr Taylor's mother, her investments were transferred to him. We shall therefore refer collectively to the sums invested as belonging to Mr Taylor.

It has subsequently transpired that Mr Barrett was a fraudster. Whatever his intentions at the time he received the monies, no investment of any kind was made or arranged on behalf of Mr Taylor. In a Report prepared by ICS in respect of Beechcroft, the determinations of fact in which were treated by ICS as applicable to the circumstances of Mr Taylor's claim, it was concluded that Mr Taylor's funds were, in common with those of other Beechcroft investors paid into an account with Barclays Bank and held there for approximately forty-two days before being misappropriated for Mr Barrett's purposes. Of the total deposits of some £1,368,000 received by Beechcroft from investors, only some 18% were used to make repayments to investors. It was concluded that the repayments made were by robbing Peter (in the form of fresh investors) to pay Paul (in the form of investors to whom payment was due).

On 22nd April 1988, Beechcroft was authorised to conduct investment business by FIMBRA and on 28th August 1988 the Scheme took effect. In March 1991, Mr Taylor "withdrew interest" in the sum of £800. In April 1991, at the expiry of the fixed term of Mr Taylor's investment, Mr Barrett represented to him that the amount due to him on his investment, together with the accrued interest, was £24,000. Mr Taylor was persuaded to make a new investment with Mr Barrett, instructing him to invest £22,000 of the £24,000. He withdrew £2,000 in interest. On his new investment of £22,000 Mr Taylor was told that he would receive a compound rate of interest of 11.25% per annum. His investment was for five years. On that basis Mr Taylor handed back all the documentation he had received in 1986 in return for a certificate from Mr Barrett in the following terms;

" 20th April 1991

This confirms your investment of £22,000 on the 1st April 1991."

In our view the proper analysis of this transaction was that, in return for his right to be paid £24,000 by Mr Barrett, Mr Taylor was promised that he would on 20th April 1996 receive £22,000 plus compound interest at 11.25%.

Mr Taylor received the payment of £2000 accrued as interest in two tranches: one in April and another in July 1991. Unknown to Mr Taylor, Mr Barrett was by this time in fact insolvent and it seems likely that the payment of £2,000 interest was made from a substantial receipt from another of Mr Barrett's clients as it coincided with that receipt. It is to be inferred that once again Peter paid Paul. However, FIMBRA did not intervene to prevent Mr Barrett and Beechcroft continuing in business for a further eighteen months. During this time Mr Taylor received a further withdrawal of £700 in May or June 1992.

In October 1992 Mr Barrett ceased trading without making any further payments to Mr Taylor. On 3rd November 1993 Mr Taylor made a claim under the Scheme which ICS refused because Beechcroft had not then been declared to be in default. However, in May 1993, ICS declared Mr Barrett to be in default under the Scheme and Mr Taylor's claim was allowed to proceed.

s1 and Schedule 1 of the Financial Services Act 1986 ("The Act") define "investment business" for the purposes of the Act. It is not necessary further to refer to their terms because it is not in issue between the parties that, as from April 1988 (and not before), Mr Barrett, through the medium of Beechcroft, was authorised and carrying on investment business under the Act.

s54 of the Act, under the heading "Compensation Fund", provides inter alia as follows:

"(1) The Secretary of State may by rules establish a scheme for compensating investors in cases where persons who are or have been authorised persons are unable, or likely to be unable, to satisfy claims in respect of any description of civil liability incurred by them in connection with their investment business.

(2) Without prejudice to the generality of subsection (1), rules under this section may -

(a) ......

(b) establish a fund out of which compensation is to be paid;

(c) provide for the levying of contributions from, or from any class of, authorised persons and otherwise for financing the scheme and for the payment of contributions and other money into the fund;

(d) specify the terms and conditions on which, and the extent to which, compensation is to be payable and any circumstances in which the right to compensation is to be excluded or modified........"

The Financial Services (Compensation of Investors) Rules 1990, as subsequently amended ("the Rules"), provide, inter alia, as follows:

"1.02 Interpretation

........

(3) Nothing in any rules made under Section 54 of the Act is to be interpreted (if it otherwise would be) as authorising the payment of compensation on a claim except to the extent that the claim is a claim in respect of any description of civil liability incurred on or after 18th December 1986 in connection with the investment business of a person who, at the time compensation is to be paid, is or has been an authorised person.

2.01 Declaration of Default

(1) The Management Company may determine a participant firm to be 'in default' where it appears .. that the firm is unable, or unlikely to be able, to satisfy claims in respect of any description of civil liability incurred in connection with its investment business and that, as a result, compensation is likely to be payable under these rules.

2.02 Payment of Compensation

(1) The Management Company is responsible for payment of compensation to investors in accordance with these rules.

(2) The Management Company may pay compensation where it is satisfied, on the basis of evidence provided by an investor or which is available to it from other sources, that ...

(b) The investor has a claim against a participant firm in default which is both a scheme business claim and a compensatable claim ....

(6) For the purposes of these rules, the Management Company is to rely, to the extent relevant, on any determination by a court of competent jurisdiction or by a liquidator or trustee in bankruptcy or on the certification of any net sum due which is made in default proceedings of a recognised exchange or clearing house and the Management Company may also rely on the certification of any net sum due which is made in default proceedings of any other exchange or clearing house.

2.03 Scheme Business Claims

(1) The first kind of 'scheme business claim' is the general claim, which relates to a liability owed by the firm in connection with scheme business done by it while it was a participant firm and with the investor for as agent on his behalf .....

2.04 Compensatable Claims

(1) The basic compensatable claims are claims for property held and claims arising from transactions which remain uncompleted at the quantification date, and an application for compensation relating to any other claim is to be met only where the Management Company considers that this is essential in order to provide fair compensation to the investor.

(2) Any claim is not a compensatable claim unless it relates to a liability which has been established before a court of competent jurisdiction or which the Management Company is satisfied would be established if proceedings were brought before such a court ...

2.06 Amount of the compensation

(1) In principle, the amount payable by way of compensation is the amount the investor's overall net claim against the firm in default at the quantification date.

(2) The Management Company is to adjust the amount of an investor's overall net claim against the firm to the extent that it appears to it that the payment of the full amount would provide benefit to the investor which is greater than the benefit he might reasonably have expected or than the actual benefit available on similar investments made with other firms."

Rule 2.07 imposes limits on the compensation sum payable which are not of relevance to this case.

In the Glossary attached to the rules the following definitions of relevance appear;

"'Claim' means a valid claim on a firm in default in respect of a civil liability owed by the firm;

'Compensatable Claim' has the meaning given by Rule 2.04 ...

In principle, 'Scheme Business' means investment business carried on by any person after his participation date and as respects which he is an authorised person....."

THE CONTENTIONS OF THE PARTIES.

The claim of Mr Taylor was canvassed in full prior to proceedings between the solicitors for Mr Taylor and ICS who, in this connection disclosed the opinions of counsel taken along the way. With some further fine tuning, both sides' contentions have remained the same before the Divisional Court and now before this Court.

Both parties accept that the Act was not intended, and should not be construed so as to have a retrospective effect; it is the proper application of that principle to the facts of this case which divides them. Mr Kitchener for Mr Taylor says that, in this context, that means no more than the position made explicit in Rule 1.02.3, namely that compensation is only payable on a claim which is "a claim in respect of any description of civil liability incurred on or after 18th December, 1986". That is the date when the First Schedule to the Act (which was itself enacted on 7th December 1986) came into force.

It was made clear by the judgment of Morritt J in Securities and Investments Board - v - FIMBRA [1992] Ch 268 that the Act conferred no power to make rules in respect of any liability incurred before the commencement date of the First Schedule whereby the definition of "Investment Business" came into force. The previous Rule 1.02.3 was amended to its present form on 25th July, 1991 to reflect that decision. Accordingly it is plain that s54(1) of the Act falls to be read as if, between the words "civil liability incurred by them" and "in connection with their investment business", the additional words "on or after 18th December 1986" had been inserted.

That being so, Mr Kitchener accepts that the claim of Mr Taylor for compensation cannot be founded upon the making of his original investment in April 1986, at which point Beechcroft's obligation to repay on maturity in 1991 arose. Equally, Mr Kitchener accepts that, if he is obliged to found the claim upon the misappropriation of that investment a month or so after it was made, then his claim for compensation must fail. However, he does not so base the claim. He relies upon the second transaction in April 1991 ("the second investment"). He submits that Mr Taylor, being ignorant (as is accepted on all sides) of the earlier misappropriation and overall fraudulent purpose of Mr Barrett, (a) entered into a bona fide contract to re-invest £22,000 of the £24,000 due for repayment on maturity in April 1991 on terms that it would be managed in good faith and repaid with the interest as was due in April 1996, and (b) relied on the express and/or implied representation of Mr Barrett that £24,000 of that sum was due to him and that he would re-invest £22,000 on his behalf.

Thus, Mr Kitchener asserts that Mr Taylor has a claim under Rule 2.02.2b which is both a scheme business claim and compensatable claim. It is a scheme business claim under Rule 2.03.1 because it is a general claim which relates to the liability owed by Beechcroft in connection with scheme business done by it while it was a participant firm. It is also a compensatable claim under 1.02.3 because it is a claim in respect of any description of civil liability incurred on or after 18th December 1986 in connection with Beechcroft's investment business and, under 2.04.1, it is a claim arising from a transaction which remained uncompleted at the quantification date.

In relation to the further requirement of 2.04.1 that ICS must consider that compensation is "essential in order to provide fair compensation to the investor", Mr Kitchener points out that it has never been in issue that this is a claim for which ICS would wish to compensate Mr Taylor if satisfied that it was a claim falling within the Scheme. Further, it has not been suggested ICS could not be satisfied that, if proceedings before a court of competence and jurisdiction were brought, Mr Taylor would be unable to establish liability arising out of his second investment. Indeed, in his affidavit dated 6th June 1996, Mr Lawson the Chairman of ICS asserts:

"ICS accepts that the advice given by Mr Barrett on behalf of Beechcroft in April 1991 to rollover the investment gives rise to an action for breach of contract and for misrepresentation".

Mr Lawson went on to state:

"I am, however, advised by my lawyers and accept that Mr Taylor's claim for compensation in relation to the advice to re-invest his funds in April 1991 will only qualify for compensation if ICS is satisfied that the advice caused Mr Taylor's losses or gave rise to further losses. This approach adopted by ICS is supported by Counsel (See Appendix A to the Notice of Application)."

In Counsel's advice, the substance of which has been maintained before us, it was accepted that the second investment in 1991 gave rise to causes of action in deceit and breach of contract. However, the point was taken that such causes of action did not result in further damage to Mr Taylor. As it was succinctly put: "He loses his money once not twice." Thus, it is said that Mr Taylor has failed to establish a fresh cause of action causing fresh damage, not only because the loss had already been suffered in 1988, but because it would be contrary to public policy to make any assumption that Beechcroft would, if pressed, have repaid Mr Taylor in 1991 had they been asked to do so, because such repayment could only have been made on the further assumption that Mr Barrett was prepared to rob Peter to pay Paul.

In giving the leading judgment in the Divisional Court, Lord Justice Staughton (with whom Mr Justice Tucker agreed) dealt with the matter quite shortly. He referred to the grounds upon which it was contended for Mr Taylor that he could claim against Mr Barrett in respect of the 1991 re-investment. Those were the grounds of breach of contract and deceit referred to above, as well as a third ground (that of restitution based upon a purported rescission in February 1996) which has not been pursued before us. In respect of those claims, Staughton LJ said as follows:

"Each of those claims in my opinion depends to a greater or lesser extent on an estoppel, as to the existence of the £22,000. We have had an interesting argument as to the effect upon the Management Company of an estoppel binding on Mr Barrett. But I consider that the solution to this problem lies elsewhere."

He then referred to the decision in Securities and Investments Board - v - FIMBRA and to the fact that the revised Rule 1.02.3 was framed as an overriding provision to reflect the position that

"As Morritt J held, the statute conferred no power to make Rules in respect of liability incurred before the commencement date of the First Schedule ..."

He continued:

In those circumstances one must in my judgement interpret the relevant part of rule 1.02.3 without any regard to the rest of the Rules. In particular, one should not consider what is meant by a Scheme Business Claim or the effect of Rule 2.02.6, which provides that the Management Company is to rely on the decisions of the courts or the liquidator or trustee in bankruptcy. One must stay with the law laid down by Morritt J as to the meaning of the statute now encapsulated in the words in Rule 1.02.3 "except to the extent that the claim is a claim in respect of any description of civil liability incurred on or after 18th December 1986..."

In my judgement the claim of Mr Taylor does not answer that description. It is a claim in respect of a civil liability that was incurred in April 1986, when Mr Taylor and Mrs Taylor entrusted their money to Mr Barrett and he misappropriated it to his own purposes. It is true that Mr Taylor did not discover the loss until November 1992, I suppose because it was deliberately concealed from him. But the liability was incurred when Mr Barrett made off with the money. What happened thereafter was fiction.

Of course Mr Taylor suffered misfortune which he does not deserve, and one would wish that he had a remedy. But this is a mutual scheme, which requires honest traders to make good losses caused by their dishonest rivals. A charitable but strained interpretation for the benefit of Mr Taylor would not be justice for those who have to finance the payment of claims. I would dismiss this application for judicial review."

Thus, in essence, Staughton LJ dismissed the arguments for Mr Taylor that his claim in contract and deceit based on the 1991 transaction fell within the Act and Rules, on the basis that it was in reality a claim in respect of a civil liability originally incurred in April 1986 and so arose prior to the date conceded by Mr Taylor to be the threshold date for valid claims.

Mr Kitchener submits that to dismiss as "a fiction" all that happened after civil liability was incurred by Mr Barrett in 1986 when (unknown to Mr Taylor) he misapplied Mr Taylor's money, is to ignore not merely the form of the claim made in respect of the second investment in 1991, but also the substance of the causes of action which are acknowledged by ICS to have arisen as a result. It also ignores the different legal sources, and the different measure of the damage arising. In respect of the contract claim, the cause of action which arose was for damages for breach of contract in respect of the fresh sum of £22,000 agreed to be invested; it did not depend upon the existence or fate of the original investment. In respect of the action for deceit, damage arose on the basis that, if Mr Taylor had been aware of the true position, he would have pressed for the repayment of the amount of his original investment, which there is no reason to suppose he would not have received, from whatever source it might have come.

Mr Kitchener further points out in respect of the public policy argument raised by Mr McManus (but not referred to in the judgment of the Divisional Court) that there is no rule of public policy which could be invoked against Mr Taylor as the innocent party to prevent him recovering damages on the basis that repayment in 1991 would have been likely to have been made at the expense of other and more recent investors. Finally, Mr Kitchener submits that, even if it be right (which he does not accept) that the liability of Mr Barrett in relation to the 1991 transaction would depend "to a greater or lesser extent on an estoppel as to the existence of £22,000", that is no answer to the validity or enforceability of Mr Taylor's claims which are, in form and legal substance fresh claims in respect of "any description of civil liability incurred after 18th December 1986" in connection with Beechcroft's investment business.

Mr McManus has not sought before us to support the judgment of the Divisional Court in the compressed terms in which it is couched. He has advanced no arguments based upon issues of estoppel. He accepts that the 1991 claim is not the same claim in form; he accepts that it would not be subject to the same limitation period; he also accepts it would not involve the same exercise in assessing the damage. Nonetheless he says that, because the original investment was misappropriated in 1986, the later transaction was indeed "fictional". He submits that the "real" claim, or at any rate the claim for purposes of the statute, is a claim in respect of that misappropriation (albeit Mr Taylor was ignorant of it until after the 1991 transaction).

We cannot agree that it is appropriate to adopt such a broad brush approach in order to exclude Mr Taylor's claim for compensation. In order to justify it in detail, Mr McManus argued on the basis of the following propositions.

(1) It is the plain purpose of the scheme not to compensate investors for losses suffered before 18th December, 1986: see Rule 1.02.3 which sets out no more than the proper construction of s57.

(2) That being so, even if the cause or causes of action in respect of the 1991 transaction would enable Mr Taylor to recover against Beechcroft the full amount of the loss he suffered in 1986, the Scheme does not authorise payment of compensation in respect of that loss. It cannot have been intended that the scheme should "pick up" past liabilities incurred before 18th December, 1986 even where a fresh cause of action accrues in respect of the same damage after that date.

(3) Whatever its legal form, any claim brought in respect of the 1991 transaction should be regarded as no more than a claim in respect of the original civil liability incurred on misappropriation of Mr Taylor's original investment in 1986 because:

(i) Mr Taylor provided no consideration for Beechcroft's promise to re-invest his money. Any forbearance to sue for the return of the original investment was of no economic value because the money had gone, and any repayment must have been from funds more recently supplied by other investors (as to which see (iii) below;

(ii) If the 1991 contract to invest was a specific obligation to re-invest an identifiable fund belonging to Mr Taylor, that fund no longer existed because it had been stolen and the contract was based on an impossibility. If the contract was simply to invest funds to Mr Taylor's account in the amount agreed (i.e. £22,000), then, again, these sums could only come from other investors;

(iii) Whatever the form of the claim or the nature of the cause of action, Mr Taylor was in fact suing in respect of past, i.e. pre-contractual loss for which on general principles he could not obtain compensation in a contractual action. A similar principle would apply in respect of the cause of action in deceit;

(iv) In relation to (i) and (ii) above, it would in any event be contrary to public policy for any court to award, or ICS to pay, compensation based on a proposition that Mr Taylor would have been paid or repaid monies out of funds misappropriated from third party investors.

It does not seem to us that the above reasoning sustains close analysis. Dealing in order with the points raised the position seems to us to be as follows.

(1) We do not accept proposition (1) in the unqualified terms stated. By referring to losses suffered before 18th December 1986 it begs the question as to how the event giving rise to such loss is to be identified. s54 and Rule 1.02.3 are framed in terms of compensation "to satisfy claims of any description of civil liability" (s54) and compensation "to the extent that the claim is ..... in respect of any description of civil liability" (Rule 1.02.3).

In our view that phraseology is focused upon compensation in respect of civil claims, whether for the recovery of property or damages, of a type enforceable in the civil courts in accordance with ordinary law and procedures. That is made quite clear by Rule 2.04.2 which requires ICS to be satisfied that the claim would be established if proceedings were brought before a court of competent jurisdiction. It does not seem to us that, where such a claim can be established (i.e. a claim arising out of or in connection with the investment business of an authorised person after the inception of the Scheme), it should be an objection or bar to recovery that it would have been open to the claimant to bring proceedings for recovery of similar or substantially the same loss caused by earlier dealings with the same person before inception.

We note that Staughton LJ considered that the warrant for focusing, not upon what seems to us to be the clear wording of the Statutory Scheme, but the assumed underlying purpose of the Act, is the fact that the Scheme is a mutual scheme requiring honest traders to make good the losses caused by their dishonest rivals. However, we consider that even if it be right to regard the Scheme set up and funded under the statutory power in s.54(2) as a "mutual scheme" in any conventional sense, that is insufficient reason to place a limitation upon what seems to us to be the underlying intention of the Act, namely to compensate members of the public in respect of claims against defaulting authorised persons for losses arising out of investment business effected by such persons after the commencement of the Scheme (c.f. R-v- Investors Compensation Scheme ex parte Weyell and Veniard [1994] QB 749 at 767B).

Paragraphs (b) (c) and (d) of s54(2) provide in unqualified terms for rules to establish a fund out of which compensation is to be paid; to provide for the levying of contributions on authorised persons and otherwise financing the Scheme; and for the specification of the terms and conditions on which and the extent to which compensation is to be payable. Those rules appear to us to be couched in terms suitable to be applied to the payment of claims for breach of contract and deceit of the type relied on by Mr Taylor as arising from the 1991 transaction. Whereas the Divisional Court thought that, for Mr Taylor to succeed, it would be necessary to give a charitable but strained interpretation to the Act and the Rules, we consider that a straightforward reading of the wording of the statutory scheme militates in his favour.

(2) It does not seem to us to follow that where an investor has effected an investment transaction with an authorised person prior to 18th December 1986 in respect of which the authorised person incurs a liability before that date, the investor is necessarily precluded from claiming and receiving compensation in respect of a later transaction giving rise to a different and separate civil liability after that date. Simply to assert that it cannot have been intended that the scheme should "pick up" past liabilities does not provide an answer to the question whether Mr Taylor is entitled to compensation in respect of Mr Barrett's liability arising from the second investment.

(3) As legally formulated, it seems to us that the claims are clearly different. They overlap, but they are not "the same". Quite apart from the different times at which the causes of action arose, a claim based on the earlier transaction would, if brought in contract, be for the sum of £22,000 (i.e. £24,000 including interest less £2,000 paid back to Mr Taylor), whereas in respect of the 1991 transaction it would be for £37,500, appropriately discounted. So far as any claim in tort is concerned, the measure of damage in relation to the misappropriated fund would be £16,500 plus appropriate interest, whereas the measure of damage in respect of deceit would be for £22,000.

Given the manner in which the 1991 transaction arose, it seems to us no answer to dismiss what happened after 1986 as mere "fiction". Whether considered as historic events, or as material facts giving rise to a claim in respect of civil liability, what happened to Mr Taylor was real enough. He had the fate of his earlier investment misrepresented to him, and on that basis, instead of asking for his money back, he entered into a bona fide transaction (at least on his part) that a debt which he was due to be repaid should be left with Beechcroft as an interest-bearing investment for a further five years.

Nor does it seem to us that any of the subsidiary reasons advanced by Mr McManus to regard the claim as essentially relating to the 1986 liability are persuasive.

As to (i) we consider that ample consideration moving from Mr Taylor can be spelled out in relation to the 1991 transaction. Instead of receiving repayment of his first investment according to its original terms, he simply received £2,000, agreeing that the balance of £22,000 should be invested on different terms for a further five years. Any chose in action based on the original investment agreement was surrendered in return for the terms of the new agreement. Even if the new arrangements were "fictional" so far as the representations and intentions of Mr Barrett were concerned, that did not prevent a valid contract coming into existence upon which Mr Taylor would be entitled to sue as a wholly innocent party. Nor, subject to the point on public policy (see further below) could it be said that Mr Taylor's forbearance to sue was of no economic value in the sense that it seems to us highly likely that, had he been aware of the true position, he would have obtained repayment.

As to (ii), there is no suggestion in relation to the original investment arrangements that Beechcroft was assuming the liabilities of a trustee, or indeed to pay Mr Taylor's money into any separate or earmarked client account. The relationship between the parties in respect of the investment and the duty to repay was never other than that of debtor and creditor. As to repayment of the debt from other investors' funds, see further below.

The argument under (iii) is simply an assertion that a fresh cause of action based on the 1991 transaction would have been for an action for recovery of past i.e. pre-contract loss. It fails to recognise that the claim in contract would be framed and recoverable as damages for breach and/or repudiation of contract in respect of the £22,000 reinvested, and, in tort, as damage flowing from Mr Barrett's misrepresentation, whereby Mr Taylor failed to assert a claim and obtain payment of the sum due to him in respect of his original investment.

Finally, so far as (iv) is concerned, we have been shown no authority and cited no principle by Mr McManus to justify his assertion that, in adjudicating on a claim for breach of contract and/or deceit in respect of the 1991 transaction, the court would decline to award damages due to the innocent party upon the basis that the defaulting party would have had no funds properly available to satisfy the judgment.

That being so, there is no requirement or justification for ICS to take a different view.

In sum, therefore we consider that the 1991 claim is, in the words of Rule 1.02.3

"a claim in respect of any description of civil liability incurred on or after 18th December 1986 in connection with the investment business of a person who, at the time compensation is to be paid .... had been an authorised person."

We also consider that, on the evidence before us, ICS may, under Rule 2.02.2b be satisfied that Mr Taylor has a claim against Beechcroft which is a Scheme Business claim as defined in Rule 2.03.1.

We would add as a footnote that some time was spent in argument as to the assistance to be derived from the facts underlying the decision in ex p. Weyell and Veniard. In that case, Mr and Mrs Veniard entered into a "Home Income Plan" on the advice of insurance brokers who were FIMBRA members before the brokers' participation date in the Scheme, which was 28th August 1988. The plan involved the raising of a loan from a third party secured by a mortgage (repayable only on death or sale of their home), a large proportion of the loan being invested in an equity-linked, single premium investment bond in order to provide income to service the loan, with the balance made available to the applicants. The bond failed to service the mortgage loan and the capital diminished at an increasing rate, with the result that the applicants were forced to sell their home. The applicants claimed in respect of the brokers' original advice. Their claim was rejected by ICS, such rejection being upheld by the Divisional Court on the grounds that the advice had been given before the date the brokers' participation in the Scheme. However, on the basis that, after that date, the brokers had reported to the applicants on the progress of the fund at six-monthly intervals and, negligently and in periodic breach of FIMBRA rules, had failed to warn the applicants of the increasing risk to the fund and their house, the Court decided that the applicants had a potential claim. Glidewell LJ stated;

"The Veniards' fund was already diminished by the time ...[the brokers]... made their first report after 28th August 1988, and was further diminished by later cash withdrawals. If, however, the Veniards can prove that they suffered further loss to their fund following the first report by Aylesbury after 28th August 1988, they had a "Scheme Business claim" for that loss against Aylesbury under Rule 2.03(1) of the Rules of 1990. ...[The brokers]... being in default, Mr and Mrs Veniard are entitled to claim compensation from ICS for such irrecoverable loss."

In our view, the case is not of direct assistance on the facts. However, it does in our view demonstrate the appropriateness of an analytical approach to the characterisation and causation of the particular loss in respect of which a claim on ICS is made, in order to see whether the conditions provided for in the Rules in respect of a Scheme Business claim are established. As we have already indicated we consider that, on the basis of such an approach in this case, the claim of Mr Taylor is one which is eligible for compensation under the Scheme.

Accordingly, subject to the further submissions of Counsel as to the appropriate form of the Order we will grant the relief sought in the Notice of Application.

ORDER: Application allowed with costs here and below; legal aid taxation of the applicant's costs; leave to appeal to the House of Lords refused.