ON APPEAL FROM THE HIGH COURT
The Hon Mr Justice Newey
Case No HC09C00868
Strand, London, WC2A 2LL
B e f o r e :
LADY JUSTICE SMITH
LORD JUSTICE ELIAS
| CHARLES CLELAND HELDEN
|- and -
Mr Fred Philpott (instructed by Neumans) for the Respondent
Hearing date: 11th April 2011
Crown Copyright ©
Lord Neuberger MR:
The facts as agreed or found by the Judge
The terms of the three loans
Section 2 of the 1989 Act and section 53 of the 1925 Act
The effect of FSMA on the loans: the background
"Section 19 of FSMA bars anyone but an 'authorised person' or an 'exempt person' from carrying on a 'regulated activity' in the United Kingdom (the 'general prohibition'). Section 22(1) provides that an activity is a 'regulated activity' if, among other things, it is 'an activity of a specified kind which is carried on by way of business' and either (under section 22(1)(a)) 'relates to an investment of a specified kind' or (under section 22(1)(b)) 'in the case of an activity of a kind which is also specified for the purposes of this paragraph, is carried on in relation to property of any kind'. The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 … specifies kinds of activity for the purposes of section 22 of FSMA (see article 4). The activities specified include certain activities relating to 'regulated mortgage contracts', [an expression] defined in article 61."
"(1) An agreement made by a person in the course of carrying on a regulated activity in contravention of the general prohibition is unenforceable against the other party.
(2) The other party is entitled to recover—
(a) any money or other property paid or transferred by him under the agreement; and
(b) compensation for any loss sustained by him as a result of having parted with it."
As the Judge said at  EWHC 2012 (Ch), para 69, accepting a point made by Mr Philpott, who appears for Strathmore, the way in which section 26(2) is framed is more obviously suited to a case in which the "other party" has made an investment than one where, as here, he has been lent money.
"(1) This section applies to an agreement which is unenforceable because of section 26 ….
(2) [Deals with the amount of compensation].
(3) If the court is satisfied that it is just and equitable in the circumstances of the case, it may allow—
(a) the agreement to be enforced; or
(b) money and property paid or transferred under the agreement to be retained.
(4) In considering whether to allow the agreement to be enforced or (as the case may be) the money or property paid or transferred under the agreement to be retained the court must—
(a) if the case arises as a result of section 26, have regard to the issue mentioned in subsection (5); ….
(5) The issue is whether the person carrying on the regulated activity concerned reasonably believed that he was not contravening the general prohibition by making the agreement.
(7) If the person against whom the agreement is unenforceable—
(a) elects not to perform the agreement, or
(b) as a result of this section, recovers money paid or other property transferred by him under the agreement,
he must repay any money and return any other property received by him under the agreement. … ."
The effect of FSMA on the loans: "carried on by way of business"
"In this context, as in some others within the financial services legislation, a distinction is drawn between (a) an activity 'carried on by way of business' and (b) carrying on 'the business of engaging in that activity'. Whereas arranging or advising on regulated mortgage contracts will be a specified activity only if the person in question 'carries on the business of engaging in that activity' (within the meaning of article 3A …), 'entering into a regulated mortgage contract as lender' or 'administering a regulated mortgage contract' is a specified activity if the activity is merely 'carried on by way of business' (within section 22 of [FSMA]) (provided that, in the case of 'administering a regulated mortgage contract', the relevant contract was 'entered into by way of business' – see article 61(2) …)."
"i) Even excluding loans to members of the Ashton family, Strathmore/Sandworth made a sizeable number of loans. … Mr Harrison explained that he was assisted with the purchase of around 100 properties, albeit that many of the properties were acquired in portfolios of up to 25 properties;
ii) The loans were made over a period of years and with some regularity. The first loan to Mr Harrison dates from 2002. Thereafter, as Mr Ashton said in his witness statement, he 'made a series of very short term loans to [Mr Harrison] to assist him to build up a buy to let portfolio'. Money was advanced to Mr Helden, Mr Jordan and companies associated with them between 2004 and 2006;
iii) Substantial amounts of money were advanced. Sandworth lent as much as £5.4 million in connection with the purchase of [Belgravia]. C & J came to owe upwards of £3 million on the security of … Catherine Place. Mr Helden was lent more than £1 million. Mr Harrison reckoned that he never owed more than about £1 million at any time, but £1 million is a considerable amount;
iv) The loans were made with a view to profit. During his oral evidence, Mr Ashton referred more than once to having tried to get the best possible return on his money. … ;
v) Mr Ashton came to meet Mr Helden and Mr Jordan because they were seeking funding. The Ashtons' friendship with Mr Helden and Mr Jordan grew out of their financial relationship, not the other way round. Likewise, the relationship between Mr Harrison and the Ashtons began as a 'purely professional' one … ;
vi) It is possible to exaggerate the informality with which matters were conducted. Solicitors were often instructed. The loans were generally secured. Mr Ashton kept a record, even if in manuscript, of the transactions. In any case, informality is not necessarily inconsistent with business;
vii) The loans to Mr Helden formed part of a chain of not dissimilar transactions, albeit that they were the only ones involving 'activity of a specified kind'; and
viii) Strathmore is a limited company with, I understand, commercial objects."
The effect of FSMA on the loans: section 28(3)
"97. … [I]t was reasonable for the Ashtons (and Strathmore) to fail to realise that FSMA was in point. After all:
i) … Strathmore employed solicitors to represent them in connection with the loan for the purchase of [the property], and those solicitors did not inform them that FSMA was (or could be) applicable;
ii) The financial services legislation had not until quite recently [October 2004] extended to any mortgages ….;
iii) Neither the Ashtons nor their companies usually entered into transactions to which FSMA applied. It did not apply, even after 2004, to loans such as those granted to C & J [the other companies in which Mr Helden was interested] or Mr Harrison; and
iv) Neither Mrs Ashton nor even Mr Ashton had ever attended any training courses on financial matters, let alone a course concerned with FSMA."
"100. The case for allowing enforcement of the agreement relating to the [main] loan is, as it seems to me, particularly compelling. The reasons include these:
v) Mr Helden has had the use of the property which Strathmore's loan enabled him to buy … since 2006 without making any rent or interest payments;
vi) The property has increased substantially in value. Whereas it was bought for £1 million, agents last year suggested that it should be marketed at £1.8m … . The loan from Strathmore has thus enabled Mr Helden to achieve a large profit;
vii) … I accept that … Strathmore would not have been willing to make the loan on an unsecured basis;
viii) … Strathmore could be expected to have generated a return on the £1 million by investing it elsewhere had it not been lent to Mr Helden. They have lost that potential profit as a result of lending the money to Mr Helden;
ix) There is no question of Mr Helden having been taken advantage of. He had considerable experience in property matters, including as a mortgage broker. Further, the rates of interest charged were agreed with Mr Helden and were not exorbitant;
x) Mr Helden preferred not to pursue alternative funding because of his concern that he should be able to make lump sum repayments without penalty …;
xi) Mr Helden has not identified respects in which he would have been better placed if Strathmore had been an 'authorised person' for FSMA purposes; and
xii) The Ashtons did not realise that FSMA could apply, and it was reasonable for them not to do so."
"I share these doubts. The interpretation adopted in the Satnam Singh case draws a distinction Parliament cannot have intended. The language of the subsection gives no support to this distinction. Section 92(5) is concerned to provide a defence where the person charged has a reasonable belief in the lawfulness of what he did. Those who act honestly and reasonably are not to be visited with criminal sanctions. It makes no sense to confine this defence to cases where the defendant is aware of the existence of the registered trade mark and exclude altogether those cases where the defendant is not. Section 92(5) provides a defence where the defendant believes on reasonable grounds his use of the sign does not infringe a registered trade mark of whose existence he is aware. It would be extraordinary if the subsection does not equally furnish a defence in the stronger case where the reason why the defendant believes his use of the sign does not infringe a registered trade mark is that he reasonably believes no relevant trade mark is registered. Section 92(5) is to be interpreted as including the latter case as well as the former."
"In contrast, I have not been persuaded that I should grant relief under section 28(3) … as regards the [£90,000 loan]. The following points in particular militate to my mind against doing so:
i) The £91,509 derived from a £35,000 loan made less than three years before … . While I understand how the debt came to grow as it did, the increase is still equivalent to an extremely high rate of interest; and
ii) The £35,000 was lent to C & J rather than to Mr Helden himself."
The effect of FSMA on the loans: conclusion
The appeal on costs
Lady Justice Smith:
Lord Justice Elias: