England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		25/03/2010

Mr Justice Lewison:

Introduction

1. The issue on this application is whether the Defendants have a real prospect of success in defeating the FSA’'s claim that they have been carrying on a regulated activity. The regulated activity alleged is that of accepting deposits. The Defendants say:

i) They were not accepting deposits but loans made to them;

ii) If and in so far as the monies they received were deposits, they did not receive deposits by way of business either in the ordinary sense of that expression, or in the sense in which it is defined by the relevant legislation.

2. The FSA say that even if the facts alleged by the Defendants are true, they have no real prospect of successfully defending the claim. Hence they say that even on a summary basis a declaration should be made to the effect that the Defendants were carrying on a regulated activity; and an injunction should be granted restraining them from carrying on such an activity.
3. I summarise the principles I should apply as follows:

i) The court must consider whether the defendant has a “"realistic”" as opposed to a “"fanciful”" prospect of success: Swain v Hillman [2001] 1 All ER 91;

ii) A “"realistic”" defence is one that carries some degree of conviction. This means a defence that is more than merely arguable: ED & F Man Liquid Products v Patel [2003] EWCA Civ 472 at [8]

iii) In reaching its conclusion the court must not conduct a “"mini-trial”": Swain v Hillman

iv) This does not mean that the court must take at face value and without analysis everything that a defendant says in his statements before the court. In some cases it may be clear that there is no real substance in factual assertions made, particularly if contradicted by contemporaneous documents: ED & F Man Liquid Products v Patel at [10]

v) However, in reaching its conclusion the court must take into account not only the evidence actually placed before it on the application for summary judgment, but also the evidence that can reasonably be expected to be available at trial: Royal Brompton Hospital NHS Trust v Hammond (No 5) [2001] EWCA Civ 550;

vi) Although a case may turn out at trial not to be really complicated, it does not follow that it should be decided without the fuller investigation into the facts at trial than is possible or permissible on summary judgment. Thus the court should hesitate about making a final decision without a trial, even where there is no obvious conflict of fact at the time of the application, where reasonable grounds exist for believing that a fuller investigation into the facts of the case would add to or alter the evidence available to a trial judge and so affect the outcome of the case: Doncaster Pharmaceuticals Group Ltd v Bolton Pharmaceutical Co 100 Ltd [2007] FSR 63;

vii) On the other hand it is not uncommon for an application under Part 24 to give rise to a short point of law or construction and, if the court is satisfied that it has before it all the evidence necessary for the proper determination of the question and that the parties have had an adequate opportunity to address it in argument, it should grasp the nettle and decide it. The reason is quite simple: if the respondent''s case is bad in law, he will in truth have no real prospect of succeeding on his claim or successfully defending the claim against him, as the case may be. Similarly, if the applicant''s case is bad in law, the sooner that is determined, the better. If it is possible to show by evidence that although material in the form of documents or oral evidence that would put the documents in another light is not currently before the court, such material is likely to exist and can be expected to be available at trial, it would be wrong to give summary judgment because there would be a real, as opposed to a fanciful, prospect of success. However, it is not enough simply to argue that the case should be allowed to go to trial because something may turn up which would have a bearing on the question of construction: ICI Chemicals & Polymers Ltd v TTE Training Ltd [2007] EWCA Civ 725.

4. Where, therefore, there are disputed facts and the grounds on which the Defendants dispute them are plausible grounds, I assume that the Defendants will succeed in establishing those facts at trial. Where, however, the grounds on which the Defendants dispute facts alleged by the FSA are implausible, incredible, or contradicted by contemporaneous documents I have not made that assumption.

Compelling reason for trial?

5. Each of the Defendants pointed out that they were unrepresented. Their assets have been frozen by a restraint order made by the Crown Court, and they are not permitted to use those assets to pay for legal representation. Each of them also says that his documents (including digitally stored documents and computers) have been seized by the City of London Police, with the result that they have not had access to them. In addition Mr Anderson and Mr Peacock had instructed solicitors, but the Law Society intervened in those solicitors’' practice. As a result Mr Anderson and Mr Peacock have not had access to all the papers that they had hoped. The Defendants say that this combination of circumstances should lead me not to entertain this application but to let the case go to trial.
6. Each of the Defendants has already applied for an adjournment of this application on the same or similar grounds. That application was refused by Briggs J on 22 February 2010. Briggs J balanced these factors against the potential injustice to the FSA of having to prepare for trial if a successful application for summary judgment would greatly shorten the trial timetable. In paragraph 50 of his judgment he said:

“"It is also important to bear in mind that the application sought to be adjourned is only for summary judgment. It is not a trial. An applicant for summary judgment must show that there is no real triable issue. The court will be astute to identify any serious issue of fact standing in the FSA’'s way and if it does so to direct a trial. Furthermore, if the Article 2 defence turns on a difficult issue of statutory interpretation the court may well direct either a trial or an adjournment of the summary judgment application to enable assistance to be obtained from an advocate to the court if the defendants are still, at that stage, entirely unrepresented. The court is in addition experienced in managing hearings, including summary judgment hearings, so as to minimise as far as possible the difficulties facing litigants in person. Counsel for any opponent has duties to assist the court where necessary.”"

7. In presenting this application Mr Purchas, appearing for the FSA, has relied only on the Defendant’'s own documents. I have reached my own conclusion without reliance on any of the e-mails referred to in the evidence filed by the FSA, which Mr Pruthi said he was unable to verify as his. As I have said I have made factual assumptions in the Defendants’' favour where there is room for doubt. So far as the law is concerned I have been guided by the decision of the Court of Appeal in Perotti v Collyer Bristow [2004] 2 All ER 189 in which Chadwick LJ said:

“"It is, in my view, important to have in mind that however much this court, and indeed any other court, would welcome the assistance that can be given by a legally qualified and competent advocate, the test is not whether (with such assistance) this court would find it easier to reach the decision which it has to reach on the facts of the case. This court, and other courts, have ample experience of cases in which the material is not presented in an ideal form; and have not found it impossible to reach just decisions in such cases. The test under Article 6(1), as it seems to me, is whether a court is put in a position that it really cannot do justice in the case because it has no confidence in its ability to grasp the facts and principles of the matter on which it has to decide. In such a case it may well be said that a litigant is deprived of effective access; deprived of effective access because, although he can present his case in person, he cannot do so in a way which will enable the court to fulfil its paramount and over-arching function of reaching a just decision. But it is the task of courts to struggle with difficult and ill-prepared cases; and courts do so every day. It is not sufficient that the court might feel that the case could be presented better; the question for the court is whether it feels that the case is being, or will be, presented in such a way that it cannot do what it is required to do — that is to say, reach a just decision. If it cannot do that the litigant is effectively deprived of proper access to the courts.”"

8. He also pointed out, as did Briggs J, that where the question is whether a claim or defence has a real as opposed to a fanciful prospect of success, the court is more likely to be able to do justice without the need for legal representation on both sides.
9. In my judgment I should entertain the application and decide it on its merits.

The statutory framework

10. One of the functions of the FSA is to take action to protect consumers from abuse in the provision of financial services. In that capacity it enforces the requirements and prohibitions contained in the Financial Services and Markets Act 2000 (“"FSMA”"). Section 19 (1) provides that no person may carry on or purport to carry on a “"regulated activity”" in the United Kingdom unless authorised or exempt. It is common ground that none of the Defendants was authorised or exempt. A “"regulated activity”" is defined by section 22 (1) as:

“"an activity of a specified kind which is carried on by way of business and (a) relates to an investment of a specified kind; or (b) in case of an activity which is also specified for the purposes of this paragraph, is carried on in relation to property of any kind.”"

11. Section 22 (5) says that “"specified”" means specified by an order made by the Treasury. There are two relevant orders for the purposes of this application: The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (“"the RAO”") and The Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 (“"the Business Order”").
12. Part II of the RAO specifies activities that are regulated activities. It is introduced by article 4 which says:

“"(1) The following provisions of this Part specify kinds of activity for the purposes of section 22 of the Act (and accordingly any activity of one of those kinds, which is carried on by way of business, and relates to an investment of a kind specified by any provision of Part III and applicable to that activity, is a regulated activity for the purposes of the Act).

…

(3) Subject to paragraph (4), each provision specifying a kind of activity is subject to the exclusions applicable to that provision (and accordingly any reference in this Order to an activity of the kind specified by a particular provision is to be read subject to any such exclusions).”"

13. The first specified activity is “"Accepting Deposits”", which is described by article 5 as follows:

“"(1) Accepting deposits is a specified kind of activity if –

(a) money received by way of deposit is lent to others, or

(b) any other activity of the person accepting the deposit is financed wholly, or to a material extent, out of the capital of or interest on money received by way of deposit.

(2) In paragraph (1), “"deposit”" means a sum of money, other than one excluded by any of articles 6 to 9, paid on terms –

(a) under which it will be repaid, with or without interest or premium, and either on demand or at a time or in circumstances agreed by or on behalf of the person making the payment and the person receiving it, and

(b) which are not referable to the provision of property (other than currency) or services or the giving of security.”"

14. Articles 6 to 9 contain the exclusions. One of them is contained in article 6 (1) (b) which says that a sum is not a deposit if it is:

“" paid by a person … in the course of carrying on a business consisting wholly or to a significant extent of lending money.”"

15. Another is contained in article 6 (1) (d) which says that a sum is not a deposit if it is:

“"paid by a person who, at the time when it is paid, is a close relative of the person receiving it or who is, or is a close relative of, a director or manager of that person, or who is or is a close relative of, a controller of that person.”"

16. Who is a “"close relative”" is defined by article 3 (1). A person’'s close relative is his spouse or civil partner; his children and step-children, his parents and step-parents, his brothers and sisters and his step-brothers and step-sisters and their spouses or civil partners. This definition does not include his uncles or his cousins or his aunts, let alone his friends or friends of friends.
17. Accepting deposits is only a regulated activity if the activity is carried on by way of business. Section 22 does not define the expression “"by way of business”". However, the Business Order prescribes circumstances in which activities will not amount to carrying on business. Article 2 (1) provides:

“"(1) A person who carries on an activity of the kind specified by article 5 of the Regulated Activities Order (accepting deposits) is not to be regarded as doing so by way of business if—

(a) he does not hold himself out as accepting deposits on a day to day basis; and

(b) any deposits which he accepts are accepted only on particular occasions, whether or not involving the issue of any securities.

(2) In determining for the purposes of paragraph (1)(b) whether deposits are accepted only on particular occasions, regard is to be had to the frequency of those occasions and to any characteristics distinguishing them from each other.”"

18. It follows that in order to establish that a person is carrying on an activity by way of business, the FSA must show that the activity would fall within the ordinary meaning of that phrase in section 22 of FMSA; and also that it is not excluded by article 2 of the Business Order.

The Facts: Mr Pruthi

19. Although Mr Pruthi is the Third Defendant I begin with him since Mr Anderson and Mr Peacock in a sense feed into his activities.
20. Mr Pruthi’'s evidence is principally found in his third affidavit. He says that in 2003 or 2004 he became aware that there was a need on the part of small companies for high cost short term funding; and that is how he developed his business. By 2005 he had about a dozen high net worth individuals, whom he had met through networking and friends and associates, who were looking to him to find opportunities for them. He developed what he called three “"propositions”" at that time.
21. The first was that if a participant put up a sum of money for one month, they would receive 8 per cent interest plus return of their capital at the end of the month. Mr Pruthi would lend that money out at between 15 and 18 per cent. The loans were made either to companies or partnerships. If the participant left their money in at the end of the month, then interest would be payable on the compounded balance. But they could ask for payment of interest on a monthly basis in which case their capital would remain in the scheme. The second proposition was a four month deal. This deal would return the participant the equivalent of 11 per cent interest per month compounded monthly. Thus the return on capital at the end of four months was more than 50 per cent, plus the return of the original capital. Under this scheme the participant could not have interest paid monthly; and was not entitled to the return of his capital until the end of the four month period. But at the end of the period he could choose to leave his money in, in which case compound interest would continue to be paid for another four months. The third proposition was an annual deal. This was similar to the four month deal, except that the monthly rate of interest was simple interest at 13 per cent; and the participant was not entitled to the return of his capital or interest until the end of the twelve month period. Each of the three “"propositions”" offered a “"rollover”" facility in which the participant could leave his money in for a further term.
22. Mr Pruthi’'s paperwork made it clear that he was not regulated by the FSA. He assumed that participant would know that there would be both a high level of risk and a high return. A typical letter that Mr Pruthi used read (in part) as follows:

“"I am writing to confirm our arrangement vis-à-vis your £10,000 (ten thousand pounds) and the amount that will be returned to you in 120 (one hundred and twenty) days.

First, I would like to confirm that you are making an investment in Business Consulting International which is a trading style for my Management Consulting and advisory activities. My full legal name is Kautilya Nandan Pruthi …

The term of our agreement will be 15^th February … through 15^th June … which is exactly 120 (one hundred and twenty) days.

In consideration for your Capital I promise and personally guarantee to return to you £15,181.00 … exactly. The Capital component of £10,000 … is included and your profit from this arrangement is equivalent to £5,181.00 … or 11% (eleven percent per month Compounded) for the period.

You have my personal guarantee that these monies will be returned to you in full on the 15^th of June … as previously mentioned.

…

By accepting the terms as contained in this Agreement and through provision of your cleared fund deposited directly into my business bank account, you confirm that your involvement is entirely voluntary and without coercion. You have chosen to be involved with my business on a commercial level and the arrangement between us while personal in nature is also commercial given that I am paying a substantial commercial consideration for use of your Capital.

Further, you also acknowledge that you understand that I am not regulated by the FSA … and I am therefore not authorised to carry on personal investment business in the United Kingdom. I have not recommended to you that this loan to my business is in your best interests as I have no understanding of your total assets and liabilities or indeed tolerance for risk. However, in the light of our personal friendship and the fact that we are peers, I have solicited your involvement and hope that you will see fit to participate.”"

23. By 2005 he had 20 to 25 participants. He knew them all personally. As he put it in paragraph 26 of his affidavit:

“"The business developed by word of mouth, and I was approached by new people who were ostensibly friends and family members of those already involved – particularly family.”"

24. By 2006 the number of participants had grown to 100; and by 2007 to 200. At the outset he operated his business from home; but in 2006 moved into larger premises in Brompton Square. In 2007 there was a new development which Mr Pruthi describes as “"a multi-layer element”". Mr Pruthi explains that what this meant was that people like Mr Anderson operated in parallel with him. In paragraph 32 of his affidavit he said:

“"Mr Anderson and I agreed that he would place money with me and I would continue to pay him my standard retail rate of interest, in accordance with the first, second, and third propositions explained above. Mr Anderson would then conduct his own business as he chose, to act as an aggregator of capital from his own network of friends, family and close associates. He would make a margin by paying a differential rate of return to his participants, because his rate would be lower than mine.”"

25. Mr Pruthi dealt with a number of aggregators. Another of them was Mr Peacock. Apart from Mr Anderson and Mr Peacock, Mr Pruthi named five other so-called aggregators. He says that he did not go out of his way to approach people to become aggregators: they approached him. He did not solicit funds or advertise. He said in his affidavit that as far as he was concerned this was “"a close-knit group of people who were either known to me, or were close associates, friends or family of those involved.”"
26. The FSA has analysed a large quantity of documentary material that it has recovered from Mr Pruthi. Based on that material the evidence of Mr Bowker (an investigator who works in the FSA’'s Enforcement Division) is that:

i) Between February 2007 and December 2008 Mr Pruthi entered into 757 separate agreements with 293 participants.

ii) The agreements vary in size between £2,000 and over £1.6 million.

iii) Mr Pruthi has entered into agreements in a number of different currencies, but the total value in pounds sterling exceeds £42 million.

iv) Apart from two dates, each of the agreements began on either the 1^st or the 15^th of the month. The 757 agreements were thus entered into on 42 separate dates. However, an analysis of Mr Pruthi’'s bank account shows that monies were received into that account throughout any given month and not just on the 1^st and the 15^th of the month.

v) Once the agreed rate of return is taken into account Mr Pruthi’'s liability to repay exceeds £72 million.

27. Mr Pruthi disputes the detail of this evidence, but not, I think, its broad thrust. His main point is that these sums of money were not “"deposits”" but loans to him. In his skeleton argument prepared for this hearing he says that his liability to repay does not exceed £40 million. So far as the 1^st and the 15^th of the month is concerned, Mr Pruthi says that broadly speaking what the FSA says is true; but that he would accept a loan if needed on any day although for ease of administration interest would be calculated as if he had accepted the loan on the 1^st or the 15^th of the month.
28. In addition to the activities just described, Mr Pruthi also had other business interests. These included directorships of a number of limited companies and he was also actively involved in the day to day operations of a company called UK Scan Ltd. This was a document imaging and retrieval business in which he was a major shareholder and of which Mr Anderson was the Finance Director. In his pleaded Defence Mr Pruthi says that he took sums from the amounts placed with him. These sums were payments for the operation of the account and attendant activities; and also payments that any self-employed entrepreneur would make to himself, such as salary, personal income or commission from the receipts of his business.

The facts: Mr Anderson

29. Mr Anderson also says that he did not take deposits. Rather people made loans to him. He says that this was also apparent from his standard contract. In his pleaded Defence Mr Anderson says that he used a letter that Mr Pruthi gave him as a template set of terms when accepting loans. A typical letter read (in part) as follows:

“"I am writing to confirm our arrangement vis-à-vis your £50,000 (fifty thousand pounds) and the amount that will be returned to you over 120 (one hundred and twenty) days.

First, I would like to confirm that you are making an investment in John Anderson Consulting which is a trading style for my Management Consulting and advisory activities. My full legal name is John Cecil Anderson …

The term of our agreement will be 1 June … through to 15 October … (inclusive) which is exactly 122 (one hundred and twenty two) days.

In consideration for your capital I promise and personally guarantee to remunerate you @ £2,000 exactly per month. The Capital component of £50,000 will be returned to you in full on 1 October … Your profit over the period is equivalent to £8,000 or 4% (four percent simple interest) per month.

You have my personal guarantee that these monies will be returned to you in full on the 1 October … as previously mentioned.

…

By accepting the terms as contained in this agreement and through provision of your cleared funds deposited directly into my business bank account, you confirm that your involvement is entirely voluntary and without coercion. You have chosen to be involved with my business on a commercial level and the arrangement between us while personal in nature is also commercial given that I am paying a substantial commercial consideration for use of your capital.

Further, you also acknowledge that you understand that I am not regulated by the FSA … and I am therefore not authorised to carry on personal investment business in the United Kingdom. I have not recommended to you that this loan to my business is in your best interests as I have no understanding of your total assets and liabilities or indeed tolerance to risk. However, in the light of our personal friendship and the fact that we are peers, I have solicited your involvement and hope that you will see fit to participate.”"

30. Mr Anderson also used an information sheet which described the scheme. It said that the scheme revolved round a fund of monies which was pooled and then used by “"Business Consulting International”" to provide trade finance to companies that usually require very short-term finance. It continued:

“"The scheme itself was set up to provide a stream of income for the founding individuals of the fund, and further participation is strictly by invitation only, typically to family and friends of those individuals. The latter has recently been broadened, principally in the light of greater demand for funds.”"

31. In his pleaded Defence Mr Anderson says that he borrowed from individual lenders in consideration for regular interest payments. He re-lent those sums to Mr Pruthi and expected to make profits from borrowing at a lower rate of interest than he received from Mr Pruthi. He paid interest monthly. Mr Anderson relied on two unsigned witness statements from his brothers-in-law, Mr Khan and Mr Southern. Each of them says that in June 2006 he became aware that Mr Anderson was borrowing money from family and friends and that Mr Anderson said that he was lending the monies he received “"en bloc”" to Mr Pruthi. Each of them says that Mr Anderson warned him that “"this venture, like most business ventures offering high returns was not without risk and it was entirely a matter for lenders to accept of reject the invitation to join this business venture.”"
32. Mr Bowker’'s evidence, based on an analysis of documents recovered from Mr Anderson, shows that:

i) Between October 2006 and December 2008 Mr Anderson entered into 775 agreements with 133 participants;

ii) The agreements vary in size between £5,000 and €356,000

iii) The total value in pounds sterling exceeds £23 million;

iv) Apart from two dates, all the agreements began on the 1^st or the 15^th of the month;

v) Mr Anderson’'s total liability to repay exceeds £11 million.

33. Mr Anderson’'s response is as follows. First, he challenges the number of agreements that the FSA asserts. He says that many of them were “"rollovers”" and that the true number of new deposits over a 25 month period is 314. That is an average of 12 per month, although he accepts that his activity started with small volumes and built up over that period, so that a flat average may be misleading. He says that an analysis of his bank statements shows that he only accepted money on the 1^st or the 15^th of the month (with perhaps one day’'s leeway). No money entered his bank account between the 4^th and the 11^th of any month or between the 18^th and the 26^th of any month. If people sent him money too early, he would offer to send it back.
34. Mr Anderson also says that of his network one person who paid him money (Mr Teagle) was a person who himself carried on the business of lending money; and that 13 of his network fall within the definition of “"close family”".
35. Otherwise he does not take issue except in the most general of terms. For the purposes of this application I will accept Mr Anderson’'s specific factual challenges. I proceed, therefore, on the basis that there were 314 deposits of new money from 119 participants who were neither Mr Teagle nor close relatives of Mr Anderson.

The facts: Mr Peacock

36. In his pleaded Defence Mr Peacock says that he was provided with Mr Anderson’'s version of Mr Pruthi’'s letter and that he used it as his own template for terms on which he accepted loans. I do not think that I need to quote it. It is in very similar terms to the other two and says (among other things) that the investor is involved with him “"on a commercial level”"; and that the arrangement “"while personal in nature is also commercial”". Mr Peacock also used an information sheet which read (in part):

“"This is an opportunity for a very high return on funds that are used to lend to businesses. These are used for situation and case specific very short term high cost finance for businesses who for any number of reasons cannot wait for traditional finance houses to render a decision…. The fund is unregulated and operates outside of the FSA or any other regulation as it makes Commercial loans which are unregulated under UK law.”"

37. The bullet points made in the sheet include the points that fund units are pooled into the fund and then spread into the portfolio of companies “"we lend to”"; that a full personal guarantee is offered; that the fund is lending at the rate of £60 million per month and that the fund has been successfully operating for six years.
38. In his pleaded Defence Mr Peacock says that says that he borrowed from individual lenders in consideration for regular interest payments. He re-lent those sums to Mr Pruthi and expected to make profits from borrowing at a lower rate of interest than he received from Mr Pruthi. He paid interest monthly, except in one case.
39. Mr Bowker’'s evidence, based on an analysis of documents recovered from Peacock, shows that:

i) Between July 2007 and December 2008 he entered into 311 separate agreements with 172 participants;

ii) The agreements vary in size between £5,000 and £1,000,000;

iii) The total value in pounds sterling exceeds £10 million;

iv) Apart from two dates, all the agreements began on the 1^st or the 15^th of the month. However, an analysis of Mr Peacock’'s bank account shows that monies were received into that account throughout any given month and not just on the 1^st and the 15^th of the month;

v) Mr Peacock’'s total liability to repay exceeds £15 million.

40. Mr Peacock says that he is “"in total disagreement with the FSA on all points”". He says that he was not a deposit taker. He entered into personal loan agreements with family and close friends. He also says that loans were not accepted on a day to day basis, but only on particular occasions.
41. Mr Peacock’'s first contact with Mr Pruthi was in June 2007. He borrowed some money from his father to “"on-lend”" it to Mr Pruthi for a substantial return. From that date he was asked by several relatives and close friends if they could benefit from this arrangement. Mr Peacock asked Mr Pruthi if he had a use for such loans; and Mr Pruthi said that he did. Mr Peacock copied the simple letter agreement that Mr Pruthi had used for the money that was lent to him by family and friends. His close friends then asked him if some of their family and friends could also take part and benefit from lending him money. They were only ever close family and friends. Mr Peacock did not himself solicit loans.
42. The letter agreement contained Mr Peacock’'s personal guarantee to repay which he says is quite unlike anything that a deposit-taking institution would give. The letter agreement also made it clear that he was not regulated by the FSA.
43. Mr Peacock also had a full time job as sales manager for a document scanning company. His activities with Mr Pruthi were only a side-line. In addition he would only consider anyone lending him money when he had time and it was on a sporadic basis. In some instances he refused to let people lend him money.

Were the Defendants engaged in deposit taking?

44. We use the word “"deposit”" to mean a number of different things. If I contract to buy a house, I will pay a deposit (typically 5 or 10 per cent) on exchange of contracts. If I complete the contract, the deposit will be used in part payment of the purchase price. But if I fail to complete, the seller will be entitled to keep the deposit. It is, therefore, non-refundable. If I take a furnished tenancy, I may be asked to pay a deposit (typically one month’'s rent). At the end of the tenancy the deposit will be returned to me, after deducting compensation for any breach of my obligations. If I pay money into the bank, I will also call the payment a deposit. Although I may speak of “"my money”" in the bank, in fact it is the bank’'s money. The bank owes me a contractual obligation to repay an equivalent amount to my credit balance when I ask for it. In short, I have made a loan to the bank. I am the bank’'s creditor and it is my debtor. It follows, therefore, that to call something a loan is not inconsistent with its being a deposit.
45. In the present case the word “"deposit”" it a defined term. The ingredients of the definition are those set out in article 4 of the RAO. They are:

i) a sum of money;

ii) paid on terms under which it will be repaid, with or without interest or premium, and either on demand or at a time or in circumstances agreed by or on behalf of the person making the payment and the person receiving it,

iii) the terms on which it is paid are not referable to the provision of property (other than currency) or services or the giving of security.

46. All these ingredients are satisfied in the present case. Each of the Defendants received a sum of money from someone else. The terms on which it was paid included an obligation on each Defendant to repay the sum; typically at the end of the fixed term of one month, four months, or one year. None of the Defendants provided property, services or security. In short, in the context of the RAO any unsecured loan is a deposit as defined unless it is excluded by articles 6 to 9. It is true that each of the Defendants offered his personal guarantee that the sums would be repaid, but that is not security. Each Defendant already had a contractual obligation to repay, and the giving of a guarantee is nothing more than emphasising the personal nature of that contractual obligation inherent in the arrangement. Some of Mr Peacock’'s lenders seem to have thought that his personal guarantee gave them something more than they could get from a bank. They are wrong. Mr Peacock’'s personal guarantee to repay the money lent is no more than a duplication of the contractual promise to repay that is an essential ingredient of any loan and it is no better or more secure than that contractual promise. A bank also has a contractual obligation to repay; and a “"personal guarantee”" by a bank of its own obligations would be of no greater worth than its contractual obligation.
47. It follows, in my judgment, that the money received by each Defendant was a deposit. However, the accepting of a deposit will not be deposit taking unless the remaining criteria of article 4 are fulfilled. One of those criteria is that the money is lent to someone else (“"money received by way of deposit is lent to others”"). In the case of Mr Anderson and Mr Peacock the money they received was lent to Mr Pruthi. In Mr Pruthi’'s case the money was lent to third parties. It may be that this is not true of all the monies; but I do not think this matters. I say that because the statutory prohibition applies not only to carrying on a regulated activity but also to purporting to carry on a regulated activity. As far as the participants were concerned both Mr Anderson and Mr Peacock told them that the money they invested was to be lent on; and the same is true of what Mr Pruthi told his participants. Thus each of the Defendants at the very least purported to carry on the activity of deposit taking.
48. In the case of Mr Anderson some of the money he received does not count as deposits, because the payments were made by close relatives or (in Mr Teagle’'s case) by a person who himself was a money lender. In the case of Mr Peacock the same may be true to some extent, but he has not identified anyone who falls into these categories, with the exception of his father. The same may also be true of Mr Pruthi, to the extent that he took money from the so-called aggregators who were, in effect, money lenders. But even if it is true to some extent, balanced against the quantity of those who do not fall into either category it is not arguable that articles 6 to 9 save the day. Moreover, in Mr Pruthi’'s case his evidence suggests that his activities had been ongoing for one to two years before he started taking money from aggregators. Thus payments made, for example, by Mr Anderson from his personal resources would count as deposits; while those that he made from money that he received from others would not. The definition of “"close relative”" is very narrowly drawn; so that the mere fact that deposits were accepted from a network of friends, business contacts and friends of friends does not matter.

By way of business

49. Section 22 says that an activity is only a regulated activity if it is carried on “"by way of business”". This expression is not defined, but the Business Order lays down some circumstances in which the carrying on of an activity is not carrying it on by way of business. So the first hurdle that the FSA must overcome is to show beyond serious argument that in the case of each Defendant the activity of deposit taking was carried on by way of business.
50. The word “"business”" is an etymological chameleon; it suits its meaning to the context in which it is found (Town Investments v Department of the Environment [1978] AC 359, 383). At its broadest it may mean anything that is not done for pleasure (Rolls v Miller (1884) L.R. 27 Ch. D. 71, where keeping a house where working girls – in the literal sense – were given free board and lodging was a business). In some contexts the performance of regulatory activities may not count as business activities (Institute of Chartered Accountants v Customs & Excise Commissioners [1999] 1 WLR 701) but in other contexts it will. I do not think that I can or should try to define what the expression means in the context of section 22.
51. Whatever the precise meaning of the phrase, I have no doubt that each of the Defendants took deposits “"by way of business”" in the general sense of the phrase. I say this for the following reasons:

i) Each of the Defendants took or purported to take deposits with a view to making money. In the case of Mr Anderson and Mr Peacock their profit was to come from the difference between the interest rate they paid and the interest rate they were to receive from Mr Pruthi. In Mr Pruthi’'s case the profit was to come from the ultimate borrowers.

ii) Each of the Defendants took deposits over a substantial period of time and at regular intervals;

iii) The number of deposits taken by each Defendant, even accepting Mr Anderson’'s challenge to the precise number in his case, was also substantial. So also was the number of depositors. Mr Pruthi took deposits from “"aggregators”" who in turn took deposits from others.

iv) In each case the amounts involved are very large. Even if there is a dispute about quantum, it is plain that the undisputed amounts in the case of each Defendant are to be counted in millions of pounds.

v) The deposits that Mr Anderson and Mr Pruthi took were paid into their respective “"business”" bank accounts.

vi) Mr Pruthi has consistently described his activities in his evidence as his “"business”"; and Mr Anderson’'s two witnesses, Mr Khan and Mr Southern, each say that Mr Anderson described his activity as a “"business venture”". Mr Peacock’'s standard letter said that the arrangement with him was a “"commercial”" one.

52. In Mr Peacock’'s case it may be that, in terms of the time spent, the deposit taking was a side-line. But that does not prevent it from being a business, which in my judgment it plainly was.

Exclusion by the Business Order?

53. Deposit taking will only be excluded by article 2 of the Business Order if both limbs of that article are satisfied. Mr Purchas dealt with the second limb first; and so will I. A person is not to be regarded as taking deposits by way of business if any deposits that he accepts are accepted only on “"particular occasions”". Mr Purchas very properly referred me to the decision of the Court of Appeal in SCF Finance Co Ltd v Masri (No 2) [1987] 1 QB 1002 in which the Court of Appeal considered the meaning of “"particular occasions”" in section 1 (3) of the Banking Act 1979. The observations of the Court of Appeal are not directly in point because they were considering different legislation, which did not contain the guidance on the meaning of “"particular occasions”" that is now to be found in article 2 (2) of the Business Order. In addition those observations were not necessary to the decision of the court, because they had already disposed of the issue on another ground: [1987] 1 QB at 1021 C-D. In more technical language those observations were obiter dicta.
54. In deciding whether occasions are “"particular occasions”" the article itself requires me to have regard to the frequency of the occasions (which the Court of Appeal in SCF Finance said was irrelevant to the legislation they were considering) and to any characteristic distinguishing one occasion from another. This requirement, in my judgment, sheds light on the meaning of the phrase. Although paraphrases are dangerous, the nearest equivalent, I think, is “"special”".
55. Taking the case of each Defendant at its highest, in the case of each Defendant deposits were accepted on the 1^st and 15^th of every month; in other words twenty four occasions a year. The period in each case was substantial. In Mr Pruthi’'s case that period was about three years; in Mr Anderson’'s case it was just over two years; and in Mr Peacock’'s case it was about a year and a quarter. In terms of frequency it is impossible to say that these occasions were “"particular”". In looking for distinguishing characteristics the search is for what characteristic distinguishes one occasion from another. In this sense a “"characteristic”" is some essential quality inherent in the occasion itself. What characteristic distinguishes, say, 1 March from 15 March; or 1 March from 1 May? In my judgment nothing. The characteristics of each occasion are the same characteristics as every other occasion (apart from the date itself). Mr Anderson and Mr Peacock said that they offered different interest rates on different dates. But in my judgment that is not a characteristic of the occasion. At best it is a characteristic of the terms on which deposits were accepted. Mr Peacock said that he accepted loans on “"a sporadic basis”". However this very vague statement is contradicted by the irrefutable evidence of the numbers and dates of the agreements into which he entered. This is a factual assertion that I am unable to accept, even on an application for summary judgment.
56. In my judgment, therefore, none of the Defendants satisfies the second limb of the exclusion. That means that it is unnecessary to consider the first limb. Both limbs must be satisfied in order for the exclusion to apply. In my judgment there is no real prospect of any of the Defendants being held to be excluded by virtue of article 2 of the Business Order.
57. It follows, in my judgment, that the FSA have succeeded in demonstrating that each of the Defendants has carried on or purported to carry on a regulated activity; and that none of the Defendants has a real prospect of successfully defending that claim.

Start date

58. In the case of each Defendant the FSA seek declarations that he has been carrying on or purporting to carry on a regulated activity from “"at least”" a specified date. In considering the form of any declaration that I make I must be satisfied that the Defendant in question does not have a real prospect of deferring that date.
59. In Mr Pruthi’'s case the start date for which the FSA contend is 1 September 2005. Mr Pruthi accepts that his activities began in 2005; and, as I understand it, does not challenge the specific date.
60. In Mr Anderson’'s case the start date for which the FSA contend is 1 October 2006. As I have said if a payment is made by a close relative (as defined by article 3 (1) of the RAO, the effect of article 5 (2) is that the payment does not count as a deposit at all. Mr Anderson has identified 13 people who, he says, fall within that definition and for the purposes of this application I take that as correct. He also says that payments made by Mr Teagle do not count as deposits because they are excluded by article 6 (1) (b); and for the purposes of this application I take that as correct too. On that basis with few exceptions all payments made to Mr Anderson before the spring of 2007 do not count as deposits. Giving Mr Anderson the benefit of the doubt, I determine that he has been carrying on a regulated activity since 1 April 2007. It will be open to the FSA to argue for an earlier date at trial if they choose to.
61. In Mr Peacock’'s case the start date for which the FSA contend is 15 August 2007. The first payment came from Mr Peacock’'s father, and thus does not count as a deposit. He began to accept deposits regularly on 15 September 2007; and that is the date that I hold was the start of his carrying on of a regulated activity.

Should declarations be granted?

62. In Office of Fair Trading v Foxtons Ltd [2010] 1 WLR 663 Waller LJ said (§ 60):

“"If it is just and useful that a declaration should be granted, the court will grant one.”"

63. The general principle needs no further elaboration.
64. In his first witness statement Mr Baum, a solicitor in the FSA’'s Enforcement Division, set out the reasons why the FSA say that declarations should be granted:

i) An established contravention of the Act will assist domestic regulators in determining whether or not a particular Defendant is a fit and proper person to be carrying on an investment business;

ii) An established contravention of the Act may be of assistance if and when consideration is given to making a disqualification order;

iii) A declaration that a particular individual has breached the Act may assist individual investors who have brought or are contemplating bringing proceedings for compensation;

iv) A declaration that a particular individual has breached the Act may assist foreign regulators in determining whether or not that individual should be authorised to provide services in their jurisdiction.

65. These reasons seem to me to point to the conclusion that making a declaration will be useful. Will it be just? In answering that question I must also consider whether there are countervailing reasons for not making a declaration.
66. First, there is the point that one or more of the Defendants may yet face criminal proceedings, although no charges have yet been brought; and charges may never be brought. This was a factor that Neuberger J considered in FSA v Rourke [2002] CP Rep 14 on very similar facts, and held was no bar to the making of a declaration. In the present case I do not consider that the possibility of criminal proceedings should deter me from making a declaration for the same reasons as given by Neuberger J. Second, there is the fact that there will be a trial of some issues which will take place in any event. The question of quantum will be in issue; and the form of the declaration sought means that the FSA will have the ability to argue for an earlier start date than the one that I am prepared to find. In addition if the FSA wishes to challenge Mr Anderson’'s assertion that the 13 named people fall within the definition of “"close relative”", thus advancing the start date, that will also be a matter for trial.
67. In Cuddy v Hawkes [2008] BCC 125 the court was concerned with a petition alleging unfair prejudice in the conduct of the affairs of a company. One of the allegations was that the respondent (Mr Cuddy) had contravened section 216 of the Insolvency Act 1986 by trading under a prohibited name (which was also a criminal offence). On an application for summary judgment the judge made a declaration that he had contravened that section. The Court of Appeal set aside the declaration. There were two reasons for that decision. The first was that it was premature for a procedural reason that does not apply in this case. The second was explained by Chadwick LJ as follows:

“"Further, the declaration goes further than is necessary to achieve the very sensible case management objective which the judge identified. What the judge wanted to achieve was to ensure that the questions of fact which he had decided–in relation to the issue whether Mr Cuddy had acted in contravention of s.216 of the Insolvency Act –should not be relitigated at the trial. That objective could have been achieved simply by a direction that the trial be conducted on the basis of those findings of fact: that is to say, on the basis of the facts in relation to the allegation of contravention of s. 216 (3) of the Insolvency Act 1986 by Mr Cuddy which the judge had found in his judgment. Mr Chivers, who appears for the petitioner Mr Hawkes on this appeal–but who did not appear as counsel below–accepts that, for practical purposes, the matter could be dealt with in the way that I have indicated. Accordingly, for my part, I would set aside the declaration which the judge made, and replace it by a direction in the terms which I have just indicated.”"

68. It is this aspect of the declarations sought that has caused me the most concern. It seems to me that unless the declaration will finally determine all questions of liability it would be wrong for me to make it. It is true that the court has a power to make an interim declaration under CPR 25.1 (b), but that is not a remedy that the FSA has sought; and since the Defendants are unrepresented I do not think that it would be appropriate for me to exercise this jurisdiction without giving them a further opportunity to be heard. That said, I recognise that there is a public interest in making declarations for the reasons given by Mr Baum. But any declaration should be both clear and certain; and should not be open for later revision. I have come to the conclusion that if the FSA abandons any claim that the Defendants have been carrying on a regulated activity at any date earlier than the dates that I am prepared to find then I should exercise my discretion in favour of making a declaration; but without the inclusion of the phrase “"at least”". However, if the FSA wishes to keep open the possibility of arguing for earlier dates, then I should not make the declarations; but should, instead, direct that the trial takes place on the basis of the findings of fact that I have made. This is a question that can be discussed when this judgment is handed down.

Injunctions

69. No similar problem exists in relation to the injunctions claimed. They relate only to the future and for that purpose it does not matter what the start date was. I will grant the injunctions as claimed.