Jersey Unreported Judgments

[2006]JRC181

royal court

(Samedi Division)

6^th December 2006 

Before     :

M. C. St. J. Birt, Esq., Deputy Bailiff, and Jurats Bullen and Allo.

 

 

 

Advocate B. H. Lacey for the representor.

Mr B. Shelton in person and on behalf of the First to Sixth Respondents.

Advocate T. V. R. Hanson for the Eighth Respondent.

 

judgment

deputy bailiff:

1.        This is an application by the Jersey Financial Services Commission ("the Commission") for an order that each of the respondents - we shall refer to the first to sixth respondents as the Anchor companies, the seventh respondent as Mr Shelton and the eighth respondent as Mr Barby - should reimburse the Commission in respect of the costs of certain co-signatories appointed by the Commission pursuant to Directions dated 7^th March 2005 ("the 2005 Directions"). 

2.        Mr Hanson, whose arguments on this point were adopted by Mr Shelton, has argued that the Court has no jurisdiction to make the order requested by the Commission.  The Court heard argument on this preliminary point and gave its decision at the conclusion of the hearing to the effect that it did not have the relevant jurisdiction.  We now give our reasons for that decision. 

The background

3.        In view of our decision on jurisdiction we have not had to consider the merits of the Commission's application.  We can therefore summarise the factual background fairly briefly.  On 31^st January 2001 the Anchor companies applied to be registered to carry on trust company business under the Financial Services (Jersey) Law 1998 ("the 1998 Law").   Under the transitional provisions, they were able to carry on business pending the Commission's decision. 

4.        On Friday 4^th March 2005 the Anchor companies were notified that the Commission had rejected their application for registration.  At 16.45 that day Mr Ian Brandon, a member of the executive team of the Commission, sent an e-mail to Mr Ben Bryant, the managing director of Anchor.  The e-mail was headed 'issue of directions' and requested that, in view of the Commission's decision to refuse registration, Mr Bryant should attend a meeting with the Commission the following Monday in order to discuss the way forward.  He said that the Commission had asked a representative of Deloitte's, chartered accountants, to attend such a meeting.  The e-mail was forwarded to Mr Shelton, one of the owners of Anchor, at 16.46 that day.  At 11.17 on Saturday 5^th March, Mr Shelton e-mailed Mr Brandon saying that he had asked Steven Gidley (a consultant who had been acting for Anchor and dealing with the Commission on the matter of registration) to contact Mr Brandon on Monday morning about the meeting.

5.        At about 9.30 that Monday morning Mr Gidley duly spoke to Mr Brandon on the telephone.  The content of that conversation was summarised in an e-mail sent at 9.34 by Mr Brandon to others at the Commission in which he said that Mr Gidley had asked about the gist of the Directions.  Mr Brandon had told him that they would involve the appointment of co-signatories under Article [23] of the Law.  Mr Gidley had asked who would be paying for the co-signatories and Mr Brandon had replied that Anchor would be paying.  The meeting was fixed for 3.00 p.m. that day.

6.        That meeting duly took place at 3.00 p.m. with Mr Gidley and Mr Barby (the other shareholder of Anchor) attending on behalf of Anchor.  The Commission formally issued the 2005 Directions.  It is not necessary to refer to them in any detail.  They provided for an orderly winding up of Anchor's business but the important provisions were contained at paragraphs 7 to 15.  In broad outline these provided that two members of Deloitte's (Mr Branch and Mr Leck) should be 'B' signatories on all the accounts of Anchor and their client entities and that no payment over £1,000 could be made without the authority of a 'B' signatory.  There were also provisions requiring Anchor to obtain the consent of one of the 'B' signatories to most other matters concerning the assets of Anchor and transactions by the client entities administered by Anchor.  Although the Directions themselves were silent as to who would be responsible for the co-signatories' costs, the position was dealt with in an accompanying letter from the Commission dated 7^th March which stated:-

"The costs associated with the appointment of co-signatories are for Anchor's account and we have requested Deloitte to ensure that they render accounts weekly.  Please ensure that these accounts are settled within 7 days of receipt.  Should Anchor decide to appeal the Commission's decision and that appeal be successful, the Commission will reimburse the reasonable costs of the co-signatories except where such costs are incurred through the unreasonable behaviour of the Anchor companies, their directors or employees."

7.        Anchor served notice of appeal against both the refusal of registration and the issue of the Directions.  Furthermore, during the course of further contact with the Commission, it made it clear that it was not going to comply with the requirement for co-signatories pending appeal.  It issued an application to the Court for an order that the 2005 Directions be stayed in this respect pending appeal and the Commission issued a cross application under Article 24 of the Law seeking an order from the Court that Anchor comply with the 2005 Directions.  These two matters came on for hearing on 22^nd/23^rd March 2005. 

8.        A week before the hearing, Mr Gidley telephoned Mr Carse, the Director General of the Commission, to inform him that, at the board meeting held on the morning of 7^th March, a few hours before the meeting with the Commission that afternoon, Anchor had transferred 75% of its client business to a trust company registered in Guernsey, Balchin Management Limited ("Balchin"), a company owned by Mr Barby.  Mr Gidley said the remaining business was that which could not be transferred, for example where a protector's consent was required or where Anchor provided the registered office.  This was the first that the Commission had heard of this transfer despite the on-going contact there had been between Anchor and the Commission since 7^th March.  There was no mention at that stage of any money having been paid away by the Anchor companies. 

9.        At the hearing before the Court on 22^nd/23^rd March, Anchor explained that its objection to the 2005 Directions related primarily to cost.  It argued that the financial impact of paying the cost of the co-signatories would be potentially ruinous and that it could seriously prejudice Anchor's ability to pursue its appeal against the decision refusing registration.  A draft affidavit from Mr Gidley was supplied to the Commission on the second day of the hearing but this document focused on the Anchor companies 'Adjusted Net Liquid Assets' ("ANLA") calculations and the impact which meeting the costs of the co-signatories would have on these calculations.  It was said that Anchor had affected a restructuring so as to ensure that Anchor could meet the costs of the appeal and at the same time continue to meet its ANLA requirements.  The restructuring had three parts:-

(i)        Shelton & Co (the accountancy practice carried on by Mr Shelton in his own name), in exchange for the sum of £260,000, had taken on all the major liabilities of Anchor in terms of staff costs, rental etc.

(ii)       The shareholders had been paid a dividend of £200,000 divided between them.

(iii)      As already mentioned the major part of the client portfolio had been transferred to Balchin. 

The upshot, according to Mr Gidley, was that Anchor had a surplus of £34,000 with which to fund its appeal.  Once this sum had been used up, it would fall below the ANLA requirements. 

10.      In the light of Anchor's submissions to the Court concerning its financial position, the Commission and Anchor reached an agreement.  This was reflected in an Act of Court dated 23^rd March.  It is not necessary to rehearse it in detail but in essence the Commission agreed that it would appoint the co-signatories and would pay their fees and expenses 'subject to there being a declared right and power reserved to the JFSC to apply for a full indemnity or contribution towards those costs in due course from any of the Anchor companies and/or from any other party, whom under Article [23] of the Financial Services (Jersey) Law 1998, as amended, the JFSC has the power to require to pay such costs and expenses'.  

11.      As part of the compromise, Mr Shelton agreed to file an affidavit explaining the 'restructuring' in financial terms.  He duly did this.  According to Mr Carse, the affidavit shows that, at about 11.30 a.m. on the morning of the 7^th March, after Mr Gidley had been told that the Commission would be issuing Directions requiring co-signatories and that Anchor would have to pay for these, the board of directors of Anchor had in effect paid away over £600,000 and had reduced its adjusted total stated assets from £969,490 on 4^th March to £241,695 on 7^th March.  This had involved inter alia:-

(i)        paying £190,000 and $148,000 to Shelton & Co in consideration of that firm taking over the liabilities of Anchor such as rent, staff costs etc (there was no explanation as to how this sum had been calculated);

(ii)       paying a dividend of £200,000 made up as to £117,160 to Mr Shelton and £82,840 to Mr Barby; and

(iii)      extinguishing loans made to Mr Shelton and Mr Barby by Anchor by treating the outstanding balances as a tax free bonus in the case of Mr Shelton and fees in the case of Mr Barby. 

12.      Following their appointment, from March to October 2005, the co-signatories performed their functions and invoiced the Commission with a total of £105,439.  Once the majority of Anchor's business had been transferred, the Commission no longer considered it essential for co-signatories to be in place and, according to Mr Carse's affidavit, on 12^th October 2005 the Commission withdrew those elements of the 2005 Directions which related to the co-signatories.

13.      Anchor's appeal against the Commission's decision to refuse registration was dismissed by the Royal Court on 27^th October 2005 and a further appeal to the Court of Appeal was dismissed on 17^th March 2006.  Following the decision of the Court of Appeal the Commission withdrew the 2005 Directions and issued a new set of Directions dated 31^st March 2006 ("the 2006 Directions").  These did not contain any provision concerning the co-signatories or the costs thereof.  Anchor's appeal against the 2005 Directions was never proceeded with.

This application

14.      In his affidavit, Mr Carse explains the general approach of the Commission to the question of costs incurred in relation to a particular regulated entity. He states that the Commission is particularly sensitive to the issue of costs due to the way the Commission is financed.  It is financed by the regulated industry, with its primary source of income being licence fees.  In addition to licence fees, regulated entities invest considerable resources in ensuring that they meet the required standards expected of them under the Law and subordinate legislation.  That their licence fees may then be used to rectify and supervise breaches by entities not meeting the necessary standard is a concept which is viewed in a highly negative light by the industry.  In the circumstances, where intervention is required by the Commission by reason of the regulatory shortcomings of a particular entity, as a matter of principle, the Commission considers that that entity should be responsible for those costs unless there is compelling reason otherwise.  For that reason the Commission in its discretion will usually exercise its power to require that the costs of co-signatories (for example) be met by the entity concerned.  The costs of supervision in this case were, says Mr Carse, provoked by the poor management of the Anchor companies and by the misconduct of its principal persons such as Mr Shelton.  The financial burden should not therefore be placed on the regulated industry unless Anchor were not in a financial position to meet the costs.  According to Mr Carse, as at 4^th March 2005, Anchor clearly had ample financial resources to meet the costs of the co-signatories but then deliberately paid away substantial funds to Mr Shelton and Mr Barby in an attempt to place them beyond the reach of the Commission.  In those circumstances the Commission considered that Anchor should reimburse the sums paid out by the Commission and that Mr Shelton and Mr Barby should be required to reimburse the costs of the co-signatories to the extent of assets received by each of them on or after 7^th March 2005.  Mr Carse further stated that the Commission had sought to recover these sums from Anchor, Mr Shelton and Mr Barby but that Anchor and Mr Shelton had refused to pay and Mr Barby had not replied substantively. 

15.      In the circumstances the Commission now applies to this Court for an order that Anchor, Mr Shelton and Mr Barby be ordered to pay the Commission the aggregate sum of £105,439, which it has paid out in respect of the co-signatories. 

Jurisdiction

16.      Miss Lacey submits that the Court has jurisdiction to make the various orders requested by the Commission by virtue of the agreement between the parties which was reflected in the Act of Court dated 23^rd March 2005 and in particular paragraph 3, which is quoted at para 10 above.  She also referred to paragraph 4 of the Act which read:-

"In relation to the JFSC's application for payment of Deloitte's reasonable fees to be met by the Anchor companies, this application is adjourned with liberty to the JFSC to apply to fix a date for the application's hearing on the giving of 24 hours notice to the Anchor companies' advocate."

17.      Mr Hanson, on the other hand, argues that the Court's jurisdiction is only that conferred upon it under the 1998 Law and that the Commission in this case is inviting the Court to make an order which does not fall within any of the provisions of that statute.

18.      We agree that the Court's jurisdiction in this area is entirely statutory and accordingly, if the Court is to make the order requested by the Commission, we must find jurisdiction to make that order in the 1998 Law. 

19.      That Law confers a number of different functions upon the Court.  Thus, Article 11 confers a right of appeal to the Court against a decision by the Commission to refuse or revoke registration or in connection with conditions imposed on a registration; Article 12 confers a power for the Court in certain circumstances to appoint a  manager of a business; Article 13 confers a right of appeal against a decision of the Commission concerning a 'principal person' of a registered business; Article 16 confers certain powers where there has been a breach of Article 15 (a change of principal person or change in shareholding); and Article 26 confers certain powers on the Court, on the application of the Commission, to make orders making a registered person's business subject to supervision, restraint or conditions.  However, the Commission does not contend that any of these provisions gives the Court jurisdiction to make the order sought in this case. 

20.      The only relevant articles would appear to be Articles 23 and 24.  Article 23(1) enables the Commission, in certain defined circumstances, to issue directions in relation to a financial service business.  It is clear from Article 23(2) - which gives examples of what a direction may require - that the power of the Commission in this respect is very wide.  Under Article 23(6) there is a right of appeal to the Court against any direction given by the Commission.

21.      Article 24 is in the following terms:-

" (1)  Where, on the application of the Commission, the Court is satisfied that it is likely that a person will contravene (or continue or repeat a contravention of);-

 (d)   any direction given under Article 23; ..........

the Court may if it thinks fit issue an injunction restraining that person from committing (or, as the case may be, continuing or repeating) the contravention. 

  (2)   Where, on the application of the Commission, the Court is satisfied that any person has committed a contravention of a type referred to in paragraph (1)(a) to (e), and that there are steps which could be taken to remedy the contravention, the Court may make an order requiring that person, or any other person who appears to the Court to have been knowingly concerned, to take such steps as the Court may direct to remedy the contravention."

22.      The 2005 Directions were issued by the Commission pursuant to the power conferred by Article 23.  Anchor exercised its right of appeal against those Directions and the Commission then applied under Article 24(1) for an order that Anchor comply with the Directions in respect of the co-signatories.  What came before the Court on 22^nd March 2005 was the Commission's application for an order under Article 24 that Anchor comply with the Directions and an application by Anchor that the Directions in respect of co-signatories be stayed pending the hearing of Anchor's appeal against the issue of the Directions. 

23.      We propose to consider first the positions of Mr Shelton and Mr Barby.  The Commission seeks an order that they pay the costs of the co-signatories.  We have concluded that, regardless of the merits of the Commission's wish to make them pay these sums, we do not have jurisdiction to make the requested orders against them.  Our reasons briefly are as follows:-

(i)        It is clear from the 1998 Law that the Court has no original jurisdiction to make such an order.  It is for the Commission to make such orders by issuing directions under Article 23.  The sole function of the Court is to hear an appeal against the Commission's decision to issue directions (in which case it could of course modify the directions including any issue of where the costs of complying therewith should fall) or to enforce the directions pursuant to Article 24.

(ii)       The 2005 Directions directed that there be co-signatories.  The Directions themselves were addressed to Mr Shelton and Mr Barby (and others) as principal persons and directors as well as the Anchor companies but said nothing about the costs of the co-signatories.  In a covering letter the costs were said by the Commission to be for Anchor's account.  On any view the 2005 Directions cannot be construed as a Direction that Mr Barby and/or Mr Shelton personally (as opposed to the Anchor companies) should pay the costs of the co-signatories. 

(iii)      In any event, the 2005 Directions had been withdrawn.  There is therefore nothing that can now be enforced. 

(iv)      In summary, the 2005 Directions have never contained a provision that Mr Barby and/or Mr Shelton should pay the cost of the co-signatories and those Directions have now been withdrawn.  There is therefore nothing that can be enforced against them under Article 24.

(v)       Miss Lacey sought initially to rely upon paragraph 3 of the Act of 23^rd March referred to at para 10 above.  The Court has not seen the proceedings issued by the Commission under Article 24 which gave rise to that Act but the Act itself states that the proceedings are only between Anchor Trust Company Limited and the Commission.  It follows that whatever may have been agreed or ordered cannot impose any obligation upon Mr Shelton and/or Mr Barby, who were not parties to the proceedings. 

By the end of the hearing Miss Lacey had effectively conceded that she could not realistically argue that the Court had jurisdiction to make an order against Mr Shelton or Mr Barby and we think that she was right so to conclude. 

24.      However she maintained her submission that the Commission was entitled to an order that the Anchor companies should pay the costs of the co-signatories.  We have considered this carefully but we have again reluctantly concluded that, on the particular facts of this case, the Court has no jurisdiction to make such an order. 

(i)        As stated in the preceding paragraph, the Court has no original jurisdiction; it may only make an order which enforces a direction pursuant to Article 24.

(ii)       What is the direction which the Court would be enforcing by making an order that the Anchor companies pay the co-signatories' fees?  There is a dispute between the parties as to whether the 2005 Directions required Anchor to pay such fees.  The Commission argues that it was a necessary implication of the direction that there should be co-signatories that Anchor should pay for such co-signatories, and this was elaborated in the covering letter referred to in para 6 above.  Anchor, on the other hand, argues that the 2005 Directions themselves are silent as to who should pay for the co-signatories and the covering letter does not form part of the Directions. 

(iii)      We do not have to resolve that issue because, whatever the 2005 Directions may have said, they have been withdrawn.  Accordingly, even assuming in favour of the Commission on the point of interpretation of the Directions, there are no Directions in force at present requiring Anchor to pay the co-signatories' fees.  There is therefore nothing for the Court to enforce.  To adopt the wording of Article 24(1) the Court cannot be satisfied that it is likely that Anchor will contravene or will continue to contravene a direction given by the Commission under Article 23 because there is no direction in force.  The Court has to be so satisfied before it can make an order under that provision. 

(iv)      Miss Lacey argues that the Act of 23^rd March confers jurisdiction on the Court to make an order against Anchor.  But an Act cannot by itself vest in a court a jurisdiction which the statute has not given it. The only relevant jurisdiction is to enforce directions issued by the Commission.  There being no relevant direction in force, we do not see how the Court can make an order enforcing it. 

25.      For these reasons we dismissed the application of the Commission both in relation to the Anchor companies and Mr Shelton and Mr Barby.

Postscript

26.      A number of other matters were touched upon in the written contentions of the parties but we have not found it necessary to consider these in view of our decision on jurisdiction.  It may be helpful however to mention three points.

27.      First, as outlined above, there was a dispute as to whether the 2005 Directions ordered the Anchor companies to pay the costs of the co-signatories or not.  We can well understand the policy considerations applied by the Commission as summarised at para 14 above and we can also well understand the argument of the Commission that it is implicit in the 2005 Directions that they required the Anchor companies to bear the costs of the co-signatories, just as, for example, a direction requiring a registered entity to obtain a report on a particular matter from its auditors would clearly imply that the entity should pay the auditors for that report.  However, the fact remains that the point has been taken that, as the Directions themselves were silent about the matter, the costs were not payable by Anchor.  It seems to us that it may be desirable in future that, where the Commission wishes to direct that the entity should do certain things at its expense, the Commission should say so specifically in the directions rather than in any covering letter.  There would at least then be no debate as to what the directions of the Commission required.

28.      Secondly Mr Hanson submitted in his skeleton argument that the Commission had no power to issue a direction under Article 23 requiring a third party to pay costs properly attributable to a registered entity.  To do so would in effect be to set aside the benefit of limited liability conferred by incorporating a company to carry on the financial services business in question.  It followed, he submitted, that the Commission would have had no jurisdiction to issue a direction ordering Mr Shelton and Mr Barby to pay or contribute to the costs of the co-signatories. 

29.      Because the matter has proceeded as a question of jurisdiction, we did not hear argument on this point and we accordingly express no view.  But what is clear is that, if the Commission wishes a third party to pay costs which would otherwise be borne by the registered entity, it must issue directions to that effect and the directions must provide for this specifically.  Thus, on the facts of this case, if, having discovered what Mr Shelton and Mr Barby had done on the morning of 7^th March, the Commission was of the view that it ought to recoup the co-signatory costs from Mr Shelton and Mr Barby to the extent that they had extracted funds from the Anchor companies, the Commission should have promptly issued a direction under Article 23 to that effect addressed to Mr Shelton and Mr Barby.  They could then have appealed against the direction on the grounds that it was either beyond the powers of the Commission or that it was simply unreasonable or otherwise inappropriate.   The Court would then have had to consider whether to uphold the direction and, as already stated, we make no observation on what our decision might have been in those circumstances.  However, if the direction had been upheld, the Court would have then had jurisdiction under Article 24 to enforce that direction and could therefore have directed Mr Shelton and Mr Barby to pay.  In summary, what we are saying is that, subject to the Court being satisfied about the validity of any such direction, the Commission could have recovered these sums from Mr Shelton and Mr Barby had it followed the right procedure. 

30.      Thirdly, we would commend the Commission for the very responsible decision which it took at the hearing on 23^rd March, namely to agree to fund the co-signatory expenses itself for the time being in order to ensure that Anchor was not prejudiced in the conduct of its appeal against the Commission's decision to refuse registration, whilst reserving its right to insist that Anchor should pay such expenses in the event that it could afford to do so.  Nevertheless, as can be seen from this judgment, the procedural course followed has had unfortunate consequences.  The Commission will need to consider in future whether there are any outstanding issues in relation to a set of directions before withdrawing them.  If it does withdraw them, it should replace them by matching provisions if it wishes to maintain its position. 

31.      Finally, we would add this.  No argument was addressed to us on Article 24(2) as opposed to Article 24(1).  Article 24(2) deals with remedying past contraventions of a direction whereas Article 24(1) deals with enforcing a direction for the future.  One can envisage the beginnings of an argument that, assuming for these purposes that the 2005 Directions did require Anchor to pay the cost of the co-signatories and assuming further that such Directions had remained in force, the Court might have power to make orders against Mr Shelton and Mr Barby (as well as Anchor) on the basis that Anchor had contravened the Directions by not paying the co-signatories' costs and that Mr Shelton and Mr Barby, by procuring that Anchor's funds were paid away, had been 'knowingly concerned' in such contravention, thereby rendering themselves liable under Article 24(2) to having an order made against them to remedy such contravention. 

32.      There are however formidable difficulties in the way of any such argument, not least the fact that the decision to pay away Anchor's assets was taken on the morning of 7^th March, which was a few hours before the 2005 Directions were formally issued. 

33.      We therefore make no further comment on the merits of such argument.  We mention the point only to emphasise that the argument before the Court in this case was based entirely upon Article 24(1) and our decision should not therefore be taken as any precedent in relation to Article 24(2) should such provision be thought relevant on a future occasion. 

Authorities

Financial Services (Jersey) Law 1998.