[2006]JRC104

royal court

(Samedi Division)

17^th July 2006

Before     :

R. C. Southwell, Esq., Q.C. Commissioner, sitting alone.

 

Interlocutory hearing regarding the Consolidated Order of Justice of 24^th March, 2006.

Advocate A. D. Hoy for the Plaintiff.

Advocate F. B. Robertson for the Applicants.

judgment

the commissioner:

1.        The plaintiff in this action, the Jersey Financial Services Commission (“the JFSC”) is a regulatory body established by the Financial Services Commission (Jersey) Law 1998.  The functions of the JFSC include the supervision and development of financial services provided in or from within Jersey.  The first Defendant, Alternate Insurance Services Limited (“Alternate”) is a company incorporated in Jersey in 1992.  At all material times Alternate has been a “registered person” under Article 7 of the Financial Services (Jersey) Law 1998 (“the 1998 Law”).  Alternate has since 13 August 2001 held a “Class D” registration permitting it to give investment advice but not to hold clients’ assets.   The second Defendant Mr Douglas Clark has at all material times been a director of Alternate and a “principal person” in relation to Alternate within Article 1(1) of the 1998 Law.  The third defendant Mr Robert Le Fustec was a director of Alternate from August 2000 until April 2004 and was also a “principal person” in relation to Alternate during that period.  The fourth defendant Mr John Cronin has at all material times been an employee of Alternate and/or an introducer of business to it.

2.        By a consolidated Order of Justice dated 24 March 2006 the JFSC alleges that Alternate through Mr Clark, Mr Le Fustec and/or Mr Cronin made misleading and/or false statements to 28 clients or sets of clients (husbands and wives) to whom I will refer as “the investors”.  The JFSC alleges that the investors purchased investments as a result of inappropriate advice received from Alternate and that these investments were unsuitable for the investors who bought them.  The investments which they bought on the advice of Alternate were traded endowment investment portfolio plans or “TIPPs”.  The purchases of TIPPs by an investor (or by investors being husbands and wives) were funded either by funds introduced by the investors, or partly by funds introduced by the investors and partly by a loan made to the investors by a lending organisation, or wholly by such a loan.  Where the purchase was funded by such a loan, the loan was typically secured against the endowment policies purchased, and sometimes against existing policies held by the investors, and sometimes by sums of money deposited by the investors.  On the purchase of a TIPP the investor became responsible for the payment of premiums on the underlying policies until the maturity of those policies.  It appears that in practice the premiums were usually paid by the lender and added to the loan together with interest and other charges.  The loan became repayable when the policies matured.  In some instances the lender required the investor to keep the outstanding loan within an agreed level, typically a percentage of the surrender value of the policies, or to provide additional security in the event that the borrowing exceeded the agreed level.

3.        Those involved in the purchase of TIPPs by the investors appear to be:  (1) The investors themselves;  (2) Alternate and the other defendants acting on behalf of Alternate, who advised Alternate’s clients, the investors;  (3) the sellers of the TIPPs who appear to have been principally Rochford Premier Limited, trading as Rochford Policies, and in one instance Policy Plus International Plc:  (4) the lenders which provided the loans (secured as I have described) for the purchase of the TIPPs, which were the Bank of Ireland, Newcastle Building Society and the Royal Bank of Scotland International.

4.        In the Order of Justice the JFSC seeks orders of two different kinds under Article 26 of the 1998 Law.  The JFSC alleges in paragraph 289 that (a) Alternate is not a fit and proper person to carry on the financial services business which it has been carrying on and/or is not a fit and proper person to carry it on to the extent that it has been carrying it on;  (b) Alternate has committed a contravention of the type referred to in Article 24(1)(c) of the 1998 Law;  and (c) it is desirable for the protection of the persons transacting financial business with Alternate that the Royal Court should make an Order under Article 26(1) of the 1998 Law.

5.        Accordingly in paragraph 290 of the Order of Justice the JFSC applies for an Order under Article 26(1) that the business of Alternate be subject to the condition that Mr Clark forthwith cease to act as a principal person in relation to Alternate, that Mr Cronin forthwith cease to provide advice in relation to clients of Alternate and/or that the business be subject to such other supervision, restraint or conditions from such time and for such periods as the Court thinks fit.

6.        In paragraph 291 of the Order of Justice the JFSC further applies for Orders pursuant to Article 26(2) of the 1998 Law that Alternate and/or Mr Clark and/or Mr Le Fustec and/or Mr Cronin take steps to restore the parties to the position in which they were in before the transactions pleaded in the Order of Justice were entered into.  The steps applied for are the payment of either a specified sum or such sum as the Court may find to be appropriate together with interest so as to restore the investors to the position they were in before they entered into the transactions pleaded in the Order of Justice.  In paragraph 292 the JFSC in the alternative seeks such other relief as will restore the parties to the position in which they were before the transactions pleaded in the Order of Justice were entered into.

7.        The present application relates solely to the relief sought by the JFSC under Article 26(2).  By a summons dated 22 June 2006 Alternate, Mr Clark and Mr Le Fustec (to whom I will refer as “the Applicants”) apply for an Order striking out the JFSC claim under Article 26(2) as against the Applicants pursuant to Rule 6/13(1)(a) and (c) of the Royal Court Rules 2004 and/or the inherent jurisdiction of the Royal Court, and specifically striking out the Order sought by the JFSC in paragraphs 291 and 292 of the Order of Justice.  The primary basis for this application is that the facts pleaded in the Order of Justice disclose no cause of action under Article 26(2) of the 1998 Law.

8.        Article 26 of the 1998 Law (so far as relevant) provides as follows:

“26.    Powers of Intervention

(1)       Where, on the application of the Commission, the Court is satisfied in relation to a registered person that –

(a)       the registered person is not, in terms of Article 9(3)(a), a fit and proper person to carry on financial business which the registered person is purporting to carry on, or is not fit to carry it on to the extent which the registered person is purporting to do; or

(b)       the registered person has committed or is likely to commit a contravention of a type referred to in Article 24(1)(a) to (e); and

(c)       it is desirable for the protection of persons transacting investment business with the registered person or, if the registered person is carrying on trust company business, persons who have entered into or may enter into agreements for the provision of services to be provided by the registered person when carrying on trust company business or persons who have received or may receive the benefit of services to be provided or arranged by the registered person when carrying on trust company business,

the Court may, as it thinks just, make an order making the registered person’s business subject to such supervision, restraint or conditions, from such time, and for such periods, as the Court may specify, and may also make such ancillary orders as the Court thinks desirable.

(2)       If, on application made under paragraph (1), the Court is satisfied that a person, by entering into any transaction, has contravened Article 7, or entered into any transaction with another party who was induced to enter the transaction as a result of the person’s contravening Article 30, the Court may order that person and any other person who appears to the Court to have been knowingly concerned in the contravention to take such steps as the Court may direct for restoring the parties to the position in which they were before the transaction was entered into.”

9.        By the application to strike out the Applicants seek to dismiss summarily the entirety of the claims brought by the JFSC for practical relief to be granted for the benefit of the investors.  The application has been made at a rather late stage in these proceedings.  In so far as it is made under Rule 6/13(1)(a) no evidence is admissible, because the sole question is as to whether the Order of Justice contains (in this respect) an arguable claim under Article 26(2).  Reliance is also placed on Rule 6/12(1)(c) and the inherent jurisdiction, and it appears that justification for the introduction of some evidence by the Applicants is sought to be derived from this reliance.  The evidence submitted consists of, first, a short affidavit of Caroline Mary Marr, and secondly, two documents annexed to the Applicants’ skeleton argument.  I am doubtful whether the introduction of this evidence is permissible on the present application, both because the issue raised is in reality merely an issue under Rule 6/13(1)(a) above, and because the two documents anyway have not been exhibited to an affidavit.  Documentary evidence can be adduced in the Royal Court by either oral evidence of a witness who produces the documents, or by exhibiting the documents to an affidavit verifying their provenance.  But I have read the affidavit and these documents de bene esse, and in my judgment they add little or nothing to the Applicants’ case.

10.      Applications to strike out the whole or part of a pleading under Rule 6/13(1)(a) will not succeed unless it is shown that what is pleaded cannot reasonably be argued, or that it cannot be saved by a suitable amendment of the pleading.  The party pleading the case, whether plaintiff or defendant, is entitled to have that case tried before the Royal Court unless it is shown that it is not reasonably arguable.  Even where the case as pleaded cannot be reasonably argued, if it can be made so arguable by amendment of the pleading, the Court is bound to allow such an amendment, subject always to questions of prescription or other disbenefit to the other party.

11.      Given that the Consolidated Order of Justice runs to 154 pages and 293 paragraphs, and that the JFSC has also filed a brief Reply, any summary of the JFSC’s case must of necessity be highly selective.  I emphasise that for the purposes of this application the Court must assume that the facts pleaded by the JFSC are true.

12.      The JFSC’s case, so far as relevant for this application, can in my judgment be summarised in this way:

(i)        Each investor or set of investors was or were clients of Alternate.

(ii)       Alternate advised each investor or set of investors in relation to the purchase by them of TIPPs, and in relation to the taking by them of loans for the purposes of such purchases.

(iii)      In respect of each investor or set of investors the advice given by Alternate was for the purpose of inducing them to enter into the purchases of TIPPs, alternatively recklessly as to whether they might enter into such purchases.

(iv)      The statements made by Alternate as part of the giving of advice by Alternate were misleading and/or false.

(v)       Such statements were made by either Mr Clark, Mr Le Fustec or Mr Cronin on behalf of Alternate.

(vi)      In respect of each investor or set of investors the person making the statements on Alternate’s behalf made such statements knowing of the risk that the statements were misleading and/or false, or made them recklessly having failed to give any thought to the existence of that risk, which the JFSC alleges to have been obvious.

(vii)     Specific allegations are made as to the financial position of each investor or set of investors, as to the advice and statements made by Alternate to them, and as to the misleading or false nature of such advice and statements.

(viii)    It appears that the JFSC alleges that such statements in each instance amounted to a contravention of Article 30(1) of the 1998 Law which reads as follows:

“30.    Misleading statements and practices

(1)       Any person who –

(a)        makes a statement, promise or forecast which the person knows to be misleading, false or deceptive, or dishonestly conceals any material facts; or

(b)        recklessly makes (dishonestly or otherwise) a statement, promise or forecast which is misleading, false or deceptive,

is guilty of an offence if he or she makes the statement, promise or forecast or conceals the facts for the purpose of inducing, or is reckless as to whether it may induce, another person (whether or not the person to whom the statement, promise or forecast is made or from whom the facts are concealed)-

(i)            to enter or offer to enter into, or refrain from entering or offering to enter into, an agreement or arrangement the making of which or performing of which constitutes financial service business or would do so but for Schedule 2; or

(ii)           to exercise, or refrain from exercising, any rights conferred by an investment or contract of general insurance.”

13.      For the purposes of Article 26(2), what relevantly the JFSC has to establish in order to obtain the relief which is sought under Article 26(2) is as follows:

(i)        that Alternate entered into a transaction with each investor or set of investors;

(ii)       that each investor or set of investors was induced to enter into the transaction by Alternate;

(iii)      that each investor or set of investors was so induced as a result of Alternate contravening Article 30;

(iv)      that Alternate (and Mr Clark, Mr Le Fustec and Mr Cronin as persons “knowingly concerned in the contravention” in so far as each made the relevant statements) could take steps to restore each investor or set of investors and Alternate itself

“to the position in which they were before the transaction was entered into”.

(v)       that Alternate and where appropriate each of the Applicants should be ordered by the Court to take such steps.

The Applicants’ Submissions

14.      In the following paragraphs I summarise the main contentions of the Applicants as set out in their skeleton argument.  The Applicants contend that, on the facts pleaded by the JFSC, the factual pre-conditions for the exercise of the Court’s power under Article 26(2) do not exist, and that the orders sought under Article 26(2) in each instance are outside the range of orders permitted under Article 26(2).

15.      The Applicants submit that for the purposes of Article 26(2) there have to be two parties: (1) a person who has contravened Article 30 – the contravener, and (2) another party – the investor – who has entered into an investment “transaction” with the contravener.

16.      They submit that here

(i)        the “transactions” which the JFSC seeks to have undone are the purchases by the investors of TIPPs from the TIPP providers (Rochford and Policy Plus), and the loans by the lenders to the investors, which resulted from and were induced by the advice given to the investors by Alternate, and these are the only relevant transactions;

(ii)       Alternate’s advice cannot simultaneously induce a transaction and be itself part of the transaction;

(iii)      the “person” in Article 26(2) must be someone who entered into the transaction, which was not Alternate, but the innocent third parties who provided the TIPPs or lent the money;

(iv)      the “person” must contravene Article 30;

(v)       the contravention by the “person” must induce the other party to enter into the transaction;

(vi)      the other “party” who has been so induced would be one of the investors.

They submit that the “persons” who entered into “transactions” with the investors were the providers of TIPPs and the lenders, and not Alternate which had a purely advisory role and entered into no transaction with the investors.  The TIPPs providers and the lenders are not alleged to have contravened Article 30.

17.      The Applicants submit that the power of the Royal Court under Article 26(2) has to be to make a restorative or restitutionary order putting all the parties back in their previous position, and the Royal Court has, in the circumstances pleaded by the JFSC, no power under Article 26(2) to make the orders sought against Alternate or against Mr Clark or Mr Le Fustec.  The positions of all the parties to the transactions would have to be restored, but the JFSC seeks no restoration of the position of any party other than the investors’ positions.

18.      The Applicants point out that, though the JFSC refers to Article 30(1) of the 1998 Law in paragraph 6 of the Order of Justice, this pleading contains no express plea that the Applicants contravened Article 30.  But they accept that by paragraph 4 of the JFSC’s Reply it is made clear that such a plea is made impliedly.  There is no allegation that any other person has contravened Article 30.

19.      The Applicants deal with the suggestion that in this case the JFSC rely on the relationship between Alternate and each of the investors as constituting a “transaction” for the purposes of Article 26(2).  They submit that this is not a tenable view on the facts as pleaded, because the word “transaction” does not, in its context, include a mere advisory relationship, because that is not a relationship which the parties have “entered into” and because a statement by A to B inducing B to enter into transactions with C and D is not part of the “entry into” those transactions.

20.      The Applicants submit that the words in Article 26(2) – “a person [who] entered into any transaction with another party who was induced to enter into the transaction as a result of the person’s contravening Article 30” – must be construed as applying only where the same person both made the misleading statement inducing the transaction and was a party to the transaction with the investor.

21.      As to the Royal Court’s powers under Article 26(2), the Applicants submit that

(i)        these cannot be exercised when there are parties to the relevant transactions who have not contravened Article 30;

(ii)       restoration of the parties to their former position requires rescission of the transaction, and not merely a compensatory payment by one person to the party induced to enter it;

(iii)      all the parties must be restored to their former position;

(iv)      a transaction which involves innocent third parties (here the TIPPs providers and the lenders) cannot be undone by the contravener whether or not the contravener is itself a party;

(v)       the relevant position to which the parties would have to be restored would be the position before the transaction was entered into, not the position before the advice was given;

(vi)      what is contemplated under Article 26(2) is restoration, and not compensation which is dealt with separately in Article 26(7) (which preserves the right of any aggrieved person to sue for compensatory damages) and in Article 27 (which gives to the States power to establish compensation schemes).

22.      The Applicants also rely on decisions of the English Courts in relation to section 6(2) of the UK Financial Services Act 1986 (Securities and Investments Board v Pantell SA et al (No 2) [1993] Browne-Wilkinson VC and Court of Appeal (“Pantell”), and Securities and Investments Board v Scandex Capital Management A/S et al [1998] 1 WLR 712 Court of Appeal (and Carnwath J – unreported) (“Scandex”) in support of their submissions.

23.      On the basis of these submissions the Applicants seek the striking out of the relevant claims for relief under Article 26(2) as being unarguable.

The JFSC’s Submissions

24.      In the following paragraphs I summarise the JFSC’s submissions as set out in its skeleton argument.  The JFSC submits that the evidence placed before the Court by the Applicants is inadmissible and should be ignored.  As already indicated, I have read this evidence de bene esse, and am satisfied that in any event it does not assist the Applicants on this summons.

25.      The JFSC submits that this application has been made very late, after completion of discovery, and with the parties due to file their witness statements at the end of July 2006, and should have been made no later than 5 May 2006 when the Answer of the Applicants was filed.

26.      The JFSC points to its pleaded case where it relies on the dealings between Alternate and the investors, in which Alternate advised the investors to buy TIPPs and take loans for that purpose and the investors agreed with Alternate that they would buy the TIPPs.  This case, submits the JFSC, reflects the reality of the arrangements by which Alternate proposed the purchase of the TIPP (often with a loan as well), advised in that regard, and made all the arrangements, and the investors dealt primarily with Alternate.

27.      The submissions of the JFSC on the interpretation of Article 26(2) are broadly as follows:

(i)        “any transaction” is apt to include arrangements other than the actual purchase of the investment, and is capable of applying to dealings between Alternate as a financial adviser and a customer, whereby the financial adviser provides advice, and the customer acting on that advice agrees to buy the investment.  The phrase is intended to bear the broadest meaning possible.

(ii)       The majority of investments bought in or from Jersey are bought on the advice of a Jersey financial adviser on exchanges or from sellers outside Jersey.  Such arrangements must have been intended to be included.  Otherwise Article 26(2) would have a very limited application.

(iii)      Reliance was also placed on the judgments in Pantell.

28.      As to the relief available under Article 26(2), the JFSC submits that the wording provides for a wide discretionary power vested in the Royal Court, capable of being used to meet the specific circumstances of a wide range of different cases.  In the present case the JFSC seeks payment of money to the investors.  Such payment could be made conditional on the investors tendering the relevant investments for the benefit of the Applicants.  Alternatively, the payments to be made to the investors could be calculated making allowance for the value of the investments realised or projected to be realised by the investors.  In these or perhaps other ways restoration of the investors and Alternate, to the position before the arrangements between them were made, could be achieved.  Reliance is particularly placed on passages in the judgments in Pantell.

The Hearing

29.      At the hearing Advocate Forbes Robertson for the Applicants addressed the Court with submissions which were in elaboration and expansion of those summarised above, as also did Advocate Ashley Hoy for the JFSC.  During the hearing it became apparent that what has been pleaded by the JFSC in its Order of Justice and its Reply does not accurately reflect the case which the JFSC in reality wishes to make against the Applicants in two major respects:

(i)        The “transactions” on which the JFSC relies for the purposes of the application of Article 26(2) are not the purchases of TIPPs from the TIPP providers by the investors, nor the loans made to the investors by the lenders, nor do they consist of the advice given by the Applicants to the investors which led in due course to the investors buying the TIPPs and borrowing from the lenders.  The JFSC’s case as summarised by Mr Hoy in the course of oral argument is directed to the dealings between Alternate and the investors after the advice to buy TIPPs had been given by Alternate and accepted by the investors.  These dealings involved the selection of TIPP providers and particular TIPPs, making all necessary arrangements for the TIPPs purchases, including provision of the necessary documentation, the selection of the lenders, and making all necessary arrangements for the loans, including provision of the necessary documentation.  In the case of Rochford, the main provider of TIPPs, Mr Hoy suggested that Rochford may act solely as “wholesalers” of TIPPs and Alternate may have acted as “retailers” of Rochford TIPPs.   Mr Hoy accepted that none of this finds, at present, any place in the JFSC’s pleadings, which are in some respects (see eg paragraph 5 of the  Reply in which it is alleged that the investors “entered into agreements with Alternate to purchase TIPPs”) apparently inconsistent with the real case which the JFSC wishes to run.

(ii)       So far as concerns relief under Article 26(2), though the JFSC has not pleaded this in the Order of Justice as involving restoration of both Alternate and the investors to their pre-existing positions, the JFSC in fact wish to seek restorative relief on the lines of the two alternatives summarised in paragraph 28 above.  Again, Mr Hoy accepted that this sort of relief does not figure specifically in the JFSC’s pleadings.

30.      It therefore became clear in the course of the hearing that the JFSC should be given an opportunity, even at this late stage, to amend its pleadings so that they accord with the case on which the JFSC wishes to rely.

31.      Mr Robertson submitted that this step should not be taken, and that the claim under Article 26(2) should be struck out in any event, because

(i)        the only relevant transactions for the purposes of Article 26(2) are those between the investors and the providers of TIPPs and of loans;

(ii)       whatever dealings there were between Alternate and the investors once the investors had accepted Alternate’s advice could not amount to “transactions” within the wording of Article 26(2);

(iii)      no relief could be granted under Article 26(2), since what would have to be rescinded would be or would include all the transactions between the investors and the providers of TIPPs and of loans, and such providers are entirely innocent parties who are entitled to enforce the transactions as against the investors.

32.      In my judgment the JFSC’s claim under Article 28(2) should not be struck out at this stage, and without giving the JFSC an opportunity to amend, because until the JFSC’s definitive pleadings have been served and then analysed, it cannot be determined

(i)        whether the dealings on which the JFSC will seek to rely will amount arguably to “transactions” within Article 26(2);

(ii)       whether the relief claimed by the JFSC will arguably be such that the Court may grant under the powers given by Article 26(2).

33.      Accordingly I decided to adjourn the summons to strike out, and to give the JFSC the opportunity to amend its Order of Justice and its Reply so as to plead the case which the JFSC now wishes to put forward.   Once the amended pleadings have been served, the Applicants will have the opportunity to decide whether or not to pursue their summons further.

34.      The Orders which I have therefore made are as follows:

(i)        The Applicants’ summons to strike out issued on 22 June 2006 is adjourned.

(ii)       The JFSC is to serve on or before 28 July 2006 an Amended Order of Justice and an Amended Reply. 

(iii)      The Applicants (if so minded) are to serve an Amended Answer on or before 18 August 2006.

(iv)      The date for filing and serving witness statements as specified in paragraph 9 of the Order dated 17 March 2006 is to be extended to 11 August 2006.

(v)       The Applicants have liberty to restore the summons to strike out for further hearing after 28 July 2006.

(vi)      The dates specified in Paragraphs 10 to 14 inclusive of the Order of 17 March 2006 for the taking of the steps there referred to are to stand unaltered.

(vii)     The costs of and occasioned by the amendments to the pleadings are to be paid by the JFSC to the Applicants.

(viii)    As to the costs of and occasioned by the summons to strike out:

(a)       the JFSC is to pay to the Applicants the costs of the hearing on 17 July 2006;

(b)       the remaining costs are reserved for later decision by the Court.

35.      The reasons for my orders in paragraph 34(8) above as to the costs of and occasioned by the summons to strike out can be summarised as follows:

(i)        the need for the hearing on 17 July 2006 would probably have been avoided, if the JFSC and those advising it had appreciated the need to amend its pleadings, and had given notice of their intention to seek leave to amend;

(ii)       no final decision has yet been made as to the outcome of the summons, and it is therefore premature for any order to be made in respect of the remainder of those costs.

36.      I refused leave to appeal, because these are matters of detailed case management which are not appropriate for and would not justify a second hearing before the Court of Appeal.

Authorities

Financial Services Act 1986.

Royal Court Rules 2004.

Securities and Investments Board v Pantell SA et al (No 2) [1993].

Securities and Investments Board v Scandex Capital Management A/S et al [1998] 1 WLR 712.