The “£ In, £ Out” Argument: The Court of Appeal’s Definition of Loss in Afan Valley v Lupton Fawcett.

In Afan Valley Ltd (in Administration, acting by Robert Armstrong and Andrew Knowles as Joint Administrators) and 42 others v Lupton Fawcett LLP [2026] EWCA Civ 2, the Court of Appeal started the year off with a knotty scope of duty and causation question: what is the correct counterfactual when considering whether or not loss would have been suffered without allegedly negligent advice from solicitors. The Court’s narrow interpretation of scope and nexus of duty will no doubt come as a relief to solicitors (not least given the c.£68m pleaded value of this claim) but will also raise difficulties going forward when considering the correct test to apply in such circumstances.

The case also serves as an important reminder of the need to plead all elements of a party’s case and the difficulty in seeking to do so via amendments, particularly when advanced on appeal.

Background

The claim was brought by several insolvent SPVs for investment schemes whereby investors would buy long leaseholds in individual rooms in hotels, care homes, or student accommodation for which they would receive ‘rent’ and, after 10 years, the right to sell back to the companies at 125% of the price. Unfortunately, the schemes essentially turned into a Ponzi scheme, where new investments were used to pay sums owing to existing investors. The companies had already succeeded in claims against a fraudulent director for c.£2.3m.

These proceedings arose out of advice given by the Defendant solicitors between 2014-2017 about whether the scheme was a Collective Investment Scheme (“CIS”) under the Financial Services and Markets Act 2000 (“FSMA”). The Defendant advised in 2017 to become FCA regulated, but the Claimants alleged that it was negligent not to give such advice earlier.

The Claimants alleged that during that time, they raised c.£68.2m from investors but would not have promoted the schemes had they received the correct advice. It was alleged that the Claimants came under a significant liability under s.26 FSMA (for carrying out CISs without proper registration) to repay the investments. S.26 FSMA allows the ‘other party’ (here, an investor) to recover (a) sums paid, and (b) “compensation for any loss sustained … as a result of having parted with” the sums paid.

The Defendant’s Application

The Defendant applied for strike out or reverse summary judgment. The Defendant argued that liability under s.26 FSMA only required repayment of investments, and because the Claimants had received the same sums, no loss could arise (“the £ In, £ Out Argument”).

The Defendant further submitted that any additional losses fell outside its scope of duty, as such losses related to the viability of the investments and/or the fraud of the director, neither of which the Defendant was asked to advise upon.

The Defendant was successful at first instance, and the Claimants appealed to the Court of Appeal.

The Claimant’s Amendment Application

At the first hearing, the Claimants relied upon Amended Particulars of Claim v.5. On appeal, the Claimants applied to rely upon v.6, alleging the £ In, £ Out Argument was incorrect because they incurred additional losses from sales commission and legal fees, and that s.26 FSMA covers both return of investment and claims for other losses.

The Court of Appeal confirmed that the principle of adducing new evidence on appeal from Ladd v Marshall [1954] 1 WLR 1489 and subsequent cases similarly applies to permission to amend on appeal. The amendment application failed because the matters could “with reasonable diligence” have been raised before the decision being appealed. The factual basis for the amendments was available to the Claimants before the first hearing, and the amendment was an attempt to remedy the reasons why they were unsuccessful. Lord Justice Nugee (with whom the other Lords Justice agreed) commented: “None of [the proposed amendments] arises out of material that has recently come to light, or recent developments in the case.  The factual basis for the amendments was always available to the Claimants.  All that has happened is that having seen the reasons why they lost in front of the Judge, the Claimants wish to improve their case on appeal by deploying (or, as they would have it, clarifying and expanding on) arguments that were always available to them.” This approach was not permitted.

The substantive appeal

Turning to the main appeal, by the close of submissions, the Claimants’ case had distilled into three grounds:

1. The payments of commissions to sales agents and the legal and professional fees on each investment meant that loss was suffered beyond repaying the investment under s.26 FSMA (i.e. the £ in was less than the £ out);
2. The Schemes were always initially loss-making, and the initial investment was spent covering those losses. As the schemes could not mature, those losses remained – as Nugee LJ commented, this ground “is not so easy to follow”; and
3. 26 FSMA covers both repayment of the initial investment and compensation for losses (i.e. the £ out was more than the £ in).

It was therefore argued that the £ In, £ Out Argument was incorrect, and that such losses fell within the scope of the Defendant’s duties.

However, the Court considered that these points were essentially all answered by a proper consideration of the test for scope of duty in SAAMCO [1997] AC 191, Hughes-Holland [2018] AC 599, and in particular Manchester v Grant Thornton [2022] AC 783. Nugee LJ set out the “structured framework” from Manchester, focussing on the questions of (1) the risks of harm against which the law imposes a duty to take care, and (2) the sufficiency of the nexus between a particular element of harm, and the subject matter of that duty. He held that the losses under Ground 1 and Ground 2 had insufficient nexus to the Defendant’s scope of duty. The Defendant’s duty was limited to whether the schemes were CISs, and the consequences under FSMA. The losses under Grounds 1 and 2 were about the general risk of running the investment schemes, analogous to Lord Hoffmann’s famous ‘mountaineer’s knee’ example in the SAAMCO case. The Court also considered the counterfactual of had the schemes not been CISs (i.e. had the advice been correct), the losses would still have been suffered, as a cross-check.

Turning to Ground 3, Nugee LJ held that there was in principle a sufficient nexus between any compensation available under s.26 and the subject matter of the Defendant’s scope of duty, as “The risk of being exposed to claims under s. 26 FSMA is undoubtedly a risk of harm which Lupton Fawcett’s duty of care was intended to guard against, and hence within the scope of the duty of care.” However, this was subject to the claim otherwise being good. In that regard, the Court held (i) such losses were not adequately pleaded as the pleading only raised the obligation to repay the initial investment, but in any event (ii) there was no loss suffered on the counterfactual.

On the latter, Nugee LJ commented that “it is helpful to compare the position they are in with the position they would have been in had the Schemes not been CISs” (emphasis added). Had the advice been correct, the investors would still have claims against the Claimants under contract and the tort of deceit. The Claimants would therefore very likely be under the at least the same liability as they would have been under s.26, due to the investors’ available claims arising from the fraudulent nature of the investment scheme, and had therefore suffered no loss. This is a similar answer to that given to Grounds 1 and 2, although through a different legal lens – namely, all of the losses said by the Claimants not to fall foul of the ‘£ in £ out’ argument, would always have arisen as a result of the scheme, and were therefore not legally caused by negligent advice as to whether the investments were CISs; either because losses were not within the scope of the Defendants’ duty (Grounds 1 and 2), or because the losses would have been incurred in any event, and so there was no loss (Ground 3).

Comment

Procedurally, the case serves as a clear reminder that courts will not allow parties to replead their cases until a valid cause of action is particularised, particularly when the attempt to do so is made on appeal, or to provide further evidence on appeal from a summary judgment application that would have been available previously. Although it is possible to amend on appeal, it would need to be shown that the points could not with reasonable diligence have been made before the decision being appealed, for instance, because of the discovery of new facts. It is not a permissible approach to wait and see what criticisms a judge makes, and then seek to fix such issues on appeal.

Substantively, the case confirms that, when considering the scope of duty and the nexus to damage suffered, the correct question is what is the scope of duty, and is there a sufficient nexus between the harm suffered and the subject of that duty. The counterfactual analysis of “had the advice been correct, what loss would have been suffered”, can be a useful cross-check, in particular where the counterfactual world is simply to construct. Interestingly, the decision also suggests that the same counterfactual question should be used when considering causation of loss. There is, however, a subtle but important difference between “what if, as the Defendant advised, the schemes were not CISs” and “what if the Defendant had instead correctly said that the schemes were CISs”. It may therefore not be long before the appellate courts must again engage with the question of the correct counterfactual for each stage of a claim in negligence – and indeed, the Claimants have applied for permission to appeal to the Supreme Court.

Article written by Louis Zvesper and Philip Marriott