In a significant judgment for professionals facing high‑value negligence allegations, the Court of Appeal has upheld the strike‑out of a £68 million claim brought against Yorkshire law firm Lupton Fawcett. The decision provides welcome clarity on the requirements for establishing recoverable loss in professional negligence claims—particularly in cases involving regulated investment schemes.
Background: Property investment schemes and alleged regulatory failures
The claim was brought by 43 insolvent special purpose vehicle (SPV) companies, all used within a network of hotel, care home and student accommodation investment schemes linked to Gavin Woodhouse, who has been under investigation by the Serious Fraud Office since 2021 for suspected fraud and money laundering.
More than £68 million was raised from investors on the promise of high returns and contractual buy‑back arrangements.
Lupton Fawcett had been instructed to advise on whether these schemes constituted collective investment schemes (CIS) for the purposes of the Financial Services and Markets Act 2000 (FSMA), which would have required FCA authorisation. The law firm sought repeated advice from counsel, receiving differing interpretations until late 2017, when it advised that FCA regulation would be needed.
The claimants argued that, had LF issued earlier warnings, the schemes would never have been promoted and the subsequent losses would have been avoided.
The High Court’s decision: No recoverable loss
In April 2024, Mr Justice Sheldon struck out the claim, finding that the claimants had failed to demonstrate any recoverable loss. He accepted LF’s position that the firms were only instructed to advise on FSMA compliance, and—critically—that receiving investor funds was not, in itself, a compensable loss. Instead, it was described as “a zero‑effect transaction: penny in, penny out.”
The losses ultimately suffered stemmed not from any regulatory classification but from the operation and management of the schemes, including alleged misappropriation of funds by their principal.
The appeal: Claimants fail to show causation
The claimant SPVs appealed, arguing that exposure to restitution claims under section 26 FSMA constituted real damage. However, the Court of Appeal firmly rejected this, endorsing the High Court’s analysis.
Lord Justice Nugee concluded that:
- Even if the schemes had not been CISs, they would still have been operated in the same way.
- Consequently, the investors’ funds would have been lost regardless of the regulatory status.
- The claimants were seeking to attribute the entirety of the schemes’ collapse to the solicitors, despite the losses being driven by operational failings and alleged fraud.
The Court reaffirmed the principle of balance‑sheet neutrality, emphasising that the mere receipt of money accompanied by an obligation to repay does not amount to recoverable loss. Authorities applicable to loans, such as Galoo and Saddington, were held to apply equally to investments.
Attempts by the claimants to amend their case on appeal were also rebuffed, with the Court stressing that parties facing a strike‑out application must bring their best case at first instance.
Lord Justices Edis and Holgate agreed with Nugee LJ’s judgment.
What this means for professionals and their advisers
This judgment is important for solicitors, accountants, and other professionals who advise on complex financial or regulatory matters. Key takeaways include:
- Loss must be real, not theoretical
Exposure to potential liabilities—without demonstrable net financial detriment—is insufficient to establish recoverable loss in negligence claims.
- Causation remains a high bar
Claimants must show that the negligence caused the loss complained of. Here, operational wrongdoing, not regulatory advice, was the true cause of investor losses.
- Courts will scrutinise attempts to “recast” claims on appeal
The decision reinforces that parties should present their full case at first instance, particularly when facing a strike‑out or summary judgment application.
- Professional scopes of duty matter
Clear definition of retainer scope, particularly in regulatory advice contexts, remains essential for managing risk.
Conclusion
The Court of Appeal’s decision brings valuable clarity on the limits of recoverable loss in professional negligence claims and highlights the importance of causation in claims linked to complex investment arrangements. For advisers working in regulated sectors, the case underscores the need for clear, well‑documented scopes of duty—and for claimants, it is a reminder that establishing loss goes far beyond demonstrating regulatory exposure.
If you would like advice on pursuing a professional negligence claim, our specialist team at Nelsons can help.
How can we help?
Daniel Brumpton is a Partner and heads up our expert Dispute Resolution team. He specialises in professional negligence claims, advising on mishandled litigation, business and personal tax advice, pension disputes.
For advice on or further information in relation to the subjects discussed in this article, please get in touch with Daniel or another member of the team in Derby, Leicester, or Nottingham on 0808 189 9643 or via our online enquiry form.
Contact us