The Court of Appeal’s decision in Afan Valley Ltd v Lupton Fawcett LLP [2026] EWCA Civ 2 is a useful reminder that proving negligence is only part of the battle in a professional negligence claim. Claimants must also show that their losses fall within the scope of the defendant’s duty of care.
The case arose from the collapse of a series of hotel, care home, and student accommodation investment schemes (the Schemes) promoted through special purpose vehicle companies, which raised approximately £68 million from retail investors before entering insolvency and pursuing this claim through their joint liquidators.
The claimants’ case was that the Schemes did not make a profit, and they were operated dishonestly and fraudulently as a Ponzi scheme, in which promised returns to existing investors were not generated from the performance of the underlying assets, but were fraudulently paid out using funds contributed by newer investors.
A central issue was whether the Schemes constituted collective investment schemes (CISs) within the meaning set out in the Financial Services and Markets Act 2000 (FSMA). None of the claimant companies were authorised by the FCA, so, if the Schemes were CISs, they would be unauthorised and subject to the statutory provisions under section 26 FSMA, which allows investors to recover their contributions.
The claimants’ case was that the defendant’s law firm was engaged between 2014 and 2017 to advise on the CIS status of the Schemes. They alleged that the firm had negligently failed to advise, at an earlier stage, that the Schemes were, or carried a serious risk of being, CISs. Had proper advice been given, the claimants contended, the Schemes would never have been promoted, and no investments would have been received, meaning that they would not have incurred potential liabilities to investors under section 26 FSMA.
The grounds of appeal
A key aspect of the defendant’s argument was that on the claimants’ own case, they had received some £68 million from investors. Under section 26 FSMA, they now faced the obligation to return the same amount to those investors. As a result, the claimants were, in effect, no worse off. In other words, receiving the investment monies was a balance sheet-neutral transaction.
It was also argued that the losses arose from the way the Schemes had been dishonestly operated. Therefore, in a counterfactual scenario where the Schemes were not CISs, they would have been run in the same way with investors’ contributions being lost in exactly the same way. There the claimants would have been in essentially the same position (save for not being exposed to potential section 26 FSMA claims). The collapse of the Schemes and the consequent loss of the investment was therefore not attributable to the advice given. The losses therefore fell outside the defendant’s scope of duty.
The claimant challenged the balance sheet-neutral analysis in two ways. It submitted that: (a) liability for compensation under section 26 meant that this was a case of £68 million in and more than £68 million out; and (b) when an investment was successfully completed, commissions to sales agents and legal and professional fees were paid, so less than £68 million came in. The claimant argued that these differences on the balance sheet constituted losses for which the defendant was liable.
The claimant also advanced a separate argument based on its intention to generate profits in the medium to long term.
The court’s approach
The Court of Appeal first considered the scope of the defendant’s duty of care, applying the framework in Manchester Building Society v Grant Thornton [2021] UKSC 20: A defendant is not liable for all losses suffered by a claimant, only those falling within the scope of duty assumed.
The claimants’ separate argument based on anticipated future profits was also rejected. The Court of Appeal considered the argument difficult to follow and noted that it appeared inconsistent with the claimants’ case that the Schemes were operated as a dishonest Ponzi scheme.
Conclusion
This case highlights the importance of obtaining specialist professional negligence advice at an early stage. By applying a rigorous scope of duty analysis and the correct approach to loss, this high-value claim was brought to an end well before trial. Indeed, the defendant did not even need to serve a defence. Without careful early assessment, parties can become embroiled in costly litigation only to discover that the alleged losses fall outside the scope of the defendant’s duty or are not recoverable as a matter of law.
At Clarke Willmott, we bring our specialist expertise enabling weak professional negligence claims to be closed down swiftly and efficiently. For claimants, our teams of litigators include specialists in fraud and all kinds of financial services disputes, who have recovered in excess of £50m for claimants in recent years.
They are seeing a significant increase in cases of this kind: Mis-Sold Bonds: Know the Risk and What to Do if You’ve Been Mis-Sold. Unregulated investments can pose a high level of risk and we are seeing the full loss of all capital invested by individuals time and time again. This case highlights the importance of analysis of potential claims against all potential parties involved and assessing the merits of each, before embarking on an expensive claim.