Case No: 2011 Folio 1559; 2012 Folio 419
Neutral Citation Number: [2014] EWHC 4268 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice Rolls Building 
Fetter Lane, London, EC4A 1NL

Date: 18/12/2014

Before :

MR JUSTICE WALKER
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Between:

2011 Folio 1559
SPL Private Finance (PF1) IC Limited and 17 others
Claimants
-and-
ARCH FINANCIAL PRODUCTS LLP
Defendant

2012 Folio 419
and Between:
SPL PRIVATE FINANCE (PF2) IC LIMITED and 5 others
Claimants
-and-
ROBIN FARRELL
Defendant
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Richard Coleman QC and Giles Wheeler (instructed by Stephenson Harwood LLP) for the claimants
Mr Robin Farrell and Mr Robert Addison (under authorisation of the defendant dated 1 October 2013 and by permission of the court under CPR 39.6) for the defendant in 2011 Folio 1559
Mr Robin Farrell in person in his capacity as defendant in 2012 Folio 419

Hearing dates: 21, 25, 26, 27, 28 November 2013, 2, 3, 4, 5, 9, 10 December 2013, 22, 23 January 2014, 12 and 13 February 2014, 18 December 2014
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Judgment
Mr Justice Walker: 
A. Introduction	1	
A1. The claims and the outcome	1	
A2. Companies, partnerships and individuals	8	
A2.1 Descriptions of companies, partnerships and individuals	8	
A2.2 Arch FP, Arch UK, AIGHL, Mr Farrell and Mr Addison	9	
A2.3 Mr King, Mr Jeffs, Mr Derks, Mr Smith and Mr Ruparell	13	
A2.4 The OEICs, the UK funds and sub-funds, and Capita FML	14	
A2.5 The ICC, the cells, AT1, Bordeaux, Mr Radford and Mr Meader	19	
A2.6 Carey Olsen, Moore Stephens and Fortis	23	
A2.7 Club Easy, Mr Hayes and Storeys	24	
A2.8 FCL, Mr Barkman, Mr Montague, FHL and “Foundations”	28	
A2.9 FPP, Mr Blythe and Blythe Financial	30	
A2.10 PKF and Cobbetts	31	
A2.11 Mr Scott, Mr Davey and Spearpoint	33	
A3. Lonscale: overview of events	34	
A4. The FSA investigation	60	
A5. The issues at trial	62	
B. The trial	72	
B1. The trial: introductory	72	
B2. Factual evidence	74	
B2.1 Factual evidence: general	74	
B2.2 Factual evidence of Mr Scott	76	
B2.3 Mr Davey	80	
B2.4 Mr Farrell	84	
B2.5 Mr Addison	87	
B2.6 Mr Jeffs	89	
B2.7 Hearsay evidence: Mr Radford and Mr Meader	91	
B2.8 Hearsay evidence of Mr King	92	
B3. Expert evidence	93	
B3.1 Expert evidence: general	93	
B3.2 Expert evidence of Mr Walton	95	
B3.3 Expert evidence of Mr Rees	97	
B4. The defendants’ general observations about the trial	100	
B5. Inequality of arms	109	
C. Aims and events in 2007	111	
C1. Aims and events in 2007: general	111	
C2. Aims and events prior to 18 August 2007	112	
C3. Aims and events in the remainder of 2007	128	
C4. Disclosure to, and consent by, the cells	140	
C5. Processes involved in the acquisition	151	
C6. The defendants’ evidence as to events in 2007	157	
D. Duties and entitlements	164	
D1. Duties and entitlements: general	164	
D2. Mandate: powers and duties	165	
D3. Management powers and duties	171	
D4. Duties of loyalty	172	
D5. Disclosure as an answer to breaches of duties of loyalty	182	
D5.1 Disclosure: general	182	
D5.2 Oral disclosure to Mr Radford and Mr Meader	184	
D5.3 The alleged Base Prospectus	186	
D5.4 Disclosure in other ways	199	
E. Failures of care in October 2007	200	
E1. Failures of care in October 2007: general	200	
E2. Arch FP’s approach to Storeys’ valuations	204	
E3. PKF’s identified need for a capital injection	217	
E4. Risk/reward analysis in October 2007	226	
E5. Conclusion on reasonable care in October 2007	233	
F. Failures of care after October 2007	234	
G. Breaches of fiduciary duty	243	
G1. Breaches of fiduciary duty: general	243	
G2. Advice on fair management of conflicts	246	
G3. Alleged fair management of the conflict	248	
G4. Conclusions on breaches of duties of loyalty	264	
H. Breach of mandate	265	
J. Alleged dishonesty by Mr Farrell	276	
J1. Alleged dishonesty by Mr Farrell: general	276	
J2. Legal tests for dishonest assistance	278	
J3. Whether the tests were met	283	
K. Alleged inducing of breach of contract	286	
K1. Inducing breach of contract: general	286	
K2: Legal principles concerning inducement	288	
K3. Application of the principles in this case	289	
L. The alleged release under the waiver agreement	293	
M. Causation, remedies and recoverability	308	
M1. Causation, remedies and recoverability: general	308	
M2. Effect of later events	309	
M2.1 Effect of later events: general	309	
M2.2 Losses on alternative investments	311	
M2.3 Scope of Arch FP’s duties and intervening causes	327	
M3. The duty to mitigate losses	331	
M4. Claim for equitable compensation against Arch FP	347	
M5. Alternative remedies for breach of fiduciary duty	350	
M6. Damages for failure to exercise reasonable skill and care	354	
M7. Restitutionary remedies	356	
M8. Equitable compensation for Mr Farrell’s dishonest assistance	357	
M9. Damages against Mr Farrell for inducement	358	
N. Conclusion	359	
Annex 1A:	Annex 1A	
Abbreviations and short forms, sorted by short form		
Annex 1B:	Annex 1B	
Abbreviations and short forms, sorted by long form		
Annex 2: History of main events	Annex 2	
A2/ A. Summary of events: introduction	Annex A2/A	
A2/ B. Late July up to and including 17 August 2007	Annex A2/B	
A2/ C. 18 August up to and including 29 October 2007	Annex A2/C	
A2/ D. 30 October 2007 to 9 January 2008 inclusive	Annex A2/D	
A2/ E. 10 January 2008 to 28 April 2008 inclusive	Annex A2/E	
A2/ F. 29 April 2008 to 9 June 2008 inclusive	Annex A2/F	
A2/ G. 10 June to 2 July 2008 inclusive	Annex A2/G	
A2/ H. 3 July to 6 October 2008 inclusive	Annex A2/H	
A2/ J. 7 October 2008 to 11 December 2008 inclusive	Annex A2/J	
A2/ K. 12 December 2008 to 5 January 2009 inclusive	Annex A2/K	
A2/ L. 6 January to 13 March 2009	Annex A2/L	
A2/ M. 14 March 2009 onwards	Annex A2/M	
A. Introduction
A1. The claims and the outcome
1.	Arch Financial Products LLP (“Arch FP”) was, among other things, an investment manager. It managed funds which were known as “the Arch-Cru funds”. For this purpose an incorporated cell company (“ICC”) was used. The ICC was incorporated in Guernsey under the Incorporated Cell Companies Ordinance 2006. I shall refer to this company, now known as SPL Guernsey ICC Limited, as “the ICC”. The ICC comprised a number of cells (“the cells”), each of which was a separate legal entity, and each of which held its own separate assets. Among them were cells with a focus on private finance (“the PF cells”) and cells with a focus on real estate (“the RE cells”).
2.	The claims advanced in 2011 Folio 1559 are brought against Arch FP by 18 cells, each of which entered into a written investment management agreement (“IMA”) with Arch FP. They include claims (“the Lonscale Arch claims”) which concern a student housing business known as “Club Easy” run by companies in the Clubeasy Group (“the Clubeasy Group companies”). Those companies included three companies which were the effective corporate owners of that business (“the CG owning companies”). 
3.	References below to the “acquisition” are to the proposed or actual acquisition of the CG owning companies. They were in the event bought by Lonscale Ltd (“Lonscale”), an Isle of Man company, under agreements made on 17 August 2007 and completed at the end of October 2007. During the period from late October 2007 to August 2009 inclusive various types of investment in Lonscale, using this expression to include the purchase of loan notes with ultimate values dependent upon Lonscale’s performance or value, were made. The investors included six of the cells. They are the second, third, fourth and fifth claimants in 2011 Folio 1559 (referred to below as “PF2”, “PF3”, “PF4” and “PF5” respectively and as “the PF claimants” together), and the twelfth and thirteenth claimants in 2011 Folio 1559 (referred to below as “RE1” and RE2” respectively and as “the RE claimants” together). I refer to these six cells below as “the Lonscale claimant cells”. 
4.	The Lonscale claimant cells make key assertions that the decisions to make these investments were driven by Arch FP’s financial interest in obtaining illegitimate payments rather than proper consideration of the investments’ merits and the interests of the cells, and that in this regard Arch acted in breach of fiduciary duty, in breach of contract and negligently. 
5.	In addition to their claim against Arch FP in 2011 Folio 1559, the Lonscale claimant cells make claims (“the Lonscale Farrell claims”) against Mr Robin Farrell. The Lonscale Farrell claims are the subject of the proceedings in 2012 Folio 419. Mr Farrell is and at all material times was the Chief Executive Officer (“CEO”) of Arch FP. The Lonscale claimant cells make key assertions that Mr Farrell dishonestly assisted Arch FP to breach its fiduciary duties and induced its breaches of contract. 
6.	By an order made on 27 July 2012 Mr Colin Edelman QC, sitting as a Deputy Judge, directed that the Lonscale Arch claims and the Lonscale Farrell claims be tried together. This judgment sets out my conclusions following the trial, in accordance with that order, of the Lonscale Arch claims and the Lonscale Farrell claims. At the trial the Lonscale claimant cells were represented by Mr Richard Coleman QC and Mr Giles Wheeler, instructed by Stephenson Harwood LLP. Arch FP and Mr Farrell were represented by solicitors and counsel until 5 July 2013, by which time the parties had given disclosure and exchanged witness statements. Since then they have been unrepresented. At the trial Mr Farrell acted in person as defendant to the Arch Farrell claims. With my permission under CPR 39.6, he and Mr Robert Addison acted at trial on behalf of Arch FP. Mr Farrell is managing partner, and Mr Addison is a partner, of Arch FP. 
7.	For the reasons given later in this judgment I am sure that the key assertions described in paragraphs 4 and 5 above are correct. I reach this conclusion with reluctance, as the key assertions involve very serious allegations. The evidence in support of the key assertions, however, is so strong that I am left in no doubt that they are correct. The result is that the Lonscale claimant cells will be entitled to remedies against Arch FP and Mr Farrell. I deal with those remedies in section M below.
A2. Companies, partnerships and individuals
A2.1 Descriptions of companies, partnerships and individuals
8.	Written material prepared by the Lonscale claimant cells and the defendants included descriptions of companies, partnerships and individuals. In this section I have made use of those descriptions to the extent that they are not in controversy. Abbreviations and short forms used in this regard, and more generally in this judgment, are set out in annexes 1A and 1B to this judgment. My descriptions, both below and earlier in this judgment, are mainly in the past tense. That is because the trial concerned past events. No inference should be drawn as to the current status of any company, partnership or individual.
A2.2 Arch FP, Arch UK, AIGHL, Mr Farrell and Mr Addison
9.	As noted above, Mr Farrell was CEO of Arch FP. After graduating in mathematics from Imperial College London in 1988 he spent the next 14 years in a series of increasingly high level posts concerned with various aspects of investment management. In 2002 he established an enterprise which carried out business advisory and research services. Arch FP was created as a limited liability partnership in November 2004 and in March 2005 was authorised to arrange and manage investments under Part IV of the Financial Services and Markets Act 2000. Mr Farrell was approved by the Financial Services Authority (“FSA”) to carry out certain controlled functions (including that of chief executive). He was responsible for the overall operation of the firm, including compliance with its regulatory obligations. 
10.	At all material times 97% of the membership rights in Arch FP were owned by Arch Group (UK) Limited (“Arch UK”), incorporated in November 2004. Mr Farrell was initially the sole shareholder of Arch UK. His shareholding was later reduced to 80%, where it remained until March 2008. In March 2008 Arch International Group Holdings Limited (“AIGHL”) purchased the entire issued share capital in Arch UK and so replaced Arch UK as ultimate parent company. The majority shareholding in AIGHL was held by Mr Farrell until 23 January 2009, and thereafter by Mr Farrell and his wife. I shall refer to the business conducted by Arch FP and Arch UK from November 2004 onwards, and by those entities and AIGHL from March 2008 onwards, as “the Arch business”. Arch FP, Arch UK and AIGHL are referred to below as “the Arch entities”. 
11.	As CEO of Arch FP, founder of the Arch business, and owner of the largest share of the economic interests in the group, Mr Farrell was the dominant person in Arch FP and in the Arch business. In addition to representing Arch FP and himself at the trial, Mr Farrell gave evidence and was cross examined (see section B2.4 below).
12.	Mr Addison, in addition to being a partner (see section A1 above), was the Chief Operating Officer of Arch FP. He was also, along with Mr Radford and Mr Meader, a director of the Lonscale claimant cells (see section A2.5 below). After graduating in economics from University College London in 1990 he was employed in senior roles concerned with investment management. From 2003 to 2005 he managed his own structuring and derivatives consultancy where he oversaw the development and launch of a number of investment funds. On joining Arch FP in 2006 he took on finance, operations and compliance roles at the firm. These included the role of compliance officer, a role in which he was responsible for implementing compliance policies and undertaking compliance monitoring of Arch FP's business practices. In addition to assisting Mr Farrell to represent Arch FP at the trial, Mr Addison gave evidence and was cross examined (see section B2.5 below). 
A2.3 Mr King, Mr Jeffs, Mr Derks, Mr Smith and Mr Ruparell
13.	Mr Gary King graduated from the University of New South Wales in Australia in 1982 with a Bachelor of Science degree in Physics and Mathematics. Over the next twenty two years he was appointed to a number of senior positions involving the trading of derivatives and of debt securities in Sydney, New York and London. He also completed a Masters Degree in Finance at the University of New South Wales. In March 2006 he was employed in London by the UK asset management arm of a New York bank, where he had a consultancy role for fixed income and foreign exchange investments. In October 2006 he joined Arch FP as Head of Trading and Execution. This involved putting into place the operational arrangements needed to launch the cells. Thereafter his role also involved executing hedges, calculating and executing foreign exchange hedging, and buying and selling bonds and equity on an execution basis. He became a portfolio manager for the RE claimants following their launch in the second half of 2007. Both before and after the launch Mr King carried out work in connection with the proposed acquisition. After the acquisition he was a director of Lonscale and involved in the management of Club Easy. At trial a witness statement by Mr King was adduced as hearsay evidence on behalf of the defendants (see section B2.8 below).
14.	Others who acted on behalf of the RE claimants included Mr Smith (see paragraph 16 below) and Mr Michael Derks, chief investment strategist of Arch FP.
15.	Mr Peter Jeffs is a former officer in the Royal Air Force who has experience of various aspects of business development. In 2006 he assisted a team bidding to become an adviser to Arch FP in relation to investment risks using environmental, social and governance metrics. After meeting Mr Farrell and Mr King he accepted an offer to join Arch FP as a project/business manager.  His role changed as Arch FP grew.  Initially he provided support on internal services management projects, moving later to provide support on external investment projects. Mr Jeffs was involved in the due diligence work carried out by Arch FP in relation to the proposed acquisition. Following the acquisition, he became a director of several of the Clubeasy Group companies. Mr Jeffs gave evidence at the trial and was cross examined (see section B2.6 below). 
16.	As noted earlier, Mr King was portfolio manager for the RE claimants. Two other portfolio managers call for mention. Mr Adam Smith was portfolio manager for the PF claimants. Mr Silash Ruparell was portfolio manager for the cell known as “AT1” (see section A2.5 below). 
A2.4 The OEICs, the UK funds and sub-funds, and Capita FML
17.	The investment structure primarily relevant for present purposes involved investment funds (“the UK funds”) and sub-funds (“the UK sub-funds”) set up so that UK investors could participate in them. In order to participate in this way such an investor would invest in a UK open-ended investment company (“OEIC”). In March 2006 Arch FP approached Capita Financial Managers Limited (“Capita FML”) to see if Capita FML would be interested in acting as Authorised Corporate Director (“ACD”) in this regard. Capita FML agreed to do this. In June 2006 an OEIC known as CF Arch Cru Investment Funds (the “Arch Cru Investment Fund”) was authorised by the FSA.  Capita FML was appointed as ACD and in July 2006 it delegated the investment management role to Arch FP. The Arch Cru Investment Fund was structured as an umbrella company and held two UK sub-funds. 
18.	The investment role for a pre-existing OEIC authorised by the FSA was subsequently taken over by Arch. The OEIC in question was renamed CF Arch Cru Diversified Fund (the “Arch Cru Diversified Fund"), and would ultimately hold four UK sub-funds.  Capita FML was again appointed as ACD, and delegated the investment management role to Arch FP in September 2007. I refer below to the Arch Cru Investment Fund and the Arch Cru Diversified Fund as “the UK OEICs.”
A2.5 The ICC, the cells, AT1, Bordeaux, Mr Radford and Mr Meader
19.	During 2006 Arch FP became aware that in Guernsey an ICC could incorporate cells, enabling cell sub-funds to be constituted as separate corporate entities with their own particular investment objectives. The shares of each cell (in effect, shares in each cell sub-fund) could also be listed on the Channel Islands Stock Exchange (“CISX"). Arch FP considered that this structure could provide both the UK Funds and other investors with the opportunity to invest in shares in entities holding a more diversified range of assets than might otherwise have been the case.  
20.	On 21 December 2006 the ICC was incorporated. Between December 2006 and May 2008 more than 20 cells were incorporated and authorised by the Guernsey Financial Services Commission (“GFSC"). They included the Lonscale claimant cells. Most were listed on the CISX. Most of the shares in the Lonscale claimant cells were held by one or more of the UK sub-funds.
21.	The cells also included Arch Treasury IC Limited (“AT1”, now known as SPL Treasury (AT1) IC Ltd). It differed from other cells. Mr Farrell explained that it was established in June 2007 “mainly as a syndications and warehousing vehicle”.
22.	Bordeaux Services (Guernsey) Limited (“Bordeaux") acted as administrator of the cells. The directors of Bordeaux, Peter Radford and Neal Meader, were appointed as directors of the ICC along with Mr Addison. In accordance with the requirements of Guernsey law they were also the directors of the cells. Hearsay evidence of Mr Radford and Mr Meader was adduced at trial on behalf of the Lonscale claimant cells: see section B2.7 below.
A2.6 Carey Olsen, Moore Stephens and Fortis
23.	As noted above, Arch FP was the investment manager for each of the Lonscale claimant cells. Also as regards each of the Lonscale claimant cells:
(1)	Guernsey lawyers, Carey Olsen, were appointed as the cells’ legal advisors; 
(2)	Moore Stephens were appointed as the cells’ auditors;
(3)	Fortis Bank (CI) Limited (“Fortis”) was appointed as custodian and in that capacity held the assets of each cell.
A2.7 Club Easy, Mr Hayes and Storeys
24.	Club Easy provided student accommodation in Exeter, Durham, Hull, Loughborough and Lincoln. It was ultimately controlled by Jason Hayes. A family business, Club Easy was founded by Mr Hayes’s father, and built up over a number of years.
25.	The Clubeasy Group companies comprised a number of companies, of which three were directly owned by Mr Hayes: Club Easy Group plc, Clubeasy Property (UK) Limited and Hayes Limited (an Isle of Man company). These three companies were the CG owning companies. ASA (Hull) Limited was a wholly owned subsidiary of Clubeasy Property (UK) Limited. Clubeasy Student Services Limited and Acepoint Limited were wholly owned subsidiaries of Clubeasy Property (UK) Limited.  
26.	Mr Hayes decided to sell the CG owning companies. By mid 2007 he wished to do so urgently. The reason that he gave was that he needed to raise money in order to pursue projects in the U.S.A. 
27.	The most valuable assets of the group were the properties in which students were housed.  They were primarily residential properties converted to be used as multiple occupancy accommodation, not modern purpose-built accommodation.  Ownership of the properties was split between the various group companies. The group had substantial borrowings from a number of banks and building societies secured on the various properties. In relation to those borrowings, valuations of the properties had, shortly before Mr Hayes made it known that he wished to sell the CG owning companies, been prepared by Storeys:ssp Limited (“Storeys”), real estate surveyors and valuers.  
A2.8 FCL, Mr Barkman, Mr Montague, FHL and “Foundations” 
28.	Mr Lee Barkman was a resident of Guernsey. He was closely connected with a company called Foundations Capital Limited (“FCL”). FCL was incorporated in the British Virgin Islands and was under the control of Mr Barkman and Mr Philip Montague. In December 2006 Arch UK and FCL incorporated a joint venture company, Foundations Holdings Limited (“FHL”). FHL was incorporated in the Isle of Man, and was owned as to 65 per cent by FCL and as to 35 per cent by Arch UK. Arch UK also acquired preference shares in FHL. The directors of FHL were Mr Farrell, Mr Addison, Mr Barkman and Mr Montague. 
29.	Mr Barkman sometimes used the word “Foundations” on its own in circumstances where it might mean himself or FCL, or both himself and FCL. He did this in contradistinction to the Arch business and FHL. For convenience I shall generally use this word in that way. Accordingly, unless the context indicates otherwise, references below to “Foundations” are to Mr Barkman and/or FCL, and do not include FHL.
A2.9 FPP, Mr Blythe and Blythe Financial 
30.	Foundations Program Plc (“FPP”) was an Isle of Man company originally owned by FCL with the object of engaging in various kinds of investment activity. It was acquired by FHL on 10 January 2007. Mr Barkman and Mr Montague were directors of FPP. Mr Farrell was a director of FPP until 17 April 2009. A further director of FPP was Mr Alan Blythe. Mr Blythe, who was also an investment committee member of FPP, was a financial adviser who traded through Blythe Financial Limited, an Isle of Man regulated company (“Blythe Financial”). In his role as a financial adviser Mr Blythe was given conduct by Mr Hayes of the sale of the CG owning companies. 
A2.10 PKF and Cobbetts
31.	PKF (UK) LLP (“PKF”) are and were a limited liability partnership trading as accountants and consultants. On 12 July 2007 PKF wrote to the directors of FCL setting out the terms on which they would carry out an assignment concerning what was described as the “Proposed Transaction”. This was the proposed acquisition of the CG owning companies. The assignment was described as a limited review of the CG owning companies in connection with the Proposed Transaction. The letter was countersigned by Mr Barkman and Mr Montague on 13 July 2007, in each case for and on behalf of FCL. 
32.	Cobbetts, LLP (“Cobbetts”), solicitors with offices in Leeds and in Guernsey, were instructed to act initially for FCL, and subsequently for Lonscale, in relation to the acquisition. 
A2.11 Mr Scott, Mr Davey and Spearpoint
33.	Mr William Scott was appointed a director of the ICC, and of each of the cells, on 31 December 2009. On 1 December 2009, a company called Spearpoint Limited (“Spearpoint”, now called Brooks Macdonald Asset Management (International) Limited) was appointed investment manager to the ICC and of each of the cells. Spearpoint took over this role from Arch FP. Mr John Davey was the CEO of Spearpoint. At the trial Mr Scott and Mr Davey gave evidence on behalf of the Lonscale claimant cells and were cross examined: see sections B2.2 and B2.3 below.
A3. Lonscale: overview of events
34.	In this overview I give a very broad account of the history, sufficient only to give some context to my overview of the issues in section A5 below. A more detailed history of events is set out in Annex 2. Where emails or documents are cited in this section and in later sections of this judgment, extracts or descriptions of the source email or document will usually be found in the relevant section of Annex 2. 
35.	By late July 2007 FCL, as the result of an introduction by Mr Blythe, had become the preferred bidder for the CG owning companies. Mr Barkman and Mr Hayes envisaged that FCL would acquire the CG owning companies in August 2007. The proposal that it should do so was sometimes referred to as “the Club Easy project”. In order to take the Club Easy project forward, FCL had engaged PKF, Cobbetts and Storeys. Possible involvement of the Arch business was discussed by Mr Barkman and Mr Farrell, among others, at meetings on 25 July and 1 August 2007. Among other things discussed on 1 August 2007 was the possibility of a delay of some months between contracting for the purchase of the CG owning companies and completion of that purchase. 
36.	By 2 August 2007 the Club Easy project had become a project which involved the Arch business. Various aspects of that involvement were discussed in the period up to 17 August 2007, and in subsequent months, mainly by Mr Farrell and Mr Barkman. 
37.	There is a dispute between the Lonscale claimant cells and the defendants as to the nature of these discussions. I examine this aspect of the history in section D below. For present purposes I record the rival contentions: 
(1)	The defence served on 1 May 2012 in 2011 Folio 1559 (“the main defence”) asserted that it was agreed in August 2007 that Arch FP “would receive fees representing 50% of the difference between the acquisition price and the value of the Club Easy Group with Mr Barkman retaining the other 50%”.  The main defence also asserted, when describing what was agreed in August 2007, that this payment was subject to an overall limit of £6m, and that any additional difference beyond the limit of £6m would accrue for the benefit of Lonscale, AT1 and the purchasers of notes which were to be issued by AT1. In his first witness statement dated 11 March 2013 Mr Farrell alleged expressly that Arch FP’s role was to help Mr Barkman by providing corporate finance advice. He added that the relevant value of the Club Easy Group was a “discounted value”, and that the limit of £6m was agreed in October 2007.
(2)	By contrast, the Lonscale claimant cells say that Arch FP was not merely a service provider doing work for a fee. They maintain that there was no discussion of any true “fee”. Their contention is that:
… the evidence clearly shows that there was a joint venture between Arch and FCL/Mr Barkman whereby they would arrange the purchase of the Clubeasy group by Lonscale, and share between themselves a substantial part of the monies invested by investors.
38.	By 17 August 2007 Lonscale had been created and identified as the company which would purchase the CG owning companies from Mr Hayes. On that day contracts agreeing the purchase were signed, and a £1m deposit was paid by Lonscale to Mr Hayes. As explained below, this payment was financed by a cell which I shall refer to as “SO3”. The bulk of the purchase money was to be paid on completion, which was fixed for 26 October, and provision was made for the balance to be paid as deferred consideration. 
39.	During the period prior to 26 October 2007, it became apparent that Mr Hayes would not be able to comply with conditions precedent to completion, among them a condition as to net asset value. Negotiations between the parties eventually resulted in an agreement on 29 October 2007 for completion that day with reductions in the amounts to be paid on completion and by way of deferred consideration. 
40.	In the meantime on 26 October 2007 the Lonscale claimant cells, as to various individual amounts totalling £20.2m, and FPP, as to £0.8m, subscribed for notes issued by AT1 (“AT1 notes”) to a total value of £21m; these notes were on terms under which they had ultimate values dependent upon Lonscale’s performance or value. On the same day arrangements were put in hand for AT1 to subscribe for £13m of notes issued by Lonscale on terms matching those applicable to £13m of the notes issued by AT1. At around this time it was envisaged that AT1 would also subscribe for £8m of shares in Lonscale. 
41.	On 29 October 2007:
(1)	AT1 received from the Lonscale claimant cells and FPP the total sum of £21m due in respect of their subscriptions for the notes issued on 26 October 2007;
(2)	AT1 paid a sum of £1m plus interest to SO3, thereby repaying with interest the money it had provided to fund the deposit of £1m paid to Mr Hayes on 17 August 2007;
(3)	the balance of £19.98m odd (“the £19.98m”) was paid by AT1 to Cobbetts’ client account. 
42.	As to the £19.98m, Cobbetts were instructed by Mr Farrell that “structuring fees” were to be paid of £3m to Arch and £3m to the order of Mr Barkman. In this regard, and more generally as to payments made by Cobbetts out of the £19.98m:
(1)	on 30 October 2007, in fulfilment of an undertaking given by Cobbetts the previous day, completion moneys amounting to £12.21m odd were paid to solicitors acting for Mr Hayes; 
(2)	in November 2007 sums of £500,000 and £950,000, described as “working capital” were transferred to Clubeasy Group companies;
(3)	on 6 November 2007 a sum of £3 million, described as “structuring fees”, was paid to Arch FP;
(4)	on 9 November 2007 a sum of £556,152 was paid to Arch UK, being a payment directed by Mr Barkman to be made out of his £3m “structuring fee” in respect of the redemption by FHL of Arch UK’s preference shares;
(5)	on 23 November 2007, a sum of £150,000 was paid to FCL, described as “£150,000 of their structuring fee”;
(6)	also in November 2007, payments were made for stamp duty and in settlement of bills rendered by PKF, Storeys, and Cobbetts themselves;
(7)	on 14 February 2008, Cobbetts advised that the remaining sums held amounted to £2,316,911.82; they added that by their calculation this was split so that they were holding £2,293,848 for FCL (which would be the amount left over from Mr Barkman’s £3m “structuring fee” after deducting the £556,152 paid on 9 November 2007 and the £150,000 paid on 23 November 2007) along with a balance of £23,063.82 for Lonscale. 
43.	During November and December 2007 FPP made additional purchases of AT1 notes which were, in effect, sold by the RE claimants. The result was that each of RE1 and RE2 received £598,281 from selling notes which had formed part of their initial investment. Each thereby made a gain of £118,281. 
44.	During the period January 2008 to January 2009 inclusive, in order to provide additional funding for Club Easy, on seven occasions arrangements were made under which the RE claimants paid amounts totalling £3.95 million in return for notes issued by AT1 on terms under which their ultimate values depended upon Lonscale’s performance or value. On each occasion AT1 paid Lonscale an identical amount for notes issued by Lonscale on terms matching those of the notes issued by AT1. 
45.	In March 2009 the notes issued by AT1 were restructured and replaced by a combination of equity in Lonscale and the assumption by Lonscale of certain of AT1’s obligations under the notes. The result was that the shares in Lonscale were owned as to 75.5% equally by RE1 and RE2. In addition, they became holders of Lonscale senior notes, and the PF claimants became holders of Lonscale mezzanine notes. By this time it had been established that the position of the CG owning companies at relevant times was such that Lonscale’s obligation to pay deferred consideration was extinguished.
46.	More generally in relation to investments managed by Arch FP, in early 2009 reviews were conducted by the FSA and the GFSC. In March 2009 the GFSC imposed on the ICC a condition that it and each of the cells were prohibited from disposing of any of their assets without the GFSC’s prior consent. Capita FML suspended trading in shares of the UK OEICs on the grounds of deteriorating liquidity. Capita FML expressed concern that investments by individual cells in other cells (“cross investments”) led to Arch FP double-charging by receiving additional fees, which I shall refer to as “cross investment fees”, for managing the same investment. 
47.	In May 2009 the GFSC directed that investment management fees should not be paid to Arch FP until the basis of the valuation of the cells had been proven. In July 2009 the shares of the cells were temporarily suspended from their official listing on the CISX at the request of the directors pending publication of the ICC’s net asset value as at 31 March 2009.
48.	Discussions took place with a view to Spearpoint replacing Arch FP as investment manager of the cells. In order to facilitate this on 25 September 2009 Spearpoint and Arch FP entered into a “Transfer and Implementation Agreement” recording obligations which Arch FP and Spearpoint had undertaken in this regard. 
49.	A conditional agreement (“the waiver agreement”) was made between Arch FP and the cells on 22 October 2009. It came about in this way. On 22 October 2009 Arch FP wrote a letter (“the waiver letter”) addressed to the directors of the cells. It was headed, “Proposed change of Investment Manager”. The letter began by referring, among other things, to the IMAs, to recent discussions concerning the proposal to appoint Spearpoint as investment manager or investment adviser, and to recent discussions concerning cross investment fees. The waiver letter went on to state that without admission of liability, in consideration for satisfaction of two conditions, Arch FP waived its entitlement to receive all investment management or investment advisory fees and expenses payable pursuant to the IMAs from 1 March 2009 up to and including the date on which Spearpoint was appointed investment manager or investment adviser. The two conditions are described in more detail in Annex 2 at section A2/M. In broad terms the first condition was that Spearpoint had been appointed as investment manager or investment adviser on or before 30 November 2009, and the second was that there be “a full release (in the form attached)” in respect of claims against Arch FP. The “form attached” made reference to cross investment fees. The defendants contend, but the Lonscale claimant cells deny, that the form provided for a release which went beyond potential claims in relation to cross investment fees, and extended to all potential claims. 
50.	Immediately following Arch FP’s signature of the letter a typed paragraph set out confirmation of agreement to the terms of the waiver letter, and this was followed by the “form” of release described in the second condition. Signatures then appeared on behalf of each of the cells. The result was that on 22 October 2009, while the first condition to the waiver agreement had yet to be met, upon that condition being met the second condition would be fulfilled. 
51.	On 30 November 2009, with the approval of the FSA, the GFSC and Capita FML, Spearpoint replaced Arch FP as investment manager to the ICC and the cells. This had the consequence that both conditions in the waiver letter were met. Accordingly on 30 November 2009 the waiver agreement came into force.
52.	Returning to the Lonscale investment, in May, June and August 2009 sums totalling £2.06 million were made available to Club Easy. In each case these sums were financed, with the consent of GFSC, by payments from RE1 and RE2 to Lonscale in return for Lonscale senior notes. 
53.	In October/November 2009, for the purpose of audit of the financial statements of the Lonscale claimant cells as at 31 March 2009, the auditors indicated that they intended to value the equity investment in Lonscale at zero, and “impair” the loan notes by £4.3 million. In November 2009 Arch FP asked Bordeaux to proceed accordingly. Later in November 2009, for the purpose of calculation of the net asset value of the Lonscale claimant cells as at 30 September 2009, Arch FP asked Bordeaux to mark the equity investment at zero and the loan notes also at zero. 
54.	Mr King was one of a number of staff who moved across to Spearpoint when it became investment manager on 30 November 2009. On 3 December 2009 he prepared a memorandum addressed to Spearpoint’s Guernsey Investment Committee entitled “Lonscale Restructuring Proposal”. It noted that “[d]ue to the financial circumstances of the company… both the equity and debt of Lonscale are marked at zero in the funds now under Spearpoint management.” Under the heading “forecast profitability” the memorandum stated: 
Clubeasy was acquired as a turnaround project, and had a running loss of approximately £5m per year when purchased. …the hugely loss making run-rate continued for some time building up the need for Lonscale to borrow to fund operating losses. This only put more burden on the consolidated company.
Since then, some progress has been made in increasing revenues … and reductions in costs… however the company, even on an operating level excluding all debt to the funds, is still running at a loss. This requires either the equity owners or lenders to support the company to keep it going. 
…
… the company remains fairly static at around £700k loss per year.
55.	Under the heading, “On-going Issues/Challenges/Risks” Mr King concluded that it was clear that Clubeasy “cannot even break even under the current set-up…”. He listed a number of issues, the first of which was a huge debt burden. Among other issues, the memorandum identified that the auditors had to rely “on support by the funds to certify that the operation is a going concern”. The memorandum then identified proposals for consideration, adding that a requirement by the auditor for confirmation of support meant that changes would have to be put into place very quickly. 
56.	At a meeting of the board of the ICC and the cells on 10 December 2009 Mr Davey presented Mr King’s memorandum to the board. Mr Davey drew the board’s attention to the fact that Arch FP had written down the equity and debt investments in Lonscale to zero with effect from 30 September 2009. He nevertheless expressed the view that there could be value in the investment, but only if there were changes to the controls and management. It was agreed that Spearpoint would put a proposal on how to deal with the Lonscale investment to the board at a future board meeting once more consideration had been given to the options. 
57.	Later in December 2009 and early in January 2010 Mr Davey took part in discussions with Mr Barkman and Mr Montague. These resulted in a memorandum of understanding (“the MoU”) dated 19 January 2010 for the sale and purchase of Lonscale debt and equity. The parties to the MoU were the Lonscale claimant cells as “Sellers”, Spearpoint in its capacity as agent for the Sellers, and CE Holdings Limited SPV (the “Buyer”). The ultimate beneficial owners of the Buyer were Mr Barkman and Mr Montague. An initial consideration of £200,000 under the MoU was received on 22 February 2010. After further negotiation the Lonscale claimant cells on 26 March 2010 entered into a sale and purchase agreement (“the Disposal Agreement”) with a corporate entity established by Mr Barkman and Mr Montague named Lonscale Holdings Limited (“Lonscale Holdings”). 
58.	The result was that by 13 April 2010 the Lonscale claimant cells, in exchange for their shares in Lonscale and their holdings of notes issued by Lonscale, had received a total of just over £1m comprising the £200,000 transferred under the MoU, a sum of £200,000 initial cash consideration under the Disposal Agreement, and the value of other assets transferred to the Lonscale claimant cells pursuant to the Disposal Agreement. A balance of £9,316,587.72 remained payable in instalments in accordance with the Disposal Agreement by way of deferred consideration. 
59.	The claim by the Lonscale claimant cells and others against Arch FP (2011 Folio 1559) was begun by claim form issued on 21 December 2011. The claim by the Lonscale claimant cells against Mr Farrell (2012 Folio 419) was begun by claim form issued on 16 March 2012. 
A4. The FSA investigation
60.	The regulatory findings of the FSA were published in a decision notice dated 14 September 2012. As against Arch FP the FSA identified breaches of the FSA Principles for Businesses. As against Mr Farrell and Mr Addison the FSA identified breaches of the FSA Statements of Principle for Approved Persons. 
61.	The Lonscale claimant cells’ skeleton argument placed reliance upon the FSA findings. However, the appropriateness or otherwise of the regulatory action taken by the FSA is to be the subject of a hearing before the Upper Tribunal. Moreover, my task is different from that of the FSA. Accordingly, in reaching the conclusions set out in this judgment I have had no regard to the FSA findings. Nor have I examined what Mr Farrell and Mr Addison said to the FSA. The Lonscale claimant cells made criticisms of what was said, but it is unnecessary and undesirable for me to make any specific finding as to whether those criticisms were justified. Pending the outcome of the hearing in the Upper Tribunal I proceed on the basis that Mr Farrell and Mr Addison have had unblemished careers. This is a factor which supports the credibility of their evidence, and makes it less likely that they would have behaved improperly.
A5. The issues at trial
62.	Detailed lists of issues were prepared in both actions. The Lonscale claimant cells’ skeleton argument used a composite structure identifying a series of main issues. Adopting this approach, but with a degree of restructuring, I have grouped the issues as set out below. 
63.	The first group of issues concerns what benefits to which individuals and other entities, and for what services, were contemplated in 2007; who provided what actual benefits to which individuals and entities in 2007; and what disclosures were made to, and what consents were given by, the Lonscale claimant cells in 2007. I deal with this group of issues in section C below. 
64.	The next group of issues concerns the duties and entitlements of Arch FP. They are discussed in section D below. An important document in this regard is the IMA made between each Lonscale claimant cell and Arch FP: see section A1 above. Each of these IMAs was in materially identical terms, consisting of 22 numbered paragraphs and 2 schedules. They referred to Arch FP as the “Investment Manager”, and to the cell with which the agreement was made as the “Company”. Paragraph 1 of the IMAs defined “Portfolio” to mean “all the assets (including uninvested cash) of the Company and entrusted from time to time by the Company to the day-to-day discretionary management by the Investment Manager”. In the present judgment where I refer to the portfolio of a cell that reference is, unless the context otherwise requires, a reference to the definition in the IMAs. The IMAs also contained a definition of “Prospectus”. As I explain in section D2 below, this referred to documentation specific to the particular cell, and which differed among the cells so as to reflect, among other things, their differing investment objectives. 
65.	Paragraph 15 of the IMA provided that Arch FP would always take reasonable care in managing the portfolio. Allegations by the Lonscale claimant cells that Arch failed to do this, or was in breach of an equivalent common law duty of care, as regards the matters which led to the Lonscale claimant cells making payments on 29 October 2007, are considered in section E below. Allegations of failure to take reasonable care in relation to subsequent dealings affecting the Lonscale claimant cells are discussed in section F below. 
66.	Assertions by the Lonscale claimant cells that Arch FP acted in breach of fiduciary duty are discussed in section G below. Also considered in this section are contentions by the Lonscale claimant cells that Arch FP was in breach of obligations under paragraph 13 of the IMAs. 
67.	Assertions are also made by the Lonscale claimant cells that Arch FP caused them to make investments in Lonscale which did not fall within the mandate given by the Lonscale claimant cells to Arch FP. These assertions are examined in section H below. 
68.	Two groups of assertions made by the Lonscale claimant cells against Mr Farrell are examined in sections J and K below. Those examined in section J concern allegations that Mr Farrell dishonestly assisted Arch FP in the breaches of fiduciary duty discussed in section G. Those examined in section K concern allegations that Mr Farrell procured breaches by Arch FP of the IMAs. 
69.	In section L below I examine a contention on behalf of Arch FP that the waiver agreement involved a release by the Lonscale claimant cells of all claims made in the present proceedings. 
70.	In section M below I discuss issues which arise as to causation and remedies. 
71.	Before turning to these issues, I set out some observations in relation to the trial in section B below. 
B. The trial
B1. The trial: introductory
72.	The trial occupied fifteen court days, of which ten were taken up with the hearing of evidence. I deal with the factual witness evidence in section B2 below. In section B3 I deal with the expert evidence. 
73.	As noted in section A1 above, in the present proceedings the defendants have had legal representation only up to 5 July 2013. The Lonscale claimant cells, by contrast, have been represented by solicitors and leading and junior counsel throughout. There has thus been an inequality of arms. In section B5 below I discuss submissions made by the defendants in that regard, after first discussing in section B4 other general submissions by the defendants about the trial. 
B2. Factual evidence
B2.1 Factual evidence: general
74.	Oral evidence was given by five witnesses of fact. They were Mr Scott and Mr Davey for the Lonscale claimant cells and Mr Farrell, Mr Addison and Mr Jeffs for the defendants. I deal with their evidence in sections B2.2 to B2.6 below. 
75.	In addition hearsay material was put in evidence for both sides. I deal with that evidence in sections B2.7 and B2.8 below. 
B2.2 Factual evidence of Mr Scott
76.	Mr Scott’s evidence in chief was set out in three witness statements, dated 1 March, 22 October and 20 November respectively. He was cross examined by Mr Farrell over the course of much of the second day and the morning of the third day of the hearing. 
77.	The defendants’ written closing submissions said that both Mr Scott and Mr Davey had a vested interest in making allegations against Arch FP whilst appearing blameless themselves for any losses incurred “on their watches”. The defendants’ further written closing submissions made complaints about what was said to be “irresponsible” litigation. I deal with these matters in section B4 below. 
78.	The defendants’ written closing submissions also criticised Mr Scott’s conduct and evidence concerning the “write off and the subsequent sale” of the Lonscale investments. I deal with that aspect of the proceedings in section M below. 
79.	More generally, the defendants said that Mr Scott’s evidence should be treated with some caution where it was opinion-based. I have treated all the evidence of Mr Scott with some caution, for I recognise that in his evidence he is necessarily seeking to justify his own decisions, and may be expected to be sympathetic to the claimants. Treating his evidence with appropriate caution, I am satisfied that his evidence was generally credible and I accept it. 
B2.3 Mr Davey
80.	Mr Davey’s evidence in chief was set out in two witness statements, dated 1 March and 13 November respectively. He was cross examined on the third day of the hearing by Mr Addison initially and later by Mr Farrell. 
81.	The defendants’ written closing submissions commenting on credibility of Mr Davey and Mr Scott jointly are dealt with in section B4 below. The remaining criticisms of Mr Davey fall into two categories. The first concerns points which were put to him in cross examination. I deal with the relevant topics in section M below. None of those points is such as casts serious doubt upon Mr Davey’s credibility. 
82.	The second category concerns criticisms of Mr Davey in relation to his evidence about whether Spearpoint had any incentive to do things complained of by the defendants. The criticisms rely on assertions which went beyond what was put to Mr Davey when he gave evidence. For that reason I ignore them. 
83.	As with Mr Scott, I approach Mr Davey’s evidence with caution, and for the same reasons. Approaching his evidence on that basis, I conclude that his explanations for the approach adopted were clear and cogent, and in general I accept his evidence. 
B2.4 Mr Farrell
84.	Mr Farrell’s evidence in chief was set out in four witness statements dated 11 March, 23 October, 30 October and 13 December 2013 respectively. At the conclusion of his examination in chief it seemed to me desirable that I should ask him to clarify certain aspects of his statements prior to cross examination. This clarification occupied an initial part of the fourth day of the hearing. Cross examination of Mr Farrell by Mr Coleman occupied the remainder of the fourth day of the hearing, the whole of the fifth and sixth days of the hearing, and an initial part of the seventh day of the hearing. 
85.	In their skeleton argument the defendants stressed that there was no evidence of any personal gain on the part of Mr Farrell. I accept that this is so. As with his unblemished record prior to the allegations made in current litigation, I treat this as a factor in his favour, making it less likely than would otherwise be the case that he would have behaved improperly. 
86.	Making full allowance for all factors in his favour, I am nonetheless driven to the conclusion that Mr Farrell’s evidence cannot be relied upon generally. In particular, for the reasons given in sections C2, C3, C6 and G below, I am driven to the conclusion that Mr Farrell knowingly misled the court in what he said in relation to Arch FP’s role in 2007, in relation to the suggestion that Mr Barkman paid Arch’s £3m fee out of a £6m “capital gain” made by Mr Barkman, and in saying that Arch FP had complied with the advice it had received on the fair management of conflicts of interest. 
B2.5 Mr Addison
87.	Mr Addison’s evidence in chief took the form of a witness statement dated 8 March 2013. His cross examination by Mr Coleman occupied the whole of the eighth day of the hearing. After re-examination by Mr Farrell during the initial part of the ninth day of the hearing, there was further cross examination of Mr Addison by Mr Coleman. I asked some questions of Mr Addison at that stage, and this led to further cross examination of Mr Addison by Mr Coleman during the initial part of the ninth day of the hearing. 
88.	As with Mr Farrell, I take into account in Mr Addison’s favour his unblemished career prior to the current litigation, and the fact that the conduct on his part which is criticised in these proceedings gave rise to no personal gain to him. Nonetheless, I cannot proceed upon the basis that his evidence is reliable. In particular, I am driven to the conclusion, for the reasons given in sections C4 and C6 below, that he deliberately misled the court in his evidence concerning the suggestion that Mr Barkman paid £3m to Arch FP out of a £6m “capital gain” made by Mr Barkman, and in his evidence alleging disclosure of Arch FP’s “fees” to Mr Meader. 
B2.6 Mr Jeffs
89.	Mr Jeffs’ evidence in chief took the form of a witness statement dated 8 March 2013. He was cross examined by Mr Coleman during much of the ninth day of the hearing. 
90.	The Lonscale claimant cells acknowledged that Mr Jeffs’ oral evidence was generally frank. They suggested that his witness statement lacked the balance of his oral evidence. In that regard I am satisfied that to the extent that the balance needed correcting, Mr Jeffs made appropriate corrections in the course of cross examination. 
B2.7 Hearsay evidence: Mr Radford and Mr Meader
91.	As noted in section A2.5 above, Mr Radford and Mr Meader were directors of the ICC and the cells, including the Lonscale claimant cells. Proceedings have been brought against them by the cells in Guernsey. Defences served by them in those proceedings deny that they knew or consented to the payments by the Lonscale claimant cells which are the subject of the present proceedings. The Lonscale claimant cells explained that Mr Meader and Mr Radford had declined to give evidence voluntarily in the present proceedings, and that in those circumstances what was said in their defences was relied upon as hearsay evidence on behalf of the Lonscale claimant cells. I deal with relevant matters concerning Mr Meader and Mr Radford in section C4 below. 
B2.8 Hearsay evidence of Mr King
92.	Mr King (see section A2.3 above) was in Australia at the time of the trial. A witness statement prepared for these proceedings and signed by Mr King on 11 March 2013 was relied upon as hearsay evidence on behalf of the defendants. I deal with matters concerning Mr King in sections A3, C2 and C3, E, F, and M below. 
B3. Expert evidence
B3.1 Expert evidence: general
93.	Each side had permission to call expert evidence as to fund management and as to accounting and valuation. The Lonscale claimant cells relied upon such evidence from Mr Michael Walton and Mr Simon Rees respectively. 
94.	At the stage when the defendants ceased to have legal representation no expert evidence had been served on their behalf. No such evidence was served prior to the trial. However in the course of their evidence Mr Farrell and Mr Addison both took issue with certain aspects of what was said by Mr Walton and Mr Rees. 
B3.2 Expert evidence of Mr Walton 
95.	Mr Walton’s evidence in chief was set out in a report dated 22 July 2013 and a supplemental report dated 13 November 2013. He was cross examined by Mr Farrell for much of the tenth day of the hearing, and further cross examined by Mr Addison for the remainder of that day. On the eleventh day of the hearing Mr Walton was cross examined by Mr Farrell during an initial part of the morning. 
96.	As appears from section E below, it is only in relation to certain limited aspects that I have derived assistance from Mr Walton’s evidence. That is not of itself a criticism of him: it has come about because his evidence concerned many matters which I have found it unnecessary to examine in this judgment. On those matters which I have examined in this judgment, I have found Mr Walton’s evidence to be carefully considered and I accept it. 
B3.3 Expert evidence of Mr Rees
97.	The evidence in chief of Mr Rees, dealing with accounting and valuation matters, took the form of three reports dated 22 July, 18 September and 13 November 2013. After the conclusion of his oral evidence the Lonscale claimant cells sought to rely upon a fourth report from Mr Rees. I upheld objections made by the defendants to that report and it was not put in evidence. In its place, a fifth report dated 17 January 2014 was admitted in evidence. 
98.	Mr Rees was cross examined by Mr Addison for much of the eleventh day of the hearing and by Mr Farrell for most of the remainder of that day. 
99.	As with Mr Walton, as appears from section E below, it is only in relation to certain limited aspects that I have derived assistance from Mr Rees’s evidence. That is not of itself a criticism of him: it has come about because his evidence concerned many matters which I have found it unnecessary to examine in this judgment. On those matters which I have examined in this judgment, I have found Mr Rees’s evidence to be carefully considered and I accept it. 
B4. The defendants’ general observations about the trial
100.	The defendants’ skeleton argument made observations about inequality of arms. I discuss these observations in section B5 below. Before doing so, it is convenient to mention here certain other general observations made by the defendants. 
101.	A first general contention made in the defendants’ skeleton argument was that, notwithstanding the seriousness of the allegations made against the defendants, the Lonscale claimant cells had not “meaningfully” particularised the duties, breaches or losses alleged by reference to any developed factual analysis of the issues. As regards the key assertions, I reject this contention: see sections D to G and J to M below.
102.	The defendants advanced four further points in paragraph 6 of their skeleton argument. All were advanced in support of an assertion that the Lonscale claimant cells’ case was “almost entirely made up of circumstantial evidence and supposition”. The first of these additional points was that the Lonscale claimant cells had provided no witness statements addressing “the specific contemporaneous evidence at the time of the Lonscale investment”. The second point was put in this way: 
None of the [Lonscale claimant cells’] current directors or advisers were involved, so they have no knowledge of the contemporaneous facts. Any attempts to reconstruct or reinterpret events and contracts must therefore be treated with the utmost caution
103.	The third further point was that the Lonscale claimant cells’ expert evidence comprised unsupported conclusions and opinion, based on erroneous assumptions which had not even been identified as assumptions. As to the fourth further point, this was a comment by the defendants that the global financial crisis “and its far reaching effects” had not been recognised in the Lonscale claimant cells’ statements of case, and had not been recognised in their experts’ reports. 
104.	I discuss these four further points where they arise in my examination of the issues in sections C to M below. There are common features of these further points which I deal with here. The defendants repeatedly stressed that differences in recollection were only to be expected. Similarly, accounts given at the time may differ according to the perspective of the person giving the account. Indeed inconsistencies of this kind are normal, and demonstrate honesty on the part of those involved. I take full account of these points. In later sections of this judgment I rely upon inconsistencies only where these points cannot explain them away.
105.	At paragraph 10(e) of the defendants’ skeleton argument it was asserted that on the claim against Mr Farrell there was “absolutely no evidence (or allegation) of any personal gain.” I have dealt with this in section B2.4 above. 
106.	A further general point was made by the defendants in paragraph 21 of their skeleton argument. This concerned what was said in parts of the skeleton argument which focussed on legal issues. The defendants were anxious to make it clear that by focussing on legal issues they were not “in any way shy” about meeting the fundamental merits of the claims. As will be apparent of my discussion of the issues below, it was very clear at trial that the defendants were not at all shy in this regard. 
107.	A final group of general points appeared in paragraphs 86 to 96 of the defendants’ skeleton argument. The defendants drew my attention to the close links between the Lonscale claimant cells and Capita FML. Mr Aldous, an officer of Capita Sinclair Henderson Ltd (which, like Capita FML, is owned by Capita Plc), became the chairman of the ICC and thus of its incorporated cells. Capita FML is being sued in proceedings brought by private investors, for which a group litigation order has been made. It has accepted a decision against it by the Financial Services Authority, and has made a contribution towards a £54m investor payment scheme. I accept that the commercial links between the Lonscale claimant cells and Capita FML are an additional reason for approaching the evidence of Mr Scott and Mr Davey with caution. Nonetheless, having approached that evidence with the requisite degree of caution, I am nevertheless satisfied of their evidence as appears later in this judgment. 
108.	Also in this group of general points the defendants draw my attention to what they describe as “a highly litigious approach to the cells’ former service providers and counterparties.” Reference is made to proceedings both in the UK and in Guernsey, and it is said that in the present proceedings “there is nil prospect of any net economic recovery.” I am not in any position to judge the merits or otherwise of other proceedings. As to these proceedings, for the reasons given below, I have concluded that they are well founded. I am not in a position to conclude that the prospects of economic recovery are so slight as to justify the criticism advanced in this regard by the defendants. 
B5. Inequality of arms
109.	The defendants stressed that the present trial has involved an inequality of arms. The Lonscale claimant cells have been represented by leading and junior counsel and solicitors, and have instructed expert witnesses who have provided lengthy and detailed reports. By contrast, Mr Farrell appears in person and Mr Farrell and Mr Addison appear on behalf of Arch FP. In the absence of expert witnesses for Arch FP and Mr Farrell, Mr Farrell and Mr Addison sought to answer the expert evidence by expressing opinions of their own on matters of expertise. 
110.	It is right to record that as the trial proceeded Mr Farrell and Mr Addison were given additional time to deal with various aspects of the case, and that on certain aspects offers of additional time were declined. Nevertheless, conduct of this litigation during a period when the defendants did not have legal representation, and did not have independent experts instructed to give evidence, has involved real and substantial difficulties for the defendants. I do not underestimate those difficulties. As with Mr Farrell and Mr Addison’s unblemished record prior to this litigation, and their lack of personal gain, I take into account in their favour that what might otherwise be a matter for criticism may be attributable to inequality of arms. It is only after making due allowance for this that I have reached adverse conclusions against Mr Farrell and Mr Addison. 
C. Aims and events in 2007
C1. Aims and events in 2007: general
111.	In this section I divide up my consideration of aspects of what was contemplated, and what came about, in relation to the acquisition during the period from late July 2007 to the end of 2007. Putting on one side questions of disclosure to, and consent by, the cells, I consider in section C2 below the period up to and including 17 August 2007. On the same basis, in section C3 below I consider the period from 18 August 2007 to the end of that year. In section C4 below I consider questions of disclosure to, and consent by, the Lonscale claimant cells. The role in 2007 of Arch FP’s investment committee, and what happened as regards other approval and decision processes, are discussed in section C5. I set out in section C6 some comments on the defendants’ evidence as to events in 2007.
C2. Aims and events prior to 18 August 2007
112.	Under this sub-heading, I consider aspects of what was contemplated, and what came about, in relation to the acquisition during the period up to and including 17 August 2007. I noted at the start of section A3 above that the main defence set out assertions as to what was agreed “in August 2007”. The relevant period in this regard is the period up to and including signature of the SPAs on 17 August 2007. There has been no suggestion that those assertions, if not correct by the time that the SPAs were signed, could nonetheless be justified by events between 18 and 31 August inclusive. 
113.	So far as material, the relevant passages in the main defence were sub paragraphs (1) to (3) of paragraph 113:
113. …
(1) The purchase price paid for the acquisition of the Club Easy Group was at a discount to the value of the Group.  
(2) In August 2007 it was agreed that Arch would receive fees representing 50% of the difference between the acquisition price and the value of the Club Easy Group with Mr Barkman retaining the other 50%.  This payment was subject to an overall limit of £6 million.  
(3) Any additional difference beyond the limit of £6 million would accrue for the benefit of Lonscale, AT1 and the purchasers of the notes issued by AT1.
114.	In section A3 above I also noted two features of Mr Farrell’s witness statement dated 11 March 2013. They concerned a reference to a “discounted value” and the date when the £6m cap was said to have been agreed. As to the “discounted value”, paragraph 43 of that statement made assertions concerning what had been agreed between Mr Farrell and Mr Barkman by “early August 2007”. It said that by this time it had been agreed that AT1 would act as “the syndications vehicle”, in the sense that it “would issue Club Easy-linked securities, subject to the transaction meeting the due diligence requirements and investors being found by Lee Barkman and his team.” In relation to the “fees”, it added that they were to be calculated “as the difference between the acquisition price of the Club Easy Group and its discounted value.” As to a limit on the “fees”, no such limit featured in paragraph 43. That paragraph made no mention of a £6m cap: the statement made no reference to a limit until paragraph 47, where it referred to a cap of £6m which “was subsequently agreed in October 2007.” 
115.	On 1 May 2012 Mr Farrell signed a statement of truth verifying what was said in the main defence. If what Mr Farrell said in his statement of 11 March 2013 were right, it would inevitably follow that, despite Mr Farrell’s statement of truth verifying the main defence, paragraph 113 of the main defence was inaccurate: 
(1)	in saying that in August 2007 it was agreed that the “fees” would represent the difference between the acquisition price and “the value of the Club Easy Group” rather than a “discounted value” of that group; and
(2)	in presenting the “overall limit of £6m” as something which was agreed in August 2007. 
116.	I am sure, however, that when describing the position in August 2007 the main defence was untrue, and when he verified it was known by Mr Farrell to be untrue, for a much more fundamental reason. It is this: the assertion that there was an agreement in August 2007 under which Arch FP “would receive fees” was simply not a true account of the position in August 2007. On the contrary, a true account would have described how Mr Barkman and Mr Farrell had made a plan to use a purchase of the CG owning companies as a way of extracting money from investors. I am sure that by the end of 17 August 2007:
(1)	Mr Barkman and Mr Farrell had agreed that Arch FP and Mr Barkman would work together on an extraction venture which would, if successful, involve a purchase of the CG owning companies;
(2)	they had agreed that the purchase would be funded by very substantial payments by investors, from which substantial amounts would be extracted in order to provide finance for benefits received by the Arch business and Foundations; 
(3)	neither side had agreed that the amounts extracted would be described as “fees”, although they may have contemplated that this might come about; and 
(4)	the first stage of such an extraction venture was in place, in that an initial payment of deposit under the SPAs had been funded by SO3, and the period prior to completion under the SPAs was available to be used to identify investors so as to enable the extraction venture to come to fruition. 
117.	It was envisaged that most of the investors would be introduced by Foundations. However, I am also sure that throughout August 2007 Mr Farrell envisaged that one or more of the cells would be among the investors making payments from which substantial amounts would be extracted in order to provide initial or later finance for benefits received by the Arch business and Foundations. 
118.	The essential elements of the plan had been identified by 2 August 2007. They emerge clearly from Mr King’s email of that date, based upon what he had been told by Mr Farrell: the purchase price (which would be paid to Mr Hayes) would be the end result of a calculation involving four elements. The first three elements would determine what amount would be provided by investors, some of which might have the benefit of a loan from Barclays bank. The calculation would start with the gross value of the properties owned by the Club Easy business, and would deduct the total amount of Club Easy debt along with tax arising from capital gains that would either be payable or would need to be provided for. The result, in effect a net value of the properties, would be the amount that the investors would provide. The difference between that amount and the purchase price was described by Mr King as, “what we can take out of it”. 
119.	Mr King added:
… we need to get a very good handle on the gross property value. … valuation is the weak link. … The valuation mandate is unclear on what specs are required. I think we need a more robust valuation.
120.	As to the position between 3 August and 17 August 2007:
(1)	Both Mr Barkman and Mr Farrell wanted, if possible, to complete the acquisition speedily. To this end, pursuant to Mr Farrell’s instructions, on Friday 3 August 2007 three of the cells invested £8 million in AT1 notes, so that AT1 would be ready to pay that amount early the following week. 
(2)	On 4 August 2007 Mr Farrell sent an email noting that with £33m “official value on balance sheet” for the CG owning companies, the “ability to extract lots of cash … upfront is good”. He added that RE1 and RE2 were likely to be investors once the deal was fully settled. 
(3)	On 7 August 2007 an email was sent by Mr Barkman to Mr Farrell. In this email Mr Barkman:
(a)	at paragraph [9], proposed that the October payment be funded as to part by “… Arch producing a note that bears an appropriate interest rate and gains a portion of the extracted profits …”;
(b)	at paragraphs [10] and [11], proposed that the balance be paid by lending in support of a mutual fund to be constructed by FCL and the proceeds from which would serve, over time, to “retire the Arch note”; and
(c)	added at paragraph [14]: “We structure the deal in such a manner that the mutual fund and Arch note gain a portion of future appreciation but Arch Group and Foundations Capital Ltd are left with a sizable portion of the future value”.
(4)	At paragraph [18] of his 7 August email, Mr Barkman:
(a)	set out various ways in which investors could contribute funds, adding that the split “between Arch and Foundations looks set for a 50/50 deal…”;
(b)	described the contribution from Foundations as: “we brought the deal forward, progressed it to a very advanced point and are injecting cash through [FPP] and our sales force [who would be selling participation in a mutual fund]”;
(c)	described the contribution from the Arch business as “supplying the backing to make certain the payments are made, adding structuring skills and general skill sets in terms of making the company a saleable entity in the end”; and
(d)	equated the two contributions.
(5)	In a summary at the end of his 7 August 2007 email, Mr Barkman:
(a)	envisaged that the two sides would receive at least £8 million from the project, describing this as “considerable meat left on the bones” and adding that there was “scope to take more than that from this deal”;
(b)	concluded by saying that the deal offered “the combination of Arch/Foundations the opportunity to use their unique abilities to turn a profit…”. 
(6)	By this time it had become clear that signature of contracts to purchase the CG owning companies would need to be put back until mid August, and that the contracts would build in a period of several months before completion. Accordingly on 7 August 2007 it was recognised that the £8 million that had been put in to AT1 would not be needed imminently, and the funding transaction in this regard was cancelled. 
(7)	Also in an email on 7 August 2007 Mr Farrell told Mr Barkman that in order to ensure “that take up is certain” there was a “change to structure”, namely that “the arch real estate fund(s) can go alongside the foundations fund as well…”. I have no doubt that this email makes plain what the Arch business would be doing when “supplying the backing” as described by Mr Barkman: it would be doing what it had done on 3 August 2007, namely, using the cells to provide investors as and when Mr Farrell thought it desirable so as to ensure that the extraction venture could proceed.
(8)	On 10 August 2007 Mr Barkman emailed that he was working on the basis that as part of the project the preference shares in FHL (which were owned by Arch UK) would be redeemed, after which “each of our respective funds will take what they need and we split anything we take out above that on a 50/50 basis.” 
(9)	Mr Farrell’s response the same day was that fifty percent should go “to arch treasury (our risk taking/warehousing entity)” and fifty percent to FHL, out of which it would finance redemption of the preference shares. 
(10)	In an email on 14 August 2007 Mr Barkman was willing to agree that the Foundations side should bear the cost of redeeming the preference shares, but was not willing to have “our end being paid into FHL”. 
(11)	In fulfilment of a revised price agreement between the purchasing company (now identified as Lonscale) and Mr Hayes, Arch FP on 17 August 2007 provided a letter stating that Lonscale was “backed by the financial resources at the disposal of the Arch Group and Foundations Capital both as principals and agents.”
121.	Minutes of Lonscale’s board meeting on 17 August 2007 were prepared. I shall assume, although I am by no means sure, that they accurately reflect what was discussed on that day. They referred to the acquisition as “the Project”. In that regard paragraph 5.2 of the minutes noted that the directors agreed that the acquisition should be funded by a mixture of equity and debt. As to equity, the directors agreed that AT1 should subscribe £8 million for shares. As to debt, the directors agreed that AT1 should propose a “facility which would be available for draw down at completion [of the SPAs] and to fund the working capital requirement of the Company for the following three years.” Paragraph 5.3 of the minutes added that the directors “also discussed payment of an introduction commission to the introducers of the Project to the Company and appropriate structuring/arrangement fees to be invoiced in due course.” These passages from the minutes do not in my view support the defendants’ contentions as to what was agreed in August 2007. The account of the directors’ discussions in paragraph 5.3 of the minutes was vague. No attempt was made to identify the recipient of the “structuring/arrangement fees”. Nor was there any attempt to identify an agreement under which such fees would be payable. 
122.	Under cross-examination Mr Farrell said he did not think the structure “had been fully finalised or defined” in paragraph 5.3, “so it would be an outstanding issue.” The wording in the minutes was in my view consistent with a recognition by Mr Farrell and Mr Barkman that when Mr Barkman and Arch FP extracted what Mr Barkman called the “meat left on the bones” it might be convenient to seek to categorise this as a payment of “structuring/arrangement fees”. This is also consistent with what was later said by Mr Farrell in his email exchanges with Mr Barkman on 24 October 2007 at paragraph [2]: “Structures obviously evolve over time to fit in with the situation and information provided.” 
123.	Mr Farrell undoubtedly envisaged from the outset that there would be use of the cells for funding. This is shown by the steps immediately taken on 3 August 2007 to put in place investments by 3 of the cells. In Mr Farrell’s email of 4 August 2007 he said that RE1 and RE2 were “likely to share some of Club Easy”. In order to ensure that the deposit could be paid, Mr Farrell arranged for it to be funded by SO3 in the full amount of £1 million. There is a dispute, which emerged only after oral evidence was complete and which I do not need to resolve, as to whether FPP provided £800,000 to SO3 for this purpose. Even if that were so, it remains the case that Mr Farrell was prepared to use SO3 as the entity which provided £1 million when needed. Moreover, it is clear that from 4 August 2007 onwards Mr Farrell envisaged that the RE cells would be investing at some stage. 
124.	Any investment by the Lonscale claimant cells had important ramifications:
(1)	The Lonscale claimant cells were, of course, already paying Arch FP for its services. In his oral evidence on day 7 Mr Farrell explained to me that the fee structure for Arch’s role as investment manager allowed for a considerable amount of work by Arch FP. That work extended to active management, typically by putting a management team to work with the management team of the investee company. 
(2)	Important duties were owed by Arch FP to the Lonscale claimant cells under the IMAs. Those duties are considered later in this judgment. For present purposes I note that, as regards the evidence as to what occurred in August 2007, there is nothing to suggest any recognition of the important duties which would arise if any of the PF cells or the RE cells were to invest in the acquisition. 
125.	As regards what was agreed in August 2007 the main defence was the subject of requests for further information. In answers dated 20 July 2012, verified by a statement of truth signed that day by Mr Farrell, it was said that the “fees” of Arch FP representing 50% of the value/acquisition price difference were “for its assistance in negotiating and structuring the transaction, including due diligence.” For the reasons given above, this answer was misleading. The costs of due diligence were not envisaged to be paid by Arch FP. In the event, consistently with what was contemplated in August 2007, they were all paid by Lonscale using funds which came from the investors. As to Arch FP providing assistance by “negotiating and structuring the transaction”, such work as Arch FP did in that regard was in order to enable it and Foundations to extract money from investors, not by way of assistance to whatever entity might acquire the CG owning companies. The true position was that Lonscale was created in order to assist Mr Farrell and Mr Barkman in their plan to extract from the total payment that was to be made by investors “what we can take out of it”.
126.	The further information also made an assertion concerning what the defence described as “Mr Barkman retaining the other 50%.” As to what this was for, the assertion said that “as originator of the transaction, Mr Barkman received a payment representing 50% of his capital gain capped at £6m.” This was an assertion as to what happened. It did not answer the question, which concerned what Arch FP had said in the main defence about the agreement, rather than the outcome. I deal with what happened in sections C3 to C6 below.
127.	Thus from 17 August 2007 onwards the first stage of the extraction venture was in place. The SPAs were signed on 17 August 2007. Arch FP had used its investment management powers on behalf of SO3 to ensure that Lonscale was lent sufficient money to pay the deposit. What was agreed about the extraction venture was that if it succeeded it would involve a purchase of the CG owning companies funded by very substantial payments by investors, a substantial part of which would find their way to Arch FP and to Foundations. There was no agreement on anything more detailed: that would have to await events. There was no agreement at this stage that when funds were extracted they would be characterised as “structuring fees”, nor as “arrangement fees”, nor indeed as “fees” at all: Mr Farrell and Mr Barkman wanted to leave open the possibility that (as happened very much later, and indeed too late, as explained in section C6 below) they might think it desirable to characterise extraction of funds in a different way. 
C3. Aims and events in the remainder of 2007
128.	Under this sub-heading I consider aspects of what was contemplated, and what came about, in relation to the acquisition during the period from 18 August 2007 to the end of that year. 
129.	During this period the idea that Arch FP might receive the money it extracted as a payment described as a “structuring fee” or as “structuring fees” began to take prominence. It may well have been agreed prior to 13 October 2007 that the expression “structuring fee” or “structuring fees” would be used to describe the money that was to be extracted for the benefit of Arch FP. However what Arch FP was to receive could not, in my view, have been thought to be in truth anything other than Arch FP’s share of “the meat” which was to be stripped out of the Club Easy business once sufficient funding from investors had been found in order to enable this to happen. 
130.	There was still no precise agreement for such “fees”. Mr Farrell appears to have contemplated such an agreement on 13 October 2007. His email that day said there was a “need to sign the terms of the Lonscale restructuring, management & control & ownership” adding that this was needed “so that Lee Barkman cedes to Arch Treasury in return for upfront structuring fees as agreed …”. But no such “terms” were ever signed. If the reference to “structuring fees as agreed” was a reference to the position in August 2007, for the reasons given above it was not accurate: at that stage “upfront structuring fees” had not been agreed, and what were vaguely described as “structuring/arrangement fees” had merely been identified as a potentially convenient way of characterising the extraction of funds.
131.	In their emails of 23 and 24 October Mr Farrell and Mr Barkman worked on the premise that AT1 would pay what Mr Farrell described as “the residual completion balance” of £20m on top of the “£1m deposit”: see item “1)” in Mr Farrell’s email of 23 October 2007. It was clear, however, that this was not the completion balance that Lonscale would have to pay to Mr Hayes. On the contrary, it was to comprise “syndication proceeds” which needed to be significantly larger than the acquisition cost that Lonscale would have to pay. As item “2)” in the same email made clear, this difference was proposed to be described as “structuring fees” which were to be paid by Lonscale to Arch FP and a Foundations entity. Mr Farrell’s email the following day, at paragraph [7], noted that the “structuring fees” were expected to be £6m. 
132.	Prior to 29 October 2007 Lonscale had no money of its own. The £1m deposit notionally passed through Lonscale on its way from SO3 to Mr Hayes. It did not belong to Lonscale for any significant period of time. 
133.	On 29 October, in a letter written on Arch FP notepaper, Mr Farrell referred to the £19.98m which would be arriving in Cobbetts’ client account that day “for completion of the acquisition of the Clubeasy group of businesses by Lonscale Limited.” The letter said that upon successful completion of the acquisition, “structuring fees” were to be paid as to £3m to Arch FP and as to £3m “to the order of Lee Barkman”. 
134.	The Lonscale claimant cells submitted, and under cross-examination Mr Farrell accepted, that this letter was an instruction given by Mr Farrell on behalf of Lonscale. This makes sense. The arrangement was that AT1 would pay Lonscale £13m for notes and £8m for shares, a total of £21m. As against the £21m, AT1 was entitled to set off amounts paid to SO3. The balance was the £19.98m referred to in the letter. That money is thus received by Lonscale before making payments to be made by Lonscale to Arch FP and to Foundations which are to be characterised as “structuring fees”. 
135.	Mr Farrell’s evidence was that the instruction was not acted upon, and that instead a last minute change in the arrangements, following tax advice, led to Mr Barkman receiving a capital gain. As I explain in section C6 below, this evidence was incoherent and was inconsistent with the documentary records. 
136.	The £19.98m was paid by AT1 only because it had received payment from the Lonscale claimant cells of £20.2m and payment of £0.8m from FPP. It represented the total of those sums after repaying £1m and interest to SO3. 
137.	On 29 October 2007 the £19.98m which Cobbetts received that day was held by Cobbetts on behalf of Lonscale first, to complete the acquisition, and second, to pay the two sums of £3m described in Mr Farrell’s emailed letter to them of 29 October 2009. This is, in effect, what Mr Farrell told Cobbetts in that letter. It is plain from Cobbetts’ email of 3 December 2007 that Cobbetts thought that by reason of Mr Farrell’s letter:
(1)	they had been entitled to pay the sum of £3m to Arch FP on 6 November 2007;
(2)	they had been entitled to pay the sums of £556,152 (used by Foundations to redeem the preference shares in FHL) and £150,000 at the direction of Mr Barkman on 9 and 23 November 2007;
(3)	they held the balance of Mr Barkman’s £3m for FCL; and 
(4)	as to the remaining monies in the £19.98m ledger account, they held those monies for Lonscale. 
138.	There can to my mind be no doubt that the £3m which was paid out to Arch FP on 6 November originated from the £21m received by AT1 on 29 October 2007. The Lonscale claimant cells had paid just over 96% of that £21m. On any view the £800,000 provided by FPP to AT1 was very much less than the £3m paid out to Arch FP on 6 November. It follows that the Lonscale claimant cells are right to say that they funded either the whole or a very substantial part of the £3m which Arch FP received. I am sure that it was the Lonscale claimant cells’ investment which resulted in Arch FP taking what it regarded as a £3m profit. 
139.	The notion that either or both of the sums of £3m could be properly described as “structuring fees” was the reverse of the truth. None of this money went to cover costs incurred in order to bring the acquisition about: those costs were the subject of separate payments out of the £19.98m ledger account. The only reason for the payments of £3m was so that, in Mr Barkman’s words, Arch FP and Mr Barkman could “turn a profit” of such a size that it would “turn heads.” (See paragraph [21] of Mr Barkman’s email of 7 August 2007.)
C4. Disclosure to, and consent by, the cells
140.	In paragraph 129(2) of the main defence it was asserted that the payment of £3m to Arch FP was disclosed to, and/or consented to by, the Lonscale claimant cells. As to the giving of consent, paragraph 129(2) identified only one way in which any express consent was given, namely in what was said in clause 13 of the IMAs. I discuss this aspect in later sections of this judgment. As to disclosure, it was asserted that there had been disclosure of the payment to the directors of the ICC and the relevant cells. A request for further information was made in this regard. In the response, verified by Mr Farrell in the same statement of truth signed on 20 July 2012, a general observation was made that it was a working practice of Arch FP, in particular Mr Farrell and Mr Addison, and the cell directors, Mr Radford and Mr Meader, “to regularly discuss potential and on-going investments both formally and informally.” The response then added:
The best particulars that Arch can provide at the present time is that disclosure was made in August 2007 in the course of a telephone conversation between Mr Addison and Mr Radford.  At the time of the telephone conversation the precise size of the fee was not known however the structure and approximate figures were discussed.
141.	In his first witness statement dated 8 March 2013 Mr Addison stated under the heading “August 2007”:
Because of the Cells’ planned investment in a deal which involved a fee being paid to AFP, I telephoned Neal Meader and asked him whether the non-AFP ICC directors would object to the Cells' involvement in an investment in which it had already been agreed that AFP would be paid a fee.  Neal Meader stated that he had no objection.
142.	As was noted in the Lonscale claimant cells’ closing submissions, there was a flat inconsistency between Mr Addison’s evidence and the response that was given to the request for further information. The response said that he had spoken to Mr Radford in August 2007. His evidence was that he had spoken to Mr Meader in August 2007.
143.	Moreover, the evidence of Mr Radford and Mr Meader, in the form of the defences signed on their behalf in the proceedings against them in Guernsey, includes assertions that: 
(1)	they had no knowledge of an agreement between Mr Farrell on behalf of Arch FP and Mr Barkman on behalf of FCL that each would received a commission payment of £3m from Lonscale Ltd in connection with the acquisition of the Clubeasy Group;
(2)	these commission payments were not disclosed to the board of directors of the cells, whether before or after the investments were made;
(3)	no authorisation for these commission payments was given on behalf of the cells by either Mr Radford or Mr Meader.
144.	In the opening oral statements on behalf of the parties, Mr Addison dealt with disclosure on behalf of the defendants. He added a number of things which had not been mentioned in his witness statement: 
(1)	He added that the conversation which he had had with Mr Meader as described in paragraph 21 of his witness statement was a conversation which occurred because “I was actually asked by Mr Farrell to check that there would be no objections…”. 
(2)	He added that while the size of the fee was not known at the time so an accurate figure could not be given, nonetheless Mr Meader was told “it would be substantial”.
(3)	He added that Mr Meader was told that “owing to the other proposed investors not being ready or available – potentially available – there was an opportunity for the cells to participate in it and Arch thought it would be a good deal for them.”
(4)	He added that not merely did Mr Meader state that he had no objection, he [Mr Meader] said “it was fine and standard for a financial services firm such as Arch to be engaged in such matters.”
(5)	He added that at a later stage, prior to the proceedings against Mr Radford being issued in Guernsey, a telephone conversation took place in which Mr Radford confirmed “that he recalled that Arch had discussed Lonscale with him and the fact that Arch would be receiving a fee from the transaction.” Mr Addison said that this confirmation had led to a telephone call from himself and Mr Farrell to Mr Radford on 15 August 2011, a note of which was in the material made available by the defendants for the trial. Mr Addison acknowledged, however, that the note of the conversation did not contain any indication by Mr Radford of the date on which the discussion about Lonscale was said to have taken place. 
145.	I have no doubt that when the main defence was being prepared, and the responses to the request for further information were being formulated, great care would have been taken in relation to what was said about disclosure and consent. First, if the cells had consented to the payment extracted by Arch FP, then this would go a long way towards providing a complete defence to the Lonscale Arch claim. It is clear that as at 20 July 2012 neither Mr Farrell nor Mr Addison had given instructions to Arch FP’s lawyers that any director of the cells, whether Mr Meader or otherwise, had said in August 2007 that there was no objection to the payment envisaged to be received by Arch FP, let alone that it “was fine”. I am sure that if instructions had been given that either of these things had occurred then they would have featured in the main defence or in the further information. By the stage that Mr Addison’s witness statement was verified on 8 March 2013, Arch FP’s lawyers had been instructed that in August 2007 Mr Meader had stated that he had no objection to the payment – but not that it “was fine”. 
146.	Turning to allegations of disclosure, in 2012 Arch FP instructed its lawyers that the best information that it could provide to back up a claim of disclosure was that “the structure and approximate figures” were discussed in August 2007 in the course of a telephone conversation between Mr Addison and Mr Radford. By the time that Mr Addison’s witness statement was signed on 8 March 2013, the instructions by Arch FP to its lawyers were that Mr Addison’s evidence was that in August 2007 he had telephoned Mr Meader, and asked him whether he and Mr Radford would object to the cells being involved in an investment in which it had already been agreed that Arch FP would be paid a fee. 
147.	It is difficult to understand how on this topic the instructions which Arch FP gave to its lawyers on 8 March 2013 when Mr Addison’s witness statement was signed could have been so very different from the instructions given to those same lawyers in 2012. The changes are, to say the least, surprising. In addition to those surprising changes, at the stage of oral openings Mr Addison came up with the five additions listed above. It is astonishing that there could be such a dramatic change as would be involved if those additions were correct. When Mr Addison gave evidence he added for good measure that:
I said the fee would be a seven figure fee, but I didn’t know any more than that. 
148.	Mr Addison was simply unable to give any coherent explanation as to how it was that so many important matters that he now describes were omitted in Arch FP’s statements of case in 2012. I have no doubt that the Lonscale claimant cells were right to submit that the entirety of the evidence about disclosure, along with the evidence that Mr Meader had consented, was invention. What was said by Mr Addison in opening and in his oral evidence in relation to a conversation with Mr Meader in August 2007 was made up by him as he went along. The reason that it was made up was that he was conscious that neither what had been said in the statements of case, nor what had been said in his witness statement, had any basis in truth. In so far as Mr Farrell supported Mr Addison’s account of a conversation with Mr Meader this, too, had no basis in truth.
149.	Nevertheless I cannot rule out the possibility that either or both of Mr Meader and Mr Radford were told informally prior to 17 August 2007 or prior to 29 October 2007 that some of the cells would be investing in the acquisition, and that Arch FP would be receiving a “fee”. It is not suggested that they were told that the “fee” would come in large part from funds invested by the cells. I am sure that they were not told this.
150.	I add that:
(1)	Neither Mr Meader nor Mr Radford has signed a witness statement for these proceedings. Nor has either of them attended to give oral evidence. I do not consider that I should draw any adverse inference against either side in this regard. It would have been open to either side to invite the court to put in hand procedures for obtaining evidence from Mr Meader and Mr Radford. Neither side has done so. I treat this as entirely neutral. 
(2)	Oral reply submissions for the Lonscale claimant cells relied in part upon a letter dated 17 August 2011 written by Arch FP’s solicitors. As it was not referred to during the oral evidence, I have not placed reliance upon it when reaching conclusions adverse to the defendants as set out above.
C5. Processes involved in the acquisition
151.	The defendants’ skeleton argument at paragraph 71 asserted that there was no element of concealment “as to the Lonscale fees.” Seven specific points were made in order to show that everything had been above board. The first six points were identified as (a) to (f) and for convenience I identify the seventh as [g]: 
(a)	the existence of the Lonscale fees was disclosed by Mr Addison.
(b)	the approval and decision processes within Arch required the approval and/or signature of a range of people and functions – Lonscale Limited, Corporate finance, Portfolio Management, Structuring, Legal, Compliance and Operations. In respect of Lonscale, Mr Jeffs was given Power of Attorney on 17 August 2007. 
(c)	staff within Arch who were aware of the fee payments included Mr Addison (Compliance), Mr Duxbury (Finance), Mr King (Real Estate cells), Mr Smith (Private Finance cells), Mr Ruparell (AT1), Mr Douglas (Legal), and Mr Jeffs.  
(d)	the transaction payments from AT1 were paid to the client account of the law firm Cobbetts.
(e)	the payment was paid to Arch’s bank account from Cobbetts and was clearly marked as “Club Easy”.
(f)	Arch took VAT advice on the payment from BDO LLP.
[g] 	the purchase of the FHL preference shares was properly documented and evidenced by board minutes and stock transfer forms.
152.	Point (a) is not established by the evidence. As indicated in section C4 above, I cannot rule out the possibility that either or both of Mr Meader and Mr Radford were told informally that some of the cells would be investing in the acquisition, and that Arch FP would be receiving a “fee”. However, I am sure that they were not told that the “fee” would come in large part from funds invested by the cells. 
153.	As to points (d), (e), (f) and [g], each is correct. None involves disclosure of the fact that the “fee” had or would come in large part from funds invested by the cells. 
154.	Turning to points (b) and (c), it is convenient to begin with the position of Mr Jeffs. In his witness statement, he said:
By October 2007 I knew that AFP was going to be paid a fee for its work in structuring and negotiating the deal and that Foundations or Lee would be paid a finder’s fee for bringing the deal.  This didn’t strike me as unusual or odd.  In reality my focus was on reviewing the quality of the potential investment and planning the post-acquisition strategy, assuming the investment went ahead. 
As far as I can now recall, I didn't know the final size of AFP's fee for the work until after the acquisition in October 2007, although I believe the exact amount was not finalised until the day of completion.  I was, however, aware of the general level of the fee prior to completion.  Whilst I thought the fee was generous, other than that I did not really consider it further. …
155.	When asked about this in cross examination, Mr Jeffs clarified that he had not known that the payment of £3m was being funded by the investors. He had thought it was generous in size and scale, but had not thought about whose generosity was involved. Moreover, if he had been aware that there had been no consent from the directors of the investing cells, he would have found that odd. 
156.	In so far as point (c) relies upon Mr King as having been aware of the fee payment, there has been no opportunity to cross examine him in the same way as Mr Jeffs. In relation to others named in point (c), and in relation to the functions described in (b), I have no evidence from any of those involved other than Mr Farrell himself. For the reasons given in section B2.4 above, while Mr Farrell asserts that the transaction was approved by the Investment Committee, I can place no reliance upon this assertion. No documentary record has been found of any Investment Committee meeting relevant to Lonscale prior to 2009. In all the circumstances, I am sure that the assertions in paragraph 71 are of no assistance to the defendants. 
C6. The defendants’ evidence as to events in 2007
157.	The Lonscale claimant cells advanced a suggestion that even on the defendants’ account of the “fees” agreement, the total amount of £6m exceeded “the difference between the acquisition price of the Club Easy Group and its discounted value”. This was, they said, because in arriving at the discounted value it was necessary to deduct in excess of £10m to allow for corporation tax which would arise in respect of capital gains made when the properties were sold. Mr Farrell’s answer was that reliance had been placed on advice that this liability to tax could be reduced to less than £2m through tax efficient structuring. In their closing submissions the Lonscale claimant cells said that there was no clear evidence that such a restructuring would have been possible. But this criticism seems to me unsustainable, as there had been no advance notice of the suggestion. In these circumstances I place no reliance on this particular suggestion by the Lonscale claimant cells.
158.	However there were other much stronger criticisms made by the Lonscale claimant cells about the evidence of Mr Farrell and Mr Addison in relation to events in 2007. In so far as Mr Farrell and Mr Addison gave evidence inconsistent with the conclusions set out in sections C2 to C5, for the reasons given below I cannot accept that evidence.
159.	The defendants accepted in their written closing submissions that “FCL and Arch had agreed to work on a joint venture basis in late July 2007, with the 50/50 terms being agreed by early August 2007”. This concession that there was a joint venture, rather than Arch FP doing work to help Mr Barkman, ought to have been made much earlier. It was an inevitable concession in the light of the contemporaneous material. Under cross examination Mr Farrell and Mr Addison had found it impossible to answer the obvious points put to them from that material. 
160.	Oral evidence was given by both Mr Farrell and Mr Addison that when Arch FP was paid its “fee” of £3m on 6 November 2007 a change in structure had occurred at Mr Barkman’s request. Both said that the request came because Mr Barkman had received tax advice that it would be preferable for him to make a capital gain. In this regard:
(1)	The oral evidence first came from Mr Farrell in cross examination on day 4: 
A. [p. 41, line 25] … originally we were to be paid from Lonscale’s account but it changed to Mr Barkman’s account.
Q. You were paid from the Cobbetts client account, were you not?
A. It was essentially to do with the tax efficiency of the arrangements for Mr Barkman. So he changed the arrangements at the last minute, on advice on his side, so that he would achieve a capital gain rather than receive a fee. 
(2)	A further exchange then took place:
A. What was the consideration for acquiring Lonscale? It clearly wasn’t going to be just £1, which was the nominal amount of the share. So Arch Treasury acquired Lonscale and Mr Barkman’s rights to the Club Easy transaction.
Q. Were the moneys out of which Cobbetts paid Arch its £3m fee not moneys that AT1 Had paid to Cobbetts for Cobbetts to hold on behalf of Lonscale …?
…
A. Those proceeds were paid to Cobbett’s client account to be subdivided between Lonscale and Mr Barkman’s upside.
Q. Were they not Lonscale’s moneys?
A. Some of it was Lonscale’s money and some of it was to the order of Mr Barkman in order to effect the transaction, the acquisition of Club Easy..
(3)	No such change of structure had been mentioned in the defendants’ statements of case, their witness statements or their skeleton argument. As noted in section C2 above, Arch FP supplied further information on 20 July 2012 referring to Mr Barkman receiving “a payment representing 50% of his capital gain capped at £6m.” It was not said that this was a change of structure, nor was it said that the £3m paid to Arch FP came from Mr Barkman.
(4)	Mr Farrell repeated this evidence on day 5. He accepted that the payment of £3m to Arch FP had come from Cobbetts, but said that they made the payment out of Mr Barkman’s money:
Q. … do you accept that the payment of £3m to Arch was funded by monies that AT1 had raised form the claimants and which AT1 then forwarded to the Cobbetts client account?
A. Not directly, no. Arch Treasury purchased Lonscale.
Q. Yes.
A. Lonscale acquired Club Easy. In doing so it paid Mr Barkman his gain, capital gain and Mr Barkman made payment to Arch for our 50 per cent of that gain.
(5)	Mr Addison gave similar evidence on day 8. At an early stage in cross examination he was asked to identify Arch FP’s client, and said that at the outset he had understood Arch FP’s client to be FCL, as distinct from Mr Barkman. In response to a question whether that changed over time, the following exchange occurred:
A. Mr Barkman informed us, I can’t remember exactly when but towards or at the end of the transaction, that it would actually be more tax advantageous for him to be the client rather than Foundations Capital Ltd.
Q. … When did that change happen?
A. I don’t know the exact date but, as I said, as an indication, it was right towards the very end or it could even well have been communicated to me after the transaction happened.
(6)	Later in his evidence that day Mr Addison was shown the different invoices prepared in March 2009 on behalf of FCL and addressed to Lonscale. One of them was for “£3m in respect of the capital appreciation arising from the sale of the Clubeasy Group”. Mr Addison confirmed that on his understanding of the revised payment arrangements this invoice should have been for £6m.
161.	The evidence on this alleged last minute change to the structure, given by both Mr Farrell and Mr Addison is simply incredible: 
(1)	The structure of what was to take place at the end of October 2007 is said to have changed so that Mr Barkman made a capital gain of £6m. However, the contemporaneous material describes plans for and achievement of a sale by Mr Barkman of the sole issued share in Lonscale to AT1 for a consideration of £1. This is the only contemporary evidence of any dealing by Mr Barkman with any of his assets in late October 2007. 
(2)	 The instruction given by Mr Farrell on 29 October 2007 to Cobbetts referred to the £19.98m which would be arriving in their client account that day “for completion of the acquisition of Club Easy by Lonscale” and said that, upon successful completion of the acquisition, “structuring fees” of £3 million were to be paid to Arch FP and £3 million to the order of Mr Barkman. This is completely inconsistent with Mr Barkman making a £6m capital gain. He was to receive £3m, not £6m. What he received was to be described as “structuring fees”, not as a capital gain. 
(3)	Arch FP was to receive £3m out of the balance of the £19.98m “upon completion of the acquisition”, not out of moneys belonging to Mr Barkman. Less than 3 weeks after the transaction, on 15 November 2007, Mr Addison wrote to BDO making no reference whatever to Arch FP being paid by Mr Barkman. It is apparent from BDO’s reply dated 23 November 2007 that they understood that Arch FP was entitled to £3m to be paid by Lonscale. 
(4)	The defendants’ written closing submissions acknowledged, in the first two sentences of paragraph 26(c) that what is said by the defendants in this regard is inconsistent with the documentary evidence. 
(5)	In the remainder of paragraph 26(c) the defendants sought to explain away the inconsistency. It was said, first, that the payment evidence was clear. Second, it was said that “the perceived inconsistency relates to invoices used for audit purposes some eighteen months after the event. They are inaccurate due to what was a lack of proper enquiry at that time.” Third, reference was made to “the genesis of the change” and Mr Barkman’s working practices. Below I deal with these explanations in reverse order. 
(6)	The genesis of the change was said to be clear from an email sent by Mr Barkman to Mr Farrell on 15 October 2007. The email had as its subject line, “Tax, Clubeasy”. The body of the email stated:
I met with a chap I use for advice in Tax issues. This idea is way out there but thought you should hear about it.
1) I own Lonscale
2) Lonscale buys/bought Clubeasy
3) as I am selling Lonscale as a Guernsey resident selling an IOM company I am not liable for CGT
4) The initial profit for both Arch T and FCL could pass to me tax free
5) I buy shares in/from any entity/persons which Arch instructs for the value that Arch is to receive
6) I immediately cede control of and income/sale rights of the shares but retain the shares as far as Inland Revenue are concerned
7) Over time I cede ownership based on a variety of incomprehensible reasons
Arch/directors of, pay no tax.
I have no idea if this has legs, but if it does it could be used as a template.
(7)	The defendants’ written closing submissions said that it was not hard to comprehend why the change took place, although it caused inconsistencies in the paperwork. In that regard they cited evidence of Mr Farrell on day five about the email sent by Mr Addison to Cobbetts on 5 November 2007. That email attached Mr Farrell’s letter of instructions to Cobbetts which had been sent to them on 29 October 2007, indicating that “structuring fees” were to be paid as to £3m to Arch FP and £3m “to the order of Lee Barkman”. It was suggested that instructions had to come from both Mr Barkman and Mr Farrell because they were both directors of Lonscale. Mr Farrell replied:
No, that is not the position as it was then. The tax arrangements of Mr Barkman had only just been communicated. So Mr Barkman preferred to receive his fee as a capital gain. Whether the paperwork has caught up with that… is another matter. 
…
Q. Your understanding surely as a commercial person was that there was no relevant capital gain in relation to these payments at the time?
A. Well, capital gain was structured by Mr Barkman. The paperwork did not keep up with that…
(8)	Reliance was also placed on evidence by Mr Addison on day eight, concerning the invoice addressed by Arch to Lonscale which Mr Addison had prepared for audit purposes in early 2009:
Q. If, as you say, Mr Barkman made the payment on his own behalf, it should surely have been an invoice addressed to Mr Barkman; is that not right?
A. At this particular time I may not have known it was Mr Barkman. Remember we told you Mr Barkman changed the agreement, and I have to say we were annoyed with him at the time because of all the paperwork we had done at the time on the assumption it was someone else. 
…
A. …Mr Barkman subsequently came back to us after the event… to say it would be more tax efficient if he had actually made that payment and he was deciding that he was the one who was making that payment. I am not going to try and change history; that would be wrong.
Q. …You are indeed changing history, are you not?
A. No, we are not at all, otherwise I would have had to go back and change all the particular documents to refer to Mr Barkman. I think its very clear, as you have shown in all the documents, that we have not done that. 
Q. … Is it your evidence that it was Lonscale Limited or Mr Barkman who made the payment to Arch?
A. I am saying it was Foundations Capital who I understood to be the person paying us, and that was true at the time, and then subsequently after the event at some stage Mr Barkman said he wanted to change the transaction for his tax purposes. 
(9)	The defendants’ written closing submissions continued:
Arch simply had to keep up with the last minute change. The inconsistency arises as a function of Mr Barkman’s frequent business travel and lack of provision of documentation or explanation, to Mr Addison and indeed his own company FCL. The defendants should not be criticised for perceived inconsistencies that naturally arise from Mr Barkman’s last minute changes and/or working practices. 
(10)	This observation is disingenuous. Mr Farrell’s oral evidence was that he was told of the change shortly before 29 October 2007. Yet he wrote the letter of 29 October 2007 to Cobbetts, which is plainly inconsistent with the change. Mr Addison began by saying, as set out in the passage cited above, that in early 2009 he might not have known it was Mr Barkman. He then accepted that he would have known it was Mr Barkman before this, and said that by 27 January 2009 he was pretty certain he knew it was Mr Barkman. Later he said that when BDO provided their tax advice on 23 November 2007 he thought it was FCL that made the payment, and that he had learnt this on about 23 November 2007 or sometime after. I reminded Mr Addison of Mr Farrell’s evidence that it was just before 29 October 2007 that the transaction changed. Mr Addison replied:
A. …With the greatest of respect, that was Mr Farrell’s understanding. He may not have necessarily conveyed that to me. 
…
A. Sitting here now, I cannot recollect Mr Farrell or Mr Barkman telling me at that time [shortly before 29 October 2007]. 
(11)	This evidence by Mr Addison strongly suggests that it was not a question of difficulty in keeping up with the paperwork: the difficulty lay, as Mr Addison understood it, in a decision by Mr Barkman to proceed as if there had been a capital gain by him whereas the transactions which had occurred had involved no such capital gain. 
(12)	Turning to what was said about the invoices being “inaccurate due to… a lack of proper enquiry…”, the invoices were produced because the auditors of Lonscale were seeking supporting evidence in relation to payments by Lonscale. There was no “lack of proper enquiry”. 
(13)	As to the payment evidence being clear, nothing in that evidence suggests a payment by Mr Barkman of Arch’s £3m. That amount was paid in accordance with the instruction given by Mr Farrell in his letter to Cobbetts of 29 October 2007. Mr Addison’s email of 5 November to Cobbetts concerned a different payment for the redemption of Arch UK’s preference shares in FHL, and was treated by Cobbetts as coming out of the £3m held “to the order of Lee Barkman”. 
(14)	As to how Mr Barkman achieved a capital gain of £6m, the defendants’ written closing submissions at paragraph 26(a) said: 
… It stands to reason that Mr Barkman would have sold Lonscale for a commercial sum, which would not have been a nominal sum of £1, as asserted by the claimants. Given this simple commercial reality, it is clear that Mr Barkman received his personal gain and out of that Arch received its fee. …
(15)	What emerges from the evidence is that Mr Barkman on 15 October 2007 was saying that an idea had been suggested to him so that “Arch/directors pay no tax”. The idea had six numbered elements. Element three noted that Lonscale was an Isle of Man company, and that as a Guernsey resident Mr Barkman could sell it without being liable for capital gains tax. This led on to element four, which contemplated that “the initial profit for both [Arch FP] and FCL could pass to me tax free”. Elements five, six and seven envisaged instructions from Arch FP that Mr Barkman was to buy shares in an asset, and over time transfer them to Arch FP. In his conclusion, Mr Barkman put this forward as a possible template. The template plainly would require not only a transaction of some kind under which £6m passed to Mr Barkman, but also identification by Arch FP of shares to be purchased by Mr Barkman and transferred from him to Arch FP. Far from adopting any of this “template”, in the second half of October 2007 the dealings between the parties completely ignored this idea. 
(16)	As to the suggestion that it “stands to reason” that Mr Barkman would have sold Lonscale for a commercial sum, it is common ground that prior to the alleged change in structure, the plan was that Mr Barkman or his creature FCL would receive a “structuring fee” of £3m from Lonscale. There was nothing “uncommercial” about this. There was no reason for Mr Barkman to insist on any additional consideration for the transfer of ownership of Lonscale. Thus the premise for the assertion that “it is clear that Mr Barkman received his personal gain” is incorrect. Moreover, there is no explanation of any transaction taking place such as would result in such a capital gain accruing to Mr Barkman. 
162.	The defendants correctly note that the £19.98m ledger account is headed “Foundations Capital Limited/Clubeasy Group of Companies”. In reliance upon this and on other matters the defendants make an assertion that the ledger shows clearly that Cobbetts’ client was “FCL/Mr Barkman” and that payments from that account were “to the order of Mr Barkman”. As to the heading, it does not expressly refer to Mr Barkman, and it expressly refers to the Clubeasy Group, which was not a client of Cobbetts. I consider that the Lonscale claimant cells are likely to be right when they say that the heading referred to the transaction and not the client.
163.	I accept that something happened at some point which led Foundations to want to present the transaction as one in which Mr Barkman received a capital gain. I cannot accept that it happened at the time and in the way that Mr Farrell and Mr Addison described in their oral evidence. There is one aspect of their evidence which I accept. This is that, after obtaining advice from BDO that in certain circumstances the payment of £3m by Lonscale would be for services of a financial intermediary falling within a VAT exemption, Arch FP chose not to rely upon this. Instead they relied on advice from Mr Barkman that no VAT need be paid because the payment had come from him and he was a Guernsey resident. I accept this evidence because it provides the only conceivable explanation for Mr Farrell and Mr Addison’s insistence that there was indeed a capital gain by Mr Barkman of £6m out of which Mr Barkman paid Arch FP £3m. It is because this is the stance that Arch FP has adopted as its justification for not paying VAT that Mr Farrell and Mr Addison consider it vital to keep up a pretence which could barely qualify as a charade. I say that it barely qualifies as a charade because the Lonscale claimant cells are right to say that this account has been “mired in inconsistency” and beggars belief. I am sure that Mr Farrell and Mr Addison are both well aware that their contention that the sum of £3m was paid by Mr Barkman is utterly untrue. 
D. Duties and entitlements
D1. Duties and entitlements: general
164.	In this section I examine the relationship between Arch FP and the Lonscale claimant cells. That relationship gave entitlements to Arch FP. It also imposed duties upon Arch FP. Below I consider three general aspects of Arch FP’s entitlements and duties. Those aspects concern the mandate given to Arch FP by the Lonscale claimant cells (section D2 below), Arch FP’s management powers and duties (section D3 below) and Arch FP’s duties of loyalty (section D4 below). In addition, in section D5 below I consider whether Arch FP’s duties of loyalty were modified by what is said to have been a “Base Prospectus” for notes issued by AT1.
D2. Mandate: powers and duties
165.	The IMAs stated in paragraph 4:
4. Investment discretion
a). The Investment Manager will manage the Portfolio within the investment objectives and investment policy as set out in the Prospectus. Subject to such objectives and restrictions, the Investment manager, will have complete discretion for the Company’s account … to buy, sell, retain, exchange or otherwise deal in investments, and other assets, … subscribe to issues and offers for sale of, and accept placings, underwritings and sub-underwritings of, any investments, … take all day to day decisions and otherwise act as the Investment Manager judges appropriate in relation to the management of the Portfolio. …
166.	Arch FP’s powers to act on behalf of the Lonscale claimant cells were thus in all respects subject to “such objectives and restrictions” as were set out in the Prospectus. The word “Prospectus” was defined to mean:
The offering document whereby shares in the Company are offered to investors and any supplemental or replacement documentation having similar effect. 
167.	The re-amended particulars of claim asserted that the relevant documentation comprising the Prospectus within this definition consisted of Scheme Particulars issued for the ICC in January 2007 and Supplemental Scheme Particulars for each of the Lonscale claimant cells. This was not expressly admitted in the defence, but it was not disputed at the trial. Nor was it disputed at the trial that the Supplemental Scheme Particulars in each case required Arch FP to arrange investments which were likely to produce capital appreciation over the medium to long term. 
168.	On behalf of the PF cells it was alleged at trial, without objection by the defendants, that the investment objectives and policies of the PF cells concerned lending to third party borrowers constituting “exposure to the private finance market … including public and private debt … instruments…” explained in an “Outline of Private Finance” as “generally employed where companies need to borrow but are either unable or unwilling to source financing from a bank and/or do not … approach the public market.”
169.	Also at trial it was submitted on behalf of PF4, again without objection by the defendants, that its Supplemental Scheme Particulars included a “requirement for a bias towards late stage structured finance or early stage (venture) finance”. 
170.	The matters described above are all said to constitute limitations on the mandate given by the Lonscale claimant cells to Arch FP. It is elementary that if Arch FP, purporting to act by virtue of its status as agent on behalf of a cell, exceeded the authority given by that mandate, then it would be liable to the cell for loss caused: see, for example, Chitty on Contracts, 31st edition, para 31-114.
D3. Management powers and duties
171.	In the absence of any contractual term to the contrary, Arch FP’s role as agent would carry with it a duty to exhibit such a degree of skill and diligence as is appropriate to the performance of the duties accepted. This includes a duty to exercise discretionary powers with due care and in the interests of the principal: see Chitty on Contracts, 31st edition, paragraphs 31-115 and 31-116. In the present case, Arch FP’s duties in that regard were set out expressly, so as to make it clear that it would be liable for negligence, wilful default or fraud by Arch FP or those acting on its behalf. This was clear from paragraph 15, which was in these terms:
15. Liability
a) Although the Investment Manager will always take reasonable care in managing the Portfolio, it cannot guarantee that they will not depreciate in value or that they will not be affected by adverse tax consequences.
b) The Investment Manager shall not be liable for any error of judgement or any loss suffered by the Company in connection with the services it provides to the Company unless such loss arises from its negligence, wilful default or fraud by it or any of its officers, employees, agents or delegates.
…
D4. Duties of loyalty
172.	Where an agent undertakes to act for another (the “principal”) in circumstances giving rise to a relationship of trust and confidence, that agent owes duties of loyalty to give preference to the principal’s interests over the agent’s own interests. These duties are usually referred to as “fiduciary duties”. There are two supplemental duties which “reinforce the duty of loyalty”. These are the duty of the agent to avoid conflicts, or potential conflicts, of interest, and the duty not to profit from the agent’s position. They are special fiduciary duties which operate strictly, without proof of intentional wrongdoing or even fault: see Chitty on Contracts, 31st edition, paragraph 31-119. 
173.	In their skeleton argument the defendants referred to JP Morgan Bank v Springwell Navigation Corp [2008] EWHC 1186 (Comm). They relied upon this case for propositions that the relationship in question had to be understood in the context of the contractual documentation between the parties, and that the mere fact that one party “trusts” the other does not predicate a fiduciary relationship. These propositions are undoubtedly correct, but they do not assist the defendants. That case was one where a party alleged a fiduciary relationship, but its complaint concerned a commercial transaction with the alleged fiduciary where there was no good reason to expect that the alleged fiduciary would have regard to the other party’s best interests. By contrast, consideration of what to do in the best interests of the cells lay at the heart of the IMAs. 
174.	In the present case Arch FP was given exclusive control over the assets of the Lonscale claimant cells. Instructions as to dealings with those assets were given by Arch FP as agent of the relevant cell. It is elementary that this relationship between Arch FP and the Lonscale claimant cells would, in the absence of contractual provision to the contrary, be a relationship giving rise to fiduciary duties and in particular the two supplemental duties. However, the defendants say that fiduciary duties were excluded, or conduct which would otherwise constitute a breach of fiduciary duty was permitted, by provisions in three paragraphs of the IMAs. 
175.	The first of these paragraphs was paragraph 12. Below I set out relevant passages in paragraph 12 with individual clauses numbered in square brackets for convenience:
12. Dealing and Counterparties
a) [12.1] In effecting transactions for the Portfolio, the Investment Manager may in its absolute discretion deal with the Company as principal or agent. 
[12.2] …
[12.3] The Investment Manager may match the Company’s order with an order from another client by acting as agent for all parties …
[12.4] …
[12.5] The Investment Manager may take all such steps as may be required or permitted by … good market practice …
176.	The second of these paragraphs was paragraph 13. Below I set out paragraph 13, again with individual clauses numbered in square brackets for convenience:
13. Potential Conflicts of Interest and Disclosures
[13.1] The Investment Manager may without prior reference to the Company, effect transactions in which or provide services in circumstances where the Investment Manager has, directly or indirectly, a material interest or relationship of any description with another party which may involve a potential conflict with the Investment Manager’s duty to the Company. 
[13.2] The Investment Manager shall not be liable to account to the Company for any profit, commission or any connected transactions and the Investment Manager’s fees shall not, unless otherwise provided, be abated thereby. 
[13.3] For example, such potential conflicting interests or duties may arise because:-
a)	the Investment Manager undertakes investment business for other clients;
b)	any of the Investment Manager’s directors or employees is a director of, holds or deals in securities of or is otherwise interested in any company whose securities are held or deal in on the Company’s behalf;
c)	the transaction is in securities issued by a client;
d)	the Investment Manager may act as agent for the Company in relation to transactions in which it is also acting as agent for the account of other clients;
e)	the Investment Manager may have regard, in exercising its management discretion, to the relative performance of other funds under its management;
[13.4] However, the Investment Manager shall at all times have due regard to its duties owed to the Company and the Company and where a conflict arises it will endeavour to ensure that it is resolved fairly. [13.5] Furthermore, where the Investment Manager could:-
(i)	allocate an Investment between two or more funds or accounts which it manages (including the Company); or
(ii)	make a disposal of investments held by two or more such funds or accounts,
it will act fairly as between the relevant funds or accounts in making such allocation or disposal, having regard to, inter alia, factors such as cash availability and portfolio balance.
177.	The third paragraph relied upon was paragraph 18. Below I set it out in similar fashion:
18. Relationship
[18.1] The relationship between the Company and the Investment Manager is as described in this Agreement. 
[18.2] None of the services to be provided hereunder or any other matter shall give rise to any fiduciary or equitable obligations 
[18.3] which would prevent or hinder the Investment Manager in transactions with or for the Company from acting as principal or agent, dealing with other clients and generally effecting transactions as provided above.
178.	It is apparent that paragraphs 12, 13 and 18 are concerned to ensure that Arch FP has the freedom to commit the cell to transactions in which Arch FP is a counterparty, either as principal or as agent, or in other ways has a direct or indirect material interest or a direct or indirect relationship with another party which may involve a potential conflict with its duty to the cell. On the other hand, Arch FP is not to have a completely free hand in that regard. When setting out the freedom each of these three paragraphs adds words of limitation. Clause [12.5] acknowledges that steps may be required by good market practice. What Arch FP must at all times do is set out in clause [13.4] which to my mind is founded on, and must be read in the context of, principles of good market practice. If one were to examine that clause minutely, a question might arise as to whether the use of the expression “endeavour to ensure that it [the conflict] is resolved fairly” might involve some lesser obligation than the unqualified obligations earlier in clause [13.4] that it must “have due regard to its duties owed to [the cell]”, and in clause [13.5] identifying circumstances where it is said that Arch FP “will act fairly”. I need not, however, examine that question further as the defendants accepted [DFWCS, para 250] that, as regards “situations of potential conflict”:
The overriding obligation for Arch in any such situation was to ensure that any potential conflicts were managed fairly, consistent with the FSA Principle 8. 
179.	FSA principle 8 provides: 
A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.
180.	The defendants’ closing submissions also advanced a contention that paragraph 18 circumscribed the duties owed by Arch FP “by specifically excluding fiduciary and equitable obligations.” I agree that there was a specific exclusion of fiduciary and equitable obligations. In my view it is important to note that this was not a general exclusion. The clause which I have numbered [18.3] was plainly worded so as to limit the exclusion found in clause [18.2]. The result is, I believe, clear. If a cell asserts that a fiduciary or equitable obligation arises, and Arch FP relies on paragraph 18, then under what I have referred to as clause [18.3] the fiduciary or equitable obligation in question would not apply to the extent that it would prevent or hinder Arch FP from effecting transactions as provided in the IMA. For present purposes the IMA provides that Arch FP can act where there is a potential conflict of interest, but has an obligation to ensure that the potential conflict is managed fairly. The defendants accept that this obligation is “overriding”. It follows from this, and from established principles of the interpretation of contracts, that the freedoms given by clauses [12.1], [12.3], [13.1], [13.2] and [18.2] are limited so that they only apply when the overriding obligation is complied with. As regards conflicts of interest, accordingly, the supplemental duties identified above will apply, but modified by paragraph 18 so that they do not prevent or hinder Arch FP from acting if it ensures that potential conflicts are managed fairly. Similarly they are modified so as to give to Arch FP the “absolute discretion” conferred by clause [12.1], and the freedoms conferred by clauses [13.1] and [13.2], so long as Arch FP complies with the requirement of good market practice that conflicts of interest must be managed fairly.
181.	The Lonscale claimant cells sought to derive a broader limitation on Arch FP’s abilities to act where a potential conflict might arise. Not only, they submitted, did Arch FP have an obligation to ensure that any potential conflicts were managed fairly, even if the conflict were managed fairly Arch FP could only act where a potential conflict arose if that conflict were similar or analogous to the examples given in the clause that I have numbered [13.3]. These examples, they said, concerned “ordinary, unexceptionable situations that may arise in the course of an investment manager carrying its business on behalf of a number of clients.” In my view, however, it is unnecessary to add any further gloss. The overriding obligation accepted by the defendants ensures that potential conflicts of interest must be managed fairly if Arch FP is to have the benefit of exceptions to the duties of loyalty. There is no good reason, in my view, to infer from the giving of examples that Arch FP’s ability to act by managing a potential conflict of interest fairly would be confined to such transactions as met a rather nebulous test of being “ordinary” or “unexceptionable”. 
D5. Disclosure as an answer to breaches of duties of loyalty
D5.1 Disclosure: general
182.	An agent may have a defence to a claim for breach of the duties of loyalty if the principal has consented to what has been done. However, it is well established that this will only be the case if the agent has made full disclosure of all the material facts and the nature and extent of the agent’s interest. 
183.	The defendants asserted that disclosure had taken place in three ways. I deal with them at D5.2, D5.3 and D5.4 below. 
D5.2 Oral disclosure to Mr Radford and Mr Meader
184.	In section C4 above I discussed the defendants’ evidence as to oral disclosure to the independent directors of the Lonscale claimant cells. For the reasons given in that section, while either or both of Mr Meader and Mr Radford may have been told informally that some of the cells would be investing in the acquisition, and that Arch FP would be receiving a “fee”, I am sure that they were not told that the “fee” would come in large part from funds invested by the cells.
185.	As noted above, the test for adequacy of disclosure is that there must be full disclosure of all the material facts. I have no doubt that the funding by the cells of Arch FP’s “fee” was a highly material fact. It follows that there was no adequate disclosure to the independent directors of the Lonscale claimant cells. 
D5.3 The alleged Base Prospectus
186.	A new assertion relevant to duties of loyalty was made in the defendants’ skeleton argument. This was that Arch FP’s “fee and dual role” were “contemplated and permitted” not merely by the IMAs but also by an alleged “Base Prospectus” governing notes issued by AT1. Three sets of provisions in the alleged Base Prospectus were relied upon in this regard. Those provisions referred to AT1 as the “the Issuer”, and to Arch FP as “the Investment Manager”. Notes of the kind issued by AT1 in the present case were referred to as “Instruments” involving a “Variable Underlying”, an expression defined on page 1 as something to which the “payout” under an Instrument was linked:
The Issuer is authorised to and may issue Instruments whose payout is linked to the level, value or price of shares… and/or other assets and securities which the Issuer may from time to time determine, and/or any baskets of any of the above (each a “Variable Underlying”). 
187.	The way in which the defendants relied on these provisions was later rephrased as being that they constituted disclosure of a kind which would bar subsequent complaint. If the assertions made about the alleged Base Prospectus were sound, however, the Lonscale claimant cells would have made a contractual agreement permitting the conduct in question. Either way, issues arise as to whether the document relied on by the defendants was indeed the Base Prospectus, and if so, what it envisaged as permissible. 
188.	The first set of provisions comprises what were said to be the third and fourth clauses on page 42 of the alleged Base Prospectus. For convenience I number them as [42.3] and [42.4]: 
CONFLICTS OF INTEREST
[42.3] Transactions Involving the Variable Underlying
[Insert if Variable Underlying Instruments:
The Issuer and its affiliates may from time to time engage in transactions involving the Variable Underlying for their proprietary accounts and for accounts under their management. Such transactions may have a positive or negative effect on the value of the Variable Underlying and consequently upon the value of the Instruments.
[42.4] Acting in other capacities
[Insert if Variable Underlying Instruments:
The Issuer and its affiliates may from time to time act in other capacities with regard to the Instruments, such as calculation agent, agent and/or index sponsor. Such functions can allow the Issuer to determine the composition of the Variable Underlying or to calculate its value, which could raise conflicts of interest where Instruments or other assets issued by the Issuer itself or a group company can be chosen to be part of the Variable Underlying, or where the Issuer maintains a business relationship with the issuer of such Instruments or assets. 
189.	The second set of provisions comprises what was said to be the first clause on page 44 of the alleged Base Prospectus. For convenience, I have numbered it as [44.1]:
[44.1] Acting as underwriter or otherwise for the Issuer of Variable Underlying
[Insert if Variable Underlying Instruments:
The Issuer and its affiliates may also act as underwriter in connection with future offerings of the Variable Underlying or may act as financial adviser to the issuer of a Variable Underlying or in a commercial banking capacity for the issuer of a Variable Underlying. Such activities could present certain conflicts of interest and may affect the value of the Instruments. 
190.	The third set of provisions comprises what was said to be the first clause on 286 of the alleged Base Prospectus. For convenience, I have numbered it as [286.1], and I have also numbered each of its sub-clauses:
[286.1] Fees and Expenses of the Issuer Investment Manager
[286.1(1)] Where the Collateral Assets are managed by the Issuer and/or the Investment Manager then fees shall be payable to the Issuer and/or Investment Manager out of the assets of the Issuer, including but not limited to the Collateral Assets in respect of the Instruments. 
[286.1(2)] Such fees may be received either as structuring or placement fees from counterparties to investments constituting the Collateral Assets or may be remuneration from the Issuer to the Investment Manager or deducted from the Collateral Assets. In all cases fees due to the Investment Manager shall not constitute Collateral Assets. 
[286.1(3)] The Investment Manager may, from time to time, at its sole discretion decide to pay distributors or intermediaries part of or all of the investment management fee or rebate such fees to the Collateral Assets.
[286.1(4)] Additionally, Issuer shall incur fees in respect of the its administrator, auditors and any other Relevant Party, each of which will be discharged out of such assets of the Issuer as it shall in its sole discretion decide and whether or not such assets are ring-fenced.
191.	The Lonscale claimant cells’ first answer to this assertion was that the document relied upon by the defendants as constituting the Base Prospectus was no more than a draft. They pointed out that, as can be seen in the clauses from pages 42 and 44 quoted above, it contains instructions as to what to do. Another example of this is found in the second clause on page 8 of the alleged Base Prospectus. For convenience I have numbered it as [8.2], and I have also numbered each of its sub clauses:
[8.2] Listing
[8.2(1)] Application has been made to list the Instruments on the [Channel Islands] Stock Exchange.
[8.2(2)] However, unlisted Instruments may be issued pursuant to the Programme and the Programme provides that Instruments may be listed on such other stock exchange(s) or markets as may be specified in the relevant Final Terms. The relevant Final Terms in respect of the issue of any Instruments will specify whether or not such Instruments will be listed on the [insert relevant exchange] (or any other stock exchange)]
[8.2(3)] [Insert if this Base Prospectus is subsequently filed and approval sought in relation to the Prospectus Directive:
[8.2(4)] [This document constitutes a Base Prospectus for the purposes of Directive 2003/71/EC (the “Prospectus Directive”).
[8.2(5)] This Base Prospectus has been filed with and approved by the Irish Financial Services Regulatory Authority in its capacity as competent authority in Guernsey (the “Competent Authority”) in relation to prospectuses for securities for the purposes of the Prospectus Directive. Such approval relates only to Instruments which are to be admitted to trading on the regulated market of the Channel Islands Stock Exchange or other regulated markets for the purposes of Directive 93/22/EEC or which are to be offered to the public in any Member State of the European Economic Area.
[8.2(6)] Application has been made to the [insert relevant regulatory authority], as competent authority under the Prospectus Directive, for the base prospectus to be approved. Application has been made to the [insert relevant exchange] Stock Exchange for the Instruments to be issued under the Programme to be admitted to trading on its regulated market. The [insert relevant exchange] Stock Exchange’s regulated market (the “Market”) is a regulated market for the purposes of Directive 92/22/EEC. However, unlisted Instruments may be issued pursuant to the Programme and the Programme provides that Instruments may be listed on such other stock exchange(s) or markets as may be specified in the relevant Final Terms. The relevant Final Terms in respect of the issue of any Instruments will specify whether or not such Instruments will be listed on the [insert relevant exchange] (or any other stock exchange)]
192.	As clause 8.2 shows, the alleged Base Prospectus contained at least one obvious inaccuracy: clause [8.2(5)] referred to the Irish Financial Services Regulatory Authority as the competent authority in Guernsey for the purposes of the Prospectus Directive. 
193.	The Lonscale claimant cells add that there is no board minute of AT1 approving the note programme until 4 August 2008.
194.	Mr Addison under cross examination observed that the relevant notes had been issued by AT1 on 26 October 2007, and referred to “the Base Prospectus of the ARCTIC Multi-Instrument Programme”. Accordingly, he said, it must be assumed that the alleged Base Prospectus was in place when the notes were issued. He added that the board minute of August 2008 was needed because revised security documentation had been prepared and approved by the GFSC. 
195.	Mr Addison’s evidence does not, to my mind, diminish the force of the Lonscale claimant cells’ first answer. It is true that the notes issued by AT1 on 26 October 2007 contemplated that there was a Base Prospectus in existence. However there is no evidence which explains how the Base Prospectus contemplated by the notes issued on 26 October 2007 could possibly have been the document produced by the defendants. The alleged Base Prospectus is no more than a draft which would require very considerable further work before it could become a document with legal effect. 
196.	Turning to the board minutes of AT1, in my view it is likely that there is a very good reason why there is no record of any approval by AT1 of the alleged Base Prospectus: namely, that no reasonable director of AT1 could possibly have regarded this document as one which merited approval. The board minute of 4 August 2008 makes no mention of there having been any previous approval. It was not suggested, nor in my view could it have been realistically suggested, that the approval on 4 August 2008 was, in relation to clauses [42.3], [42.4], [44.1] and [286.1], retrospective so as to take effect from 26 October 2007 onwards. 
197.	In these circumstances it is not necessary to turn to the observations made in the Lonscale claimant cells’ second answer, and I deal with it briefly. The first observation is that clauses [42.3], [42.4] and [44.1] form part of a section of the alleged Base Prospectus under the heading “conflicts of interest”. For present purposes the Variable Underlying referred to in those clauses would be Lonscale. Clause [42.3] on this basis points out that transactions between AT1 and its affiliates may have a positive or negative effect on the value of Lonscale and consequently upon the value of the relevant notes. Clause [42.4] points out that AT1 and its affiliates might act in capacities which allowed AT1 to determine the composition of Lonscale or to calculate its value. Clause [44.1] points out that AT1 and its affiliates might act as underwriter in connection with future offerings as regards Lonscale, or as financial adviser to Lonscale, or in a commercial banking capacity for Lonscale. Nothing in any of these provisions is remotely relevant to the “fee” taken by Arch FP. 
198.	Second, as to clause [286.1], the Lonscale claimant cells pointed out that sub-clause [286.1(1)] contemplated fees being paid out of assets of the issuer. They added that sub-clause [286.1(2)] contemplated that those fees might be received either as structuring or placement fees from counterparties to investments constituting collateral assets or might be remuneration from the issuer to the investment manager.  In order to claim that the present case fell within clause [286.1] Mr Farrell, later on day five, maintained that the “fees” were financed by AT1. I am sure that when giving this answer Mr Farrell knew it to be untrue. For the reasons set out in section C above, there can be no doubt whatever that the £3m paid to Arch FP was almost entirely financed by the Lonscale claimant cells. 
D5.4 Disclosure in other ways
199.	In their further written closing submissions the defendants suggested that they could rely upon not only the alleged Base Prospectus but also upon the Supplemental Scheme Particulars for AT1. This appears to me to be plainly without foundation. The Supplemental Scheme Particulars for AT1 were not part of the contracts between the Lonscale claimant cells and Arch FP. Nor is there any reason why the Lonscale claimant cells should be concerned with them: they were of relevance only to those who had holdings in AT1. I add that Supplemental Scheme Particulars for each of the Lonscale claimant cells made reference to conflicts of interest, but not in such a way as would materially affect the analysis in section D4 above.
E. Failures of care in October 2007
E1. Failures of care in October 2007: general
200.	The Lonscale claimant cells made no investment in Lonscale prior to 26 October 2007. On that day the PF cells made investments by subscribing for £13m AT1 October 2007 class B notes and the RE cells made investments by subscribing for £7.2m AT1 October 2007 class C notes. I shall refer to these investments as “the October 2007 investments”. The benefits promised to the cells under the October 2007 investments could only be enforced by recourse to assets of Lonscale. 
201.	It is elementary that before entering into these investments on behalf of the Lonscale claimant cells Arch FP needed both:
(1)	to satisfy itself that the prospects of receiving the promised benefits were so great as to outweigh the risk that £20.2m of the cells’ money might be lost; and
(2)	for this purpose, to take reasonable care in evaluating both the prospects of receiving the promised benefits and in assessing the risk that £20.2m might be lost.
202.	The Lonscale claimant cells’ closing written submissions identified overarching alleged failings. These constituted the three principal respects in which it was said that Arch FP acted in breach of its duty to exercise reasonable skill and care in October 2007. They were:
(1)	It failed to conduct adequate due diligence.
(2)	It failed to obtain an enforceable funding commitment from a third party prior to committing the Claimants to the investment.
(3)	It caused the Claimants to invest in the Lonscale investments when it knew or should have known that the investments were uneconomic and/or that they involved risks disproportionate to the likely returns.
203.	The Lonscale claimant cells identified many and various detailed alleged failings falling within these three respects. On analysis, however, the case advanced by the Lonscale claimant cells in relation to these three respects can be seen to involve key elements which overlap. Below, in order to keep the present judgment within manageable proportions,  I focus on these key elements. In section E2 I examine Arch FP’s approach to the Storeys property valuations. Questions concerning the need for a capital injection, identified by PKF in their draft reports and final report, are examined in section E3. I examine in section E4 the extent to which Arch FP made any evaluation of the rewards promised to the cells, and the risks to which they would be exposed, before committing the cells to the October 2007 investments. In section E5 I return to the three overarching alleged failings. 
E2. Arch FP’s approach to Storeys’ valuations
204.	The Lonscale claimant cells identified three main criticisms of Arch FP’s approach to Storeys’ valuations. The first was that there had been no valuation of the business itself, rather than the properties. The second was that Arch FP had ignored its own concerns about the reliability of the Storeys’ valuation. The third was that Storeys were not independent.
205.	To my mind, these criticisms have a common thread. The Storeys valuations all stressed that they gave a high valuation to the properties because of the strength of the Clubeasy brand name: see paras 1.14 and 5.22 of the Storeys August 2007 draft report, repeated in the Storeys final report as emailed on 15 October 2007. Thus Storeys made it perfectly clear that they were not giving a market value of what the properties would be worth if Clubeasy were to dispose of them. The properties were being given a higher value dependent upon the property in question remaining a Club Easy property and forming part of a thriving Club Easy business. At times the Lonscale claimant cells appeared to be relying on Mr Rees’s evidence as warranting a conclusion that Storeys had been negligent. I do not reach any such conclusion. The only question I need consider for the purposes of this section of my judgment is whether Arch FP was negligent in the reliance it placed on the Storeys’ valuations. For the reasons given below, I am sure that Arch FP was at the very least negligent, and through Mr Farrell knew that it was acting wrongly, in treating the Storeys property valuations (after deduction of amounts secured on the properties) as a proxy for a valuation of the business, in ignoring its own reservations about those valuations, and in relying upon the Storeys property valuations despite the care which Storeys had taken both to point out the true basis upon which the valuations had been compiled and to draw attention to their prior and continuing involvement with the properties. 
206.	As to treating the Storeys property valuations (net of amounts secured on the properties) as a proxy for a valuation of the business, Mr Rees at paragraph 3.1 of his first report pointed out that any valuation of the Clubeasy Group will be based on its financial performance, both historical and anticipated, and its balance sheet. One method of valuing property investment companies is by reference to their net asset value, with the valuations of the properties being of prime significance. However, as Mr Rees pointed out at paragraph 4.1, the overall value of a trading business will ultimately be derived from its future cash flows, while net assets will be reviewed to establish a fall back position should the need arise to liquidate the investment. They may also be reviewed as part of a purchase to establish if there are surplus assets, for example cash, which could be distributed to the seller, or if there is a need for further funds to be provided by the purchaser. Mr Rees commented at paragraph 4.4 that he had not seen any indication that Arch FP considered a trading based valuation of the Clubeasy Group. Any such valuation would have required detailed profit and loss accounts, cash flows and balance sheets, which were not prepared.
207.	The defendants’ written closing submissions sought to deal with this aspect of the case at paragraphs 89 to 119. However those paragraphs do not show that the points made by Mr Rees on this aspect had been addressed at any stage in 2007. At paragraph 108 of the defendants’ written closing submissions reference was made to accounts subsequently prepared by Kingston Smith. A figure in those accounts of £7.5 million is described as “negative good will”, and is also said at paragraph 98(1) to have been a “valuation reserve”. Mr Walton rightly described it as no more than a book keeping entry: it assumes that Storeys were right to value the properties in the way that they did, and thus adopts a figure which is only valid if the Clubeasy business is indeed a thriving one.
208.	Moreover, Mr Walton pointed out that the stark difference between the purchase price of around £15 million, including the deferred consideration, and the alleged net asset book value of Clubeasy of around £30 million, ought to have indicated that the net asset book value did not correspond to the market value. Mr Farrell and Mr Addison suggested in evidence at the trial that the difference could be explained because Mr Hayes was in their words “a stressed seller”, anxious to bring about a quick sale so that he could fund his proposed investments in the United States. I accept that Mr Hayes in August 2007 wanted at least to secure a speedy commitment to payment of an immediate deposit with the bulk of the purchase price being paid in October 2007. It would nevertheless be surprising if the net book value of the properties could, of itself, be relied upon as showing that he was willing to part with the business for around half its true worth. 
209.	Suggestions were made by the defendants that PKF and Bordeaux had valued the Clubeasy business or had endorsed the Storeys property valuations (net of amounts secured on the properties) as a proxy for the value of the business. The answer to these suggestions was identified by the Lonscale claimant cells in a supplemental note on valuation evidence dated 22 January 2014. As to PKF, their role was to provide a “limited review”, and it was only for that purpose that they produced a set of accounts based on the Storeys property valuations. As to Bordeaux, its valuation was based on the completion accounts which in turn were based on the Storeys valuation. Neither PKF nor Bordeaux was asked to give independent consideration to the question whether the Storeys property valuations (net of amounts secured on the properties) represented an appropriate proxy for the value of the business. 
210.	As to Arch FP’s own reservations, Mr King in his witness statement said that by late September 2007 he and Mr Jeffs had looked closely at the Storeys valuation. Mr King said that he was happy with the valuation methodology used by Storeys, but “had some reservations about the yield figures being used against known rental levels to derive the actual valuations of the properties.” 
211.	Mr Farrell was asked about this in cross examination. His response on this, as on other aspects of the reasons which underlay the purchase, was cagey. When shown this passage in Mr King’s witness statement, and asked whether Mr King had said that he had some reservations about the yield figures that were being used Mr Farrell did not initially reply. The question was put again, and Mr Farrell eventually replied that he and Mr King had had many discussions over quite a long period.  When asked whether it could be assumed from that answer that Mr King did indeed say that he had had reservations about the yield figures, Mr Farrell simply responded that Mr King had said that he had such reservations in his statement. Only when the question was put yet again did Mr Farrell give an answer, which was that as to whether Mr King had told him of these reservations, “I imagine he did at some point, yes.”
212.	Turning to Mr Jeffs, in cross examination he accepted that if gross rents were to be used as the basis for a reliable valuation, then it would be important to know how much of the gross rent represented costs. However he said that he had not known that Storeys in fact had no information about the amount of the costs that would need to be deducted from the gross rent in order to derive a net rent. 
213.	Moreover, on 29 August 2007 Mr Jeffs sent an email in which permission was given to release the draft Storeys valuation to Clubeasy provided that they were told:
we have reservations about the valuation because of the methodology used; namely deriving the property value from assumed yield percentage. As fund managers Arch adopts a prudent valuation approach for multi-let property acquisition somewhere between fully yield derived and the valuation as a stand alone, non-specialist and possibly non-rental residential property. Independently, Arch’s property adviser confirms that valuations solely derived from assumed yield will give a “toppy” valuation.
214.	Mr Farrell and Mr Jeffs suggested that this assertion of reservations must be read in the context of the bargaining process which was underway with Mr Hayes at this stage, but it does not seem to me that that detracts to any significant extent from the fundamental force of the point being made. 
215.	Turning to Storeys’ lack of independence, and the true basis of their valuation, the defendants’ closing written submissions at paragraphs 92 to 107 acknowledged that in the Storeys August 2007 memorandum Storeys had rightly raised points relevant to their independence. The defendants then sought to dismiss the matter on the basis that the potential for conflict was common in the industry and disclosed by Storeys, that Cobbetts and PKF were happy for Storeys to proceed, and that Storeys’ familiarity with the localities and properties in question was an advantage.
216.	This stance on the part of the defendants ignores a key consequence of Storeys’ close relationship with the Clubeasy group, a consequence which Storeys made plain in their valuations. This was that Storeys had formed a very high opinion of the accommodation services offered by Clubeasy. As was stated by Storeys in paragraphs 1.14 and 5.22 of both the Storeys August 2007 draft report and the Storeys final report, it was this high opinion of the Clubeasy business which led to the high valuations. I consider that the Storeys valuations were obviously founded upon Clubeasy being a thriving business. The consequence is that an objective reader of those valuations would have appreciated that if, for whatever reason, the business was not viable then the valuations could not be relied upon. I have no doubt that this was something which Mr Farrell fully appreciated.
E3. PKF’s identified need for a capital injection
217.	A constant feature of the PKF report, both in drafts and in the final version was that the need for a capital injection was identified as a key issue. The section of the report headed “Key Issues” included a section concerned with the profitability of historic and current trading, stating: 
The Group as it stands is very highly geared and, as a result, there is a significant interest burden that has been exaggerated by recent interest rate increases. Due to this apparent over-gearing, the group has been unable to generate sufficient profits to cover interest payable and has therefore been loss-making in recent years. 
218.	In relation to this key issue, PKF made two points. The first was as follows: 
A further injection of capital is required to reduce the gearing of the Group and we understand that this is proposed in the funding structure that will be used to finance the proposed transaction.
219.	PKF added a second point: 
The purchaser should ensure that the projected level of EBIT is sufficient to cover the interest that will fall due on the level of debt assumed going forward and to hedge against any future interest rate rises where possible. 
220.	The defendants did not dispute that PKF had indeed been told that there would be a capital injection in accordance with PKF’s own account of what it had been told. The Lonscale claimant cells pointed out that no such capital injection had occurred. They complained that Arch FP had been negligent in failing to obtain enforceable commitments for further funding, or at the very least investigating whether FCL’s promises of investment by FPP could be relied upon. 
221.	In their further written closing submissions at paragraph 282 the defendants suggested, in effect, that there was an obvious answer to this point. There was, they suggested, “no requirement for an enforceable funding commitment from a third party. The cells were capable of funding the investment themselves. Neither did the investment mandate require an enforceable funding commitment from anyone. Additional investment could have been made at any time.”
222.	In my view this reasoning is fundamentally flawed. The October 2007 investment involved the payment over by each Lonscale claimant cell of very substantial sums of money. It was clear from the PKF report that if that investment were to have any prospect of success, then there must be arrangements in place to ensure that there would be a substantial capital injection. It is no answer to say that “the cells” generally were capable of providing the necessary funds. Unless immediate steps were taken to ensure that the capital was provided, each Lonscale claimant cell was exposed to an obviously unacceptable risk. In this regard there was no satisfactory answer to points made by Mr Walton in cross examination. He noted that at the outset there had been no commitment from anyone to provide further funding. Whether or not further funding was contemplated, he thought that “to be certain there needs to be a commitment.” He added:
… one has to consider the rights of the individual investors… one has to question how far Arch, even with the initial investment, actually looked at the investment from the point of view of the investors. … 
223.	The defendants’ initial closing written submissions at paragraphs 71 to 78 addressed the matter in more detail. Reliance was placed in particular upon the completion accounts showing a “cushion” of £7.5 million. This sum was (described as) set aside for losses. That was, however, by reference to the gross asset value of £29 million, which in turn was based on Storeys valuation, and thus explicitly based on the assumption that Clubeasy was a thriving business. However, as PKF had pointed out, Clubeasy could only be a thriving business if gearing was reduced. 
224.	More generally, in so far as the defendants sought to identify ways in which further borrowing could enable Clubeasy to remain in business, for the reasons that PKF identified, further borrowing was not a solution. What Clubeasy desperately needed was a substantial capital injection to enable it to repay loans and reduce gearing. 
225.	Both in their original written closing submissions and in their further written closing submissions the defendants placed reliance upon an appreciation in the housing market. Again, the short answer is that, quite apart from inherent uncertainty as to whether there would be any such appreciation, it would not give rise to the capital injection needed to reduce gearing. 
E4. Risk/reward analysis in October 2007
226.	The defendants accept that reasonable care required a risk/reward analysis. Mr Farrell’s oral evidence was that such an analysis was carried out by the portfolio managers. For the reasons given below, I am sure that in giving this evidence Mr Farrell was telling the court that such an analysis had been produced, when in fact he well knew that no such analysis had been produced.
227.	On Day 1 of the trial I asked the Lonscale claimant cells to identify for me the documentary evidence in relation to each decision on behalf of each cell to make the investment made by that cell in the Lonscale project. In response to this request a considerable amount of work was done by both sides as the trial progressed. The first stage was that on 27 November 2013 the Lonscale claimant cells produced a note entitled “The approval of note subscriptions by the cells”. Among other things, the note said that: 
(1)	Prior to May 2009 there were nine separate occasions on which the Lonscale claimant cells subscribed to loan notes relating to Lonscale. As regards those nine occasions, the Lonscale claimant cells had found no record of any decision to subscribe being taken by any of those cells, whether through their directors or otherwise. Nor had they found any record by Arch FP of a decision that any particular cell should invest in Lonscale. 
(2)	In relation to those nine occasions, the Lonscale claimant cells had been able to find documentary evidence of the decisions to invest only in the form of the documents which showed the subscriptions being made. In each case the loan note subscriptions were signed on behalf of the cells by an Arch FP employee pursuant to Arch FP’s discretionary mandate, and were also signed by an Arch FP employee on behalf of the note issuer (whether that be AT1 or Lonscale).
(3)	As regards the October 2007 investments:
(a)	when AT1 subscribed to the Lonscale October 2007 class B notes Mr Farrell signed on behalf of Lonscale as issuer and Mr Ruparell signed on behalf of AT1 as subscriber. 
(b)	The subscriptions to the AT1 October 2007 notes (class B in the case of the PF claimants and class C in the case of the RE claimants) were signed on behalf of the Lonscale claimant cells by Mr Smith of Arch FP and on behalf of AT1 as the issuing cell by Mr Ruparell of Arch FP. 
228.	When the note was produced on the morning of 27 November Mr Farrell was about to start his oral evidence. I asked whether he would wish to take half an hour to work his way through the note and consider whether there were particular things that he would wish to say in addition to what was already in his witness statements, or whether longer than half an hour might be needed. Mr Farrell’s reply was, “I think I can do it now actually.” In response to a question from me, he confirmed that he believed that at the start of his evidence he could give further evidence in chief in which he would tell the court about anything he thought relevant to the note. Accordingly when he gave evidence that morning, after some initial questions from Mr Addison by way of examination in chief, I invited Mr Farrell to deal with the note. He responded that from the perspective of the Lonscale claimant cells the most important documents were “the trade documents which are the notes issued by Arch Treasury and purchased by the range of investors.” From the perspective of Lonscale Mr Farrell identified the share purchase agreements and what he referred to as “a bible of documents relating to the acquisition of the Clubeasy Group.” In terms of what was recorded within Arch FP Mr Farrell identified what he called “trade tickets”, “trade database entries”, and “the note documentation.” The portfolio manager for a cell would complete the trade ticket, and the trigger to doing that would be an investment decision made by the portfolio manager or managers. 
229.	Paragraphs 123 to 125 of the defendants’ written closing submissions said of Mr Farrell’s evidence that it revealed the note to be materially incomplete and misleading, proving that the Lonscale claimant cells were simply unaware of the processes within Arch and Bordeaux. Complaint was made that there had been no disclosure of relevant information in relation to the deal tickets/trade database, and that there were relevant documents which were not before the court. 
230.	In my view these assertions on behalf of the defendants were clutching at straws. The Lonscale claimant cells gave a detailed account of the searches they had made. I am satisfied that all available material has been produced in so far as relevant. As to the defendants’ assertions:
(1)	If the RE cells had made any risk/reward analysis Mr King would have known about it. His witness statement made no mention of any such analysis. 
(2)	If the PF claimants had made any risk/reward analysis Mr Jeffs would have known about it. As the Lonscale claimant cells pointed out in their written closing submissions, Mr Jeffs accepted in evidence that he did not recall seeing any written investment proposal and that he did not write one himself. 
(3)	Mr Farrell dealt with the position in the period shortly before completion of the acquisition at the end of October 2007 in paragraph 56 of his first witness statement:
Shortly before completion I learnt from Lee Barkman that his ability to raise funding had been severely constrained (by what we now know was the onset of the developing financial crisis) and he had been unable to secure any debt finance for the deal.  I understood that the expected lending from Barclays had not concluded in time, and this was after the prospect of any lending from Investec had fallen through in mid-October 2007.  As for his equity investors, my understanding from Lee Barkman was that this was primarily a timing issue and that he was still confident that he would fund the deal but he needed a bit more time.  Whilst unexpected, it did present the Cells with a good opportunity.  They could invest on highly favourable terms and get access to the majority of the transaction, at a time when there was plenty of new liquidity arriving… 
(4)	Mr Farrell’s first witness statement added in the remainder of paragraph 56 that if Mr Barkman’s funding materialised, the Lonscale claimant cells would “exit… at a significant premium.” If not, they “would hold an asset-rich business with substantial growth and restructuring potential, acquired for approximately 60% of its asset value.” On the footing that the “turnaround” plan prepared by Mr Jeffs was put in place, this was expected to be “an extremely attractive and profitable investment.”
(5)	At paragraph 57 of the same statement Mr Farrell said:
Whilst we had various group discussions at AFP about whether to let the deal fall away, the view was taken by the portfolio managers, Adam Smith and Gary King, that the Cells’ investments should go ahead and that it would be a bad decision for the Cells to pass up on the investment.  The portfolio managers had up to then been willing to invest alongside other investors in a business that they by then understood very well given AFP's involvement in the due diligence, and although taking on the bulk of the transaction carried different risks, it also offered more potential for gains.  As such, I understood that the portfolio managers were of the view that the Club Easy investment was in the interests of the Lonscale Investing Cells.
(6)	In a section of his first witness statement headed “Rationale for the Club Easy investment”, Mr Farrell said this:
64. The balance sheet of the Club Easy Group was healthy, with a PKF/Storey’s valuation of £30.6 million, that is, a surplus of assets over bank debt of £30.6 million.  However, although seemingly asset-rich, we knew that in terms of cash flow, the Club Easy Group would need to be supported by way of further capital injections because the previous owner had in place a number of arrangements and financing terms which were unnecessarily draining the cash availability of the business.  This was the reason AFP was able to secure the acquisition from the vendor on the terms it did.
65. Losses were to be reduced within two years and were in any event small when compared to the net asset value or equity within the business at the outset. …
66. The plan for the investment was, in summary, to bring the business back into profit through a combination of, inter alia, further capital injections (to increase the size of the portfolio), corporate restructuring, rental income increases (subject to student year time lags) and cost reductions.  Interest rate reductions would also have a significant impact on the overall profitability, with hedging to be considered at a later date and part of the initial post-acquisition strategy was to consolidate and simplify the debt arrangements in place at the Club Easy Group. 
(7)	Under cross examination on day 6, Mr Farrell was asked about the position in late October 2007. It was pointed out to him that there was no written analysis to demonstrate that the Clubeasy business would generate sufficient value to enable the investing cells to recover their money. Mr Farrell’s response was:
That would only be one consideration for a portfolio manager. 
(8)	The point was made to Mr Farrell again that there was no written analysis to demonstrate that the business would generate sufficient value to enable the investing cells to recover their money. Mr Farrell’s response was:
If I went and bought a government bond tomorrow morning would I do a written analysis to determine whether I get my money back?
(9)	It was only after the point was put a third time that Mr Farrell conceded that there was “no specific written analysis in the way you describe it.”
(10)	Specifically in relation to the position shortly before completion it was put to Mr Farrell that he had considered it essential to complete the transaction regardless of whether it was in the cells’ interests. Mr Farrell replied that as the deposit was refundable it would have been possible to walk away. He then asserted that in the emails there were many discussions among portfolio managers as to “how they are going to take this deal in the event that Mr Barkman does not come up with the goods.” It was then put to him that there was not a single document from the portfolio managers in which they identified or analysed why the deal would be in the best interests of the cells. Mr Farrell’s response was: 
That is already a given by then. 
(11)	It was at this stage that Mr Farrell then made a claim that there was a document from portfolio managers in which they identified why the deal would be in the interests of the cells. This suggested document, however, never materialised. 
231.	Mr Farrell’s understanding of what was “a given” by the end of October 2007 was something which, in my view, became clear a little later in cross examination. It was that, even allowing for a fifteen percent marketability discount, the Storeys property valuations, as adopted in the PKF reports, could be asserted to mean that “the syndicate” (i.e. the Lonscale claimant cells and FPP) had bought something for £21 million which was worth £22.95 million. 
232.	In these circumstances the evidence to my mind points overwhelmingly to the lack of any risk/reward analysis on behalf of the cells. Mr Farrell’s approach in October 2007 was that despite all the obvious problems with the Clubeasy business the Storeys property valuations could be used to justify investments which he knew to be unjustifiable. 
E5. Conclusion on reasonable care in October 2007
233.	For the reasons given above I conclude that Arch FP was negligent in relying upon the Storeys property valuations, in committing the Lonscale claimant cells to the October 2007 investments when they knew that a substantial capital injection was needed and that nothing was in place to ensure that the necessary capital injection would be made, and in failing to conduct any risk/reward analysis on behalf of the cells. The analysis under each of these three heads identified earlier leads to the same conclusion: no reasonable investment manager could possibly have considered that the October 2007 investments would be in the best interests of the cells.  Mr Farrell knew that they were unjustifiable. He nevertheless ensured that Arch FP committed the Lonscale claimant cells to those investments so as to enable Arch FP and Foundations to extract the substantial sums planned as the second stage of their extraction venture.
F. Failures of care after October 2007
234.	It is common ground that during the period January 2008 to August 2009 inclusive the RE claimants invested additional sums totalling £6.1 million. It is also common ground that these sums were used to fund Clubeasy’s operational costs. Details of the investments are set out in annex 2 at section A2/D to A2/M. 
235.	The RE claimants say that if they had not been involved in the October 2007 investments these subsequent investments would never have been made. If that is right then it will not be necessary to examine whether Arch FP’s instructions that the RE claimants should make the subsequent investments were negligent in themselves. In case that assertion should not be made good, in this section I examine whether the RE claimants are right to say that the decisions made by Arch FP committing the RE claimants to each of these subsequent investments were negligent on their own merits.
236.	Three principal matters are relied upon by the RE claimants to justify their assertions that Arch FP acted in breach of its duty to exercise reasonable care and skill in relation to the subsequent investments. The first is that there had been no material improvement in the viability of the Clubeasy business since the acquisition. On the contrary, the position had only worsened since the initial investments, as Arch FP’s awareness of the problems faced by the Clubeasy business increased over time. The second is that there is no evidence of Arch FP giving any greater consideration as to how subsequent investments could be justified as being in the interests of the RE claimants than had been the case with the October 2007 investments. Indeed none of Arch FP’s witness statements attempted to explain why each of the subsequent investments was thought at the time to be in the RE claimants’ best interests. Arch FP, it was submitted, was simply trying to keep the business afloat, meeting day to day operational costs, without regard for any properly thought out investment proposals, at least during the period up to May 2009. Third, it is said that in these circumstances it is clear that Arch gave no proper consideration as to whether the subsequent investments were in the best interests of the RE claimants. 
237.	The defendants seek to answer these criticisms under two main heads. The first concerns funding plans at the outset. This in substance repeats points made in answer to the claim for negligence in relation to the October 2007 investments. Four examples were given of a recognition that additional investment was needed. Two of these relate to unsuccessful attempts on the part of FCL to secure funding which, in the event, was not forthcoming. The inability of FCL to attract funding seems to me to be a point in favour of the case advanced by the RE claimants rather than a point against it. Reference was then made by the defendants to what was described as the “working capital funding reserve.” This was reference to the £7.5 million discussed in section E3 above. For the reasons given in that section this so called “reserve” was no more than a bookkeeping entry. Finally, reference was made to a £15 million initial commitment for expansion in Exeter, Durham and London: but this was not the capital injection contemplated in the PKF draft reports and final report, an injection which was vital in order to reduce Clubeasy’s high level of gearing. 
238.	The other head under which the defendants responded to these criticisms concerned changes in market conditions during 2008. Those changes cannot in my view provide any answer to the criticisms made by the RE claimants. The defendants refer to problems relating to the global financial crisis, in the form of “the complete removal of liquidity and bank lending appetite, and the general loss of confidence in valuations at such time.” They assert that these fundamental changes could not have been foreseen in 2007. Whether that is right or not, it provides no answer to the failure to recognise the weaknesses of the Clubeasy business from January 2008 onwards. 
239.	The defendants take issue with certain of the particular matters relied upon by the RE claimants concerning events during the period from January 2008 onwards. It is not necessary to go into the detail in that regard. The problems facing Clubeasy form a consistent theme. Thus prior to the investments on 9 January 2008 Arch FP had received the report from Mr Featherstone warning about what he had learnt in relation to Mr Hayes’ management style, warning that the company would require capital injections to keep it going unless something significant happened, warning that the expected increase in property values had slowed down, and seeking to know what strategy existed to bring the company to profitability. During the period prior to the investments made on 28 April 2008 the position summarised in the briefing document prepared by Mr Jeffs on 22 April 2008 involved a lack of self reliance on the part of management, inadequate financial systems, reluctance on the part of mortgage and loan providers to enter into new or renegotiated arrangements. During the period prior to the investments on 9 June 2008 it was noted that Clubeasy had lost most of its senior management team, that it had a cost base commensurate with twice the level of properties currently on its books, and that it made a loss on most of its property base. Moreover it had become apparent that Barclays had concerns in relation to the proposals that it should support FPP’s investment activities involving the Arch business. Mr King had noted that Lloyds had stated a desire to lend to Arch, and potentially increase their lending to Clubeasy, but this would not in any way provide the capital injection which PKF had identified to be needed. There was no significant improvement by 2 July 2008 when the RE claimants made further investments of £1.1 million in order to enable Lonscale to provide operational funding to the Clubeasy business in that amount. By the time of the next investment in October 2008 there had been continuing problems in seeking to keep loan to value ratios within the limits required by lenders. Clubeasy management had produced a “business plan for growth” which assumed a capital property development programme of £20 million per year from 2009/10. Mr King had produced his own plan on 21 August 2008 aimed at “making Clubeasy perform in the near term”. Paragraph [2] of his covering email commented that “this requires huge input from Arch and Foundations otherwise I can’t see that Clubeasy will ever show a profit with its current level of gearing.” He made it clear that “for the management to even have a shot at making inroads” Arch/Foundations would have to give a commitment to Clubeasy to provide the necessary capital investment, which he estimated at £50 million equity over the next two to three years. A further investment of £500,000 was made by the RE claimants on 11 December 2008. At this time there was nothing to suggest that Clubeasy would be given the capital commitment which Mr King had identified as necessary. A note from Arch FP’s real estate division identified, at least by implication, a “required equity injection” of £11 million to £12.3 million, but even in this regard there was no commitment in place. The position was no better on 5 January 2009 when the RE claimants invested a further £500,000 in order to enable Lonscale to provide funding to Clubeasy in that amount. 
240.	For these reasons I conclude that as regards investments prior to March 2009 the RE claimants’ first head of criticism is made good. Also as regards those payments the RE claimants’ second head of criticism is also made good. There is nothing to suggest that those responsible for the portfolios of the RE claimants made any risk/reward analysis. Nor, in relation to the third head of criticism, does the evidence suggest that there was any focus on the need to consider whether the subsequent investments were in the best interests of the RE claimants. The focus was entirely on keeping the Clubeasy business afloat.
241.	It was in March 2009 that Capita FML suspended trading in shares of the UK OEICs on the grounds of deteriorating liquidity. This was followed by a restructuring of the note holdings. Three subsequent investments were made by the RE claimants. There is a stark contrast between these three investments and what had gone before. They were the subject of consideration at meetings of the relevant investment committee. They were approved by GFSC. The crucial point made to the investment committee was that these were limited funding requirements, which in major respects represented a fulfilment of commitments that had been given as part of the external audit process for the year ending July 2009. These funding proposals were the subject of careful scrutiny and, despite criticisms by the RE claimants, I am not prepared to hold that in relation to these specific further payments Arch FP acted negligently. It does, however, seem to me that it was only by reason of Arch FP’s failure to exercise reasonable skill and care over the previous fifteen months that the RE claimants were in a position where these specific further payments came about. 
242.	Accordingly for all these reasons, and to the extent set out above, I conclude that Arch FP was in breach of clause 15 of the IMAs in relation to subsequent payments by the RE claimants from January 2008 onwards. 
G. Breaches of fiduciary duty
G1. Breaches of fiduciary duty: general
243.	The Lonscale claimant cells contended that Arch FP broke each of the two supplemental duties identified in section D4 above. The facts relied upon by the Lonscale claimant cells in this regard are: 
(1)	as demonstrating breach of the duty to avoid actual or potential conflicts of interest, that Arch FP had a huge financial interest in causing the Lonscale claimant cells to invest in the notes to which they subscribed, because their investment would mean that Arch FP itself could, and on 6 November 2007 did, receive a £3m payment, and Arch UK could, and on 9 November 2007 did, receive £556,152 by way of redemption of the preference shares it held in FHL; and
(2)	as constituting a breach of the duty not to profit from its position, that the payment to Arch FP of £3m on 6 November 2007 came about not merely because Arch FP was in a position to ensure and did ensure that the Lonscale claimant cells entered into the October 2007 investments but also because sums invested by those cells would fund almost the entirety of that payment.
244.	For the reasons given in section C4 above I am sure that the Lonscale claimant cells are right to say that these facts have been established. For the reasons given in section D5.2 above, while there may have been some informal disclosure to the independent directors of the Lonscale claimant cells, I am sure that it was inadequate, as it did not include the fact that the relevant payments would be substantially funded from moneys invested by the cells. For the reasons given in sections D5.3 and 5.4, I am sure that there was no disclosure in other ways, whether in the form of the alleged Base Prospectus or otherwise. Accordingly, unless permitted by the IMAs, there were breaches by Arch FP of its fiduciary duties in each of these two respects. Thus the only issue which calls for consideration in the present section of this judgment is whether the IMAs permitted that conduct. For the reasons given in section D4 above, the effect of the IMAs is that the question becomes whether Arch FP managed the relevant conflict of interest fairly. If it did, then under the IMAs it was permitted to act, despite the conflict of interest, and to retain the £3m.
245.	For the reasons given below, I am sure that Arch FP did not manage the conflict of interest fairly. In section G2 below I deal with advice received by Arch FP in 2007 in relation to the fair management of conflicts of interest. In section G3 I examine the reasons given by Arch FP for saying that the conflict was managed fairly. 
G2. Advice on fair management of conflicts
246.	In paragraph 72 of their skeleton argument the defendants asserted, correctly, that Arch FP took external advice on “situations where it might earn a transactional or advisory fee…”. That advice was given orally by Mr Richard Symington, chief executive of Methuen Consulting, at a meeting on 23 August 2007 (“the Symington meeting”). Also present were Mr Farrell, Mr Addison, and a legal adviser, Mr Charles Douglas. A note of the meeting was prepared and was signed by Mr Farrell and Mr Addison. In the note Mr Symington and Mr Douglas are referred to as “RS” and “CD” respectively. 
247.	With paragraph numbers added in square brackets for convenience, the note of the Symington meeting stated: 
Purpose of the Meeting
[1] Arch sought external advice on how to correctly manage conflicts of interest that are likely to occur between investment funds/vehicles where Arch acts as Investment Manager/Adviser, including funds/vehicles in which Arch shareholders have a beneficial interest. 
Background
[2] Arch is Investment Manager/Adviser to a member of funds in Guernsey and the shareholders of Arch are to become beneficial owners of one such fund called Arch Treasury (“AT”)
[3] AT is designed as a fund to source, structure and syndicate investments of various types in order to provide various beneficial services:-
(i) To customise/re-package such investments to better fit the risk/return requirements of the funds and end investors in general
(ii) To apply various treasury and risk management techniques in order to provide liquidity for Arch and other third party funds/investors
(iii) To warehouse risk and investment positions thereby enabling  investors/funds to participate who would not be able to participate otherwise, due to cash flow timing
(iv) To open up distribution of investments to a much wider potential audience consisting of syndicates of Arch funds, third party firms/funds and other investors.
Conflicts of Interest – Summary of Discussion
[4] General and specific issues of conflicts of interest between funds were discussed. …
[5] RS outlined the current FSA position which requires disclosure to clients and RA demonstrated the disclosures already contained within the offering particulars of each fund. While the wording is considered sufficient it is being reviewed and will be updated for the next round of fund placings e.g. review description of affiliates specifically to mention shareholders and beneficial owners as well as employees of the Investment Manager.
(i) The allocation of opportunities amongst the funds was a relatively straightforward issue …
(ii) On the retention by AT of some of the rights to the underlying investments RS commented that it was perfectly reasonable to expect AT to retain a benefit from the trades in a number of instances highlighted by RF such as where it was adding value to a transaction (such as liquidity provision) or the transaction could not otherwise be undertaken by the individual funds.
…
(iii) RS detailed four possible actions under MIFID
•	disclosure of interests
•	policy of independence
•	internal arrangements
•	declining to act
[6] Disclosure of conflicts of interests was being dealt with through the offering particulars of each fund. It was noted that disclosure on its own was not enough to comply with the new rules.
[7] Policy of independence – It was highlighted by RS that there was no independent way of determining how to resolve conflicts of this nature, but that reference should be made to a combination of factors such as:
[7.1]	● the beneficial lessening/altering of the risk profile to the underlying funds via AT
[7.2]	● the pricing/terms of similar external deals that could be identified in the market
[7.3]	● pricing that an external counterparty to such deals would find acceptable
[7.4]	● whether the expected risk and return met or exceeded the investment objectives of the funds involved
[7.5]	● reasonable costs for structuring/re-packaging of the opportunities
[8] Internal arrangements – it was considered sensible and pragmatic for the various funds to agree to work together as a syndicate through AT in order to foster such attractive transactions. It was also raised by RF and noted by RS that the ability of AT to earn a return meant that Arch was able to attract and reward structuring talent that can source more underlying direct transactions with higher IRRs than the current range of investments in the funds. Without this the funds would be worse off in terms of returns even after allowing for the retention of benefits at AT level.
[9] RS commented that for each case we should document the reasons for undertaking a transaction via AT, so that there is a clear paper trail for the dealing of the conflict in a fair manner. RF highlighted that internal processes had already been upgraded to record the rationale for every transaction undertaken by the funds. In practical terms a different fund manager to the funds would represent AT in the consideration of such opportunities.
[10] An alternative arrangement considered was the use of a Chinese Wall but it was agreed that this would not solve the issues as given the size and ownership structure of Arch all staff regardless of their individual fund “hats” would know about the trades and where their duties lay. Bonus incentives would not alter this as the size would not be sufficient to outweigh the Arch inventive and would cause inequalities within the Group.
[11] Declining to act – RS echoed CD’s earlier interpretation that it would be somewhat ridiculous for the funds to decline to act on the investment simply because AT was a beneficiary of such transaction. This would be tantamount to “cutting off one’s nose to spite face”. Further, RF highlighted that AT would be capable of obtaining funds from an external syndicate at lower rates of return (as exemplified by similar publicly-observable issuances), hence the opportunity for the funds was highly attractive.
…
G3. Alleged fair management of the conflict
248.	The defendants repeatedly asserted that the acquisition involved an “equitable split” of benefits. Although they did not put it in this way, their contention was that even if it is right to describe the acquisition as an “extraction venture”, it nevertheless gave the investors a fair share of expected profit. 
249.	In this regard I should stress that in describing what was proposed as an “extraction venture” I am not using the term “extraction” in a pejorative sense. Those involved in commerce commonly speak of “extracting value”. Sometimes that can be achieved by doing work under an agreement for the payment of fees. For the reasons I have identified, however, in August 2007 there was no such agreement, nor was there any definite arrangement that there would be such an agreement. The defendants were anxious to maintain that the extraction of gains was for the “collective benefit of the investors and originators”, and that the gains were to be extracted from the vendor, not from the investors. For the reasons I have identified, however, no gains were extracted from the vendor: it was the investors who funded the total of £6m paid to Arch FP and Foundations. 
250.	As to fair management of conflicts of interest, the defendants cannot in my view realistically suggest that they were entitled to do anything substantially less than what had been recommended at the Symington meeting. 
251.	The first point made by the Lonscale claimant cells is that nothing akin to the present transaction was discussed at the Symington meeting. Nothing in Mr Symington’s advice suggested that Arch FP could fairly commit the cells to pay £20.2m in circumstances where that payment would cause FCL to receive £3m out of which it would provide a benefit to the Arch group by payment to Arch UK, Arch FP’s parent company, of more than £500,000. Still less did anything said by Mr Symington suggest that Arch FP could fairly commit the cells to a payment of £20.2m which would cause Arch FP itself to receive a benefit of £3m. Even so, it seems to me that examination of whether the defendants put into effect Mr Symington’s recommendations provides a minimum base line against which to assess whether there was fair management.
252.	Citing evidence given by Mr Farrell under cross examination, the defendants’ further written closing submissions relied upon paragraph [11] of the note of the Symington meeting. Mr Farrell did indeed refer to this paragraph of the note (day 6, page 14, line 5), but he did so in circumstances where he had already correctly acknowledged that the note did not specifically address the question whether Arch FP could take a substantial fee financed by the cells in addition to the contractually agreed fee for its management services: see day 6, page 13, line 22. He nevertheless maintained that an ability to take such an additional fee was implicit in the advice given by Mr Symington. 
253.	Mr Farrell was then taken in cross examination to paragraph [7.1] of the note. It was put to him that there was no “beneficial lessening/altering of the risk profile to the underlying funds” as a result of the involvement of AT1. Mr Farrell disagreed, maintaining that there was indeed such a beneficial lessening or altering of the risk profile. He acknowledged, as he was bound to acknowledge, that AT1 took no risk in the transaction. He nevertheless placed reliance upon the returns which were promised under the notes issued to the Lonscale claimant cells. It was pointed out to him that those rights could have been conferred without any involvement by AT1. Mr Farrell was obliged to accept that this was so. Nevertheless he maintained that “the whole point” of AT1’s involvement was “to do it in a systematic way so that we don’t generate tons of administration on these types of deals.” 
254.	Turning to paragraph [7.2] of the note, it was put to Mr Farrell that there was no industry practice to support the amount of the fees in the present case. This was a matter which had been the subject of cross examination the previous day, and Mr Farrell dealt with it by simply asserting that he did not agree with what was put to him. However, what had happened on the previous day was that under cross examination he had not in fact been able to identify any comparable example by way of industry practice which supported fees of anything like the amounts involved in the present case. 
255.	The cross examination then turned to what had been identified at paragraph [7.3] of the note. This was that the pricing should be such as an external counterparty to the deal would find acceptable. It was pointed out to Mr Farrell that he had made no investigation as to what pricing an external counterparty would find acceptable in relation to the total of £6m paid to Arch and FCL. Mr Farrell did not attempt to deny this. His only observation was an assertion that this was referring to the terms or the pricing of the notes. As to that, however, for the reasons I have given above, no external counterparty would find the terms or pricing of the note acceptable.
256.	Moreover, at [7.5] the note of the Symington meeting identified as relevant that there were “reasonable costs for structuring/re-packaging of the opportunities”. It was put to Mr Farrell that there was no serious consideration given to whether £6m, in the context of a £13m to £15m transaction, was a reasonable sum. Mr Farrell did not attempt to assert that there had been any such consideration. Instead he claimed that the reference to “reasonable costs” was a reference to AT1, and that AT1’s costs were zero. 
257.	Thus in cross examination on day 6 Mr Farrell made a determined attempt to suggest that the present transaction could be brought within paragraph [7] of the note of the Symington meeting. As regards the examples Mr Farrell relied upon (those at [7.1], [7.2], [7.3] and [7.5]), Mr Farrell in cross examination was making points which were obviously false, and I am sure that they were known by him to be false. The notion that this transaction could be brought within paragraph [7] of the Symington note was preposterous. 
258.	The cross examination then turned to paragraph [9] of the note of the Symington meeting. Mr Farrell accepted that, following what had been said at the meeting, his understanding was that if Arch FP’s interests conflicted with those of the cells there had to be a clear documented paper trail in order to justify any action that Arch FP might take. When it was suggested to him that there was no such documented paper trail, his immediate response was to rely upon his email to Mr Smith dated 4 August 2007. When that email was turned up, however, it was seen to be the email referred to in section A2/B of annex 2 to this judgment, sent at 6:40am, in which Mr Farrell, having noted that Club Easy had £33m “official value on balance sheet” went on to say:
Ability to extract lots of cash P&L upfront is good…
259.	As this plainly offered no rationale for the transaction from the point of view of the cells, Mr Farrell was compelled to assert that the document he had in mind was somewhere else. On day 7 it was suggested to him in re-examination that it was a different email, sent to Mr Smith on 4 August 2007 at 11:52am. This email, however, merely listed items to be recorded using drop down menus with a list of possible reasons for trades. This may have been what Mr Farrell had in mind when he said, as recorded at paragraph [9] of the note, that “internal processes had already been upgraded”. However it had nothing to do with recording how a conflict had been dealt with in a fair manner. 
260.	The reality is that, for the reasons given earlier in this judgment, there was no merit whatever in Mr Farrell’s assertion that there was a documented rationale for the transaction. Thus the transaction plainly did not comply with the requirements identified at paragraph [9] of the note of the Symington meeting. 
261.	Moreover, Mr Farrell’s initial assertion that it fell within paragraph [11] of the note of the meeting was absurd. There would have been nothing “ridiculous” about the funds declining to pay AT1 £20.2m for the October 2007 investments if they had been told what was going to happen to nearly a third of that money. 
262.	In each of the above respects I am sure that Mr Farrell gave evidence at the very least without regard to its truth and in most respects knowing it to be untrue.
263.	In these circumstances there is simply no basis whatever for the defendants’ assertion that Arch FP managed the conflict of interest fairly. Similarly there is no basis whatever for the assertion made in the defendants’ closing submissions that the October 2007 investments represented an “equitable split” of benefits among those involved. The consequence is that Arch FP cannot rely upon the IMAs as relieving them from the supplementary duties, and the Lonscale claimant cells’ claim that those duties were broken is made good. 
G4. Conclusions on breaches of duties of loyalty
264.	For the reasons given above I conclude that there were serious breaches by Arch FP of its duties of loyalty owed to the Lonscale claimant cells. As they observed in their closing written submissions, it is not necessary for them to prove that Arch FP’s conflict of interest and unauthorised profit had a causal impact on its decision making. It is nevertheless right that I should record that I am sure that it did. This is indeed my conclusion at the end of section E above. All the attention on the part of Mr Farrell and those whom he instructed was devoted to ensuring that the acquisition went ahead. This was the overriding focus from the start. It was able to remain the overriding focus only by deliberately allowing an unjustifiable assumption as to the value of the business to be made, knowing that assumption to be unjustifiable. This would never have come about if Arch FP had recognised that it should not have put itself in the position that it did. It would equally not have come about if Arch FP had made proper disclosure to the independent directors. Had they been informed that the cells would be funding almost the entirety of a payment of £3m to Arch FP, I am sure that they would have objected in the strongest possible terms. 
H. Breach of mandate
265.	The remaining claims against Arch FP are that the Lonscale investments were not within the scope of the mandate given to Arch FP by the Lonscale claimant cells. I shall refer to these claims as “the mandate claims”. They do not in my view add anything of significance in the circumstances of the present case. The reason is that I have already held that the Lonscale claimant cells are successful in their claims for breaches of the duty to act with reasonable skill and care and for breaches of fiduciary duty. A finding that a mandate claim also succeeds will give rise to no additional entitlement in favour of the Lonscale claimant cells. For this reason I deal with the mandate claims relatively briefly. 
266.	In support of the mandate claims the Lonscale claimant cells rely on paragraph 4(c) of the IMAs. This provides that Arch FP’s discretionary powers are subject to “the investment objectives and investment policy as set out in the Prospectus”. The defendants do not dispute that Arch FP’s mandate was confined in this way. 
267.	The Prospectus for each of the Lonscale claimant cells included what were described as “Supplementary Scheme Particulars”. A common feature in the case of each of the Lonscale claimant cells was that the Supplementary Scheme Particulars contained a section headed “Investment Objective.” In the case of the PF claimants, this section included the following: 
Investment Objective
The investment objective of the Fund is to provide Shareholders over the medium to long term with capital appreciation through an economic exposure to a diverse range of investments in private finance selected by the Investment Manager.
There is no guarantee of performance and past or projected performance is not necessarily a guide to the future. Any return targets quoted are based on performance projections of investment approach using a historical portfolio constructed by the Investment Manager with similar anticipated investment exposures.
268.	In the case of the RE claimants a similar section appeared. It differed only in that the first sentence stated:
The objective of the Fund is to provide Shareholders with capital appreciation over the medium to long term through economic exposure to a diverse range of real estate investment opportunities selected by the Investment Manager.
269.	The primary way in which the mandate claims were put relied on this section of the Supplementary Scheme Particulars. For the purposes of his expert report Mr Walton was asked to consider the question whether the notes purchased by the cells were “likely to produce capital appreciation over the medium to long term, as required by the investment policy in the relevant Supplemental Scheme Particulars.” He duly gave reasons why he considered that purchase of the notes was very unlikely to produce any capital appreciation. 
270.	That approach to the matter assumes that because the investment objective is to provide shareholders with capital appreciation over the medium to long term, it follows that Arch FP’s mandate extends only to those investments which can be shown to be objectively likely to produce capital appreciation over the medium to long term. However in my view the one does not follow from the other. 
271.	An investment manager may well be given criteria under which the mandate is defined by reference to an objective criterion. For example, the mandate may be confined to the sale or purchase of securities listed on a particular stock exchange. In such circumstances the plain intention of the parties will be that if a security is listed on the stock exchange in question then the investment manager may sell or purchase it. If it is not, then the investment manager will have no power to make such a sale or purchase on behalf of the client. 
272.	The Lonscale claimant cells implicitly recognised that their mandate claims do not fall within this type of case. The question which Mr Walton was asked was not simply an objective one as to whether or not a particular investment would provide capital appreciation over the medium to long term. Instead, the suggestion was that the mandate must be confined to investments which are “likely to” produce such a result. This would be a wholly unworkable restriction upon the mandate of an investment manager, and would expose those dealing with the manager to unacceptable risks. In the present case Arch FP was, quite separately, under an obligation to exercise reasonable skill and care: see paragraph 15 of the IMAs. There is no need to introduce any restriction upon the mandate in this regard. 
273.	A subsidiary claim was advanced by the PF claimants only. This was that the notes purchased by the PF claimants were concerned not with private finance, but with private equity. Reliance was placed on what was said by Mr Walton under cross examination on day 10: 
… Lonscale, as far as I am concerned, is a private equity deal that happened to be involved in the acquisition and management of student accommodation. So that would be a fairly typical private equity transaction, like investing in a company that manages hotels or just happens to fall into that sector. … 
274.	It is not, however, necessary for me to consider whether the notes purchased by the PF claimants were properly categorised as “private equity” rather than “private finance”. The reason is identified by the defendants in their written closing submissions: the investment policy in the Supplemental Scheme Particulars clearly stated that it included “public and private debt and equity instruments”. There is thus no basis for any contention that the mandate for the PF claimants excluded private equity investments. 
275.	For these reasons I conclude that the mandate claims fail.
J. Alleged dishonesty by Mr Farrell
J1. Alleged dishonesty by Mr Farrell: general
276.	In this section I deal with the first of two claims made by the Lonscale claimant cells against Mr Farrell. This claim concerns the breaches of fiduciary duty by Arch FP. It is said that Mr Farrell is personally liable for those breaches of fiduciary duty because he dishonestly assisted Arch FP in committing them.
277.	There are particular legal tests which must be met before a claim for dishonest assistance can succeed. I describe them in section J2 below. In section J3 I examine whether they have been met in the present case. 
J2. Legal tests for dishonest assistance
278.	The claim against Mr Farrell for dishonest assistance asserts that he is liable as an accessory to Arch FP’s breaches of duty to the Lonscale claimant cells. If the relevant test for dishonesty is met, such a liability will be imposed upon a person who assists a breach of duty by a fiduciary: see Snell’s Equity (32nd edition, 2010) paragraph 30-077. Footnote 316 to that paragraph draws attention to Goose v Wilson Sandford & Co (No. 2) [2001] Lloyd’s Rep P.N. 189. In that case the Court of Appeal left open the question whether there can be liability for dishonest assistance where the relevant breach of duty does not involve misapplication of a trust fund or other property subject to a fiduciary obligation (see Gencor ACP Ltd v Delby [2000] 2 B.C.L.C 734 at paragraph 86). There can be no doubt in the present case, however, that the £20.2m of the Lonscale claimant cells’ money used to purchase the relevant notes was the subject of a fiduciary obligation. 
279.	As to the relevant test of dishonesty, the standard by which the law determines dishonesty for this purpose is objective. It has been established by the Privy Council decision in Barlow Clowes v Eurotrust International Ltd [2005] UKPC 37; [2006] 1 WLR 1476 at paragraph 16 that the test will be met if there is:
… consciousness of those elements of the transaction which make participation transgress ordinary standards of honest behaviour. 
280.	Moreover, it is not essential that there be actual knowledge of the relevant element of the transaction. A dishonest state of mind will exist where there is suspicion of the relevant element of the transaction, combined with a conscious decision not to make enquiries which result in knowledge: see Barlow Clowes at paragraph 10. 
281.	The defendants’ skeleton argument relied on the well established principle governing the approach to allegations of fraud or dishonesty. This is that the standard of proof is the balance of probabilities, but the cogency and strength of the evidence required to prove dishonesty and fraud is heightened by the nature and seriousness of the allegation. Neither dishonesty nor fraud should be equated with negligence, or even gross negligence. 
282.	It was also suggested in the defendants’ skeleton argument that Mr Farrell did not provide any advice in a personal capacity, and moreover did not act on behalf of Arch FP, merely acting “as the relay or conduit between Mr Barkman and Lonscale on the one hand, and the Arch teams on the other.” As was rightly pointed out in the claimant’s written closing submissions, however, neither of these assertions, even if made good, would provide any answer in law to a claim of dishonest assistance. Liability for dishonest assistance arises whether or not the person who provided the assistance acted in a personal capacity. I add that my conclusions earlier in this judgment are inconsistent with the notion that Mr Farrell distanced himself from “the Arch teams” so as to be no more than a “relay or conduit”. But even if Mr Farrell had been no more than a relay or conduit, that would not prevent possible liability on his part for dishonest assistance. If assistance is provided, and the person providing that assistance acted dishonestly, then it does not matter that the person in question may have been acting as no more than a “relay or conduit”. 
J3. Whether the tests were met
283.	I have held in section G above that Arch FP was in breach of fiduciary duty in committing the Lonscale claimant cells to the October investments in circumstances where this gave rise to a conflict of interest, and in taking the payment of £3m on 6 November 2007 which came about because Arch FP was in a position to ensure and did ensure that the Lonscale claimant cells entered into the October 2007 investments. For the reasons given in section G above, I have no doubt that Mr Farrell assisted Arch FP to breach its duty in both these respects: he was in charge of the extraction venture on behalf of Arch FP throughout August 2007, and he ensured that it was carried through during the months which followed. 
284.	Thus the only question which remains is whether Mr Farrell acted dishonestly in the sense described in section J2 above. In that regard I apply the well established principle under which I can reach a conclusion of dishonesty only if the evidence has the cogency and strength necessary to demonstrate the allegation of this nature and seriousness has been proven. I bear in mind, too, that a conclusion on my part that Mr Farrell was lying in his evidence to the court, or on other occasions, does not of itself demonstrate that he acted dishonestly in relation to any particular element of the relevant transaction or transactions. Lies may be told for reasons which are consistent with honest conduct. Even allowing for all this, and all the other factors which Mr Farrell can rely upon, the evidence against Mr Farrell is so strong and cogent that I am driven to the conclusion that he knew that what he was doing was wrong.
285.	Moreover, even if I were wrong to conclude that Mr Farrell was well aware that what he was doing was wrong, in my view it is plain that at the very least he suspected that relevant elements of the transaction were such as would make it wrong, and nevertheless took a conscious decision not to make enquiries which would have resulted in him learning things which would have made it wrong to proceed with the transaction.
K. Alleged inducing of breach of contract
K1. Inducing breach of contract: general
286.	In this section I deal with the second of the claims made by the Lonscale claimant cells against Mr Farrell. This claim concerns alleged inducement by Mr Farrell of breaches by Arch FP of the IMAs made between it and the Lonscale claimant cells. In this regard the Lonscale claimant cells in their closing written submissions focused on a particular type of breach by Arch FP. This was Arch FP’s conduct causing the Lonscale claimant cells to finance “fee” payments in breach of its fiduciary obligation not to act in circumstances where its own interests conflicted with those of the Lonscale claimant cells. 
287.	In section K2 below I deal with the legal principles which govern such a claim. In section K3 I examine whether the facts of the present case give rise to liability on the part of Mr Farrell in accordance with those principles. 
K2: Legal principles concerning inducement
288.	It is common ground that liability for the tort of inducing breach of contract will arise if three requirements are met. These are that there must be knowledge of the contract, an intention to induce a breach of the contract, and an actual breach of the contract caused by the defendant’s conduct. As to the second of these requirements, the Lonscale claimant cells acknowledge that if Mr Farrell had been acting in good faith as part of his relationship with Arch FP and within the scope of his authority to act on behalf of Arch FP, then a claim against him for inducing Arch FP’s breach of its contract could not succeed: see Welsh Development Agency v Export Finance Co Ltd [1992] BCC 270 at 295. 
K3. Application of the principles in this case
289.	It is common ground that Mr Farrell was aware that each Lonscale claimant cell was in a contractual relationship with Arch FP under which Arch FP owed to that cell duties pursuant to the IMA made between the cell and Arch FP. It is also common ground that Mr Farrell was aware that, at the very least, Arch FP owed a duty under that contractual relationship to manage any potential or actual conflict of interest fairly. 
290.	The first answer given on behalf of Mr Farrell to the claim for inducing breach of contract was that no breach of contract on the part of Arch FP occurred. For the reasons given in section G above, that answer fails. There was a breach of contract because Arch FP did not manage the conflict fairly. 
291.	The second answer was that, even if Arch FP was in breach of contract, Mr Farrell had acted in good faith. I have already held, however, that Mr Farrell did not act in good faith. He acted dishonestly, knowing that what he was doing was wrong. Moreover, even if he did not have actual knowledge of elements of the transaction which made it wrong, he suspected that there were such elements and consciously decided not to enquire further lest he gain knowledge of elements which would plainly make it wrong for Arch FP to proceed.
292.	In these circumstances I hold that Mr Farrell is liable to the Lonscale claimant cells for inducing the breaches by Arch FP identified in section G above. 
L. The alleged release under the waiver agreement
293.	Section A3 above describes the concerns which arose in 2009 concerning cross investment fees, and the waiver letter written by Arch FP to the directors of the cells on 22 October 2009. By that letter Arch FP agreed to waive its entitlement to receive all investment management or investment advisory fees and expenses payable pursuant to the IMAs from 1 March 2009 up to and including the date upon which Spearpoint was appointed investment manager or investment adviser. That agreement was subject to two conditions. The second involved the provision by the cells of “a full release (in the form attached)” in respect of claims against Arch FP, and was satisfied on 22 October 2009. The release, like the waiver letter, was conditional upon Spearpoint having been appointed as investment manager or investment adviser on or before 30 November 2009. Spearpoint was duly appointed on 30 November 2009, and both the waiver letter and the release accordingly took effect. 
294.	The defendants advance a contention that the release extended to any claims which the cells might have against Arch FP. If right, they say that this would mean that the Lonscale claimant cells were not entitled to advance any of the present claims. 
295.	This contention falls to be considered in accordance with well-established principles for determining the true meaning of contracts. Those principles require the words used to be considered as a whole in their context. Applying those principles, I cannot accept the defendants’ contention. It is contrary to the clear words used both in the release and in the waiver letter. 
296.	For convenience I have set out in annex 2 at section A2/M the text of the waiver letter and of the release, split up into numbered or lettered sub-clauses. It is convenient to begin with the wording of the release. As will be seen from annex 2, if sub-clauses [e], [f] and [g] were read in isolation then they would have constituted an irrevocable release, in favour of Arch FP and, among others, its partners, from any and all manner of actions, causes of action, suits, proceedings and the like. These were described as the “Potential Claims”. 
297.	However, the release immediately went on to say more about the “Potential Claims” which were the subject of the release. Sub-clause [h] made this clear by beginning with the word “which”. After explaining in sub-clause [h] that the release was in relation to “Potential Claims” which the cells had or might have against Arch FP and those associated with it, the release immediately continued in sub-clause [j]:
in relation to the Cross Investment Fees (as defined in the letter) …
298.	These words in my view make it perfectly clear that the release was confined to claims arising in relation to the cross investment fees. If the release were intended to apply to all claims that the cells might have against Arch FP or those associated with it, then the words in sub-clause [j] would not have appeared. The presence of those words is completely inconsistent with any notion that the release went beyond claims in relation to the cross investment fees. 
299.	The defendants relied upon the undertaking found in sub-clause [k]. It was an undertaking by the cells that they would not threaten or commence legal proceedings in respect of any “Potential Claims”. As a matter of ordinary English, it seems to me to be clear that the undertaking was referring to the “Potential Claims” which were the subject of the release. These “Potential Claims” were those in relation to the cross investment fees. 
300.	Turning to the waiver letter itself, it referred in clause [3.]2 to a “full release (in the form attached) in respect of any Claims…”. In my view it is clear that by referring to the “Claims” the letter is referring to the “Potential Claims” which were the subject of the release. For the reasons given earlier, the “Potential Claims” which were the subject of the release are claims in relation to the cross investment fees. 
301.	This is, in my view, made abundantly clear by the care which was taken at the start of the letter to explain and define what was meant by “Cross Investment Fees”. The reason for taking such care is made plain in the final sub-clause in each of clause [3.]2 and clause [4] of the waiver letter. It describes the release in this way:
… the said full release in relation to the Cross Investment Fees …
302.	If the defendants were right in saying that the release extended to all claims then the words “in relation to the Cross Investment Fees” would simply not have been present. A release in relation to all claims cannot be described as a “release in relation to the Cross Investment Fees.” If the defendants were right, the presence of those words could not be explained away as a mere infelicity of drafting. Their presence would be a blunder of huge proportions. 
303.	Far from acknowledging this, the defendants positively relied on the words “in relation to the Cross Investment Fees”. They make the point that these words were followed by the words “or not”. This is an obviously false point. The final sub-clause is specifically concerned to ensure that the release extends to claims not contemplated at the time that the release was given. It is for that reason that it contains the words “and whether in contemplation … or not.”
304.	The defendants sought to rely upon matters other than the words used in the release and the waiver letter. First, they drew attention to what was recorded in the minutes of a meeting of the board of directors of the ICC and the cells on 22 October 2009. Those minutes referred to the waiver letter and recorded a resolution to accept the terms and conditions detailed within the letter. When describing the letter, the minutes noted that the letter envisaged:
… a full release in respect of any Claims the Funds, or each of them may have against Arch Financial Products LLP, whether past, present or future, actual or contingent, known or unknown, suspected or unsuspected.
305.	I do not accept that this assists the defendants. On well established principles, the release and the waiver letter must be construed objectively, and not by reference to any subjective intention of the cells. Moreover, even if it were permissible to have regard to the subjective intention of the cells, the minutes simply record the wording used by the waiver letter in relation to “Claims”. For the reasons given above, that wording is a reference to the terminology in the release, which itself was plainly concerned only with claims in relation to the cross investment fees. 
306.	Second, the defendants contend that a release confined to claims concerning the cross investment fees would have been uncommercial. They sought to maintain that the defendants would have been giving up an eight figure sum in exchange for something worth much less. Here I shall assume that the evidence of contractual matrix relied upon by the defendants meets the necessary legal requirements so as to be admissible. I shall also assume that the defendants are right in so far as they object to evidence of matrix relied upon by the Lonscale claimant cells.
307.	Even on this basis, in my view, this contention does not assist the defendants either. The potential claim in relation to the cross investment fees was very large and went back several years. There is nothing in the commercial matrix which demonstrates that an agreement to waive fees as set out in the waiver letter in exchange for a release from claims about the cross investment fees would have been so illogical so as to make it imperative to ignore the references both in the release and in the waiver letter to the release being in respect of the cross investment fees. 
M. Causation, remedies and recoverability
M1. Causation, remedies and recoverability: general
308.	In this section I deal with the consequences of earlier findings. I start with general matters affecting remedies, after which I turn to the particular remedies that are sought. In section M2 I deal with questions as to whether the Lonscale claimant cells would have lost money in any event, and I examine assertions that losses were caused by intervening events rather than by the wrongdoing of Arch FP. In section M3 I examine whether the Lonscale claimant cells were in breach of a duty to mitigate their losses. I then proceed to consider the particular claims against Arch FP for equitable compensation (section M4), for alternative remedies for breach of fiduciary duty (section M5), for damages for breach of contract and negligence (section M6), and for restitution (section M7). I then turn to consider particular claims against Mr Farrell for equitable compensation for dishonest assistance (section M8), and damages for inducing Arch FP to breach the IMAs (section M9). 
M2. Effect of later events
M2.1 Effect of later events: general 
309.	A major element of the financial claims advanced by the Lonscale claimant cells concerns losses alleged to have arisen by reason of the investments in Lonscale. The premise for this head of financial claim is that if Arch FP had acted in accordance with its duties, the Lonscale claimant cells would not have invested in Lonscale. That premise is not in dispute. It is not suggested by the defendants that if Arch FP had acted in accordance with its contractual duties the Lonscale claimant cells would nevertheless have made any of the investments in Lonscale that they in fact made. 
310.	There are nevertheless two general answers given by the defendants to this head of financial claim. In section M2.2 below I consider an assertion on the part of the defendants that if Arch FP had not committed the Lonscale claimant cells to the Lonscale investments, it would nevertheless have committed them to alternative investments which would have resulted in financial loss. In section M2.3 below I consider the defendants’ contention that the losses claimed to have resulted from the Lonscale investments were losses which were not attributable to those investments but arose from an independent intervening cause. 
M2.2 Losses on alternative investments
311.	The question for consideration here is whether, in the event that Arch FP had fulfilled its duties, the Lonscale claimant cells would nevertheless have made alternative investments giving rise to losses. It is common ground that if this would have been the case, then the Lonscale claimant cells can recover under this head of financial claim only to the extent that their actual losses exceeded the losses that would have been made on alternative investments. It is also common ground that the burden of proving that losses would have been made on alternative investments lies on the defendants. 
312.	Relevant questions in this regard were identified in the second report of Mr Rees dated 18 September 2013. He considered the matter on the basis of a hypothetical assumption that the Lonscale claimant cells had not invested in Lonscale on the dates and in the amounts when they did, and that they had those amounts available to be used for some other purpose. The questions which he identified, and the answers which he gave, were as follows:
(1)	What criteria should have governed selection by Arch FP of any alternative investments? Mr Rees noted that it was on 14 September 2007 that Northern Rock Plc announced that it had been granted emergency funding by the Bank of England. By the end of September 2007 it had been reported that banks had reduced corporate lending and were expecting further reductions in the final quarter of 2007. In these circumstances Mr Rees stated that the relevant criteria which should have governed the selection of any alternative investments were compliance with the Supplemental Scheme Particulars and an appropriate anticipated likely return on the investment which was supported by rigorous examination and analysis. 
(2)	Was it likely, and if so to what extent, that the Lonscale claimant cells could reasonably have invested further in investments already held within their existing portfolios? Mr Rees said that he had not been asked to consider the investments held within the existing portfolios. However, in general those investments would normally have been made because finance was sought by the business in question for a specific purpose. Any additional investment would therefore be sporadic and dependent on when any requirement arose. Accordingly there would be very limited (if any) opportunities for “follow-on” unquoted investments. Mr Rees added that it would be unusual at this time for “follow-on quoted investments” to be made. He therefore thought it unlikely that the Lonscale claimant cells would have been able to make significant follow-on investments. 
(3)	How should Arch FP have handled the sums which were in fact invested in Lonscale if it had been unable to identify appropriate alternative investments? Mr Rees noted that all the Lonscale claimant cells held significant cash balances at relevant times. He added that the investment policy in the Supplemental Scheme Particulars for the RE claimants stated that it might take time for the fund to become fully invested, and that during that time monies would be invested in a variety of short term deposits, other money market instruments and financing related investments. Accordingly his view was that such sums ought to have been held as cash on short term deposits. 
(4)	Is it reasonably possible to identify any particular alternative investments that might have been made? Mr Rees stated that if he had been seeking investments at this time he would have approached introducers (such as corporate financiers, estate agents and accountants) and his existing contacts and clients, reviewed the trade press, and possibly instructed a targeted search by a corporate finance house. Should opportunities have been identified, he would then have rigorously reviewed the expected returns to determine which, if any, investments to make. Mr Rees added that he did not think it possible to conduct these procedures retrospectively. The result was that he was not able to identify any particular alternative investments that might have been made by the Lonscale claimant cells. It followed that he was also unable to quantify the likely level of any returns on those investments. 
313.	In his third witness statement dated 30 October 2013 Mr Farrell made numerous criticisms of the second report of Mr Rees. In addition, section D of his statement proposed what he described as the “most appropriate methods of selection” for alternative investments. In paragraph 59 of his third statement Mr Farrell addressed the position where Lonscale investments had represented a large proportion of a particular cell’s portfolio. In such a case he suggested that there would have been a portfolio comprising a number of alternative investments, a number which “would most likely be driven by the average investment size” of the cell. The selection of investments would, he said, “most likely be driven by the existing favoured strategy allocation.” 
314.	On this basis, Mr Farrell proposed two methods of identifying losses that would have been made on alternative investments. What he called “Method One” consisted of investment of relevant sums into “the strategies selected at that time, rebalanced according to the contemporaneous (and dynamic) portfolio weightings of each Claimant cell at each month end.” This, he said, was an accurate measure of what would have happened, “in that it reapportions the Lonscale holdings back to precisely those strategies that were being invested in over time, in the same weightings.”
315.	What Mr Farrell described as “Method Two” was reinvestment of relevant sums into “replacement investments that have similar risk and return characteristics or are the same type of investment exposure.” This method, he said, assumed that “a close (or broad) equivalent of Lonscale (or its investment alternatives)” is chosen as a replacement. As the PF claimants had invested in class B notes, Mr Farrell said that the equivalent would be similar mezzanine debt exposures, or a diversified portfolio of asset based lending funds. As to the RE claimants, comparable investments would be similar student accommodation investments, or diversified portfolios and indices of UK and global real estate.
316.	Accompanying his third statement Mr Farrell produced calculations showing that under Method One during the period to the end of March 2009 alternative investments would have given rise to profits for PF2 of £381,460, PF3 of £18,673, and PF4 of £365,759. Thus for those three cells alternative investments would have resulted in a total profit of £765,892. However, against this would need to be set losses for PF5 of £178,820, RE1 of £1,366,331 and RE2 of £1,386,194. The total of these losses would have been £2,931,345. Taking the Lonscale claimant cells as a whole, the overall loss would have been £2,165,453. 
317.	As regards Method Two, for the PF claimants Mr Farrell identified three comparables. During the period October 2007 to March 2009 the first (ACP Mezzanine) would have resulted in losses of 90%, the second (Intermediate Capital Group) would have resulted in losses of 84%, and the third (estimated Asset-based Lending Sector) would have resulted in losses of 50%. For the RE claimants Mr Farrell proposed what he described as the fourth to ninth comparables. The results would have been in the case of the fourth comparable (IMA Property Sector) a loss of 46%, for the fifth comparable (UNITE) a loss of 78%, for the sixth comparable ( Opal Property Group) a loss of 100%, for the seventh comparable (Halifax Average House Price index) a loss of 18%, for the eighth comparable (FTSE Commercial Property Index NAV) a loss of 34%, and for the ninth comparable (Leveraged Property Funds - Tilney, Goldman Sachs) a loss of 97%.
318.	It is superficially plausible to suppose that if Arch FP had fulfilled its duties, the Lonscale claimant cells would nevertheless have made alternative investments giving rise to losses. However there are inherent weaknesses in Mr Farrell’s Method One and Method Two, weaknesses which he was not able to remedy in his oral evidence. 
319.	As regards Method One, the Lonscale claimant cells rightly pointed out that it proceeds on a particular premise. The premise is that, for a particular cell, alternative investments made with reasonable skill and care would have achieved a performance comparable to the performance of that cell’s non-Lonscale portfolio. I do not consider that this premise is justified or justifiable. I have concluded that the Lonscale investments involved breaches of fiduciary duty and failure to exercise reasonable skill and care. Those breaches are so serious and so fundamental that I cannot assume that, in relation to any particular cell, the non-Lonscale investments were investments which did not involve any breach of duty. Moreover, even if earlier investments had been properly made at some point in the past, it does not follow that they were investments which could properly be regarded as appropriate to make in the market conditions which prevailed at the time when the Lonscale investments were made. 
320.	The defendants’ closing submissions offered no response to this fundamental difficulty with Method One. It is therefore unnecessary to analyse in detail a number of points raised by the Lonscale claimant cells as showing that the calculations in Method One were flawed. I observe that none of these detailed points was answered in the defendants’ closing submissions and that each of them seems to me to be well founded. 
321.	Turning to Mr Farrell’s Method Two, the Lonscale claimant cells accepted that in general terms it offered a sounder approach in principle. They complained at the adoption of March 2009 as the end point of the analysis. As discussed in section M2.3 below, it was in March 2009 that the GFSC imposed on the ICC a condition that it and each of the cells were prohibited from disposing of any of their assets without the GFSC’s prior consent, and that Capita FML suspended trading in shares of the UK OEICs on the grounds of deteriorating liquidity. I am content to assume that for these reasons March 2009 was an appropriate cut off point. 
322.	The difficulty with Mr Farrell’s Method Two lies in his choice of proposed comparables. In his second witness statement Mr Davey gave an analysis which dealt with the private finance comparables as regards the PF claimants and the real estate comparables as regards the RE claimants. 
323.	As to the PF claimants, the first private finance comparable proposed by Mr Farrell was ACP Mezzanine. Mr Davey noted that it had considerably higher levels of leverage than one would expect from private finance structures. The defendants’ closing submissions rely upon their own paraphrase of a statement by Mr Walton referring to “mezzanine” finance. That remark, however, concerned the general area of “mezzanine” finance, and provides no answer to Mr Davey’s criticism of ACP Mezzanine as an appropriate alternative investment. The second comparable was Intermediate Capital Group. Mr Davey pointed out that this was listed on the London Stock Exchange and would therefore be highly unlikely to be an alternative investment. No answer to this observation was provided by the defendants. The third comparable, described as “Asset-based Lending Sector” was no more than Mr Farrell’s own estimate of the performance of the sector. I cannot regard this as offering any objective basis for showing that a reasonable alternative investment would be likely to have resulted in losses during the period to March 2009. By contrast Mr Davey notes that comparables identified by Arch FP in “Fact Sheets” for PF2, PF3 and PF4 would have produced a performance of between 7 and 8% during the period from October 2007 to March 2009. As regards the comparables given in the “Fact Sheet” for PF5, one would have produced a performance of plus 5.53%, while the other would have produced a performance of -18.99%. The comparators in the “Fact Sheets”, however, included some derived from investments outside those permitted by the Supplemental Scheme Particulars. For this reason, it does not seem to me that the comparables identified by Mr Davey in themselves show that alternative investments would have led to a positive performance. Overall, however, the state of the evidence is such that it does not provide me with any sound basis upon which to conclude that it is more likely than not that alternative investments made at the time that the PF cells invested in Lonscale would, as at March 2009, have resulted in losses. 
324.	In relation to the RE claimants, Mr Davey examined Mr Farrell’s fourth to ninth comparables. He accepted that the fourth, the IMA Property Sector Index, was one of a number of reasonable comparators for the RE claimants. His evidence was that from October 2007 until March 2009 the performance of this comparator would have been -46%. If the end point is extended until December 2009 then the performance was -29%, while if the end point were not until November 2013 performance was -6%. Mr Davey objected to the fifth proposed comparator, UNITE, on the ground that it was listed on the London Stock Exchange. No answer to this was provided by the defendants. The sixth proposed comparator was Opal Property Group. Mr Davey said that it went into administration blaming its demise on a mis-sold financial instrument, and for its own idiosyncratic reasons was not a relevant comparable. No answer was provided by the defendants. The seventh comparable suggested by Mr Farrell was the Halifax Average House Price Index. Mr Davey accepted that this was a good comparator for the RE claimants, but noted that it did not include income which would be an integral part of the expected return profile from property. During the period from October 2007 until March 2009 the index had a negative performance of just under 20%. Against that, however, Mr Davey considered that income would be likely to be 5% per annum. The result would be that the negative performance from October 2007 to March 2009 would be in the region of -13%. Mr Farrell’s eighth proposed comparable was the FTSE Commercial Property Index NAV. Mr Davey commented, and I accept, that this included retail and industrial sectors and so was not as appropriate as the Halifax Average House Price Index. Mr Farrell’s ninth proposed comparable took three leverage property funds. Mr Davey considered that these were extreme examples. Under cross examination on day seven Mr Farrell accepted that they were extreme. He added that these leveraged funds were run by well known groups, and that if they were “losing ninety plus percent, I think that tells you something about the environment at the time.” The fact that they are extreme examples, however, means that I am unable to regard their results as providing any basis for an objective assessment of the return that would have been provided by a truly comparable alternative investment. 
325.	Mr Davey noted that the comparables given in the “Fact Sheets” for the RE cells produced returns ranging from +7.99% to -75.24% at March 2009. He added that another alternative comparable would be the Brandaux Student Accommodation Fund, which increased by +15.46% from October 2007 to March 2009. The defendants accepted that Brandeaux was the largest student accommodation fund provider at the time. They added that it suspended fund redemptions on two occasions and was currently in an “orderly wind down” status. This does not, however, answer the point that Brandeaux was a comparable which achieved a positive investment result over the period from October 2007 to March 2009. In these circumstances I do not consider that the defendants have shown on the balance of probabilities that if alternative investments had been made by the RE cells in October 2007 they would have resulted in losses. 
326.	Moreover, as noted in section A3 above, substantial parts of the investments made by the RE cells in October 2007 were sold at a relatively early stage to FPP at a substantial profit. For the most part, the losses to the RE claimants came about as a result of investments made during the period January 2008 to March 2009. I have no data on which to form any conclusion as to what results would have been achieved by alternative investments made during that period. 
M2.3 Scope of Arch FP’s duties and intervening causes
327.	The Lonscale claimant cells rightly acknowledged that, following the decision of the House of Lords in South Australian Asset Management Company v York Montague [1997] AC 191, the loss claimed must be within the scope of the duty owed. The breaches of duty that I have identified earlier in this judgment are such as, in my view, make it plain that the Lonscale claimant cells were committed to investments of a type which they should not have been committed to at all. It follows that, subject to arguments that alternative investments would themselves have resulted in losses, they are entitled to recover their entire loss, including any element arising from matters unconnected with the breaches of duty. 
328.	In the present case, moreover, it seems to me that the matters which the defendants rely upon as intervening causes are matters which are directly related to the defendants’ breaches of duty. The first such matter concerned the global financial crisis of late 2008. In this regard Mr Jeffs accepted in cross examination on day nine that Lonscale’s problems were not brought about by the global financial crisis. Indeed the reduction in interest rates flowing from the financial crisis was beneficial. The Lonscale claimant cells rightly pointed out that Arch FP’s own monthly reports as early as August 2007 had drawn attention to the reduction in banks’ willingness to lend. The root cause of the difficulties with the Clubeasy business was that it did not have adequate equity funding. 
329.	The second matter relied upon as an intervening cause concerned the events in March 2009 discussed above. As the Lonscale claimant cells rightly pointed out, the complaint in this regard is that after March 2009 injection of new capital into Clubeasy was impossible. The key element, however, in respect of which the Lonscale investments involved a failure to exercise reasonable skill and care on the part of Arch FP lay in Arch FP’s failure to ensure that the business had adequate equity funding at the time that it was purchased. In these circumstances it is simply not open to Arch FP to assert that difficulties in securing new capital in March 2009 represented a new and intervening cause of the Lonscale claimant cells’ losses. 
330.	The third and final suggested intervening cause concerned the decisions in December 2009 and January 2010 to wind up the UK funds, and to change the investment mandate for the Lonscale claimant cells so they were to proceed to an orderly realisation of their assets. As the Lonscale claimant cells pointed out, however, by this time Arch FP itself had already written down the value of the Lonscale claimant cells’ investments to zero. Neither of these decisions can sensibly be regarded as the causes of the Lonscale claimant cells’ losses. 
M3. The duty to mitigate losses
331.	The Lonscale claimant cells accepted that they were under a “duty” to take reasonable steps to mitigate their losses, in the sense that they would not be able to claim for any part of their losses which was due to a neglect to take such steps. They added that the standard of reasonableness is not a high one, relying in this regard upon the well established principle that where an innocent party is put in a position of embarrassment the measures which that party may be driven to adopt are not to be weighed “in nice scales” at the instance of the party whose breach of contract has occasioned the difficulty. The defendants did not dispute that these were the governing legal principles in relation to this aspect of the case. 
332.	As to the measures actually taken by the Lonscale claimant cells, I have noted in section A3 above that in November 2009 Arch FP valued the Lonscale investments at zero, that in January 2010 the Lonscale claimant cells entered into the MoU, and that in March 2010 they entered into the Disposal Agreement. Sums received pursuant to these agreements will thus reduce the amount of damages which the defendants would otherwise have to pay. 
333.	The defendants recognise that the disposal agreement is to their benefit in the sense that sums paid under it will reduce the amount of the damages which they would otherwise have to pay. They nevertheless asserted in their skeleton argument that the Lonscale claimant cells failed to act reasonably in three respects. The first is that the disposal agreement was premature, and therefore at an undervalue, because the business turnaround strategy had not been completed. The second is that the terms of the disposal agreement “left the business to fend for itself” with no further assistance from the Lonscale claimant cells, despite those cells having a contingent economic interest in the business. The third complaint is that the “contingent terms” of the disposal agreement left the Lonscale claimant cells “exposed to the risks of non-payment and default, with an untested ability to regain full control”. 
334.	These complaints, along with an assertion that Spearpoint had an interest in engineering the valuation of the Lonscale investments at zero and maintaining that valuation, were dealt with by Mr Davey in his capacity as chief executive officer of Spearpoint. Key matters described in Mr Davey’s first witness statement included:
(1)	When Mr Davey reviewed the matter in December 2009, Mr King was a director of Lonscale and was “closest to the investment”, and in his note of 3 December 2009 took a “particularly negative view” of Lonscale’s prospects. 
(2)	There was no third party buyer for Lonscale.
(3)	The easiest course of action from Spearpoint’s perspective would have been to allow the Lonscale business to default on its debts, leaving it to the secured lenders to salvage what they could. Mr Davey discussed this with Mr Martin Bolland, who on 1 January 2010 became chairman of Capita Plc. Mr Bolland had been a founding partner of Alchemy Partners, a private equity house specialising in investing in distressed and undervalued or underperforming businesses. He regarded the assets of the business as “pretty low quality”, was sceptical “as to whether in the Arch run-off period any value, or at least meaningful value, can be recovered”, questioned whether “any meaningful management time” should be devoted to the assets, and commented that on this analysis “the responsible/practical thing to do” would be “to facilitate consensual handovers to the banks”. 
(4)	Mr Davey considered that he should nevertheless consider whether Lonscale could be rescued, or whether it could be sold to the ultimate minority shareholder, in the form of Mr Barkman and Mr Montague. As to a rescue, in the absence of a significant recovery in the property market, any rescue would require the Lonscale claimant cells to put significant capital into the business in order to persuade secured lenders to write off some of the debt. If that course had been taken, the “quite likely” possibility was that, “no matter how hard we tried to rescue it, the investment would fail and we… would be accused of throwing good money after bad.” 
(5)	Mr Davey learnt that Mr Barkman and Mr Montague were keen to acquire full ownership and control over Lonscale, taking the view that “they could do a better job” than had been done in the past, and that the property market “would roar back”. 
(6)	Mr Davey’s reaction when he learnt this was, “I could not believe my luck”. He negotiated the “absolute maximum price”, and for this purpose gave Mr Barkman and Mr Montague the ultimatum that either they took over Lonscale at a satisfactory price or the Lonscale claimant cells would take it over and wipe out their interest. Just in case Mr Barkman and Mr Montague’s predictions about the future should prove to be correct, provision was made for the Lonscale claimant cells to receive 30% of any amounts by which the banks agreed to a reduction in debt or by which the properties were sold above the then current valuations. 
(7)	A substantial element of the consideration for the disposal was deferred. Mr Davey said he never thought that all of it would be received: “My thinking was that if [they] could keep the Lonscale business alive in order … to pay us anything at all under the agreed payment schedule, then that was a victory.” On various occasions Mr Davey himself had lent money to Mr Barkman and Mr Montague “in order to get them through one financial crisis or another”. This was done with the consent of the board, and the loans in question were duly repaid.  A proposal made by Mr Barkman and Mr Montague in 2012 for acquisition by the Lonscale claimant cells of properties mortgaged to the Yorkshire Building Society was considered to be in the cells’ best interests and had led to acquisition of the properties at a discount to the most recent valuation. 
335.	Mr Scott, in his capacity as a director of the ICC and the cells from 31 December 2009 onwards, also dealt with questions as to whether the Lonscale claimant cells had failed to take reasonable steps to mitigate their losses. Key points in his first witness statement dated 1 March 2013 were:
(1)	While he, Mr Hugh Aldous, and Mr Andrew Duquemin had been appointed to the board of the ICC and the cells by resolution dated 19 November 2009, they had insisted that they would not take up the appointment until the existing directors had approved and signed the accounts to 31 March 2009. 
(2)	A meeting of the board took place on 10 December 2009. It had been intended that the new directors would be appointed to the board on this date. However, the accounts for the period ending 31 March 2009 were not ready, and accordingly Mr Scott, Mr Aldous, and Mr Duquemin attended the meeting as observers. Mr King’s memorandum of 3 December 2009 was considered, and it was agreed that Spearpoint would put a proposal on how to deal with the Lonscale investment to the board once more consideration had been given to the options. 
(3)	On 30 December 2009 information relating to the proposed disposal agreement was circulated. It included valuations by Storeys dated 22 July 2009.
(4)	On 31 December 2009 Mr Duquemin noted that this material suggested that there was a margin of property assets over and above the bank debt. Mr Scott said that he and Mr Duquemin were keen to obtain as much value as possible from the Lonscale investment, and he accordingly raised this issue at the audit committee meeting on 8 January 2010. Mr Duquemin was also concerned at the absence of an independent valuation of the properties, and arranged for Mr Bob Locker, of CNC Property Fund Management, to look through the properties.
(5)	The proposal that the board approve a Memorandum of Understanding (“MoU”) with Mr Barkman and Mr Montague was put to the board on 15 January 2010. By this time both Mr Locker and one of the lenders had called into question the valuations by Storeys dated 22 July 2009. 
(6)	The board concluded that all realistic options had been considered and that the proposed MoU offered the best chance of squeezing value out of Lonscale with minimal risk.
(7)	By this time Mr Scott took the view that “making any recovery at all from this investment would be pretty fortuitous”. He considered that “getting anything for this kind of asset, even on a deferred consideration basis, was a worthwhile achievement.” 
(8)	The MoU was signed and dated 19 January 2010. The steps to be taken by the purchaser under the MoU were duly performed during the period to 26 March 2010, when the disposal agreement was signed. Mr Scott’s view was that Mr Davey had done extremely well to close the deal. 
(9)	Mr Scott gave an account of Lonscale’s difficulties in paying deferred consideration in 2011, and of Mr Davey’s personal loans in that regard, which was consistent with the account given by Mr Davey.
(10)	Turning to the Yorkshire Portfolio described by Mr Davey, Mr Scott gave an account of the discussions in this regard in the first half of 2012, and described the advantages of the proposal put forward by Spearpoint. There would be “some straightforward recovery of liquidity” through an early sale of some of the properties, and it would avoid the need to call an event of default and take over Lonscale.
336.	In his second witness statement dated 22 October 2013 Mr Scott explained that Lonscale Holdings remained in a financially precarious position and that a proposal for payment of the balance of the deferred consideration was awaited. In the meantime, Lonscale Holdings had agreed to pay an amount of £5,000 weekly, an agreement which had in most, but not all, weeks been complied with since May 2013. 
337.	In a third witness statement dated 20 November 2013 Mr Scott recorded that no further weekly payments had been received. It was understood that a proposed refinancing of Lonscale Holdings had not occurred, that Lonscale Holdings was financially destitute, and that it was very unlikely that any more money would be obtained from it. 
338.	Mr Scott gave oral evidence on day two. Relevant criticisms that were put to him by Mr Farrell, and the answers given by Mr Scott to those criticisms, were as follows:
(1)	Mr Farrell suggested that the Lonscale sale was more or less agreed in December 2009. Mr Scott disagreed. He said that in January 2010 the Lonscale sale was “still very much a work in progress”. He added, “I think the deal wasn’t ultimately concluded until probably March 2010.”
(2)	Mr Farrell suggested that the decision to sell to the minority shareholders had been made in haste, at the very start of the appointment of the new investment manager and new directors, and that there had been a lack of consideration “of the going concern solution”. Mr Scott replied that the sale had been a sale of a going concern to a buyer which subsequently sought to operate the business as a going concern, and indeed the business was “still operating largely.” It was not a rush decision but rather had been something done over a period of months. Mr Scott accepted that on 23 February 2010 he had received an email from Mr Davey in which Mr Davey said, “The bottom line is we remain desperate to sell.” This, said Mr Scott, needed to be read in context: “we had somebody who was essentially prepared to pay us £10m for a worthless asset, if asset is the right word, and, yes, we were desperate to close the deal and get their money from them because, frankly, we wouldn’t have got anything like £10m through any other route.”
(3)	Mr Farrell questioned whether “a worthless asset” could have been “sold for £10.6m”. Mr Scott confirmed that the board considered it to be a worthless asset, while obviously the buyer must have had a different view. Even after it was sold it continued to be valued at nil on the grounds that there were reservations as to whether the buyer would be able to meet the payment schedule. Accordingly the payments were only recognised when they were received. As to the net book value of Clubeasy, Mr Scott said that it had no relevance because the entitlement was to receive the balance payments, and the only question was whether they would actually be received. 
(4)	Mr Farrell asked Mr Scott whether he accepted that the buyer might make a profit on the purchase. Mr Scott replied that he thought that was highly unlikely, and in response from a further question from Mr Farrell that “at the time we thought it very, very highly unlikely. We have thought consequently that it would be very unlikely that they would be able to meet the repayment schedule, certainly in full.” As to the possibility of the buyer making a profit, Mr Scott said: “I think we are talking about a very, very small probability and one that got even smaller as time went by.”
(5)	Mr Farrell asked whether Mr Duquemin had been questioning the zero valuation from an audit perspective. Mr Scott replied that Mr Duquemin had been giving due consideration to the proposed transaction that was at that time under contemplation. The matter had been raised with the audit committee because the meeting of the audit committee gave an opportunity to raise the subject with the then external auditors. This had enabled the directors to satisfy themselves “that actually the accounting NAV might not really represent anything in substance.” 
(6)	Mr Farrell suggested that an asset was being marked at zero and then being sold very quickly straight afterwards, giving rise to a large performance fee potentially. Mr Scott replied that he thought they had been “very lucky to find the only purchaser in the world who would take this asset for anything other than zero, if indeed they would take it at all.”
339.	Mr Scott’s evidence continued on day three. Further criticism by Mr Farrell, and answers by Mr Scott were as follows:
(1)	Mr Farrell suggested that the decision for an “orderly wind-down” meant that liquidity had to be generated wherever it could be found in order to start to repay the UK funds. Mr Scott replied that an orderly wind-down was not a fire sale: “The whole point about an orderly wind-down was to realise the assets to the best advantage over a period of approximately three to five years. 
(2)	Mr Farrell suggested it was “very brave” to enter into a disposal agreement where “essentially you were taking on the capital raising risk of Lee Barkman Foundations in what was a terrible environment.” Mr Scott did not agree: “The situation presented itself as it was, and after consideration we took what we thought was the best exit route… Mr Barkman clearly did not have £10m in cash on day one. That is why we had a deferred consideration deal. Ideally we would like not to have had such a deal. Had he offered a little bit less but … been able to fund it completely on day one we might have taken that as an alternative.” 
(3)	Mr Farrell asked a further question reiterating his comment that it was “a brave decision” and asking how much consideration was given by the directors to keeping the investment. As to the first part of the question, Mr Scott replied that the business was loss making and “burning cash to the extent of I think £2m odd a year … A deal was structured whereby we sold the asset, albeit on the basis of receiving consideration … partly deferred … all other things being equal we were in no worse position because we would have had the business back and we would have had whatever consideration we had received in the meantime which was not returnable to the buyer.”
(4)	Mr Scott added that how the deferred consideration was generated was up to the buyer, it was not necessarily to do with Lonscale. 
(5)	As to the second part of Mr Farrell’s question, Mr Scott commented that the directors discussed supporting the business and retaining it, but it was very highly geared. It had been loss making from the time of the acquisition, and had never managed to become consistently profitable “or cash generative”. In January 2010 a consideration of £10m partly upfront and partly deferred “seemed to us a more attractive risk adjusted outcome than signing up for a lot of commitment with very uncertain outcome.”
(6)	Mr Farrell then reviewed the position following the Yorkshire Portfolio transaction, asking how much cash had actually been received. Mr Scott agreed with Mr Farrell that approximately £2.6m of cash had been received, but on top of this the Yorkshire Portfolio properties had been received some of which may have been sold. 
(7)	Mr Farrell suggested that Spearpoint had adopted a balance sheet for Lonscale showing a value of £23.3m. Mr Scott did not accept this, observing that while the document in question was a recital of what Lonscale Holdings were saying, the directors had had severe reservations over the level of that valuation. 
(8)	As to Mr Scott’s description of the Lonscale business currently being “extremely shaky with significant cash flow problems”, Mr Farrell suggested that this was a direct reflection of the fact that the directors had taken a decision to sell the Lonscale business and not support it. In these circumstances, Mr Farrell suggested, all the pressure was landed on the purchaser to deliver the deferred consideration and money to support the business. Mr Farrell suggested that this was “the worst of both worlds.” Mr Scott disagreed: “… from our point of view it is the best of both worlds. We had an asset which nobody else wanted to buy, which if we were to try to fix it ourselves would require the commitment of a considerable amount of money and time … with an uncertain outcome against which we received, albeit… that we quite expected never to get the full amount, … up to £10m … with the right to take the business back if it did not work in which case we would essentially be no worse off than we were before we started.”
(9)	Mr Farrell suggested that the cost of supporting the Lonscale investment would have been about £2 to £3 million over the next two years. Mr Scott responded that £2m may well have been an annual number. 
(10)	Mr Farrell suggested that what had happened in relation to the Yorkshire Portfolio proved that it was necessary to put money in by default to keep Lonscale going. Mr Scott replied that assets had been taken back with a view to selling them later. There had been no intention to “run a mini Lonscale”. 
340.	In re-examination Mr Scott clarified that the figure of about £2m a year that he had given would not have been the amount required in order to inject capital into the business to bring the debt down to a level where the business would have been profitable. To get the business down to a sustainable level of debt would, he thought, have involved something of the order of £30m. 
341.	Mr Davey gave oral evidence on day three. Relevant matters raised with him by Mr Farrell, and his answers, included:
(1)	Mr Farrell pointed out that a document dated 17 November 2009 identified the option of contacting Mr Barkman and giving him an opportunity to put in more equity. Mr Farrell asked when Mr Barkman was contacted. Mr Davey replied that he recalled a meeting in the first half of December in which Mr Barkman “expressed a desire to buy us out if we were interested in selling”. 
(2)	Mr Farrell asked about potential sales to third parties, and suggested that “it clearly was not an environment to be selling a business like Clubeasy at the time.” Mr Davey replied that “if it had been a good business we would have found a good buyer, it would have been a question of price.” 
(3)	Mr Farrell asked whether the decision was one for the board or for Spearpoint. Mr Davey replied that it was a decision for the board, but it was for Spearpoint as investment managers to make a proposal to the board. Spearpoint had, he said, been “very particular on all of the early decisions to make sure we had full board support and make sure everything was subject to a high level of board scrutiny …”. 
(4)	Mr Farrell suggested that fixing the business with a view to making it more saleable “would sound like a fairly pragmatic thing to do.” Mr Davey replied that they had tried to establish what would be required to fix the business, and had always had “a plan B up our sleeve” if they ever had to take the business back. However such a plan involved a considerable amount of uncertainty: “… it would require some form of debt relief for this business to be viable… it would have been a highly risky venture with no known sum of capital to be put in… I had… a figure of something like £40m that might be required”.
(5)	Mr Farrell asked about the “actual working capital support to just keep the business ticking over”. Mr Davey replied that “… I do not think you could keep it ticking over because of the unstable nature of the business. … probably [the banks] would require additional capital beyond the working capital requirements. … I think this business was losing something like £2m of cash a year at that particular point with other surprises that may come around…” 
(6)	Mr Farrell referred to the net book value of around £17m or £18m, and suggested that “the valuation of the debt portion of Lonscale would clearly have value based on the dividends in net book value”. Mr Davey replied that Spearpoint had not believed that the suggested net book value was correct. His perception that the business was worthless came very clearly from meetings with Mr Smith and Mr King: “The general perception was this was a basket case… to move it from being a basket case would take a very substantial investment with a very high level of uncertainty.” 
(7)	Mr Farrell suggested that Spearpoint had an incentive to adopt a low value of Lonscale because “the lower one could value Lonscale the greater would be the performance fees that could flow from a recovery later in valuation”. Mr Davey replied emphatically to the contrary: “Quite the opposite… A valuation of nil gives us no annual management fee for an extended period of time. So actually it would have suited us to have a valuation of something. … the write-down to nil happened before we were appointed so we had no… involvement in that.”
(8)	Mr Farrell suggested that a worthless business would result in a performance fee if the valuation were subsequently increased or the business were sold. Mr Davey agreed that Spearpoint would get a performance fee if the value went from nil to something, but it would also get a performance fee if the value went from ten to something, plus the management annual fees over the period of time involved. There was no incentive in the fee structure for Spearpoint to realise any assets quickly. 
(9)	Mr Farrell suggested there had been a change in late 2010 as to the calculation of the performance fee which was backdated to April 2010 so as to include Lonscale. Mr Davey replied that the change made no difference so far as the Lonscale investments were concerned. 
(10)	Mr Farrell suggested that in November 2009 Arch staff, conducting reviews of the assets, would have been tempted to do what “their new boss” would want, and that lowering the valuation would have been seen by them as a good thing because it would mean more performance fees in the future. Mr Davey replied that he did not think any of the Arch staff would have been dishonest in that sense, at a time when they were under scrutiny by both the FSA and the GFSC. 
(11)	Mr Farrell then said: “All I am saying is there is subjectivity as to where you make valuations. A zero valuation I think in anyone’s book is an extreme position especially when there is a net book value approaching £20m.” Mr Davey replied that when buying a business one would look at the net book value “with a very jaundiced eye as to what is the real book value and that would be one part of a valuation. The other part of a valuation is, does the business generate cash and profits? And clearly in this case the answer was no.”
(12)	Mr Farrell then suggested that there may have been “group think” in the sense that the overriding need for an orderly wind-up was affecting the way everyone was thinking, leading them to converge on what may be the wrong view. Mr Davey replied that there had been a material sum of money in the cells when Spearpoint was appointed. They had used some of that cash to support other investments. They would not have relied on the Arch view, but would have taken their own view. 
(13)	Mr Farrell suggested that by March 2010 Spearpoint had ruled out potential sales to third parties. Mr Davey replied that they were always open minded up to the point when the deal was actually completed, but had thought it was highly unlikely that a third party would make any offer that was more than nil. 
(14)	Mr Farrell then suggested that releases to the Channel Islands Stock Exchange “might have [had an effect] on the availability of capital to buy Lonscale because in a way this is putting the dirty laundry in public…”. Mr Davey replied that they were not putting dirty laundry in public, but were trying to give enough information to shareholders without putting in things that would have been detrimental. 
(15)	Mr Farrell pressed the point, saying that it would seem extraordinary that notes should come out which mentioned complications associated with the sale. Mr Davey said that if information were put out which was very rosy and led to an offer, the offer would never complete when the facts became clear. 
(16)	Mr Farrell then suggested that it had been a difficult environment in which to sell, with “lots of scrutiny and press around the situation… which would not have helped on achieving a good price.” Mr Davey replied that it depended on the starting view as to the worth of the asset that was being sold. Having found that Mr Barkman was “a very motivated buyer at a price that we thought was much higher than it was worth” Spearpoint had been “very keen to pursue that particular avenue, even though we wondered whether it would actually complete.” 
(17)	Mr Farrell suggested that an email from Mr King indicated that Clubeasy was within its “interest cover covenants”. Mr Davey replied that the feedback from the Arch staff “was of grave concern about the banking arrangements.”
(18)	Mr Farrell suggested that Mr King’s note of 3 December suggested that the capital injection needed was in an amount of £2 to £4 million. Mr Davey replied that this part of the note was concerned with immediate working capital requirements. 
(19)	Mr Farrell drew attention to a passage in Mr King’s witness statement suggesting that in December 2009 Mr Davey had mentioned that he had effectively agreed to sell Lonscale to Mr Barkman. Mr Davey replied that he had not effectively agreed this, but had decided that if they could complete the transaction with Mr Barkman it was a fantastic offer and they should take it. 
(20)	Mr Farrell noted that in paragraph 35 of Mr King’s witness statement, Mr King said, “My impression was that even before John Davey formally came on board he was looking to get rid of assets quickly, particularly those assets requiring active management.” Mr Davey replied that he did not agree with that impression. Spearpoint had kept some assets which required intensive active management, and had invested in assets which required intensive active management since its appointment. He added: “… we were absolutely clear that we had to look at every case on its own merit and… within the constraints of governance procedures that were in place at the time with the new board we could not rush through anything.” 
(21)	Mr Farrell then noted that at paragraph 36 of Mr King’s witness statement Mr King said that the disposal agreement represented a liquidation of the investment at a poor time, adding “It would have been in the best interests of Lonscale and the Cells to complete the turnaround process by making some hard calls and overruling intransigent management…”. Mr Davey replied that he did not agree, and that what was said in paragraph 36 was inconsistent with Mr King’s note of 3 December 2009. 
(22)	Mr Farrell asserted that in the remainder of paragraph 36 Mr King was suggesting that he would rather have waited “for the banks’ commercial lending practices to return to a new normality”, recognising that there was a lot of stress in the lending market at the time. Mr Davey replied that there were structural issues around Lonscale which even in a good banking environment would have made it very difficult to sell to anybody at an attractive price. Mr Davey added: “… my view at the time was not that the banking environment had a negative impact on our ability to sell this. Our ability to sell this was constrained by the fact that we had a very messy business with a minority shareholder.” 
(23)	Mr Farrell suggested that Spearpoint had not gone to the market to find out whether there were banks at the time prepared to lend to Lonscale. Mr Davey replied that it was obvious that no bank was going to put any sort of financing on top of the massively leveraged structure of Lonscale. 
(24)	Mr Farrell asked about Mr Davey’s expectation as to what actually would be received under the disposal agreement. Mr Davey replied that Spearpoint were sceptical about the ability to collect the deferred consideration but were very happy with the situation where in default the cells would end up with 100% ownership instead of 75% ownership. He accepted that under the disposal agreement the senior debt on Lonscale was wiped out. Spearpoint felt that the senior debt would never be recovered anyway. 
(25)	Mr Farrell suggested that giving up the senior debt was the difference between a fair value and an immediate sale value. Mr Davey replied that the fair value of the business was nil. There had been, he said, no counter to that from the Arch staff. He added: “We would not have been able to get the deal through the scrutiny that we would have had to have, going through the board structure and being in the spotlight in the way that we were.” 
(26)	Mr Farrell returned to the question of performance fees, putting the matter to Mr Davey in this way: “I am not suggesting that the performance fees were the motivation but they were not dissuading from the decision?” Mr Davey replied that Spearpoint’s motivation, from a fee perspective, would have been to do the opposite of what they had done. If £20m or more had been put into Lonscale, the business would have had at least some value based on that cash going in, and Spearpoint would then have had an annual management fee for five years based on that value. 
(27)	Mr Farrell then clarified that what he meant was that the performance fees would be “a nice side benefit”. Mr Davey replied that Lonscale’s zero value was a disappointment, as was the case for values of a number of the investments, so far as the annual management fee was concerned. 
(28)	Mr Farrell suggested that the RE claimants did not have the cash to support the investment. Mr Davey accepted this, but maintained that there was capacity to borrow from other cells. 
(29)	Mr Farrell commented that in October there had not been enough cash to meet commitments, and Arch FP had accordingly asked Capita FML whether it would be possible to earmark some of the UK funds’ capital to support investments if required. Mr Davey said that Capita FML had been willing to do that if necessary, but Spearpoint preferred not to ask unless it were really needed, and as it had turned out they did not need to ask. 
(30)	There was then a discussion as to the date upon which a “parallel transaction” occurred which provided greater liquidity. Mr Davey maintained that even before that transaction there had been investments which Spearpoint supported. The reluctance to commit capital to Lonscale was, he maintained, “absolutely nothing to do with the liquidity situation of the funds. It was the state of Lonscale that made us reluctant to invest into Lonscale and if there was a credible case to make the investments we would have considered it and made it. But I do not believe we could have put a case to the board to invest into Lonscale which was based on the poor quality of the information available and the extreme amount of leverage… it could tip over at any stage.” 
(31)	Mr Farrell suggested that the problem of funding Lonscale had been passed to the minority shareholder. Mr Davey refused to accept this, commenting that what had been passed to the minority shareholder was “the opportunity to throw good money after bad”. Mr Barkman was willing to put money in. He was highly critical of previous management and felt he could do a better job, and Spearpoint were happy to let him try. 
(32)	Mr Farrell returned to Mr King’s witness statement pointing out that at paragraph 37 Mr King had commented that employee levels at Spearpoint in London dropped substantially in the six months after its takeover and that any assets that required management attention were sold in that period. Mr Davey disagreed. He noted that Spearpoint was based in Guernsey and had fifty-odd staff in the Channel Islands. Arch staff had been taken on for their “back knowledge” and there was a clear understanding that there would be redundancies once they were not needed. 
(33)	Mr Farrell referred to passages in Mr Jeffs’s witness statement asserting that Mr Davey had arranged for a financial adviser to attend a meeting with Lloyds at which the financial adviser “appeared to be negotiating against Clubeasy’s interests.” Mr Davey responded that the adviser in question was Mr Colin Walker Robson, and that he had seen no evidence of Mr Walker Robson negotiating against the company’s interests. 
(34)	Mr Farrell suggested that the disposal agreement had involved “quite extreme things”, and suggested that “it was the overriding need to generate cash that was driving these decisions.” Mr Davey responded that this was simply not the case. The upfront payments under the disposal agreements had not generated an enormous amount of cash. It was a transaction outside of normal market conditions because it involved a highly motivated buyer who needed to protect his current position from being wiped out. 
(35)	The cross examination then repeated questions concerning whether attempts had been made to find other buyers, the net book value of Lonscale, and whether Lonscale had been sold “at the bottom”. Mr Davey gave similar answers to those he had given earlier. 
(36)	Mr Farrell then asked Mr Davey about the current performance of Lonscale. Mr Davey responded that Mr Barkman had done “a remarkable job to keep the ship from going down…”. While Mr Barkman was not paying on time, “we have been happy to provide our indulgence… to allow him to continue to do what he needs to do in the business and collect what consideration we can collect and if he is in default and we issue the default notice we end up with 100% of the business and can exercise our rights at any time.” 
342.	I have described these exchanges at some length because they demonstrate that every point put to Mr Scott and Mr Davey was convincingly answered. In their closing submissions the defendants complained about the “unprecedented” write-down “from £17m to zero [which] happened in the space of one month (November 2009).” However the obvious first answer to this complaint is that the write-down occurred during the period when Arch FP was investment manager, and was acquiesced in Arch FP. The suggestion in cross examination that the write-down might have occurred because Arch FP’s employees were anxious to ingratiate themselves with the new owners was both unworthy and farfetched. The write-down in my view was fully warranted. The net asset value of £17m was dependent upon the validity of the Storeys valuations, but they were based on a premise that the Clubeasy business was viable whereas in the absence of a substantial capital injection the business was plainly not viable. The defendants sought to rely upon the fact that Mr Duquemin initially questioned the write-down. That merely seems to me to show that the new directors were taking their job seriously. There is no reason to doubt that they were right to conclude that the write-down was fully justified. 
343.	The defendants submitted that the views of Mr Locker and Mr Bolland were “informal and caveated” and the defendants commented that no external valuation was undertaken and “no formal valuation was sought.” However there was no evidence to suggest that any external or formal valuation would have shown that the Lonscale investments had any real worth. There is no reason to doubt that the assessments of Lonscale’s value made by Mr Bolland and Mr Locker, albeit rough and ready, were amply justified. 
344.	The defendants asserted that the decision to sell was “rushed or premeditated”. This ignores the fact that keeping Lonscale afloat required finance of the order of £2m each year. Complaint was made that Mr Davey did not have the requisite background knowledge, but in my view the note of 3 December 2009 prepared by Mr King gave Mr Davey a clear picture of the serious problems and fully justified his decision to take action. There is no evidence whatever to suggest that this was premeditated. Nor was it rushed: the matter was looked at in an orderly manner and a sensible commercial decision was taken. The defendants were unable to point to any evidence which would warrant an inference that further bank finance would have been available. Even if further bank finance would have been available, moreover, it would not have been an answer to the problem: what was needed was a very substantial capital injection. 
345.	The defendants suggested that whereas Mr Davey had claimed that capital of the order of £40m was required, “the evidence also shows that he had thought that only £2-3m of working capital support was required”. This was a distortion of Mr Davey’s evidence. The scope for possible distortion had been recognised, and the fact that Mr Davey’s figure of £2-3m did not include the capital injection needed, had been clarified in re-examination. This, however, did not deter the defendants from making an obviously false point. 
346.	My conclusion is that the criticisms of the decision by the Lonscale claimant cells to enter into the disposal agreement were utterly unwarranted. 
M4. Claim for equitable compensation against Arch FP
347.	The Lonscale claimant cells noted that equitable compensation can be recovered for breach of the fiduciary duties identified earlier, provided that it is shown that but for the breach, the beneficiary would not have acted in the way which has caused loss. The defendants did not contest these propositions as a matter of law. 
348.	Turning to the factual position, the Lonscale claimant cells submitted that the investment in Lonscale would not have been made at all if Arch FP had not been induced to commit the cells to that investment in order to bring about an extraction of funds for its own benefit. The defendants’ closing submissions asserted that this reasoning was based on flawed logic. They said that the investment was acquired at 40% below the net asset value as assessed by PKF, that it was not made purely on value, that it was made because of strong future growth prospects and turnaround prospects, that the strong return potential counterbalanced the risk of having to fund the company in the interim, that Mr Barkman was able to acquire the company at a level even lower than the 40% discount, and that for this reason the split was considered equitable. These points all appear to me to be completely divorced from reality. What was presented by Mr Barkman to Mr Farrell was an extraction venture. The evidence that Arch FP committed the Lonscale claimant cells to the investment in order to ensure the success of that extraction venture is overwhelming. The notion that the Lonscale claimant cells would have paid £20.2m for the October 2007 investments, content that £6m of this sum would go elsewhere, is absurd. 
349.	Two further answers were put forward in the defendants’ closing submissions when dealing with equitable compensation. These were that there had been disclosure to the Lonscale claimant cells, and that those cells would have suffered losses in any event. For reasons given earlier in this judgment, neither of these suggestions has any merit. 
M5. Alternative remedies for breach of fiduciary duty
350.	In their closing written submissions the Lonscale claimant cells identified alternative claims in the event that an order were not to be made for recovery of equitable compensation extending to all the types of loss identified in section M4. The first of these alternatives was for equitable compensation computed in a different way. The second alternative concerned entitlements by way of proprietary interest, accounts and enquiries. 
351.	The first of these alternatives does not arise. I have held that the October 2007 investments and the follow-on payments were losses caused by Arch FP’s breach of fiduciary duty and are recoverable as equitable compensation: see section M4 above. However, if that were wrong then in my view the Lonscale claimant cells are right to say that at the very least Arch FP’s breaches of fiduciary duty would entitle the Lonscale claimant cells to recover as equitable compensation the amounts extracted from the Lonscale claimant cells and paid over to Arch FP and Mr Barkman. This was a transaction in which the payments to Arch FP and those to Mr Barkman went hand in hand. There can be no doubt that Arch FP’s breaches of fiduciary duty caused both the extraction of the £3m which went to Arch FP and the extraction of the £3m that went to Mr Barkman. These extractions were made from the £21m, contributed by the Lonscale claimant cells as to £20.2m and by FPP as to £0.8m. The Lonscale claimant cells recognised that this alternative claim would not apply in relation to such part of the extraction as came from FPP’s share of the £21m. Accordingly they confine this particular alternative claim to 20.2/21 of the total of £6m, with the result that the claim would be £5,714,285. 
352.	In relation to this first alternative claim the defendants merely repeat points made earlier about disclosure, the true construction of the IMA, suggested intervening causes, and the suggestion that alternative investments would have led to greater losses. For reasons given earlier, none of these points has merit. Accordingly, if my conclusion in section M4 as to the extent of equitable compensation were wrong, I would nevertheless have awarded as equitable compensation the amount of £5,714,285 claimed under this first alternative head. 
353.	The second alternative concerned the gain to Arch FP deriving from its breach of its fiduciary duties. This gain comprised a sum of £3m which, for the reasons given earlier in this judgment, was a secret profit. The Lonscale claimant cells asserted that as a beneficiary of Arch FP’s fiduciary duties they were entitled to claim a proprietary interest in respect of any money or asset acquired by Arch FP by taking advantage of an opportunity or right which was properly that of the beneficiary. In this regard they relied upon the decision in the Court of Appeal in FHR European Ventures LLP v Mankarious [2013] EWCA Civ 17; [2013] 1 Lloyd’s Rep 416. This decision has now been the subject of an appeal, and the recent appeal decision of the Supreme Court [2014] UKSC 45 in my view confirms this entitlement. On this aspect, in one respect only, the defendants sought to rely upon an answer not already dealt with in earlier sections of this judgment. This was a contention that to the extent that a restitutionary remedy was sought, Arch FP had a defence of change of position. However, change of position is no answer to a claim to a proprietary remedy for breach of fiduciary duty. I deal separately with Arch FP’s possible restitutionary claim in section M7 below. As regards the second alternative claim, I conclude that the Lonscale claimant cells may, if they choose to do so, rely upon this second alternative. As was accepted in their skeleton argument, the Lonscale claimant cells will need to elect as to the course they wish to adopt no later than the stage at which I make my order in this matter consequential upon the present judgment. 
M6. Damages for failure to exercise reasonable skill and care
354.	For the reasons set out in sections E and F above I have held that both in relation to the October 2007 investments and in relation to the follow on investments Arch FP was in breach of its contractual duty to exercise reasonable skill and care and to the similar duty which arose in tort and was not materially modified by the IMAs. The Lonscale claimant cells acknowledged that in order to be recoverable as damages, the losses for which they claimed must have been causally related to Arch FP’s breach of duty to exercise reasonable skill and care in two respects.  The first is that the causal relationship must exist as a matter of fact. The second is that the losses claimed must fall within the scope of Arch FP’s duty to the Lonscale claimant cells. I have already held that the second of these respects has been satisfied. As to the first, my conclusions in relation to the October 2007 investments are such that it cannot, in my view, be seriously contended that an investment manager acting with reasonable care and skill could have committed the Lonscale claimant cells to those investments. The same applies in relation to those of the follow on investments which were made prior to May 2009. For the reasons given in section F above, I have held that if the follow on investments from May 2009 onwards are examined on their own, there was no breach of duty by Arch FP. As noted in section F, however, my primary finding is that those investments, as with earlier follow on investments, came about as a result of Arch FP’s breaches in October 2007, and will thus be recoverable under that head. 
355.	In answer to this aspect of the Lonscale claimant cells’ closing submissions the defendants relied only upon matters which I have dealt with earlier in this judgment. Accordingly I hold that the entitlement to damages for breach of the duty to exercise reasonable care and skill, as asserted by the Lonscale claimant cells in their closing submissions, is made out. 
M7. Restitutionary remedies
356.	A restitutionary claim, on the basis of unjust enrichment, was advanced in the particulars of claim against Arch FP and repeated in the claimant’s skeleton argument. However no such claim was advanced by the Lonscale claimant cells in their closing submissions. Accordingly I need not investigate the reliance, mentioned earlier, by the defendants on a potential defence of change of position. There is no need to do so because no restitutionary claim is now made. 
M8. Equitable compensation for Mr Farrell’s dishonest assistance
357.	I have held in section J above that Mr Farrell dishonestly assisted Arch FP in its breaches of fiduciary duty. As noted in that section, his liability arises as an accessory. It is not necessary to show that his assistance in fact caused the loss suffered by the Lonscale claimant cells, but if this were a requirement I would have no doubt that in the present case Mr Farrell’s assistance was the prime factor which brought about Arch FP’s breaches of fiduciary duty. To the extent that that assistance must have some causative impact in facilitating the breach of duty, there can be no doubt whatever that Mr Farrell’s assistance did this.
M9. Damages against Mr Farrell for inducement
358.	As noted in section K above, the claim against Mr Farrell for inducing breach of contract is limited to causing the Lonscale claimant cells to finance the payments of £3m to Arch and £3m to Mr Barkman. The Lonscale claimant cells submitted that without Mr Farrell’s inducement, neither of these two sums would have been paid, and accordingly the relevant tests for recovery were satisfied. In answer the defendants asserted that there was no “extraction”, that Mr Barkman’s involvement as a principal was agreed from the outset before the Lonscale claimant cells became involved, that the same was true of Arch FP’s “corporate finance fee split”, and that the interests of Arch FP’s clients were fairly managed. For reasons given earlier in this judgment, there is no merit in any of these contentions. 
N. Conclusion
359.	For the reasons given above, the claims against Arch FP and Mr Farrell succeed. I ask the parties to seek to agree the terms of necessary consequential orders. 

Annex 1A: 
Abbreviations and short forms, sorted by short form
Abbreviation/short form	Long form	Notes	
£19.98m	£19,983,750.34 paid by AT1 to Cobbetts on 29 October 2007. 	See “£19.98m ledger account”.	
£19.98m ledger account	£19.98m ledger account opened as a ledger within the client accounts of Cobbetts on 29 October 2007	The £19.98m was treated by Cobbetts as the initial entry in the £19.98m ledger account on 29 October 2007: see Judgment, sections A3 and C3.	
AB	see “Blythe, Mr”		
ACD	Authorised Corporate Director	See Judgment, section A2.4.	
Acepoint Ltd	Acepoint Limited	A wholly owned subsidiary of Clubeasy Property (UK) Ltd.	
acquisition	acquisition, proposed or actual, of the CG owning companies	See Judgment, section A1.	
AD	see “Duquemin, Mr”		
Addison, Mr	Addison, Robert 	See Judgment, sections A1 and A2.3. Chief Operating Officer of Arch; director of the cells from 21 December 2006 until 31 December 2009; director of FHL from 27 
December 2006.	
AFP	see Arch FP		
AIGHL	Arch International Group Holdings Limited	See Judgment, section A2.2. Ultimate parent company of the Arch group from March 2008.	
Aldous, Mr	Aldous, Hugh 	Current director of the Cells, appointed 31 December 2009.	
Annex 1A	Annex 1A to the Judgment	Abbreviations and short forms, sorted by abbreviation/short form. See Judgment, section A2.1.	
Annex 1B	Annex 1B to the Judgment	Abbreviations and short forms, sorted by long form. See Judgment, section A2.1.	
Annex 2	Annex 2 to the Judgment	History of main events. See Judgment, section A3.	
Arch business	Arch FP, Arch UK and AIGHL’s business 	See Judgment, section A2.2: the business conducted by Arch FP and Arch UK from November 2004 onwards, and by those entities and AIGHL from March 2008 onwards, is referred to as as “the Arch business”. 	
Arch Cru Diversified Fund	CF Arch Cru Diversified Fund	See Judgment, section A2.4.	
Arch Cru Investment Fund	CF Arch Cru Investment Fund	See Judgment, section A2.4.	
Arch entities	Arch FP, Arch UK and AIGHL 	See Judgment, section A2.2. 	
Arch FP	Arch Financial Products LLP	See Judgment, sections A1 and A2.2. Sometimes referred to as “Arch” or as “AFP”; see also “firm”.	
Arch Lonscale claims	see Lonscale Arch claims		
Arch UK	Arch Group (UK) Limited	See Judgment, section A2.2. Holder of about 97% of the membership rights in Arch and, until March 2008, ultimate parent company of the Arch group.	
Arch-Cru funds	Funds managed by Arch FP		
ARCTIC MCABN terms	ARCTIC Multi-Class Asset Backed Note terms executed by AT1 on 26 October 2007	See E9/2133 and Judgment Annex 2, section A2/ C.	
ARCTIC MIP	ARCTIC Multi-Instrument Programme	See E9/2133 and Judgment, section C3.	
AS	see “Smith, Mr”		
ASA (Hull) Ltd	ASA (Hull) Limited	A wholly owned subsidiary of Clubeasy Property (UK) Ltd. 	
AT1	SPL Treasury (AT1) IC Ltd	See Judgment, section A2.5. Formerly known as Arch Treasury IC Ltd.	
AT1 notes	AT1 loan notes		
AT1 October 2007 notes	AT1 loan notes issued on 26 October 2007	See Judgment section C3. The AT1 October 2007 Notes were divided into three classes, A, B and C. Class B Notes in the amount of £13 million were issued on identical terms to those applicable to the Lonscale October 2007 class B Notes. Class C Notes were issued in the total amount of £8 million. Holders of class C Notes would not receive their nominal amount or any interest on maturity. Rather, they would be entitled to any value of Lonscale after the liabilities to holders of class A and class B Notes had been discharged.	
Barclays Wealth	Barclays Bank PLC Wealth Management Division	See Judgment, section C6 and BWIC.	
Barkman, Mr	Barkman, Lee 	See “Foundations” and Judgment, section A2.8. Controller (with Mr Montague) of FCL and director of FPP and FHL.	
Base Prospectus	Base Prospectus of the ARCTIC Multi-Instrument Programme	See Judgment, section D5.3.	
BLME	Bank of London and the Middle East	See E18/4464, E18/4467.	
BLr	see “Locker, Mr”		
Blythe Financial	Blythe Financial Ltd	See Judgment, section A2.9. An IoM regulated company through which Mr Blythe traded as a financial adviser.	
Blythe, Mr	Blythe, Alan 	See Judgment, section A2.9. Director of FPP and a member of its investment committee. Traded as a financial advisor through Blythe Financial. Engaged by Mr Hayes in relation to the sale of Club Easy.	
BMAM	Brooks Macdonald Asset Management (International) Limited	See “Spearpoint” and Judgment, section A2.11. The Lonscale claimant cells’ current investment manager, formerly known as Spearpoint Limited. 	
Bordeaux	Bordeaux Services (Guernsey) Limited	See Judgment, section A2.5. Administrator of the cells until 1 July 2010 (for some cells) and 2 August 2010 (for the others).	
Burgess, Mr	Burgess, Piers 	Solicitor of Cobbetts, acting for (among others) Lonscale.	
BPCIL	Barclays Private Clients International Ltd	See BWIC and OFM.	
BSc	see “Scott, Mr”		
BSGL	See “Bordeaux”		
Business Plan for Growth	Business Plan for Growth prepared by Club Easy management	Emailed by BM on 8 Aug 2008, see E16/4039.	
Butler, Mr	Butler, Jeremy 	Solicitor of Howard Kennedy, acting for Jason Hayes.	
BVI	British Virgin Islands		
BWIC	Barclays Wealth Intermediates & Corporates 	Part of BPCIL; SHi was Manager, OFM; see E14/3513 and Barclays Wealth.	
Campbell, Mr	Campbell, Vincent	At SMP Partners, administrators of FPP: see E14/3513. 	
Capita	Capita Financial Managers Ltd	See Judgment, section A2.4. ACD of the Arch Cru Investment Fund and the Arch Cru Diversified Fund.	
Carey Olsen	Carey Olsen	See Judgment, section A2.6. Guernsey lawyers, appointed as the Lonscale claimant cells’ legal advisers.	
Cbts	see “Cobbetts”		
CD	see “Douglas, Mr”		
cells, the	Cells forming part of the ICC	See Judgment, section A1.	
CEO	Chief Executive Officer	See Judgment, section A1.	
CG owning companies	Clubeasy Group owning companies, being companies which themselves were asset owners/operators , or which owned asset owners/operators, of the Club Easy business	See Judgment, sections A1 and A2.7. The CG owning companies were purchased by Lonscale under the SPAs. See “Club Easy Group plc”, “Clubeasy Property (UK) Ltd” and “Hayes Limited”.	
CH	see “Harris, Mr”		
CISX	Channel Islands Stock Exchange	See Judgment, section A2.5.	
Club Easy	Club Easy, a student accommodation business 	See Judgment, sections A1 and A2.7. At relevant times the Club Easy business was run by the Clubeasy Group companies. 	
Club Easy Group plc	Club Easy Group plc	See Judgment, section A2.7. Clubeasy Group company, owned by Mr Hayes prior to its purchase by Lonscale. 	
Clubeasy Group 	Clubeasy Group companies, being companies which ran the Club Easy business	See Judgment, sections A1 and A2.7. The Clubeasy Group companies included the CG owning companies.	
Clubeasy Property (UK) Ltd	Clubeasy Property (UK) Limited	See Judgment, section A2.7. Clubeasy Group company, owned by Mr Hayes prior to its purchase by Lonscale. See “ASA (Hull) Ltd”, “Clubeasy Student Services Ltd” and “Acepoint Ltd”. 	
Clubeasy Student Services Ltd 	Clubeasy Student Services Limited 	A wholly owned subsidiary of Clubeasy Property (UK) Limited. 	
Cobbetts	Cobbetts LLP	See Judgment, section A2.10. Solicitors based in Leeds, instructed to act initially for FCL, and subsequently for Lonscale, in relation to acquisition of Clubeasy Group companies.	
Company	Company for the purposes of the IMAs	The IMAs define “Company” to mean the cell entering into the IMA with Arch FP.	
cross investment	cross investment  arising when individual cells invested in other cells	See Judgment, section A3.	
cross investment fees	fees received by Arch FP as a result of cross investment and constituting a double charge in that regard. 	See Judgment, section A3.	
Davey, Mr	Davey, John 	See Judgment, section A2.11. CEO of Spearpoint.	
Derks, Mr	Derks, Michael 	Chief Investment Strategist of Arch. See Judgment, section A2.3.	
Development Director 	Development Director envisaged by Mr Jeffs as the description of his role	See “turnaround plan letter”.	
Disposal Agreement	Sale and purchase agreement entered into between the Lonscale claimant cells and Lonscale Holdings in January 2010	See Judgment, section A3.	
Douglas, Mr	Douglas, Charles	Legal adviser to Arch FP: see Judgment, sections C5 and G2.	
Duquemin, Mr	Duquemin, Andrew 	director of the Cells from 31 December 2009 to 1 October 2010; executive chairman of Elysium Fund Management Ltd.	
Duxbury, Mr	Duxbury, Paul		
EBIT	earnings before interest and tax		
EFM	Elysium Fund Management Ltd	Administrator of the Cells from 1 July 2010 (for some Cells) and from 2 August 2010 (for the others).	
ESOP	Employee Share Ownership Plan		
Farrell, Mr	Farrell, Robin 	See Judgment, sections A1 and A2.2. CEO of Arch; director of FHL from 27 December 2006; director of FPP from 26 February 2007 to 17 April 2009.	
FCL	Foundations Capital Limited	See Judgment, section A2.8. A BVI company under the control of Mr Barkman and Mr Montague.	
Featherstone, Mr	Featherstone, Gordon 	Interim Chief Executive Officer of Club Easy after its acquisition by Lonscale Limited.	
Ferris, Ms	Ferris, Margaret 	Partner of PKF.	
FHL	Foundations Holdings Limited	See Judgment, section A2.8. An IoM company established as part of a joint venture between FCL and Arch, which was 65% owned by FCL and 35% owned by Arch UK.	
FM1	Foundations Property Opportunities Mutual Fund	A fund to be established by Mr Barkman [see RF email 23 Oct 2007, E7/1732].	
Fortis	Fortis Bank (CI) Ltd	See Judgment, section A2.6. Custodian of the assets of each of the Lonscale claimant cells.	
Foundations	FCL or Mr Barkman or both of them	see main judgment, section A2.8.	
FPP	Foundations Program Plc	See Judgment, section A2.9. An Isle of Man company which was previously owned by FCL and which engaged in various kinds of investment activity. On 10 January 2007 the shares in FPP were transferred to FHL.	
FSA	Financial Services Authority	See Judgment, section A2.2.	
GF	see “Featherstone, Mr”		
GFSC	Guernsey Financial Services Commission	See Judgment, section A2.5.	
Gibson, Mr	Gibson, Ian 	Surveyor for Storeys engaged to prepare report on the Club Easy property portfolio.	
GK	see “King, Mr”		
Grange	Grange Nominees Ltd	Buyer (with RE1 and RE2) from AT1  of 1.96m shares in Lonscale for a consideration of £1,892,646.43 under the Share Acquisition Agreement dated 30 March 2009.	
GT 	see “Thompson, Mr”		
GTa	see “Taggart, Mr”		
HA	see “Aldous, Mr”		
Hall, Ms	Hall, Tracy 	Solicitor of Cobbetts, acting for (among others) Lonscale.	
Harris, Mr	Harris, Christopher 	Current director of the cells, appointed on 1 August 2010.	
Hayes Ltd 	Hayes Limited	An IoM company. See Judgment, section A2.7. Clubeasy Group company, owned by Mr Hayes prior to its purchase by Lonscale. 	
Hayes, Mr	Hayes, Jason 	See Judgment, section A2.7. Effective owner of the Clubeasy Group companies prior to their purchase by Lonscale.	
Heinemann, Mr	Heinemann, Stephen 	Solicitor of Howard Kennedy, acting for Jason Hayes.	
Hirstenstein, Mr	Simon Hirstenstein	Manager Offshore Financial Markets, Barclays Wealth Intermediates & Corporates – Barclays Private Clients International Ltd.	
HK	Howard Kennedy	Solicitors acting for Jason Hayes in connection with the sale of Club Easy.	
ICC	Incorporated Cell Company	A company incorporated in Guernsey under The Incorporated Cell Companies Ordinance 2006. See Judgment, section A1.	
ICC, the	SPL Guernsey ICC Limited 	See Judgment, section A1.	
ICPS	Investment Committee Proposals		
IFRS	International Financial Reporting Standards		
IG	see “Gibson, Mr”		
IMA	Investment Management Agreement	See Judgment, section A1. Each of the Lonscale claimant cells was party to an IMA with Arch FP.	
integration team	Integration team envisaged in the turnaround plan letter	See “turnaround plan letter”.	
Investment Manager	Investment Manager for the purposes of the IMAs	The IMAs define “Investment Manager” to mean Arch FP.	
investments in Lonscale	investments in Lonscale, including the purchase of loan notes with ultimate values dependent upon Lonscale’s performance	See Judgment, section A1.	
IoM	Isle of Man		
JB	see “Butler, Mr”		
JD	see “Davey, Mr”		
Jeffs, Mr	Jeffs, Peter 	See Judgment, section A2.3. Member of Arch from 6 April 2007 until 22 September 2009; director of FPP from 17 April 2009 to 1 June 2009; director of Club Easy group companies from 29 October 2007 until August 2010.	
JH	see “Hayes, Mr”		
King, Mr	King, Gary 	See Judgment, section A2.3. Member of Arch until December 2009, who then transferred to Spearpoint until May 2010; director of Lonscale from 9 April 2009 until around or shortly before the Disposal Agreement of 26 March 
2010.	
Kingston Smith	Kingston Smith LLP		
LB	see “Barkman, Mr”		
Lloyds	Lloyds TSB plc		
loan to value	loan to value ratio		
Locker, Mr	Locker, Bob		
Lonscale	Lonscale Ltd	See Judgment, section A1.	
Lonscale Arch claims	Claims advanced against Arch FP in 2011 Folio 1559 by the Lonscale claimant cells	See Judgment, section A1.	
Lonscale claimant cells	PF2, PF3, PF4, PF5, RE1 and RE2	See Judgment, section A1.	
Lonscale Farrell claims	Claims advanced by the Lonscale claimant cells in 2012 Folio 419		
Lonscale Holdings	Lonscale Holdings Ltd	A corporate entity established by Mr Barkman and Mr Montague. See Judgment, section A3.	
Lonscale MCAB notes	Lonscale notes issued pursuant to the Lonscale Multi-Instrument Programme	See “Lonscale Multi-Instrument Programme”.	
Lonscale MCN terms	Lonscale Multi-Class Notes due April 2013 tems and conditions	See E9/2204 and Judgment, section C3.	
Lonscale Multi-Instrument Programme	Lonscale Multi-Instrument Programme 	See E9/2204.	
Lonscale October 2007 notes 	Lonscale notes issued on 29 October 2007	See E9/2204 and Judgment, section C3. 	
Lonscale Restructuring Report	Lonscale Restructuring Report prepared by Kingston Smith	Prepared on 3 July 2008, see E15/3601.	
LTV	loan to value ratio		
main defence	Arch FP’s defence served on 1 May 2012 in 2011 Folio 1559 	See Judgment, section A3.	
MBC	Managing Board of Clubeasy	See “Turnaround plan letter”.	
MD	see “Derks, Mr”		
Meader, Mr	Meader, Neal 	See Judgment, section A2.5. Director of the Cells from 21 December 2006 until 28 January 2010.	
MF	see “Ferris, Ms”		
MH	Molly Hayes Building	Purpose built student accommodation building in Exeter, comprising 46 beds. Newly constructed in 2007, described in the Storeys August 2007 draft report as achieving “full letting … off plan”. [E5/1020 at 1039]	
Montague, Mr	Montague, Philip 	See Judgment, section A2.8. Controller, with Mr Barkman, of FCL; director of FPP and FHL.	
Moore Stephens	Moore Stephens	See Judgment, section A2.6. Auditors to the Lonscale claimant cells.	
MoU	memorandum of understanding entered into between the Lonscale claimant cells, Spearpoint and CE Holdings Limited SPV in January 2010	See Judgment, section A3.	
MT	see “Treanor, Mr”		
NAV	Net Asset Value		
NM	see “Meader, Mr”		
OEIC	open ended investment company	See Judgment, section A2.4. Mechanism by which a UK investor could participate in the UK funds and sub-funds.	
OFM	Offshore Financial Markets	Part of BWIC; SHi was manager: see E14/3513.	
PB	see “Burgess, Mr”		
PD	see “Duxbury, Mr”		
PF claimants	PF2, PF3, PF4, and PF5	See “investors” and Judgment, section A1.	
PF2	SPL Private Finance (PF2) IC Limited 	Second claimant in 2011 Folio 1559. Formerly known as Arch Private Finance IC Ltd.	
PF3	SPL Finance Opportunities (PF3) IC Limited	Third claimant in 2011 Folio 1559. Formerly known as Arch Finance Opportunities IC Ltd.	
PF4	SPL Structured Finance (PF4) IC Limited	Fourth claimant in 2011 Folio 1559. Formerly known as Arch Structured Finance IC Ltd.	
PF5	SPL ARL Private Finance (PF5) IC Limited	Fifth claimant in 2011 Folio 1559. Formerly known as ARL Private Finance IC Ltd.	
PJ	see “Jeffs, Mr”		
PKF 	PKF (UK) LLP	See Judgment, section A2.10. Accountants and consultants, instructed by FCL to undertake a limited review of Clubeasy Group companies.	
PKF (IOM)	PKF (Isle of Man) LLC	Auditor of FPP.	
PKF August 2007 draft report 	PKF draft “Project Clubeasy” report dated “August 2007”. 	E3/495. Emailed by MF to LB and PJ on 16 August 2007 [E3/493]. See Judgment Annex 2, section A2/ B.	
PKF final report 	PKF final “Project Clubeasy” report	E7/1473 (a version which is wrongly dated “August 2007”). Emailed by IG to GK, PJ, RF and LB on 15 October 2007 [E7/1471]. See Judgment Annex 2, section A2/ C.	
PKF September 2007 draft report 	PKF revised draft “Project Clubeasy” report emailed in September 2007	E6/1230 (a version which is wrongly dated “August 2007”). Emailed by MF on 4 Sep 2007 [E7/1202]. See Judgment Annex 2, section A2/ C.	
PM	see “Montague, Mr”		
portfolio	Portfolio for the purposes of the IMAs	The IMAs define “Portfolio” to mean “all the assets (including uninvested cash) of the Company and entrusted from time to time by the Company to the day-to-day discretionary management by the Investment Manager”.	
PRd	see “Radford, Mr”		
Proposed Transaction	Proposed Transaction, being the proposed acquisition of Clubeasy Group companies.	See Judgment, section A2.10.	
Prospectus	Prospectus for the purposes of the IMAs	“Prospectus” was defined in the IMAs as “The offering document whereby shares in the Company are offered to investors and any supplemental or replacement documentation having similar effect.”	
RA	see “Addison, Mr”		
Radford, Mr	Radford, Peter 	See Judgment, section A2.5. Director of the Cells from 21 December 206 until 28 January 2010.	
RE claimants	RE1 and RE2	See “investors” and Judgment, section A1.	
RE1	SPL Real Estate 1 (RE1) IC Limited	Twelfth claimant in 2011 Folio 1559. Formerly known as Arch Real Estate 1 IC Ltd.	
RE2	SPL Real Estate 2 (RE2) IC Limited	Thirteenth claimant in 2011 Folio 1559. Formerly known as Arch Real Estate 2 IC Ltd.	
real estate cells	cells with a focus on real estate investments	See Judgment, section A2.3.	
RF	see “Farrell, Mr”		
RS	see “Symington, Mr”		
Ruparell, Mr	Ruparell, Silash	Portfolio manager for AT1. See Judgment, section A2.3.	
Scheme Particulars 	Scheme Particulars issued for the ICC in January 2007 	Scheme Particulars issued for the ICC in January 2007 are said by the claimants to be part of the “Prospectus” for the purposes of the IMAs.	
Scott, Mr	Scott, William 	See Judgment, section A2.11. Current director of the Cells, appointed 31 December 2009.	
SH	see “Heinemann, Mr”		
SHi	see “Hirstenstein, Mr”		
Smith, Mr	Smith, Adam 	Part of Arch’s portfolio management team, who then transferred to Spearpoint. See Judgment, section A2.3.	
SO3	Arch Sustainable Finance IC Limited 	See Judgment, section A3: a £1m payment by SO3 was used to finance payment by Lonscale of the £1m deposit due under the SPAs.	
SPA	Share Purchase Agreement	SPAs signed by Lonscale for the purchase from Mr Hayes of the CG owning companies are dealt with in section C2 of the judgment.	
Spearpoint	Spearpoint Limited	See Judgment, section A2.11. Appointed investment manager to the ICC and of the cells on 1 December 2009 in succession to Arch FP. Now known as Brooks Macdonald Asset Management (International) Limited.	
SR	see “Ruparell, Mr”		
SSL	see Storeys		
Storeys	Storeys:ssp Limited	See Judgment, section A2.7. Real estate surveyors and valuers instructed to prepare a valuation report on Club Easy’s property portfolio.	
Storeys August 2007 draft report 	Storeys draft Appraisal and Valuation report dated “August 2007”. 	E5/1020. Emailed by IG to LB and PM on 24 August 2007 [E5/1018]. See Judgment Annex 2, section A2/ C.	
Storeys August 2007 memorandum	Storeys August 2007 memorandum	A “Memorandum of Valuation Instructions” signed by IG on behalf of Storeys on 1 August 2007 [E1/253]. See Judgment Annex 2, section A2/ B.	
Storeys final report 	Storeys final Appraisal and Valuation report. 	E7/1473 (a version which is wrongly dated “August 2007”). Emailed by IG to GK, PJ, RF and LB on 15 October 2007 [E7/1471]. See Judgment Annex 2, section A2/ C.	
Supplemental Scheme Particulars	Supplemental Scheme Particulars issued for each cell	Supplemental Scheme Particulars issued for each cell are said by the claimants to form part of the Prospectus for that cell.	
Symington meeting	Symington meeting: a meeting with RS attended by CD, RF and RA	The meeting took place on 23 August 20107: see H1/32/1.	
Symington, Mr	Symington, Richard	Chief Executive, Methuen Consulting.	
Taggart, Mr	Taggart, Graham	At SMP Partners, administrators of FPP: see see E14/3513. 	
TH	see “Hall, Ms”		
Thompson, Mr	Thompson, Gary 	Managing director of Club Easy at the time of the sale and until 12 May 2008.	
Treanor, Mr	Treanor, Martin	Head of sales for FCL, according to RF on Day 8.	
Turnaround plan	Turnaround plan set out in the Turnaround plan letter		
Turnaround plan letter	Turnaround plan letter dated 17 September 2007 written by Mr Jeffs to the board of Lonscale	E6/1319.	
UK funds	Funds in which a UK investor could participate through an OEIC	See Judgment, section A2.4.	
UK OEICs	UK OEICs for which Arch FP was investment manager, namely the Arch Cru Investment Fund and the Arch Cru Diversified Fund	See Judgment, section A2.4. 	
UK sub-funds	Sub-funds of UK funds		
VC	see “Campbell, Mr”		
waiver agreement	waiver agreement dated 22 October 2009 	See judgment section A3. 	
waiver letter	waiver letter signed by Arch FP on 22 October 2009 	See judgment section A3. 	
WS	see “Scott, Mr”		

Annex 1B: 
Abbreviations and short forms, sorted by long form
Long form	Abbreviation/short form	Notes	
£19,983,750.34 paid by AT1 to Cobbetts on 29 October 2007. 	£19.98m	See “£19.98m ledger account”.	
£19.98m ledger account opened as a ledger within the client accounts of Cobbetts on 29 October 2007	£19.98m ledger account	The £19.98m was treated by Cobbetts as the initial entry in the £19.98m ledger account on 29 October 2007: see Judgment, sections A3 and C3.	
Acepoint Limited	Acepoint Ltd	A wholly owned subsidiary of Clubeasy Property (UK) Ltd.	
acquisition, proposed or actual, of the CG owning companies	acquisition	See Judgment, section A1.	
Addison, Robert 	Addison, Mr	See Judgment, sections A1 and A2.3. Chief Operating Officer of Arch; director of the cells from 21 December 2006 until 31 December 2009; director of FHL from 27 
December 2006.	
Aldous, Hugh 	Aldous, Mr	Current director of the Cells, appointed 31 December 2009.	
Annex 1A to the Judgment	Annex 1A	Abbreviations and short forms, sorted by abbreviation/short form. See Judgment, section A2.1.	
Annex 1B to the Judgment	Annex 1B	Abbreviations and short forms, sorted by long form. See Judgment, section A2.1.	
Annex 2 to the Judgment	Annex 2	History of main events. See Judgment, section A3.	
Arch Financial Products LLP	Arch FP	See Judgment, sections A1 and A2.2. Sometimes referred to as “Arch” or as “AFP”; see also “firm”.	
Arch FP, Arch UK and AIGHL 	Arch entities	See Judgment, section A2.2. 	
Arch FP, Arch UK and AIGHL’s business 	Arch business	See Judgment, section A2.2: the business conducted by Arch FP and Arch UK from November 2004 onwards, and by those entities and AIGHL from March 2008 onwards, is referred to as as “the Arch business”. 	
Arch FP’s defence served on 1 May 2012 in 2011 Folio 1559 	main defence	See Judgment, section A3.	
Arch Group (UK) Limited	Arch UK	See Judgment, section A2.2. Holder of about 97% of the membership rights in Arch and, until March 2008, ultimate parent company of the Arch group.	
Arch International Group Holdings Limited	AIGHL	See Judgment, section A2.2. Ultimate parent company of the Arch group from March 2008.	
Arch Sustainable Finance IC Limited 	SO3	See Judgment, section A3: a £1m payment by SO3 was used to finance payment by Lonscale of the £1m deposit due under the SPAs.	
ARCTIC Multi-Class Asset Backed Note terms executed by AT1 on 26 October 2007	ARCTIC MCABN terms	See E9/2133 and Judgment Annex 2, section A2/ C.	
ARCTIC Multi-Instrument Programme	ARCTIC MIP	See E9/2133 and Judgment, section C3.	
ASA (Hull) Limited	ASA (Hull) Ltd	A wholly owned subsidiary of Clubeasy Property (UK) Ltd. 	
AT1 loan notes	AT1 notes		
AT1 loan notes issued on 26 October 2007	AT1 October 2007 notes	See Judgment section C3. The AT1 October 2007 Notes were divided into three classes, A, B and C. Class B Notes in the amount of £13 million were issued on identical terms to those applicable to the Lonscale October 2007 class B Notes. Class C Notes were issued in the total amount of £8 million. Holders of class C Notes would not receive their nominal amount or any interest on maturity. Rather, they would be entitled to any value of Lonscale after the liabilities to holders of class A and class B Notes had been discharged.	
Authorised Corporate Director	ACD	See Judgment, section A2.4.	
Bank of London and the Middle East	BLME	See E18/4464, E18/4467.	
Barclays Bank PLC Wealth Management Division	Barclays Wealth	See Judgment, section C6 and BWIC.	
Barclays Private Clients International Ltd	BPCIL	See BWIC and OFM.	
Barclays Wealth Intermediates & Corporates 	BWIC	Part of BPCIL; SHi was Manager, OFM; see E14/3513 and Barclays Wealth.	
Barkman, Lee 	Barkman, Mr	See “Foundations” and Judgment, section A2.8. Controller (with Mr Montague) of FCL and director of FPP and FHL.	
Base Prospectus of the ARCTIC Multi-Instrument Programme	Base Prospectus	See Judgment, section D5.3.	
Blythe Financial Ltd	Blythe Financial	See Judgment, section A2.9. An IoM regulated company through which Mr Blythe traded as a financial adviser.	
Blythe, Alan 	Blythe, Mr	See Judgment, section A2.9. Director of FPP and a member of its investment committee. Traded as a financial advisor through Blythe Financial. Engaged by Mr Hayes in relation to the sale of Club Easy.	
Bordeaux Services (Guernsey) Limited	Bordeaux	See Judgment, section A2.5. Administrator of the cells until 1 July 2010 (for some cells) and 2 August 2010 (for the others).	
British Virgin Islands	BVI		
Brooks Macdonald Asset Management (International) Limited	BMAM	See “Spearpoint” and Judgment, section A2.11. The Lonscale claimant cells’ current investment manager, formerly known as Spearpoint Limited. 	
Burgess, Piers 	Burgess, Mr	Solicitor of Cobbetts, acting for (among others) Lonscale.	
Business Plan for Growth prepared by Club Easy management	Business Plan for Growth	Emailed by BM on 8 Aug 2008, see E16/4039.	
Butler, Jeremy 	Butler, Mr	Solicitor of Howard Kennedy, acting for Jason Hayes.	
Campbell, Vincent	Campbell, Mr	At SMP Partners, administrators of FPP: see E14/3513. 	
Capita Financial Managers Ltd	Capita	See Judgment, section A2.4. ACD of the Arch Cru Investment Fund and the Arch Cru Diversified Fund.	
Carey Olsen	Carey Olsen	See Judgment, section A2.6. Guernsey lawyers, appointed as the Lonscale claimant cells’ legal advisers.	
Cells forming part of the ICC	cells, the	See Judgment, section A1.	
cells with a focus on real estate investments	real estate cells	See Judgment, section A2.3.	
CF Arch Cru Diversified Fund	Arch Cru Diversified Fund	See Judgment, section A2.4.	
CF Arch Cru Investment Fund	Arch Cru Investment Fund	See Judgment, section A2.4.	
Channel Islands Stock Exchange	CISX	See Judgment, section A2.5.	
Chief Executive Officer	CEO	See Judgment, section A1.	
Claims advanced against Arch FP in 2011 Folio 1559 by the Lonscale claimant cells	Lonscale Arch claims	See Judgment, section A1.	
Claims advanced by the Lonscale claimant cells in 2012 Folio 419	Lonscale Farrell claims		
Club Easy Group plc	Club Easy Group plc	See Judgment, section A2.7. Clubeasy Group company, owned by Mr Hayes prior to its purchase by Lonscale. 	
Club Easy, a student accommodation business 	Club Easy	See Judgment, sections A1 and A2.7. At relevant times the Club Easy business was run by the Clubeasy Group companies. 	
Clubeasy Group companies, being companies which ran the Club Easy business	Clubeasy Group 	See Judgment, sections A1 and A2.7. The Clubeasy Group companies included the CG owning companies.	
Clubeasy Group owning companies, being companies which themselves were asset owners/operators , or which owned asset owners/operators, of the Club Easy business	CG owning companies	See Judgment, sections A1 and A2.7. The CG owning companies were purchased by Lonscale under the SPAs. See “Club Easy Group plc”, “Clubeasy Property (UK) Ltd” and “Hayes Limited”.	
Clubeasy Property (UK) Limited	Clubeasy Property (UK) Ltd	See Judgment, section A2.7. Clubeasy Group company, owned by Mr Hayes prior to its purchase by Lonscale. See “ASA (Hull) Ltd”, “Clubeasy Student Services Ltd” and “Acepoint Ltd”. 	
Clubeasy Student Services Limited 	Clubeasy Student Services Ltd 	A wholly owned subsidiary of Clubeasy Property (UK) Limited. 	
Cobbetts LLP	Cobbetts	See Judgment, section A2.10. Solicitors based in Leeds, instructed to act initially for FCL, and subsequently for Lonscale, in relation to acquisition of Clubeasy Group companies.	
Company for the purposes of the IMAs	Company	The IMAs define “Company” to mean the cell entering into the IMA with Arch FP.	
cross investment  arising when individual cells invested in other cells	cross investment	See Judgment, section A3.	
Davey, John 	Davey, Mr	See Judgment, section A2.11. CEO of Spearpoint.	
Derks, Michael 	Derks, Mr	Chief Investment Strategist of Arch. See Judgment, section A2.3.	
Development Director envisaged by Mr Jeffs as the description of his role	Development Director 	See “turnaround plan letter”.	
Douglas, Charles	Douglas, Mr	Legal adviser to Arch FP: see Judgment, sections C5 and G2.	
Duquemin, Andrew 	Duquemin, Mr	director of the Cells from 31 December 2009 to 1 October 2010; executive chairman of Elysium Fund Management Ltd.	
Duxbury, Paul	Duxbury, Mr		
earnings before interest and tax	EBIT		
Elysium Fund Management Ltd	EFM	Administrator of the Cells from 1 July 2010 (for some Cells) and from 2 August 2010 (for the others).	
Employee Share Ownership Plan	ESOP		
Farrell, Robin 	Farrell, Mr	See Judgment, sections A1 and A2.2. CEO of Arch; director of FHL from 27 December 2006; director of FPP from 26 February 2007 to 17 April 2009.	
FCL or Mr Barkman or both of them	Foundations	see main judgment, section A2.8.	
Featherstone, Gordon 	Featherstone, Mr	Interim Chief Executive Officer of Club Easy after its acquisition by Lonscale Limited.	
fees received by Arch FP as a result of cross investment and constituting a double charge in that regard. 	cross investment fees	See Judgment, section A3.	
Ferris, Margaret 	Ferris, Ms	Partner of PKF.	
Financial Services Authority	FSA	See Judgment, section A2.2.	
Fortis Bank (CI) Ltd	Fortis	See Judgment, section A2.6. Custodian of the assets of each of the Lonscale claimant cells.	
Foundations Capital Limited	FCL	See Judgment, section A2.8. A BVI company under the control of Mr Barkman and Mr Montague.	
Foundations Holdings Limited	FHL	See Judgment, section A2.8. An IoM company established as part of a joint venture between FCL and Arch, which was 65% owned by FCL and 35% owned by Arch UK.	
Foundations Program Plc	FPP	See Judgment, section A2.9. An Isle of Man company which was previously owned by FCL and which engaged in various kinds of investment activity. On 10 January 2007 the shares in FPP were transferred to FHL.	
Foundations Property Opportunities Mutual Fund	FM1	A fund to be established by Mr Barkman [see RF email 23 Oct 2007, E7/1732].	
Funds in which a UK investor could participate through an OEIC	UK funds	See Judgment, section A2.4.	
Funds managed by Arch FP	Arch-Cru funds		
Gibson, Ian 	Gibson, Mr	Surveyor for Storeys engaged to prepare report on the Club Easy property portfolio.	
Grange Nominees Ltd	Grange	Buyer (with RE1 and RE2) from AT1  of 1.96m shares in Lonscale for a consideration of £1,892,646.43 under the Share Acquisition Agreement dated 30 March 2009.	
Guernsey Financial Services Commission	GFSC	See Judgment, section A2.5.	
Hall, Tracy 	Hall, Ms	Solicitor of Cobbetts, acting for (among others) Lonscale.	
Harris, Christopher 	Harris, Mr	Current director of the cells, appointed on 1 August 2010.	
Hayes Limited	Hayes Ltd 	An IoM company. See Judgment, section A2.7. Clubeasy Group company, owned by Mr Hayes prior to its purchase by Lonscale. 	
Hayes, Jason 	Hayes, Mr	See Judgment, section A2.7. Effective owner of the Clubeasy Group companies prior to their purchase by Lonscale.	
Heinemann, Stephen 	Heinemann, Mr	Solicitor of Howard Kennedy, acting for Jason Hayes.	
Howard Kennedy	HK	Solicitors acting for Jason Hayes in connection with the sale of Club Easy.	
Incorporated Cell Company	ICC	A company incorporated in Guernsey under The Incorporated Cell Companies Ordinance 2006. See Judgment, section A1.	
Integration team envisaged in the turnaround plan letter	integration team	See “turnaround plan letter”.	
International Financial Reporting Standards	IFRS		
Investment Committee Proposals	ICPS		
Investment Management Agreement	IMA	See Judgment, section A1. Each of the Lonscale claimant cells was party to an IMA with Arch FP.	
Investment Manager for the purposes of the IMAs	Investment Manager	The IMAs define “Investment Manager” to mean Arch FP.	
investments in Lonscale, including the purchase of loan notes with ultimate values dependent upon Lonscale’s performance	investments in Lonscale	See Judgment, section A1.	
Isle of Man	IoM		
Jeffs, Peter 	Jeffs, Mr	See Judgment, section A2.3. Member of Arch from 6 April 2007 until 22 September 2009; director of FPP from 17 April 2009 to 1 June 2009; director of Club Easy group companies from 29 October 2007 until August 2010.	
King, Gary 	King, Mr	See Judgment, section A2.3. Member of Arch until December 2009, who then transferred to Spearpoint until May 2010; director of Lonscale from 9 April 2009 until around or shortly before the Disposal Agreement of 26 March 
2010.	
Kingston Smith LLP	Kingston Smith		
Lloyds TSB plc	Lloyds		
loan to value ratio	loan to value		
loan to value ratio	LTV		
Locker, Bob	Locker, Mr		
Lonscale Holdings Ltd	Lonscale Holdings	A corporate entity established by Mr Barkman and Mr Montague. See Judgment, section A3.	
Lonscale Ltd	Lonscale	See Judgment, section A1.	
Lonscale Multi-Class Notes due April 2013 tems and conditions	Lonscale MCN terms	See E9/2204 and Judgment, section C3.	
Lonscale Multi-Instrument Programme 	Lonscale Multi-Instrument Programme	See E9/2204.	
Lonscale notes issued on 29 October 2007	Lonscale October 2007 notes 	See E9/2204 and Judgment, section C3. 	
Lonscale notes issued pursuant to the Lonscale Multi-Instrument Programme	Lonscale MCAB notes	See “Lonscale Multi-Instrument Programme”.	
Lonscale Restructuring Report prepared by Kingston Smith	Lonscale Restructuring Report	Prepared on 3 July 2008, see E15/3601.	
Managing Board of Clubeasy	MBC	See “Turnaround plan letter”.	
Meader, Neal 	Meader, Mr	See Judgment, section A2.5. Director of the Cells from 21 December 2006 until 28 January 2010.	
memorandum of understanding entered into between the Lonscale claimant cells, Spearpoint and CE Holdings Limited SPV in January 2010	MoU	See Judgment, section A3.	
Molly Hayes Building	MH	Purpose built student accommodation building in Exeter, comprising 46 beds. Newly constructed in 2007, described in the Storeys August 2007 draft report as achieving “full letting … off plan”. [E5/1020 at 1039]	
Montague, Philip 	Montague, Mr	See Judgment, section A2.8. Controller, with Mr Barkman, of FCL; director of FPP and FHL.	
Moore Stephens	Moore Stephens	See Judgment, section A2.6. Auditors to the Lonscale claimant cells.	
Net Asset Value	NAV		
Offshore Financial Markets	OFM	Part of BWIC; SHi was manager: see E14/3513.	
open ended investment company	OEIC	See Judgment, section A2.4. Mechanism by which a UK investor could participate in the UK funds and sub-funds.	
PF2, PF3, PF4, and PF5	PF claimants	See “investors” and Judgment, section A1.	
PF2, PF3, PF4, PF5, RE1 and RE2	Lonscale claimant cells	See Judgment, section A1.	
PKF (Isle of Man) LLC	PKF (IOM)	Auditor of FPP.	
PKF (UK) LLP	PKF 	See Judgment, section A2.10. Accountants and consultants, instructed by FCL to undertake a limited review of Clubeasy Group companies.	
PKF draft “Project Clubeasy” report dated “August 2007”. 	PKF August 2007 draft report 	E3/495. Emailed by MF to LB and PJ on 16 August 2007 [E3/493]. See Judgment Annex 2, section A2/ B.	
PKF final “Project Clubeasy” report	PKF final report 	E7/1473 (a version which is wrongly dated “August 2007”). Emailed by IG to GK, PJ, RF and LB on 15 October 2007 [E7/1471]. See Judgment Annex 2, section A2/ C.	
PKF revised draft “Project Clubeasy” report emailed in September 2007	PKF September 2007 draft report 	E6/1230 (a version which is wrongly dated “August 2007”). Emailed by MF on 4 Sep 2007 [E7/1202]. See Judgment Annex 2, section A2/ C.	
Portfolio for the purposes of the IMAs	portfolio	The IMAs define “Portfolio” to mean “all the assets (including uninvested cash) of the Company and entrusted from time to time by the Company to the day-to-day discretionary management by the Investment Manager”.	
Proposed Transaction, being the proposed acquisition of Clubeasy Group companies.	Proposed Transaction	See Judgment, section A2.10.	
Prospectus for the purposes of the IMAs	Prospectus	“Prospectus” was defined in the IMAs as “The offering document whereby shares in the Company are offered to investors and any supplemental or replacement documentation having similar effect.”	
Radford, Peter 	Radford, Mr	See Judgment, section A2.5. Director of the Cells from 21 December 206 until 28 January 2010.	
RE1 and RE2	RE claimants	See “investors” and Judgment, section A1.	
Ruparell, Silash	Ruparell, Mr	Portfolio manager for AT1. See Judgment, section A2.3.	
Sale and purchase agreement entered into between the Lonscale claimant cells and Lonscale Holdings in January 2010	Disposal Agreement	See Judgment, section A3.	
Scheme Particulars issued for the ICC in January 2007 	Scheme Particulars 	Scheme Particulars issued for the ICC in January 2007 are said by the claimants to be part of the “Prospectus” for the purposes of the IMAs.	
Scott, William 	Scott, Mr	See Judgment, section A2.11. Current director of the Cells, appointed 31 December 2009.	
Share Purchase Agreement	SPA	SPAs signed by Lonscale for the purchase from Mr Hayes of the CG owning companies are dealt with in section C2 of the judgment.	
Simon Hirstenstein	Hirstenstein, Mr	Manager Offshore Financial Markets, Barclays Wealth Intermediates & Corporates – Barclays Private Clients International Ltd.	
Smith, Adam 	Smith, Mr	Part of Arch’s portfolio management team, who then transferred to Spearpoint. See Judgment, section A2.3.	
Spearpoint Limited	Spearpoint	See Judgment, section A2.11. Appointed investment manager to the ICC and of the cells on 1 December 2009 in succession to Arch FP. Now known as Brooks Macdonald Asset Management (International) Limited.	
SPL ARL Private Finance (PF5) IC Limited	PF5	Fifth claimant in 2011 Folio 1559. Formerly known as ARL Private Finance IC Ltd.	
SPL Finance Opportunities (PF3) IC Limited	PF3	Third claimant in 2011 Folio 1559. Formerly known as Arch Finance Opportunities IC Ltd.	
SPL Guernsey ICC Limited 	ICC, the	See Judgment, section A1.	
SPL Private Finance (PF2) IC Limited 	PF2	Second claimant in 2011 Folio 1559. Formerly known as Arch Private Finance IC Ltd.	
SPL Real Estate 1 (RE1) IC Limited	RE1	Twelfth claimant in 2011 Folio 1559. Formerly known as Arch Real Estate 1 IC Ltd.	
SPL Real Estate 2 (RE2) IC Limited	RE2	Thirteenth claimant in 2011 Folio 1559. Formerly known as Arch Real Estate 2 IC Ltd.	
SPL Structured Finance (PF4) IC Limited	PF4	Fourth claimant in 2011 Folio 1559. Formerly known as Arch Structured Finance IC Ltd.	
SPL Treasury (AT1) IC Ltd	AT1	See Judgment, section A2.5. Formerly known as Arch Treasury IC Ltd.	
Storeys August 2007 memorandum	Storeys August 2007 memorandum	A “Memorandum of Valuation Instructions” signed by IG on behalf of Storeys on 1 August 2007 [E1/253]. See Judgment Annex 2, section A2/ B.	
Storeys draft Appraisal and Valuation report dated “August 2007”. 	Storeys August 2007 draft report 	E5/1020. Emailed by IG to LB and PM on 24 August 2007 [E5/1018]. See Judgment Annex 2, section A2/ C.	
Storeys final Appraisal and Valuation report. 	Storeys final report 	E7/1473 (a version which is wrongly dated “August 2007”). Emailed by IG to GK, PJ, RF and LB on 15 October 2007 [E7/1471]. See Judgment Annex 2, section A2/ C.	
Storeys:ssp Limited	Storeys	See Judgment, section A2.7. Real estate surveyors and valuers instructed to prepare a valuation report on Club Easy’s property portfolio.	
Sub-funds of UK funds	UK sub-funds		
Supplemental Scheme Particulars issued for each cell	Supplemental Scheme Particulars	Supplemental Scheme Particulars issued for each cell are said by the claimants to form part of the Prospectus for that cell.	
Symington meeting: a meeting with RS attended by CD, RF and RA	Symington meeting	The meeting took place on 23 August 20107: see H1/32/1.	
Symington, Richard	Symington, Mr	Chief Executive, Methuen Consulting.	
Taggart, Graham	Taggart, Mr	At SMP Partners, administrators of FPP: see see E14/3513. 	
Thompson, Gary 	Thompson, Mr	Managing director of Club Easy at the time of the sale and until 12 May 2008.	
Treanor, Martin	Treanor, Mr	Head of sales for FCL, according to RF on Day 8.	
Turnaround plan letter dated 17 September 2007 written by Mr Jeffs to the board of Lonscale	Turnaround plan letter	E6/1319.	
Turnaround plan set out in the Turnaround plan letter	Turnaround plan		
UK OEICs for which Arch FP was investment manager, namely the Arch Cru Investment Fund and the Arch Cru Diversified Fund	UK OEICs	See Judgment, section A2.4. 	
waiver agreement dated 22 October 2009 	waiver agreement	See judgment section A3. 	
waiver letter signed by Arch FP on 22 October 2009 	waiver letter	See judgment section A3. 	

Annex 2: History of main events
A2/ A. Summary of events: introduction
A2.1.	In this summary I identify some stages in the course of events. On occasion, when quoting from documents or emails, I have added paragraph numbers, or bullet point numbers, in square brackets for ease of reference. What is set out in relation to each stage does not give a complete account of all relevant events: only the most important events are described. I indicate some major matters of controversy, but do not seek to decide them. To the extent necessary, matters of controversy are resolved in the main judgment. 
A2.2.	Much of what happened is common ground. Where that is so in relation to a particular event, I have, for convenience only, adopted the account of that event given in the Lonscale claimant cells’ skeleton argument. 
A2.3.	The stages I have identified are:
(1)	The period from late July up to and including 17 August 2007, the day on which share purchase agreements (“SPAs”) were signed by Lonscale for the purchase from Mr Hayes of the CG owning companies (section A2/B below).
(2)	The period from 18 August 2007 up to and including 29 October 2007, the day on which completion occurred pursuant to the SPAs as amended (section A2/C below).
(3)	The period from 30 October 2007 up to and including 9 January 2008, when RE1 and RE2 made further investments in Lonscale (section A2/D below).
(4)	Successive periods ending on 28 April, 9 June, 2 July, 6 October and 11 December 2008, and 5 January 2009, being the dates of successive further investments by RE1 and RE2 in Lonscale (sections A2/E to A2/J below).
(5)	The period from 6 January 2009 up to and including 13 March 2009, this being the date upon which Capita suspended trading in the shares of the UK OEICs (section A2/K below). 
(6)	The period from 14 March 2009 onwards (section A2/L below).
A2/ B. Late July up to and including 17 August 2007
A2.4.	An email was sent by Cobbetts on 20 July 2007 to those acting for Mr Hayes. It referred to there having been an agreement in principle between Mr Hayes and Cobbetts’ client (at that stage, FCL) which was subject to due diligence and agreeing the terms of the contract. 
A2.5.	By this time FCL had engaged PKF to undertake a review of the CG owning companies in connection with the proposed acquisition: see section A2.10 of the main judgment. 
A2.6.	A “Memorandum of Valuation Instructions” signed on behalf of Storeys on 1 August 2007 (“the August 2007 memorandum”) records that they were asked on behalf of FCL to value student properties belonging to Clubeasy Group companies. The original instruction had come from Mr Barkman, and had been confirmed by an email from Mr Blythe dated 14 June 2007. The August 2007 memorandum recorded that Mr Hayes, FCL, Mr Blythe, Cobbetts and PKF were aware of Storeys’ prior and continuing involvement with the properties, including loan security valuations for Mr Hayes. All were said to be “happy that we should proceed with the valuation having made these disclosures.” 
A2.7.	On 25 July 2007 Mr Barkman, Mr Addision and Mr Farrell [?and Mr Montague?] met to discuss the possibility of Arch FP becoming involved in the acquisition. At that time:
(1)	Mr Hayes was looking to sell the CG owning companies in August 2007 for around £19.5 million;
(2)	Mr Barkman was looking to finance the acquisition, in part, with a loan of £9 million from Barclays in the Isle of Man. 
A2.8.	Mr Farrell met Mr Barkman again on 1 August 2007. Various aspects of the way in which the transaction would be structured were discussed, including the possibility of paying a deposit for the purchase and then allowing a period of possibly six months in which to complete the transaction. 
A2.9.	On 2 August 2007 Mr Montague sent an email to PKF and Cobbetts stating: 
Please note that Arch Group Ltd are now partnered with us on the due diligence and acquisition of Club Easy project. …
A2.10.	At 7:10pm that evening Mr King emailed Mr Farrell. His email included a number of bullet points. I set out the email below, including only the first, ninth and eleventh bullet points:
Some points that I would like clarified at this stage:-
[1] ● Since the trade is virtually a “purchase price = gross property value – debt – CGT – what we can take out of it” trade, we need to get a very good handle on the gross property value. I presume worst case CGT can be calculated, and we will know debt with accuracy, so valuation is the weak link. I am concerned that valuations in the spreadsheet are on the basis of # rooms * a number = property value. The valuation mandate is unclear on what specs are required. I think we need a more robust valuation.
…
With respect to our issues:-
…
[9] ● What are the exact loan by loan rates and caps / floors / fixed rates / hedges / length of facility / single loan or group facility / break penalties etc.
…
[11] ● What are the covenants / terms of the Barclays bank offer?
…
A2.11.	An email within Arch FP on 3 August 2007 recorded that Mr Farrell had asked that AT1 be funded with £8 million of cash, “so that it is ready for the Club Easy real estate investment early next week.” It also recorded that this had been achieved by issuing five year maturity 8 percent notes, which had been bought by three of the cells in a total amount of £8 million. An email from Mr Farrell to Mr Smith at 6:40am the following day explained that he wanted to make sure that the cash was “physically in situ at AT, rather than be part of an ongoing competition for available cash at the time…” The email stated that Mr Barkman was authorised to negotiate with Club Easy up to £15 million, adding 
Reality is Club Easy has 33m official value on balance sheet… So ability to extract lots of cash P&L upfront is good… RE1 and RE2 likely to share some of Club Easy… once deal is fully settled. 
A2.12.	In an email to Mr Farrell dated 7 August 2007 Mr Barkman made a number of points. In the second paragraph he recorded that Mr Hayes would accept £17 million based on a share purchase agreement on 17 August, with an associated payment of £1 million, and with completion in October. In the third paragraph Mr Barkman proposed that the way forward was to accept Mr Hayes’s timing but offer either £16.5 million or £16.75 million, the latter of which would include “our costs”. On this basis Mr Barkman envisaged in the fifth paragraph that the balance sheet would “come in at over £33 million leaving more than £16 million over the sale value.” Mr Barkman continued by making further points as set out below:
[6] The due diligence procedure is second to none that I have been involved with and therefore we know all the problems that may arise. Given this level of knowledge the issues seem less than I would have expected given the amount being left on the balance sheet.
[7] I see the structure of the deal from our end as follows.
[8] 1) Foundations Program Plc buys the £1million in August to consummate the deal. It also buys £250,000 to cover costs.
[9] 2) October payment of £15.5-.75 is made by a combination of Arch producing a note that bears an appropriate interest rate and gains a portion of the extracted profits and lending from a bank. Both Barclays and Investec are in the frame here. Neither has said yes at this point as they need to see the due diligence, but both have provided valid expressions of interest. There are also other banks.
[10] 3) Foundations Capital Ltd constructs a fund which is both sold by it sales staff and bought by the Foundations Program plc, The proceeds from this serve to 1) give us a method of extracting a portion (if not all) of the balance sheet, 2) add to the property portfolio of the company, 3) and, over time, retire the Arch note.
[11] Presuming that the Arch note is at 10%, lending at 8% and needed return and costs of the mutual are at 11% (9.25% return, AMC 1.5%, Costs 0.4%) the cost of carry would look something like
Arch £8 million * 10% £800k
Lender £7 million * 8% £560k
Total £1.360
[12] Capital appreciation is £3.6 leaving £2.24 million in growth.
[13] The mutual fund would use some of the net growth to underwrite its unit price – but as the fund grows so does both the profitability and the capital appreciation as a result of the increase in the property portfolio that occurs … My sales chaps tell me that properly structured this is a very saleable product.
[14] We structure the deal in such a manner that the mutual fund and Arch note gain a portion of future appreciation but Arch Group and Foundations Capital Ltd are left with a sizable portion of the future value.
[15] The only down side is the latent CGT. Three points on this, 1) We only owe CGT if we sell the properties – not if we sell the company as shares in the same way as we are buying it now without incurring this cost. 2) We do not owe CGT on the recent purchases as they are structured under an IOM company. 3) A tax structuralist, (if such a word exists) in Guernsey informs us that over time and with prudent negotiations we can “chip away” at the potential liability.
[16] Presupposing that the potential CGT is £8 million a number that seems in line with the thinking of most of our due diligence parties, that leaves no less than £8 million for us to extract over the short term, and growing by the capital appreciation not used to service the various capital input mechanisms. 
[17] Cleaning up the company and injecting needed growth capital, in concert with the efforts of a group such as Knight Frank should see us in a position to sell the company in 36 months.  
[18] The split between Arch and Foundations looks set for a 50/50 deal, as we brought the deal forward, progressed it to a very advanced point and are injecting cash through the Program and our sales force.  Arch are supplying the backing to make certain the payments are made, adding structuring skills and general skill sets in terms of making the company a saleable entity in the end.
A2.13.	In a summary at the end of the email Mr Barkman added:
[20] While we are not achieving the desired price of £15 million, we have received a substantial discount and there is still considerable meat left on the bones, (at least £8 million) both of our companies will accelerate their growth patterns as a result of this capital injection. There is scope to take more than that from this deal …
A2.14.	The summary continued:
[21] … it is unlikely that a deal of this magnitude under which we have a huge residual balance sheet and time to put it together is likely to present itself to Foundations any time soon. So while there are issues, especially with the attitude and management skills of the loan wolf vendor, this deal offers the combination of Arch/Foundations the opportunity to use their unique abilities to turn a profit and, given the size of the deal, turn heads. 
A2.15.	Also on 7 August 2007 the £8 million funding transaction for AT1 was cancelled. In an email timed at 11:45 or 12:45 that day Mr Farrell advised Mr Barkman:
One change to structure – the arch real estate fund(s) can go alongside the foundations fund as well – so that take up is certain. 
A2.16.	In an email timed at 17:36 on 7 August 2007 Mr King explained to Mr Farrell that he had just spoken to Mr Barkman. What Mr Hayes would now accept was a £1 million deposit, followed by £14 million on completion in October 2007, followed by £1 million in one year’s time, and a further £1 million in two years’ time. Mr King’s email noted in the third paragraph that the final two payments, which he described as “trailing payments”, were “subject to no surprises appearing from under rocks”, thus providing “protection just in case”. It added that Mr Barkman needed to give an answer the following day, but was going “back into hospital” at 2pm that day. Mr King’s email then continued:
[5] Worst case on this is £119m [property valuation] less £89m [loans] less £10m [max CGT] = £20m. At £17m purchase price, this leaves us at least £3m upside, and potentially £5+m [more if we manage CGT well, improve the business, inject more properties etc.].
[6] My call would be to say yes – go to £17m max – and ensure the trailing payments have wide warranty scope over any / all surprises. Please confirm and I’ll let Lee know in the morning.
[7] I presume we buy the IoM company, and then later sell it to the Mutual / RE2 and extract the intrinsic value as cash. My preference would be to hold fire until we can sort out the CGT issues (a lot of value stored in that gem), as we could do inter-company transfers (to offshore) without triggering tax, agree something with HMRC etc. We’ll need to get the experts onto this one.
[8] Is the Mutual fund really going to happen or just RE2? If so, how split?
[9] Re 50/50 income split of this up-front bump-up with Foundations – has this been agreed or is Lee’s dream?
[10] Re the capital upside, I am working on minimums in my mind of funds 60% and AT 20%. This leaves Foundations with 20% max going forward.
A2.17.	On 9 August 2007 Mr Addison reported to others in Arch FP that Barclays in the Isle of Man had said that Mr Hayes was known by reputation to them and they recommended “thorough due diligence”. Mr Addison added that a £9 million loan from Barclays “would be too much they would be more likely to lend £3 million …”. 
A2.18.	An email from Mr Barkman on 10 August 2007 commented on this:
The £3M versus £9M is news to me, but Investec are still talking £8[million] and they know Jason all too well. Yes he has honesty issues. Once the due diligence is done we can bring in other banks …
… 
We all realise that there is some clean up work to do on the company but we are getting a cracking discount to do that… 
I am working on the basis that this is an Arch/Foundations JV where the current pref shares are retired, (this would normally be taken from Arch’s cut of FHL and therefore represents a bonus to Arch), each of our respective funds will take what they need and we split anything we take out above that on a 50/50 basis. 
A2.19.	An email from Cobbetts was sent to those acting for Mr Hayes on 12 August 2007. The email noted that the buyer was “in effect being required to enter into this agreement prior to it completing its due diligence”. It explained that this had necessitated “adding a few further conditions” which were “fundamental to doing the deal this week”. 
A2.20.	Meanwhile on 10 August 2007 in an email timed at 19:30 Mr Farrell had responded to Mr Barkman’s email earlier that day. In relation to the proposed 50/50 split, Mr Farrell suggested that 50 percent should go “to arch treasury (our risk taking/warehousing entity)” and 50 percent to FHL, which could use the cash to expand and pay down preference shares. Mr Barkman replied on 14 August that he agreed “with the 50/50 aspect” and also agreed that the cost of repaying the preference shares should be taken out of the initial earnings. This, he said, represented “a £270K bonus to Arch”. Mr Barkman’s email continued:
That said, we can’t agree to the idea of our end being paid into FHL. This is not an FHL deal as your end of the initial earnings doesn’t sit inside that vehicle therefore ours should not be treated in that way. 
A2.21.	At around this time, Mr Barkman caused Lonscale to be incorporated in the Isle of Man. Mr Barkman owned the sole issued share of Lonscale. Mr Barkman and Mr Farrell were appointed as directors. 
A2.22.	Shortly after 1:30pm on 16 August 2007 an email was sent by PKF to Mr Barkman and Mr Jeffs attaching a draft of PKF’s report (“the PKF August 2007 draft report”). The Lonscale claimant cells’ skeleton argument identified what it described as “significant features” in the draft. These included:
(1)	At the outset of section 2, entitled “Executive Summary”:
Clubeasy is a substantial and dynamic property based group which has established a strong brand in the arena in which it operates the provision of quality student accommodation.
The financial highlights demonstrate the significant growth of the business in both property value and rental income over recent years as a result of the efforts of the owner and his team. The Group achieves high occupancy levels which are one of the key elements to maximising income from its property portfolio.
However in this executive summary we have focussed not on detailing the positive aspects of the Group, which we believe are recognised by the potential purchaser, but on key issues which may have a negative impact on the transaction or the business, or issues which should be resolved in the contract process of exchange and completion. 
The recent history of the Group shows that the interest burden which accompanies the current level of borrowings exceeds the operating profit of the Group and results in a small loss making position. A new financing structure in terms of capital and loans can address this and we understand that this is planned in the short term.
The net asset position of the Group is very important in the pricing of the transaction. We show in the above table an adjusted net asset position as at 30 April 2007, starting with management figures and highlighting a number of adjustments which could potentially reduce the net assets from £33.5 million to £30.6 million. The mechanism which will provide greater assurance of the net asset position is audited accounts for all the target companies as at 31 July 2007 and completion accounts as at the completion date. We recommend the requirement for these is incorporated into the sale and purchase agreement.
(2)	In the same section, under a sub-heading “Key Issues”:
Historic and Current Trading
Profitability
	The Group as it stands is very highly geared and, as a result, there is a significant interest burden that has been exaggerated by recent interest rate increases. Due to this apparent over-gearing, the group has been unable to generate sufficient profits to cover interest payable and has therefore been loss-making in recent years.
(3)	In relation to what was said about historic and current trading, the same section of the draft report included under the heading “Observations and Conclusions”:
	A further injection of capital is required to reduce the gearing of the Group and we understand that this is proposed in the funding structure that will be used to finance the proposed transaction.
	The purchaser should ensure that the projected level of EBIT is sufficient to cover the interest that will fall due on the level of debt assumed going forward and to hedge against any future interest rate rises where possible.
(4)	In the Executive Summary PKF noted that management accounts were currently prepared on a quarterly basis, automatically generated by accounting software on a company by company basis. They observed that this approach did not appear appropriate going forward, and added that the content and format of monthly management accounts should be designed to meet the needs of remote stakeholders. 
(5)	In section 4, headed “Corporate Structure”, the draft report noted that an internal sale said to have given rise to an intra group profit of £12 million had been followed by the declaration of a dividend of that amount to Mr Hayes. £4.5 million had been paid in cash to Mr Hayes, and he was shown as a creditor in relation to the remainder of the dividend. The draft report commented that, “as this profit is unrealised by the Group it is questionable whether it is distributable.”
(6)	In section 10, headed “Financial Control Environment”, the draft report stated under the sub-heading “Budgetary procedures”: 
Due to the size, nature and hands on approach adopted by management no recorded budgetary procedures are carried out and therefore the projections to 31 July 2008 commented on in this report have been prepared on a one off basis. 
Management stated that directors meet to discuss budgets but no records of this are held or measurements of actual to budgeted.
… The Group however has made losses in recent years due to significant interest charges as a result of the level of gearing and impact of rate rises. 
Management have stated that to improve the control and performance measurement procedures budgetary information should be prepared in an accounts format and variances followed up. 
(7)	The projections referred to in section 10 were discussed in detail in section 8 of the draft report. At the outset of section 8 PKF noted that the projections, which had been prepared by management and their advisers, Blythe Financial, included only profit and loss figures. As a result PKF were unable to review projected balance sheet or cash flow items.
(8)	While the Group had projected earnings before interest and tax of £6.43 million in the year to 31 July 2008, PKF considered that after additional costs of sales of £0.55 million, depreciation of £0.2 million, and estimated interest payments of £5.85 million, an adjusted loss before tax of £0.17 million should be assumed. 
(9)	While the draft report noted that Mr Hayes appeared to be responsible for driving the business forward and concentrated on strategic issues, it added that he also appeared “to be relatively hands-on in some respects.” The draft commented that it would be necessary to find a replacement for the role undertaken by Mr Hayes after December 2007. In this regard the draft said that PKF understood that there were plans to ensure that a suitable replacement would be recruited prior to the peak lettings season in April 2008. In addition, the draft noted that some of the key managers were employed under contracts entitling them to resign their positions by giving only one week’s notice. The draft commented that it was vital that all key staff contract terms included sufficiently long notice periods to ensure that the loss of one of those employees would not significantly disrupt the business, affording the Group time to recruit an appropriate replacement. 
A2.23.	At 7:24am on 17 August 2007 Mr Blythe emailed Mr Jeffs drawing attention to an aspect of the revised price agreement. This was that Mr Hayes was to receive confirmation that Arch was effectively underwriting the transaction, and that Arch was financially capable of underwriting the transaction. This confirmation was provided later that day in a letter written on Arch FP note paper and signed by Mr Addison. The letter stated at the outset that Lonscale was “backed by the financial resources at the disposal of the Arch Group and Foundations Capital both as principals and agents.” It added:
We currently manage around $700m worth of assets in both open and closed end vehicles which have a combination of upfront and annual management charges together with performance fees that are paid quarterly. Current inflows into the funds from the retail sector are running at approximately £1m every two days. The closed end nature of the majority of our funds, together with the emphasis on investing in private markets means that we are sheltered from the turmoil that is currently besieging the public equity and bond markets.
A2.24.	Minutes of a meeting of the board of directors of Lonscale, held in the Isle of Man on 17 August 2007, state that Mr Barkman was present, and that Mr Farrell participated by telephone. The business of the meeting was described in paragraph 4 of the minutes as being to approve the proposed acquisition by Lonscale of “the Clubeasy group”. Paragraph 7 recorded that it was resolved to authorise execution on behalf of Lonscale of the SPAs and other documents as might be required. 
A2.25.	The minutes as signed also noted:
(1)	at paragraph 3, that each director present “declared their interest in the business to be transacted at the meeting in accordance with the requirements of the Company’s articles of association and other lawful requirements.”
(2)	at paragraph 5.2, that the directors agreed that the acquisition of the Clubeasy Group should be funded by a mixture of equity and debt: 
The Directors agreed to the proposal that Arch Treasury IC Limited should subscribe for 8 million £1 ordinary shares in the Company and should propose a debt facility which would be available for draw down at completion of the Agreements and to fund the working capital requirement of the Company for the following three years. The Directors agreed that Arch Financial Partners LLP should negotiate the terms of these facilities and report back for approval. 
(3)	at paragraph 5.3:
The Directors also discussed payment of an introduction commission to the introducers of the Project [i.e. the acquisition of the Clubeasy Group] to the Company and appropriate structuring/arrangement fees to be invoiced in due course. 
(4)	at paragraph 6, that it was agreed that Mr Blythe should be approached to become a director of Lonscale.
A2.26.	Also on 17 August 2007, Lonscale and Mr Hayes entered into the SPAs. There were three separate agreements for the three parts of the Clubeasy Group. For present purposes they can be treated as one. On that basis:
(1)	A deposit totalling £1 million was payable on execution of the agreements. 
(2)	The total consideration for the purchase was £16,587,226. 
(3)	This consideration included an amount of £2 million which was deferred. In that regard loan notes were to be issued by Lonscale to Mr Hayes, under which £1 million would be payable on 31 October 2008 and a further £1 million would be payable on 31 October 2009. The loan notes entitled Lonscale to set off against the deferred consideration any admitted or finally determined claim which Lonscale had against Mr Hayes in connection with the SPAs. 
(4)	Apart from the deferred consideration, and the deposit, the remainder of the purchase money was payable on completion, which was due to take place on 26 October 2007. 
(5)	However, under clause 3 of the SPAs Lonscale was entitled to insist that certain conditions be met prior to completion. They included that:
(a)	the aggregated net asset position of Club Easy as at 31 July 2007 should be no less than £32,337,500 [clause 3.1.7];
(b)	consent letters be obtained from lenders that had the ability to demand repayment of monies or terminate a loan facility upon a change of control, consenting to the transfer of shares to Lonscale [clause 3.1.5];
(c)	Mr Hayes should deliver a signed Warranty Certificate to Lonscale [clause 3.1.4];
(d)	related-party loans be settled in full [clause 3.1.8].
A2.27.	The £1 million that was paid by Lonscale as a deposit was initially funded by a cell known as SO3. As appears below, that cell was later reimbursed from monies provided by the Lonscale claimant cells for the completion of the transaction. 
A2/ C. 18 August up to and including 29 October 2007
A2.28.	On 21 August 2007 Cobbetts produced a document entitled “Legal Due Diligence Report”. Schedule 1 to the report stated that Cobbetts had been instructed by Lonscale to prepare the report in relation to the proposed acquisition. 
A2.29.	On 24 August 2007 Storeys sent an email to Mr Barkman and Mr Montague attaching a draft appraisal and valuation report (“Storeys August 2007 draft report”). The cover sheet described the draft as prepared “without prejudice for: Foundations Capital …”. The draft report comprised a summary, a table of contents, a letter addressed to “Foundations Capital” bearing the date “1st August 2007”, thirteen sections, and a supplementary appendix. As to these:
(1)	The summary described the purpose of valuation as, “Market Valuation for acquisition purposes.”
(2)	The letter bearing the date “1st August 2007” ended with a section headed, “VALUATION”. In this section the draft report gave an opinion as to the value of Clubeasy Group companies’ student bed spaces, assuming full occupancy, in each of Hull, Lincoln, Loughborough, Exeter and Durham. The amounts identified for student bed spaces in each of these cities totalled £114,790,000. In addition, it was stated that Storeys were of the opinion that the value of various “non student/commercial properties” in Hull, Lincoln and Loughborough was in the order of £4,640,000. Thus the total valuation of  properties held by the Clubeasy Group companies was £119,430,000. 
(3)	Section 1 of the draft report was entitled “OVERVIEW”. It stated at paragraph 1.1 that the portfolio “under consideration herein for acquisition purposes” comprised “2533 student bed spaces with a gross rental income (with full occupancy) at the 2007/2008 academic year of £8,157,361.” Paragraph 1.14 added that Storeys had:
… taken into consideration the advantages of “Club Easy brand” in the various locations when considering our values herein, which is the pre-eminent reason why these properties are valued towards the “top end” of the market. 
(4)	Section 5 of the draft report was entitled “TENURE AND TENANCIES”. In this section Storeys set out, among other things, a table identifying the number of student bed spaces in each location and the gross residential rental income for 2007/2008 in relation to those bed spaces. Paragraphs 5.9 and 5.10 identified Loughborough, Lincoln and Hull as “core locations” which were run exceptionally well, constituting “the strongest brand name within these locations in terms of student accommodation”, with very high levels of demand and exceptionally low levels of voids and bad debts. Paragraphs 5.11 to 5.13 and 5.22 stated: 
5.11 We know from our previous involvement that in the aforementioned core locations, the various properties have invariably enjoyed 100% occupancy year-on-year for the last 5 years or so. Overall occupancy levels stand in excess of 95%, at the time of our inspection.
5.12 However, in agreement with yourselves we have assumed that all of the units are 100% occupied and have not made any specific provisions for bad debts or voids, although have reflected these in the Gross Initial Yields returned, which can be considered as an All Risks Yield.
5.13 Please note, however, that the Gross Yields returned on the new build properties have simply been extrapolated from the Net Yields. …
…
5.22 We re-emphasise that we have valued the properties taking into consideration the strength of the Clubeasy brand name and caution that should any of these properties be sold individually as investment that they may not necessarily achieve the yields articulated herein since they would not enjoy the wider benefits that being within the Clubeasy Group affords in terms of University accreditation, management and maintenance policies, and so forth.
(5)	Section 10 of the draft report was entitled “VALUATION METHODOLOGY”. At paragraphs 10.5 and 10.6 the draft report stated: 
10.5 We have elected to value the properties individually and in respect of the overwhelming majority of the stock have adopted a straightforward straight line Gross All Risks Initial Yield approach.
10.6 This simply involves capitalising the Gross Income Stream at a yield which reflects the inherent risk and also takes into specific consideration Facilities Management costs and the like.
A2.30.	In an email to Mr Montague dated 29 August 2007 Mr Jeffs recorded that he had spoken with Mr Barkman. It had been agreed that the Storeys draft August 2007 report could be released to Mr Blythe and Mr Hayes subject to certain reservations being communicated. Those reservations were also being communicated to Storeys. They included the following: 
We have reservations about the valuation because of the methodology used; namely deriving the property value from assumed yield percentage.  As fund managers Arch adopts a prudent valuations approach for multi-let property acquisition somewhere between fully yield derived and the valuation as a standalone, non-specialist and possibly non-rental residential property.  Independently, Arch’s property advisor confirms that valuation solely derived from assumed yield will give a ‘toppy’ valuation.
A2.31.	On 4 September 2007 PKF produced a revised draft of their report (“the PKF September 2007 draft report”). The revisions did not materially affect the “significant features” identified above in relation to the draft of 16 August 2007. 
A2.32.	On 17 September 2007 Mr Jeffs, in his capacity as business manager and partner of Arch FP, wrote a letter addressed to the board of directors of Lonscale. It was headed, “Immediate Post-Acquisition Recommendations for Clubeasy Group”. The letter described a plan which has been referred to as “the turnaround plan”, and it is convenient to refer to this letter as “the turnaround plan letter”. Mr Jeffs explained that he had prepared the letter following his recent review of the due diligence undertaken by PKF, Cobbetts and Storeys, and his own “research and evaluation of the current status of business management at Clubeasy”. 
A2.33.	In the turnaround plan letter Mr Jeffs envisaged an integration team:
Lonscale should provide an integration team to address the key risk areas that have been highlighted in the due diligence reports and additionally to cover the transition from an “Owner Managed” model of business management into an “Institutionally Owned” model.
The integration team to be tasked as follows:
	Ensure risk areas identified in PKF and Cobbetts due diligence reports are dealt with in a prompt and effective manner.
	Familiarise themselves with the day-to-day operations of the company.
	Recommend change or continuance of management practices and procedures where appropriate. 
	Guide and advise the Managing Board of Clubeasy (MBC) to develop a business plan and associated budget.
	Guide and advise the MBC in developing the required level of management information reporting.
A2.34.	Mr Jeffs then set out things that he would plan to do, in a role which he suggested be referred to as “Development Director”:
	Represent the Lonscale Board in day to day dealings with other members of the MBC and in general review the way that Clubeasy is run, recommend changes that may be required and supervise implementation of agreed changes as may be required.
	Review the opportunity that exists post acquisition but pre next year’s main lettings season (understood to be January to March), of adding suitable student residential properties to the operation.
	Make formal property acquisition proposals for completion in time for Jan/Mar 2008 letting season, as long as they do not jeopardise the letting season activities.
	Subject to Lonscale funding approval; supervise acquisition of approved properties and ensure they are on-stream in time for the Jan/Mar 2008 letting season.
	Ensure that there are no obstacles to achieving a smoothly operating, fully committed lettings season Jan/Mar 2008. This is the first lettings season post-acquisition and is vital for Clubeasy that it occurs efficiently and effectively.
A2.35.	The turnaround plan letter also envisaged that:
(1)	Gary Thompson, the existing Managing Director of Club Easy, would remain in his position and would take on more responsibilities that had been taken by Mr Hayes under his ownership; and
(2)	a final budget would be created for the first three months post-acquisition would be available within one month of acquisition, “following access to more detailed information”.
A2.36.	By 20 September 2007 Mr Jeffs had prepared what he described as “my valuation of Clubeasy properties”. In an email that day to Mr Barkman and Mr Farrell, he noted that Storeys had used forecast revenue for the year ending 2008. In relation to the Molly Hayes Building, purpose built student accommodation in Exeter which was newly constructed in 2007, Storeys had used a yield of 6.70 percent on projected lettings for its first year of operation (it was described in the Storeys August 2007 draft report as “fully let… off plan”) of £215,280. This led to a valuation of £3,213,134. Mr Jeffs noted that the remaining properties as valued by Storeys amounted to £116,207,296. The valuation had been on the basis of projected revenue of £8,244,317, and thus represented a gross yield of 7.09 percent. In his email Mr Jeffs explained that if that gross yield of 7.09 percent were applied to the expected 2007 revenue of £7,310,000, then the properties excluding the Molly Hayes Building would achieve a value of £103,037,683. Once the Molly Hayes Building was added back in (adopting Storeys’ valuation for it of £3,213,134), Mr Jeffs arrived at a total value in 2007 of £106,250,817. 
A2.37.	Thus by adopting expected revenue for 2007 in relation to all property other than the Molly Hayes Building, Mr Jeffs arrived at a value of approximately £106.2 million, £13.2 million less than Storeys’ valuation of £119.4 million. Mr Jeffs explained his reasoning in this way:
I believe that the valuation for net asset purposes in 2007 should not be based on next year’s revenue (and therefore a forecast only at this stage).
A2.38.	On 3 October 2007 Mr Jeffs emailed Mr King setting out his understanding of funding requirements for completion. PKF were expected to report net assets of £30 million. As against those assets, Mr Jeffs identified, first, a sum of £17 million required to purchase the CG owning companies. He then assumed £7 million for additional working capital, additional properties and restructuring costs. Thus when these figures were added together at £24 million, this would allow an “on sale” after restructuring “at say £27M leaving +3 for ultimate funds as they take ownership”. 
A2.39.	Turning to the sources of actual funds for the purchase, Mr Jeffs envisaged Arch’s contribution as “AT 14M (PF or PE funding initially?)”. Mr Jeffs then envisaged bank borrowing by Lonscale, which he understood to be from Barclays, of £3 to £6 million, commenting “BUT THIS NOW NEEDS TO BE DEFINITE”. As to the remaining balance of £4 to £7 million, Mr Jeffs envisaged that this would come from a second bank “or (say PF)”. Mr Jeffs added: 
Above assumes full cash funding on day of completion but Lonscale could just be funded with 15M and allow 2M “holdback” and 7M working cap etc to be funded over longer time as drawdown facility to suit AT or RE cashflow.
A2.40.	PKF’s final report (“the PKF final report”) was issued on 8 October 2007. As with the revised draft of 4 September, there were no material changes to the “significant features” identified above in relation to the draft dated 16 August 2007. 
A2.41.	On 13 October 2007 Mr Farrell prepared an email headed “Updates on Corporate Stuff”. Under the heading “Overviews”, Mr Farrell included a paragraph concerned with Lonscale, noting that the deal was scheduled to complete on October 26th. He added:
Before then we need to sign the terms of the Lonscale restructuring, management & control & ownership, so that Lee Barkman cedes to ARCH Treasury in return for upfront structuring fees as agreed …
A2.42.	Storeys emailed Mr King, Mr Jeffs, Mr Farrell and Mr Barkman on 15 October 2007 attaching their finalised valuation (“the Storeys final report”). The covering email explained that Storeys had now clarified certain aspects, and were confident that “there are no other issues outstanding in respect of this undertaking.” The Storeys final report continued to adopt a methodology under which a “straight line gross all risks initial yield approach” was applied to forecast gross residential rental income for 2007/2008. Paragraphs 14 and 5.22 were unchanged from the Storeys August 2007 draft report. The total valuation was £122.5 million. This was £3.07 million greater than the total of £119.43 million in the Storeys August 2007 draft report. The difference came about as a result of increases in the valuations for non-student property (up £0.5 million), student accommodation in Hull (up £2.1 million), student accommodation in Loughborough (up £0.01 million), and student accommodation in Lincoln (up £0.46 million). 
A2.43.	An email was sent by Mr Barkman to Mr Farrell on 15 October 2007. The email had as its subject line, “Tax, Clubeasy”. The body of the email stated:
I met with a chap I use for advice in Tax issues. This idea is way out there but thought you should hear about it.
1) I own Lonscale
2) Lonscale buys/bought Clubeasy
3) as I am selling Lonscale as a Guernsey resident selling an IOM company I am not liable for CGT
4) The initial profit for both Arch T and FCL could pass to me tax free
5) I buy shares in/from any entity/persons which Arch instructs for the value that Arch is to receive
6) I immediately cede control of and income/sale rights of the shares but retain the shares as far as Inland Revenue are concerned
7) Over time I cede ownership based on a variety of incomprehensible reasons
Arch/directors of, pay no tax.
I have no idea if this has legs, but if it does it could be used as a template.

A2.44.	A further meeting of the board of Lonscale was held on 23 October 2007. The minutes record Mr Farrell as chairing the meeting. At paragraph 3.4 they record that the directors of Lonscale approved the payment by Lonscale of “structuring” fees of £3m to each of Arch and Mr Barkman (see paragraph 3.4 of the minute).
A2.45.	By 23 October 2007 it was apparent that arrangements with Barclays were taking longer than Mr Barkman had hoped, and would not be in place by 26 October 2007. On 23 October 2007 Mr Farrell emailed Mr Barkman. The email said that, based on Mr Barkman’s “latest progress update with Barclays”, it set out “the terms and timetable for the proposed transactions in order to complete on the acquisition of the Club Easy group.”
A2.46.	Under the heading, “Completion Date: 26th October 2007”, Mr Farrell’s email of 23 October stated:
1) ARCH Treasury IC Ltd (“AT”) pays for the residual completion balance, as discussed we expect this to be around £20m, allowing for the £1m deposit already paid.
2) You transfer the entire share capital of the acquisition SPV Lonscale Ltd (“Lonscale”) to AT. AT understands that, in consideration for this and for Foundations jointly bringing and co-structuring the transaction with ARCH Financial Products, Lonscale will compensate both parties for 50% of the difference between syndication proceeds and acquisition cost (“Structuring Fees”). 
3) You have committed that you will procure that the Foundations Program PLC (“FPP”) and the (to be established) Foundations Property Opportunities Mutual Fund (“FM1”), will participate in the senior and junior notes, as soon as practical, and that Barclays Bank Isle of Man have agreed to provide funding to FPP in support of this.
4) Barclays Bank provide evidence of commitment to fund FPP to enable FPP’s investment in senior and junior notes.
5) FPP will, as soon as practical, subscribe for at least £1m of junior notes, as described in the multi-class asset backed notes termsheet (attached). AT is relying upon this funding to be put in place in order to complete the transaction described above.
6) The board of directors of Lonscale to be expanded to include a further Isle of Man based director (to be nominated).
A2.47.	Mr Farrell’s email of 23 October 2007 then continued, under the heading “Following Completion”: 
7) FPP will, as soon as practical, subscribe for at least £4m of senior notes, as described in the multi-class asset backed notes termsheet (attached). AT is relying upon this funding to be put in place in order to complete the transaction described above. 
8) Upon receipt of the Structuring Fees by Foundations the existing preference share capital of Foundations Holdings Limited shall be repaid.
9) As they grow in size through time, FPP and FM1 will be entitled to increase their exposure to the classes of notes, at the prevailing market value for such notes. AT will procure that reasonable secondary-market liquidity will be made available for such purchases. AT will also create further issues in the multi-class notes, in order to facilitate additional investments by Lonscale. 
A2.48.	An exchange of emails then took place on Wednesday 24 October 2007. In response to points raised by Mr Barkman, Mr Farrell began by saying:
[2] - Structures obviously evolve over time to fit in with the situation and information provided. At some point we need to firm up.
A2.49.	Mr Farrell added:
[7] … After receipt of AT syndication proceeds, Lonscale pays structuring fees = 50% of (syndication proceeds minus acquisition cost) to AFP and to Foundations (which entity? FCL?) – Notes paid down on participation of FPP/FM1 in the Notes as soon as practical. The amount of structuring fees will be a function of the deal with Hayes – we expect this to be £6M but clearly depends on last minute negotiation.
A2.50.	A futher point was a suggestion by Mr Barkman that FPP had put £800,000 into Arch’s Sustainable Opportunities fund to help with the deposit. Mr Farrell replied:
[8] … FPP has a holding in Sustainable Opportunities fund because it could not transact as originally planned in the Lonscale Notes. AT purchased £1M Notes instead. There is no link as such and SO3 fund currently holds notes it would not ordinarily hold.
A2.51.	In response to a suggestion from Mr Barkman that the easiest way forward was for the note [i.e. the class C notes for which FPP would pay a total of £2m] to be bought through an Arch fund, Mr Farrell said this:
[15] … This does not achieve the desired result at our end. NB – There are regulatory and reporting issues with Arch conducting all money flows without third party buyers.
A2.52.	In response to a question as to how Mr Farrell saw “our role in the Clubeasy project after completion” Mr Farrell said this: 
[20] … AT will own Lonscale. Lonscale will be managed and controlled from Isle of Man, with Directors Alan, Lee & Robin. ‘Influence’ should be driven by the interests of the shareholders, namely 100% AT, plus the look-through interests of the Noteholders (again mainly Arch funds at present time, reducing as FM1 grows in size and Note allocations).
A2.53.	In response to a suggestion that “any benefit given to Alan Blythe for doggedly sending the deal our way” should be split between Arch/Foundations, Mr Farrell replied:
[21] … Consistency please. You originally stated that you would take care of Alan’s end.
A2.54.	By the time of this email exchange it was apparent that Mr Hayes would not be able to meet all the conditions prior to completion set out in the SPAs. In particular, audited accounts of Club Easy indicated an aggregated net asset position significantly less than £32,337,500. In addition, from the following morning onwards it was clear that Mr Barkman would not be able to provide the funding that was envisaged in Mr Farrell’s email of 23 October 2007. The upshot, as explained in more detail below, was that:
(1)	on Friday 26 October 2007:
(a)	FCL signed a commitment letter as to future funding;
(b)	Lonscale and Mr Hayes entered into a further agreement reducing the total purchase price by £1,428,153, so that the sum due on completion would be £12,334,073 and the deferred consideration would be £1,825,000; and
(c)	as set out in more detail below, the Lonscale claimant cells subscribed for notes under which they would lend £20.2 million to AT1; 
(d)	FPP subscribed for notes under which it would lend £0.8m to AT1; after which
(2)	on Monday 29 October 2007:
(a)	it having become clear that there were additional deficiencies in the aggregated net assets, a further agreement was made between Lonscale and Mr Hayes under which the acquisition price was reduced to a total of £15,043,078, of which £12,218,078 was payable on completion, which was to take place that day; 
(b)	AT1 subscribed for notes under which it would lend £13 million to Lonscale, and the parties proceeded on the basis that AT1 subscribed for £8 million of equity in Lonscale;
(c)	ownership of the sole issued share in Lonscale was transferred by Mr Barkman to AT1 for a consideration of £1; and
(d)	AT1 received a total of £21 million from the Lonscale claimant cells and FPP, and made payments including a sum of £19,983,750.34 to Cobbetts’ client account; after which 
(3)	from Tuesday 30 October 2007 onwards payments out of Cobbetts’ client account were made, starting with payment of the completion monies on 30 October 2007. 
A2.55.	The commitment letter dated 26 October 2007 was signed by Mr Barkman and Mr Montague on behalf of FCL. It had no specific addressee, but expressed the hope that the commitments it described would be acceptable “in order for Arch Treasury to go ahead with the acquisition as soon as possible”. The letter stated: 
Letter of Intent
In connection with Lonscale Ltd, the acquisition vehicle for the Club Easy Group and related assets, we hereby confirm our commitment to part fund the acquisition through the purchase over time of the Arch Treasury Notes (Class A and Class C).
Owing to the timing of release of monies through our lender, Barclays (Isle of Man), we envisage the schedule will be as follows:- 
1. The excess borrow amount from Barclays (£8M approx) is expected to be agreed in 1-2 weeks’ time.  This amount will be invested 50/50 between Arch Treasury Private Finance Asset backed Notes (8% coupon) and Class A (6.5% coupon) of the Multi-Class Notes of the Arch Treasury Asset Backed Notes.
2. The Foundations Program commits to subscribe for £2M of Class C Notes today, with £800k for immediate settlement two weeks later.
3. Finally, the Foundations Property Opportunities Fund (being established November 2007) will be funded by the Foundations Program with the normal monthly draw mechanism and will commit to a minimum of £4M of Class C Notes, in addition to those held directly by the Foundations Program.
4. To enable us to commit to this larger amount, we require that we have the right to transfer the Notes over time in specie from the Foundations Program to the Foundations Property Opportunities Fund.
A2.56.	As to other events on 26 October 2007, arrangements made that day for Lonscale to receive funds totalling £21 million included the following:
(1)	Arrangements were made for Lonscale to execute a document (“the Lonscale MCN terms”) setting out terms for the issue of loan notes (“the Lonscale October 2007 notes”), divided into two classes, senior and mezzanine. The former, none of which were to be issued at the outset, ranked ahead of the latter, and would give holders an entitlement to receive the nominal amount on maturity on 13 April 2013, plus interest of 6.5% per annum. As regards the latter, a total of £13 million Lonscale October 2007 mezzanine notes were issued. Holders of those notes would be entitled to receive the nominal amount on maturity on 13 April 2013, plus interest of 12% per annum, plus 25% of any value of Lonscale in excess of £21 million. AT1 subscribed for the mezzanine notes. It also has been said to have subscribed for 8 million £1 ordinary shares in Lonscale, although the paperwork was not put in place until later. 
(2)	AT1 executed a document (“the ARCTIC MCAB terms”) headed “ARCTIC Multi-Class Asset Backed Notes. Final Terms”. This document concerned notes said to be issued pursuant to the ARCTIC Multi-Instrument Programme (“the ARCTIC MIP”). It set out terms for the issue of collateralised limited recourse loan notes (“the AT1 October 2007 notes”), divided into three classes, A, B and C:
(a)	Class A notes, none of which were to be issued at the outset, were to be on terms which were materially identical to those applicable to the Lonscale senior notes.
(b)	Class B notes in the total amount of £13 million were to be issued at the outset on identical terms to those applicable to the Lonscale mezzanine notes. 
(c)	Class C notes were to be issued at the outset in the total amount of £8 million. Holders of class C notes would not receive their nominal amount or any interest on maturity. Rather, they would be entitled to any value of Lonscale after the liabilities to holders of class A and class B notes had been discharged. 
(3)	The AT1 October 2007 notes were secured on shares that AT1 was said to hold in Lonscale. Note holders had no recourse against AT1. The notes were not tradable. 
(4)	Arch FP caused the Lonscale claimant cells between them to subscribe for AT1 October 2007 notes in a total nominal amount of £20,200,000. Separate subscription requests, each signed on their behalf by Mr Smith, were prepared for the PF claimants and RE claimants respectively. The notes issued in response were signed by Mr Ruparell on behalf of AT1.  The amounts payable for the notes equalled the nominal amounts.  Payment was due immediately.  The allocations were as follows:
(a)	PF2 - £3,900,000 of class B notes;
(b)	PF3 - £2,900,000 of class B notes;
(c)	PF4 - £3,900,000 of class B notes;
(d)	PF5 - £2,300,000 of class B notes;
(e)	RE1 - £3,600,000 of class C notes; and
(f)	RE2 - £3,600,000 of class C notes.
(5)	FPP subscribed for £2,000,000 of AT1 October 2007 class C Notes.  £800,000 of that sum was paid on that day and the balance of £1,200,000 was payable on or before 14 November 2007.  
A2.57.	By way of supplement to the summary above of what occurred on 29 October 2007, on that day:
(1)	Arch FP instructed Bordeaux to execute payments to AT1 by each of the Lonscale claimant cells in the amounts due under their subscriptions for their respective AT1 October 2009 notes. The payments were to be made at AT1’s internal account at Fortis;
(2)	Bordeaux instructed Fortis to make the transfers to AT1.
(3)	AT1 received the £800,000 due from FPP in respect of the first tranche of its subscription for AT1 October 2007 class C notes.
(4)	AT1 thus received £21m in total.  It used £1,016,750.34 to repay the amount due, including interest, to SO3, which, as stated in section A2/B above, had funded the payment of £1 million that Lonscale had made to Mr Hayes in August 2007 when the SPAs were concluded.
(5)	Arch FP instructed Bordeaux to transfer the balance remaining, £19,983,750.34, to the client account of Cobbetts. Bordeaux gave the necessary instructions to Fortis.
(6)	Mr Farrell wrote to Cobbetts noting that they were aware that £19,983,750.34 would be arriving in their client account that day for completion of the acquisition of Club Easy by Lonscale.  His letter was written on Arch FP headed paper. It said that, upon successful completion of the acquisition, “structuring fees” of £3 million were to be paid to Arch FP (whose bank account details were supplied) and £3 million to the order of Mr Barkman.
(7)	The sum of £19,983,750.34 was credited to Cobbetts’ client account. In respect of this sum Cobbetts created a client ledger account. I shall refer to it as “the £19.98m ledger account”. 
A2.58.	Documents bearing the date 29 October 2007 were prepared for auditors in early 2009. They included:
(1)	an invoice from Arch FP to Lonscale bearing the date of 29 October 2007 and stating that it was “for £3,000,000 for the provision of intermediary services in relation to the acquisition of the Clubeasy group of companies”; 
(2)	various versions of an invoice for £3m from FCL to Lonscale, some of them bearing this date, which were prepared in the period after 29 January 2009 (see the account of events following an audit request relayed on 29 January 2009 as set out in sections A2/L and A2/M). 
A2/ D. 30 October 2007 to 9 January 2008 inclusive
A2.59.	On 30 October 2007 the first transfer out from the £19.98m ledger account is recorded. It was a transfer of the sum of £12,218,078 to the client account of Mr Hayes’s solicitors. This was the payment of the completion monies. 
A2.60.	The second payment out of the £19.98m ledger account was a transfer to Club Easy on 2 November 2007 of £500,000. The narrative entry was “Working Capital from Completion monies Clubeasy Group plc”. 
A2.61.	The third payment out from the £19.98m ledger account was on 6 November 2007. This was a transfer of £3 million to Arch FP. The narrative described this payment as “Arch structuring fee”. It is common ground that this is a reference to the description used by Mr Farrell in his letter of 29 October 2007 to Cobbetts, in which a payment of £3 million to Arch FP was described as one of two “structuring fees”. 
A2.62.	On 5 November 2007 Mr Addison emailed Cobbetts. Mr Addison explained that Mr Barkman would be “calling you shortly to give consent to release funds to Arch Financial Products …”. In that regard Mr Addison’s email attached Mr Farrell’s letter of 29 October 2007. It will be recalled that this described the second “structuring fee” as being £3 million “to the order of Lee Barkman”. Mr Addison’s email concluded:
I would be grateful for immediate release of the funds once you have Lee’s authorisation.
A2.63.	While Mr Addison’s email referred to a release of funds to “Arch Financial Products”, the fourth payment out from the £19.98m ledger account was in fact a transfer to Arch UK of £556,152 on 9 November 2007. The narrative described it as “from Foundations Capital Limited”. It is common ground that this payment was made at Mr Barkman’s direction out of his £3 million “structuring fee”, and constituted the amount due to be paid by FCL to Arch UK for the redemption of Arch UK’s preference shares in FHL. 
A2.64.	On 15 November 2007 Mr Addison in his capacity as a partner of Arch FP wrote to BDO Stoy Haywood LLP (“BDO”). The content of the letter is set out below, with paragraph numbers added in square brackets for convenience:
VAT Advice
[1] Arch Financial Products recently received a fee of £3m from an Isle of Man company from assistance in acquiring another group of companies. I would like to confirm our understanding how we should treat this payment for VAT purposes.
Background
[2] In July 2007 Arch was made aware by a company called Foundations Capital Limited (FCL) of an opportunity to purchase a group of companies involved in the student accommodation and letting business in the UK. The vendor is an Isle of Man resident individual.
[3] The intended purchaser of the transaction could not complete the transaction at the time and so Arch was approached by FCL with a view to finding an alternative purchaser for the group of companies. 
[4] Arch introduced and acted on behalf of Arch Treasury IC Limited a Guernsey investment company to which Arch has an investment management agreement. 
[5] As there were a number of companies in the UK and the Isle of Man under common ownership that were being sold, it was recommended that a separate Isle of Man holding company was set up to purchase the various businesses and so Lonscale Limited was set up by FCL and Arch as a holding company to hold the disparate companies under the Clubeasy umbrella, and Arch Treasury IC Limited purchased Lonscale.
[6] There is no formal letter appointing Arch. Arch acted on behalf of Arch Treasury IC Ltd under the terms of the investment management agreement between the parties. 
Due Diligence
[7] FCL had already appointed the following parties to undertake due diligence for the purchase and whose fees were paid by Lonscale:-
[7.1] ● Cobbetts solicitors to undertake due diligence,   disclosure,  conveyancing, banking and tax issues.
[7.2] ● PKF undertook a forensic accounting review covering the financial control environment, accounting policies, balance sheet, cash flow and profit and loss and future projections of the companies.
[7.3] ● Storeys were engaged to prepare a valuation report on the property portfolio.
[8] I have attached a copy of the engagement letters. You will note that they were engaged by FCL as Lonscale had not been formed at the time.
[9] Arch and FCL undertook the following activities
[9.1] ● Negotiated the price with the vendor
[9.2] ● Negotiated the terms of the sale and purchase agreement
[10] We understand from the above that the entire fee is therefore classed as financial intermediary service and as such no VAT is due on the invoice.
[11] Payment has been made to us in November by Cobbetts but I have not submitted a formal invoice yet, and attach a draft invoice for your consideration to ensure that it correctly describes the work undertaken and the appropriate VAT treatment.
Timing
[12] Our VAT quarter ends on 30 November and we will need to submit the return and any payment by 31 December.
A2.65.	BDO replied by letter dated 23 November 2007. The letter noted that they had had a conference call with Mr Addison. Material parts of the remainder of the letter are set out below, with paragraph numbers added in square brackets for convenience.
…
[2] I understand that Arch FP provides fund management services to a Guernsey based investment company, Arch Treasury IC Ltd (Arch TIC). Arch TIC recently incorporated an Isle of Man subsidiary company, Lonscale Ltd, which purchased a group of companies. Arch FP together with a third party FCL, acted as an intermediary in arranging and brokering the deal which resulted in the acquisition.
[3] FCL had previously acted as an intermediary in arranging an acquisition by an alternative purchaser but the deal fell through. FCL then approached and invited Arch FP to introduce a potential purchaser and assistant in negotiating/arranging the deal between the two parties.
[4] Arch FP introduced the purchaser (Lonscale Ltd) to the vendor, helped raise funds for the acquisition and together with FCL negotiated the terms of the sales/purchase agreement and price for the shares. Arch FP is now entitled to a commission of £3Million payable by Lonscale. FCL is also entitled to commission. These commission payments were contingent upon the successful conclusion of the deal. In the event that the acquisition had not completed both parties would not have been entitled to a commission.
VAT Implications
[5] The services of a financial intermediary are exempt from VAT. The definition of a financial intermediary is someone who:
[5.1] 	1. Brings together parties who wish to buy and sell shares, securities, loans and other such financial instruments;
[5.2]	2. Acts as the middle man between the two parties in negotiating the terms of the acquisition; and 
[5.3]   3. Undertakes preparatory work for the conclusion of contracts.
[6] Please note that the exemption only covers the services of an intermediary in carrying out activities detailed in points 1-3 above and does not extend to additional services such as due diligence, valuation, legal work etc.
[7] In this instance I understand that Lonscale Ltd has paid separately for these services and that Arch FP’s commission only relates to its service of introducing and brokering the deal. Therefore the services provided by Arch FP fall within the above definition and I can confirm that its commission will be exempt from VAT.
Fund Management Services
[8] It is important that Arch FP’s financial intermediary services can be distinguished from its supplies of fund management to Arch TIC. I understand from our conversation that this is indeed the case and that the two supplies are independent of each other.
[9] If this was not the case we would need to consider whether the intermediary services form part of a wider service of fund management and as such should be treated as taxable fund management services rather than exemption financial intermediary supplies.
[10] In this instance if HMRC considered that the intermediary services formed part of the fund management supply, the commission would be outside the scope of UK VAT, as service as Arch TIC is based in Guernsey. However, I feel that this is a distinctly separate service supplied to Lonscale Ltd and is exempt from VAT.
…
A2.66.	In the meantime, a fifth payment out of the £19.98m ledger account had been made. This was a payment of stamp duty to HM Revenue and Customs on 22 November 2007 in an amount of £54,915. 
A2.67.	The sixth payment from the £19.98m ledger account was made on 23 November 2007 to FCL. It was a sum of £150,000, described in the narrative as “Foundations Capital - £150K of their structuring fee”. The defendants explained [see DFWCS para 87] that this was part of Mr Barkman’s £3m, used by him to pay “the introducer’s fee to Mr Blythe”.
A2.68.	The seventh and eighth payments out of the £19.98m ledger account were both made on 27 November 2007. They were in response to invoices from PKF and PKF (IOM), in amounts of £70,664.61 and £1,141.22 respectively. 
A2.69.	The ninth and tenth payments out of the £19.8m ledger account were also made on 27 November 2007. They were in respect of invoices from Dickinson Cruickshank (lawyers in the Isle of Man) and from Storeys, in amounts of £5,475.50 and £52,875 respectively.
A2.70.	The eleventh, twelfth and thirteenth payments out of the £19.98m ledger account were on 29 November 2007. They comprised a “Client to Client Transfer FO 00475.1/FO 00475.2”, in an amount of £19,659.23, and payments of £66,845.94 and £21,032.02, each described in the narrative as “Client to Office Transfer”. 
A2.71.	The fourteenth payment out of the £19.98m ledger account was on 30 November 2007, for an amount of £950,000. It was described in the narrative as “from Lonscale Ltd to Clubeasy Group plc”. This payment was the subject of a letter written to Cobbetts on paper headed with Lonscale’s name and address and dated 29 November 2007. It was signed by Mr Farrell and Mr Barkman in their capacity as directors, and asked that the payment to Clubeasy Group plc be made to Clubeasy Group plc’s bank account, adding “bank costs may be debited from the funds held on behalf of Lonscale Ltd.” 
A2.72.	On 3 December 2007 Cobbetts emailed Mr Jeffs, Mr Barkman and Mr Montague attaching an annotated print out of the transactions on the £19.98m ledger account. The balance of that account, following the fourteenth payment described above, was £2,316,911.82. The annotations calculated that after deducting the fourth and sixth payments (made at the direction of Mr Barkman on 9 and 23 November 2007 respectively), the sum of £3 million to be held to the order of Mr Barkman had been reduced to £2,293,848. A further calculation showed that when that sum was deducted from the £19.98m ledger account balance of £2,316,911.82, there remained in that account a sum of £23,063.82. In Cobbetts’ covering email they asked for confirmation that the split of the balance of funds held was:
Foundations Capital		£2,293,848; and
Lonscale Limited		£23,063.82.
A2.73.	In December 2007 and early January 2008 email exchanges took place between Mr Jeffs and Mr Farrell concerning preparation of what was described as an “Abbreviated Business Plan for Clubeasy”. On 6 January 2008 Mr Gordon Featherstone, a consultant to Club Easy brought in by Mr Jeffs, prepared a report stating, among other things:
…
Looking at the company now it appears that Jason probably ran it principally to create cash. He regularly re-mortgaged the property but did not always re-invest that money in the company. He had a management style that was very ‘capital’ focussed and made it plain to the staff that he was not very concerned about bottom line profitability. He had a management style that was very dictatorial and employed staff to accommodate that way of working.
So we now have a company that is losing money and will require capital injections to keep it going unless something significant happens. The expected increase in property values has slowed down and this could have an impact on the underlying asset value of Clubeasy. We have a level of senior staff that is struggling to make the adjustments needed by the new owners in the way that they work, and this makes one wonder if they have what it takes to change and move forward.
…
One final point that could impact how we move forward is the Arch/Lonscale strategy for their Clubeasy investment. It would seem that the original investment that was made was expected to be in a company with an increasing capital value. This increase has now slowed down because of the downturn in property value increase. It would be useful to know the strategy you have in mind to bring the company to profitability as this may affect the way we move forward now.
A2.74.	On 9 January 2008 Lonscale provided funding to Club Easy in an amount of £1 million. This was financed by a payment in that amount by AT1 to Lonscale by way of subscription for one hundred Lonscale October 2007 senior notes. AT1’s payment itself was funded by payments of £500,000 by each of RE1 and RE2 pursuant to subscriptions by each of them for fifty AT1 October 2007 class A notes. 
A2/ E. 10 January 2008 to 28 April 2008 inclusive
A2.75.	Mr Featherstone produced an updated report on 16 January 2008. In a section entitled “background” Mr Featherstone said this:
…
In the past there was never any requirement for the finance department to produce monthly information of any kind, other than schedules of bank balances and a rudimentary Balance Sheet – Jason Hayes was not concerned with profitability. As a result of this the systems in place have been set up simply to provide Jason with what he wanted, as well as produce year end accounts. There is no comprehensive schedule by property showing the loan raised against it and the interest payments due and when the payments are due: there is no comprehensive schedule by property showing the outgoings on that property and when payments are due: there is no schedule of the various city offices and their associated costs and payment due dates: there is no comprehensive schedule of all the employees, what they do, where they work and what they are paid. There is no properly prepared budget for the year and thus no derived cash-flow forecast. 
A2.76.	Mr Featherstone also noted issues concerning the way that work was split between the finance director and the commercial director. In a concluding section of his updated report, Mr Featherstone noted that resolution of those issues would be a vital part of the exercise that he proposed. As to that exercise, what Mr Featherstone proposed was this:
1. The simple cash-flow … produced [by the Finance Director] is reasonably accurate for the moment and will give an idea of what cash needs to be injected and when.
2. We produce the necessary back up schedules needed to create a ‘proper’ budget, and use them for a more practical budget, a budget that is in a similar format to the financial accounts so that the accounts can show actual and budget figures and highlight variances.
3. We then create a cash-flow forecast from that budget, again in a format that can easily be compared to actual figures.
4. We can then work on forecasting the Balance Sheet on a monthly basis.
5. We can also address the detailed information requirements of Arch/Lonscale that include results/profitability by property and also by city.
A2.77.	 In an internal email sent by Mr Jeffs on 14 February 2008, Mr Jeffs forwarded the email sent by Cobbetts on 3 December 2007 giving their breakdown of the funds held in the £19.98m ledger account (see section A2/D above). Mr Jeffs noted that the balance described in Cobbetts’ email as being held for Lonscale should match with the amount in a Barclays account that was due to be opened. 
A2.78.	A fifteen page briefing document was circulated by Mr Jeffs on 22 April 2008. It was entitled “An Introduction to Clubeasy: Background Narrative.” With the addition of paragraph numbers in square brackets, this document included the following: 
…
[9] Lonscale acquired Clubeasy on 29th October, anticipating that the existing management team and company structure and personnel would be able to continue the day-to-day operations of the company. This would allow a combination of Lonscale owners (Arch and Foundations) to be able to concentrate on expanding the accommodation portfolio, re-negotiate loans to reduce debt-repayment burden and generally restructure the company and get costs under control.
[10] In fact the basic assumption proved to be incorrect: the operating board were not used to directing the Company, they had been operating in a culture of “don’t do anything unless instructed to do so”. The previous owner was very hands-on and would frequently and typically get involved in everyday matters and decision making and micro-management down to fine details. Over time staff had got used to this way of working and were expecting to be told and steered rather than be self reliant, while this might be more acceptable in junior roles/jobs this unfortunately was pervasive up to and including the operating board.
[11] Management information was non-existent and the finance and admin systems in place were not able to produce consolidate group information: in fact monthly accounts were not prepared as the owner was not interested in looking at profit and loss as he was concerned with capital value. Nor were systems and processes in place that allowed the individual cities to be analyzed in any meaningful way. An additional unexpected problem arose when it was discovered that, due to procedural and hardware inadequacies, financial information had become corrupted. …
[12] The thrust of the companies finances appear to have been to re-mortgage as the properties increased in capital value and ensure that direct expenses could be covered by repeating such exercise on a regular basis. Prior to acquisition the previous owner was able, in a rising property market, to cover the P&L deficit by regularly releasing funds from the re-financing and draw substantial dividend payments as well. Latterly interest rates were rising, property capital value growth was slowing, overall level of debts was increasing, larger scale operation had increasing level of costs – unchanged this would represent a poor outlook. These facts would show the full impact on the Company’s financial position once the new levels of debt, costs etc were fully and accurately set out in a forecast or budget. …
[13] A consequence of not having Completion Accounts that are agreed between vendor and purchaser is that mortgage and loan providers are reluctant to enter into new or re-negotiated arrangements until the Completion Accounts are signed off and subsequent management information is readily and routinely available to them. 
…
[17] Immediately following the acquisition three individuals (Company mangers who were relatives or close friends of the previous owner) caused a crisis by refusing to work with the MD and made demands, expecting to have their previous arrangements recreated (these arrangements centred on the individuals being gifted a share in their respective city’s capital appreciation of the property). …
A2.79.	On 28 April 2008 Lonscale provided funding to Clubeasy in an amount of £200,000. This was financed by a payment in that amount by AT1 to Lonscale by way of subscription for twenty Lonscale October 2007 senior notes. AT1’s payment itself was funded by payments of £100,000 by each of RE1 and RE2 pursuant to subscriptions by each of them for ten AT1 October 2007 class A notes. 
A2/ F. 29 April 2008 to 9 June 2008 inclusive
A2.80.	On 10 May 2008 Mr Farrell prepared an email which he entitled, “real estate – update notes”. It included as section B a synopsis in relation to Club Easy. Under the heading, “current trading”, the synopsis noted that an interim CEO had been appointed, that a strategy of a structure under which there would be an operating company (“OpCo”) and a property owning company (“PropCo”) had been “oft discussed” but was still in need of progression, and that Club Easy had lost most of its senior management team, which posed considerable operational risk if further departures were to ensue. At item 5 under this heading the synopsis stated:
5. Further buying in the Southern cities (and London) is planned, which should serve to provide additional future revenues against the cost base, which is being gradually reduced.
A2.81.	Under the heading “Structural Problems/Opportunities”, the synopsis stated:
1. Club Easy needs an infusion of professionals in order to migrate from a single entrepreneur owner-run business into a sustainable more professional business, focussed on returning to profit within one year
2. Club Easy has a cost base commensurate with twice the level of properties currently on its books
3. Club Easy makes a loss on most of its property base, through inappropriate pricing and marketing policies
4. Club Easy is significantly loss-making, so Arch has prudently created large loss provisions over the next 12 months which are steadily being drawn down
5. Club Easy has had little active management in the period since acquisition. Lender relationships, strategy, staff all need to be optimized
6. Student accommodation properties are valued at a higher level than comparable residential properties. This presents both a potential uplift on change of use, and a potential loss on revaluation/disposal if not sold en bloc.
A2.82.	Under the heading “Structural Solutions”, the synopsis stated:
1. Additional funding for new purchases. Lenders are still keen on student accommodation so making LTV ratios still attractive
2. Additional funding for new staff and structural fixes to the cost base
3. New pricing policies. Removal of the all-in unlimited package, to be replaced by a higher-priced “reasonable use” package
4. Better communication and marketing strategy development, as opposed to advertising
5. Given the housing nature of much of the portfolio and the need to upgrade some of the housing stock, the attraction of other high quality tenant groups e.g. young professionals
A2.83.	On 23 May 2008 Mr Montague forwarded to Mr Barkman and Mr Addison an email that had been received from the wealth management division of Barclays Bank PLC (“Barclays Wealth”) in relation to FPP. The email noted that Barclays Wealth were currently conducting a review of what was described as “the Foundations Programme”. There had been a request that Barclays Wealth include as security for an existing facility what it described as a “heavy Arch investment”. The email expressed concerns as to “the supporting documentation and the Arch funds themselves.” Among other concerns, the email noted that FPP’s holding of AT1 October 2007 class C notes formed the largest part of the Arch investment, and commented that there was “no appetite to use this as collateral”. The email gave two reasons for this lack of appetite from Barclays Wealth’s point of view. They were as follows:
[1] “there is no transparency of the underlying company, i.e. Lonscale Ltd”; and
[2] “the fact that these are C class and therefore only have value following the redemption of class A and B notes”.
A2.84.	In relation to this aspect of Barclays Wealth’s concerns, Mr Addison replied by email the same day thanking Mr Montague and adding, “we’re on the case”. 
A2.85.	On 6 June 2008 Mr King sent Mr Farrell an email describing a meeting that had taken place with Lloyds TSB (“Lloyds”) on 3 June 2014. Lloyds had lent to Club Easy on the basis that each loan was supported by a personal guarantee (“PG”) provided by Mr Hayes. Mr King noted that the lending was subject to covenants which would be reviewed at the end of 2008. It would be important to satisfy the covenants as breach would lead to a higher interest rate and a reduction in the existing minimum ratio of the amount of the loans against the value of the security (“loan to value” or “LTV”). At present Mr Hayes’s liability under his PG remained in place, and Mr King noted that removal of that liability might be something to raise in negotiations with Mr Hayes. He added that Lloyds had stated a desire to lend to Arch, and potentially to increase their lending to Clubeasy. 
A2.86.	On 9 June 2008 Lonscale provided funding to Club Easy in an amount of £600,000. This was financed by a payment in that amount by AT1 to Lonscale by way of subscription for sixty Lonscale October 2007 senior notes. AT1’s payment itself was funded by payments of £300,000 by each of RE1 and RE2 pursuant to subscriptions by each of them for thirty AT1 October 2007 class A notes. 
A2/ G. 10 June to 2 July 2008 inclusive
A2.87.	On or shortly after 25 June 2008 a document described as the “latest version of the 2008/2009 budget for the consolidated Clubeasy Group” was prepared. It projected a loss of £3.4m for 2008/2009 [using a year end of 31 July], against a forecast loss for the current year [ending 31 July 2008] of £3.8m. As to cash flow, there would be a cash requirement by the end of July 2008 [the document referred to “2007”, which appears to be an obvious slip] of approximately £1.1m, and that by the end of 2008/2009 there would be an additional requirement of approximately £3.3m, to which would need to be added tax and VAT penalties expected to be over £200,000. Five general comments were made in relation to the budget figures. With the addition of numbering in square brackets, they were as follows:
[1] We have prepared these figures on a conservative basis to ensure that we show a ‘worst case’ scenario. They reflect the information that we currently have. We do expect to identify areas where improvements can be made and so intend to re-forecast on a quarterly basis to reflect any such improvements.
[2] For the purposes of this budget exercise we have ignored the effect of any potential VAT registration for Clubeasy as we do not yet know what effect these will have.
[3] We have prepared these figures to be ‘inclusive of OpCo and PropCo’ so that all items of income and expenditure that affect the Consolidated Group are included. The only exception to this are the costs of the properties purchased since acquisition that are owned offshore by Savile Durham and Savile Exeter.
[4] We have used current interest rates so there would be a saving in this area if rates were to reduce. Kingston Smith have done an exercise which includes interest projections for 2008/2009 at around £5.6m compared to our budgeted £6.2m.
[5] City budgets resulted from property by property forecasts for revenue and direct costs, an exercise that has already given much useful information.
A2.88.	On 2 July 2008 Lonscale provided funding to Clubeasy in an amount of £1.1m. This was financed by a payment in that amount by AT1 to Lonscale by way of subscription for one hundred and ten Lonscale October 2007 senior notes. AT1’s payment itself was funded by payments of £550,000 by each of RE1 and RE2 pursuant to subscriptions by each of them for fifty five AT1 October 2007 class A notes. 
A2/ H. 3 July to 6 October 2008 inclusive
A2.89.	On 3 July 2008 Kingston Smith LLP (“Kingston Smith”) produced a report for Lonscale and its directors. The report was entitled “Lonscale Restructuring”, and comprised a review of the current business structure along with advice on appropriate changes to make the structure more tax efficient. The report noted that all employees had a single contract of employment with Clubeasy Group plc, which recharged costs of the employees to other Clubeasy Group companies on a “best guess” basis. It advised that this was a supply of staff for VAT purposes, and that Clubeasy Group plc or any earlier employer of staff should have been VAT registered. There would be a late registration penalty in that regard. The VAT due would need to be paid, which would be a true cost as the company receiving the services would be VAT exempt and unable to recover. In addition there was likely to be a liability to VAT surcharges. In the eight months to March 2008 Kingston Smith calculated the VAT on recharges of employment costs as amounting to £101,875. 
A2.90.	In an email sent by Mr King to Mr Farrell and Mr Jeffs on 23 July 2008, Mr King reported on a discussion with Bath Building Society. The building society had asked to be provided with current rents so that rough valuations could be made. Mr King commented that using the current figures for rents which were inclusive of utilities, and a yield for valuation of 7.25 percent, the loan to value ratio was 83 percent, which he described as “probably way too high” to give the building society comfort. Mr King added that if the building society were to use a “blanket ten percent utility cost assumption”, which he said was what Lloyds did, this would increase the ratio to 93 percent. Immediately after making this observation, Mr King continued:
If we use a realistic 20% utility number, the LTV is 104%!!
A2.91.	On 8 August 2008 Club Easy management produced a “Business Plan for Growth.” The plan envisaged that Club Easy would add 1,654 bed spaces over a five year period by “opening up” two or three new cities. It assumed a capital property development programme of £20 million per year from 2009/10. This would be “in addition to the acquisitions/developments currently being planned in Exeter and Durham.” The plan envisaged that capital property developments would “be funded 60/40 borrowing to equity.” Under the plan a break even position would be reached in 2012/13. 
A2.92.	In an email to Mr Farrell, Mr Barkman and Mr Blythe on 14 August 2008, Mr Jeffs recommended that Lonscale’s board of directors should approve and support the Business Plan for Growth. The following morning Mr Farrell emailed Mr Blythe and Mr Barkman, commenting:
The numbers therein [i.e. in the Business Plan for Growth] are low-ball i.e. base case 20M expenditure over next 4 years on new properties, so all that should be achievable on a much earlier timescale. 
A2.93.	Mr King had received a copy of Mr Farrell’s email, and on the afternoon of 15 August 2008 responded:
… I wouldn’t accept the plan… if I was part of the Executive unless there was a written undertaking from Arch/Foundations to provide the capital for additional purchases. There’s no way any profitability can be achieved standalone at current leverage levels. Maybe a way to get Foundations on the hook?
A2.94.	On 21 August 2008 Mr King sent Lloyds an email headed “clubeasy – information requested”. In the email he referred to a recent conversation regarding Club Easy’s desire to refinance various loans provided by, among others, Bath Building Society. Attached to his email was information on those facilities. Later that day Mr King forwarded the email to Mr Jeffs and Mr Farrell among others, commenting:
Note that for the Lloyds email below, I’ve removed any details of costs [i.e. just property details, loan amount and 2008/9 rent etc.].
Since Lloyds are an existing lender and therefore know Clubeasy, they assume a 10% cost ratio. The real number is 25%, so I didn’t want to show this.
A2.95.	Also on 21 August 2008 Mr King emailed Mr Farrell and Mr Barkman, attaching a plan which would reduce the time needed to show “earnings multiples in valuations on OpCo”, as well as accelerating the break even point in cash terms on the group. His covering email included a number of comments, one of which referred to the Employee Share Ownership Plan (“ESOP”). With the addition of paragraph numbers in square brackets, those comments were as follows:
[1] Attached is my plan of making Clubeasy perform in the near term i.e. shrink the period before we can start to see some earnings multiples in valuations on OpCo, and accelerate the breakeven point in cash terms on the group. 
[2] Clearly this requires huge input from Arch and Foundations otherwise I can’t see that Clubeasy will ever show a profit with its current level of gearing. That said the refinancing exercise may require additional capital in the coming months of up to £7m.
[3] In order for the management to even have a shot at making inroads, Arch/Foundations have to give a commitment to Clubeasy to provide the necessary capital investment [say £50m equity over the next 2-3 years], via whatever means are available to each party.
[4] I’m surprised that, so far, the management hasn’t made noises that without this commitment the ESOP scheme is pointless as they will have meaningless and unachievable targets.
[5] Accordingly, I seek an undertaking from both parties re the capital injection levels and plans on this front.
[6] Lee – I’m pretty much in the dark on Foundations plans/capacity. If you could flesh this out for me that would be most appreciated.
A2.96.	On 6 October 2008 Lonscale provided funding to Club Easy in an amount of £50,000. This was financed by a payment in that amount by AT1 to Lonscale by way of subscription for five Lonscale October 2007 senior notes. AT1’s payment itself was funded by payments of £25,000 by each of RE1 and RE2 pursuant to subscriptions by each of them for 2.5 AT1 October 2007 class A notes. 
A2/ J. 7 October 2008 to 11 December 2008 inclusive
A2.97.	On 31 October 2008 Mr King received an email from a colleague reporting on discussions with banks with a view to replacing the Club Easy debt. Mr King’s colleague reported that at the stage when terms were to be provided for the facility, HSBC pulled out of the market. He had contacted a director of Abbey UK Corporate who was familiar with Mr Hayes and did not want to lend on the portfolio, having seen it in the past and having taken a decision not to lend then. In relation to other banks the position was summarised in the email in this way:
I am still in discussions with three banks who are eager to proceed and I am advancing them quickly, but the main problem is that they will require a third party valuation from another firm.  The Storey’s valuations is above what we feel is the market value of the property and as such we have been trying to find banks friendly with Storey’s as the valuer.  If we are unable to reuse the valuation (or the firm) the resulting value and LTV will drive our debt to levels that will require us to substantially increase our equity.
A2.98.	On 3 November 2008 Arch FP’s real estate division sent an email to Mr King and Mr Farrell, among others, attaching a review paper regarding “Clubeasy Funding of Jason Hayes PG secured loans.” In a section entitled “Background” the note commented that there had been a protracted attempt to refinance the existing Clubeasy portfolio, which had been hampered by a number of factors. One such factor was that the existing debt had been “secured in a rising market, pre-credit crunch.” In a section entitled “Valuations” the note commented that the valuations provided by Storeys were “not only very generous, but arguably flawed, being based on a Gross Yield methodology rather than Net Yield – the norm for student accommodation and residential rental investments… no Banks we have spoken to are willing to consider Storeys to provide their lending security valuations.” In addition the market had fallen materially since August 2007 when the Storeys valuations were undertaken. The note identified a best case valuation of £25.787m, but commented that this contrasted with a vacant possession valuation of £21.255 million and noted a doubt as to whether an external valuer could justify such a large discrepancy. The note concluded that on the footing of an expected valuation of £23.6 million, the expected achievable debt would be £16.5 million from the Bank of London and the Middle East (“BLME”) on terms specifying a 70% LTV, or £15.3m from Barclays on terms involving a 65% LTV. The implication identified in the note was that there would be a “required equity injection” of £11m to £12.3m. 
A2.99.	On 10 November 2008 Mr King prepared a note setting out the “general gist” of discussions with banks about Club Easy. The note identified four existing lenders where the sale of the CG owning companies had involved a breach of loan covenants. While in one case, Beverly Building Society, there had been agreement to the sale, the remaining three lenders (Bath Building Society, Skipton Building Society and Paragon) were insisting on repayment. Mr King commented that the facility provided by Beverly Building Society was “small in the scheme of things”. In relation to Paragon he noted that the facility was for £25m odd, as to which “we do not have unlimited resources to inject this amount of capital.” More generally, Mr King commented:
The sale of Clubeasy by the Vendor to Arch was a breach of loan covenants in all of the above loans.  Unfortunately we did not find this out until well after Completion due to poor documentation trails, and this left us in the lurch in potentially facing a £30m liquidity hit if really pressed, or having the company fail.
A2.100.	On 11 December 2008 Lonscale provided funding to Club Easy in an amount of £500,000. This was financed by a payment in that amount by AT1 to Lonscale by way of subscription for fifty Lonscale October 2007 senior notes. AT1’s payment itself was funded by payments of £250,000 by each of RE1 and RE2 pursuant to subscriptions by each of them for twenty five AT1 October 2007 class A notes. 
A2/ K. 12 December 2008 to 5 January 2009 inclusive
A2.101.	On 21 December 2008 Arch FP produced a document entitled “Valuations Policy Real Estate”. It applied to funds for which Arch FP was the investment manager. As regards student accommodation, it noted that there were different methods of valuing this asset class depending, among other things, on the mode of operation. In the case of Lonscale, having identified that the mode of operation was “Direct Operation”, the document continued:
There are basically 3 methodologies that we can use for Direct Operation student accommodation:-
i)	Vacant Possession i.e. normal residential market valuation of an empty property; or
ii)	Bedspace Model : a valuation based on the average bed cost in a particular regional market multiplied by the number of beds in the property e.g. 4 beds x £60,000/bed = £240,000. The average bed prices vary by each regional city, and by location in that city; or
iii)	Yield Model : a yield based calculation which uses the rental yield divided by the market yield for accommodation in that particular market e.g. a rental income from a property of £20,000/yr in a 7% commercial yield environment implies a valuation of £285,000.
The Vacation Possession valuation is the most conservative, however it misprices the commerciality of the property which now has a changed use from normal residential, and has a much higher yield than normal buy-to-let use.
The Yield Model is at the other end of the spectrum, and would be used when selling a commercial business of this type i.e. it is the most aggressive.
For conservatism, we will use the Bedspace Model utilizing market prices per bed in each of the markets we enter.
A2.102.	On 5 January 2009 Lonscale provided funding to Club Easy in an amount of £500,000. This was financed by a payment in that amount by AT1 to Lonscale by way of subscription for fifty Lonscale October 2007 senior notes. AT1’s payment itself was funded by payments of £250,000 by each of RE1 and RE2 pursuant to subscriptions by each of them for twenty five AT1 October 2007 class A notes. 
A2/ L. 6 January to 13 March 2009
A2.103.	On 21 January 2009 Mr Featherstone emailed Mr Jeffs. He noted that answers were needed for Kingston Smith in relation to a number of matters. The third of them was described in this way:
3. Arch Real Estate provided £21m to be deposited at Cobbetts to pay acquisition costs and the two £3m amounts to Arch and Foundations. We need some documentary evidence for the £3m amounts. So far I have shown the payments as ‘Restructuring Costs’
A2.104.	Just over a week later, Mr Featherstone received an email from Kingston Smith, auditors of Lonscale, referring to “the two £3m fees paid on the acquisition”. In the email Kingston Smith said: 
Given the size of these we need to understand the commercial rationale behind them; … 
A2.105.	Mr Featherstone forwarded that email to Mr Jeffs on the same day, adding in relation to the £3 million fees, “Only you guys can help here”. 
A2.106.	Mr Farrell was told that as regards the Lonscale audit Kingston Smith needed “documentary support and commercial rationale” for these fees. Mr Farrell indicated in an email that those involved should ask Mr Addison adding:
- he went thru it with bdo at our end
also [AT1] acquired + then securitised the deal into a+b+c notes
A2.107.	Mr Farrell’s email had been sent at 1:16pm on 27 January 2009. At 2:21pm Mr Addison sent a reply. With paragraph numbers added in square brackets, it was as follows: 
[1] I hope this helps
[2] In July 2007 Arch was made aware by a company called Foundations Capital Limited (FCL) of an opportunity to purchase a group of companies involved in the student accommodation and letting business in the UK. The vendor is an Isle of Man resident individual.
[3] The intended purchaser of the transaction could not complete the transaction at the time and so Arch was approached by FCL with a view to finding an alternative purchaser for the group of companies.
[4] Arch introduced and acted on behalf of Arch Treasury IC Limited a Guernsey investment company to which Arch has an investment management agreement.
[5] As there were a number of companies in the UK and the Isle of Man under common ownership that were being sold, it was recommended that a separate Isle of Man holding company was set up to purchase the various businesses and so Lonscale Limited was set up by FCL and Arch as a holding company to hold the disparate companies under the Clubeasy umbrella, and Arch Treasury IC Limited purchased Lonscale.
[6] Arch and FCL undertook the following activities
	[6.1] ● Negotiated the price with the vendor
	[6.2] ● Negotiated the terms of the sale and purchase agreement
A2.108.	Mr Addison’s explanation, along with Arch FP’s invoice to Lonscale dated 29 October 2007, was forwarded to Mr Jeffs, who in turn forwarded it to Kingston Smith. On 29 January 2009 Mr Jeffs emailed Mr Barkman and Mr Montague, informing them that the auditors were “asking to see the Foundations invoice to help them complete their outstanding queries in this particular area.”
A2.109.	On 31 January 2009 Mr Farrell emailed, among others, Mr Addison, Mr King and Mr Jeffs. In his email Mr Farrell reported that he had spoken to Capita, who had told him that the FSA had raised queries, and had expressed concerns in three areas. Mr Farrell’s email described these three areas, and set out plans to assemble documentation so that Capita would be in a position to give responses to the FSA. The three main areas were these:
1. Risk management process of Arch (and Capita’s governance of Arch)
2. Strong concerns about liquidity (and 100% ownership of some Guernsey cells) – can investors get out if they want?
3. Conflicts of interest – how does Arch pick its investments (there is a financial inducement for Arch to invest in Arch cells, as opposed to other investments). Also separation of the investment managers & appropriate level of independence.
A2.110.	Mr King reported to Mr Farrell on 5 February 2009 that he had found a note “late last year referring to an options structure that Clubeasy had in place.” Mr King said that it now appeared that Mr Blythe had “actively sought to enter an options structure that really is pretty awful for Clubeasy.” The upshot was that as regards lending by Lloyds at rates linked to LIBOR, in relation to interest on an amount of £24 million LIBOR was effectively stuck at 5.67 percent. Mr King commented that “there could be a case that it was mis-sold to someone not understanding what they were buying”. 
A2.111.	In an email the following day to Mr Jeffs, copied to Mr Farrell, Mr King set out a number of comments. His first three comments, with the addition of paragraph numbers in square brackets, were as follows: 
[1] The situation with the Lloyds loan & option is complex, but with the interest rate struck it will be impossible for the 2 companies [Hayes Ltd & ASA] to make a profit for at least another 3 years, and this could prove a drag on the entire Group [and hence our valuation].
[2] Lloyds are the sole lender to these 2 companies, and they have security over all the properties owned – so if we did anything with the company it is clean & isolated in that sense. We’d of course need to check if we could trigger any other loan within the Group if we made proposals to Lloyds on the debt/option.
[3] Given that the LTV is probably over 100%, the funding rate is about to be increased dramatically with the change to LIBOR and a new spread etc., these companies might not be in good shape going forward.
A2.112.	On 10 February 2009 Mr Jeffs emailed Arch Treasury. He attached a draft letter of support from Arch Treasury in relation to Lonscale/Clubeasy, explaining that it had been requested by the auditors and asking if formal approval from the Investment Committee could be sought at the earliest opportunity. The attached draft letter contained, among other things, confirmations that AT1 would continue to provide working capital funding for a period of at least twelve months from the date of approval of the accounts of Lonscale Limited and its subsidiaries, and that AT1’s budget included provision of additional loans of £3 million from AT1 and its shareholders for the period to 31 July 2009. 
A2.113.	In an internal email dated 22 February 2009 Mr King, in response to a suggestion that revaluation of the Lonscale assets would not be a trivial process, replied:
Lonscale is a big issue, however the Board have decided that the value of the properties is fine as stated. 
A2.114.	On 3 March 2009 AT1 provided a letter of support for Lonscale which included the confirmations described above.
A2.115.	On 9 March 2009 FCL emailed Mr Jeffs attaching a draft invoice from FCL to Lonscale in an amount of £3 million. The covering email explained:
Just thought that I’d run this past you first as Guernsey have copied your invoice word for word – this won’t really case a problem will it, or would you like me to shuffle it a bit?
A2.116.	On 12 March 2009 an email was sent to Mr Jeffs on behalf of Mr Montague. It attached an invoice from FCL to Lonscale dated 9 March 2009, but what was said in the invoice differed from what had been said in the draft emailed to Mr Jeffs on 9 March 2009. Whereas that draft had, as indicated in the body of the email dated 9 March 2009, used materially identical wording to the invoice issued by Arch FP, the wording of the invoice of 9 March 2009 as signed by Mr Montague was:
09th March 2009
Dear Sirs
REF: Lonscale Acquisition of Clubeasy
Invoice for £3,000,000 in respect of the capital appreciation arising in the sale of the Clubeasy group.
Yours faithfully
Philip Montague
Director
A2.117.	As noted in section A3 above, in March 2009 Capita suspended trading in shares of the UK OEICs on the grounds of deteriorating liquidity. This occurred on 13 March 2009. [Also on that day the GFSC, as stated in section A3 above, imposed on the ICC a condition that it and each of the cells were prohibited from disposing of any of their assets without the GFSC’s prior consent.]
A2/ M. 14 March 2009 onwards
A2.118.	It appears from emails dated 16 March 2009 that Foundations Capital sent to Mr Jeffs on that day a copy of the draft invoice from FCL to Lonscale as emailed on 9 March 2009, and thus using materially identical wording to that which had been used in Arch FP’s invoice, but with the date of the invoice revised to “30 October 2007”. This was then forwarded by Mr Jeffs to Mr Featherstone. 
A2.119.	Also on 16 March 2009 Mr King sent Mr Featherstone what he described as “a more accurate summary” for the auditors. With paragraph numbers added in square brackets, the “more accurate summary” stated:
[1] The funding of Lonscale for the purchase of Clubeasy was always intended to be structured in such a way that part of it would be capital and part loans. There has been some confusion regarding Loan Notes which was caused, in part, by poor drafting internally within Arch. In addition there was an implication that Lonscale had itself issued Loan Notes to support the monies that it received from Arch which was incorrect. All of this is now being corrected.
[2] We believe that … the draft Lonscale Balance Sheet that we currently have should be adjusted by reducing the ‘Creditors Falling Due After More Than One Year’ by £8m and increasing the ‘Capital and Reserves’ by £8m.
[3] The original funding to Lonscale from Arch Treasury, plus interest to 30 July 2008, of £23.9m was made up as follows
[3.1] ● £2.9m of funding via 6.5% Senior Loan Notes; and
[3.2] ● £13m of funding via 12% Mezzanine Loan Notes; and
[3.3] ● £8m capital.
[4] The £8m of capital should be seen as a subscription for share yet to be issued at that time: as the paperwork was not done at the time we are now putting this in place.
[5] As Arch Treasury did not have the resources to provide all of this, it needed to be able to break up transactions, and there was a requirement to add some equity component to a mezzanine loan note, Arch Treasury issued the following Loan Notes to Investors (i.e. various Arch managed funds):-
[5.1] ● “Lonscale A Notes” – £2.9m of senior loan notes paying a 6.5% coupon (with no equity share) – so these are effectively identical to the Senior Notes issued to AT by Lonscale.
[5.2] ● “Lonscale B Notes” – 13m mezzanine notes paying a 12% coupon, plus 25% share of any equity upside – so these are effectively the Mezzanine Notes issued to AT by Lonscale with the addition of the synthetic equity; and
[5.3] ● “Lonscale C Notes” – effectively synthetic equity of £8m that included 100% of Lonscale equity, but only 75% of the equity performance upside – there is no Lonscale equivalent to these;
A2.120.	On 24 March 2009 a revised draft letter of support for Lonscale was signed on behalf of AT1 and Arch FP. 
A2.121.	A meeting of the board of directors of Lonscale was held on 25 March 2009. Those present were Mr Blythe, along with Mr Barkman and Mr Farrell both of whom participated by telephone. The minutes record that, among other things:
…
3. DECLARATION OF INTEREST
3.1 Each director present declared their interest in the business to be transacted at the meeting in accordance with the requirements of the Company’s articles of association and other lawful requirements.
4. BUSINESS OF THE MEETING
4.1 The chairperson reported that the business of the meeting was to rectify the omission from the books and registers of the Company the allotment of 8 million ordinary £1 shares in the capital of the Company to Arch Treasury IC Ltd.
…
5.3 The Chairman … noted that, in order to permit the Company to complete the [SPAs] and to provide further working capital to the Company, the Company on 29 October 2007:
(a) borrowed from Arch Treasury IC Ltd £13 million via a 12% Mezzanine “B” Class Loan Note; and
(b) accepted from Arch Treasury IC Ltd £8 million via a subscription of 8 million ordinary £1 shares in the capital of the Company (Shares).
5.4 The Chairman then confirmed that it had now come to the Board’s attention that the subscription for the Shares had been omitted from the books and registers of the Company.
5.5 The Chairman noted section 64(1) of the Companies Act 2006 which provides that “if the directors are satisfied that any information that ought to be entered in the register of members has been omitted therefrom or has been inaccurately entered therin, they may, by resolution, amend the register of members accordingly, provided that any such person thereby affected or to whom such amendment relates consents to such amendment being made”.
6. ALLOTMENT OF SHARES
IT WAS RESOLVED TO:
6.1 Rectify the omission of the allotment of Shares by entering into the books and registers of the Company, with effect from 29 October 2007, the allotment of the Shares to Arch Treasury IC Ltd.
6.2 Instruct the Company Secretary to prepare share certificates in respect of the shares allotted and to arrange for the share certificates to be executed and delivered to Arch Treasury IC Ltd.
…
A2.122.	Section A3 of the main judgment records that in March 2009 the notes issued by AT1 were restructured and replaced. This was achieved by arrangements which were completed on 30 March 2009. The AT1 October 2007 class A notes were called in by AT1, which discharged its obligations by transferring to those who held those notes the interest which AT1 held as noteholder under the Lonscale October 2007 senior notes. AT1 called in the AT1 October 2007 class B notes, discharging its obligations by procuring Lonscale to issue to the holders of those notes Lonscale mezzanine notes with attachable warrants for 25 percent equity in Lonscale. AT1 called in the AT1 October 2007 class C notes, discharging its obligations by transferring to the holders of those notes eight million shares in Lonscale, pro-rata to their respective holdings. The result was that AT1 ceased to hold any notes issued by Lonscale, and the AT1 October 2007 notes were all redeemed. 
A2.123.	A proposal was drawn up on 7 April 2009 for Arch FP’s investment committee to approve limited further investments in Lonscale. The proposal described the cash flow forecast for Lonscale/Clubeasy for the year ending July 2009 as confirming that the remaining additional working capital (cash) requirement was £1.46m, split between April £0.24m, May £0.24m and July £0.98m. The proposal noted that on the basis of assurance provided as part of the formal external audit process Clubeasy had based its business on the assumption that working capital would be provided in line with forecast. It added that the outlook for the year August 2009 to July 2010 on a like-for-like basis was that there would be no requirement for additional working capital. In relation to potential conflicts of interest the proposal noted that both Mr King and Mr Jeffs were directors of Lonscale, and that Mr King was joint portfolio manager on the Real Estate funds. It added that the PF funds and RE funds benefitted from this transaction with support of their direct equity or warrant related exposure. By email dated 8 April 2009 Mr Jeffs confirmed that this proposal represented the last working capital loan requirements for the current year and that in the following year there should be zero requirement. 
A2.124.	On 9 April 2009 Mr Farrell resigned as a director of Lonscale. On 17 April 2009 Mr Farrell ceased to be a director of FPP.
A2.125.	Section A3 of the main judgment records that in May 2009 the GFSC directed that investment management fees should not be paid to Arch FP until the basis of the valuation of the cells had been proven. This direction was made on 1 May 2009. 
A2.126.	On 12 May 2009 Mr King emailed Mr Meader, Mr Radford and Mr Addison, noting that minutes of the Arch FP investment committee recorded that it had approved the proposal of 7 April 2009. Accordingly Mr King sought approval from the ICC directors and the GFSC for payment of £0.24 million which had been due in April, and approval for payments of £0.24 million due in May and £0.98 million due in July. This was duly approved by the ICC directors on 13 May 2009. GFSC gave its approval on 15 May 2009. On 19 May 2009 RE1 and RE2 duly made the April and May payments, thus enabling Lonscale to provide funding to Clubeasy in an amount of £480,000. The total sum received by Lonscale comprised payments of £240,000 by each of RE1 and RE2 pursuant to subscriptions by each of them for twenty four Lonscale MCAB class A notes dated 19 May 2009. 
A2.127.	On 10 June 2009 Mr King emailed PricewaterhouseCoopers on a number of matters. The second of these referred to what was described as a “structuring fee”. It also referred to net asset value (“NAV”): 
A structuring fee was paid as part of the negotiations if … successful. This was agreed by the Directors of Lonscale to be paid on successful transfer (copy of Minutes attached) if a large discount to the NAV was negotiated with the Vendor. These fees formed part of the purchase of Clubeasy, and therefore are not relevant to the accounts as they form part of the purchase price. 
A2.128.	On 24 June 2009 Lonscale provided funding to Clubeasy in an amount of £985,933.70. This was financed by payments of £492,966.85 by each of RE1 and RE2 pursuant to subscriptions by each of them for forty nine Lonscale MCAB class A notes dated 23 June 2009. 
A2.129.	A proposal for Arch FP’s investment committee was prepared on 8 July 2009. A section entitled “background” gave an account of the options structure affecting loans by Lloyds to Club Easy, resulting in a very high cost of the loan which put Hayes Ltd, the relevant CG owning company, in a position where covenants were being breached. Remaining sections of the proposal explained that various options had been discussed with Lloyds, and that there was a preference for an option under which Hayes Ltd would place a deposit for one year’s interest cover shortfall, approximately £0.65 million. It was proposed that RE1 and RE2 would lend the sum required to make the Lloyds deposit by way of subscription for Lonscale senior notes. A section of the proposal concerned with potential conflicts of interest noted that both Mr King and Mr Jeffs were directors of Lonscale Ltd, and that Mr King was the joint head of Guernsey Portfolio Management which managed the RE and PF funds, and chairman of the Guernsey Investment Committee which would approve this transaction. 
A2.130.	Minutes of the Arch Guernsey Investment Committee meeting on 9 July 2009 noted that the committee confirmed their support of the proposal and would recommend it to the Guernsey Investment Committee Board. 
A2.131.	Section A3 of the main judgment records that in July 2009 the shares of the cells were temporarily suspended from their official listing on the CISX at the request of the directors pending publication of the ICC’s net asset value as at 31 March 2009. This suspension occurred on 27 July 2009.
A2.132.	On 13 August 2009 Lonscale provided funding to Clubeasy in an amount of £600,000. This was financed by payments of £300,000 by each of RE1 and RE2 pursuant to subscriptions by each of them for thirty Lonscale MCAB class A notes.
A2.133.	A draft document was prepared within Arch FP entitled, “Synopsis of legal and compliance issues 21 August 2009”. In section 11, entitled “Compliance Monitoring”, the draft stated, among other things, that all conflicts were identified at the trade ticket level, and that any new potential conflicts of interest were “reported to the Head of Compliance, and placed onto the conflicts register.” Section 12, entitled “Conflicts of Interest”, included the following:
[1] We have managed our conflicts fairly and always undertook any investments for the funds on the same terms or better for the funds
…
[3] Conflicts management and rationales for trading were built into all trade ticketing and investment committee proposals as a matter of course – this demonstrates best practice
[4] External advice was sought on conflicts and the Board of Arch was consulted
[5] Use of market comparables was included in any analysis
[6] The original written Conflicts of Interest Policy was put in place following enaction of MiFID in Nov 2007. Prior to this general conflict principles were followed as laid out in the Compliance Manual and a Conflicts and Insider policy note dated Jan 2007.
[7] Conflict Notes were made on an ongoing basis following referral to compliance and senior management.
[8] In cases of uncertainty external advice would be sought.
…
[10] When a potential conflict arises, front office personnel are required to record the potential conflict on the relevant deal ticket.
[11] The Head of Compliance has also insisted that any potential conflicts of interest need to be reported to him as soon as they are known, and be recorded in the Conflicts Register.
A2.134.	In section 22 of the draft, entitled “Other Investment Vehicles and Counterparties”, a number of points were made under the heading “Lonscale/Club Easy”. These included:
…
[4] As originator of the transaction and in consideration for them agreeing to give up the lion share of the transaction to the Arch syndicate, it was agreed that Foundations would be paid an origination fee based on the difference between the total amount paid for the Notes (syndication proceeds) and the acquisition price.
[5] Arch created a debt and equity investment syndicate via Arch Treasury in the form of A, B and C Notes, with Arch FP as Arranger. Several funds participated. The syndication proceeds were £21M. Foundations agreed to share their origination fee 50/50 with Arch FP as Arranger i.e. £3M each.
[6] At the time of acquisition, the completion balance sheet value was circa £33.3M and the acquisition price circa £17M, thus the acquisition was believed to be extremely good value. Upon deal finalisation (completed by Foundations), the acquisition price dropped further to £13.2M plus a contingent amount of £1.8M, making £15M. Thus the funds made a substantial gain at inception.
[7] Further, the £1.8M amount was contested by Arch and subsequently did not need to be paid, providing additional value to the investor syndicate.
A2.135.	Section A3 of the main judgment records the Transfer and Implementation Agreement between Arch FP and Spearpoint, and the waiver agreement made between Arch FP and the cells on 22 October 2009. It is convenient here to set out the terms of the waiver letter, written by Arch FP and addressed to the cells:
[1] We refer to the investment management agreements and investment advisory agreements (the “Investment Management Agreements”) between us and each of the incorporated cells of Arch Guernsey ICC Limited or their investment manager (as the case may be) and between us and the investment manager of BMS Specialist Debt Fund Limited (together the “Funds”). We also refer to our recent discussions concerning:
(a) the proposal in appoint Spearpoint Limited (“Spearpoint”) as investment manager or investment adviser (as the case may be) to each of the Funds; and
(b) the investment management fees or investment advisory fees (as the case may be) paid to us under the Investment Management Agreements on those assets of the Funds which were invested in other Funds on which fees had already been paid in the originating/investee Fund for the period up to and including 31 December 2008 (the “Cross Investment Fees”)
[2] Without admission of liability in respect of the payment of the Cross Investment Fees and without prejudice to, and with full reservation of the rights of Arch Financial Products LLP in respect of the Cross Investment Fees until satisfaction by you, and each of you, of Condition 1 and Condition 2, and each of them (as defined below), we hereby and in consideration for the satisfaction by each of you of Condition 1 and Condition 2, waive our entitlement to receive all investment management or investment advisory fees (as the case may be) and expenses payable to us pursuant to the Investment Management Agreements from 1 March 2009 up to and including the date on which Spearpoint is appointed as investment manager or investment advisor (as the case may be) to the Funds.
[3] The foregoing is subject to, and conditional upon, the satisfaction by you, and each of you, of both of the following conditions:
[3.]1 the appointment of Spearpoint as investment manager or investment advisor (as the case may be) to each of the Funds and the satisfaction of all of the conditions set out in the transfer and implementation agreement made between Spearpoint and Arch Financial Products LLP and dated 25 September 2009 (to the extent that the satisfaction of any such conditions has not been waived by the parties to that agreement) on or before 30 November 2009 (or such later date as we may notify you of in writing) (“Condition 1”); and
[3.]2 you, and each of you, agree to provide to us a full release (in the form attached) in respect of any Claims the Funds or any one, or each of them, may have against Arch Financial Products LLP, whether past present or future, actual or contingent, known or unknown suspected or unsuspected, and whether in the contemplation of the Funds or any one or each of them at the time of entering into the said full release in relation to the Cross Investment Fees or not (“Condition 2”)
[4] For the purposes of the foregoing the word “Claims” shall include any claim, potential claim, counterclaim, any potential counterclaim, right of set-off, indemnity, cause of action, right, demand, or interest of any kind or nature whatsoever whether past, present or future, actual or contingent, known or unknown, suspected or unsuspected and whether in the contemplation of the Funds or any one, or each of them at the time of entering into the said full release in relation to the Cross Investment Fees or not.
[5] If you are agreeable to this proposal please sign and return the enclosed duplicate of this letter which contains the release referred to in Condition 2 above ...
[6] This letter shall be governed by and construed in accordance with the laws of the Island of Guernsey and the parties hereto submit to the exclusive jurisdiction of the Royal Court of Guernsey.
Yours faithfully
Arch Financial Products LLP
A2.136.	Immediately beneath this signature was the form of release, which was duly signed on behalf of the cells. For ease of reference I have divided the wording into clauses, each indicated by a letter in square brackets. As so divided, the wording of the form of release was:
[a] We hereby confirm our agreement to the terms of this letter and [b] consent to the proposal as set out in the letter. [c] We note that the waiver of your fees is conditional upon Condition 1 and Condition 2 being satisfied as detailed in the letter. [d] Conditional upon the satisfaction of Condition 1 as detailed in your letter [e] we hereby irrevocably release you [f] and any officer, partner, member, director or employee of Arch Financial Products LLP [g] from any and all manner of actions, causes of action, suits, proceedings, debts, dues, profits, expenses, contracts, damages, claims, demands and liabilities, whatsoever, in law or in equity (the “Potential Claims”), [h] which the Funds or any one of them, ever had, now has or may have in the future against Arch Financial Products LLP or any of its officers, partners, members, directors, or employees [j] in relation to the Cross Investment Fees (as defined in the letter) [k] and undertake that we shall not threaten or commence any legal proceedings against Arch Financial Products LLP or any of its officers, partners, members, directors or employees in respect of any Potential Claims. 
A2.137.	Remaining events are sufficiently summarised for present purposes in section A3 of the main judgment and are not repeated here.