KHAN AGAINST MUHAMMAD ZUBAIR HUSSAIN [2019] ScotCS CSOH

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	Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> KHAN AGAINST MUHAMMAD ZUBAIR HUSSAIN [2019] ScotCS CSOH_11 (08 February 2019) URL: http://www.bailii.org/scot/cases/ScotCS/2019/[2019]_CSOH_11.html Cite as: 2019 GWD 6-79, [2019] PNLR 14, 2019 SC 322, [2019] ScotCS CSOH_11, [2019] CSOH 11, 2019 SLT 319

[1] The pursuer’s regulatory authority, the Financial Services Agency, brought

disciplinary proceedings against him. He was found to be in breach and as a sanction his

authority to perform certain functions was withdrawn. The pursuer raised an action against

the defender for breach of contract and professional negligence, and sought to recover from

“2. Any obligation incumbent upon the defender to make payment having

prescribed in terms of Section 6 of the Prescription and Limitation (Scotland) Act 1973,

the defender should be assoilzied from the Conclusions of the Summons.

3. The pursuer being precluded from recovering damages from the defender by

reason of public policy – ex turpi causa non oritur actio – the defender should be

4. The pursuer having suffered no loss as a result of any breach of duty on the

[3] The pursuer’s pleas in law sought the repelling of these pleas.

[4] The action called before me for debate on these pleas in law.

[5] The pursuer was the sole director and shareholder of Sovereign Worldwide Ltd

“In around March 2007 Sovereign was granted permission by the Financial Services

Agency (“FSA”) to carry on regulated mortgage and general insurance activities. The

defender thereafter also contracted with the pursuer on a personal basis to provide

advice about the pursuer’s tax affairs as an individual and the submission of the

pursuer’s personal tax return.” (Article 2 of condescendence)

“In or around late 2009 the defender contracted with the pursuer that he would

provide a financial reference for the pursuer to a lender, Intelligent Finance. The

defender knew that the pursuer required to provide accurate financial information for

the lender. The defender was also informed by the pursuer that the pursuer required

to provide information in relation to the pursuer’s earnings to another lender, Abbey

National plc (“Abbey”) for a loan to fund the purchase of a residential property at 1

Leven Terrace, Edinburgh. Under and in terms of the contract between the parties,

the defender provided the pursuer with advice about his earnings and the way in

which this should be evidenced to Abbey. In particular, the defender generated three

payslips from Sovereign in favour of the pursuer for the months of July, August and

September 2009. Under and in terms of the contract between the parties, the defender

prepared a financial reference for the pursuer and sent this to Intelligent Finance.

This financial reference was not shown to the pursuer before the defender sent it to

Intelligent Finance. The reference was faxed direct by the defender to Intelligent

Finance. The financial reference letter incorrectly stated that the pursuer had an

earned income of £60,000 per annum. In fact, that figure was based upon a projection

made by the defender and not historic figures. That figure was also consistent with

the figures which the defender provided to Abbey in the form of payslips.”

[8] The history of the regulatory proceedings by the FSA can be set out here by reference

to facts agreed in the joint minute of admissions and to the relevant documentation.

[9] By letter of 21 March 2006 the defender contracted with Sovereign Worldwide Ltd to

provide certain services. These were preparation of annual company accounts, completion of

Corporation Tax returns (CT 600s), dealing with the payroll and other small sundry matters.

[10] The defender prepared and signed a letter dated 11 September 2009 in the following

We confirm that we act as accountants for Mr Amir Khan of 7 Forth View Place,

We further confirm that Mr Khan has earned income of £60,000 per annum. In

[11] The pursuer was, from March 2005 until 4 March 2013, approved by the Financial

Services Agency to perform certain controlled functions, under and in terms of the Financial

[12] In 2011, a complaint regarding the pursuer was made to the Financial Services

Agency, as the regulator of the pursuer under the 2000 Act. The FSA started an investigation

in 2011. The FSA investigation was not initiated because of concern about the pursuer’s

personal mortgage transactions. It was initiated because of a different concern about

passport certification in another transaction. By September 2011 the investigation had

extended to cover a range of matters including the pursuer’s mortgage transactions.

[13] The FSA issued a warning notice under section 67 of the 2000 Act on 18 October 2012.

That section provides that if the FSA proposes to take disciplinary action against a person, it

must give him a warning notice, and that a warning notice about a proposal to impose a

[14] By Decision Notice dated 4 March 2013, certain disciplinary sanctions were imposed

on the pursuer by the FSA in terms of section 66 of the 2000 Act. Inter alia the FSA (1)

directed the pursuer to pay a penalty of £80,000; (2) withdrew the approval granted to the

pursuer, pursuant to section 63 of the 2000 Act, to perform controlled functions; and; (3)

made an order, pursuant to section 56 of the Act, prohibiting the pursuer from performing

any function in relation to any regulated activities carried on by any authorised or exempt

persons, or exempt professional firm. Parts (2) and (3) of the Decision Notice of 4 March 2013

preclude the pursuer from working as an Independent Financial Adviser (“IFA”).

[15] The summary of reasons in the Decision Notice included the following:

(1) failed to act with honesty and integrity in carrying out his controlled

functions, in breach of Statement of Principle 1, by knowingly submitting a

personal mortgage application to a mortgage lender containing false and

misleading information about his income in the form of false payslips; and

(2) failed to act with due skill, care and diligence in performing his significant

influence function, in breach of Statement of Principle 6, by failing to take

adequate steps to counter the risk that Sovereign might be used to further

3. The Statement of Principle 1 breach is aggravated by Mr Khan’s conduct

during the course of the investigation, namely his purported explanations for

why he provided a false income figure. When he was interviewed in

September 2011, the FSA was aware of only one of two personal mortgage

applications, both of which contained the same false income figure. In

interview, Mr Khan repeatedly sought to divert responsibility to his

professional adviser for the misstatement of his income and claimed to be

naïve about the level of income he could declare to mortgage lenders.

4. The subsequent discovery of the second application submitted in 2007 and not

made in his capacity as an approved person, seriously undermined the

plausibility of those explanations. The FSA therefore considers that Mr Khan

deliberately attempted to give a false and misleading explanation to the FSA.

5. The serious nature of these breaches, aggravated by his conduct in interview,

leads the FSA to conclude that Mr Khan is not a fit and proper person to

perform functions in relation to regulated activities carried on by an

authorised person, exempt person or exempt professional firm, and should be

prohibited from doing so. Only a full prohibition will prevent Mr Khan from

6. The financial penalty on Mr Khan would have been higher but for his personal

[16] The breach of statement of principle 6 referred to in 2(2) was overturned on appeal to

the Upper Tribunal so is not of relevance to the matters before the court. What is of relevance

are the matters relevant to paragraph 2(1), that is mortgage applications in 2007, 2009 and

13. Mr Khan confirmed that any income he earned via regulated business,

unregulated business and personal contract work was paid to Sovereign in the

14. The following financial information was taken from Sovereign’s annual

15. Mr Khan said that he did not tend to take any salary or dividends from

Sovereign because he lived from his rental income. The FSA has also obtained

Mr Khan’s HMRC records covering the period from 6 April 2007 to 5 April

2010. The records show that Mr Khan took a minimal salary and no dividends

16. On 9 December 2007, Mr Khan submitted a personal mortgage application

through Sovereign to a lender. The application was to port an existing

mortgage on a residential property to a new residential property. In this

application, Mr Khan declared a ‘present income’ from self-employment of

£60,000 gross and an annual rental income of £15,000. These amounts far

17. On 13 October 2009, Mr Khan submitted an online mortgage application

through Sovereign to a lender in his own name. The application was for a loan

18. In the application, Mr Khan stated that he was employed by WP Financial (a

trading name of Sovereign) and declared a total annual income of £74,500,

comprising a ‘basic wage/salary before tax’ of £60,000 and ‘other secondary

19. His declared income of £60,000 and his income from rent far exceeded the

20. Mr Khan claimed in interview that he could afford to pay himself a £60,000

income annually, in part because of the money he had access to in Sovereign’s

bank account. The balance of Sovereign’s account on the day that Mr Khan

21. In support of his mortgage application, Mr Khan submitted copies of three

payslips to the lender, dated July, August and September 2009, which

appeared to show that he had been paid a gross monthly income of £5,000 by

Sovereign (i.e. the equivalent of £60,000 per annum). The payslips included a

‘year to date –gross pay’ figure which gave the impression that Mr Khan had

been paid (and had incurred income tax on) a total of £30,000 by Sovereign in

22. The information provided in these payslips was false. Mr Khan’s HMRC

records showed that he had not been paid £5,000 by Sovereign for any month

in 2009. Mr Khan confirmed this is to be the case during an interview.

23. Mr Khan generated income by way of intermittent temporary contract work

for financial services institutions. He always arranged for the proceeds of the

24. Mr Khan said that the £60,000 income figure he had declared to the lender

took into account the income he stood to earn from contract work.

25. The FSA obtained records from Mr Khan and Mr Khan’s recruitment

consultants in relation to the contract work he had carried out in previous

years. The approximate income generated by Mr Khan through contract work

totalled £7,000 in the year ending 30 June 2007, £7,000 in the year ending 30

26. On 9 October 2009, Mr Khan completed a six week contract for which he

earned approximately £5,000. By 13 October 2009, the day that Mr Khan

submitted his mortgage application, Mr Khan had been informed of a

potential contract which he had been deemed suitable to perform. The

contract was not however formalised until around five weeks after he

submitted the application. If this contract had run its course on the agreed

terms, Mr Khan could have netted a maximum of £18,000, which would have

resulted in a maximum income from contract work in that tax year (April

2009-March 2010) of only £26,850. As it was, Mr Khan earned only £4,200 for

27. Mr Khan owns an unencumbered property which he had let out to students

each year since 1993. In support of his mortgage application, Mr Khan

submitted a rental income form in which he stated that the maximum annual

income he could receive from the property’s rental was £14,500. He also

provided copies of tenancy agreements to the lender which showed that under

28. The FSA found that the rental income figures which Mr Khan declared to

HMRC in the tax years ending 5 April 2008, 2009 and 2010 were significantly

lower than £12,000, as he often did not receive the full amount of rental

income in a year. When asked why he had declared rental income of £14,500

in his mortgage application, he said ‘that’s probably just an oversight’.

29. Mr Khan did not take up the mortgage offered by the lender as a result of his

application of 13 October 2009 because he was not successful with the

purchase of the target property. However, on 6 May 2010, Mr Khan signed

and submitted a ‘substitute property details application’ to the lender in which

he applied for a loan of £260,000 to fund the purchase of a different property.

30. Mr Khan signed the substitute application, which included the following

‘This form is supplemental to my previous mortgage application form dated

____. I confirm that all the information given in both applications is correct

and where changes have occurred these have been advised and the revisions

31. In the six months between submitting the original mortgage application and

the substitute application, Mr Khan had generated £4,200 in income from one

temporary contract which was paid into Sovereign’s account. Mr Khan had

32. In respect of the substitute application, Mr Khan did not take any steps to

correct or revise the income figures he had declared to the lender in the

original mortgage application. Mr Khan had no explanation for omitting to do

40. In his personal mortgage application submitted in 2009, Mr Khan declared

Furthermore, those declared income figures were significantly more than the

annual income Sovereign had ever generated and therefore significantly more

41. He therefore knowingly submitted a mortgage application to a lender which

42. Mr Khan’s explanations for the declared income figure in the 2009 mortgage

43. When asked by the lender to provide evidence in relation to his income, Mr

Khan could have provided existing documents such as accounts, bank

statements or HMRC returns. Instead, Mr Khan arranged for three payslips to

be created which gave the impression that he had been paid a monthly salary

44. Mr Khan knew that the payslips were false and misleading given that:

(1) most of the material information on the payslips was false, including

(2) he knew that he had not received a wage from Sovereign in the six

45. Mr Khan also declared an annual rental income of £14,500 when he knew that:

(1) the maximum rental income he could earn in a year was £12,000; and

(2) the actual rental income he had received in the previous three years

46. Given that Mr Khan submitted a specific rental income form and tenancy

agreements to the lender in support of the mortgage application, Mr Khan’s

explanation that the £14,500 figure was an ‘oversight’ is not credible.

47. Six months after submitting the October 2009 application, Mr Khan signed a

substitute application form which included a declaration that, the information

he had provided to the lender remained accurate. During that period, Mr

Khan had not paid himself any salary out of Sovereign’s reserves. Mr Khan’s

48. As the sole owner and controller of Sovereign, and as an individual who

arranged mortgages for customers, Mr Khan was aware of the need to submit

accurate and candid information to mortgage lenders when applying for a

mortgage. He acknowledged that lenders rely on the total income received,

not a prediction about what an applicant may be able to earn in the future.

49. Mr Khan knowingly provided false information about his income in his 2009

mortgage application. In support of his application, he submitted payslips

which he knew to be false and misleading. Accordingly, Mr Khan breached

50. This breach is seriously aggravated by Mr Khan’s attempts to mislead the FSA

about his 2009 mortgage application through the explanations he advanced for

his declared income of £60,000. Those explanations, whilst already

implausible, were shown to be false on the discovery of the 2007 mortgage

application in which he had declared an identical income figure which bore no

similarity to his financial position at that time. The 2007 mortgage application

demonstrates that he did not naively accept his professional adviser’s advice

because he had made the same false declaration two years earlier.

54. Mr Khan failed to act with honesty and integrity by knowingly submitting

false and misleading information to a mortgage lender in both 2007 and

2009… The seriousness of the facts and matters described above demonstrates

that Mr Khan fell short of the standards expected of a person performing

functions in relation to a regulated activity carried on by an approved person.”

[19] The Decision Notice then went on to consider various representations made to the

66. The written representations were unequivocal: “I maintain the information in

the payslips which [my adviser] produced was correct”. To his credit, when

questioned in the course of making his oral representations about the

information in some detail, Mr Khan acknowledged that the information was

not correct. He said that the payslips were not true statements although he

still believed they could be substantiated; that they were correct based on a

projection; that they were incorrect based on an actual and that should have

been made clear. Mr Khan admitted that it was not acceptable for him to have

relied on the payslips as evidence of actual payments in support of a mortgage

67. Although some credit is to be given to Mr Khan in finally acknowledging the

(1) He knowingly used the false information in support of his mortgage

(2) he blamed his adviser for preparing payslips which he knew to be false

without acknowledging his responsibility for ensuring that they were

(3) he made the 2009 application in his capacity as an approved person

and that, as such, his clients would look to him to be a man of honesty

68. It is self-evident, and a mortgage broker must have been aware, that a

prospective lender can only assess realistically whether to lend to someone

when it is in possession of the information it asks for. It is not fair to a

prospective lender, apart from being dishonest, knowingly to give a version of

events, figures or information based on anything else and pass them off as

69. It is neither correct not relevant to say that ‘The test of a successful mortgage

application is the ability to meet payments’ as Mr Khan claimed (see paragraph

59). The obligation of an applicant is to answer the questions fully and

truthfully, putting the lender into the position he expects to be. Referring,

later, to matters such as arrears, complaints and disadvantage, cannot help

answer the question ‘Has the application form been properly completed?’

70. The declaration to the mortgage lender that the information was correct (see

paragraph 30) was not the case and Mr Khan knew that it was not the case.

71. It should also be self-evident to anyone, and particularly to a mortgage broker

acting in the course of his business, that certifying a photograph as having a

true likeness to a person without having met the person is dishonest.

72. The FSA has come to the clear conclusion that Mr Khan knew exactly what he

was doing when completing his mortgage applications and that his actions

were dishonest rather than reckless. It was not inadvertence on his part that

led him to make two applications in the manner that he did two years apart.”

[20] The pursuer appealed to the Upper Tier Tribunal against part (1) of the Decision

Notice of 4 March 2013 (i.e. the part that required him to pay a penalty of £80,000). He

challenged the FCA’s categorisation of the breach of Statement of Principle 1 and the size of

the financial penalty determined by the FCA. By judgment dated 8 April 2014, the Upper

[21] The Upper Tier Tribunal made the following findings of fact:

34. Mr Khan graduated with a degree in business studies from Napier University,

Edinburgh in 1992. He then worked for a period of approximately 8 years

with a number of large financial institutions in various administrative,

analytical and management roles. In June 2000 Mr Khan decided to set up his

own company, Sovereign, which at all material times was wholly owned by

him and of which he was the sole director and employee. Sovereign’s purpose

was initially to operate in the unregulated sector providing advice and

arranging commercial finance for small businesses within the financial sector,

but in March 2007 Sovereign was granted permission by the Financial Services

Authority (“FSA”), the Authority’s predecessor, to carry on regulated

mortgage and general insurance activities. On 5 March 2005 Mr Khan was

approved by the FSA to perform the controlled function of director (CF1) and

was approved to perform the controlled function of apportionment and

oversight (CF8). He thus became an approved person subject to the provisions

35. Sovereign’s business was relatively small. Its annual accounts for each of the

five financial years between 2006 and 2010 showed the following results:

36. Sovereign arranged a total of 16 regulated mortgage contracts on a non-

advised basis between March 2007 and March 2011. Mr Khan was responsible

for all of those arrangements, acting in his capacity as an approved person of

Sovereign, including in relation to the 2009 and 2010 Applications.

37. In addition to this business, Mr Khan continued throughout the period under

review to undertake consultancy work under short term contracts with a

considerable number of leading financial institutions the income from which

was paid into Sovereign. During his consultancy work, Mr Khan would have

become familiar with the relevant standards imposed by the financial services

regulatory system, which he accepted was the case in his oral evidence,

38. Mr Khan also personally owns two buy to let properties which during the

39. Mr Khan declared the following income in his tax returns to Her Majesty’s

Revenue and Customs (“HMRC”) in respect of the three tax years between

40. The Authority, using its statutory powers, obtained information about the

consultancy contracts that Mr Khan worked on between 2007 and 2009. This

information shows that Mr Khan had generated £9,450 from contract work in

2007, nothing in 2008 and £6,650 during 2009 up to the date of submitting the

41. At the time of the submission of the 2009 Application Mr Khan did not have a

current consultancy contract, but he had received an oral offer of a contract

with Northern Rock which was confirmed in writing on 20 November 2009.

This contract commenced on 30 November 2009 and was for a period ending

on 26 March 2010. If the contract had run its full course it would have

generated income of £18,000 but it was terminated after Mr Khan received

42. It was clear that up to the point that Mr Khan made the 2009 Application that

he had not tended to take significant amounts of salary and no dividends from

Sovereign. Hence, at the time of the first application, it had cash reserves of

£27,196, built up over a period of some four years and most of which was

represented by the balance on Mr Khan’s director’s loan account.

43. On 13 October 2009, Mr Khan submitted an online mortgage application

through Sovereign on his own behalf to Abbey National Plc (“Abbey”) for a

loan of £237,000 to fund the purchase of a residential property in Edinburgh,

namely 1 Leven Terrace. The application disclosed that Mr Khan’s marital

status was ‘separated’. Mr Khan’s unchallenged evidence, which we accept,

was at the time this application was made, Mr Khan was engaged in an access

dispute with his wife regarding his children which was resulting in

considerable stress. Mr Khan was ultimately divorced on 17 December 2012

but he continues to press for custody of his children in proceedings which are

44. The 2009 Application discloses that Mr Khan’s current address was 7 Forth

View Place, Dalkeith, which was the former matrimonial home and which

remains Mr Khan’s residence at the present time, Mr Khan sharing occupation

with his disabled mother. Mr Khan disclosed that he was employed by

Sovereign at a gross salary of £60,000 per annum and that he had secondary

income of £14,500, which was explained as income from a buy to let property.

Mr Khan also declared that 7 Forth View Place, on which he disclosed an

outstanding mortgage of £218,000, would be rented out at £1,200 per month.

45. It is common ground that Mr Khan was not employed by Sovereign at a salary

of £60,000 and had never received earnings of that magnitude from Sovereign,

as shown by his tax returns. There was also a discrepancy between the rental

income shown in respect of the tax year 2009/10 (£8,500) and the £14,000

declared by Mr Khan to Abbey National, although he explains this, which we

accept, that the income actually received was reduced as a result of two

student tenants leaving during the year having failed their examinations.

46. Mr Khan’s consistent explanation as to why he declared an employment

income of £60,000 which was given in interview with the Authority during the

Authority’s investigation, in his witness statement in these proceedings and in

47. Mr Khan’s evidence was that he took advice from his accountant as to how to

declare his income on the 2009 Application. At the relevant time, Sovereign’s

cash position and the director’s loan account showed that amount in the

region of £30,000 could be drawn out of Sovereign and on that basis, Mr Khan

contends, his accountant advised him that he could show earnings as an

employee of Sovereign via the director’s loan account of £5,000 per month,

bearing in mind the expected level of consultancy work, including the

anticipated contract with Northern Rock, and the sums available for draw

down from Sovereign. Mr Khan’s evidence was that he included the

anticipated rental income in that amount, although it is clear to us that he

declared that in addition to the employment income rather than as a

48. Mr Khan accepts that he never drew money from Sovereign to that extent but

that he believed, on the basis of the advice he received from his accountant,

that he could have done so. He also accepts, he says with the benefit of

hindsight, that neither he nor his accountant should have approached the

calculation of his employment income on that basis, which he described as

49. He now accepts that he was reckless to have relied on his accountant in this

way, but he was not deliberately setting out to deceive the lender, as shown by

the fact that without hesitation he voluntarily provided the files relating to his

own mortgage applications to the Authority in advance of it being indicated to

50. Mr Khan also contends that his mind was confused at the time, because of the

51. It appears that Abbey National asked for proof of Mr Khan’s employment.

Accordingly, Mr Khan submitted copies of three payslips to Abbey National,

for the months of July, August and September 2009. These payslips, which

were in the usual form expected for such documents, stated that Mr Khan had

received gross pay of £5,000 for each of the months in question, and that

deductions for income tax, based on the tax code (647L) shown on the

document and national insurance had been made. It is common ground that

no such deductions had been made and that the relevant sums had not been

accounted for to HMRC. The payslips also showed year to date figures, so on

the October 2009 payslips gross pay of £35,000 was shown, indicating that Mr

Khan had been receiving pay of £5,000 per month since the beginning of the

tax year in April 2009. The copy payslips were certified as true copies of the

original by Mrs A Mirza, Mr Khan’s sister, who was also Sovereign’s company

52. Mr Khan’s evidence was that these payslips had been created by his

accountant on the accountant’s advice; he stated in interview that the

accountant would be able to provide the necessary documentation to verify

what sums the accountant had advised Mr Khan he was entitled to draw

down from Sovereign. This evidence is consistent with the accountant’s own

evidence to the Authority, and we accept it and find accordingly.

53. Mr Khan accepted in his oral evidence that the information on these payslips

was misleading, but not that it had been dishonest to produce them as

evidence of income to Abbey National. He drew a distinction between

creating false payslips from a site on the internet to justify non-existent

income, and what had happened in this case, which was that the payslips had

been created by the accountant, on the accountant’s advice, to justify an

income which the accountant had advised he was entitled to withdraw from

54. It is clear to us from the evidence as reviewed above that the employment

income declared to Abbey National was false; at no time had Mr Khan been

earning an income of £60,000 per year from Sovereign. The declaration that

Mr Khan made to that effect relied on a projection of income, based upon

advice from his accountant on the existing resources of Sovereign and what

Mr Khan had anticipated he might earn in consultancy income. The question

for us to determine, on the basis of those facts , was whether Mr Khan’s

behaviour was dishonest in representing he had an income of £60,000, and on

the basis of the test in Ghosh, his behaviour will be characterised as dishonest if

declaring an income of £60,000 in those circumstances would be considered

dishonest according to the ordinary standards of reasonable and honest

people, and whether Mr Khan himself must have realised that what he was

55. In that context we also have to consider the question of the payslips. It is clear

from the evidence that the payslips are false in that Mr Khan had not received

the income from Sovereign declared to have been paid to him on these

payslips. Neither had the income tax and national insurance contributions

declared to have been deducted been so deducted and accounted for to

HMRC. The question for us is whether the submission of those payslips to

Abbey National in support of the income declaration made on the 2009

Application in circumstances where those payslips had been created by Mr

Khan’s accountant to support a level of income which the accountant had

advised Mr Khan could be supported in the future, would be considered

dishonest according to the standards of ordinary standards of reasonable and

honest people and whether Mr Khan himself must have realised that what he

56. In our view the correct approach is to look at the circumstances surrounding

both the submission of the 2009 Application and the payslips in the round.

57. In our view the evidence that the behaviour concerned demonstrates

58. Mr Khan is an experienced financial services professional who on his own

admission is aware of the standards expected of persons in that position.

Reasonable and honest people would understand the difference between

being asked a question about their actual or historic income and what they

might be expected to earn in the future. They would have known that stating

they had an income of £60,000 from a particular employer when they had

never received that sum in the past and were not expecting to do so in the

future would be dishonest, even if advised by an accountant that it was

legitimate to proceed on the basis of a projected income. If given that advice,

59. In any event, the evidence shows that an income of £60,000 per year could not

be justified by the financial circumstances of Sovereign at the time; its cash

resources of a little less than £30,000 had been built up over a period of four

years and it had no long term consultancy contracts at the time the 2009

Application was submitted. Mr Khan must have known that to be the case

based on his own tax returns, which he prepared, and the current position

regarding consultancy work. Mr Khan must have known that he had never

earned £60,000 per annum from Sovereign and that he was not at the time he

made the 2009 Application expecting to do so. It must have been obvious to

him, based on his experience, that lenders were expecting an answer based on

his actual income rather than his projected income. He must therefore have

known when he answered the question on the form that his answer was

60. In order for us to be satisfied that Mr Khan’s behaviour was reckless rather

than dishonest he would have had to have satisfied us that he was aware that

there was a risk that a figure of £60,000 overstated his income and that if he

actually checked the position more rigorously himself rather than relying on

his accountant, he would have discovered that his actual level of income was

significantly below that. For the reasons that we have stated above, the

evidence clearly points to the conclusion that Mr Khan knew that his earnings

from Sovereign’s earnings did not at the time of the application amount to him

having an income from employment of £60,000 per annum so he knew more

than the fact that there was a risk his income was lower than £60,000 and his

61. An ordinary and reasonable person would also have known that the

submission to a lender of a payslip declaring that he was entitled to £5,000 in

respect of a particular month’s salary and that he had received that amount

less deductions for tax and insurance when that had not been the case would

have been dishonest, notwithstanding the fact that such a payslip had been

created by his accountant to support a projected rather than actual income of

the stated amount. Mr Khan, as an experienced financial services professional,

knows the purpose of submitting a payslip to a lender to support a mortgage

application. It is to verify income actually earned, not to support a projection

of income, and Mr Khan knew that he had not received the income stated in

the payslip and that therefore the payslip was false. He must therefore have

known that submitting the payslip to the lender in those circumstances

62. Nor do we believe that the fact that Mr Khan disclosed his mortgage

applications to the Authority voluntarily affects the position. We agree that

such action is normally indicative of the behaviour of an honest person, but we

find the evidence surrounding the circumstances in which the 2009

Application and the payslips were submitted, as found above, to provide

63. It is therefore clear in these circumstances that we must characterise Mr Khan’s

behaviour in relation to the 2009 Application as dishonest rather than reckless.

64. The purchase of the property envisaged by the 2009 Application did not

proceed as a consequence of which Mr Khan submitted the 2010 Application

in respect of an alternative property. We now turn to consider that

65. On 6 May 2010 Mr Khan submitted a further mortgage application through

Sovereign on his own behalf to Abbey. This was submitted on what was

described on the application form as a ‘substitute property details application’

in that it was supplemental to a previous application (in this case the 2009

Application) which proceeded on the basis of the information provided in the

2009 Application, save that the substitute property was the subject of the

mortgage in place of the original property. Mr Khan was required to sign a

declaration to the effect that the information provided in both applications

was correct subject to any changes notified. The application also required Mr

Khan to declare that he or a member of his immediate family intended to live

in the property concerned; had that not been the case a buy to let mortgage

66. Mr Khan disclosed the property to be funded by the mortgage as 4 West

Newington Place, Edinburgh, and a loan of £260,000 was sought. The

purchase of this property was completed but Mr Khan did in fact only live in it

for a short period, as he was able in due course to continue to reside in the

former matrimonial home at 7 Forth View Place, Dalkeith. 4 West Newington

Place is still owed [sic] by Mr Khan and he rents it out, but he admitted in his

oral evidence that he had never, as he is required to do, notified Abbey that it

is not occupied by him as a dwelling. Consequently, in effect Mr Khan

continues to have a residential mortgage over what has become a buy to let

property. It would appear that Abbey has also never been notified that he

continues to occupy 7 Forth View Place as his residence, whilst the 2009

Application indicated that this property would be rented out to tenants.

67. In view of the fact that the 2010 Application was supplemental to the 2009

Application, it is clear that all of Mr Khan’s representations in that application

are equally applicable to both applications. On the basis of our findings in

relation to the 2009 Application, we must therefore conclude that Mr Khan

obtained the mortgage on 4 West Newington Place on the basis of dishonest

68. The Authority relies on an earlier mortgage application made by Mr Khan as

aggravating Mr Khan’s behaviour in relation to the 2009 and 2010

Applications. The application concerned was made on 9 December 2007 to

Intelligent Finance in order to finance his purchase of 7 Forth View Place and

the amount of the loan sought was £221,000. In that application Mr Khan

declared that he was self-employed and had an annual income of £60,000

69. In the light of our findings of fact based on Mr Khan’s activities since

Sovereign was formed, we can only conclude that this representation was also

70. This finding is of limited significance in relation to this case. The application

was submitted by Mr Khan personally, rather than through Sovereign and was

not therefore submitted in his capacity of an approved person. Consequently,

it is not open to the Authority to seek to impose a financial penalty on Mr

71. However, in our view it is appropriate for us to take the circumstances of the

2007 application into account when assessing all the circumstances relating to

the imposition of a financial penalty in respect of the 2009 and 2010

applications, and in particular when assessing Mr Khan’s financial resources

and considering whether the appropriate penalty should be reduced because

of Mr Khan’s financial circumstances. Accordingly, we consider the effect of

[22] The pursuer appealed the judgment of the Upper Tier Tribunal to the Court of

Session. Following an opposed Inner House hearing, leave to appeal was granted on

24 March 2016. On 26 August 2016, in light of the pursuer’s financial circumstances, the

Financial Conduct Authority (“FCA”), as successor to the FSA, agreed with the pursuer that

he would withdraw his appeal in return for the FCA withdrawing the penalty of £80,000.

[23] By Final Notice dated 26 August 2016, the FCA confirmed that in light of serious

financial hardship the £80,000 penalty was withdrawn, and made an order of new, under

section 56 of the 2000 Act, prohibiting the pursuer from performing any function in relation

to any regulated activity carried on by an authorised person, exempt person or not to contest

“1. For the reasons given in this notice, the Authority hereby:

(a) publishes a statement of Mr Khan’s misconduct (‘a public censure’),

pursuant to section 66 of the Act for failing to comply with Statements

of Principle 1 and 6. Mr Khan provided verifiable evidence of serious

circumstances the Authority would have imposed a financial penalty

(b) makes an order, pursuant to section 56 of the Act, prohibiting Mr Khan

from performing any function in relation to any regulated activity

professional firm. This order will take effect from 26 August 2016.

[24] The Summons in the present action passed the signet on 2 March 2018, and was

[25] Counsel for the defender submitted that the pursuer had been subjected to sanctions

by his regulator and that it would be inconsistent, and contrary to public policy, to allow the

pursuer to attempt to pass on the consequences of his own wrongdoing to the defender

(Safeway Stores Ltd and others v Twigger and others [2011] Bus. L.R.1629 at paragraph [16]; Gray

v Thames Trains Ltd [2009] 1AC 1339; Les Laboratoires Servier and another v Apotex Inc [2015] AC

430). It would be impossible for the pursuer to have insured against the consequences of FSA

disciplinary sanction (Colinvaux’s Law of Insurance, 11th Edition at 21-154); and by the same

token he could not sue in negligence or contract in respect thereof. On the pursuer’s own

averments, he knew he was relying on false statements and as such could not recover

damages for the consequences of such reliance (Brown Jenkinson & Co Ltd v Percy Dalton

[26] Counsel for the pursuer submitted that ex turpi causa non oritur actio should be upheld

only in clear cases (Bilta (UK) Ltd v Nazir (Number 2) [2016] AC1). The present case involved a

claim between two individuals and should be distinguished from cases involving corporate

structures. The “turpitude” required by Les Laboratoires Servier v Apotex does not affect a

claim between private individuals. Context was very important (Gray v Thames Trains Ltd

[2009] AC1 339 at paragraph 30, as the maxim was not based on a single justification but a

group of reasons. In the present case, the pursuer’s claim was not linked, nor did it rely on,

any illegality or immorality on the part of the pursuer. There were strong policy

considerations that persons who rely on another for professional services should be able to

hold their advisor accountable (Hounga v Allen [2014] 1WLR 2889; Ramblers Association,

Secretary of State for the Environment, Food and Rural Affairs [2017] EWHC 716 [Admin]).

Safeway Stores Ltd v Twigger should be distinguished as it sought to recoup a penalty and it

arose in a different statutory context and was concerned with a corporate setting rather

between individuals. The pursuer did not accept that he knew he was relying on false

statements, and there was a significant dispute as to facts on this.

[27] The brocard ex turpi causa non oritur actio is well recognised as applying in Scots law

(Bell Principles s35, Winnick v Dick 1984 SC 48, D Geddes (Contractors) Ltd v Neil Johnson Health

and Safety Services Ltd [2017] CSOH 42). There has however been little or no judicial analysis

of the brocard or of its history or development in Scotland, nor of its doctrinal basis in Scots

Law. Parties did not address me on this but were content for me to proceed on the English

[28] By contrast, in English law the brocard has in recent years been subject to extensive

analysis both judicially by the House of Lords and Supreme Court (Gray v Thames Trains,

Hounga v Allen and Bilta (UK)Ltd v Nazir No 2) and extra-judicially in the English Law

[29] In this case it is not necessary to solve all the problems identified in England. It is

necessary only to consider the application of the brocard to the circumstances of this case.

[30] In this case the pursuer seeks to recover from the defender losses which the pursuer

has incurred as a result of a sanction imposed on the pursuer by the pursuer’s regulator.

[31] In Gray v Thames Trains Ltd, Lord Hoffman in considering the brocard held that there

was a well-established rule that “you cannot recover for damage which is the consequence of

a sentence imposed upon you for a criminal act.” (paras 32 and 41).

[32] The rule is not limited to sentences imposed for criminal acts. It extends to sanctions

applied by a regulator. In Safeway Stores Ltd v Twigger, a supermarket company had

participated in commercial activities which resulted in an increase in the selling price of milk

and other dairy products. The Office of Fair Trading conducted an investigation into

whether the Company had breached the prohibition on anti-competitive activities contained

in sec 36 of the Competition Act 1998. The company admitted the breach and the regulator

imposed a financial penalty on the company. The company sought to recover the penalty

from its employees and directors who had been responsible for the company’s participation

in the activities. The employees and directors argued that the company’s claim was barred as

a matter of public policy as it infringed the brocard. The Court of Appeal found against the

“The rationale of the maxim [ex turpi causa non oritur actio] is the need for the criminal

courts and the civil courts to speak with a consistent voice. It would be inconsistent

for a claimant to be criminally and personally liable (or liable to pay penalties to a

regulator such as the OFT) but for the same claimant to say to a civil court that he is

[33] The pursuer has been disciplined in terms of the financial services regulatory regime.

He now seeks to recover for damage which is the consequence of the sentence imposed on

him under that regime. In my opinion he is prohibited from so doing by the rule set out by

[34] I do not accept the pursuer’s argument that the Safeway case is distinguishable as it

was between the company and its directors and this case was not. The rule stated by

Lord Hoffman is of general application and not limited to cases between a company and its

directors or employees. There is no good reason in principle why the requirement for

consistency between courts and regulators set out by Longmore LJ should be limited to such

[35] I acknowledge that the brocard is founded on policy, and there may be circumstances

in which the policy of the brocard has to defer to some other public policy. However, this is

not one of them. Counsel for the pursuer founded on the public policy consideration that

persons who rely on others for professional services should be able to hold their adviser

accountable. However this case cannot be categorised as falling under any such public

policy. The pursuer was not disciplined for acting in accordance with professional advice.

He was disciplined for his own dishonest conduct. The Upper Tribunal found that the

pursuer had previously made a dishonest representation in relation to a 2007 mortgage

application which pre-dated the production of the reference and payslips by the defender in

2009 (para 69). The Upper Tribunal found in relation to the 2009 application that “He must

have known that submitting the payslip to the lender…notwithstanding the advice of his

accountant was dishonest” (para 61) and gave detailed reasons for this finding at paras 58

[36] There can be circumstances in which the lack of knowledge on the part of the claimant

that his acts were wrong might result in the exclusion of the brocard. Such circumstances

may include, for example, strict liability offences where the claimant was not privy to the

facts making the acts unlawful (Les Laboratoires Servier per Lord Sumption at para 29).

Another example was given by Lord Walker of Gestinthorpe in Stone & Rolls Ltd v Moore

“…Suppose for the sake of argument that a trader engages an accountant for the

primary and express purpose of preparing financial statements that comply with all

the requirements of company law and tax law, so that the lawfulness of the financial

statements is the very thing that the accountant undertakes to do; and suppose that

the accountant negligently fails to perform this task, and the trader is in consequence

liable to some penalty or criminal sanction. Could the accountant meet a claim for

professional negligence by pleading the ex turpi causa defence? It is obviously

impossible to answer that question without knowing more about the facts. If the

trader had honestly supplied information which he believed to be correct and

complete, and the accountant had negligently failed to notice that the information

could not be correct and complete, it seems unlikely that such a regulatory breach, not

involving dishonesty, would bring the ex turpi causa principle into play.”

[37] The Upper Tribunal has found that the pursuer’s regulatory breach involved

dishonesty. It follows from this that the application of the brocard has not been excluded.

[38] Further, as noted above, the rationale for the brocard is that there should be consistency

between courts. As Lord Rodger said in Gray “the civil court should cleave to the same policy

as the criminal court” (para 82). That rationale has even stronger force where the regulatory

structure is such that there is an appeal from the regulator to the same court as that in which

the claimant has brought a claim for damages. It would be inconsistent to allow a claimant

who failed in the Inner House on a regulatory appeal to revisit the factual circumstances of the

[39] In all the circumstances I find that the brocard applies to this case. I will uphold the

[40] In the light of this decision it is not necessary for me to make an order on the

prescription and causation arguments. However, I set out below what my findings would

[41] This action was signeted and served on 2 March 2018. Accordingly, if the prescriptive

period began to run on the date of the Decision Notice of 4 March 2013, prescription has not

operated. However, if time began to run prior to that and outwith the five year prescriptive

“On the hypotheses of fact upon which the pursuer proceeds, the defender acted in

breach of duty in 2009. The pursuer’s actions in founding upon the payslips took

place in 2009 and 2010. By acting as aforesaid, the pursuer rendered himself

vulnerable to the disciplinary proceedings which later eventuated, and at that time

suffered actionable loss. In any event, the pursuer was first subjected to investigation

by the FSA in 2011. He expended funds, time and effort –all of which would properly

be the subject of a damages claim had the pursuer any proper basis therefor – in

“the investigation process was initiated as a result of a different concern about

passport certification in another transaction, not the pursuer’s personal mortgage

transaction. It was the FSA determination of March 2013 which caused the actionable

[44] Counsel for the defender submitted that the prescriptive period began to run as soon

as the pursuer became subject to disciplinary prosecution by the FSA. At that point he

became aware that he had suffered a detriment and had not obtained something which he

sought or had incurred expenditure (Gordon’s Trustees v Campbell Riddell Breeze Paterson LLP

[2017] SLT 1287 at paragraph [21]). He suffered actual loss as soon as he became subject to

disciplinary proceedings (Knapp v Ecclesiastical Insurance Group Plc [1998] PNLR 172). The

fact that the FSA might ultimately have acquitted the pursuer was neither here nor there: the

occurrence of loss was not postponed by the possibility that a later event might rectify it

(Jackson v Clydesdale Bank Plc [2003] SLT 273). By way of analogy, where a solicitor fails to

timeously raise an action, the client’s claim is timebarred subject only to section 19A of the

1973 Act (Axa Insurance v Akhtar & Darby [2009] PNLR 455). As soon as the pursuer became

subject to disciplinary proceedings he became aware that he had suffered a detriment and

not obtained something he sought (Gordon’s Trustees v Cambpell Riddell Breeze Paterson LLP

2017 SLT 1287 at para [21]). The pursuer’s pleadings did not discharge the onus of showing

how his title to sue had been preserved (Pelagic Freezing (Scotland) Ltd v Lovie Construction Ltd

and Grontmij Group Ltd [2010] CSOH 145 at [86] – [96]). Counsel invited me to dismiss the

[45] Counsel for the pursuer submitted that the case of Kusz v Buchanan Burton

[2009] CSIH 63, 2010 SCLR 27 1H (1 Div) was analogous to the present case. He sought to

distinguish Jackson v Clydesdale Bank Plc on the basis that the pursuer was not prevented from

carrying out controlled functions until the decision of the FCA in 2013. He also sought to

distinguish Knapp v Ecclesiastical Insurance Group on the basis that the loss in that case

crystalized at the point of negligent advice. He further submitted that the expenditure that

the pursuer incurred in relation to dealing with the initial investigation was not caused by the

defender but by the need to deal with other matters raised by the FCA. The loss did not

come from being subject to investigation (CF Gordon’s Trustees v Campbell Riddell Breeze

Paterson LLP): instead, no loss from the defender’s actions could be established until the

decision was made by the FSA in March 2013. Counsel invited me to repel the defender’s

[46] Read short, Section 6 of the Prescription and Limitation (Scotland) Act 1973 provides that

an obligation to make reparation is extinguished if it has subsisted without claim or

acknowledgement for a continuous period of five years after the date when the obligation

“… any obligation….to make reparation for loss, injury or damage caused by an act,

neglect or default shall be regarded for the purposes of section 6 of this Act as having

become enforceable on the date when the loss, injury or damage occurred”

[47] In this case the “act, neglect or default” for which the pursuer seeks reparation is the

advice, reference and payslips in 2009. The more difficult issue is when the “loss, injury or

damage occurred”. On the pleadings and in the discussion before me there were three

(a) The dates in 2009 and 2010 when the pursuer founded on the advice and payslips

(b) The date at which the pursuer expended funds, time and effort in relation to the

“An obligation to make reparation for such loss, injury and damage is a single and

indivisible obligation, and one action only may be prosecuted for enforcing it. The

right to raise such an action accrues when injuria concurs with damnum. Some

interval of time may elapse between the two, and it appears to me that section 11(1)

does no more than to recognise this possibility and make it clear that in such

circumstances time is to run from the date when damnum results, not from the earlier

date of injuria. The words “loss, injury and damage” in the last line of the subsection

refer back to the same words in the earlier part and indicate nothing more than the

subject-matter of the single and indivisible obligation to make reparation. In the

present case the loss, injury and damage flowing from the respondents' negligent

omission occurred at Whitsunday 1971 when the appellant, but for that omission,

would have obtained vacant possession of the premises. A quantification of the loss

was capable of being made at that date, notwithstanding that it would then

necessarily have had to be made on the basis of estimation, and that greater accuracy

might have been capable of being achieved, in the light of supervening events, at a

later date. Whitsunday 1971 is therefore the date at which the prescriptive period

[49] In my opinion the damnum occurred at the time when the pursuer expended funds,

time and effort in relation to the investigation by the FSA into the pursuer’s representations

in 2009 and 2010. At that stage the pursuer suffered damage which would have been

recoverable from the defender if successful in this action. The expense incurred in defending

professional regulatory proceedings for acting in accordance with negligent advice flows

naturally from the giving of the negligent advice. Even a modest cost of instructing a

solicitor is recoverable (Bell v Browne [1979] Ch 383 per Nicholls LJ at p 503 quoted in Knapp v

Ecclesiastical Insurance per Hobhouse LJ at p184). If the pursuer had concluded in this action

for the cost of defending the FSA investigation and proceedings (in so far as relating to the

2009 and 2010 representations) then he would have been entitled to these costs if successful.

It does not assist the pursuer that he is suing only for the loss resulting from the penalty

imposed by the FSA on 4 March. There can only be one point of concurrence between

damnum and injuria (Kusz v Buchanan Burton at para 11). A pursuer cannot postpone the date

from which prescription runs by not suing for the damnum incurred at the point of

concurrence but instead suing only for further damage which occurred at a later date.

[50] There can be situations in which the damnum coincides with the injuria but cannot be

quantified until a later time. This is often the case where a client has entered into a

transaction on the basis of negligent professional advice. However in this case the pursuer

does not seek damages for entering into a transaction. In my opinion this takes the current

case into the category of “no-transaction” cases identified by Professor Johnston at para 4.32

of his book on Prescription and Limitation. Kusz v Buchanan Burton is an example of a case in

that category. Jackson v Clydesdale Bank is not. I agree with Professor Johnston that what is

crucial in “no-transaction” cases is to pinpoint a moment at which it can be said that the loss

was certain or bound to occur, leaving extraneous factors aside. In my opinion the loss was

not certain or bound to occur at the time when the 2009 and 2010 applications were made.

These applications might never have come to the attention of the FSA. They only came to the

FSA’s attention in the course of an FSA investigation into another unrelated matter relating to

passport certification. If this had not happened, and the FSA had never become aware of the

2009 and 2010 applications, then there would not have been any loss. Accordingly the loss

was only certain or bound to occur when the pursuer incurred loss in responding to the

[51] I was referred to Gordon’s Trustees and David T Morrison v ICL Plastics 2014 SC (UKSC)

222 but did not find them to be of assistance as they turn on section 11(3) of the 1973 Act.

[52] I do not require to make any orders in relation to prescription as I have already

dismissed this action on the ex turpi causa non oritur actio ground.

[53] Had I not so dismissed the action, I would not have dismissed the action on the

prescription ground. Instead I would have allowed a preliminary proof before answer on

prescription. That is because a fuller understanding of the facts would be required before I

could apply to the particular facts of this case my decision that the damnum occurred at the

time at which the pursuer expended funds, time and effort in relation to the investigation by

the FSA into the advice and payslips tendered by the pursuer. The time at which the FSA

investigation was widened to cover the 2009 and 2010 representations and payslips is not

precisely specified in the decisions of the FSA nor the Upper Tribunal. I observe that the FSA

Decision Notice at para 55 narrates dates on which the pursuer made written and oral

representations. All of these dates are more than five years prior to the raising of this action.

I also observe that counsel for the pursuer confirmed to me that the pursuer had obtained

legal advice and that this was not on a pro bono basis. I also observe that the pursuer was

represented by counsel at the Upper Tribunal. However it would be speculation on my part

to conclude from these observations that the written and oral representations to the FSA

related to the defender’s advice and payslips rather than only the passport issue. It would

also be speculative to conclude that the defender incurred legal fees in respect of these

representations. If that were the case, then applying my view on the law to these facts then

the action would fall to be dismissed. However, it would be premature to come to any such

[48] Counsel for the defender submitted that the decision of the FSA to prosecute the

pursuer, and thereafter to impose sanctions, were independent of the defender and not

matters for which he was responsible. That being so, there was no relevant averment of

causation (Boswell v North British Railway Company [1902] 4F 500).

[49] Counsel for the pursuer submitted that but for the breaches of duty averred by the

defender, the FCA would not have had the basis for the decision they reached and the

pursuer would not have been placed in the situation he complained of but for these breaches.

[48] The pursuer’s case is that the defender provided negligent advice to him, he followed

it and as a result he was disciplined by his regulator. That is a very different situation from

Boswell v North British Railway Company. In that case a lady who had been tried and acquitted

for illegal possession of a salmon, sued a railway company which had permitted a Fishery

officer without a warrant to open a box which contained the salmon and remove it. The lady

sought damages for the expenses of her defence and solatium. The court held that the

prosecution followed on from what the railway company did, but was not a direct

consequence of their action, and that the railway company had no responsibility for the

decision to prosecute. In that case the railway company had no involvement in the alleged

wrongful criminal act. All it did was allow the prosecuting authorities to gather evidence. In

the current case however the defender had, according to the pursuer, a central involvement

in the alleged wrongful acts of misrepresentation by the pursuer to the mortgage lenders: the

misrepresentations were made on the defender’s advice. Accordingly there is a direct causal

link between the advice given by the defender and the sanction imposed by the FSA.

[49] Accordingly, had I not dismissed this case on the ex turpi causa ground, I would have

[50] For these reasons, I uphold the defender’s third plea in law and dismiss the action. I

reserve all questions of expenses in the meantime.

Scottish Court of Session Decisions