The recent Court of Appeal judgment in Afan Valley Ltd & others v Lupton Fawcett LLP has highlighted the importance, in potential professional negligence claims, of carefully assessing scope of duty and recoverable loss at an early stage.

Published 13 January 2026

The Court of Appeal (CoA) has unanimously dismissed an appeal by the various insolvent Claimant companies (acting by their Joint Administrators) against an order striking out their claims against the Defendant solicitors’ firm and granting reverse summary judgment.  In his judgment Lord Justice Nugee (with whom Lord Justices Edis and Holgate agreed) endorsed the key finding of the High Court judge that the Claimants had failed to show they had suffered any loss as a result of the Defendant’s allegedly negligent advice, in particular on the basis of a ‘money in money out’ argument, and applying the Supreme Court’s approach set out in its 2021 decision in Manchester Building Society v Grant Thornton LLP (MBS).

Background

In short, the Claimants were special purpose vehicles used as part of property investment schemes that together raised around £68m from investors in the UK and abroad.  The schemes were however operated fraudulently, resulting in the Claimants’ eventual insolvency.

The Claimants’ case was that they had sought advice from the Defendant over a prolonged period as to whether the schemes were collective investment schemes (CISs) within the meaning of ss.235 and 417(1) of the Financial Services and Markets Act 2000 (FSMA) (and therefore subject to the general prohibition at s.19 FSMA).  The net result was that by late 2017 the Defendant advised the key individual operating the schemes to “become FCA regulated”.

The Claimants alleged the Defendant should have advised much earlier that the schemes were (or very likely were) CISs, in which circumstances the schemes would never have been promoted and no investments made.  Instead, on the Claimants’ case, the consequence of the Defendant’s advice was that the Claimants incurred significant liabilities under s.26 FSMA, entitling the investors to recover (i) the funds invested, plus (ii) compensation for any loss sustained as a result of having parted with those funds.

High Court decision

The Defendant applied for strike out/reverse summary judgment, arguing that the Claimants had failed to establish any recoverable loss.

The High Court agreed; the s.26 liabilities to return the funds invested were the primary head of loss claimed, but those liabilities were only equal to the assets obtained, and so overall the Claimants were no worse off (the ‘money in money out’ argument).  In addition, it was the (fraudulent) use of the funds invested which had caused the losses claimed, rather than merely their receipt.  Following MBS, the scope of the Defendant’s duty of care to the Claimants was limited to the impact of FSMA to the extent the schemes were CISs; the relevant alleged harm flowing from that was the requirement to repay the funds invested which was set off in full.

The appeal

The Claimants appealed on three grounds, essentially that:

• the investments made were not ‘balance sheet neutral’, since commissions and fees were payable on completion
• the judge was wrong in his analysis of the scope of duty (albeit this later evolved into a point around longer-term expenditure)
• they had a reasonable prospect of demonstrating further losses in the form of compensation payable under s.26(2)(b) FSMA

Court of Appeal decision

Addressing scope of duty first, Nugee LJ endorsed the judge’s conclusion that the duty of care the Defendant undertook was limited to the impact of FSMA if the schemes were CISs.  This was the question it was asked to advise upon (not any wider issues around commercial viability of the schemes, risk of fraud etc) and the only pleaded impact was the s.26 liability.

On that basis, Nugee LJ considered there was no sufficient nexus between the Ground 1 losses (commissions and fees) and the Defendant’s duty of care.  These were losses which would have been incurred whether the schemes were CISs or not and, applying the MBS framework, these were not losses the duty of care was intended to guard against.

Conversely there was sufficient nexus, in principle, between the Ground 3 losses (s.26(2)(b) compensation) and the Defendant’s duty of care; “the Claimants’ only possible escape from the logic of the [money in money out] argument”.  This was also bound to fail, however; in the ‘counterfactual world’ in which the schemes were not CISs, the same sequence of events would have unfolded, culminating in the Claimants’ insolvency.  Whilst the investors would not have rights under s.26 FSMA, Nugee LJ accepted the Defendant’s argument that the investors would (as they did in any event) have valid claims against the Claimants in the tort of deceit and in breach of contract which were “at least as valuable” as s.26 claims.  It would only be if the s.26 claims were of greater value than other available claims that the alleged negligence would give rise to loss recoverable from the Defendant.

The Claimants’ further argument around losses relating to longer-term expenditure required from investors was disposed of in short order; it assumed the schemes were ultimately intended to be profitable which was “flatly inconsistent” with the Claimants’ own case that they were in fact a dishonest Ponzi scheme.

The appeal was accordingly dismissed.

Key takeaways

The CoA decision provides a further useful example, to those engaged or potentially engaged in professional negligence disputes, of how the Courts will apply the “structured framework” set out in MBS in 2021, in particular the questions relating to scope of duty, factual causation and the nexus between duty and harm.

It also clearly illustrates the importance for parties contemplating bringing a claim of carefully considering at an early stage what the MBS analysis would ‘look like’, engaging constructively and comprehensively in pre-action correspondence, and (if/when appropriate) pleading their case fully and promptly.  While certain aspects of the claim may well appear strong, if there are ‘gaps’ in other elements then the claim as a whole will be susceptible to strike out/summary judgment applications (and the attendant costs consequences).

Finally, in relation to unauthorised CISs generally, the decision highlights (and briefly contrasts) the different potential causes of action investors in such schemes may seek to rely on - subject of course to the facts - to recover associated losses, as well as a lack of authority on the statutory right to claim compensation under s.26(2)(b) FSMA.