Afan Valley Ltd (in Administration) and 42 others v Lupton Fawcett LLP [2026] EWCA Civ 2

March 29, 2026

Scope of Duty and Recoverable Loss in Solicitor Negligence Claims: Afan Valley Ltd (in Administration) and 42 others v Lupton Fawcett LLP [2026] EWCA Civ 2

Introduction

The Court of Appeal’s decision in Afan Valley Ltd (in Administration) and 42 others v Lupton Fawcett LLP [2026] EWCA Civ 2 is an important authority on recoverable loss in solicitor negligence litigation. It addresses a recurring difficulty in professional negligence claims, namely the tendency to treat every adverse commercial consequence flowing from a transaction as recoverable once negligent advice is alleged.

The appeal arose from the strike out and summary judgment decision of Sheldon J in Afan Valley Ltd (in Administration) and 42 others v Lupton Fawcett LLP [2024] EWHC 909 (KB). The Court of Appeal dismissed the appeal. It held that, even assuming the pleaded allegations in APOC 5 were true, the losses advanced against the solicitors were not legally recoverable on the claim as pleaded.

The decision is significant for three principal reasons. First, it contains a clear appellate application of scope of duty principles in a solicitor negligence context. Secondly, it confirms the continuing force of the “£ in, £ out” analysis where a claimant company has received funds matching the liability said to have been incurred. Thirdly, it underlines the difficulty of attempting to recast a defective loss case on appeal by relying on fresh amendments and fresh evidence after a strike out application has already succeeded.

Factual background

The claimants were 43 companies which, by the time of the appeal, were in insolvent liquidation and acted by their joint liquidators, Mr Robert Armstrong and Mr Edward Bines, although the formal title of the proceedings still referred to Afan Valley Ltd as being in administration.

They had been used as special purpose vehicles in connection with 22 investment schemes involving hotels, care homes and student accommodation. Investors were offered the opportunity to buy long leasehold interests in individual rooms, with returns described as guaranteed or assured. Those returns included annual coupon payments of between 8% and 12%, together with a right, after 10 years, to sell the room back to the relevant vehicle for 125% of the original price.

The companies fell into two groups, the MBi Group and the Northern Powerhouse Development Group. The pleaded case was that over £68 million was raised from investors in the United Kingdom and overseas. A central regulatory question was whether the schemes were collective investment schemes for the purposes of the Financial Services and Markets Act 2000. If they were, their establishment and operation would amount to regulated activity, and the absence of authorisation would expose the scheme vehicles to the consequences of section 26 of the Financial Services and Markets Act 2000.

That statutory framework mattered because, where an agreement is made in the course of unauthorised regulated activity, the other party may recover money paid under the agreement and may also be entitled to compensation for loss sustained by parting with it. The claimants’ case was that the schemes were collective investment schemes, had been operated in breach of the general prohibition in section 19 of the Financial Services and Markets Act 2000, and exposed them to very substantial liabilities to investors.

Lupton Fawcett LLP, a firm of solicitors in Leeds, was alleged to have advised the MBi and NPD groups on the collective investment scheme question between 2014 and 2017. The claimants said the firm should have advised much earlier that the schemes were collective investment schemes, or at least that there was a serious risk that they were. Their causation case was straightforward in formulation: had proper advice been given, the schemes would not have been promoted and the investments would not have been taken.

An important feature of the appellate judgment is that there had been no trial and no findings of fact. The Court of Appeal made clear that the factual account before it was taken from APOC 5, the fifth version of the draft amended particulars of claim, because permission to rely on APOC 6 was refused. Lupton Fawcett continued to deny negligence and breach of duty. The issue was therefore not whether negligence had been proved after trial, but whether the claim in APOC 5 could survive strike out or reverse summary judgment on the assumption that the pleaded allegations were true.

The claimants’ own pleaded case was also that the schemes were unsuccessful, that none made a profit, and that they were in truth operated together as a Ponzi scheme by the fraudulent use of newer investors’ monies. The judgment referred to separate proceedings in which findings of dishonesty had been made against Mr Gavin Woodhouse in Northern Powerhouse Developments Ltd & Ors v Woodhouse [2023] EWHC 3124 (Ch). By 2018 cashflow problems had become acute, by the end of March 2018 the NPD Group was insolvent, and by 2019 insolvency processes were under way. All the claimant companies were ultimately in liquidation.

The loss case in APOC 5 was anchored principally to section 26 liabilities. In substance, the claimants said that Lupton Fawcett’s advice exposed them to civil liability to repay investors’ money, with very substantial figures pleaded by reference to the funds raised and the sums already returned to investors.

The issues before the court

In substance, the appeal and associated application raised four questions:

1. whether the claimants should be permitted on appeal to rely on a further draft amended pleading, APOC 6, and further evidence from Mr Armstrong;
2. whether Sheldon J had been right to conclude that the claimants had no recoverable loss because the money received from investors matched, pound for pound, the liability said to arise under section 26;
3. whether the claimants could escape that analysis by pointing to commissions, legal and professional fees, or the wider loss of investor monies as the schemes failed; and
4. whether a distinct claim based on compensation under section 26(2)(b) had in fact been pleaded and, if so, whether it had any real legal substance.

The court’s reasoning

The refusal to allow APOC 6 and fresh evidence

Before dealing with the substance, the Court of Appeal refused permission to rely on APOC 6 and new evidence from Mr Armstrong. That part of the decision is itself of practical significance.

The proposed amendments sought to recast the loss case. They advanced, among other matters, a more explicit case that the “£ in, £ out” analysis was defeated because commissions and fees became payable on investment, and that compensation under section 26(2)(b) should also be treated as part of the relevant loss. Further evidence was also put forward about investor claims in the liquidations and the amounts said to have been paid in commission and fees.

Applying Aylwen v Taylor Johnson Garrett [2001] EWCA Civ 1171 and the modified Ladd v Marshall [1954] 1 WLR 1489 principles applicable in this context, the court held that these points could and should have been advanced before Sheldon J. They were not based on newly discovered material or later developments. The court held that the factual basis for them had always been available, and that the claimants were seeking to improve their case on appeal by deploying arguments that could and should have been put forward below. The claimants had had ample time to formulate their response to the strike out application.

For practitioners, that part of the judgment is a warning. A claimant facing strike out or summary judgment on a point of legal loss must proceed on the footing that the pleading and evidential case put forward at that stage may be the only case available. It is a serious mistake to treat the first appeal as the point at which a deficient loss case can be reconstructed.

The central comparison: “£ in, £ out”

The core of the decision lies in the court’s treatment of the pleaded loss. The claimants said that, had proper advice been given, the schemes would not have proceeded and they would not have incurred liabilities under section 26 of the Financial Services and Markets Act 2000. On one level that was true. But it was only half of the necessary comparison.

Nugee LJ emphasised that in assessing damages for the alleged legal wrong, the court had to compare the actual world with the counterfactual world. In the actual world, the claimant companies received approximately £68 million from investors and were said to be exposed to a liability to repay that money. In the counterfactual world, if the schemes had not proceeded, they would neither have received the money nor incurred the liability.

Once both sides of the balance sheet were brought into account, the basic claim failed. The companies were not worse off merely because they had received money which they might have to repay. That was the essence of the “£ in, £ out” analysis. The court treated that conclusion as consistent with earlier authority, including Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360 and Saddington v Colleys Professional Services (a Firm) [1999] Lloyd’s Rep PN 140.

The point is of obvious importance in transactional and corporate claims. An obligation to repay money received is not, without more, actionable loss. It is necessary to identify why the receipt and the corresponding liability do not cancel each other out. On the pleaded case before the Court of Appeal, the claimants could not do so.

Scope of duty

The judgment is equally important for its treatment of scope of duty. Applying Manchester Building Society v Grant Thornton LLP [2021] UKSC 20, read with Meadows v Khan [2021] UKSC 21, the Court of Appeal held that Lupton Fawcett’s duty was confined to advising on the consequences under the Financial Services and Markets Act 2000 of the schemes being collective investment schemes. It was not a general retainer concerning the commercial soundness of the ventures, the risk of fraud, the wisdom of expenditure, or the overall viability of the developments.

That distinction was fatal to much of the claimants’ reasoning. The court rejected any suggestion that the pleading’s references to “legal, regulatory and commercial implications” expanded the scope of duty into a responsibility for the schemes’ business model or profitability. Whether the schemes were commercially viable was a different question from whether they were collective investment schemes.

That matters because, once the duty is properly defined, the law does not permit a claimant to recover every loss that would not have happened but for the advice. There must be a sufficient nexus between the loss claimed and the risk against which the defendant was retained to guard. The Court of Appeal applied orthodox principles derived from South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191, Hughes-Holland v BPE Solicitors [2017] UKSC 21 and Manchester Building Society v Grant Thornton LLP [2021] UKSC 20 in a disciplined way.

Ground 1, commissions and fees

The first substantive attempt to escape the “£ in, £ out” analysis was to say that when a claimant company received an investment it did not truly keep the full amount. Commission became payable to sales agents, and legal and professional fees also had to be met. On that basis, the claimants argued that the company did not receive the whole of the relevant investment net.

The court rejected that point on scope of duty grounds. Commissions and fees were not losses flowing from the schemes being collective investment schemes. They would have been paid whether the schemes were collective investment schemes or not. In the counterfactual world, where the schemes were assumed not to be collective investment schemes but otherwise operated in the same way, the same commissions and fees would have been incurred.

That reasoning shows the court refusing to allow the loss inquiry to drift away from the purpose of the retainer. A solicitor retained to answer a specific regulatory question does not become responsible for all transactional outgoings merely because the transaction would not have happened without the advice.

Ground 2, the wider loss case

The second attempt was broader, but the Court of Appeal was itself very doubtful that the point was properly open to the claimants. Nugee LJ recorded that the argument had not been run before the judge below, appeared first to have been sought in APOC 6, and was difficult to locate in APOC 5. He also noted its tension with the claimants’ own case that the schemes were not genuine investment opportunities at all but a dishonest Ponzi scheme that would never have made a profit.

Even assuming, however, that the point was available, it still failed. In the counterfactual world where the schemes were not collective investment schemes, they would have been operated in exactly the same way, the investors’ money would have been lost in exactly the same way, and the claimants would have been in exactly the same position save for the absence of potential section 26 claims. Those wider losses therefore fell outside the scope of Lupton Fawcett’s duty.

This part of the judgment is likely to be of particular interest to defendants and insurers. It reinforces the need, in a professional negligence claim, to separate the legal consequence of the specific negligence alleged from the wider commercial disaster in which that negligence is said to sit.

Ground 3, compensation under section 26(2)(b)

The third ground concerned compensation under section 26(2)(b). This was the claimants’ strongest point in theory because, if compensation sat on top of repayment, the case might no longer have been one of simple equivalence.

The problem was twofold.

First, the Court of Appeal held that APOC 5 did not plead any distinct claim based on compensation under section 26(2)(b) at all. Although APOC 5 referred to investors recovering their investments and to declarations and indemnities arising from the operation of section 26, the court held that those references, read in context, were directed to repayment under section 26(2)(a), not compensation under section 26(2)(b). There was, as Nugee LJ observed, no reference in the particulars of claim to section 26(2)(b) compensation at all, and APOC 5 gave no fair warning that such a claim was being advanced.

Secondly, the court went further and made clear that it was in any event unpersuaded that the point had real merit. The court also noted that there was, in fact, no evidence or pleading that any investor had by that stage made a section 26 claim at all.

If the schemes had not been collective investment schemes, the investors would still have had claims, very likely in deceit and in contract, arising from the fundamentally dishonest manner in which the schemes were alleged to have been promoted and operated. The court considered it highly probable that those claims would be at least as valuable as anything available under section 26, even taking section 26(2)(b) into account.

The judgment is also notable for rejecting the suggestion that compensation under section 26(2)(b) could include the benefit of contractual provisions such as the buy-back right. The court held that this was wrong in principle because section 26(2)(b) is concerned with what the investor has lost by parting with the money, not with what the investor might have received had the investment performed as promised. The court referred in this context to In re Whiteley Insurance Consultants (a firm) [2008] EWHC 1782 (Ch).

The decision

The Court of Appeal dismissed the appeal. Lord Justice Edis and Lord Justice Holgate agreed with Lord Justice Nugee.

The consequence was that the strike out and summary judgment entered in favour of Lupton Fawcett remained in place. The case therefore stands as an example of an appellate court upholding early disposal of a solicitor negligence claim on loss and scope of duty grounds, without any trial of breach.

Conclusion

The decision matters because it draws a sharp but necessary line between negligent advice and recoverable damage. In professional negligence claims, especially those arising from complex corporate or investment structures, there is often a temptation to argue that if competent advice had been given the whole venture would have been avoided, and therefore all subsequent losses should be recoverable. Afan Valley shows why that reasoning is legally inadequate.

For claimants, the case is a reminder that loss must be pleaded with precision and must match the purpose of the duty alleged. It is not enough to identify a negligent failure and a catastrophic outcome. The pleaded loss must survive both balance sheet analysis and scope of duty analysis.

For solicitors and their insurers, the judgment is valuable because it confirms that scope of duty arguments remain powerful at an interlocutory stage. Where the pleaded loss falls outside the purpose of the retainer, or where the claimant has simply matched a liability with funds received, a properly focused strike out or summary judgment application may succeed without the need for a full trial.

For liquidators and insolvency practitioners, the case is a further reminder that the fact a company is exposed to claims from creditors or investors does not by itself establish recoverable loss against advisers. The court will ask what the company received, what liabilities it assumed, what would have happened in the counterfactual world, and whether the alleged harm truly falls within the adviser’s duty.

Finally, the procedural aspect should not be overlooked. The refusal to permit APOC 6 demonstrates that a claimant cannot ordinarily keep a weak loss case in reserve and expect to reconstruct it on appeal. If a case on loss depends on commissions, fees, investor compensation, or a more sophisticated balance sheet analysis, it must be properly pleaded and supported when the strike out application is fought, not afterwards.

Further Reading

• Professional Negligence
• Solicitor Negligence Claims
• A Guide to Bringing a Professional Negligence Claim

Contact Us

Carruthers Law acts in professional negligence disputes, including claims arising from negligent advice given by solicitors and other professionals. If you require advice about a potential professional negligence claim, issues of scope of duty, causation, loss, or limitation, please contact Carruthers Law on 0151 541 2040 or 0203 846 2862, email info@carruthers-law.co.uk, or use our Contact Us page.

Carruthers Law
Suite 205/206 Cotton Exchange
Bixteth Street
Liverpool L3 9LQ