InvestmentsJan 29 2020

What advisers can learn from court ruling over troubled investment

  • Explain how court calculated damages payable to winning party in case
  • Describe the key tenets of case that led to court decision
  • Identify why advisers should pay attention to court case
  • Explain how court calculated damages payable to winning party in case
  • Describe the key tenets of case that led to court decision
  • Identify why advisers should pay attention to court case
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What advisers can learn from court ruling over troubled investment

Thirdly, you’ve taken the money by fraud. You’ve kept it. I’ve no idea what you did with it. But I can elect for 5 per cent, the higher rate, because you’re a fraudster and you’ve had my money and kept it. I don’t even have to go into what you’ve done with it.”

Ms Jones’ summary was based on various 19th century cases starting with Docker v Somes. 

McCombe LJ observed: “The 4 per cent and 5 per cent rates awarded in Victorian times reflected (respectively) what might have been expected if the trust money had been properly invested and what could be obtained if used in the defaulting trustee’s business. 

The alternative rate was awarded to deprive the defaulting trustee of the profit he had made or was deemed to have made. 

In those days, it seems that trustees would invest in interest bearing securities at fixed rates. Investment habits (and indeed trustee investment duties) have changed over time.”

Historical cases

He later continued:

“In the 19th century the task was relatively simple; trust investments could be expected to yield 4 per cent.

Trustees who mixed their own for the purposes of commerce could safely be presumed to have earned at least 5 per cent which they should restore to the trust. 

If they are thought to have offered 5 per cent as a cheap price of their true profit an account of that profit would be ordered.”

Acknowledging the value of the 19th century cases as a starting point, McCombe LJ noted that courts have, nevertheless, “consistently tried to make awards that were suited to investment of trust funds and the economic realities of the times”. 

In his judgement on interest, Mr Justice Nugee had expressly compared the 6.5 per cent which he was proposing to award with the traditional rates:

He said: “(6.5 per cent) might seem quite a high rate, and over six years undoubtedly produces a significant sum. It is interesting however to compare it with the traditional rates. 

“It will be recalled that although 4 per cent was the standard rate, the court would award 5 per cent (which might be compounded) in suitable cases, one of which was where there was fraud or serious misconduct.

“A return of 5 per cent compound in times of stable money is approximately the same in real terms as a return of 6.5 per cent compound in times when the inflation rate is 1.5 per cent per year (to be more precise, 5 per cent interest at zero inflation is by my calculation the equivalent in real terms of 6.5 per cent interest if inflation is 1.43 per cent (ie 106.5/105 = 1.0143).”

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