SWM Limited (“SWM”) is a financial services firm regulated by the Commission. It is subject to regulatory action by the Commission in respect of the suitability of advice given to investment clients. As part of its regulatory action the Commission had issued a number of directions, one of which prohibited SWM from making payments in the “ordinary course of business”. This is a common part of “lock down” directions issued by the Commission. In this case the direction was aimed at preserving assets so they would be available for compensation to SWM’s customers.
The Commission had also ordered SWM to commission a report by Grant Thornton (“GT”). SWM challenged GT’s expertise but a report was prepared. GT concluded that, for the most part, the advice and hence the investments were unsuitable. SWM subsequently sought to commission a second report. The Commission resisted. Its view was that the expenditure in obtaining a second report was not in the ordinary course of SWM’s business.
The Court was asked by SWM to grant a declaration that payment for a second report would be in the ordinary course of business. This was so that SWM could be sure that it would not be in breach of a direction and thus would not commit a criminal offence.
The judgment considers the Court’s jurisdiction to order declaratory relief, the circumstances in which that jurisdiction ought to be exercised and whether the action proposed by SWM amounted to conduct in the ordinary course of business.
In broad terms, a declaratory judgment is a formal statement pronouncing upon the existence or non-existence of a legal state of affairs. In this way the Court is able to resolve a possible future dispute and to do so without the need to make an order to enforce its decision.
Though used sparingly, a declaratory judgment can thus be a very useful tool for a business that is unclear as to the scope of its rights and duties in circumstances that may expose it to the risk of incurring penalties or damages or administrative interference.
The Royal Court has adopted a broad and flexible approach to applications for declaratory relief, in contrast to the more technical analyses at English law. In short, is there a live practical question with practical consequences?
The Court took the view that SWM was seeking clarity for a practical purpose, namely as to whether it could use its money for purposes that would not breach a direction and thus expose the company to a criminal prosecution.
The Court gave leave to hear submissions of the Solicitor General. It was his view that to grant a declaration in the terms sought would affect any future decision of the Attorney General as to whether or not he should prosecute for breach of a direction, thus effectively encroaching upon the exclusive prerogative of the Attorney General to bring criminal proceedings.
The Court accepted that a degree of caution would naturally be required in the exercise of its discretion to grant a declaration. However, it disagreed that the effect of the declaration sought was a trespass upon the Attorney General’s jurisdiction. A declaration would not necessarily be determinative of any future decision to prosecute.
Rather, SWM had asked the Court to express an opinion as to the interpretation of an administrative direction in an effort to avoid the violation of and in order to ascertain the law.
This was in the circumstances an entirely appropriate occasion in which the Court should grant declaratory relief.
The Commission’s view was that the instruction by SWM of a one-off, expert opinion to review expert, unregulated funds and their suitability for sale to retail investors was an exceptional item and thus not in the ordinary course of business.
The Court’s view of the proposed transaction was not so narrow. It made reference to the fact that SWM carries out its business in a regulated environment. In this context SWM may on occasion be required to take advice in connection with its relationship with the Commission.
The Court was concerned that one of the potential consequences of the Commission’s regulatory action was the demise of SWM’s business. As such, actions which a company takes to preserve or protect its business in the face of regulatory action are – though exceptional – in the ordinary course of business. SWM should be able to secure evidence in the form of independent advice in order to challenge the evidence of the Commission.
This outcome is one that should reassure businesses which find themselves subject to regulatory action and uncertain as to the scope of their permissions and obligations under such action. Where a company seeks clarity as to the interpretation of a direction imposed by the regulator, particularly in circumstances where the regulator challenges the company’s own interpretation, it may apply to the Court for guidance.
What may concern some in industry is the Commission’s apparent willingness to use its powers so as to deny a business the opportunity to defend itself by obtaining alternative advice. It is to be welcomed that the Royal Court indicated that given the gravity of the potential consequences of an adverse finding by the Commission (the closure of the business) it wanted to make sure SWM had an opportunity to secure evidence to preserve it.
Whether SWM, having won the battle, will win the war, remains to be seen.