116 Cardamon Ltd v Mr Alan Ramsay Macalister
| Jurisdiction | England & Wales |
| Judge | Mrs Justice Cockerill |
| Judgment Date | 15 May 2019 |
| Neutral Citation | [2019] EWHC 1200 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Docket Number | Case No: CL-2016-000586 |
| Date | 15 May 2019 |
[2019] EWHC 1200 (Comm)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS
OF ENGLAND AND WALES
COMMERCIAL COURT (QBD)
Royal Courts of Justice,
Rolls Building
Fetter Lane, London, EC4A 1NL
Mrs Justice Cockerill DBE
Case No: CL-2016-000586
Mr Alec Haydon Q.C. (instructed by Weightmans LLP) for the Claimant
Mr Colin West (instructed by Excello Law) for the Defendant
Hearing dates: 4, 6,7, 8 March 2019
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
In this case the Claimant (“Cardamon”) claims for damages arising out of what it claims are breaches of warranties contained in a share purchase agreement dated 23 May 2014 (the “SPA”). That agreement related to the purchase of 100% of the shares in Motorplus Limited (“Motorplus” or “the Company”) a privately owned company regulated by the Financial Conduct Authority (“FCA”). The business of Motorplus involved selling policies of insurance such as legal expenses insurance and lost key insurance which are “added-on” to policies of motor or household insurance, and also providing claims handling and first notification of loss services to underwriters.
Cardamon is an investment company and is part of a group of companies which is also involved in the insurance and claims handling sector.
The Defendant sellers (“Mr and Mrs MacAlister”) were the founders of Motorplus and its sole shareholders and directors.
The purchase price of the shares was £2,386,247.50 (“the Purchase Price”). Payment was made as to £1,282,472 by means of Cardamon assuming liability for certain directors' loans in the same sum which had previously been owed to the Company by Mr and Mrs MacAlister. The balance of the consideration in the sum of £1,103,775.50 was paid in cash.
Under the terms of the SPA the Purchase Price is the maximum aggregate sum recoverable for any claim for breach of warranty. It is also the principal sum claimed in this action.
The basis of the claim is that the MacAlisters warranted the truth, fairness, accuracy and proper preparation of the Company's accounts for the financial year ending 31 August 2013 (“the Accounts”) and warranted that the management accounts to 30 April 2014 (“the Management Accounts”) fairly represented the assets and liabilities and the profits and losses of the Company as at the date when they were prepared. It is also said that Mr and Mrs MacAlister warranted that the Accounts were not affected by any unusual or non-recurring items or any other factor that would make the financial position and results shown by the Accounts unusual or misleading in any material respect.
In essence it is said that, contrary to the picture painted by the Accounts and the Management Accounts, Motorplus was, at the time of purchase, effectively insolvent. Three particular matters are relied on.
i) First it is said that the Accounts understated Motorplus's liability to pay claims under a scheme called FamilyPlus, a book of before-the-event (BTE) legal expenses insurance business (“the Underprovision claim”).
ii) Secondly it is said that the Accounts listed as an asset half of a debt owed by an associated company Boomerang-Tag Limited (“Boomerang-Tag”) which should have been written off entirely (“the Boomerang-Tag claim”).
iii) Thirdly it is said that there was a failure to disclose a change in the method of remunerating insurance brokers which had occurred part way through the 2013 financial year, which had allowed the Company to defer accounting for a large amount of this expense giving an unduly rosy look to the accounts (“the Remuneration of Brokers claim”).
There was a fourth aspect to the claim, namely that certain business written by the Company as agent was recognised in its accounts as if written as principal, resulting in an over-statement of turnover which required to be corrected (“the Overstatement of Turnover claim”). That claim was not the subject of detailed argument and is dealt with briefly at the close of the judgment.
All in all, Cardamon says, Motorplus was effectively insolvent, and Cardamon had to advance sizeable sums — over £1 million — to keep it afloat. It claims that in effect Motorplus was worthless and claims the entire sum paid for it by way of damages for the breach of warranties. Indeed, it says the claim would be larger but for the fact that the claim is limited by the terms of the SPA to the purchase price. There is a damages cap under the SPA which makes the first £500,000 of any claim irrecoverable (the “de minimis provision”). However, it is contended for Cardamon that the full purchase price is nonetheless recoverable if the damage suffered is £500,000 or more greater than the purchase price.
The case has been heard over four Court days. The major part of the evidence was expert evidence. Cardamon called Mr Graham Nunns, a chartered accountant of over 30 years' experience. Mr and Mrs MacAlister called Mr Andrew Conti, a forensic accountant of over 20 years' experience. Although the experts did not see eye to eye on a number of issues, and regrettably at times did not fully comprehend what the other was aiming to do in performing certain calculations, they did their best to co-operate with each other in the way experts in this Court should do. I formed the view that they were both genuinely trying to assist and that the differences in their approaches were to be attributed to legitimate stylistic differences in the way they approached their tasks, rather than any partisanship.
Cardamon called three witnesses of fact:
i) Mr Graham Pulford, who has been Cardamon's Managing Director since before the SPA. Mr Pulford's evidence primarily concerned the circumstances surrounding the SPA.
ii) Mr Ian Robins, who has been the Group Chief Finance Officer of Cardamon's group since September 2014 (i.e. subsequent to the SPA). Mr Robins' evidence primarily concerned the breach of warranty claims.
iii) Mr Nick Leeming. Mr Leeming has worked for the Company (i.e. Motorplus Limited) since 2011 and has been its Financial Controller since around January 2013. Mr Leeming's statement primarily concerns how the Company went about setting the claims provision in the period prior to the SPA.
It is a pleasure to say that this was a case where all the witnesses who appeared, both factual and expert, appeared to be doing their best to assist the Court.
Nor, I should add, is there anything sinister in the fact that Mr and Mrs MacAlister did not call any factual witnesses. Although they were the Company's sole shareholders and directors up to the date of the SPA in 2014, they had been absentee owners for some time, having moved to Australia in 2002. Mr and Mrs MacAlister are both now in their mid-sixties and retired.
Between 2002 and the date of the SPA, the day-to-day management of the Company was in the hands of its management team. Mr and Mrs MacAlister's role over this period was primarily limited to reviewing accounting information (such as Management Accounts) for the Company, as well as reviewing and approving its annual audited Accounts.
I will deal with the issues which arise by reference to the following headings:
The Backdrop
| The Backdrop | Paragraph 16 |
| The SPA and its Terms | Paragraph 34 |
| Events After Purchase | Paragraph 40 |
| Under-Provision for Claims | Paragraph 50 |
| Boomerang-Tag | Paragraph 99 |
| Brokers' Remuneration | Paragraph 107 |
| Quantum | Paragraph 130 |
The factual backdrop to the sale was substantially not contentious. On 12 April 2014, in correspondence with Mr Chatterton of Speed Medical Examination Limited – a related company to Cardamon, Mr MacAlister proposed that Cardamon should buy 100% of the shares in Motorplus for £5 million and suggested that the deal should be done quickly.
On 16 April 2014, Mr MacAlister provided Mr Chatterton with a forecast to the end of the 2014 financial year based on actual figures in the Management Accounts to 31 March 2014 and forecasts to the end of August 2014.
Cardamon made an indicative offer of being willing to pay £2.3 million for all of Mr and Mrs MacAlister's shares on 22 April 2014, explaining that, as Cardamon understood the figures, the business would generate around £500,000 in profit in 2014.
Initially, Mr MacAlister expressed no interest in selling at that price but, 12 hours later, he accepted it on terms that Cardamon would complete within two weeks and pay the MacAlisters' transaction costs, telling Mr Chatterton, “Any delays etc. I will not tolerate as you are onto a good thing.”
The sale was conducted without any due diligence being performed; at least in part because the existing management team were working on obtaining finance for a Management Buy-Out and there was a desire not to alert them until the sale was due to complete. Mr MacAlister indicated in correspondence that Cardamon's willingness to buy the Company without due diligence was “the reason I offered the company at a discount”.
There was also a reason why the sale had to be agreed quickly. Mr and Mrs MacAlister owed the Company the sum of £1,282,474, payments having been made by the Company to them by way of a loan (“the Directors' Loan”). If the full sum was not repaid by 31 May 2013, Motorplus would become liable to pay further tax in the amount of £151,000 under section 455 of the Corporation Tax Act 2010 (“Section 455”). Motorplus had no funds with which to discharge this liability, or the rest of its liability to pay Corporation Tax on the taxable profits shown in the Accounts (of £155,000), without...
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