Assetco Plc v Grant Thornton UK LLP
| Jurisdiction | England & Wales |
| Judge | Mr Justice Bryan |
| Judgment Date | 31 January 2019 |
| Neutral Citation | [2019] EWHC 150 (Comm) |
| Docket Number | Claim No CL-2015-000884 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 31 January 2019 |
[2019] EWHC 150 (Comm)
THE HONOURABLE Mr Justice Bryan
Claim No CL-2015-000884
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF
ENGLAND AND WALES
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Rolls Building, Fetter Lane
London, EC4A 1NL
Mark Templeman QC, Richard Blakeley and Tom Pascoe (instructed by Mishcon de Reya LLP for the Claimant
David Wolfson QC, Simon Colton QC and Stephanie Wood (instructed by Clyde & Co LLP) for the Defendant
Hearing dates: 12, 13, 14, 18, 19, 20, 25, 26, 27 June 2018, 10, 11 and 12 July 2018
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.
INDEX
A. Introduction
B. Overview of the Parties' Cases
C. The Witnesses
D. GT's Duties
E. Breaches of Duty by GT
F. The Material Facts: What Actually Happened
G. Defence Ground 1: Whether AssetCo can establish loss on the Counterfactuals H. Defence Ground 2: Whether AssetCo has mitigated or otherwise avoided its loss I. Defence Ground 3: Legal Causation / Scope of Duty
J. Defence Ground 4: Credit for benefits allegedly accruing
K. Defence Ground 5: Contributory Fault
L. Defence Ground 6: Circuity of Action
M. Quantum
N. Section 1157 of the Companies Act 2006
O. Interest
P. Conclusion
A. INTRODUCTION
A.1 The parties and the claim
The Claimant (“AssetCo plc” or “AssetCo”) in these proceedings is a public company limited by shares listed on the Alternative Investment Market (“AIM”). Its current business consists only of the provision of fire and rescue services to the Special Operations Command (now known as the Presidential Guard Command), UAE Armed Forces (“SOC”), pursuant to a contract executed in writing on 24 February 2010 (the “SOC Contract”). AssetCo was the holding company of the AssetCo Group (the “Group”) until 2012, when it disposed of the last of its Group business. It was not a trading company, save in respect of the SOC Contract.
The Group's business varied over time but it is useful to provide a brief overview at this point given the significance of a number of subsidiary companies to the present case. The Group's business can broadly be described as follows:
(1) The Group was created on 30 March 2007, when AssetCo Group Limited completed the reverse acquisition of AssetCo (then named Asfare Group plc). AssetCo Group Limited was, at the time, the holding company of two companies, AS Fire and Rescue Equipment Limited (“AS Fire”), which manufactured ladders, gantries and ancillary equipment, and Todd Research Limited, which manufactured x-ray scanning equipment. AS Fire is a separate legal entity from AssetCo Fire and Rescue Limited, which is a subsidiary holding company known for part of the relevant period as AssetCo Group Limited.
(2) Upon the reverse acquisition, AssetCo became the holding company for a number of companies which provided fire and rescue support services, most notably under a major 20-year PFI (Private Finance Initiative) contract with the London Fire and Emergency Planning Authority (“LFEPA”) dated 16 November 2000 (the “LFEPA Contract”/ “London Contract”), and also under a 20-year PPP (Public Private Partnership) contract with Lincolnshire County Council dated 19 April 2006 (the “Lincoln Contract”). The main services AssetCo provided under the London and Lincoln Contracts were the provision, servicing and maintenance of the London and Lincoln Fire Brigades' fleets of fire engines and ancillary equipment. AssetCo's subsidiaries involved in the provision of services under the London Contract are referred to below as the “London Group”.
(3) In 2009 the Group also operated a number of equipment manufacturing and vehicle assembly and servicing subsidiaries. However, on 12 April 2010 AssetCo announced that in line with the company's strategy to generate all of its revenues as a support services business, all other activities had been exited or were being divested. One of the vehicle assembly subsidiaries (Treka Bus Ltd) was sold in October 2010 and the specialist equipment manufacturing subsidiaries (Supply 999 Ltd, AS Fire and Todd Research Ltd) were sold together in December 2010. Other subsidiaries that were dormant or otherwise of little or no value were subsequently struck off, entered into liquidation or were disposed of.
(4) Thus after the 2010 disposals, the Group's main business lines were (i) the developing business in Abu Dhabi under the SOC Contract, and (ii) the London and Lincoln Contracts.
(5) In 2012, AssetCo disposed of the London Contract and the Lincoln Contract was terminated. In November 2013, AssetCo successfully re-tendered for a new contract with the UAE Special Operations Command which replaced the expiring SOC Contract.
The significant subsidiary companies of AssetCo in the present case, some of which I have already referred to above, include the following:
(1) AssetCo Group Ltd (renamed in FY10 as AssetCo Fire and Rescue Ltd). This company was the holding company for many of AssetCo's subsidiaries.
(2) AssetCo London Ltd (“ AssetCo London”). This was the company which held the London Contract.
(3) AssetCo Lincoln Ltd (“ AssetCo Lincoln”). This was the company which held the Lincoln Contract.
(4) AssetCo Engineering Ltd. This was the company which manufactured and maintained emergency equipment leased by AssetCo London, AssetCo Lincoln and others.
(5) AS Fire and Rescue Equipment Ltd (“ AS Fire”), Todd Research Ltd (“ Todd”), and Fire Safety Equipment Ltd (later known as Supply 999 Ltd). These were companies which manufactured and distributed safety, cutting and security equipment. These were all sold in December 2010 to Spring Ventures Ltd.
(6) The Vehicle Application Centre Ltd (“TVAC”). This was a company which assembled specialist vehicles, placed into administration by AssetCo in December 2008.
(7) UV Modular (“ UVM”). Another company specialising in assembling specialist vehicles, this was placed into administration in January 2010.
(8) Papworth Specialist Vehicles Ltd (“ Papworth”). This was another company specialising in assembling specialist vehicles.
The Defendant (“GT”) is a large and well-known professional services firm that provides, amongst other matters, audit services.
GT was engaged by AssetCo plc to audit AssetCo's financial statements, those of its subsidiaries, and the consolidated statements of AssetCo plc and its subsidiaries (together, the “financial statements”) for the financial years ended 31 March 2009 (“FY09”) and 31 March 2010 (“FY10”). These audits are referred to individually as the “2009 Audit” and the “2010 Audit” and collectively as the “Audits”.
It is common ground that in those years the senior management team at AssetCo behaved in a way that was fundamentally dishonest. During the audit process management made dishonest statements to GT, provided GT with fabricated and massaged evidence and dishonestly misstated reported profits, and provided GT with flawed and dishonest forecasts and cash flow projections. Outside of the audit process, management were engaged in dishonestly ‘overfunding’ assets (i.e. misleading banks as to the costs of new purchases etc so as to borrow more than was permitted), misappropriating monies, dishonestly under-reporting tax liabilities to HMRC, concluding fraudulent related party transactions and forging and backdating documents.
It is also common ground that at the dates of the 2009 and 2010 Audits, AssetCo's business was ostensibly sustainable only on the basis of the dishonest representations or unreasonable decisions made and taken by management.
GT accepts that it was negligent in a number of respects as the company's auditor in failing to detect these matters and in giving the company clean bills of health; indeed GT accepts that if it had acted competently (as what has been termed in the proceedings “the Competent Auditor”), many if not all of the misrepresentations by AssetCo management would have been discovered. The precise scope of the duties owed by GT and its breaches was not agreed, but the parties agreed in a document produced at my direction, to which I shall return, that to the extent that there was any disagreement on this, that was not material to the dispute.
The points at issue in this case are instead about causation and loss. The bulk of the trial was devoted to the question of whether AssetCo could establish that, had GT acted as the Competent Auditor, events would have turned out as AssetCo said it would in its “Counterfactual” for 2009 and 2010, and that AssetCo would have avoided expenditure that it made between 2009 and 2011 and for which it now seeks to be compensated. In the event AssetCo averted insolvency thanks to its entry, following the appointment of new management in March 2011, into a scheme of arrangement with its creditors in September 2011 pursuant to which liabilities of £121,071,000 were settled for £5,000,000 with the balance written off. By the end of September 2011 AssetCo plc was debt-free, ring-fenced from all of its loss-making subsidiaries, and with a profitable UAE business.
AssetCo claims that if GT had acted competently, a series of events would have been triggered with the result that the business of the company would have been revealed as ostensibly sustainable only on the basis of dishonest representations made, and/or the unreasonable positions taken by, management, that new management would have been brought in, and a substantively similar scheme of arrangement would have been agreed as was reached with AssetCo plc's creditors in 2011. Moreover, it is said AssetCo would have ceased incurring...
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