Capcon Holdings Plc v Edwards & Others

This an appeal of Capcon Holdings plc brought to the leave of Deputy Master Beruns from his order made on 26 ^th April 2007 granting specific performance of an agreement dated 23 ^rd January 2003 for the sale of shares in a company then called Argen Limited, now called Capcon Gulf Limited (“Argen”).

Capcon carries on business by providing audit, stocktaking, commercial, investigative and administration services. Its shares have been quoted on the alternative investment market since 2001. In that year, it received a sales memorandum in relation to the issue of share capital of Argen. Argen had been incorporated on 17 ^th August 1968 with an authorised capital of £10,000 divided into 10,000 shares of £1 each. By the time of the sales memorandum, 110 of those shares had been issued and were held as to 100 jointly by (1) Anchor Trustees International Limited (2) Intertrust New Zealand Limited and (3) the third claimant, Richagent Limited, as trustees for the family of Gwyneth Farrah Smith. Five were held by the first claimant, Mr JB Edwards, and five by the second claimant, Mrs Edwards.

Argen had a half-owned subsidiary called Argen information Services GMBH (“GMBH”). That company had been incorporated in Germany in 1977 and 50% of its shares were held by Argen.

In 2002 negotiations for the acquisition of shares in Argen by Capcon commenced. Capcon enquired as to the identity of the other 50% owner of GMBH, and was told that the shares were held by a Panamanian company called Argen International Incorporated and were owned beneficially by Mr David Cowling. Representations to that effect were made on 26 ^th April 2002 by Mr Edwards and Mrs Farrah-Smith and on 22 ^nd January 2003 by Mr Edwards, as reflected in a diligence report of that date conducted on behalf of Capcon by its accountants, Vantis plc.

The negotiations resulted in an agreement dated 23 ^rd January 2003 made between the members of Argen (of the first part), Capcon Holdings plc (of the second part), and Mrs Farrah-Smith (of the third part), for the sale of the shares in Argen for an initial consideration of £1,350,000 and a further consideration, the amount of which depended on the profits of Argen over the next two years. That further consideration could not exceed the further sum of £1,915,250.

Clause 6.2 of the agreement provided for a mechanism whereby the relevant future profits were to be ascertained. It stated – I quote from page 56 of the bundle:

“The purchaser shall and shall procure that the company (and/or newco as appropriate) shall, so soon as practicable, following the end of each relevant financial year, and in any event within four calendar months thereof, provide to each of the parties hereto a copy of the draft accounts of the company (and/or newco, as appropriate) and certificate as to the amount of the applicable net profit before tax. Provisions of clause 10 shall apply in relation to such a certificate.”

Clause 1 had contained a number of definitions. The Company, of course, was defined as Argen. The term “Certificate” was defined as: “A certificate issued by the auditors under clause 6.2.”

Clause 10 (referred to in clause 6.2) provided a mechanism whereby disputes arising from the certificates might be resolved by an independent expert.

The agreement was completed on 19 ^th February 2003. On that day, and for tax reasons, the business of Argen, including the shares in GMBH, was transferred to Capcon Argen Limited (“CAL”), a subsidiary of Capcon itself. On 19 ^th February 2004, i.e a year later, Capcon delivered to representatives of the claimants draft accounts of Argen for the year ended 31 ^st December 2003. The claimants contend that these were the relevant draft accounts for the purposes of clause 6.2.

On 30 ^th June 2004 Mr David Cowling sent an email to Vantis plc (the accountants for Capcon) referring to a declaration that he had made to the tax authorities in Cologne on 20 ^th November 2001 to the effect that he was not the beneficial owner of the shares in GMBH registered in the name of Argen International Incorporated. This caused Capcon to pursue enquiries with the claimants as to who the beneficial owner was. It is common ground that, by September 2004 at the latest, Capcon knew that the representations made to them as to the beneficial owner of the other 50% of GMBH were false.

In the meantime, on 30 ^th July 2004, Capcon paid the claimants a further £100,000 plus interest due under clause 6.1.2 of the agreement. In mid August 2004 there was a meeting of the board of Capcon to consider what they should do in the light of the discovery that the beneficial owner of the other 50% was not Mr David Cowling. The minute of that meeting is in the following terms – page 214:

“GMBH

We really must sort this out and put pressure on our advisors. I cannot see why we cannot put a case forward for retention against warranties especially as the advice we have is that an exposure exists. Also, the fact that we relied on Gwen and Jonathan for warm and comfort re ownership, which they led us to believe was with DC. This was also verified in Vantis documents and we now not only find out that this was not the case but, worse still, they have no idea as to the identity of the other shareholder. I suspect the other shareholder is DC, Gwen, or even Jonathan. If it is DC, then it is a straightforward tax fraud. If it is Gwen, it would be more serious under the warranties. And JE even worse. These are the facts as we know to date.”

The writer of the memorandum then set out in numbered paragraphs 1 to 15 various considerations that he or she was bearing in mind.

The memorandum then continues at the bottom of page 214:

“Now forgive me for being a tiny bit suspicious. We may never find out who the beneficial owner of the other 50% truly is, as they will be bearer shares. A shareholders' meeting may uncover a nominee but we are unlikely to get beyond that mark. We have three options, viz (a) battle on putting resolution after resolution including appointing an MD in Germany; (b) purchase the other 50% (probably no chance as we are likely to find out too much for DC's comfort); (c) sell our 50% to DC or unidentified. For me, (c) is the only realistic option, but we may need pressure from A first. It may just suit DC to get us out to protect its position. Such a sale could be funded out of the business over say three to five years at circa £200 K per annum. Such income could go into a newco.”

In the event, that is what happened. In December 2004 Mr David Cowling agreed to buy the other 50% in GMBH for £360,000. In the meantime, in October 2004, in the course of negotiations between Capcon and Mr Edwards regarding his bonus, Capcon clearly acknowledged that the agreement was binding. Correspondence in April and May 2005 also indicates that, from the point of view of Capcon, the sale of 50% of GMBH was regarded as closing the matter. On 10 ^th May 2005 Capcon relied on the agreement as giving rise to cross claims it could set off against the further consideration due under clause 6 of the agreement and paid further additional consideration due under that provision. On 3 ^rd June Capcon delivered draft accounts for the year ended 31 ^st December 2004 to the claimants. The claimants contend that those accounts were what clause 6.2 required, albeit provided four days late. On 28 ^th May 2006 Mr Edwards resigned as the Managing Director of Argen.

On 14 ^th November 2006 the claimants served a statutory demand on Capcon for £381,164 in respect of further consideration for the Argen shares allegedly due under clause 6.1 of the agreement. On 19 ^th December 2006, Mr Cavender, the Managing Director of Capcon, made a witness statement in support of an intended application to apply for an injunction to restrain the claimants from presenting a winding-up petition. He referred to the history of the matter in some detail, but advanced no claim to rescind the agreement. By contrast, he relied on cross claims arising under the agreement as a reason for enjoining the presentation of the petition.

The claim form in this action was issued on 23 ^rd February 2007 by the claimants. They claimed £100,000 allegedly due under clause 6.1.2 plus interest. In addition they sought specific performance of clause 6.2 of the agreement so that their entitlement to further consideration might be ascertained and enforced. On 6 ^th March 2007 they applied for summary judgment under Part 24 of the Civil Procedure Rules. That sought specific performance of the agreement but not an order for payment of the £100,000 allegedly due. The application is supported by the first witness statement of the claimants' solicitor, Mr Scott.

On 21 ^st March 2007 a letter was sent by Capcon's solicitors to the solicitors for the claimants purporting (for the first time) to rescind the agreement. The letter particularised the representations to which I have referred, Capcon's reliance on them, and their falsity. No allegation was then made as to whether the representations had been made innocently, negligently, or fraudulently.

On 23 ^rd March 2007 Mr Cavender made a further witness statement in answer to the...