Macquarie International Investments Ltd v Glencore UK Ltd (No 2)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Jackson,The Master of the Rolls,Lord Justice Lloyd |
| Judgment Date | 21 June 2010 |
| Neutral Citation | [2010] EWCA Civ 697 |
| Docket Number | Case No: A3/2009/2301 |
| Court | Court of Appeal (Civil Division) |
| Date | 21 June 2010 |
[2010] EWCA Civ 697
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Mr Justice Andrew Smith
Before: The Master of the Rolls
Lord Justice Lloyd
and
Lord Justice Jackson
Case No: A3/2009/2301
Mr Ian Glick QC and Mr Michael Fealy (instructed by Herbert Smith LLP) for the Appellant
Mr Richard Southern QC and Ms Jessica Sutherland (instructed by Clyde & Co Solicitors LLP) for the Respondent
Hearing dates: 9 th June 2010
Lord Justice Jackson:
This judgment is in six parts namely:
Part 1 – Introduction
Part 2 – The Facts
Part 3 – The Present Proceedings
Part 4 – The Appeal to the Court of Appeal
Part 5 – True and Fair View
Part 6 —The Construction of Paragraph 4.2 of Schedule 3 to the SPA
Part 1. Introduction
This is an appeal by the purchaser of a group of companies against the rejection of its claim for damages for breach of warranty. The appeal turns upon the correct construction of warranties given to the purchaser.
The purchaser is Macquarie Internationale Investments Ltd, which I shall refer to as “Macquarie”.
The sellers were Baring European Fund Managers Limited, Flenwood Limited and Glencore UK Limited. I shall refer to those three companies as “Baring”, “Flenwood” and “Glencore”.
The holding company which was the subject of the sale and purchase agreement was Corona Energy Holdings Ltd. That company has subsequently changed its name to Macquarie Corona Energy Holdings Ltd. I shall refer to it simply as “Corona”.
Another company which will feature in the narrative is Xoserve Ltd, to which I shall refer to as “Xoserve”. Xoserve is owned by the five major gas distribution companies in the UK. It acts as an interface between (a) companies which ship gas to terminals at various ports and (b) the gas distribution network companies. The gas distribution network companies are sometimes described as gas transporters, because they transport gas through their network of pipes to the numerous users throughout the UK.
The only statute which is relevant to this case is the Companies Act 1985, to which I shall refer as “the 1985 Act”.
Section 226A of the 1985 Act provides:
“226A Companies Act Individual Accounts
(1) Companies Act individual accounts must comprise:-
(a) a balance sheet as at the last day of the financial year, and
(b) a profit and loss account.
(2) The balance sheet must give a true and fair view of the state of affairs of the company as at the end of the financial year.
(3) Companies Act individual accounts must comply with the provisions of Schedule 4 as to the form and content of the balance sheet and profit and loss account and additional information to be provided by way of notes to the accounts.
(4) Where compliance with the provisions of that Schedule, and the other provisions of this Act as to the matters to be included in a company's individual accounts or in notes to those accounts, would not be sufficient to give a true and fair view, the necessary additional information must be given in the accounts or in a note to them.
(5) If in special circumstances compliance with any of those provisions is inconsistent with the requirement to give a true and fair view, the directors must depart from that provision to the extent necessary to give a true and fair view.”
Section 227A of the 1985 Act provides:
“227A Companies Act group accounts
(1) Companies Act group accounts must comprise:-
(a) a consolidated balance sheet dealing with the state of affairs of the parent company and its subsidiary undertakings, and
(b) a consolidated profit and loss account dealing with the profit or loss of the parent company and its subsidiary undertakings.
(2) The accounts must give a true and fair view of the state of affairs as at the end of the financial year, and the profit or loss for the financial year, of the undertakings included in the consolidation as a whole, so far as concerns members of the company.
(3) Companies Act group accounts must comply with the provisions of Schedule 4A as to the form and content of the consolidated balance sheet and consolidated profit and loss account and additional information to be provided by way of notes to the accounts.
(4) Where compliance with the provisions of that Schedule, and the other provisions of this Act as to the matters to be included in a company's group accounts or in notes to those accounts, would not be sufficient to give a true and fair view, the necessary additional information must be given in the accounts or in a note to them.
(5) If in special circumstances compliance with any of those provisions is inconsistent with the requirement to give a true and fair view, the directors must depart from that provision to the extent necessary to give a true and fair view.”
Subsections (4) and (5) in each of these sections are sometimes referred to as the “true and fair view override”: see Palmers Company Law, volume 2, paragraph 9.182.
The Accounting Standards Board is a body which publishes standards for the guidance of those who prepare accounts. One of its publications, FRS 3, gives the following guidance in respect of prior period adjustments:
“60 The majority of items relating to prior periods arise mainly from the corrections and adjustments which are the natural result of estimates inherent in accounting and more particularly in the periodic preparation of financial statements. They are dealt with in the profit and loss account of the period in which they are identified and their effect is stated where material. They are not exceptional or extraordinary merely because they relate to a prior period; their nature will determine their classification. Prior period adjustments, that is prior period items which should be adjusted against the opening balance of retained profits or reserves, are rare and limited to items arising from changes in accounting policies or from the correction of fundamental errors.
…..
63. In exceptional circumstances it may be found that financial statements of prior periods have been issued containing errors which are of such significance as to destroy the true and fair view and hence the validity of those financial statements. The corrections of such fundamental errors and the cumulative adjustments applicable to prior periods have no bearing on the results of the current period and they are therefore not included in arriving at the profit or loss for the current period. They are accounted for by restating prior periods, with the result that the opening balance of retained profits will be adjusted accordingly, and highlighted in the reconciliation of movements in shareholders’ funds. As the cumulative adjustments are recognised in the current period, they should also be noted at the foot of the statement of total recognised gains and losses of the current period.”
After these introductory remarks, I must now turn to the facts.
Part 2. The Facts
Prior to September 2006 Baring, Flenwood and Glencore held the entire share capital of Corona. Corona is and was the parent company of Corona Energy Limited. That company directly or indirectly owns four further subsidiaries known as “Corona 1”, “Corona 2”, “Corona 3” and “Corona 4”. I shall refer collectively to Corona and its various subsidiaries as “the Corona Energy Group” or “the Group”. I shall refer to Corona 1, Corona 2, Corona 3 and Corona 4 as “the Corona companies”.
The Corona Energy Group carries on the business of supplying gas to commercial customers in the UK. The manner in which it operates is as follows. Each day the Corona companies deliver gas at sea ports to the national transmission system. Each day Corona's customers draw off gas at their premises and the amount of gas drawn off at each address is recorded on the customers’ meters. Other shippers of gas operate in a similar manner.
As explained in Part 1, gas is transported through the national transmission system not by the shippers but by gas transporters. Gas transporters own and operate the transmission and distribution system.
The relationship between the various shippers and gas transporters is regulated by the Uniform Network Code, which constitutes a contract between them. Xoserve acts as agent for the gas transporters and, amongst other things, it calculates on a daily basis the volumes of gas supplied to and taken off from the system by each shipper. Any imbalance between the volumes gives rise to a balancing charge, payable by Xoserve or the shipper. Where there is an oversupply, a charge is paid by Xoserve to the shipper and, where there is an undersupply, by the shipper to Xoserve. This process is known in the industry as energy balancing and the charges are known as balancing charges.
In about October 2005 Xoserve began to use a computer system called “Gemini” to determine balancing charges in respect of each shipper. Unfortunately, Xoserve made an error in October 2005 in loading information into the Gemini system. Xoserve failed to include in the Gemini system the changes that had occurred in each shipper's portfolio of customers on 2 nd and 3 rd October 2005. That error was not corrected until September 2006.
Unknown to Macquarie, Glencore or Corona, by 31 st July 2006 Corona 2 had incurred a liability of some £2.4 million to Xoserve as a result of the error that Xoserve had made in October 2005. That error resulted in an undercharge by Xoserve in respect of balancing charges due from...
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