Man Nutzfahrzeuge AG and another v Freightliner Ltd and Others
| Jurisdiction | England & Wales |
| Judge | Lord Justice Chadwick,Lord Justice Dyson,Lord Justice Thomas |
| Judgment Date | 12 September 2007 |
| Neutral Citation | [2007] EWCA Civ 910 |
| Docket Number | Case No: A3/2005/2912 |
| Court | Court of Appeal (Civil Division) |
| Date | 12 September 2007 |
[2007] EWCA Civ 910
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
(LORD JUSTICE MOORE-BICK
Lord Justice Chadwick
Lord Justice Dyson and
Lord Justice Thomas
Case No: A3/2005/2912
Mr Geoffrey Vos QC and Mr Andrew Twigger (instructed by Clifford Chance, 10 Upper Bank Street, Canary Wharf, London E14 5JJ) for the Defendant/Part 20 Claimant/Appellant, Freightliner Limited
Mr Justin Fenwick QC and Mr Simon Salzedo (instructed by Linklaters, One Silk Street, London EC2Y 8HQ) for the Part 20 Defendant/Respondent, Ernst & Young
Hearing dates: 19 and 20 March 2007
Judgement
Crown copyright©
This is an appeal from an order made on 28 October 2005 by Lord Justice Moore-Bick, sitting as a Judge of the Commercial Court, in proceedings brought by MAN Nutzfahrzeuge AG (“MN”) and others against Freightliner Limited (“Freightliner”) and in related proceedings brought under CPR Pt 20 by Freightliner against Ernst & Young, a limited liability partnership practising as accountants in Canada (“E&Y (Canada)”), Ernst & Young, a firm practising in the United Kingdom (“E&Y (UK)”) and certain named individuals who were members of the Canadian partnership. The judge gave judgment for the claimants against Freightliner with damages to be assessed. The appeal from that part of his order has been compromised. He gave judgment for the Part 20 Defendants against Freightliner. It is Freightliner's appeal from that part of his order which is now before this Court.
The underlying facts
The underlying facts are fully set out by the judge at paragraphs [1] to [55] of his judgment, [2005] EWHC 2347 (Comm). The following summary is, I think, sufficient to provide the context for the issues which this Court needs to decide:
(1) MN is a subsidiary of MAN AG, the holding company of a large German industrial group. MN has responsibility within the group for the operation of the commercial vehicle division. By a share purchase agreement dated 30 January 2000 MN agreed to purchase from Western Star Trucks Holdings Limited (“Western Star”), a Canadian truck manufacturer, the whole of the issued share capital of ERF (Holdings) Plc for the sum of £65.3 million, subject to certain adjustments. The sale was completed on 8 March 2000.
(2) ERF (Holdings) Plc, through its subsidiary ERF Limited, (together “ERF”) was a manufacturer of trucks in the United Kingdom. ERF had been acquired by Western Star in June 1996.
(3) E&Y (Canada) had been appointed as auditors to the Western Star Group in March 1991. Following the acquisition of ERF Holdings Plc, E&Y (UK) were appointed auditors of that company and its subsidiary.
(4) Western Star was acquired by Freightliner LLC in June 2000: that is to say, after the sale of ERF to MN had been completed. Freightliner LLC is a subsidiary of Daimler-Chrysler AG. Western Star's Canadian operations were merged into Freightliner Limited. It was common ground in the proceedings that Freightliner was responsible for any liabilities incurred by Western Star: in particular, that Freightliner was responsible for any liabilities in connection with the sale of ERF to MN.
(5) Mr Stephen Ellis had joined ERF in August 1976. He had been employed in various positions in the finance department throughout the period up to the acquisition of ERF by MN (and for some twelve months thereafter). By 1998 he had risen to a senior position in that department as deputy to the financial controller. In May 1998 he was appointed financial controller of ERF and thus became the most senior member of staff responsible for ERF's financial affairs.
(6) As the judge observed (at paragraph [7] of his judgment) it was an unusual feature of the proceedings that it was common ground between the parties that, from about the middle of 1997, the accounts of ERF – both monthly management accounts and year-end statutory accounts – had been persistently manipulated by Mr Ellis. The judge explained the nature of Mr Ellis' fraud at paragraphs [10], [11] and [13] of his judgment. I will return to his findings later in this judgment. For the present it is sufficient to note that the effect of the fraud was that neither the statutory accounts prepared by Mr Ellis and his staff as at 30 June 1998 (the end of ERF's financial year) nor those prepared as at 30 June 1999 gave a true and fair view of its financial position and affairs. In particular, the accounts were founded on false journal entries in the purchase ledger control account. Those entries gave rise to a discrepancy between the purchase ledger itself and the purchase ledger control account; which Mr Ellis disguised by producing a false reconciliation between the two figures.
(7) ERF's statutory accounts for the years ending 30 June 1998 and 1999 were the subject of audit by E&Y (UK). The partner responsible for the audit, in respect of both years, was Miss Alison Cunningham (later to become Mrs Sinderson). The accounts were signed off by the auditors, on 4 May 1999 and 4 November 1999 respectively, without qualification. It was accepted by E&Y (UK) that, had the audits been carried out with proper skill and care, defects in the accounts would have been identified.
(8) By July 1999 MN had expressed interest in acquiring ERF from Western Star and had been provided with copies of ERF's audited accounts for the years ended 30 June 1997 and 30 June 1998. In August 1999 representatives of MN and Western Star met to open negotiations: in particular to discuss the method for establishing a price for ERF. Mr Ellis was present at that meeting. The judge found that the discussion proceeded on the basis of accounts prepared by Mr Ellis, including a profit and loss account for the year ended 30 June 1999 for ERF (Holdings) Plc, a balance sheet as at 30 June 1999 for that company, a comparison between ERF's actual profit and loss figures for the year ended 30 June 1999 and its budget for the year ending 30 June 2000, and a comparison between ERF's actual profit and loss figures for the year ended 30 June 1999 and the forecast figures for that year. The judge found that, during that meeting, MN representatives asked detailed questions about those documents; and that Mr Ellis provided answers to many of those questions.
(9) Shortly before the June 1999 accounts were signed off by the auditors, MN had instructed accountants, Deloitte & Touche (“D&T”), to conduct a due diligence investigation of ERF and its affairs. D&T were given access to E&Y (UK)'s working papers on the terms of a “hold harmless” letter dated 19 October 1999. The due diligence exercise commenced on 2 November 1999 and continued until 19 November 1999. Mr Ellis was a key participant: his role was to respond to questions relating to the ERF accounts and other financial matters. As the judge found, throughout the course of the exercise:
“[31] … Mr Ellis provided copies of financial documents to the MN representatives at their request and answered questions arising out of them. He did so without at any time informing the management of ERF or Western Star, much less those representing MN, that the accounts had been falsified in the manner described earlier.”
(10) Based on the information obtained in the course of the due diligence investigation, MN sought to renegotiate the proposed purchase price. On 2 and 3 December 1999 there was a meeting between representatives of MN and Western Star in London at which Mr Ellis was present. The judge found (at paragraph [81] of his judgment) that Mr Ellis took an active part in discussions and “by implication represented once again that the accounts and the budget had been prepared honestly”.
(11) On 9 December 1999 MN put forward a revised offer, on terms which Western Star found acceptable in principle. There was a further meeting in London on 20 December 1999 to resolve matters of detail, at which Mr Ellis was present. He took part in discussions relating to the accounting treatment of the pension fund. Negotiations continued into the New Year. The outstanding issues were finally resolved on 14 January 2000 in the course of a telephone conversation between the respective chairmen of MN and Western Star. Preparations were made for the signature of a formal agreement.
(12) On 18 January 2000 Mr Ellis sent MN a copy of ERF's management accounts for the period ending 31 December 1999. The management accounts showed net assets of £26.3 million and earnings before interest, tax, depreciation and amortisation (“EBITDA”) of £4.834 million. Both figures were generally in line with earlier forecasts. As the judge found (at paragraph [36] of his judgment), although an analysis of the accounts suggested that ERF's financial position had deteriorated slightly since June 1999, the change was not regarded as significant in the context of the negotiations as a whole.
(13) On 30 January 2000 a formal share purchase agreement was concluded by an exchange of faxes. MN agreed to purchase the whole of the share capital of ERF (Holdings) Plc for the sum of £65.3 million, subject to certain adjustments. MN also agreed to take over a number of guarantees that Western Star had given in support of ERF and to take over responsibility for ERF's bank overdraft. The share purchase agreement contained a large number of representations and warranties relating to the state of ERF's business. As I have...
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