Simon Goodley v Oliver Nobahar-Cookson
| Jurisdiction | England & Wales |
| Judge | Mr Justice Calver |
| Judgment Date | 06 May 2021 |
| Neutral Citation | [2021] EWHC 1193 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Docket Number | Case No: 2012 FOLIO 1356 |
| Date | 06 May 2021 |
[2021] EWHC 1193 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
THE HONOURABLE Mr Justice Calver
Case No: 2012 FOLIO 1356
and
Jude Bunting (instructed by Guardian News & Media) for the Applicant
Tim James-Matthews (instructed by Harbottle & Lewis LLP) for the Respondent (Claimant)
Hearing date: 30 April 2021
Background
The Application
In November 2014 Mr. Justice Blair gave judgment in The Hut Group Limited v Nobahar-Cookson and Barclays Private Bank and Trust Limited [2014] EWHC 3842 (“the Blair judgment”). This is the hearing of an application dated 25 September 2020 by Simon Goodley, a journalistic reporter who works for The Guardian newspaper, for an order of the court that the Claimant to that action, The Hut Group Limited (“THG”), do provide him with a copy of the “Project Hydrogen” report which is referred to in paragraph 222 of the Blair judgment, pursuant to CPR 5.4C(2) and/or the court's inherent jurisdiction.
The dispute leading to the Blair judgment
The Blair judgment concerned a dispute arising out of a Share Purchase Agreement (“SPA”) under which THG purchased a company trading as MyProtein from the Defendants for a combination of cash and shares in THG. THG contended that the financial position of MyProtein was not as warranted in the SPA and claimed damages for the loss caused as a result. For its part the Trustee of Mr. Cookson's family trust, Barclays Private Bank and Trust Limited, (“the Second Defendant”) contended that the financial position of THG was not as warranted in the SPA, which THG admitted. However, there was a cap in the SPA on liability for breach of warranty not resulting from THG's fraud (“the cap”) and the Second Defendant alleged that its losses exceeded the cap. It therefore alleged that THG's admitted breach resulted from the fraud of THG and also that it had been deceived into entering into the SPA.
In awarding THG damages, Blair J found that MyProtein's Management Accounts had not fairly presented its financial position in virtually all the respects alleged by THG and he rejected the Defendants' case that timely and adequate notice had not been given of THG's breach of warranty claim. As to the counterclaim, it was common ground that THG's admitted breach of warranty resulted from the fraud of a former employee of THG and the Judge held that his fraud was to be attributed to THG for the purposes of the relevant provision in the SPA – accordingly, the Second Defendant was entitled to recover more than the cap. However, the Judge rejected the allegation that a current employee and former director of THG had known of and/or participated in the fraud and dismissed the allegation of deceit.
In particular, Blair J stated as follows in his judgment:
“The fraud uncovered
44. On 16 September 2011, in relation to work on the accounts to 30 June 2011, PwC uncovered fraud in THG's accounts department. An investigation by the company ensued, which was in part PwC led, with independent participation, and included formal interviews conducted with the people concerned.
45. It is common ground that the position is summarised in a draft report prepared for the company by PwC on 16 December 2011 (the “Project Hydrogen” report) under the heading “Falsification of documentation”. The summary is set out below. In brief, PwC state that on 16 September 2011, it came to their attention that there had been a falsification of documentation provided to it in its capacity as the Group's auditors. The Financial Controller, Mr McCarthy, had been manipulating profitability, on a monthly basis, by overstating off-line stock and debtors, and understating liabilities. In addition, an initial review revealed a number of occasions where it was apparent that PwC had been misled by the finance team.
46. PwC records that it then switched its focus to the audit of the year ended 31 December 2010. This “resulted in a number of further issues being identified”. Before adjustments, EBITDA (earnings) had been stated as £4.1m. Following adjustments, the figure was restated as an LBITDA (loss) of £1.5m. There was also an adjustment to the 2011 management accounts, though no definitive revised accounts for the quarter are in evidence.
47. PwC state, “The IPO process having been halted, we focused with management on the finalisation of the 31 December 2010 financial statements. This involved re-performance of those areas of our audit work were [sic] there was the risk of further document falsification, as well as adjusting for the areas of falsification of accounting records identified in the investigation …”. The accounts were filed on 30 September 2011, right at the end of the permitted period.
48. PwC noted “that the people associated with the falsification of documentation and accounting records have now left the business”. Mr McCarthy had been dismissed for gross misconduct on 18 October 2011. Another employee in the finance department, Mr Sajith Hevamanage, was dismissed for the same reason, and others were given final warnings.
49. In early October 2011, Mr Rajanah was placed on gardening leave, returning at the end of November. The circumstances are in dispute between the parties.
50. Mr Cookson said in his evidence, “I was in total shock and dismay. Whilst I thought I had got involved with a highly profitable and attractive business, this could not have been further from the truth. It was my worst nightmare and I felt robbed and cheated”. I accept that this is how he did in fact feel.
51. It must also have been a severe blow to THG's top management, particularly Mr Moulding. He said in his evidence that he was shocked when Mr Whitehead told him on 16 September 2011 of the falsification that PwC had uncovered which raised concerns about THG's accounts generally. I accept that this is how he did in fact feel.
52. Though THG suggested at trial that market conditions may have played their part in the abandonment of the proposed IPO, I am satisfied that the reason that the IPO went off was the fraud and the discovery of the losses concealed by the fraud.
53. A further consequence of the discovery of the losses was that Barclays was asked to waive THG's compliance with its banking covenants, which it did following a report by Deloitte under the name “Project Napoli”. I infer that THG secured PwC's agreement to sign off its 2010 accounts on the “going concern” basis by arranging an equity injection from its shareholders at a price of £17.46 per share on 30 September to 4 October 2011. This compared with a price of £57.71 per share in the share issue on 31 May 2011 which funded the purchase of Cend.”
At paragraphs 222–223 of his Judgment, Blair J returned to this topic as follows:
“ The accounting fraud
222. As stated above, it is common ground that the position is summarised in a draft report prepared for the company by PwC on 16 December 2011 (the “Project Hydrogen” report) under the heading “Falsification of documentation”. The summary is as follows:
“ Falsification of documentation
On Friday, 16 September 2011, it came to our attention that there had been a falsification of documentation provided to us, in our capacity as the Group's auditors and Reporting Accountants. In the first instance, this led to the Group Financial Controller [Mr McCarthy] being suspended. In that same week, the remaining members of the finance function produced the management accounts for the month to 31 August 2011. The results that were produced were some £2.3m below the results that were anticipated based on the daily sales information. The explanation for this variance was that the Financial Controller had been manipulating profitability, on a monthly basis, by overstating off-line stock and debtors, and understating liabilities.
Management, led by John Gallemore, performed an initial investigation and determined that there had been a series of documents that had been falsified during the audits of the year ended 31 December 2010 and the period ended 30 June 2011. We had also been misled as to the recoverability of certain assets and the extent of unrecorded liabilities. The three key areas of manipulation were:
Offline stock: At 31 December 2010, an entry had been booked to recognise £1.6m of ‘off – line’ stock which was either double counted within the system stock balance, or which had been sold prior to 31 December. Senior members of the finance team verbally represented to us that this stock was held at the Warrington warehouse. We are also aware of a number of falsified goods despatched and goods receipts notes to support inappropriate sales and purchases cut-off;
Unrecorded liabilities: We became aware of a number of unrecorded liabilities at 31 December 2010. Upon investigation, it became apparent that members of the finance function (including the wider purchase ledger team) had falsified a number of supplier statements and withheld certain invoices and supplier statements from us. The Financial Controller had also released a significant number of smaller accruals which would be below the audit materiality threshold; and
Recoverability of debtors: At 31 December 2010, a number of debtors … were recognised on the balance sheet. These items were either recognised early or were not recoverable, despite formal representations from senior...
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R Saifullah Gharab Yar v Secretary of State for Defence
...available for “proper” or “serious” journalistic activity. He suggested that the judgment of Calver J in Goodley v The Hut Group [2021] EWHC 1193 (Comm) was authority for this 6 I think this submission goes too far. The open justice principle does not need to be over-complicated. The point......