Swynson Ltd v Lowick Rose LLP ((in Liquidation) – Formerly Known as Hurst Morrison Thopson LLP)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Longmore,Lord Justice Davis,Lord Justice Sales |
| Judgment Date | 25 June 2015 |
| Neutral Citation | [2015] EWCA Civ 629 |
| Court | Court of Appeal (Civil Division) |
| Date | 25 June 2015 |
| Docket Number | Case No: A3/2014/2373 |
[2015] EWCA Civ 629
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
CHANCERY DIVISION
THE HONOURABLE MRS JUSTICE ROSE DBE
Royal Courts of Justice
Strand, London, WC2A 2LL
The Right Honourable Lord Justice Longmore
The Right Honourable Lord Justice Davis
and
The Right Honourable Lord Justice Sales
Case No: A3/2014/2373
Mr David Turner QC & Miss Nicole Sandells (instructed by RPC LLP) for the Appellant
Mr Hugh Sims QC & Mr James Wibberley (instructed by Gardner Leader LLP) for the Respondent
Hearing dates: 19 th May 2015
Introduction
This appeal concerns the amount of damages recoverable by a lender from a negligent firm of accountants who failed to do a proper exercise of due diligence on the borrower to whom the money was lent. The majority of the loan was repaid by utilising money lent to the borrower by the owner of the lending company. Rose J has held that that repayment was a collateral matter which did not go to reduce the damages recoverable from the negligent accountants. The question is whether she was right.
Outline facts
The respondent ("Swynson") is owned indirectly by Mr Michael Hunt. On 31 st October 2006 Swynson lent £15m to a company called Evo Medical Solutions Limited ("EMSL") to enable it to facilitate a management buyout of Evo, an American company specialising in the distribution of medical devices in the USA (the "2006 Loan"). The loan was secured by charges over EMSL's and Evo's assets, which were accompanied by personal guarantees given by the former executive team of Evo limited to £500,000. The loan was subject to interest at a rate of 6% above base and an arrangement fee of £750,000. The loan was repayable on 31 st October 2007.
The 2006 Loan was made by Swynson in reliance upon a due diligence report ("the Report") prepared by Mr Bruce Morrison of an accountancy firm now named Lowick Rose LLP (the appellant) but at the time named Hurst Morrison Thomson ("HMT"). Although breach of duty and causation were initially in dispute, during the course of the trial it was conceded by HMT that the Report had been prepared negligently and that there was a causal link between Mr Morrison's negligence and the decision of Swynson and Mr Hunt to make the 2006 Loan. The Report had been prepared negligently in that it failed to report that there was a $3-$4m adverse difference between Evo's actual and forecast working capital. This would have had a material impact on Evo's cash flow post-completion.
In February 2007 HMT's letter of engagement, in which HMT's liability for its advice was capped at £15m, was signed by a Mrs Jenkins on behalf of Swynson. There was a dispute at trial regarding the limit of HMT's liability cap as there was some confusion owing to the existence of three versions of the engagement letter, each of which gave differing impressions as to the size of the liability cap. The judge decided that the parties had agreed to increase the original liability cap to £15m as evinced by the third version of the engagement letter. There is no appeal against that decision.
By the end of the first quarter of 2007 it became clear that Evo was not performing as well as had been expected and was experiencing cash flow problems. By July 2007 Mr Hunt was told that Evo was at risk of financial collapse without further investment. On 13 th August 2007 Mr Hunt caused Swynson to grant a further facility of £1.75m to EMSL (the "2007 Loan") through a drawdown of £1.25m on 14 th August 2007 and £500,000 on 1 st October 2007. Interest was set at 5.5% above base rate, with a minimum base rate of 5.75%. There was also a facility fee of £2,400 per month. The loan was repayable on 31 st October 2007.
By the end of October 2007 EMSL should have repaid the 2006 Loan and the 2007 Loan (total: £16.75m). It had failed to do so. There were also interest payments and other fees outstanding. By May 2008 EMSL had not made any interest payments in over six months. Mr Hunt gave evidence that if there was to be any chance of protecting the initial investment he had no choice but to support Evo until it could be floated on a stock exchange or financed by a private equity investor, which was not possible at that time. Mr Hunt therefore decided to provide to Evo, through a loan to EMSL by Swynson, a further £3m on 4 th June 2008 (the "2008 Loan"). The Loan was to be repaid by 1 st May 2010 by monthly instalments. Interest was charged at 1.5% over LIBOR in addition to an exit fee of 2% per annum from drawdown to repayment. In addition, the EMSL shareholders agreed that Henley Trustees Ltd's 25% shareholding in EMSL (held on behalf of Mr Hunt) would be converted into 85% preferred ordinary shares thereby giving Mr Hunt majority control of EMSL.
At the end of 2008 there was what the judge described as a "refinancing of the 2006 and 2007 Loans". What happened was that on 31 st December 2008 EMSL and Mr Hunt entered into a loan agreement whereby Mr Hunt made funds available to EMSL in the sum of £18,663,306.59 (the judge called this "the 2008 Partial Refinance"). EMSL then paid Swynson £17,015,000 which was the totality of the sums due under the 2006 and 2007 Loans, leaving only the 2008 Loan outstanding. The 2008 Partial Refinance was made partly because, now that Mr Hunt had become the majority owner of EMSL, Swynson and EMSL had become connected entities and, if the current structure of the loan continued, tax would be payable on interest due from EMSL to Swynson even though EMSL continued to default on such payments and partly because it was, in any event, thought to be better for Swynson not to have an impaired debt on its books. For those reasons Mr Hunt had been advised that the loans should be restructured by his arranging for EMSL to pay off most of the sums due with the monies provided by (and now owed to) Mr Hunt personally.
Evo continued to encounter severe financial difficulties. On 31 st May 2011 Mr Hunt exercised his rights under his loan and associated debentures to cause Evo to transfer real property in Iowa worth approximately £1.39m to him, which was sold a couple of years later for a net sum of approximately £1.36m. On 5 th October 2011 an agreement was entered into whereby Evo's business was surrendered and transferred to a company called Global Medical Holdings LLC which was indirectly owned and controlled by Mr Hunt. This company continued to make efforts to realise value from Evo, but ultimately a decision was taken to wind the company down. Neither Mr Hunt nor Swynson received any monies from the realisation. Collections from debtors were absorbed by payments to creditors and continuing losses. The remaining stock was virtually unsaleable and there was nothing left. Neither the 2008 Loan nor the loan constituted by the 2008 Partial Refinance have ever been repaid. These are the circumstances in which the respondent claimed to recover the amounts of the 2006, 2007 and 2008 Loans as losses resulting from HMT's breach of duty.
HMT says that it can only be liable for the amount of the 2008 Loan because EMSL has repaid the 2006 and 2007 Loans. The judge held that that repayment, effected as it was by the 2008 Partial Refinance was collateral to the loss caused by HMT's breach of duty, or (as some lawyers put it) res inter alios acta, and did not extinguish Swynson's loss in respect of the 2006 and 2007 Loans. She accordingly awarded damages against HMT in the amount of those loans (and the 2008 Loan) subject to the cap. She did not therefore have to consider alternative arguments by Swynson in relation to unjust enrichment and the so-called doctrine of transferred loss. These are now raised by a respondent's notice.
Avoided Loss: Collateral or non-collateral?
It is, of course, the law that an innocent party, who claims for breach of contract, is under a duty to take reasonable steps to mitigate his loss. In so doing, he may bring about a situation in which his loss is partly or wholly avoided. In this category of cases a question will arise whether that avoided loss has to be brought into account in assessing his damages. It may also be the case that a claimant's loss is partly or wholly avoided despite his taking no steps to mitigate his damages. The principles governing the assessment of damages are (or, at any rate, should be) similar in both categories of case. It is usually said that, if the transaction giving rise to the avoided loss arises by virtue of circumstances which are collateral to the breach of contract, the avoided loss need not be brought into account; but if the transaction giving rise to the avoided loss arises out of the consequences of the breach and in the ordinary course of business it is to be taken into account.
Typical examples of the second category of avoided loss, which is not brought into account because it is collateral, are insurance payments, benevolent payments and disablement (and other) pension payments, see Bradburn v Great Western Railway Co (1874) L.R. 10 Ex. 1, Redpath v Belfast and County Down Railway [1974] N.I. 167 and Parry v Cleaver [1970] A.C. 1 in which Lord Reid (at 15E) put the principle down to the "intrinsic nature" of the payments.
Cases in the first category where the claimant has sought to mitigate his loss sometimes give rise to difficult questions. In Jebsen v East and West India Dock Co. (1874) L.R. 10 C.P. 300 delay caused by a charterer in discharging cargo caused the shipowner to lose passengers whom he had...
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