Invertec Ltd v De Mol Holding BV & Anor [2009] EWHC 2471 (Ch)

“1 INTERPRETATION 1.1 Definitions In this Agreement unless the context otherwise requires: … ‘Company’ means Volante …. ‘Company 2005 Accounts’ means the audited balance sheet of the Company made up as at the Company Balance Sheet Date and the audited profit and loss account of the Company for the year ended on that date, and the notes, reports, statements and other documents which are annexed to the accounts, a copy of which has been initialled by or on behalf of the parties for the purpose of identification; ‘Company Balance Sheet Date’ means 30 June 2005 … ‘Company Management Accounts’ means the unaudited management accounts of the Company for the period from the Company Balance Sheet Date to the Company Management Accounts Date, a copy of which has been initialled by or on behalf of the parties for the purpose of identification; ‘Company Management Accounts Date’ Means 31 August 2005 … ‘Disclosure Letter’ means the letter of even date from the Vendor to the Purchaser (in the agreed form) disclosing: (a) information constituting exceptions to the Warranties (save those set out in paragraph 1of Schedule 4); and (b) particulars of other matters required to be set out in the Disclosure Letter in accordance with Schedule 4; … ‘Initial Consideration’ means the sum of £1,512,113; …. ‘Shares’ means the entire issued share capital of the Company being 20,000 ordinary share of £1 each a 1 B ordinary share of £1; … ‘Tax’ means any form of taxation, duty, impost, levy, tariff of any nature whatsoever whether of the United Kingdom or elsewhere … and includes, without limitation … any penalty, charge, fine or interest payable in connection with any such taxation, duty, impost, levy or tariff; … ‘Total Earn-Out Consideration’ means the part of the consideration for the Shares to be calculated and paid in accordance with clause 8; … ‘Warranties’ means the warranties given by the Vendor set out in Schedule 4. … 3. PURCHASE CONSIDERATION 3.1 The total consideration for the sale by the Vendor of the Shares shall be the Initial Consideration plus the Total Earn-Out Consideration (as adjusted, if applicable, in accordance with clause 5.6 and the Tax Deed). …. 5 WARRANTIES BY THE VENDOR 5.1 Accuracy of warranties The Vendor warrants to the Purchase that, save as fairly disclosed by the Disclosure Letter, the Warranties are true and accurate in all material respects. 5.2 The rights and remedies of the Purchaser in respect of any breach of the Warranties shall not be affected by: …. 5.2.2 information relating to the Company of which the Purchaser has knowledge, actual or constructive save for that fairly disclosed in the Disclosure Letter; 5.2.3 any investigation made by or behalf of the Purchaser into the affairs of the Vendor or the Company; … 5.3 Knowledge of the Vendor Save as qualified in relation to any particular Warranty in Schedule 4 where any Warranty refers to the knowledge, information or belief or awareness of the Vendor, it shall be deemed to include a warranty that the same is made or given after due and careful enquiry by the Vendor into the subject matter of the Warranty. 6 LIMITATIONS OF LIABILITY 6.1 Limitation of Vendor’s liability The provisions of Schedule 5 shall operate to limit the liability of the Vendor under the Warranties save the Warranties set out in paragraph 1 of Schedule 4. 6.2 No limitation in cases of fraud etc The provisions of Schedule 5 shall not operate to limit the liability of the Vendor under or in connection with the Warranties where the liability arises as a result of fraud on the part of the Vendor, the Company or any of the officers or employees of the Company, or any agents or representatives of the Company or of the Vendor or where a matter has been deliberately concealed or withheld by the Vendor or any of the officers of the Company. 7 INDEMNITIES 7.1 The Vendor shall indemnity and keep indemnified the Purchaser and the Company from and against all losses, costs, claims, demands, liabilities or expenses which the Purchaser or the Company many suffer, incur or sustain (including, without limitation, professional costs reasonably and properly incurred on a full indemnity basis) as a result or in connection with …. 7.1.7 any loss resulting to the Company from performing or terminating the contract dated 30 November 2004 between the Company and Alstom Transport SA…. 19 ENTIRE AGREEMENT 19.1 Entire agreement This Agreement (together with the documents referred to herein): 19.1.1 shall constitute the entire agreement between the parties with respect to the subject matter of this Agreement; and 19.1.2 supersedes and extinguishes and any prior drafts, agreement understandings between the parties relating to such subject matter. 19.2 Fraud and entire agreement Each of the parties acknowledge that in entering into this Agreement with the document referred to in it, they do not rely on, and shall have no remedy in respect of, any statement, representation, warranty or understanding of any person other than as expressly stated in this Agreement as a warranty, representation or undertaking. This clause shall not exclude any liability which any party would otherwise have to the other or any right which either of them may have to rescind this Agreement in respect of any statements made fraudulently by the other prior to the execution of this Agreement or any rights which either of them may have in respect of fraudulent concealment by the other. …. SCHEDULE 4 The Warranties … 2 SUPPLY OF INFORMATION 2.1 Accuracy of information All information contained in Schedules 1 and 2 in this Agreement and (subject as provided below) all information provided by the Vendor and/or the Vendor’s Solicitors to the Purchaser’s Solicitors in the documents listed in Schedule 8 in the course of the negotiations leading to this Agreement was when given and is at Completion true and accurate in all material respects and the Vendor is not aware of any fact or matter or circumstance not disclosed in writing to the Purchaser which renders any such information untrue, inaccurate or misleading. …. 3 ACCOUNTS AND RECORDS … 3.7 The Company Management Accounts The Company Managements Accounts: 3.7.1 have been prepared in food faith (good faith being regarded for these purposes as being with the intention of achieving a reasonably accurate and not misleading view of the financial and trading position of the Company) on bases and principles which are consistent with those used in the preparation of the unaudited management accounts of the Company for the financial year ended on the Company Balance Sheet Date [and] reflect with reasonable accuracy the financial and trading position of the Company for the period from the Company Balance Sheet Date to the Company Management Accounts Date. 3.8 Changes since the Company Balance Sheet Date Since the Company Balance Sheet Date: 3.8.1 there has been no material adverse change in the financial position or turnover of the Company compared with the same period last year; 3.8.2 the Company’s business has been carried on in the ordinary course, without any interruption or alteration in its nature, scope or manner and with the intention of maintaining the same as a going concern up until Completion; … 5 TRADING AND CONTRACTUAL ARRANGEMENTS … 5.2 Contracts The Company is not a party to any material contract, transaction, arrangement, understanding, obligation or liability which: 5.2.1 is of an unusual or abnormal nature or not wholly on an arm’s length Basis in the ordinary and usual course of business; 5.2.2 is of a loss-making nature (that is to say, known to likely to result in a loss on completion of performance); 5.2.3 cannot readily be fulfilled or performed on time without undue, or unusual, expenditure of money or effort; or 5.2.4 invoices payment by reference to fluctuations in the index if retail prices, or any other index, or in the rate of exchanged for any currency. …. 6 LEGAL MATTERS .. 6.3 Compliance with Agreements To the best of the knowledge, information and belief of the Vendor the terms of all leases, tenancies, licences, concessions and agreements of whatsoever nature to which the Company is a party have been complied with by all the parties thereto and to the best of knowledge, information and belief of the Vendor there are no circumstances likely to give rise to any breach of such terms. 6.4 Litigation 6.4.1 Since the Company Balance Sheet Date no claim for damages or seeking any other relief has been made against (and notified to) the Company. … 6.5 Insolvency etc … 6.5.10 The Company is not unable to pay its debts with the meaning of s.123 Insolvency Act 1986. … 9 TAX 9.1 Tax returns and compliance ... 9.1.2 The Company has discharged every Tax Liability of the Company falling due before Completion, due from the Company directly or indirectly in connection with any Event occurring on or before Completion and there is no Tax Liability of the Company or potential Tax Liability of the Company in respect of which the date for payment has been postponed by agreement with the relevant Tax Authority or by virtue of any right under any Tax Statute or the practice of any Tax Authority. … 9.1.4 Neither the Company nor any director or officer of the Company (in his capacity as such) has any liability for any interest, fine, penalty or surcharge in connection with any Tax Liability of the Company. .. 9.1.11 All Instalment Payments are up to date. 9.1.12 The Disclosure Letter contains full details, by express reference to this paragraph 9.1, of ever subsisting formal or information arrangement or agreement (including without limitation any dispensation) entered into by the Company with any Tax Authority with regard to any of its Tax affairs. … SCHEDULE 5 Warranty Limitations 1 LIMIT ON INDIVIDUAL RELEVANT CLAIMS The Vendor shall have no liability whatsoever in respect of any individual claim arising under the Warranties (other than paragraph 1 of schedule 4) (a ‘Relevant Claim’) unless: … 1.3 notice in writing of the Relevant Claim (stating in reasonable detail, so far as known to the Purchaser, the nature of the Relevant Claim and, so far as practicable, the Claim Amount) has been given to the Vendor: 1.3.1 on or before the second anniversary of Completion in the case of a Relevant Claim under the Warranties (other than the Tax Warranties); … 1.4 proceedings in respect of the Relevant Claim shall have been properly issued and served on the Vendor within the period of six months following the giving of notice pursuant to paragraph 1.3. 2 MAXIMUM LIMIT FOR ALL RELEVANT CLAIMS The aggregate liability of the Vendor in respect of all claims under this Agreement shall be the aggregate of the Consideration received by the Vendor and the aggregate liability of the Vendor in respect of all Relevant Claims (which expression shall for the purposes of this paragraph 2 include any claim under the Tax Deed and the indemnities in clause 7.1.5 (Transbus or Wrightbus claims), clause 7.1.7 (Alstom contract) clause 7.1.8 (fire certificate), clause 7.1.9 (injury or illness claims) and clause 7.1A (tax)) shall not exceed £1,300,000 (or if less the aggregate payments made or payable by the Purchaser under clause 8). … 4 OTHER LIMITATIONS 4.1 The Vendor shall not be liable for a Relevant Claim if, and to the extent that, 4.1.1 it is fairly disclosed in the Disclosure Letter; …. 4.6 Any breach of this Agreement by the Vendor shall give rise only to an action in damages by the Purchaser and shall not entitle the Purchaser to rescind this Agreement. …. 4.8 The Purchaser shall take all reasonable steps with a view to mitigating the ultimate liability of the Company in respect of any Relevant Claim. …. SCHEDULE 8 List of Documents … 3 Email from H Dewit [sic] to D Paulson dated 12 August 2005 and related financial information other than the budget (section 62 of the Disclosure Bundle).”

“Where there is any inconsistency between the contents of the documents referred to at 1 to 73 below and the factual statements contained in this Disclosure Letter, then the provisions and contents of those documents shall prevail save in so far as any disclosure is only effective for the purposes of the Agreement to the extent it results in information being fairly disclosed. The Seller is not to be put under any liability to the Buyer as a result of any such inconsistency or any failure to specifically refer to any of the documents referred to in 1 to 73 below. For ease of reference the majority of disclosures are made under paragraph numbering which refers to particular paragraphs of Schedule 4 of the Agreement and, subject to the proviso below or as expressly provided elsewhere in this Disclosure Letter, they are numbered accordingly. Such headings are for convenience only. Accordingly, if the information disclosed is capable of applying in respect of any of the other Warranties, such information shall be deemed to be disclosed where it is capable of applying and save in so far as any disclosure is only effective for the purposes of this Agreement to the extent that it results in information being fairly disclosed the Seller shall not fail to avoid liability by reason of the fact that a particular disclosure is not made against a particular Warranty or that no disclosure is made against a particular Warranty. This Disclosure Letter shall be deemed to include and there are hereby incorporated into by reference as having been fairly disclosed the following matters, but no warranty is given as to the accuracy of the matters or the information deemed to be disclosed in sub-paragraphs (a) to (k) save where the matters and documents referred to are specifically warranted in the Warranties and in such even [sic] such matters and documents shall be warranted in accordance with the terms of the relevant Warranties: a) any matter referred to, noted or reasonably evident from the Company 2005 Accounts and the Company Management Accounts which are annexed to this Disclosure Letter at document 1 in sufficient detail to enable a reasonable and not misleading understanding of the matter to be obtained therefrom; … f) the documents listed in schedule 8 of the Agreement which are annexed to this Disclosure Letter at document 6 … h) the contents of all documents number 1 to 73 copies of which are annexed to this Disclosure Letter ... Warranty Number Disclosure Document 3.8.1 The turnover in the period since the Company Balance Sheet Date (‘the Period’) has decreased and is less than that for the same period in 2004 (‘the 2004 Period’). Copies of the monthly profit and loss accounts (from the management accounts) for the months of July, August and September 2004 (together with quarterly profit and loss accounts for the periods July to September 2004, October to December 2004, January to March 2005 and April to June 2005) (attached at Annexure 7) and copies of the management accounts for the months of July and August 2005 (attached at Annexure 3) demonstrate the financial position and decrease in turnover over that period. 7, 3 … 5.2.2 The Company is a party to a contract with Alstom Transportation SA (‘Alstom’) for the manufacture or interior partitioning and panelling for TGV, the French high speed train, (‘the Alstom Contract’) (copy terms and conditions attached at Annexure 29) which has not to date been profitable and, unless the terms are renegotiated, will be loss-making. EDM has discussed the Alstom Contract with David Paulson at length. 29 … 9.1.1 H M Revenue and Customs (‘the Revenue’) enquired into the Company's tax return for the accounting period ended 30 of June 2004. The enquiries were in relation to whether or not the relationship between the Vendor and the Company affects the number of associated companies which the Company has. The result of the enquiry was a finding that an additional £20,000 of corporation tax was payable by the company for the accounting period ended on 30 June 2004. This is due for payment at the end of October 2005. ... Copy correspondence and the corporation tax computations for the financial years ending 30 June 2004 and 30 June 2005 are attached at Annexure 61A. 61A 9.1.2 Additional corporation tax (and interest to thereon) is payable in respect of the matter disclosed at Disclosure 9.1.1. 9.1.4 Please see Disclosure 9.1.1. Interest may be payable in relation to that matter. 9.1.11 Please see the email dated 12 August 2005 from HDW to David Paulson and the budget for 2005/2006 attached at Annexure 62 which set out the Company’s position at that time in relation to corporation tax instalment payments. 9.1.12 Please see Disclosure 9.1.11. ”

“Speaking from my own experience, I have found it essential in cases of fraud, when considering the credibility of witnesses, always to test their veracity by reference to the independent facts proved independently of their testimony, in particular by reference to the documents in the case, and also to pay particular regard to their motives and to the overall probabilities. It is frequently very difficult to tell whether a witness is telling the truth or not; and where there is a conflict of evidence such as there was in the present case, reference to the objective facts and documents, to the witnesses' motives, and to the overall probabilities, can be of very great assistance to a judge in ascertaining the truth.”

“It is looking as though there may be insufficient cash to pay John, on the due date, which could have difficult ramifications for you if it is just left open. Your contract guarantees John the final instalment, based upon the security of his shares. We do not want to get into that situation. The other point that I would like to make is now is the time to organise finance, whilst the Company is still making profits. For my peace of mind and especially yours, I would like to see the sums, to show that sufficient cuts are to be made for the balance of the year to ensure at least break even over the remaining months, leaving us a profit for the year.”

“The cash situation is not getting any better as you can see ... After payments made to the Tax Department ... we have no money in the account to pay other creditors at the moment. Something needs to happen very fast on the sales side ... I think we are running big cash risks at the present time ... ”

“Please read this, the Company is at a cross roads and in my view significant decisions have to be made. ... The two greatest threats that face the Company at the present time are lack of sales and lack of management. In the case of the former although Eric is bullish (and it is his job to be so!) there do not seem to be many definite orders on the horizon.”

“k) How can strong cost control be introduced and managed as a discipline. l) Address the shortage of cash in July and carefully consider the alternatives listed below.”

“The Company is strong with a reasonable Balance Sheet but is facing problems of diminished trade, greater competition etc, and needs to take action before the lack of sales starts to weaken the Balance Sheet. Problems: 1) Lack of sales 2) Intense competition 3) Pressure on margins 4) Lack of management 5) Costs too high 6) Lack of future planning 7) High current assets 1) Sales. Why have they gone? What has happened to Eric's extremely successful sales results in the early years? What are the alternatives? ... 4) Sell out ... 2) Intense competition: Invertec They must be pouring money into putting us out of business instead of buying us, what do we do? ... 3) Sell the Company to Invertec 4) Do deal with Invertec 8) Buy Invertec 9) Arrange an amalgamation under a new umbrella company ... ”

“BN opened the meeting by pointing out the seriousness of the situation and the need for urgent action. In his opinion the Company was still strong, had only just broken into losses and there was sufficient time to reverse the trend. ... BN then talked about the deal between Eric and John to buy John's shares. He explained that in essence this had been an arrangement of Eric to buy John's shares without Eric personally having to borrow money. This worked for both parties up until now and it was obvious that the company could not find the cash to pay the last instalment. ... When questioned Eric stated that he wanted to sell at the earliest opportunity. Bryan insisted this was not the time to sell; everyone must work together to put the company back into sales and profitability. The American owner of Invotec [sic] had approached Eric and Bryan expressed the opinion that it was wise to do nothing at the moment. John also expressed concerns that if we open negotiations with Invite [sic] they would see our problems and fight harder to put pressure on us. ... Upon a question from John that if the Company was back into profitability in the short term and he could sell for a price of £2 million less the £5[00]k to John would Eric still want to sell, he replied that he would. Bryan replied that it was therefore essential that the Company was properly groomed for that sale with a full efficient management team and strong management techniques. ... Eric was of the opinion that sales would be around £400[000] per month for the foreseeable future. Bryan said that was dependent upon the selling over the next months.”

“Before I start, I must warn you of a common problem: these the negotiations can take a long time and very often fail well into the agreements usually at the warranty stage, when the vendor realises just what he has to commit to! While all this excitement and frustration is going on, the business owner's mind is taken off his company and the Company starts to slide downhill. YOU MUST PROCEED FROM NOW UNTIL SIGNATURE AS THOUGH THERE WAS NO DEAL and keep your eye firmly on the ball. (Some institutional buyers have been known to use this to get the price down!!) In particular management must be brought back to Volante, whether or not it is owned by another company. Questions …. 2) Did you discuss warranties? ... 8) Was due diligence discussed?”

“Cash is a major problem. Julie will give you an update. NSAA is the victim of this particular right now. Julie is in discussions with the banks for conversion of the contract. Fortis has also taken up the business again in the UK (see my e-mail and information). Bryan is up to speed and will discuss it during his visit to Trimdon with a view to a possible (temporary) solution. If Invertec goes quick we will be free of a problem. But output is essential to it at the present time (Joe knows that only too well). ”

“My advisors have described to me the personal impact of personal warranties and indemnities and I have come to the conclusion that I would not like to sign any warranties but I would like to discuss this further.”

“We will provide warranties to show that we stand by our reported information. We would expect you would want to do the same. Neither of us should expect to be bound by projected numbers, but certainly we want you to trust our reported data as we want to trust yours: warranties make sense here.”

“Subject cash Flow. A request had been made to temporarily increase the factoring percentage from 80% to 90%. The overdraft extension to £100k had been agreed to 30th June. The Inspector had been contacted to agree an extended payment plan for the corporation tax spread over four months. Julie was now using cheques instead of BAX [sic] to better control payments. Creditors had been delayed to the maximum. Julie had started upon the stock reduction exercise with Joe embracing: Swap sale or use. Laminates analysis and decide what could be used elsewhere Joe was now signing orders and nothing was being ordered unless it was absolutely necessary. Julie to check old and scrap stock items The stock exercise would be complete by the end of June The following meetings had been held with banks: GE, European Financial Factors, Barclays Bank and Lloyds TSB. Two of the banks interviewed looked good and a decision would be made to the following week. Julie had promised to let everyone have a simple weekly cash flow until the new Bank was appointed.”

“Volante is in the final phase of a merger with a lighting and panelling supplier with operations in UK and the Far East. Due diligence phase is due to start in June 2005. The purpose of this merger is for Volante to offer low-cost integrated ceiling systems. Furthermore, this merger offers opportunities for sourcing components in the Far East. The combined group will be 27 million euros (50% in Railway, 50% in Bus), BT accounting for less than 20% of the overall turnover.”

“Look at the way Eric has committed himself to us! The opening text describes well their expertise. But beyond that a large part of the credibility of his pitch rests on his future relationship with us and what we bring to the group. It's nice for us that the rail market is already opening up for our lights. But Eric has now put himself into a position where he really won't want to walk away from us, because part of the credibility of his relationship with his biggest customer is now dependent on the deal. This will put Harald and Bryan Nelson in a potentially difficult position if they want to be very hard-nosed in the negotiations (although in an extreme scenario their best alternative to dealing with us might take them to Teknoware for a similar lines ... very hard to see that, though).”

“Volante’s trading future. I have received Eric’s sales budget (which seems to include the Infotec [sic] sales) and Julie and Joe are putting together the budget upon this basis. What concerns me greatly is that this budget will show losses and upon DD the other side will at least be asking some difficult questions, but more probably seek a reduction in value. It is imperative that this budget is not discussed with the other side yet and it is even more important that neither of them attend any of our meetings until we have this well and truly sorted. I have already said that it needs thinking out of the box to correct this problem.”

“Warrants and Data Accuracy Both parties agree to be bound by warrants within the merger agreement, stating that all data submitted as part of the due diligence and negotiation phases is a true and fair representation of the state of both parties and their respective operations, managers, and directors. In the event that such data is subsequently found to have been false or deliberately misleading, both parties accept that they will be entitled to pursue legal redress against the offending counter-party. In my view this is the second deal breaker. Eric has already stated that he will sign no warranties and this section clearly states that full warranties will be signed by both sides. This sets out the real nonsense of this deal. Eric only wants to sell his shares and under normal circumstances would be advised to sign properly safeguarded warranties on what he is selling. In this deal he's been forced into carrying out DD into the other companies (one of which is Malayan registered) to safeguard his investment. Both of you have got to really understand the implication of DD and warranties. Most of the deals that fall over are at the warranty stage and I realise that you will reciprocate and enforce warranties on the other side, however in the real world of warranties it is the richest person who wins.”

“We would like you to take out the warrants on data accuracy on VPTIS. To our opinion it is not necessary to have this in because the valuation on VPTIS is based on audited annual accounts.”

“As you and I discussed on Monday, we want to keep in the section on warrants because we want both of us to be fully confident in each others' statements, excluding of course sales projections for 2006 or similar data. By this we mean information which we share over and above anything covered in audited accounts and due diligence. So we would want warrants to be included, please.”

“Volante Germany is excluded from the merge as it also not taken into account in the valuation formula. Eric is considering to give the shares back to the owners as it is a family owned business and it will be a problem to them that shares goes to a third party. We are talking about 10% of the shares. We do not have influence and never got any dividend out of it.”

“I had a worried John on the phone last night to tell me that you had rung him during the day from an open office in Holland, in front of employees, to discuss my personal and confidential notes to you. You said that ‘Bryan Nelson’ had it all wrong and that Harald had ‘earned’ the Option and you only had to pay him the profits ... Harald Share Option Scheme I can only take on board what you tell me on the phone last week you told me that you had a share option scheme with Harald and YOU OWED HARALD 20% OF THE COMPANY. I naturally assumed that Harold had taken up his option and owned the shares and that was the reason you owed Harald 20% of the share sale consideration. I then started to worry about how you were to accomplish everything. Now you tell John Harald has ‘earned’ the shares and you only owe the profit. I am now completely bewildered! … ”

“I feel compelled to say ‘told you!’ You must talk to Robert about signing the vending agreement before DD is complete. Before any DD is started you must have complete confidentiality from everyone involved. This is your competitor and if the deal falls over they walk away with all your secrets. We must decide who is going to be involved from the Volante viewpoint in the Commercial DD, it is an exhaustive list and will be very disruptive. Julie will be key in the finances, but you will have to be involved plus Joe, Gillian, Harald and John. ... ”

“2. Sale & Purchase agreement He wants to have the agreement signed up before we do the due diligence. I said we didn't want to waste any more lawyer time or money, and that we would sign once we've done the diligence and seen the audited accounts. Eric says they will be naked in the dd and therefore need protection. I invited him to get Robert, his lawyer, to write up a brief heads of terms if they were concerned: that and the confidentiality should give them the protection they need. Harald then said that if we were to do the dd before the agreement they would expect to see all warrants etc removed from the agreement because they would now be unnecessary. Again, I said this wasn't acceptable to us, seeing the paperwork doesn't remove their obligation to ensure the whole picture is revealed.”

“You must realise that any overstating of profit whether you feel is to be justified or not will provoke a writ from the buyer under the relevant warranty clause, within the warranty period the loss in sale consideration, brought about by the overstatement.”

“1. Total factored sales in monthly report for May and June is GBP 174,773 but according Efacs and Excel of HW this is GBP 180,447. What is this difference of GBP 5,674? 2. Detail margin per project/client is needed on factored sales of June as I expect a much higher margin on it.”

“There are a lot of old invoices open. Several times I asked you for a payment of the overdue invoices. First there was a problem with the bank, and now you only can pay asked if the money from your customer is payed [sic]. There have been a lot of delays lately. We need the money on our bank account on the 25th of July. If we did not receive the money then, legal action will follow. We cannot accept another delay. At that time all the outstanding invoices will be send for collection. All the collected cost are for your account. To prevent legal action, please make sure the next payments are on our bank account on the 25th of July: NSAA 44.741,15 euro; and NSAM. 3.965,40 euro.”

“The Vendor or the Purchaser agree: 9.1.1 that all information provided in respect of the proposed transaction by or on behalf of the Vendor is given in good faith, but is in no respects warranted by the Vendor will; and 9.1.2 the only warranties and representations that shall be given by the Vendor shall be those contained in the final form of Share Sale and Purchase Agreement.”

“Hereby the adjusted reporting of May which you can discuss with the auditor of Invertec as an example. Tell him that this is our first reporting in this format and that in the former months we (had and reviewed also this information) but reviewed and official reported mainly only P&L and BS. Do not give him any other monthly reporting if we can avoid that. Furthermore, do not discuss actuals and budget 2005 2006. I want to do this after KPMG have confirmed the numbers. Furthermore, we have to have more closer look to BS and cash flow for future. Concentrate on efacs-system and procedures (not on numbers) with this auditor of Invertec. Explanation of actual - budget: Sales (and result) are way below budget as Transbus went into administration and did not recover, we got competition in bus-business of ITS and margins on Connex were not as expected.”

“- Actual P&L (and BS) compared with budget for 2003/2004; - Tie-in mgt-accounts 2003/2004 with annual report 2003/2004; - Cash flow/financing actual compared with budget 2003/2004; - Actual P&L compared with budget for 2004/2005 (and explanation for differences).”

“We are not going to send him this break-even P&L!!!!! I told David already that from the budget 2005/2006 they can see the break-even.”

“2 Key Issues 2.1 Historic results … * turnover and margins have declined in 2005 due to - loss of business following administration of Transbus - higher than expected costs on a Connex contract - increased competition … 2.2 Forecast sales and sales mix * Sales are forecast at £4.9m (below the current year levels) * confirmed sales per management are £3.5m * last years forecasts were £1.6m below budgeted * management at Volante consider the forecasts for 2006 to be very cautious in comparison to last years * Volante staff consider break even sales to be between 3.5 and £4m. … 2.3 Balance sheet at 30 June 2005 … * Corporation tax from the previous financial year remained unpaid at 30 June 2005 * the company had to extend its overdraft from £50,000 to £100,000 and to re-negotiate its debt purchase agreement due to cash flow problems around the year end. …. 3 Review of balance sheet … 3.5 Short term creditors …. Corporation tax The corporation tax computations are incomplete for the current year. However the creditor relating to corporation tax last year remained unpaid at 30 June 2005 (£119,974). Volante have come to an agreement with the Inland Revenue and have avoided penalties for late payment. However interest is being charged on the outstanding balance. The client paid off an element of the balance post year end, but approximately half (per Julie Wilkinson) remains unpaid … 3.7.Draft statutory accounts Draft statutory account were received 9 August 2005, therefore there has not been time to carry out a full review of these, however the following points have been noted: … * The cash flow shows an outflow of £72,382 for the year and a significant increase in funding via debt purchasing … 4 Review of results and forecasts … 4.1 Historic and forecast sales Sales were under budget in 2005 by approximately £1.6m and decreased by £416k from the prior year. … The sales forecasts for 2005 [sic – clearly 2006 in context] provided by management at Volante show 84% of in-house sales (70% of total sales) budgeted for are train related sales. Management accounts at May showed 76% of sales were train related compared to the 61% budgeted. The gross profit margin achieved in 2005 was 21% before business overheads. (per 2005 management accounts in appendix A). All other costs totalled £1,141k. Therefore if costs remain as for last year break even sales would be £1,141k/21% = £5,433k.. However due to the change in sales mix and cost savings management at Volante anticipated that break even sales will be approximately £3.5m - $4m. We have requested the break even analysis prepared by Julie Wilkinson, however we are yet to receive a copy. … 4.2 Confirmed orders for 2006 Of the £4.9m sales budgeted for, £3.5m are confirmed orders (per Harald). The order showed approximately £3.2m on 1 August 2005. … 4.4 Full budgets for 2006 Although sales forecasts for 2006 were received during the visit to Volante during the week end 5 August 2005, the full budgets have just been received (9 August 2005). Therefore a detailed review of these has not been carried out. However on undertaking a brief review the following was noted: * Sales have increased from the original forecast received as Volante management believed they had been over cautious initially * margins are higher than for 2005 actual giving a break even sales of around £4 m. … Cash flow forecasts have been requested given the need for cash outflows in preparation for the larger train contracts.”

“Current status of 03/04 corporation tax and arrangements for repayment … Your actual cash flows for 04-05 and draft cash flows for 05-06 (by quarter if that's all you have) Understanding of the factoring relationship as it relates the provision of cash flow to the business and the calculation of factoring need in the spreadsheet already provided Your July management information pack”

“Current status of 03/04 corporation tax and arrangements for repayment Liability of corporate tax 03/04 was GBP 119k (see annual report 03/04). We are up-to-date with the two payments of GBP 30k each, which have been made according our payment schedule. This has been has also been displayed in the budget we have forwarded to you (Sheet: Factoring need). … Your actual cash flows for 04-05 and draft cash flows for 05-06 (by quarter if that's all you have) The estimated cash flow 05/06 (per month) is in the budget which we supplied to you. The estimated factoring we need for our operations (incoming cash minus outgoing cash) can be seen on the sheet ‘Factoring need’. The estimated status of the outstanding factoring/cash can be seen on the sheet ‘Balance sheet’. Our actual cash flow can be seen in the draft annual accounts 2004/2005 which we have sent you. Bear in mind that we have paid out dividends of GBP 400k in 2003/2004 and GBP 500k in 2004/2005. Already confirmed to you (and in the budget) that we will not pay out dividends in 2005/2006 because of the potential deal. Understanding of the factoring relationship as it relates the provision of cash flow to the business and the calculation of factoring need in the spreadsheet already provided See point above. Your July management information pack Close of July is not finished as we have been very busy with the year end close, audit and DD. Our expectations is to have it available next week expected to be close to our budget.”

“Next week Eric sits with Invertec and then the decision will be taken by Invertec. I told Eric once again that we had to do the deal (and also the other party has to do the deal ... But you never know. Eric has to convince them about our budget/forecast next week. About warranties: we did not tell them any lies, so what would be the problems with warranties.”

“All I need more is the details of the factored sales/margins per project and the margins per project on the inhouse sales. I will come back tomorrow with my corrections.”

“Harald’s projected £254k PBT for Volante alone in 05-06 doesn't stack up - if you apply the 04-05 ratios as Kassy has done, you get a loss of £100k.”

“As we need to be careful with our cash, I want to see and approve all outgoing payments as of now. Furthermore, we will come to the final result for July on Monday.”

“I spoke to the Inspector of Taxes today, and I need to respond to him this week. Based on what you have told me, the rate of corporation tax should be adjusted to reflect the fact that D mol Holdings BV is an associated company and, subject to any views you may have, I will respond to the Inspector on this basis. I attached a computation to my letter of 30 June setting out the tax liability, totalling just over £140,000. From this should be deducted payments already made, being some £60,000, leaving £80,000 payable. I know when we spoke in July you mentioned an arrangement had been entered into with the Collector of Taxes. When I just spoke to him the Inspector of Taxes was talking about the Collector being on the verge of issuing distraint proceedings. Can I help in speaking to the Collector?”

“Here are the results from July 05 and the possible corrections (see the second worksheet). Let me know what you think. Don’t send this around!! For internal use only!!”

“I think we need to impress upon him that we first have to complete the contract before we go any further! The emphasis must be on completing the transaction in the shortest time!!!!”

“Did you have a chance to talk to Lloyds about agreeing to the 90% extension as it runs out tonight? We have drawn all the money we can which gives us the £30k which we were to pay to the Inland Revenue. Gillian and I are to look at payment proposals. I need to call Kirsty this afternoon at Resopal and will give you an update on their account and make a proposal for payment. Eric may want to talk to Resopal to discuss this as well.”

“This is the first draft of the payments to be made. A lot of them are old April invoices and relate to the suppliers that are likely to take us to court or we require continued supply for. Also the transport companies will not collect, which compounds the situation. ... I'm looking at the Resopal account to see how we can put together a payment plan, but I'm not sure how they will take it.”

“The duty on this statement on the statement below is unpaid, wholly or in part because of the failure of the company to meet its obligations under the Taxes Acts. On the basis that no proceedings are taken against the company for that duty or for the penalties and interest on it. Volante Public Transportation Interior Systems Limited of Trimdon Court, Trimdon Grange, County Durham. TS296PE Offers the sum £147,400.00 Less £59,996.94 already paid The balance of £87,403.06 will be paid on or before 31st October 2005. If the full sum has not been paid by that day, interest at the rate which applies for Section 86 Taxes Management Act 1970 and which may be varied from time to time will also be payable on any unpaid balance from that day. This interest will be payable without deduction of tax. Statement of duties Year ended 30th June 2004 Corporation tax £140,398.56”

“Here is the current position as discussed. I have three sheets [the first] with current availability and what we have already sent. The next sheet is wages and inland revenue and €20k for EDM [i.e. Mr de Mol]. The final sheet is the minimum we need to send and does not include any additional for ALM [a supplier]. I cannot see us being able to pay Formica before the end of the month. There will be some VAT and cash in, but I work at that later. Are you going to talk to Formica as they would normally be paid today at the latest? As discussed we update the position daily so will send it to you.”

“KPMG – accounts for 2004 – chq dated 30/9/05 - 1,880.00 …. Hogg – sue if not before 26/9 - 2,804.55”

“There are a couple of things we need to discuss today/first thing tomorrow. 1 Formica - they called today and Gillian said that she thought it had been paid, but would look into it and get back to them. I was not sure if Harold had spoken to them so we need to talk to them tomorrow. 2 Recore - they are not happy. I advised Mike that we would try and pay before the end of September for the overdue invoices. Can you advise me on what has been said?”

“Fr [Mr Rundall] asked for extension of exclusivity into Oct to allow time to finish negotiation. Eric flipped, saying exclus only till 30/9 and sign within 1 wk ort he ‘goes to plan B’. We think he's bluffing but won't push on exclus till 31/10 as it also keeps his guys fast on docs turnarounds etc for a quicker close.”

“I have had Paul Wright on the phone and he said you would call him every Friday to give him an update on the situation regarding the money we owe them. I did not know who he was the time and said you were on holiday until 3rd October. ... I advised him that I would mail you to let you know he had called. ... I think you should call him as he did not appear too happy.”

“- Concerns that TGV is not profitable on Alstom project - Material + labour aren’t covered by cost price! - Invested heavily to date - EDM has called them + asked them either 1. to increase prices by 80-90% [or] 2. to find another supplier”

“I called you a while ago to mention a concern flagged up by Eric this afternoon. Apparently one of their ongoing contracts, with Alstom, has proven to have been mispriced, as a result of which they occur a loss on every system they ship. Eric said he wanted to be honest with us, and that he accepted we should ‘put it next to the Wrights clause’ in the warranties.”

“Our session yesterday lasted for 7 hours. The basic problem in the negotiation has been Eric’s stonewalling position on the warranties, as you and I have discussed before. In the cold light of day, there are some key concerns which Francis has summarised very well in his email below: 1. Volante don't want to state the business as a going concern, or that it would be financially viable if the deal weren’t to go ahead with us. They also insist that we should have no warranty claim against them under £75k. There may be technical legal reasons form wriggling on this stuff, but it gives me an uncomfortable feeling about their real confidence in the prospects of their business. It also makes me wonder whether there is a financial hole waiting for is that we can't see at the moment. 2. I think Eric is getting a great deal in view of the current performance of his business, the possibility of the contract with Alstom (his #2 customer) going wrong, and considering what we will bring to him. In the circumstances, even if we still want to pay him £2.8M, the insistence of his lawyers that we subordinate Ellison Co debt to Eric's £1.3M instalment payments, can't do anything with the assets of Volante etc seems to me to be asking a lot. 3. I'm too suspicious, probably, but if you consider the demands of (2) in the light of the financial situation in (1) above, I wonder whether Harald knows will be disappointed and will quickly feel we've overpaid, hence the desire to bind us up tight so we can't try and grab back any of the £1.3M. John, I apologise if I frustrate you would raise these points - maybe this is only my inexperience. But I really want to ensure we get best value of your money, and my hesitation and worry just reflect this. ….”

“I don't think that Eric will buy the idea of a holdback. He has given us plenty of access to evaluate the bombardier preferred supplier status. reading between the lines, was bombardier expressing that we probably would not be a preferred supplier? if so can we still have significant bombardier sales as a tier two supplier? I think your options are: call the deal off because of the uncertainty (when Eric and Harold have stated they were confident we would be named); or go ahead on the strong belief that we can go grow significantly as a tier two supplier.”

“your comments and francis’s are valuable. in negotiations, you always need to keep asking yourself if you've made a mistake. you and Francis are raising really good questions. we should not let eric's deadline prevent us from doing our due diligence big red flags for me: 1. Volante don't want to state they are a going concern or financially viable if the deal isn’t done. 2. alstom problem and the cost thereof 3. bombardier and preferred supplier status 4. their lawyer' insistence on too much security on the debt. 5. current level of losses and cash flow problems for the next year. 6. their trying to limit the warranties after eric had agreed to cover that liability. There are some important worries. if we need to slow down the deal to get the answers to bombardier and alstom, next 12 months cash flows, francis's questions on stock etc - I'm willing for us to say – ‘there are too many new issues. we need answers before we close. if you want to walk we are sorry, but we will not close without clarity on certain issues.’ on the other hand - how bad is our situation at its? how much would it cost to shut it down?”

“As you surely know, Volante PTIS unfortunately has financial problems. For this reason it was agreed with Eric that Volante Germany will only supply against cash in advance.”

“I have not had a chance yet to go through the slow moving stock as yet. We have been trying to sort out cash and fend off supplier calls. We're trying to work out what we have to pay at the moment and see the sales we have to allocate payment dates so we have something to tell the suppliers. We will update fully tomorrow when we have the sales information for the month and an indication from Joe regarding the sales next week. …”

“I spoke to Paul Wright of Percy Lane and I have delayed payment again. Sign off of the deal is planned on Wednesday. Can you forward me the cash flow so that I can review it this weekend and we can discuss it on Monday!?!!”

“… On another matter was the 90% just until the end of September? It appears to have gone. I will ask Mike for an extension as we are now £50k overpaid.”

“Here is the latest draft of the SPA containing the earn-out. You’ll see there have been some changes but we've held firm on the warranties and have the earn-out itself, so I think this is still favourable. Of course, we could be super-pessimistic and worry about the ring-fencing of the £1.5 M, but as you and I have discussed before this would only be a problem for it if the company went into meltdown very quickly and I don't think this is going to happen. ... We are looking hard at the tax situation, as they have just disclosed an additional 04 charge levelled by the taxman for £20k which we're going to demand that they pay. We’re also looking at other tax again just in case there is other doubtful stuff in there.”

“This is the tax info which concerns us. Both Ruth and Francis are adamant that we shouldn’t sign until we're sure that the tax affairs are in order. Eric, who is now at the point of walking away, assures me his taxes all in order and he has never heard of the threatened ‘distraint proceedings’ (seizure of assets by the tax authorities) that are contained in the attached package. (By the way, none of this was mentioned in the disclosures.) He has now gone away to check with Harald, but I've told him we’re not simply going to accept Harald's assurances and will need confirmation from the Tax Inspector that all is in order. Eric is shouting that we've known all along about payments in instalments. My reply is that instalments for 04-05 might be acceptable, but why should WE be paying HIS tax from 03-04? After all, if he has £30k to pay why, shouldn't he find that from his £1.5 M? And if there are serious problems there, why on earth should we inherit them? ... I'm sorry that this is coming out at the 11th hour, but if they reveal key information only 24-36 hours before closing, it's difficult to do anything other than react at this late stage. I’ll give you an update if Eric calls back. He assures me he will be moving to plan B tomorrow if we don't sign, but I think we must take that risk if the alternative is to land ourselves in serious tax problems, don't you agree?”

“I am sorry you are being subjected to this. it's difficult. i believe eric would be making a big mistake to walk. eric's old taxes - not yet paid should fairly be eric's. ee didn't own the company then and his taxes is not a liability like a trade payable. if there are questions about taxes from eric's ownership then he should indemnify us from any liability. with the earnout we have sufficient protection that he will pay via deduct from the earnout. i have never said anything other than eric's taxes should be paid by Eric and that he needs to indemnify us from future tax liabilities that arise because he, harald and his accountants did not file their taxes properly. every deal i've ever done contained this type of warranty.”

“Conversations today with David Paulson concerning the latest draft of the SPA and the second draft of the disclosure letter have led to the conclusion that Invertec should ask for three new indemnities in the SPA. These are in respect of: * Tax liabilities. This should cover the £20,000 relating to the financial year ended 30 June 2004 but also any as yet unpaid instalments of tax relating to the year ended 30 June 200r or earlier periods.”

“… in principle these are all the things one would want to be able to count on. 1. Aug 05 financials. 2. July 05 financials. 3. Sales forecasts ... unlikely we can ‘rely’ on them, but if they were pure fantasies it would materially affect our view of the business’s future. 4. Their previous years’ management accounts (which we would also have seen during the financial dd) and cash flow, which materially affect our appreciation of their financial history.”

“1. Cash Kassy spoke to Julie at V today. She has an urgent need for £200k to meet pressing obligations, including £87k of tax, £7k of which is fines. Not good. However, we will make sure that we get the tax element back. Fortunately we've just negotiated a £300k overdraft facility and will be able to use that: V are up to the limit on their debt finance facility. No wonder Harald didn't want to disclose the cash position.”

“I tried to speak with you 3 times yesterday to ask you this: 1) What can you tell me about the payment of the last invoice? Mr Sperduti talked with Mr Eric de Mol on the phone, yesterday and they agreed that because of this huge delay of payment, Volante will also pay, this week, the last invoice….”

“this cash situation is a surprise to me and a pretty big negative. were you blindsided also?”

“I saw your note about the cash situation. Yes, I was blindsided, it's my fault not to have drilled into it in more detail and I'm sorry to have presented you with less than happy news right from the outset. I've asked Kassy to ensure that we pay nothing that’s owing to Eric or Harald, as I think we’ve been treated unfairly. We’ll try to cut back that £200k as far as possible. I don't want to start our relationship on a sour note, but I shall have to say something to Eric as I'm unhappy about it. Also I've asked Francis what the warranty situation is as far as cash is concerned, to [see] if any remedial action is open to us.”

“I wasn’t aware they stopped payment of your 1000 GBP. To be honest I wasn’t payed [sic] by my own company for the last 2 month because short of cash and most probably will not get that money at all with the new owner.”

“We had a difficult meeting with Eric. I thought it better to have Kassy and Ian involved and to say this was a board conversation (in case we need witnesses to anything), though in the event I did all the talking. I showed him the 2 separate P&L's per month, and said that we felt the numbers have been set up in such a way as to persuade us the company was worth buying at their price, when in fact it wasn't. I also explained that our legal advice was that this constitutes fraud. Eric said he could explain it all. We asked Harald to step in, and sure enough he said there was an explanation for it all: tooling and packaging adjustments. He also denied the competence of their finance people to prepare the accounts (though Julie is a CPA and has been preparing for 6 years). The upshot was this: * I said we felt they had deliberately arranged the figures in order to push the sale through at a price they knew we wouldn't agree to. * I said you and I would talk to Eric tomorrow to get his reaction * I told Harald I didn't wish to work with him again * I asked them both to leave and go home and not stay in the office any longer We’re all very sorry that it happened like this. Eric is outraged at the suggestion of fraud (in retrospect, not a good word to have introduced at this point, but on the other hand there was no point in trying not to show him the gravity of the situation), while not seeming to understand why we could think they had done anything wrong. For the record, all 3 of us thought that both he and Harold knew absolutely what they were talking about ... their protest is that what they did to the numbers was 100% legitimate business practice. Also for the record, Harold was paid £100k by Eric at the close ... some motivation. According to Julie, John Park got his £500k, Harold £100k, Eric's parents £400k, Eric's lawyer £67k, leaving the balance (~£450k) to Eric. I very much fear Eric won't want to work with us in the future. If he does, his £400k in settlement of our claim would get us through the cash hole and leave him the chance to earn out £1.8M through performance BUT we may not want to work with him anyway if we think we can't trust him.”

“Further to your conversation with John today, this is how I suggest we approach next week: 1. We will engage an accountant to review the P&Ls and cash flow situation, and to interview the finance team at Trimdon. They will give us a review of the accounts and advise us of their reading of the situation. John and/or I will then review the results of their findings with you. 2. If the accountants’ views are negative, we and you will consider what our next steps are and how we should resolve our differences. 3. If their views are positive, i.e. if they agree with you that the P&Ls and cash flow situation are completely in order and that we were wrong to criticise you, we will of course apologise immediately. We will also withdraw any suggestion of fraudulent practice, which as I explained in our meeting is the legal terminology suggested to us: if it does not apply we will of course withdraw it and apologise unreservedly for using the word, as I know how much it has offended you. 4. If we are found to be at fault and have apologised, that will leave you with the decision as to whether you wish to work with us again in future. That will be your choice, but I can only say that I've enjoyed working with you so far and was looking forward to doing so in for the next few years, so I would regret it if we parted in those circumstances. But that is a decision for later, after the review has been completed and emotions have cooled. 5. If you choose not to work next week, I can't force you to. But I’d prefer to keep the relationship with De Mol Holding going, so that we can pay the people and keep the office going. I’d also prefer to keep up our momentum with the current projects, and I intend that we will continue to invest time and money in them. So if you can work, even if you prefer to communicate with John at the moment rather than directly with me, please do. ... Before I leave you, I have to say one last thing. You were rightly angry yesterday when you thought I was secretly taping our conversation. In fact, we switched on the machine only because I wanted to concentrate on talking rather than trying to make notes at the same time. I wanted there to be a record of the conversation for your protection as well as ours. But in the emotion of starting our conversation I forgot to mention it to you. I'm sorry, and I was embarrassed, and you were right to feel mad if it looked to you as though I had unfairly taken advantage of you. That's why I destroyed the tape.”

“We tried to arrange for Kassy to visit V 2 weeks before closing to sit with Julie and work on the cash flows. Eric refused, saying she was too stressed out by the deal and the people in the factory would be spooked by our visit, so Kassy would have to come after the close. Wanting to preserve morale in his business and prevent staff from defecting, we turned to the forecasts Harald had produced. Of course, in hindsight I should have called off the deal as soon as it was stated that Kassy couldn't visit, but I was more trusting at that time. Sorry.”

“today i am also faxing you on behalf of david, emails that surround the cash flow issue and eric and harald’s obviscation [sic] efforts? i hope these are helpful in clarifying this issue. clearly cash flow is the area that has cost us the most money (£400,000 between now and the end of the calendar year). david believes volante misled – herald believes we did inadequate due diligence and the fault is ours.”

“We have reviewed all of the reclassifications and adjustments that have been made by Volenti PTIS Limited. It appears to us that the reclassifications and adjustments are common practice reclassifications and adjustments in the process of preparing the monthly management accounts. The Company can provide sufficient evidence to support the reclassifications and adjustments. However, because we didn't perform an audit on the monthly management accounts, nor on the Financial statements for the year ended 30 June 2005, we don't have an opinion on the accounting policies which are applied in the monthly management accounts. The Financial statements for the year ended 30 June 2005 have been audited and signed off by KPMG LLP.”

“- Not a clear picture - Not consistent with mgmt a/c but possibly with annual a/c - Some ‘v, v grey areas’ - NB they were just looking at mgmt accts They have adjusted by £50k but only £5k is completely unreasonable.”

“I just heard from account department that the invoices of DMH won't be paid. These invoices of service costs August, September, expenses of travelling of Rein, Harald, Eric and last the credit insurance. You can imagine I have to pay these people as well and would like to ask you what we would do with these invoices. I had to pay next three months coming Monday and you can understand that this is not easy for me if they are not paid by Volante any more. Please let me know what we will do with the invoices.”

“We have a major cash problem at Volante. Invertec has put in £270k already, to pay creditors which had not been paid since June and to prevent the tax man taking legal action against us. We now need to put in another £200k in order to place the pay suppliers and staff. £470k was way in excess of the amount of cash which Harold told us would be needed. A large part of the reason is that we have sales which are also way below those predicted. I find myself in a difficult position. I have had to ask John for much more cash than we anticipated needing. I've also run up a huge bank overdraft at Invertec just to meet obligations which Volente occurred months before we owned it. This makes life difficult for everyone, from the staff at Trimdon who are under severe pressure from suppliers, through to everyone else at Volante and now at Invertec, which has never even had an overdraft before. On the other hand, De Mol Holding has just received £1.5m. I know you have paid out John, but would it not be possible from the remaining £1.012m for you to find sufficient cash to pay the staff and the rent? Then will work together to build up sales rapidly and Julie, Kassy and the rest will be able to satisfy the taxman, the creditors, and the bank. Eric, we are in a very tough situation which we were not anticipating because it was not predictable from the information we were given. It would help us to resolve it if you could take care of your immediate needs. Obviously we will meet our liability to you as soon as we can.”

“However, our client would prefer for this matter to be resolved without the need for expensive litigation. Our client is also keen to maintain the relationship it has with you and would like you to continue to work with the company, something that would be impossible if litigation was to be commenced. Our client values the contribution that you make to the Company and it is with this in mind that it proposes the following: 1 Our client will agree not to bring a claim against to De Mol Holdings BV and you in return for your agreement that our client is not liable to make any payments under the earn out provisions in the Agreement. The initial consideration paid for the company will become the full consideration payable by our client. 2 The £87,403.06 paid by our client in relation to the tax liability of the Company is to be repaid to our client. Our client is happy to discuss a repayment schedule with you and De Mol Holdings BV. 3 Provided agreement is reached on points.1 and two above by 31 January 2006, our client will honour its contract with you and will pay forthwith all consultancy fees, salary and expenses payments due to you that have been occurred since completion of the Agreement. 4 Our client will thereafter continue to pay you the consultancy fee and salary agreed in the Agreement. It will also agree that you will continue to participate in the five-year bonus programme contained in Schedule 2 of the Agreement, and as such will be entitled to earn the maximum £525,000 bonus, subject to achieving the conditions of the programme. You will appreciate that our client is keen to resolve this matter as soon as possible. For this reason, this offer will remain capable of acceptance until close of business on 31 January 2006. If we do not hear from you by this date, we will advise our client to issue proceedings and takings any such steps are necessary to protect its position without further delay.”

“He says he understands why you're unhappy. But says hed told you he wd have to ‘move to plan B’ and become a components supplier, as they weren't in good shape. I said it seems to us you weren't even in good enough shape to achieve that: you'd have gone bust by 1 January. I said you were aggrieved because you felt the true picture had not been shown. If it had been, you would still probably have wanted to be involved but at a way different price. Even so, we would still have looked to invest in business growth. As it was, we simply felt we hadn’t been given the true picture and had therefore paid £1.5m, and invested £600k, in something worth only £300k according to our advisers. Eric says he's now got €2M+ of contracts lined up. He also says he knows people who would be willing to pay good money for V now in order to become a systems supplier: do we want him to introduce them to us? I said you were upset and willing to spend money to right the wrong you had suffered. Eric says he'll make a proposal that meets you part way. But he'll only do that if I sit with him and his friend.”

“Factored sales are not sales made pursuant to Volante’s usual contracts; rather they are sales of parts, which Volante buys and ships to a customer for a price. Volante is not required to make any parts for factored sales.”

“Some of Volante’s products were made in-house and were known as ‘in-house sales’, whereas other products were bought in and finished from other companies and were simply sold on to the customer for a profit - these were known as ‘factored sales’.”

“In-house sales (products that we manufactured at the plant in Trimdon) was from the outset organised by Helen Wilson….”

“Mr de Wit and [Mr de Mol] have informed me that ‘Sales’ [which she had explained at 5.5.3 were also referred to as ‘in house sales’] represented components that were manufactured at Volante PTIS’ factory in Trimdon, Durham. Whereas ‘Factored sales’ were components that were purchased for onward sale, e.g. panels from Volante Germany.”

“What we tried to do with the factored sales was to state that these were the abnormal exceptional items so that the in-house sales represented the underlying activity through the factory and to stop distortion by the one-off exceptional cost revenue coming into the line. That was the reason for doing it.”

“On reviewing the corrections that had been made I was satisfied that these adjustments were necessary adjustments that we would ordinarily make to the accounts.”

“This reclassification [of sales from factored sales to in-house sales] is in line with the sales projects in the budget 2005/2006 under in-house and factored sales.”

“A company is deemed unable to pay its debts … (e) if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due.”

“… Mr Clements’ analysis overstates the amounts due for payment as at 6 October 2005.”