“1. Alltrust has reserves well in excess of£1m with an additional£150k provision for claims. 2. Had we ‘saved’ the last two years’ premiums as claims provisions then this would have been£350k . … 6. The only offer of PII we have received is from the existing insurer at a premium of£97k . This means that we would have to pay almost£200k before we were able to benefit from the cover. Were we to add this to what we might have had makes£450k . … 9. As a business thus, we would rather add£100k to our claims provision and continue to build this throughout the year with an objective of a minimum addition of£50k giving a total of£300k by the end of our financial year on31 March 2022 . This is not far short of the cover especially with the excess in mind and the potential that this might actually get to£350k .”
“As of31 March 2022 , our claims provision was and remained£350,000 .”
“3. The Share Purchase Agreement shall take account of the payment of any shareholders’ and related funds due as at completion, including: 3.1. All reserves 3.2 Claims provision 3.3. Deferred fee income The Sellers shall take advice on a tax efficient method of the payment of the above monies and consideration for the share sale. Completion accounts shall be prepared within a month of Completion showing on a cash free / debt free basis to assess any further monies due to the Seller.”
“3.3 Except for any procedural matters, or as otherwise expressly provided in this Schedule, the scope of the Expert’s determination shall be limited to determining the unresolved matters in the Dispute Notice relating to: (a) whether the Draft Documents have been prepared in accordance with the requirements of this Schedule; (b) whether any errors have been made in the preparation of the Draft Documents; and (c) any consequential adjustments, corrections or modifications that are required for the Draft Documents to have been prepared in accordance with the requirements of this Schedule.”
“3.8 The Expert shall act as an expert and not as an arbitrator. Save in the event of manifest error or fraud: (a) the Expert’s determination of any matters referred under this Schedule shall be final and binding on the parties; and (b) the Draft Documents, subject to any adjustments, corrections or modifications that are necessary to give effect to the Expert’s determination, shall constitute the Completion Accounts and the Purchase Price Statement for the purpose of this agreement.” (a) whether the Draft Documents have been prepared in accordance with the requirements of this Schedule; (b) whether any errors have been made in the preparation of the Draft Documents; and (c) any consequential adjustments, corrections or modifications that are required for the Draft Documents to have been prepared in accordance with the requirements of this Schedule.” (a) the Expert’s determination of any matters referred under this Schedule shall be final and binding on the parties; and (b) the Draft Documents, subject to any adjustments, corrections or modifications that are necessary to give effect to the Expert’s determination, shall constitute the Completion Accounts and the Purchase Price Statement for the purpose of this agreement.”
“4. The Completion Accounts shall be prepared on the following basis, and in the order of priority shown below: (a) applying the specific accounting principles, bases, conventions, rules and estimation techniques set out in paragraph 5 of this Schedule (‘Specific Policies’); (b) to the extent not provided for by the Specific Policies, applying the same accounting standards, principles, policies and practices (with consistent classifications, judgements, valuation and estimation techniques) that were used in the preparation of the Accounts; and (c) to the extent not provided for by the Specific Policies or the matters referred to in paragraph 4(b) above, in accordance with FRS 102, together with all other generally accepted accounting principles, policies and practices applied in the UK and the applicable accounting requirements of the CA 2006, in each case as in force for the accounting period ending on the Accounts Date.” (a) applying the specific accounting principles, bases, conventions, rules and estimation techniques set out in paragraph 5 of this Schedule (‘Specific Policies’); (b) to the extent not provided for by the Specific Policies, applying the same accounting standards, principles, policies and practices (with consistent classifications, judgements, valuation and estimation techniques) that were used in the preparation of the Accounts; and (c) to the extent not provided for by the Specific Policies or the matters referred to in paragraph 4(b) above, in accordance with FRS 102, together with all other generally accepted accounting principles, policies and practices applied in the UK and the applicable accounting requirements of the CA 2006, in each case as in force for the accounting period ending on the Accounts Date.”
“14. This agreement (together with the other Transaction Documents) constitutes the entire agreement between the parties and supersedes and extinguishes all previous discussions, correspondence, negotiations, drafts, agreements, promises, assurances, warranties, representations and understandings between them, whether written or oral, relating to their subject matter.”
“19.1 If a party fails to make any payment due to any other party under this agreement by the due date then the defaulting party shall pay interest on the overdue sum from the due date until payment of the overdue sum, whether before or after judgment. 19.2 Interest under this clause will accrue each day at 4% a year above the Bank of England’s base rate from time to time (subject to a minimum interest rate 6%). 19.3 In relation to payments disputed in good faith, interest under this clause is payable only after the dispute is resolved, on sums found or agreed to be due, seven days after the dispute is resolved.”
“The relevant general principles are authoritatively explained by Lord Hodge in his judgment in Wood v Capita Insurance Services Ltd[2017] UKSC 24 ,[2017] AC 1173 at paras 10 to 15. So far as relevant to the present case, they may be summarised as follows: (1) The contract must be interpreted objectively by asking what a reasonable person, with all the background knowledge which would reasonably have been available to the parties when they entered into the contract, would have understood the language of the contract to mean. (2) The court must consider the contract as a whole and, depending on the nature, formality and quality of its drafting, give more or less weight to elements of the wider context in reaching its view as to its objective meaning. (3) Interpretation is a unitary exercise which involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its implications and consequences are investigated.”
“54. The Claims Provision was a provision in respect of future professional indemnity claims, in layman’s terms. It was always classified as a provision in the accounts within the definition provided by FRS102 in that it was a liability of uncertain timing or amount (contingent liability) which was recognised in the AS Subsidiary Accounts from31 March 2021 onwards in the form of a liability in the balance sheet and an expense in the profit and loss account. The AS Subsidiary, at all times, maintained cash in its bank accounts in an amount exceeding the Claims Provision, in compliance with the agreement with the FCA. At no time did AS Subsidiary need to retain a separate cash fund to meet this potential liability and I certainly never said that we did, either to the FCA or the Defendant. 55. Whilst the Claims Provision represented a potential liability for AS Subsidiary, to my mind, it also represented an investment Tim and I had made in the company. But for the need to comply with the FCA’s VREQ and capital adequacy requirements, Tim and I, as sellers, would have released the Claims Provision prior to completion and would have taken the equivalent cash out of the company by way of a pre-completion dividend. That was not possible and so the terms of the deal were deliberately negotiated in order to put Tim and I [sic] in the position we would have been had the Claims Provision been released prior to Completion. 56. As part of the SPA, we agreed to pay£25,000 towards the PII premium which the Defendant was able to put in place. The rationale for this was twofold: it would cover any future claims and, were the Claims Provision to be released, it would have a positive impact on the business’s financial position as it would increase profits (it would no longer be a provision and a liability). The release of the Claims Provision would have been of a particular benefit for the Defendant as it would need to establish that it could comply with the FCA capital adequacy requirements following Completion and its acquisition of Rowanmoor (which had substantially more non-standard assets than AS Subsidiary did). The Defendant has released the Claims Provision since Completion. I was keen that we made sure that the commercial terms agreed with the Defendant recognised this benefit. The Claims provision was always there for the protection of the SIPP members over and above the Capital Requirement. It gave the FCA comfort and the solvency of Alltrust was never in doubt. A collateral advantage was that it reduced the tax liability since it was derived from profits.”
“I had no reason to believe that they did not fully understand what I had explained to them or what was shown in the accounts/financial documents.” (Witness statement, paragraphs 99 and 100) In fact, in saying that Claims Provision was “to cover future liabilities”, Mr Nawaz-Khan was clearly presenting it as an asset, namely as a resource from which future claims could be met. This is also clear in the evidence he gave when cross-examined by reference to his witness statement: “Q. So can we take it from that sentence [in the witness statement] that you are not suggesting that you told the buyer that it was a liability? A. Well, I have suggested at various times. At times I have said -- Q. Not at various times. At this meeting? A. At this meeting I may not have. I may not have done that. But it does say that it is to cover future liabilities. So it’s a contingent liability essentially. Q. Claims provision is a contingent liability? A. Yes, because if the claims arise then that is to be used towards that, otherwise it just stays there as a provision. Q. That doesn’t tell you whether it is an asset or a liability. That’s my question. You hadn’t told them that it wasn't an asset; it was a liability? A. I do say to cover future liabilities.”
“Mr Nawaz-Khan again highlighted during the meeting that the Company had a sum of money retained for self-insurance purposes. I remember this because from the outset, I found it was unusual for the Company to be trading without an insurance policy in place. Mr Nawaz-Khan referred to this money as a cash provision held ‘elsewhere’ (i.e. not immediately in use) to cover potential professional indemnity claims. We discussed whether, in an acquisition scenario, UAP would want to add that cash provision to the purchase price (buying the Company with that cash left in) or whether the Sellers should extract it (for example, by dividend to themselves) prior to completion. I understood from these conversations that this ‘Claims Provision’ was actual cash sitting in the Company, earmarked for claims/liabilities but very much real money on the balance sheet.”
“Q. Can you remember what words you might have used? A. I can’t recall exactly what words I used, but it would be that there was a sum of money there which was for a provision – a provision for meeting claims. Q. Mr Floyd says: ‘It was made very clear to [him] that the Sellers were referring to physical cash ... retained ...’ Do you agree that that was the impression you gave at this meeting? A. I don’t know what impression I gave and what impression they took. I can't comment on that, and I can't recall exactly the words that were used.”
“[W]e have still not heard from you how to treat the funds in claims provision and deferred fee income.” (Mr Shipman replied: “I think we will be taking the full reserves.”) (My emphases in both quotations.) Again, on the morning of5 December 2022 , in readiness for completion, the terms of the Disclosure Letter were finally agreed; these included in respect of Claims Provision: “Since July 2021, Alltrust Services Limited no longer maintains professional indemnity insurance. This was undertaken with the express knowledge of the FCA. Please see email dated 19.04.2022 from FCA at 7.1 of the Disclosure Bundle. The commercial decision was taken due to the large premium of£120,000 which was being requested by the insurers against an excess of£100,000 . Since this date, Alltrust Services Limited has maintained the cash in its account to cover any such liability. It is currently holding£350,000 to cover such liability.”
“[The Purchase Price shall be payable on a cash free debt free basis. Completion Accounts shall be prepared in accordance with Schedule [x] to take account of amounts due to the Sellers on Completion, in particular: (a) Reserves; (b) Provision in relation to claims; (c) Deferred fee income.] [NOTE- clause to be drafted in detail once tax advice obtained. Also redemption of Preference shares to be considered].”
“A. [T]hey’re saying, ‘Monies of the company, are you going to buy them or –’. It is in my statement. We covered it. It is part of reasons for doing it was to help them out on a tax perspective, that by purchasing it they paid less tax than dividends. Q. We’ll come back to the reasoning for it. A. Just to finish that point: it’s about a 20% tax difference. So we were doing them – that’s a -- Q. We will come back to that.”
“Q. Again no definitions at this stage [in draft Heads of Terms]: ‘The sellers shall take advice on a tax efficient method of the payment of the above monies and consideration for the share sale.’ Now this tax advice, what do you say that tax advice was? A. It was whether the funds should be included in the sale. It was better for us that they were included as part of the amount that went to the Buyers because then the sums we received would have a different tax treatment than if we had taken it out as dividends. Q. If they are included, then you would pay capital gains tax – is that the position? A. Yes. If they were included, then yes, we would pay capital gains tax. Otherwise there would be dividend tax and income tax. So we had taken tax advice on the matter.” “Q. … I suggest to you that’s [viz. the Note in the draft] a reference to the tax advice that we discussed a moment ago about the most tax efficient method to do this from the Sellers’s perspective? A. Yes.”
“24. On12 October 2022 , a further meeting took place between the parties to address remaining issues. Prior to that meeting, there was a brief call involving Mr Nawaz-Khan, Mr Williams, Rob, and me. During that call (a sort of pre-meeting discussion), the Sellers noted that they did not mind whether we ‘bought’ the funds (i.e. left the cash reserves including the Claims Provision and Deferred Fee Income in the Company for UAP to acquire) or they took them out as a dividend, but they pointed out it would be better for them tax-wise if the cash reserves were included as part of the sale consideration (taxed as capital gains) rather than as a dividend. They also suggested it would be better for UAP to have the Company keep that cash for future acquisitions (implying it was in our interest as well to include it in the purchase price). 25. In the meeting which took place later that day on12 October 2022 (attended by Mr Nawaz-Khan, Mr Williams, the Sellers’ tax advisor Mr Tony Totham, Rob, and me), we again discussed the opportunity for UAP to acquire the Company inclusive of those cash reserves versus the Sellers extracting the cash. This issue was still unresolved and remained a key point of negotiation. The Sellers kept emphasising the cash in the business and questioning us on how we wanted it to be treated in the transaction. We were unsure about including it in the purchase price but decided to do so for the reasons set out in the paragraph above (i.e. the Sellers’ insistence that there were mutual benefits to both parties). …”
“Q. … Do you agree that this discussion occurred at this meeting -- sorry -- at both the pre-meeting and the meeting? A. I have no recollection, but it probably did. I can't say for definite. Q. And he says that your tax adviser, Mr Tony Totham, was there. Do you recall him being there? A. He probably was, yes. Q. Was it Mr Totham’s function to give you personal tax advice on this issue? A. On the transaction, yes.”
“Deferred Fee Income – This has to be considered as an asset of the Company against future costs and therefore should not be included in the purchase price. Claims Provision – Again, this is an accumulated amount against future liabilities and should remain with the company as its asset.” (The logic appears to be that these are assets already accounted for in the Cash reserves and so should not be subject of an additional charge.) Mr Nawaz-Khan responded to this proposal in an email to Mr Floyd and Mr Shipman on24 October 2022 : “The reasoning put forward is spurious as all the money belongs to the business which, in turn, belongs to the shareholders. It is not difficult for us to take credit for it all. We just thought that it would be good for your development / spending plans to have these sums available.”
“Q. Now when you say, ‘... all the money’ – emphasising the word ‘money’ – ‘belongs to the business ...’, I suggest that conveys to Mr Floyd and Mr Shipman that these concepts are referring to money? A. Yes. That’s what I suggest here.”
“No they look light as we are expecting the following cash in accounts - plus Estimated Cash 1,265,330 - plus Estimated Claims Provision 350,000 - plus Estimated Deferred Fee Income 154,853”
“So they should add up to the first number? Was an estimate to be rectified aft[er] completion but they are well out, best to discuss with Hamid?”
“No it should all add up to a lot more James [Floyd] is checking with Hamid here at the moment.” - plus Estimated Cash 1,265,330 - plus Estimated Claims Provision 350,000 - plus Estimated Deferred Fee Income 154,853”
“Hamid is checking with his accountant now.”
“Let’s see what comes back from James as we suspect they are missing an account or yes there [scil. their] figures for cash are way out and they need to return it to UAP Ltd as we need this for Rowanmoor.”
“We are ready to complete and you have all the signed documents from UAP now, however there is an issue we need resolving and that is the SPA and completion statement stated that the physical cash in the bank accounts was£1,265,330 however having received the bank account statements this afternoon (14.45) it states that there is a total of£1,091,411.62 . This means we have overpaid£173,918.38 which is of a material significance and therefore we can only agree to complete now on the basis that the sum of£173,918.38 is returned to UAP Limited after completion and it is not to be offset against any future consideration to be paid etc as this is a material amount and affects the agreed warranties on the tax matter as well. If you are in agreement to hold and ultimately return this sum then we can complete now if not we require the necessary documents to reflect this.”
“I am very confident that the figures are correct as I explained to James. Tomorrow I am going to ask our accountant to prepare reconciliations to demonstrate this. In the meantime, my non-accounting self explains this as below: Bank Balances 1,091,414 Add debtors total 227,603 Add prepayments 24,103 Investment 15,000 My loan account 211,052 Deferred Fee Income 154,854 TOTAL 1,724,026 Take away 504,854 sum of Claims provision and deferred income Balance 1,219,172 The slight discrepancy is only due to the bank balances being taken at todays [sic] date and the other figures being at the end of October. I do hope that this makes sense and we can proceed. Many thanks.”
“I am not referring to what you have stated, I am talking about the actual physical cash in the SPA stated at£1,265,330 but its only£1,091,411.62 so we have overpaid for physical cash, it has nothing to do with deferred income claims provision etc.”
“That is how it has been stated in our accounts as debtors are counted as cash. If we just took the bank balance then we would have to allow for debtors. If you are still not happy then we can organise an accountant to accountant call tomorrow and clarify the issue. In any event, there will be the completion accounts which will resolve this. Until such time I can ask Theresa not to pay us the disagreed amount until such time as the matter is clarified either way.”
“On the attached completion statement we had to pay£350,000 for the insurance provision, but we understood this to be retained cash in an account somewhere when we looked at the completion statement (Highlighted on the statement attached) hence we paid this in addition to the cash in the bank accounts and % of turnover as agreed. It has come to light that this was just taken off the profit and loss of the business and therefore we do not know what we paid for this and it needs to be refunded to UAP Ltd as the agreed sale price had nothing to do with the companies [sic] profit and loss. See the below confirmation from the companies [sic] accountant this is what they did. How do we proceed with this claim?”
“As per our discussion could you please speak with your accounts about how we can deploy the claims provision as usable capital for the purpose of expansion of Alltrust? The claims provision was always defined as: Claims provision: means the amount held by the Company in relation to the potential professional indemnity claims in respect of services provided by the Company and/or its Subsidiaries. As it was purchased as an asset rather than a long term liability, nor profit or retained earnings your accountant should be able to assist us in putting this back into the company for future expenditure.”
“Q. I suggest to you that the only commercial explanation for that decision is their belief that they were getting an asset in return for their money? A. I can't comment on that, what they believed. Q. I am suggesting that you knew that that’s what they believed. A. Again I go back to the point being we included that. We agreed it. I presume they did their due diligence. They completed it, signed it, so I still don’t know what you’re trying to get out of me here. Q. I am suggesting to you that it is absurd for them to have purchased, to have paid money for, liabilities and the reason they made that decision, if your construction of the contract is correct, is because you had led them to believe that they were buying assets? A. Again I say this is their belief and instead due diligence should have brought it out, and if they didn’t believe this was correct they should have said ‘No, we are not buying it at this price.”
“2.2 I determine that the deferred income liability recognised in the draft Completion Accounts qualifies as being Deferred Fee Income ‘held’ by the Company for the purposes of calculating the Purchase Price, on the basis that ‘held’ is a commonly used accounting term with reference to amounts recognised on a balance sheet, and the SPA does not explicitly state the amount is to be held as cash. 2.3 I therefore determine that a positive amount of£158,622 should be included when calculating the Purchase Price. To add a negative amount in respect of Deferred Fee Income would be inconsistent with the wider basis of calculation of the Purchase Price. For example, the definition of the Purchase Price specifically states ‘less the amount of Third Party Debt” (i.e. it is explicitly stated that balance should be deducted rather than added on).”
“2.9 As stated above in respect of Deferred Fee Income, ‘held’ is a commonly used term in accounting to refer to balances recognised on the balance sheet. 2.10 Again, as with Deferred Fee Income Balance, the SPA states that the amount held for the Claims Provision should be added when calculating the Purchase Price. 2.11 As such, I determine that the Claim Provision of£350k shown under Provisions for Liabilities in the Completion Accounts, meets the definition of Claims Provision as per Schedule 8 of the SPA, and should be added when calculating the Purchase Price.”
“RI and GM agree that there is not a technical definition of ‘held’ in accounting but that ‘held’ is a commonly used accounting term with reference to amounts recognised in a balance sheet.”
“5.1 I have searched the entire text of FRS 102, March 2018 Edition. There are 127 uses of the word ‘held’. However, nowhere is it a defined term. 5.2 It is often used in the context of someone (or a business) being in possession of something, albeit not generally in the literal sense of holding something tangible in one’s hand. 5.3 On several occasions it refers to physical items or financial instruments as being ‘held’ at a given value. For example, being held at ‘fair value’. In this context, I interpret ‘held’ as being held on the balance sheet as some such items are intangible and so could not be physically held. 5.4 I have been a Chartered Accountant for over 30 years. In that time, the concept of amounts or balances being ‘held’ on the balance sheet has been a common and consistent phraseology that I, my colleagues and other members of my profession have used. Prior to this case, I do not recall it ever giving rise to any confusion or dispute as it is part of generally utilised lexicography within accounting and financial reporting.”
“4.2.4 I therefore conclude that there is no technical definition of ‘held’, but in the context of the definitions summarised above, ‘held’ seems to refer to assets and/or liabilities on a balance sheet. 4.3.1 In my opinion hold (or held) is a commonly used term when referring to assets or liabilities reported on the balance sheet of an entity”
“At all material times the AS Subsidiary maintained cash in its bank accounts in a sum exceeding value of the Claims Provision. The AS Subsidiary was not required to retain a separate cash fund to meet the liability represented by the Claims Provision, and the Claimants never represented that it did so, to the FCA or to the Defendant.”
“30. The narrowness of the permitted defences of ‘manifest or mathematical error or fraud’ is relevant to the implications of the interpretation that the landlord’s certification is conclusive subject only to those defences. ‘Mathematical error’ and ‘fraud’ are self-explanatory terms but the meaning of ‘manifest error’ is less clear. Whilst its precise meaning may depend on the particular contract and context in which it is used, there are a number of authorities which have considered the meaning of these words in conclusive evidence clauses. 31. An often cited and applied explanation of the meaning of ‘manifest error’ is that given by Lewison J in IIG Capital LLC v VanDer Merwe[2007] EWHC 2631 (Ch) , [2008] 1 All ER (Comm) 435 at para 52: ‘A “manifest error” is one that is obvious or easily demonstrable without extensive investigation’. This formulation was approved by the Court of Appeal in the same case[2008] EWCA Civ 542 ,[2008] 2 Lloyd’s Rep 187 (per Waller LJ at paras 33-35) and more recently in Amey Birmingham Highwavs Ltd v Birmingham City Council[2018] EWCA Civ 264 ,[2018] BLR 225 (per Jackson LJ at paras 83-87). 32. Guidance as to what is meant by being ‘obvious or easily demonstrable’ is provided by the Court of Appeal’s decision in in Veba Oil Supply & Trading GmbH v Petrotrade Inc[2001] EWCA Civ 1832 ,[2002] 1 Lloyd’s Rep 295 in which it was stated that manifest errors were ‘oversights and blunders so obvious and obviously capable of affecting the determination as to admit of no difference of opinion’ (per Simon Brown LJ at para 33, his emphasis). This has been applied in a number of recent first instance decisions - see, for example, Septo Trading Inc v Tintrade Ltd[2020] EWHC 1795 (Comm) ;[2021] 1 Lloyd’s Rep 258 (Teare J), Flowgroup plc(In Liquidation) v Co-operative Energy Ltd[2021] EWHC 344 (Comm) ; [2021] Bus LR 755 (Deputy High Court judge Adrian Beltrami QC), Euler Hermes SA (NV) v Mackays Stores Group Ltd[2022] EWHC 1918 Comm (Deputy High Court judge Philip Marshall QC). 33. What is meant by being demonstrable ‘without extensive investigation’ may depend on the context. Unless the contract makes it clear that only the certificate can be considered, extrinsic evidence will be admissible - see Amey Birmingham at para 87. Although it may not be necessary to be able to demonstrate the error immediately, in most cases this will need to be done readily – i.e. by an investigation limited in both time and extent. In so far as the decision of the Court of Appeal in North Shore Ventures Ltd v Anstead Holdings Inc[2011] EWCA Civ 230 ,[2012] Ch 31 suggests otherwise, I agree with Flaux J’s observation in ABM Amro Commercial Finance plc v McGinn[2014] EWHC 1674 (Comm) ;[2014] 2 Lloyd’s Rep 33 , at paras 51 to 52 that it ‘has to be viewed with some circumspection’ and that on any view it cannot depend on ‘a full blown trial’. 34. It is therefore clear that the permitted defences of ‘manifest or mathematical error or fraud’ are indeed narrow. An arguable error will not suffice, however well founded the allegation of error may ultimately prove to be.”
“2.4 On the basis that the 67% Policy used in the preparation of the Completion Accounts is consistent with that applied in the preparation of the Accounts (and therefore the application of FRS 102 is not relevant due to the hierarchical basis set out at paragraph 4 of Schedule 8), I determine that Combined Turnover should be£1,125,567 , based on the underlying sales information provided.”
“2.2 The Completion Statement will be drawn up in accordance with the bases that appear and in the order shown below: (a) the specific accounting policies set out in part C (Specific Accounting Policies) of this Schedule; (b) to the extent not covered by para 2.2(a), on a basis consistent with and using the same accounting principles, policies, practices, evaluation rules and procedures, categorisations, methods and bases adopted by [Target] in the preparation of the Accounts including in relation to the exercise of accounting discretion and judgement; and (c) to the extent not covered by paras 2.2(a) and/or 2.2(b), in accordance with UK GAAP.”
“Para 2.2 sets out a hierarchy of bases upon which the Completion Statement is to be drawn. They are on their terms mutually exclusive and, in short form, engage (a) the specific accounting policies in Part C; and if not (b) a basis consistent with the Accounts, as defined; and if not (c) in accordance with UK GAAP.”
“‘Consistent Basis’ means a basis consistent with and using the same accounting principles, policies, practices, evaluation rules and procedures, categorisations, methods and bases adopted by [Target] in the preparation of the Management Accounts including in relation to the exercise of accounting discretion and judgement (save for the calculation of the ‘Bad Debt’ line item, which for the purposes of the Completion Statement shall be calculated at a rate of 3% on debtor balances, consistent with historical preparation of the Management Accounts and with the Accounts) …”
“The definition of ‘Consistent Basis’, in turn, requires consistency with the principles, policies and so forth in the Management Accounts, as defined. It was common ground that, to the extent that para 2.2(a) of Part A and therefore para 1.2 of Part C were engaged, what was referred to as the ‘Consistent Basis test’ needed to be satisfied.”
“38. The principal issue of interpretation considered by the Expert was whether, when applying the Consistent Basis test, this imported all, or indeed any, of the concepts and principles within UK GAAP. The conclusion which she reached, at para 2.15 of the Report, is that it depended on whether such concepts and principles had been applied when exercising discretion and judgements in the preparation of the Management Accounts. If they had, then this would then carry forward as a component of the Consistent Basis test. 39. Seller contended that this interpretation was a manifest error in three respects. First, it was submitted that, on a proper interpretation of para 2.2, any involvement of UK GAAP was excluded unless and until para 2.2(c) was reached (which it never was). I reject this submission, which I consider to be plainly wrong. The hierarchy in para 2.2 was indeed set in three stages with a final and residual reference to UK GAAP if neither of the first two stages applied. But that says nothing about the content of the earlier two stages. If the Management Accounts were produced by reference to UK GAAP concepts then this would necessarily flow into any application of the Consistent Basis test. In other words, the inclusion of UK GAAP at para 2.2(c) does not operate silently to exclude the potential for UK GAAP at para 2.2(a), or indeed 2.2(b), if such concepts would otherwise be applicable by reference to the accounting documents referred to.” (a) the specific accounting policies set out in part C (Specific Accounting Policies) of this Schedule; (b) to the extent not covered by para 2.2(a), on a basis consistent with and using the same accounting principles, policies, practices, evaluation rules and procedures, categorisations, methods and bases adopted by [Target] in the preparation of the Accounts including in relation to the exercise of accounting discretion and judgement; and (c) to the extent not covered by paras 2.2(a) and/or 2.2(b), in accordance with UK GAAP.”
“For this doctrine … to apply I think it must be shown: first, that one party A erroneously believed that the document sought to be rectified contained a particular term or provision, or possibly did not contain a particular term or provision which, mistakenly, it did contain; secondly, that the other party B was aware of the omission or the inclusion and that it was due to a mistake on the part of A; thirdly, that B has omitted to draw the mistake to the notice of A. And I think there must be a fourth element involved, namely, that the mistake must be one calculated to benefit B. If these requirements are satisfied, the court may regard it as inequitable to allow B to resist rectification to give effect to A's intention on the ground that the mistake was not, at the time of execution of the document, a mutual mistake.”
“Warranties: the warranties given by the Sellers pursuant to clause 6 [the reference should be to clause 5] and set out in Clause 6.2 [the reference should be to clause 5.2] and Schedule 5.”
“5.1 The Sellers acknowledge that the Buyer is entering into this agreement on the basis of, the Warranties. … 5.3 The Sellers warrant to the Buyer that except as Disclosed, each Warranty is true, accurate and not misleading as at the date of this agreement.”
“No, I don't think that's the case, because I think there are cases where we were talking years to actually claim a debt, but we knew that the money was available and we knew that the assets existed and we were merely waiting for the correct time to release the funds.”
“I can’t answer that, I’m sorry. I don’t know.”
“Deferred income is an accounting mechanism that enables income to be recognised in the same accounting period as that in which the costs associated with generating that income are incurred. This is called the matching principle.”
“Despite the above, the Prospective Claimants discussed the change in accounting treatment with your client during the meeting on25 May 2022 (6 months prior to completion).”
“Deferred Fee Income had previously been completed on a straight-line basis throughout the year however, CASS Auditors, Watts Gregory, during an audit felt uncomfortable with this approach as they felt that the deferred income should reflect the position when the work was done during a ‘scheme year’. Alltrust undertook an exercise internally and determined that, generally, a higher percentage of the work was undertaken at the beginning of any ‘scheme year’, with the rest of the deferred income spread throughout the remaining months on a linear basis. This approach was undertaken by Alltrust following the first couple of years which meant that any benefit to the business would have been generated during the first year by creating a tax deferral. However, after the initial benefit (tax deferral), had Alltrust ceased deferring income in the final year before the sale, it would have inflated income. The tax liability increased/decreased with the variation in Deferred Fee Income.”
“58. This decision was made to reflect the position that, as a SIPP provider, turnover was created by year-long contracts. Prior to May 2020, a basic internal review was conducted by me, with the assistance of other employees into the way in which invoices were raised and how we treated that income. This review identified that the majority of the work in respect of those contracts was completed at the beginning of the contract. The amount of work completed at the beginning of the contract was, on average, 67%. By changing the accounting treatment in this way, we made sure that income was properly and fully represented the way in which it was generated by AS Subsidiary. 59. The change in accounting treatment was not intended to artificially accelerate the recognition of income, as alleged by the Defendant. It accurately represented the timeframe in which work was performed and income was generated. There was no need for AS Subsidiary to artificially generate profits as these were significant enough for the Claims Provision and to show pre-tax profits.”
“It is also denied that the accounting treatment is inconsistent with FRS 102, in particular paragraph 23.15 of Section 23. The Prospective Claimants reviewed the financial position in some detail, which resulted in a conclusion that the work was not performed on a straight line basis and an alternative method better represented the stage of completion.”
“HNK expressed concerns over this year’s profits. Unless better new business levels we may struggle in 2020/21 year. HNK ran through the Financial Report which is appended to these minutes. The issue that had affected his recent report had been corrected. HNK explained that he was intending to change the way we accounted for deferred income to improve our reserves – this had been previously agreed with the CASS auditor. SRB [Stuart Brothers, a solicitor] asked if HNK could bring the meeting up to speed with his recent discussions with the FCA. HNK explained that the following points had been covered:- • Solvency Practitioner’s Report • Cash flow projections • The litigation we were involved in • The discussions we were having with CamLee.”
“The other point you have to take into consideration is all fees and all revenue for any business contain overheads, and I would say [is] that for a business the size of Alltrust at the time about 20% of the fees would include overheads.”
“that’s part of maintaining all records, but we don’t actually every month go and look at them to say, ‘Are they ok?’”
“If it’s monthly, it would happen regularly anyway.” • As to the next item (“Liaising with your financial adviser”), Mr Nawaz-Khan said that this could happen at any point during the year and, particularly in the case of simple SIPPs, might not occur at all after the scheme was established. • As to the next item (“Provision of general technical assistance …”), Mr Nawaz-Khan's evidence was that work of this sort usually arose in relation to ad hoc matters, for which a specific charge would be made. It seems to me that, if and insofar as such a service was provided other than in relation to a specific transaction outside the scope of the annual fee, it could be required and performed at any time during the contract period. • Mr Nawaz-Khan said that the work under the next item (“Recording all contributions and submitting returns for tax reclamation …”), insofar as it related to annual fees rather than ad hoc matters, was done in accordance with the regulator’s requirements but had to be done within a certain time period—he thought, up six months but was not sure. This raises a matter relevant to further items on the list, namely the extent to which work arose from, and was controlled by, regulatory obligations. Mr Nawaz-Khan’s cross-examination contained the following exchange (transcript, day 2, pages 5-6): “Q. What I would like to suggest to you is that in the business of pension trustee and administration services the bulk of the work is regulatory compliance. Correct? A. I would not say that, because lots of the regulatory compliance work is just taken off the system. Things are recorded. Reports are prepared. So I would not say that’s the bulk of the work. Q. And insofar as it did constitute work, the reporting deadlines were driven by the requirements and demands of the regulators? A. Indeed, yes. Q. Correct? Those deadlines were nothing to do with the anniversary of the scheme? A. Correct. No, they weren’t.”
“i) The commercial purpose of such disclosure clauses is to exonerate the seller from its breach of warranty by fairly disclosing the matters giving rise to the breach. ii) The disclosure requirements of the contract in question must be construed applying the usual rules of contractual interpretation, by reference to the express words used, the relevant factual matrix and the above commercial purpose. iii) The adequacy of disclosure must be considered by careful analysis of the contents of the disclosure letter, including any references in the disclosure letter to other sources of information, against the contractual requirements. iv) A disclosure letter which purports to disclose specific matters merely by referring to other documents as a source of information will generally not be adequate to fairly disclose with sufficient detail the nature and scope of those matters. For that reason, disclosure by omission will rarely be adequate. v) However, it is open to the parties to agree the form and extent of any disclosure that will be deemed to be adequate against the warranty. That could include an agreement that disclosure may be given by reference to documents other than the disclosure letter, such as by list or in a data room. vi) Where disclosure is by reference to documents other than the disclosure letter, only matters that can be ascertained directly from such documents will be treated as disclosed.”
“I do not say that facts made known by disclosure of the means of knowledge in the course of negotiation could never constitute disclosure for such a clause as this but I have no doubt that a clause in this form is primarily designed and intended to require a party who wishes by disclosure to avoid a breach of warranty to give specific notice for the purpose of the agreement, and a protection by disclosure will not normally be achieved by merely making known the means of knowledge which may or do enable the other party to work out certain facts and conclusions.”
“… fair disclosure requires some positive statement of the true position and not just a fortuitous omission from which the buyer may be expected to infer matters of significance.”
“This letter is the Disclosure Letter referred to in the SPA, and constitutes formal disclosure to the Buyer for the purposes of the SPA of the facts and circumstances which are or may be inconsistent with the warranties … contained in Schedule 5 of the SPA ("Warranties"). Such facts and circumstances will be deemed to qualify the Warranties accordingly. Terms defined in the SPA shall have the same meaning when used in this letter. References in this letter to paragraph headings and numbers shall, unless the context otherwise requires, be to those headings and numbered paragraphs in Schedule 5 of the SPA (‘Warranty Schedule’). Such headings and numbering are for convenience only and shall not alter the construction of this letter, nor in any way limit the effect of any of the disclosures, all of which are made against the Warranties as a whole. A disclosure or qualification made by reference to any particular paragraph of the Warranty Schedule shall be deemed to be made also in respect of any other paragraph of the Warranty Schedule to which the disclosure or qualification may be applicable. … By way of general disclosure, the following matters are disclosed or deemed disclosed to the Buyer: … 8. All matters contained or referred to in the documents in the Data Room (an index of which is attached to this letter, two copies of which have been initialled by the Sellers and the Buyer for the purposes of identification 9. All matters shown in the Group Accounts and the Management Accounts. …”
“Q. [W]hat was the purpose of the adjustments? A. The purpose was to smooth the profits a bit, because if I'd left it as it was, there was too much of a spike in the profits. So it went from something like£300,000 profit for the year, close enough, and the following year went down to 30. So I made that adjustment only to smooth the figures. It doesn’t change the end result. It doesn't change the revenue of the business. It doesn't change what we accrue or anything. Q. So the effect of the smoothing out of the change is that it wouldn’t be as noticeable that there had been a change? A. Well, just that it was more – not smooth; it was more in line with sort of income and revenue and profits. To reduce the impact of it in that particular year, it was just spiking up. Q. And that would have been more easily understood by someone looking at the profit levels in the accounts. They would have wondered why you were having such a good year? A. Well, they could have done. We had previous years which were like that. Q. Is that why you smoothed it out? A. I smoothed it out just to make it look a bit better, because it would have been too much of a spike.”
“281. There is a fine but important distinction between two closely connected stages of analysis: proof of causation of loss; and quantification of damage. a) If it is to recover anything more than nominal damages for breach of contract, the claimant has the burden of proving on the balance of probabilities that the defendants’ wrongdoing caused it loss. In Marathon Asset Management LLP v Seddon[2017] EWHC 300 (Comm) , where the fundamental problem concerned the proof that any loss had been suffered, Leggatt J referred at [164] to principles that may assist a claimant who has difficulty in proving loss, in particular that difficulty of estimation will not prevent the court from awarding damages, especially if the difficulty arises from the defendant’s breach, but at [165] he noted that the principles have limits and do not, for example, ‘enable the court to conjure facts out of the air’ and remarked, ‘They may give the claimant a fair wind, but not a free ride: see Adam Kramer, The Law of Contract Damages (2014) at 470-1.’ b) If the court finds on the balance of probabilities that loss has been suffered, it must do the best it can on the evidence available; at this stage, the matter is not one of balance of probabilities: see Chitty on Contracts, 33rd edition, para 26-018; Wemyss v Karim[2016] EWCA Civ 27 at [40]-[49], per Lewison LJ; and 116 Cardamon Ltd v MacAlister[2019] EWHC 1200 (Comm) at [77]-[83], per Cockerill J. However, ‘doing the best one can’ still does not entail a free ride. The court cannot ignore the statements of case: damages cannot be awarded for a loss that has not been pleaded. Further, if a claimant pleads a loss in an exaggerated amount, he ‘cannot complain if, through opening his mouth too wide, he fails to prosecute a more modest claim and the judge does not deal with the matter as sympathetically as he might otherwise have done’: see Senate Electrical Wholesalers Ltd v Alcatel Submarine Networks Ltd (Court of Appeal,22 June 1998 , unreported) at [53].” a) If it is to recover anything more than nominal damages for breach of contract, the claimant has the burden of proving on the balance of probabilities that the defendants’ wrongdoing caused it loss. In Marathon Asset Management LLP v Seddon[2017] EWHC 300 (Comm) , where the fundamental problem concerned the proof that any loss had been suffered, Leggatt J referred at [164] to principles that may assist a claimant who has difficulty in proving loss, in particular that difficulty of estimation will not prevent the court from awarding damages, especially if the difficulty arises from the defendant’s breach, but at [165] he noted that the principles have limits and do not, for example, ‘enable the court to conjure facts out of the air’ and remarked, ‘They may give the claimant a fair wind, but not a free ride: see Adam Kramer, The Law of Contract Damages (2014) at 470-1.’ b) If the court finds on the balance of probabilities that loss has been suffered, it must do the best it can on the evidence available; at this stage, the matter is not one of balance of probabilities: see Chitty on Contracts, 33rd edition, para 26-018; Wemyss v Karim[2016] EWCA Civ 27 at [40]-[49], per Lewison LJ; and 116 Cardamon Ltd v MacAlister[2019] EWHC 1200 (Comm) at [77]-[83], per Cockerill J. However, ‘doing the best one can’ still does not entail a free ride. The court cannot ignore the statements of case: damages cannot be awarded for a loss that has not been pleaded. Further, if a claimant pleads a loss in an exaggerated amount, he ‘cannot complain if, through opening his mouth too wide, he fails to prosecute a more modest claim and the judge does not deal with the matter as sympathetically as he might otherwise have done’: see Senate Electrical Wholesalers Ltd v Alcatel Submarine Networks Ltd (Court of Appeal,22 June 1998 , unreported) at [53].”
“The Buyer claims the difference between the value of the shares as warranted and their actual value. The value of the shares as warranted is to be ascertained by reference to the Purchase Price, which was calculated by reference to a turnover multiple of 1.75. The actual value of the shares, in the light of the breaches of warranty, is to be calculated by reference to the deductions from the value as warranted set out in the table in Schedule 4.”
“A. Well, where [Mr Mesher] and I differ most is on that point, because timing is everything. Companies have collapsed because they recognised their income too soon. It’s not just to keep accountants employed, good though that is as an aim in itself, but one does not recognise income when the money comes in: the need to match income and costs has real commercial significance, and simply ignoring it and just looking at invoicing -- it would make everybody’s lives much simpler, but there is a genuine commercial reason for doing what we accountants do. … And to say, ‘Just ignore deferred income and look at things’ ignores that point.”
“Recognising that, had the deferred income been appropriately calculated, the Company would have reported a loss in the year to31 March 2021 [the loss was£64,993 , as against a reported profit of£117,804 ] and would have broadly broken even in the year to31 March 2022 [the profit was£8,124 , as against a reported profit of£99,043 ] and that the value of a loss-making business is, in RI’s experience, considerably less than one that is significantly profitable, RI considers it reasonable to make a further adjustment by reducing the turnover multiple from 1.75 to 1.0. The effect of this is results in a revised purchase price of£2,637k . In any event, in response to GM’s suggestion that the acceleration of turnover would not affect the Company’s value, RI comments as follows. The reported annual sales in the three years to31 March 2022 was£1,025k ,£1,169k and£1,060k respectively. The true figures applying a straight line approach to deferred income were£1,025k ,£986k and£970k . Not only are the true figures lower but they reflect a steady year on year reduction. The same is true of a comparison of turnover as reported and true turnover. In RI’s opinion even if the main interest for a hypothetical purchaser were to be sales income, he considers that a company with lower and consistently declining sales would be worth less than an otherwise equivalent company with higher sales that were not in decline.”
“9.20 I do not consider there to be any adverse effect on the value of the shares should it be found that these warranties are breached. This is because the change in policy only influences the timing of revenue recognition in the financial statements, it does not affect the volume of business carried out by the business or the value of the sales invoices raised to Alltrust’s clients. Value is dependent upon the maintainable future revenue, not the level of revenue recognised in a specific financial year, particularly not a historical year. 9.21 Also, any change in revenue recognition policy has the biggest influence in the year of change which, for Alltrust, occurred in the financial year ended31st March 2021 . Accordingly, the financial years ended31st March 2022 and 2023 will be only slightly affected by the change in policy as, the amount recognised year on year will be broadly consistent assuming that overall revenue is flat. It can be seen from the accounts that the turnover figure (see Appendix 4) shows very little change in the period 2018 to 2022, averaging£1.25 million .”
“GM does not consider it likely that a willing seller would accept a turnover multiplier of 1.0x even with the alleged breaches.”
“Q. So it is fair to say then that your analysis excludes the profitability of the business as a value driver. Correct? A. Broadly speaking that’s right, because what in my experience I would say … the value of this business is related to its recurring income, recurring turnover. So … for this particular business I would say that that is correct, yes. Q. So profitability is irrelevant? A. I wouldn’t say that it's entirely irrelevant, but I would say that it’s of less importance than the turnover, which is driving the valuation. Q. Does it become more important the closer you get to break-even and loss-making? A. Well, it depends on the reason why that is, but I don't think that it’s necessarily going to make a massive difference to the value, because the concept between a willing buyer and willing seller for this sort of business is that you are importing that into your own costs model. … [After being given an example:] [T]urnover multiplier applies to the turnover, not the profitability. That’s the whole point. … In your assumption, where there is a£30 million difference in profitability, then it may make a difference, but it depends on the specifics of the business and how that business is going to be integrated into the buyer. So if you have a situation where a buyer is going to continue running that business in exactly the same way, I would agree, but there I would expect that the valuation would have been predicated on an EBITDA or earnings basis, not on turnover. … [And with further reference to the example] A. Well, again, it depends on the specifics of the business. I mean, that’s quite an extreme example where there’s a£30 million difference in terms of profit as opposed to maybe£100,000 difference in profit. No, it depends on the specifics of that business. In this particular case, where the business has been valued on a turnover multiplier, do I think that as a result of the business making£100,000 profit or break-even, it would affect from a valuation perspective the multiplier to be applied? No, I don't. … Q. [Mr Isaacs] says: ‘... had the deferred income been appropriately calculated, the Company would have been [loss-making in FY21] and would have broadly broken even [in FY22].’ Do you agree with that, assuming that a straight-line approach was appropriate? A. Yes, I think on the basis -- I don’t think I have an issue with Mr Isaacs’ figures on the basis that he’s putting them forward. Q. He goes on to say that the value much [sic: I think a transcription error] a loss-making business is, in his experience, considerably less than one that is significantly profitable. Do you agree with that? A. As a general observation, yes. This goes to the point that we were discussing earlier. Q. He suggests that it is therefore reasonable to make an adjustment to the value calculation by reducing the turnover multiple from 1.75 to 1. That’s right, isn’t it? A. Well, that's what he says. I don’t consider that’s reasonable, no, because what we would be talking about here is perhaps a£100,000 difference in turnover, giving rise to a multi-million pound difference in price. Maybe the buyer would have wanted that reduction but we are dealing with a willing buyer and willing seller for market value and I don't think a seller would be particularly happy with that level of amendment. Q. Are you referring to the parties in our case or to abstract parties? A. I’m referring to a hypothetical willing buyer and seller, as required under an assessment of market value. Q. You threw out the number of£100,000 . Doesn’t it depend on the overall figure and what percentages you are dealing with? A. Yes, it does.”