GE Commercial Finance Ltd v Gee & Ors [2005] EWHC 2056 (QB)

Case No HQ02X02622[2005] EWHC 2056 (QB)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 28th September 2005
Before
MR JUSTICE TUGENDHAT
Between
GE COMMERCIAL FINANCE LIMITEDClaimant(1) DAVID GEEDefendants(2) KEVIN SMEDLEY (3) JOHN STEEL (4) KEVIN RITCHIEDefendant
Mr Nigel Tozzi QC and James Bowling (instructed by Hammonds) for ClaimantMr Steven Thompson (instructed by Max Engel & Co) for 1 st DefendantMr Smedley and Mr Ritchie appeared in person for in personHearing Hearing dates: 4th May - 13th July
Judgment
[1]City Truck Group Ltd (“CTG”) is a company that until January 2002 carried on a very substantial business operating more than 1000 trucks and associated activities. David Gee had built the business up since the late 1970s. He owned 80 per cent of the share capital of CTG, the balance being held by 3i. He was described in the accounts as the Group Executive Chairman, and in large measure he managed the business himself.[2]On 10 January 2002 Administrators were appointed on the application of the Claimant (“GE”). For the preceding period of about eleven months companies in the group had received funds for the business from GE under agreements entered into on 1st February 2001. Under these agreements GE discounted debts from debtors of the three trading companies up to a maximum of £25m. GE is a finance company. It is a subsidiary of The General Electric Company, incorporated in the USA. It was formerly called GE Capital Commercial Finance Ltd. Its offices are in Tunbridge Wells. As a result of information obtained in the two weeks preceding 10th January 2002, GE declined to make further payments under those agreements, with the result that the CTG companies were unable to pay their debts.[3]The companies in the CTG group ceased trading in March 2002, and parts of the business were sold. The Administrators anticipate a shortfall on sums advanced by GE before costs of administration of about £14 million. After allowing for the costs of the administration, GE claim that they will have suffered losses between £16 and £16.3 million in connection with their agreements with companies in the CTG group.[4]This is a claim by GE for damages for the tort of deceit or fraudulent misrepresentation and, or in the alternative, the tort of conspiracy, against Mr Gee, Mr Smedley and Mr Ritchie. A claim on the basis of a breach of trust is not pursued on the footing that GE consider that it adds nothing to the other claims. Mr Smedley is described in the accounts as Group Finance Director. He is a chartered accountant and was from 1991 the finance director and company secretary of the main companies in the CTG group. Mr Gee and Mr Smedley met at university and are nearing retirement age. Mr Ritchie is a young man who was appointed a Financial Controller to City Trucks Ltd (“CTL” or “Trucks”) in 1996 and who describes his own role as “a general factotum” to Mr Smedley (Mr Gee describes him as Mr Smedley’s assistant). He obtained no formal qualifications after leaving school. The third defendant was Mr Steel. He was a director of City Truck Group Services Ltd (“CTGSL”) with responsibility for arranging the finance on assets purchased. Following an agreement between GE and the Third Defendant, the claim formerly advanced against him has been discontinued.[5]Mr Tozzi QC represented GE. Mr Thompson has represented Mr Gee. Mr Smedley and Mr Ritchie have appeared in person at the hearing. There are other pending proceedings, both criminal and civil, relating to the events the subject of this action. The lack of representation and the existence of the other proceedings have given rise to submissions as to how these proceedings should be conducted. I shall refer to these at the end of this judgment.

THE BUSINESS OF THE CTG COMPANIES

[6]GE entered into funding agreements with three trading subsidiaries of CTG, namely City Logistics Ltd (“CLL” or “Logistics”), CTL and City Truck Rentals Ltd (“CTRL” or “Rentals”). It did not enter into any agreement with the fourth subsidiary, CTGSL. Mr Gee was Managing Director and Mr Smedley the Finance Director of all four. There were two non-executive directors of CTG, Mr Andrew and Mr King. Mr Andrew’s background is in accounting and Mr King’s in banking.[7]The business of CTL, CTRL and CLL is as follows: i) CTL provided workshop facilities, contract maintenance, parts, service, and breakdown control. It accounted for about 15% of CTG’s annual turnover. Frank Andrew was the Chairman of CTL, and in addition to Mr Gee and Smedley, Peter Banwell, Allan McKee and Nigel Bailey were directors of CTL. ii) CTRL, as its name suggests, was a truck rental business. It also accounted for about 15% of CTG’s annual turnover. In addition to Mr Gee and Mr Smedley, CTRL had one other director, Gary Lowther. iii) CLL provided distribution services and it is said that it accounted for 60% to 70% of CTG’s annual turnover. CLL was itself divided into various divisions, namely City Transport East, City Transport West, Foodchain, City Freight North, City Freight South, Warehousing, City Worldwide, City Support Services and Managed Contracts. Managed Contracts were for large clients who sub-contracted their logistics operations to CLL. Those clients included Alcan Aluminium (“Alcan”), Akcros Chemicals (“Akcros”), British Gypsum, Douwe Egbert, LDH and Resin Express. In addition to Mr Gee and Mr Smedley, CLL had 5 other directors, Richard Griffiths, Tony Noonan, Colin Rust (who was the general manager of City Transport West), Tony Ware and Phil Constable (who was the general manager of City Transport East). iv) CTGSL provided financial and administrative services to CTL, CTRL and CLL. These included the provision of IT, arranging insurance, asset financing of trucks, and asset management. In addition to Mr Steel, CTGSL had one other director, Nigel Mockford.[8]The operations of CTG were carried out at a number of locations across the UK. For present purposes the most significant were as follows: i) Newport Pagnell: CTG’s main administrative offices were at Newport Pagnell (sometimes referred to as City House). Mr Smedley and Mr Ritchie were both based there. Mr Steel was also based in Newport Pagnell as from October 2001. A number of other relevant employees worked at the Newport Pagnell office, namely: a lady who I shall refer to as AB, the Chief Group Accountant for CTG until she left in January 2001; Julie Cartwright, the Credit Control Manager for CTG; Paul Murphy, an Accounts Controller for CTGSL; Tamlyn Roberts (from June / July 2001), a credit controller for CLL; Wendy Gibb, a credit controller for CTRL; Elaine Attrill, a credit controller who dealt with cash receipts and allocations for CTL, CTRL and CLL; a credit controller who dealt mainly with CTL, but also with CLL; a credit controller for CLL; and the Purchase Ledger Manager. ii) Birch (near Manchester): The City Freight business of CLL operated out of sites based in Birch, Spennymoor and Northampton. Relevant employees based at Birch included: Kim Hogan, the financial controller of CLL; Tony Noonan, a director of CLL responsible for the City Freight business; Malcolm Grocott (until May 2001), responsible for City Worldwide; iii) Northampton:The Northampton site was the base for the City Transport East division of CLL. Mr Gee was based here, as was: Mr Gracey, the Management Accountant for CLL; Richard Griffiths; Tony Ware, the Commercial Director of CLL; Tamlyn Roberts (until about July 2001 when she moved to Newport Pagnell); and the Fuel Manager for CLL.[9]According to its audited Report and Accounts for the year ended 31 December 2000, CTG had a turnover in that year of £99m, up from £64.8m in the previous year. The extent to which these audited accounts are reliable depends in part on the allegations in this action, which include a case that there was fraud in 2000. The 2000 accounts were not signed until 21 December 2001, only days before the Administrators were appointed. The Directors’ Report states that 2000 was a highly successful year with profits over £3m. The auditors’ report is unqualified.[10]In the accounts for 2000 trade debtors were said to be just under £22m (£12.7m in 1999). The turnover is not broken down so as to show the respective contributions of CTL, CTRL and CLL, but un-audited accounts for those companies dated April 2001 suggest that their respective figures for the year ended 31 December 2000 were: Company Turnover Trade Debtors CTL £14m £2.6m CTRL £12.9m £2.8m CLL £56.5m £12m[11]The claims in this action are not claims for breach of contract, which would in any event be available only against the companies concerned. The claims are for the torts of deceit and conspiracy against individuals. It is alleged that as a result of these, GE made payments to the companies in reliance on representations made to them by or on the authority of the individual defendants, and that GE suffered loss in consequence. In order to understand the nature of the alleged deceit and losses, it is necessary to understand the contractual framework under which GE was entitled to, and did receive information and make payments to the companies.

THE CONTRACTUAL FRAMEWORK

[12]In about 1999 or 2000 CTG entered into an invoice discounting facility with Royal Bank Invoice Finance Ltd (“RBIF”). The precise terms of that facility are not relevant, but by the end of 2000 the sums advanced by RBIF were approaching £15m. Towards the end of 2000 CTG was looking for a replacement for RBIF. Mr Steel, whose role included arranging truck finance for CTGSL, raised this with a contact at GE European Equipment Finance (“EEF”), who in turn introduced GE.[13]The initial contact with GE was between Mr Van der Ree (a business development manager at GE) and Mr Steel, and negotiations took place with Mr Steel and Mr Smedley between November 2000 and January 2001, culminating in Finance Agreements dated 1 February 2001 between CTL, CTRL, CLL and GE providing for a combined total facility of £25m. It is to be noted that CTGSL was not a party to any agreement.[14]In the course of the negotiations GE requested financial information regarding the CTG companies in order to assess whether it wanted to advance facilities to them, and in order to assess the amount which it was prepared to advance. On 15 December 2000 Mr Van der Ree sent a fax to Mr Steel seeking, amongst other things, aged debtor and creditor listings, detailed balance sheets, profit and loss forecasts to the end of 2001 and to the end of 2002, and opening balance sheet positions for 2001 and 2002. Further information was asked for on 11 January 2001.[15]Information was subsequently provided by Mr Smedley in response to this request in the form of an e-mail with attached spreadsheets covering some 17 pages. One of these spreadsheets showed that CTG were using (or expecting to use) total facilities from RBIF of £15.5m in January 2001, and that the expected usage in December 2001 was £15m, after rising to a maximum of £17.5m in July 2001. Turnover was forecast to rise from about £12m in the month of December 2000 to about £18m in the month of December 2001, the increase being in the business of CLL (from £5.5m to £13m). GE studied and relied upon the information which was provided to them. The Finance Agreements were signed on behalf of CTL, CTRL and CLL by Mr Gee and Mr Smedley.[16]The purpose of the agreements is simply stated:
“… for us to provide you with financing services, including the sale by you and purchase by us of those of your Debts referred to in …” the agreement. They were set up so as to be kept confidential, that is so that the customers, and for that matter some of the employees of the companies, would not know about the existence of the agreement. The CTG companies were appointed undisclosed agents of GE to collect debts and administer debtor’s accounts (“cl.”
A17, 8.1). The agreements included the following express terms: i) On or after the commencement date (1 February 2001) CTL, CTRL and CLL each agreed to offer to GE all outstanding debts and associated rights, and GE would “only accept such offer by crediting its Notified Value to the Asset Account” (cl. 3.1). ii) CTL, CTRL and CLL agreed to transfer to GE the ownership of all Notifiable Debts created after the commencement date (cl. 3.2, 12.1.7). iii) CTL, CTRL and CLL were obliged to include all Notifiable Debts coming into existence after the commencement date on a Notification sent to GE immediately each Contract of Sale (i.e. as between CTL, CTRL and CLL on the one hand, and their customers on the other hand) had been completely performed (cl. 3.3). iv) From the moment that CTL, CTRL or CLL received any Remittance (defined as cash, cheques and any other form of payment towards discharge of a debt) they were to hold it absolutely on trust for GE (cl.11.1).[17]The provisions for the accounts kept by GE included the following:
“5.1 By the close of business on the next Working Day following receipt of each Notification, we shall credit the Notified Value of all properly Notified Debts included therein to an account kept by us known as the Asset Account. At the same time we shall debit the aggregate Notified Value of Debts to an account in our books known as the “Sales Ledger Control Account”
. However we may refuse to make such credits or reverse any previous credit if any information required to be sent with your Notification or Offer is found to be unsatisfactory or missing… 5.4 If you comply with the terms of this Agreement, you may … take payments from your Current Account even if it then goes into debit. However the debit balance must not exceed the lesser of either your Availability or the Current Account Limit. We will not make Advances in respect of unapproved Debts. Should an Outstanding Debt become an unapproved Debt, your Availability will immediately be affected… 5.6 When we receive any Remittance, which we identify as relating to you, we will debit its amount to the Asset Account and credit it to your Current Account with us. We will also credit the same amount to the Sales Ledger Control Account. The balance on the Current Account will reflect the Purchase Price of Debts and any other sums credited by us to you; less 5.6.1 payments taken by you; and 5.6.2 any other sums, including fees, Discount and charges, debited by us”. 5.6.1 payments taken by you; and 5.6.2 any other sums, including fees, Discount and charges, debited by us”.[18]Provision was made for credit notes as follows:
“14.3 If you receive or are advised of a claim to which the Debtor is entitled you must promptly raise a credit note. Unless we advise you otherwise, you must immediately deliver such credit note to the Debtor and include it on a Notification Schedule delivered to us together with a copy of the credit note. The amount of every credit note will be debited to the Asset Account and credited to the “Sales Ledger Control Account”.”
[19]On receipt of a Remittance CTL, CTRL and CLL were obliged immediately to hand over to GE the identical Remittance or pay it into a designated bank account (cl.11.2.1 ); and not to deal with, negotiate or pay it into any other account, including CTL, CTRL or CLL’s own bank account (cl.11.2.2 ).[20]GE opened the following designated accounts with Barclays Bank at 54 Lombard Street in London, into which receipts in respect of notified debts were to be paid: CTL: Account No: 90033081, CTRL: Account No: 30332585, CLL: Account No: 10130850[21]CTL, CTRL and CLL gave various undertakings to GE, including: i) after notifying GE of a debt, not to cancel or vary any contract of sale or any payment terms or settlement discounts without GE’s written consent (cl.12.1.2) ii) immediately it was sought, to give GE such information about debtors as GE might specify, and evidence of any order and completion of any contract of sale (cl.12.1.6) iii) not to notify certain debts called Non-Notifiable debts, which included any debt due by an associated company (as defined), or “due by a Debtor who also supplies goods and services to” the CTG company which was party to the agreement (cl. 12.1.7(ii) and (iii)) iv) to make sure that warranties about debts were complied with until they were discharged, and promptly to notify GE if they became aware of any breach (cl. 12.1.13).[22]In respect of each Notified Debt CTL, CTRL and CLL gave various warranties, including that: i) “all the particulars contained in the Offer or Notification are correct and complete and the Debt has not been previously Notified to us …” (cl.13.1.1 ) ii) “each Debt refers to an actual and bona fide sale and delivery of Goods to the Debtor or services completely performed for the Debtor” (cl.13.1.2 ).[23]The Current Account Limit was £25m, combined with the limits under all three agreements (cl. 5.4 and A4). The Advance Percentage was 85% (A5 i.e. GE agreed to advance 85% of the face value of any debt notified and assigned to it). The Debtor Concentration was 15% (A6) i.e. no one debtor was to make up more than 15% of the overall debt assigned by any one of CTL, CTRL or CLL. The Advance Period was 90 days from the end of month of invoice date (A7), i.e. debts that were more than 90 dates old could not be relied on (and could no longer continue to be relied on if originally notified whilst under 90 days old) for the purposes of obtaining an advance.[24]CTL, CTRL and CLL were required, amongst other things, to provide GE with various documents detailing the financial position of the business (A16 and cl. 16.1-6). These included: i) audited accounts within 6 months of each year end; ii) monthly management accounts (including both profit and loss account and balance sheet) within 21 days of each month end; iii) “an annotated open item aged debt analysis (in a form acceptable to [GE]) and a reconciliation, agreed back to the Asset Account statement, within 10 working days of each month end” (see also A17) – this is the class of documents to which greatest attention has been focussed in the course of the trial; iv) copies of purchase ledgers within 21 days of each month end.[25]It was provided that “the aged debt analysis … must be on the basis that from the date of each invoice the amounts due must be separately identified and by reference to each Debtor and must break down each Debtor’s balances as follows:(i) Total;(ii) up to 30 days old;(iii) 31-60 days old;(iv) 61-90 days old;(v) over 90 days old;(vi) any unallocated cash” (cl 17.1.1).[26]Notification of debts to GE was carried out using an internet module known as GE Link. Use of GE Link was governed by the terms of an agreement known as the Internet Module. This contained the following provisions: i) that any Data provided by CTL, CTRL or CLL which contained a Notification of Debts should be treated as containing a notice to GE from CTL, CTRL or CLL in the following terms: “We hereby guarantee that in relation to the debts referred to herein the warranties contained in the Agreement for the purchase of debts have been complied with and in particular the goods and/or services have been delivered and/or fully performed prior to the date hereof” (IN6) ii) undertakings by CTL, CTRL and CLL to GE to: “ensure that all Data provided by [CTL / CTRL / CLL] is correct, complete, duly authorized by [CTL / CTRL / CLL] and not misleading in any respect” (IN9(2)) “notify us forthwith if you learn or suspect that there has occurred any … error or fraud in or affecting the provision of any Data …” (IN9(3))[27]There was provision requiring the CTG companies to let representatives of GE to enter premises in order to inspect Contracts of Sale and evidence of their performance and “to verify, check and be provided with copies of all Accouting Records, orders, correspondence and such other documents as we require”.[28]The performance of the agreements involved a high degree of trust on the part of GE in the integrity of those making notifications, since payment was made by GE without contemporaneous proof of entitlement.[29]Mr Ritchie was the individual who usually notified debts to GE on behalf of CTL, CTRL and CLL. In his absence notifications were sometimes made by Mr Smedley.[30]The Asset Account was thus a running account of the balance of the "assets" which had been notified (and thereby assigned) to GE. The "assets" were the outstanding book debts which had been assigned. The Asset Account recorded each transaction and a running balance. The transactions which were recorded included: i) The value of debts notified to GE. These were shown as credit entries to the account. For example, on 1 February 2001, CLL notified (and assigned) to GE two batches of debts in the sums of £1,418,847.75 and £97,867.00 respectively; ii) All remittances received by GE (paid by CTL, CTRL and CLL into designated accounts). Payments were shown as debits to the Asset Account (as their receipt reduced the value of the book debts held by GE). For example, on 1 February 2001, CLL received £24,786.52 and £61,844.51 from debtors; iii) There is provision on the Asset Account statements for recording adjustments, re-assignments of debts and credit notes, but as a matter of fact, although they issued (or purported to issue) many credit notes, none of them are recorded as such on the Asset Account Statements. The Description column and summaries are completed almost without exception as “invoices” and “cash”. As a matter of fact, many of the items bearing the description “invoices” had not been invoiced at the time they were notified, although as a matter of principle there was nothing wrong with that misdescription. Debts could in principle be notified even if not yet invoiced to the customer, provided that the condition set out in para 22.ii) above was fulfilled. (In contemporaneous documents and in evidence there are many occasions when a debt is referred to as an invoice).[31]At the end of each month, a closing balance was shown. This figure recorded debts notified (and assigned to GE) which remain unpaid. For example, as at 28 February 2001, the credit balance on the CLL Asset Account was £16,059,594.77.[32]The Current Accounts recorded a running balance of the amount owing at any one time from CTL, CTRL and CLL to GE. Throughout the operation of the CTG facility the Current Accounts were in debit, reflecting the fact that CTL, CTRL and CLL were receiving payments against unpaid debts that had been notified. All receipts from debtors were credited to it; all payments drawn by CTL, CTRL and CLL under the Finance Agreements, together with fees and charges, were debited to it. It follows that the Current Account recorded the indebtedness of the respective companies to GE at any one time.[33]The Current Accounts recorded, amongst other things, the following transactions: i) The amount of each payment made by GE against any notification of debts. This was shown as a debit to the account. For example, in respect of CLL GE made payments to CLL on 1 February 2001 of £8,602,929.61 and £1,600,000 the items bearing the description “Advance”. These were in respect of debts notified for funding to GE. (The amounts advanced by GE on 1 February 2001 were so large was because this was the commencement of the facility, and CLL notified the entirety of its then outstanding ledger). ii) All charges and discounts applied to the account by GE under the terms of the invoice discounting facility. This was also shown as a debit to the account. For example, on 28 February 2001, in respect of CLL, GE applied to the CLL account discount charges of £66,767.92. The “discount” charge was roughly equivalent to bank interest; it was a percentage charge calculated daily on the funds in use by the client. iii) All cash collections received in respect of debts previously notified. These were shown as credits to the account and generally bore the description “Cash”. (These were identical to the cash entries shown as being received on the Asset Account). For example, on 2 February 2001, in respect of CLL GE received payments from debtors of £71,670.21 and £36,205.33.[34]At the month end, a closing balance was shown. This was the amount at the month end that was owing to GE. For example, as at 28 February 2001, the closing balance of the current account for CLL was £12,866,726.84.[35]Statements of account for the Asset and Current Accounts were sent to CTL, CTRL and CLL every month. The Asset Account statements were used by GE and CTL, CTRL and CLL for the purpose of month end reconciliations with aged debtor reports sent to GE by CTL, CTRL and CLL.[36]Debts were notified electronically using the GE Link system. The notification was a bulk figure only (i.e. the total sum of the assigned debts being notified). The effect of a notification of further debt was to increase the availability of funds under the facility to reflect that notification. The figures were updated automatically using a system known internally as “I Factor”. GE did not receive any supporting documents. It relied on the veracity of these notifications.[37]The cut-off period for daily payments was 10.30am. GE would usually make payment by CHAPS or BACS. GE did not generally require to be sent copies or lists of invoices. It could require such information to be given about debtors as it might specify and evidence of any order and the completion of any contact (cl 12.1.6). GE set a figure, not intended to be known to the client, called a "sounding limit", and might require further information if this was exceeded. There were detailed provisions for the furnishing of information, and for giving access to business premises for the purposes of verification and audit, and for the provision of monthly returns, including aged debt analyses, reconciliations and other information (“cl”. 16).

THE ALLEGED DECEIT

[38]As noted above, on 1 February 2001 GE made prepayments to CLL of £8,602,929.61 and £1,600,000. From then, until the appointment of the Administrators in January 2002, GE received notifications and made payments pursuant to the contractual arrangements. Aged debt reports and reconciliations were sent to GE, mostly by Mr Ritchie. There were problems and complaints from GE, and GE made a number of visits to the business premises of the companies with a view to obtaining information and carrying out their audit and verification procedures. These were substantially unsuccessful, due to the information not being available, and it will be necessary to return to this topic.[39]The utilisation of the GE facility can be summarised as follows: Period end Logistics Trucks Rentals Total Facility % Take On £10.203m £4.097m £1.709m £16.009m £25m 64% Feb 2001 £12.867m £4.725m £1.978m £19.570m £25m 78.2% March 2001 £15.705m £4.686m £1.971m £22.362m £25m 89.4% April 2001 £15.522m £4.152m £2.158m £21.832m £25m 87.3% May 2001 £16.561m £4.688m £2.437m £23.686m £25m 94.7% June 2001 £16.631m £3.934m £2.674m £23.239m £25m 93.9% July 2001 £16.854m £4.751m £2.762m £24.367m £25m 97.4% August 2001 £16.903m £5.001m £2.984m £24.888m £25m 99.5% Sept 2001 £17.012m £4.995m £3.000m £25.007m £25m 100% Oct 2001 £16.996m £4.992m £2.940m £24.928m £25m 99.7% Nov 2001 £16.968m £4.969m £2.976m £24.913m £25m 99.6% Dec 2001 £17.006m £5.001m £3.000m £25.007m £25m 100% 10 Jan 2002 £16.148m £5.522m £2.357m £24.027m £25m 96.1%[40]When the Administrators were appointed, the latest hard copy statements of account which had been sent by GE to CTL, CTRL and CLL showed the position as at 31 December 2001. These recorded debts totalling £32,769,521.60 which they had notified and therefore claimed to have assigned to GE: CTL: £7,050,907.84; CTRL: £4,426,764.68; CLL: £21,291,849.08.[41]The operation of the facility was not halted at the appointment of the Administrators. GE continued to fund the business by means of the facility through to March 2002. The fact that the business continued, and that facility continued to be operated, has given rise to points in relation to quantum. The issues relate to the whether particular notifications and payment fall to be attributed to pre or post Administration trading. GE’s records showed that as at 10 January 2002, the date when the Administrators were appointed, purported debts with a total value of £34,767,459.23 had been assigned to GE: CTL: £7,638,187.77; CTRL: £4,340,710.19; CLL: £22,788,561.27 .[42]As at 10 January 2002 the facility drawdown by the City companies stood at £24,027,364.73: CTL £5,522,215.67; CTRL £2,357,028.27; CLL 16,148,120.79.[43]On the basis of what had been notified and assigned to it, GE expected to be able to recover its outlay in full by recourse to the debtors. The difference between the facility drawdown and the purported value of the assigned debts (represented by the fact that only 85% of debts notified was paid by GE) was in total about £10m. GE expected this to provide them with more than enough headroom to allow for potential disputes on some invoices and the cost of having to appoint administrators to effect a recovery.[44]As appears from the above table, the limit of the facility had been substantially reached in the first five months to the end of June 2001. The alleged deceits are said to include, in general terms: i) The notification of entirely fictitious debts (and subsequent representations as to their existence made in the Aged Debt Reports and other documents); ii) The initial notification of the value of genuine (and properly notifiable) but as yet uninvoiced debts (referred to by some of the witnesses as work in progress), followed by the subsequent notification of the same debt once it had been invoiced, while omitting to notify or give credit against the value of previous notifications the value of sums invoiced to, or paid by, the debtor in respect of uninvoiced debt previously notified iii) Mainly after June, a so-called “carousel”. One stage of the carousel involved monies received from debtors being paid into the bank accounts of one of the CTG companies (instead of into GE’s designated accounts with Barclays). Another stage (which allegedly occurred either before or after the first stage had occurred) involved the payment by cheques drawn on CTGSL’s account with RBS into GE’s designated accounts for the credit of other companies in the group. This payment might be reversed by the notification of a (non-existent) debt from CTGSL. This gave the false appearance that the turnover of the companies was higher than it was, and that sums were available to be drawn down from the Current Account when in fact they were not. The benefit to the CTG companies accrued from the fact that the Current Account could be drawn upon as soon as the cheque on RBS had been paid into the designated account, notwithstanding that it would remain uncleared for the usual number of days required to clear cheques. The money required to enable RBS to clear the cheque might come either from the payment into it of a customer’s cheque, or the payment into it of sums drawn down from GE, giving the CTG company the use of those funds for time needed to effect clearance of the RBS cheque. iv) The notification of non-notifiable debts, such as debts due to CTGSL or debts allegedly arising from the sale of assets such as trucks.[45]These are the means by which it is alleged GE were induced to pay monies under the facility which they would not otherwise have paid and which corresponded to the amounts in respect of which notifications were made.[46]Once payments had been made when they should not have been made, this would have become apparent on delivery of the aged debt reports and on the audit procedures. Accordingly, it is alleged that the defendants prepared or authorised the preparation of false aged debt reports and other documents to conceal what had occurred, and that steps were taken to obstruct GE’s auditors when they visited the premises, mainly by delaying or altogether failing to provide information that they requested, including bank statements and other records, on false pretexts. This in turn involved false entries on the Sales Ledger. Fictitious debt (it is alleged), corresponding to what had been notified to GE, was entered on the Sales Ledger in order to produce aged debt reports for GE at the end of the month, but the entries had to be reversed promptly by credit notes, so that invoices were not sent out to the customers or chased up by credit controllers. And when GE’s auditors came, so it is said, the entries had to be put back on to the Sales Ledger, and then reversed when they had gone.[47]So, it is alleged, that the following transactions in respect of 32 customer accounts were entered and reversed on the Sales ledger on the following dates. There is no dispute that these were entered. GE call them fictitious. Mr Smedley and Mr Ritchie call them provisions. Debts entered on:- Reversed by credit notes on:- Affecting aged debtors for the month of:- Total value of fictitious debts or provisions 9 May 2001 10 May 2001 April 2001 £2,914,635.80 18 June 2001 19 June 2001 May 2001 £4,575,722.03 26 June 2001 27 June 2001 - £4,575,722.04 13 July 2001 16 July 2001 June 2001 £4,046,129.65 15 August 2001 16 August 2001 July 2001 £6,247,932.98 29 August 2001 30 August 2001 - £6,677,743.20[48]The fictitious debts or provisions entered on 9 May, 18 June, 13 July and 15 August 2001 appeared on the aged debt reports sent to GE. By way of example, on 19 June 2001 there was faxed by CTG to GE a template recording that, in respect of CLL, the balance on the GE Asset Account as at 30 May 2001 was £20,434,484.79 (as that Account itself shows), and reconciliation. There are boxes provided for “invoices in transit” to be added, and “credit notes” to be deducted, but, as always, these are left blank by CTG. There is then a box for “Cash in transit” to be deducted, and under that head there is a list of figures said to be BACS transfers or other bankings dated 23 May to 31 May. These total £2,402,513.13. The difference is stated to be the month end balance of £18,031,971.66. This is compared with the “Sales ledger Balance”, which is the same figure, showing, in the last line of the page, a “Variance” of nil. The “Sales ledger Balance” of £18,031,971.66 is supported by the Aged Debt Report. This is in the form of Excel spreadsheet covering thirteen pages with each customer account on one row in alphabetical order, the ZZ accounts appearing at the end. The total figure of £18,031,971.66 includes the figures which GE call fictitious, and Mr Smedley provisions. In respect of each month GE prepare another template to work out what was due to be paid to CLL. That sheet records that the sum of £18,031,971.84 was notified. Various retentions to be made are calculated, including sums overdue by 120 days or more and any debtor with a concentrations over 15% (there was none). There is nothing to indicate to GE that £4,575,722.03has been added to the notifications and aged debt for “provisions”, or that that the sums making up that figure are to be differentiated from any other figures on the spreadsheet.[49]The entry of false invoices on 26 June and 29 August, and their reversal on 27 June and 30 August 2001 was, it is said, not for the purposes of producing an end of the month aged debt report to send to GE, but because GE’s auditors were in attendance on those dates, and the fictitious debts needed to be put back onto the ledger.[50]There is no dispute that these entries in fact appear on the ledgers. They are recorded as having been entered for the most part by Mr Ritchie, but in some instances by Paul Murphy. Moreover, during the trial Mr Smedley and Mr Ritchie gave evidence that similar reports were generated for September and later months. The reason why the September and subsequent reports were not found on the data used by Mr Stern is that Mr Ritchie was instructed by Mr Smedley to use different means for producing the reports. Instead of entering the provisions or fictitious debts (whichever they were) on the Sales Ledgers, what Mr Ritchie did was to run the backup data on the server at Bletchley and enter the figures on a parallel or duplicate set of accounts. That had the advantage that the figures did not appear on the Sales Ledgers on Access and the printing of the reports did not interrupt the use of the Access system by the other staff using that system. The Ledgers were prepared on Access Accounts software. This is software designed for keeping business accounts, which was used by CTG companies (along with other software) in 2001 to 2002.[51]It will be necessary to return to these figures below. But in order to understand how these figures were recorded, and the explanations given for them, it is necessary to consider briefly some of the arrangements between the companies and their customers.[52]CLL had an arrangement for some of its customers which they referred to as “self billing”. One such customer was CCSB which distributes Coca-Cola products. The truck would deliver a load and the driver would receive a document referred to as a Proof of Delivery. The driver might have other journeys to make and so would not always return promptly to his depot. The Proof of Delivery might therefore not be returned to CLL’s offices for some time. However, the customer, having a record of the delivery, would be in a position to raise an invoice in respect of what it acknowledged that it owed. In these cases, rather than CLL issuing a sales invoice to the customer, the customer would provide its own invoice to the company of the payment to be made for services rendered. The notification from the self billing customer was sometimes known as an “STI”, which is an abbreviation for “standard trade invoice”.[53]The trading divisions of CLL used a transport management software system known as TDP. This enabled them to record work in progress. When the work had been invoiced, it was imported overnight into the Access system. Access is a software application on which the CTG companies’ accounts were kept. The self-bill invoices were manually posted on to Access, until July 2001 by the staff at Birch, and from then on by the staff at Newport Pagnall.[54]Each customer had a separate account on the Sales Ledger, but the self billing customers had two accounts each, the first recording the invoices raised and the second being called “ZZ accounts”. CLL created the ZZ accounts in order to provide what is sometimes referred to as an accrual for debts due from the self billing accounts, where the STI had not yet been received from the customer. The accounts were called “ZZ” because those two letters were prefixed to the name or customer identification by which the account was known. The relevant division of CLL would calculate the accrued income for these accounts and record it in an Un-invoiced Work Report, on the software package used within that division.[55]CLL would then make a record on the sales ledger in the ZZ account to reflect the un-invoiced debt. This record would then be (and could properly be) notified to GE as a debt under the terms of the invoice discounting agreement in order to obtain funding.[56]The records made in this way on the ZZ accounts are sometimes referred to as “dummy” invoices. They were, of course, not invoices at all, but have been variously referred to as accruals, or provisions, or estimates entered pending the arrival of the true invoice or STI from the self-billing customer. In this sense the word “dummy” has no sinister connotation. However, there are many other references to dummy invoices in the evidence, and in respect of some of these it is alleged that they connote entries which are fictitious and deceitful. This may be either because they refer to entries which were wrongly retained on the ZZ accounts after the STI had arrived and been entered on the Sales Ledger, or because no goods or services had ever been rendered in respect of them in the first place.[57]When the STI came in from the customer, it would be posted to the customer’s sales ledger account. CLL should at this stage have raised a corresponding credit note (sometimes referred to as a “dummy”) equal to the value of the STI to reverse the “dummy” invoice and clear the balance on the ZZ account to zero in respect of that transaction. If this did not happen, then there would be two entries on CLL’s books corresponding to the same service to the customer, and, when the customer paid, only one of these would be removed from the sum of debts. Debts on the companies’ Sales Ledgers would thus appear to be larger than in fact they were.[58]When credit notes were not entered on the ZZ accounts to reflect invoices posted to the conventional accounts, there were obvious consequences for the management of CLL, and for GE, as already mentioned. There were also, from time to time, consequences involving the customer concerned. The customer might be informed that it owed money which in fact it did not owe. Another consequence of failing to enter on a ZZ account a credit corresponding to the invoice received from the customer (which had been posted to the conventional account) might be that the customer would appear to have exceeded its credit limit. This would have the effect of preventing the operations side of the business from transacting new business with that customer (as happened on some occasions). Once the STI came in, there might also have to be adjustments to reflect errors omissions or misunderstandings in the entries on the ZZ accounts or, no doubt, the STI.[59]There is another group of customers whose accounts are referred to as “managed accounts”. These were customers for whom CLL managed the logistics requirements under contracts which provided for a fixed monthly payment to CLL, subject to adjustment at intervals such as at the end of the month or quarter. Two of these customers were Akcros Chemicals (a subsidiary of Akzo Nobel) and Alcan Aluminium UK Ltd. The sales ledger in respect of these customers would normally be expected to contain only one or two entries a month, and the amounts tended to be regular. In the case of managed contracts it was Mr Gracey who would raise invoices. Mr Gracey was able to view information on Access, but he did not have the ability to make entries or to edit them. He would raise the invoices using Microsoft Word software, sending the information to others for them to input the information on to Access: until July 2001 to Mrs Hogan’s team at Birch, and thereafter to Julie Cartwright’s team at Newport Pagnell.[60]A further feature of the business to be noted is that, at least until mid 2001, it was CTGSL which acquired title to the trucks and trailers used by group companies, in so far as title was acquired at all by a CTG company, as distinct from a finance company. The use of trucks and trailers by CLL was subject to inter-group arrangements between CTGSL and CLL. Given the very large fleet, in excess of 1000 trucks, CTGSL were able to obtain favourable terms from suppliers, some of which involved rebates and buy back provisions. One of these suppliers was Renault and another was Schmitz Cargobull, who supplied trailers. Funding for the provision by suppliers such as Renault to CTGSL was provided under financing agreements with many different finance companies. One of these was EEF, referred to above, the company associated with GE, through which GE was introduced to CTG. Most of the trucks and trailers were acquired under hire purchase contracts.[61]It is GE’s case that the deceits had in fact commenced before 2001, and had also been perpetrated on RBIF. This would mean that the figures provided to GE for the purpose of inducing them to enter into the agreements with the CTG companies were false, and that the initial payment made at the beginning of February 2001 was greater than it should have been.[62]If this allegation is correct, and if one or more of the defendants was a dishonest party to the giving of that false information, GE’s claim might be based not just on the payments made pursuant to the agreements with the CTG companies, but on the fact that they were induced to enter into these agreements at all. However, GE have not advanced their case in every way in which it might have been advanced, and they have not advanced it in this way.[63]It is alleged that examples can be found on the Akcros and Alcan ledgers which show debts entered and then reversed in a manner similar to the entries in 2001 and which show overstatement of debts from time to time of the order of £1m to £2m.[64]As noted above, it is alleged that mainly from July 2001 onwards (when the credit limit in the GE facility was close to being exhausted) there were a series of inter company transactions carried out to conceal that the drawings on the facility had been deceitfully overstated. It is alleged that the funds drawn down from GE in respect of recently notified debts were credited to CTGSL, and CTGSL issued cheques which were credited as payments of the older debts (real or fictitious) which were recorded as being as yet unpaid.[65]It is alleged that the following payments were made by CTGSL into the Barclays account of GE held for CLL by means of cheques where the payee is identified as a group company for a value of over £50,000 between May and December 2001. The cheques on CTGSL were signed by Mr Ritchie or Mr Smedley. Month £ May 2001 352,500 June 2001 2,374,650 July 2001 6,906,353 August 2001 3,928,233 September 2001 9,393,091 October 2001 7,325,793 November 2001 8,723,473 December 2001 9,613,803 Total 48,617,896[66]A further £29,227,798.36 was paid into CTL’s accounts from CTGSL in the same way in the months April to December 2001, and a further £2,447,597.41 into CTRL’s account in the period February to December 2001. The total of such payments is thus about £82m in the period when the facility with GE was in operation. During the same period the total received from GE was some £177m. For convenience sake all of this was paid by GE to CTRL, and distributed from CTRL. CTRL paid £113m to CTGSL.[67]Since debts between associated companies were not notifiable under the agreements with GE, it is alleged there was no good reason why CTGSL should have paid any cheques into the GE designated account. There could be a few exceptions to this. One exception might be that a customer had erroneously paid a cheque or BACS payment to CTGSL instead of to GE, and the error needed to be corrected.[68]Most entries on the Sales Ledgers were designated as invoices. On some occasions the debit entries in the sales ledgers were not designated as invoices but as ADRs (an expression used for a debit adjustment). Credit entries would be shown sometimes as payments, but sometimes as credit adjustments. Persons looking at the accounts might understand a debit designated as an invoice to refer to a transaction with or service rendered to the customer. The ADRs would not normally be understood as anything other than accountancy adjustment. In many instances the entries were recorded without any corresponding entry for VAT. GE submit that (subject to some exceptions) this is an indication that they did not correspond to any transaction with or service rendered to a customer. The exceptional cases where it might be proper for entries not to show VAT are where they represent payments between companies in the same group with the same VAT number. CTGSL and CLL did have the same VAT number.

EVENTS IN 2001 INVOLVING GE

[69]The main events in 2001 were as follows. After the facility was put in place in February 2001 the first audit, or attempted audit, by GE was on 19 April 2001. Mr Lusk and Mr Dallison attended Newport Pagnell to carry it out. GE found that AB had left and Mr Ritchie was unavailable. A full audit was postponed until 9 May.[70]On 30 April 2001 the facility drawdown stood at £21.832m (CLL £15.522m; CTL £4.152m; CTRL £2.158m). The balances as per GE Asset Account were CLL £19,310,394.30; CTL £5,502,745.35; CTRL £3,210,861.17. The Aged Debts according to sales ledger balances and aged debt reports sent to GE were: CLL £17,332,221.28; CTL £5,213,898.22; CTRL £2,837,728.52.[71]On 4 May 2001 a meeting took place attended by Mr Lyall and Mr Broomhead for GE, and Mr Smedley and Mr Steel for CTG, to discuss usage of the facility and management information required by GE. Mr Lyall and Mr Broomhead were told that key reason for increased usage was CTG having reduced their creditors.[72]On 9 and 10 May Mr Lusk and Mr Dallison attend Newport Pagnell to carry out an audit. There were numerous problems with carrying out the audit. GE were told by Mr Ritchie that he had been ill and unable to print off all the documents which GE needed, or to request bank statements. GE were concerned about the increased borrowing, but were unable to account for it. Mr Smedley was busy with a recent acquisition.[73]On 16 May 2001 Mr Broomhead took over from Mr Lyall as client manager for GE. On 22 May he wrote to Mr Smedley, identifying issues on which GE were focusing: higher than forecast usage of facility, cash turn / debt turn, management information and audits.[74]On 31 May 2001 there was a visit by Mr Broomhead. Mr Smedley claimed that the original projections had been asked for at the eleventh hour, and that it had been made clear to GE at the time that they should not be relied on; that monitoring by GE was much more detailed than that by RBIF; and that GE’s requirements meant that Mr Smedley had had to re-build the management accounts, which involved a re-structure of the companies. An important issue in respect of this meeting is Mr Smedley’s contention that an agreement was reached as to the debts which could be notified, to which it will be necessary to return. GE remained dissatisfied by the information with which they had been provided.[75]On 25 to 26 June there was a further audit visit by Mr Richards and Mr Sanderson to Northampton. There were delays while the GE representatives waited for reports to be produced. On 28 June 2001 Mr Sanderson of GE paid a site visit to Warrington, and concluded that it caused no concern to GE.[76]On 28 August 2001 Mr Dallison and Mr Hanlan visited CTG’s premises in Milton Keynes to carry out an audit. They were unable to carry out the debtor verifications. On 29 August 2001 Mr Dallison and Mr Hanlan visited the Newport Pagnell offices. Again they had difficulties completing their tests.[77]On 9 October 2001 Mr Dallison and Mr Hanlan attended the depot in Northampton (which was part of CLL’s operation). They met Mr Gee who showed them around. On 10th October Mr Dallison and Mr Hanlan attended Newport Pagnell to carry out audit tests. Again they were unable to complete their tests because of lack of information.[78]On 12 October Messrs Conquest and Flynn of Grant Thornton on behalf of GE met Mr Smedley for a review. This revealed nothing, although GE were sceptical as to whether Grant Thornton had done enough.[79]On 17 October 2001 Mr Smedley’s mother died and he was absent from work for a period. At about this time Mr Steel took over responsibility for credit control at CTG. That function had been performed at Birch by Mrs Hogan and her team until July, and at Newport Pagnell under Julie Cartwright since the transfer from Birch.[80]On 30 October GE discovered that Lloyds UDT had registered a charge against CTRL. GE claimed that this was a breach of the facility agreement which gave them a right to appoint administrative receivers, and to impose a charge. On 22 November 2001 Mr Broomhead wrote to Mr Smedley giving notice of a breach of cl. 19.3 of the finance agreement with CTRL (that is, the granting of a floating charge to Lloyds UDT), and indicating an intention to charge a debit fee of £194,627.91. There was an exchange of correspondence.[81]On 20 December 2001 there was an important meeting at Tunbridge Wells attended by Mr Kelsey, Mr Shaw and Mr Broomhead from GE, and Mr Steel and Mr King from CTG. Mr Smedley did not attend. Although the CTG representatives went to discuss the proposed fee, the importance of the meeting lies in the impression conveyed to them of what Mr King minuted as the “profound disquiet” at what he learned. GE made clear how unhappy they were with Mr Smedley’s failure to provide timely information. They were still awaiting confirmation as to why borrowing under their facility was at the high level that it was. Mr King’s note includes the following: “On the journey home I spoke to Kevin Smedley from the car and told him what had happened at the meeting. He strongly maintained that the only forecast figure that the borrowing is exceeding is a very rough budget drawn up by the GE people themselves. He also feels that there is a dichotomy between the attitudes of the sales people who sold him the facility earlier in the year and the attitude of the people in the lending control function. From the former there was encouragement to borrow and use the facility but from the latter a much more cautious attitude is being seen. He did however seem curiously disinterested in the whole affair – almost as if he has given up and I find this of concern”.[82]Mr King considered the position of sufficient seriousness to call a board meeting the next day, 21st December 2001, at which Mr Smedley was not present. His Minute of the meeting includes the following:
“The meeting with GE left John Steel and I very concerned for the following reasons: • We were told that the level of drawings under the facility was some £10m [more] than the cash flow provided by Kevin Smedley had forecast. • Accounting Information has not been provided as promised. • There is little scope left under the facility. • GE are clearly hugely disenchanted with the Group and I think that there is a very real possibility that they may withdraw the facility. • I was particularly concerned and have been for some weeks about the state of mind of the finance director. I am also concerned about what John Steel tells me about his attitude to asset financing. • I was angry that I had to learn from GE that there were problems when we were being assured all along by the finance director that things were running smoothly. John & I outlined the points arising from the meeting and I outlined my concerns about the Finance Director. I stressed that we both viewed the situation as very serious. I stressed that companies fail because they run out of cash not because they have stopped making profits. The City Group appears to be in danger of doing just that. I further stressed that we must co-operate fully with the forthcoming review by G[rant] T[hornton] and Frank Andrews will spend as much time as possible in the office with Kevin when the GT arrives to ensure that the review is completed as quickly as possible. There was a strong suggestion from our GE meeting that Kevin Smedley has been very uncooperative to date. Is he trying to hide something? I promised to give whatever help I could when I am back from a brief holiday over new year. I also made it clear that there has got to be a better and more timely level of information coming forward to Group Board members. Finally there was some discussion on Kevin Smedley. David Gee feels that the death of his mother a few weeks ago hit him particularly hard and this is the cause of his present state of mind. I am not so sure. He seems to me to have lost interest in what he is doing and I have a fear that the job has got all too much for him. We are I think going to have a very difficult few weeks and I am still not sure that David Gee appreciates how serious the position is. He is still too protective of Kevin.”
[83]There was no time for Mr King to pursue matters within CTG, or for GE to pursue their concerns in the manner in which, as I have no doubt, they would have done if events had not overtaken them as they did on 28 December 2001. On that day Mr Beveridge received the information that there was fake invoicing on CTG ledger, information which originated with Mrs Hogan, who reported it to Mr Noonan, who took advice on it from an accountant who passed it to GE. On 31 December GE decided to bring their audit forward to 2nd January 2002.[84]On 2 January 2002 an audit team from GE (Messrs McMillan, Lusk, Richards, Dallison, Hanlan) attended Newport Pagnell. They discovered from the bank statements the extent to which cheques credited to the designated accounts emanated from CTG companies. Their subsequent investigations gave them increasing cause for concern, and led to the appointment of the Administrators, to this claim, and to the other proceedings I have mentioned.

THE CASE FOR EACH DEFENDANT

[85]Mr Gee has throughout denied that he was involved in or knew of any deceit. As to whether or not there was a deceit at all he has throughout taken a neutral stance, neither accepting nor denying that anything improper took place. In his oral evidence he claimed he did not read, or understand the contents of, the contracts entered into with GE, which he had signed, and that he had no knowledge of the operation of those agreements. He says he left everything to do with the finances to Mr Smedley, the Finance Director, in whom he placed complete trust, and who did not inform him of what (if anything) was going on. At no time since he became aware of the problems with GE, of which he was first informed on 21 December 2001, has he conducted or caused to be conducted any investigation into the financial affairs of the companies. No expert evidence was adduced on his behalf. He did not admit any of the facts alleged by GE to constitute the deceit or conspiracy, putting them to proof of their case. In so far as former employees of his companies gave evidence that they had had conversations with him which showed that he was told, or already knew, of the matters GE rely on, he either denied that the conversations took place at all, or that they conveyed anything of significance to him. In so far as he received e-mails, mostly from Mr Gracey, to the same effect, he denied that he read them, or, where he did read them, that he understood their effect.[86]The Amended Defence of Mr Smedley is settled (and, of course verified) by himself. He denied any deceit. His Amended Defence includes the following: i) An averment that the information was entered on GE Link by Mr Ritchie and Mr Murphy, and that this information was generated by administrative staff of the various operating companies (paras 13(1), 44(3)); ii) An averment that the financial projections given to GE to support the application for the facility were (and were known by GE to be) “rough and ready ones, produced in order that the Claimant’s sales representatives could satisfy the internal requirements of the Claimant that the facility was an appropriate one…” but that “in reality, the business of City Truck Group was expanding rapidly and it was not possible for Mr Smedley or any other person to predict accurately the future rate or pattern of that expansion” and that the grant of the facility was a factor leading very considerable expansion in the group’s business (para 16(3) to (5)); iii) An averment that the group was not “structured to permit the ready generation or deployment of the level or form of reporting sought by” GE (para 16(8)); iv) An averment that the methodology deployed by Mr Stern, GE’s expert, in his reports is flawed “proceeding as it does on the basis of extrapolations and historical data” (para 19), although there is no specific admission or denial of any particular allegation in Mr Stern’s reports; v) A table setting out the figures given in para 47 above broken down to show the sums attributed to each of the customer accounts was exhibited to the Re-Amended Particulars of Claim. In response to that Mr Smedley pleaded (para 40): “The reports made of allegedly fictitious invoices were in fact reports of accruals entered in relation to invoices still to be posted to the sales ledgers” … “the majority of these provisions were for invoices that had already been declared to GE by the GE Link” … “once that month’s end process had been completed, and the actual invoices collected and processed, the provision would be cancelled by a credit entry and only the difference, if any, between the accrual and the actual receipts would be accounted for in the subsequent accounting period” … “neither the provision nor the credit notes were declared to GE… alternatively … it is denied that Smedley knew of or is liable for any such reporting”; vi) In response to the claim relating to the flow of funds within the group summarised in 65 above, the Defence (para 43) pleads only that it caused no loss to GE, followed by a non-admission; vii) As to the ZZ accounts, an averment that “the task of reconciling the conventional and ZZ accounts was the responsibility of the administrative staff of the operating companies [and] … not under the control of CTGSL” (para 50(2)); viii) As to the notification of debts in relation to money due in respect of the sale of trucks and trailers, Mr Smedley admits that title (such as it was) vested in CTGSL, but averred that both he and GE knew that “debts arising in relation to trucks would be treated as notifiable debts” (paras 64, 68). In a written opening statement he adds that sales of trucks was part of the normal trading of CTL and so such debts and associated rebates were notifiable.[87]Mr Ritchie’s Defence was dated October 2004 and amended on 11 March 2005. It is settled by counsel but, of course, verified by himself. He denies all allegations of deceit and conspiracy. His Amended Defence includes the following: i) He “at all times acted on the instructions of Mr Smedley and … will say that in so acting he acted in good and clear conscience” (para 2.4); ii) He denies that he was an accountant, and asserts that he has no qualifications other than seven O levels, three CSEs and one A level, all obtained while at school in about 1987 to 1989. He had joined CTL in 1989 as school leaver, in the position of Purchase Ledger Assistant, and remained employed until March 2002. Apart from a course which he did not complete, he received no training while employed by CTG. He was about thirty years of age at the time of the events in question. None of this is in dispute. iii) He admits that he made notifications to GE and requested payments from GE, but states that he did so on the instructions of Mr Smedley. Likewise he admits that he produced month end reconciliations from time to time, but always on the instructions of Mr Smedley; iv) He admits that he signed cheques from time to time, and paid them into bank accounts, but always on the instructions of Mr Smedley;[88]He denies that he was responsible for reconciling the ZZ accounts with the self-billing customers’ conventional accounts in the Sales Ledger.[89]At the risk of oversimplification, it can be seen that Mr Smedley and Mr Ritchie cast any blame there may be on each other, and Mr Gee’s case is that he knew nothing.[90]None of the defendants have carried out any investigation into the accounting or other records of the CTG companies with a view to advancing their own cases or undermining GE’s case.[91]During the course of the hearing Mr Smedley’s case changed substantially. In the course of his cross-examination of Mr Stern, there emerged what is now his case on the notifications and Aged Debt Reports. This is not a new case, because an explanation involving what are referred to as provisions is recorded as having been given by Mr Smedley in a note of a meeting on 4th January 2002. This case was subsequently developed by him in answer to questions from Mr Tozzi QC, and in his Closing Submissions. His Closing Submissions include the following: “121. The entries in the City Group sales ledger accounts to which Mr Stern refers in his report of 19 March 2004 represented what I refer to as ‘provisions’ in respect of sales invoices that had been raised and notified to the Claimant during the month in question but which had yet to be entered into the City Group sales ledger at the relevant month end.122. The existence of a backlog of approximately two weeks-worth of sales invoices, that were un-posted to the sales ledger on the City Group’s Access accounting system, resulted in an imbalance between the total of the balances on the individual customer accounts, on the Access system, and the balance shown on the asset account.123. In the light of these circumstances, I took the view that, if the Claimant realised that the accounting function within the Group could not keep up with the increasing volume of paperwork, resulting in a backlog of postings to the sales ledger, the Claimant may place restrictions on the invoice discounting facility or even withdraw it altogether. Which would have had an adverse affect on CITY.124. It was for this reason that I adopted the ‘provisions’ mechanism described above to ensure that the aged debtors listing provided to the Claimant on a monthly basis agreed to the asset account balance. I could, of course, simply have disclosed to the Claimant that a difference existed between the two ledgers and explained the reason for such a difference. However, I would then almost certainly have been required by the Claimant to provide support for the balancing figure on a customer-by-customer basis. In view of the number of customer accounts involved, undertaking the exercise to provide such supporting evidence would almost certainly have taken more time than would be required to post the outstanding invoices.125. In order to provide the Claimant with an aged list of sales ledger balances that reconciled to the balance on the asset account within the time limit prescribed by the Claimant, I would, shortly before the expiry of that time limit, identify the total of all the balances on the customer accounts on the Access sales ledger and compare this with the balance on the asset account at the relevant month end.126. Having calculated the difference between the Access sales ledger balance and the asset account balance I allocated this difference over a number of customer accounts on an ‘arbitrary but informed’ basis. It is these allocations that I describe as ‘provisions’.127. Since these provisions were in due course to be replaced by the actual invoices, the provisions were reversed almost immediately, once the relevant aged debtors list had been printed and sent to the Claimant. Had they not been reversed this would have resulted in the relevant invoices being posted on to the Access system twice – once as a ‘provision’ and again when the actual invoice was posted.128. In view of the number of customer accounts operated by the City Group and the volume of transactions that passed through the sales ledger, it was not possible for me to calculate accurately the value of the provision that should be allocated to each particular customer. The purpose of the provisions was to allocate the total difference between the Access ledger and the asset account balance on the most convenient and practical basis.129. In the circumstances, neither the provision nor the credit notes that cancelled them, were declared to GE and no invoices would have been sent to the customers. As these entries were only provision, no customer invoices would have been raised in connection with them and therefore no invoices would have been sent to the customers or declared to GE. This point is confirmed by Stern’s own debtor circularisation in which the Customers have stated that they did not receive any invoices in connection with these transactions.130. There appears to be no dispute between the Claimant and myself concerning the contents of the Access sales ledger and the entries to be found therein. The dispute between us arises solely in relation to how those entries should be interpreted and what the underlying purpose of such entries may have been.131. Mr Stern’s contention is that the necessity for making such entries in the Access ledger arose as a consequence of the asset account having been overstated as a result of the inclusion of fictitious invoices. I contend that the entries were required in order to correct the understatement of the Access sales ledger account caused by the backlog in the posting of invoices.132. Any assessment regarding which of the above assertions may be correct is impossible solely by reference to City Group’s accounting ledgers, since the entries within the customer accounts are identical under both possible scenarios.[92]After Mr Gracey had given evidence on 29th May 2005 Mr Smedley indicated his case on the ZZ accounts would also change, and the form in which it changed became clear on disclosure of Mrs Hindson’s first report dated 13th June 2005 (see para 95 below). On p36 of the transcript of 29th May, Mr Gracey is recorded as saying that he had flagged the Cadbury account as self-billed. The effect of this was that the CTG clerks would not issue invoices to Cadbury’s. Mr Smedley also noted some answers given by Mr Gracey on 28th May 2005, on pp88-90 of the transcript. Mr Smedley submitted that the effect of this evidence was that when (after responsibilities were transferred from Birch in July 2001) Mr Gracey received self-bill invoices in Northampton, Mr Gracey was saying that he retained the copies at his office and did not send them to Newport Pagnell. The result, Mr Smedley submitted, was that no one at Newport Pagnell could then enter the corresponding sums as credits on the ZZ accounts. He added that he, Mr Smedley had not been aware of any of this before Mr Gracey gave evidence. The result was that he accepted that the ZZ accounts had been overstated to GE by some £5m (of which £2.1m is attributed to Cadbury’s, £500,000 or more to each of Coca Cola and British Gypsum, and the rest to other customers).[93]Mr Smedley’s case on the ZZ accounts thus became that the overstatement had not been made deceitfully. In his Closing Submissions he wrote this:
“196. Had the City Group not entered into Administration in January 2002 but had continued to trade in the normal way, the accounts for the year to 31 December 2001 would have been prepared by the Group and would have been audited in April or May 2002. These accounts would have covered the period in which the overstatement of the ZZ accounts occurred. 197. In view of the materiality of the balances on the ZZ accounts it seems to me inevitable that they would have been subject to scrutiny by the auditors and the overstatement of such balances would in all likelihood have been discovered. The auditors would immediately have drawn the overstatement to my attention so that they could take whatever action they considered appropriate with regard to informing the Claimant and negotiating terms for the repayment of the excess balance on the current account.”

THE MAIN ISSUES

[94]There are a large number of issues arising in this case. They fall broadly under the following headings; i) The notifications and other statements made to draw down funds and provide GE with information pursuant to the financing agreement: was any notification or other material communication of information by each of Mr Smedley and Mr Ritchie false? If so, then in the case of such a notification or communication by Mr Ritchie, was either of Mr Smedley or Mr Gee a party to it, and if so, then was he deceitful? And in the case of such a notification or communication by Mr Smedley, was Mr Gee a party to it, and if so, then was he deceitful? ii) Did any, and if so which, of the defendants conspire together to defraud GE? iii) What if any damage has GE suffered by reason of any deceit or conspiracy to which any defendant was a party?[95]Neither Mr Gee nor Mr Ritchie availed themselves of the opportunity to disclose reports of expert witnesses. Mr Smedley did not avail himself of the opportunity within the much extended timetable for such exchanges. But in April 2005, the month before the trial, Mr Smedley instructed Mrs Hindson FCA. She produced reports dated 13 and 20 June, that is to say after day 16 of the trial and on day 21 of the trial. Mr Stern gave evidence on 16 and 17 June. In so far as these reports related to quantum, GE did not object to their being adduced in evidence, and I gave permission for them to be admitted. I heard evidence on quantum from Ms Hindson on 30 June, after all the other evidence in the case. However, in her report of 20 June Ms Hindson also expressed opinions on liability. GE did object to this being adduced in evidence, and in a ruling made on 24th June 2005, day 25, I upheld that objection.

THE TORT OF DECEIT

[96]The law can be taken from the following passage in the 18th edition of Clerk & Lindsell on Torts at paragraph 15-01: “The tort of deceit involves(1) a false representation made by the defendant, (i) who knows it to be untrue, or (ii) who has no belief in its truth, or (iii) who is reckless as to its truth. If(2) the defendant intended that the plaintiff should act in reliance on such representation and(3) the plaintiff in fact does so, the defendant will be liable in deceit for(4) the damage caused.” (Numbering added)[97]Evans LJ summarised the position in Standard Chartered Bank v Pakistan National Shipping Corporation [2000] 1 Lloyd’s Rep 218 at paras 2-3, in relation to bills of lading. Bills of lading are commonly produced to banks to obtain payments under letters of credit, and there is no reason why the law should be any different in relation to any other documents produced to banks to obtain payments. Evans LJ said this: “This requirement of honest commerce is stringently enforced by the English courts… The rule in Derry v Peek (1889) 14 App Cas 337 applies, and it is no defence to a charge of knowingly making a false statement that the [maker] believed that he was justified in doing so or that in the circumstances no harm would result: Brown Jenkinson & Co Ltd v Percy Dalton (London) Ltd …[1957] 2 QB 621”.[98]So far as Mr Gee and Mr Smedley are concerned, this statement of the law requires no further elaboration at this stage. Mr Gee’s liability is alleged to be as a joint tortfeasor. He is said to be liable on the basis that he aided, directed or joined in the acts of Mr Smedley in furtherance of a common design (see para 4-108 of Clerk & Lindsell).[99]In opening GE’s case Mr Tozzi QC had submitted that what GE sought to prove against Mr Ritchie was that he had made representations to GE (principally, the notifications of “debts” via GE link; the month end reconciliations, and the cheques he signed) with a lack of honest belief as to the truth of their contents: Derry v Peek (1889) 14 App Cas 337 per Lord Herschell at 374.[100]The case against Mr Ritchie presents some unusual features. Cargill v Bower (1878) 10 Ch D 502, Derry v Peek (1889) 14 App Cas 337, Standard Chartered Bank v Pakistan National Shipping Corporation (No.’s 2 and 4) [2002] UKHL 43; [2003] 1 AC 959 at 968, paras 20 to 22 and other cases cited to me on deceit are cases where the defendant was a company director responsible for the issue of a prospectus, or a senior manager of a company, or the Master of a ship signing a bill of lading, or someone of similar status. There was no case cited, or of which I am aware, involving a defendant employee of the status of Mr Ritchie. Since Mr Ritchie was unrepresented, I conducted research into the law which I would not otherwise have expected to do. However, this was made easy in that I had the benefit of the work of Janet Ulph in the form of the manuscript of her book Commercial Fraud to be published shortly by OUP. I am greatly indebted to her.[101]The reports of decisions in Standard Chartered contain references to the point. The House of Lords was concerned as to the personal liability of a managing director. At para 20 Lord Hoffmann refers to him as “the only human being involved in making the representation to SCB (apart from administrative assistance [which should probably read ‘assistants’] like someone to type the letter and carry the papers round to the bank)”. No such assistant was by then a defendant in the case. And if the potential liability of such assistants was canvassed in argument, that does not appear from the report.[102]Mr Tozzi QC referred to the report of the same case on the application for summary judgment against the shipping brokers ([1995] 2 Lloyd’s Rep 365). Counsel for those defendants had submitted that the law on ministerial handling of a chattel (that provides a defence to a claim in conversion) was also available as a defence for his client to the claim in deceit (p375-376). Clarke J (as he then was) rejected the submission. He said at p376 “There is no such principle in the law of deceit”. It is to be noted that he did so against a factual background where the defendant in question knew that the bill of lading that he was signing was false. And the shipping agents did not appeal: see [2000] 1 Lloyd’s Rep 218 para 9.[103]I found this point troubling. I suggested this example to Mr Tozzi QC. Suppose a young unqualified assistant to a chartered accountant who is the finance director of a large company. The assistant is asked to fax to the bank some figures given to him by the director. The assistant does so, signing the fax in his own name. Does that count as a representation to the bank by the assistant personally? In other words, does that make the assistant a representor? Mr Tozzi QC submits that the answer is Yes, and that any injustice that might otherwise result could be addressed at the next stage of the enquiry, namely as to the assistant’s state of mind. He submitted that, in any event as a matter of fact, the representor in such a case will normally believe that the figures are true.[104]This does not seem to me to be a satisfactory answer. My concern derives from the formulation of the tort as including as one of the alternative states of mind attracting liability:
“(ii) who has no belief in its truth”
. This derives from the words of Lord Herschell in Derry v Peek (1889) 14 App Ca 337 374 (cited in Clerk & Lindsell para 15-17): “to prevent a false statement being fraudulent there must ... always be an honest belief in its truth”.Suppose the assistant does not have such a belief. The assistant may regard the director as being mistaken, but be unable in practice to make any (or any further) enquiry, and be unsure that his own judgment on the matter is to be preferred to that of his superiors.[105]Lord Herschell was speaking in the context of a director who had a free choice whether to make the representation or not, and in that context the dictum is readily understandable. By a free choice, I mean not under the direction of anyone with lawful authority to give such a direction. In the context of a junior employee of a large company, who is ordered by the finance director to perform what may be an apparently routine duty, the requirement of honest belief may be less understandable. It may be open to question whether the dictum was intended to apply in such a context. And no case was cited to me in which liability has been established against a defendant on the basis of Lord Herschell’s second case (i.e. absence of belief where there is neither a finding of knowledge nor one of recklessness).[106]At a different stage of the argument my attention was also drawn to a passage in Manifest Shipping Company Limited v. Uni-Polaris Shipping Company Limited and Others [2001] UKHL 1; [2003] 1 AC 469, para 116 where Lord Scott of Foscote said:
“In summary, blind-eye knowledge requires, in my opinion, a suspicion that the relevant facts do exist and a deliberate decision to avoid confirming that they exist. But a warning should be sounded. Suspicion is a word that can be used to describe a state-of-mind that may, at one extreme, be no more than a vague feeling of unease and, at the other extreme, reflect a firm belief in the existence of the relevant facts. In my opinion, in order for there to be blind-eye knowledge, the suspicion must be firmly grounded and targeted on specific facts. The deliberate decision must be a decision to avoid obtaining confirmation of facts in whose existence the individual has good reason to believe. To allow blind-eye knowledge to be constituted by a decision not to enquire into an untargeted or speculative suspicion would be to allow negligence, albeit gross, to be the basis of a finding of privity. That, in my opinion, is not warranted by section 39(5) [of the Marine Insurance Act 1906].”
[107]While that was not said in the context of deceit, it is a helpful reminder that absence of belief in the truth of a representation (so long as it does not amount to a firm belief in its falsity) may include a state of mind which falls short of the deliberate decision to avoid obtaining confirmation of facts in whose existence the individual has good reason to believe. The example given by Lord Scott is a vague feeling of unease. There may be others, perhaps including a decision to trust the judgment of another person who appears to be better qualified or better informed.[108]In two recent cases in the Court of Appeal, the tort has been expressed in terms that do not include Lord Herschell’s second case: Society of Lloyd’s v Jaffray [2002] EWCA Civ 1101 para 49, 62 (although that paragraph also includes the full citation from Lord Herschell), 71; Twinsectra v Yardley [1999] EWCA Civ 1290; [1999] 1 Lloyd’s Rep Bank 438, 447 Potter LJ para 38. In Jaffray the point did not in the event arise because the conclusion at paras 481, 587(vi) was that:
“The names have however failed to prove that Lloyd’s did not believe the representations to be true or that they either knew that they were or became untrue or were reckless as to whether they were true or untrue”
[109]It is common ground that, as stated in Jaffray at para 66:
“the tortfeasor does not have to be dishonest in the sense in which that word is used in the criminal law. On the other hand it is no defence to a charge of knowingly making a false statement that the person who made it believed that he was justified in doing so or that no harm would come of it or that it would be for the best….”
[110]In the tort of deceit the test is wholly subjective, whereas in the criminal law there is the combined objective and subjective test in R v. Ghosh [1982] QB1053.[111]In the event, I do not have to decide whether Lord Heschell’s second case applies to an unqualified and relatively junior employee acting on the instructions of a director of the company. In his closing submissions Mr Tozzi QC made clear that his case against Mr Ritchie depended upon proof of either actual knowledge, or of recklessness, on Mr Ritchie’s part, and GE did not seek judgment against Mr Ritchie if or in so far as I might find that any representation was made by Mr Ritchie on the footing that he was a person “(ii) who has no belief in its truth” and no more.[112]Mr Ritchie’s status is relevant also to the question whether he should be found to have been reckless. As Evans-Lombe J said in Barings plc v Coopers & Lybrand [2002] EWHC 461; [2002] Lloyd’s Law Reports Professional Negligence 395, at paras 61 to 62:
“61. Nonetheless, given the difficulty described by Bowen LJ in Angus v Clifford in “look[ing] into a man’s mind”, a court has to have regard to the surrounding circumstances in trying to descry his belief when he made the representation. The inquiry is not limited to “did he believe this statement to be false when he made it?”
The court should also ask “must he have believed it to be false? 62. An aspect of this regard to surrounding circumstances is motive. I fully accept D&T’s contention that motive is irrelevant to fraud (see Derry v Peek per Lord Herschell at page 374:
“if fraud be proved, the motive of the person guilty of it is immaterial.”). Nevertheless, in trying to decide whether a person made a statement which he must have known to be false (or which satisfied the other tests set out above), it must be relevant to consider why he should have done so. A man is more likely knowingly to make a false statement if he has some reason for doing so. The question is what was the state of mind of Mr Jones at the moment he signed the representation letters. It must be shown that at that moment he must have known that he had no proper basis in knowledge, either direct or indirect through enquiry of others, for signing. Since Mr Jones did sign the letters, it is easier to conclude that he did so knowing that he should not if it is possible to demonstrate a likely motive for signing, notwithstanding a lack of such knowledge.”
[113]It was also common ground that contributory negligence is no defence to a claim in deceit: see Standard Chartered in the House of Lords cited above.[114]The law on damages in the tort of deceit will be considered below.

THE TORT OF CONSPIRACY

[115]Both counsel invited me to take the relevant law on conspiracy from Kuwait Oil Tanker Company SAK & Anor v Al Bader & Ors [2000] EWCA Civ 160; [2000] 2 All ER (Comm) 271. The conspiracy alleged here is the unlawful means type, a conspiracy to defraud. The tort is expressed as follows at para 108:
“A conspiracy to injure by unlawful means is actionable where the claimant proves that he has suffered loss or damage as a result of unlawful action taken pursuant to a combination or agreement between the defendant and another person or persons to injure him by unlawful means, whether or not it is the predominant purpose of the defendant to do so.”
[116]The paragraphs to which the parties directed my particular attention were:
“110. It is important to note that the tort of conspiracy to injure by unlawful means is different in significant respects both from the crime of conspiracy and from the law of contract. A criminal conspiracy is in essence an agreement to commit a crime and, as such, is complete when the agreement is made, whether or not it is carried out. For this reason care must be taken in considering decisions in criminal cases where (as here) the question is whether the tort of conspiracy was committed. Lord Diplock put it in this way in Lonrho v Shell (at page 188): ‘Regarded as a civil tort, however, conspiracy is a highly anomalous cause of action. The gist of the cause of action is damage to the plaintiff; so long as it remains unexecuted the agreement, which alone constitutes the crime of conspiracy, causes no damage; it is only acts done in execution of the agreement that are capable of doing that. So the tort, unlike the crime, consists not of agreement but of concerted action taken pursuant to agreement’. In that passage Lord Diplock appears to have been referring to both types of conspiracy. The essence of the unlawful means conspiracy is injury to the claimant as a result of an unlawful act or acts where two or more people have combined to cause the injury. It is not necessary that every overt act is done by every conspirator, but the act must be done pursuant to the conspiracy or combination. 111. A further feature of the tort of conspiracy, which is also found in criminal conspiracies, is that, as the judge pointed out at page 124, it is not necessary to show that there is anything in the nature of an express agreement, whether formal or informal. It is sufficient if two or more persons combine with a common intention, or, in other words, that they deliberately combine, albeit tacitly, to achieve a common end. Although civil and criminal conspiracies have important differences, we agree with the judge that the following passage from the judgment of the Court of Appeal Criminal Division delivered by O’Connor LJ in R v Siracusa (1990) 90 Cr. App. R. 340 at 349 is of assistance in this context: Secondly, the origins of all conspiracies are concealed and it is usually quite impossible to establish when or where the initial agreement was made or when or where other conspirators were recruited. The very existence of the agreement can only be inferred from overt acts. Participation in a conspiracy is infinitely variable: it can be active or passive. If the majority shareholder and director of a company consents to the company being used for drug smuggling carried out in the company's name by a fellow director and minority shareholder, he is guilty of conspiracy. Consent, that is agreement or adherence to the agreement, can be inferred if it is proved that he knew what was going on and the intention to participate in the furtherance of the criminal purpose is also established by his failure to stop the unlawful activity. Thus it is not necessary for the conspirators all to join the conspiracy at the same time, but we agree with the judge that the parties to it must be sufficiently aware of the surrounding circumstances and share the same object for it properly to be said that they were acting in concert at the time of the acts complained of. In a criminal case juries are often asked to decide whether the alleged conspirators were ‘in it together’. That may be a helpful question to ask, but we agree with Mr Brodie that it should not be used as a method of avoiding detailed consideration of the acts which are said to have been done in pursuance of the conspiracy.” ‘Regarded as a civil tort, however, conspiracy is a highly anomalous cause of action. The gist of the cause of action is damage to the plaintiff; so long as it remains unexecuted the agreement, which alone constitutes the crime of conspiracy, causes no damage; it is only acts done in execution of the agreement that are capable of doing that. So the tort, unlike the crime, consists not of agreement but of concerted action taken pursuant to agreement’. Secondly, the origins of all conspiracies are concealed and it is usually quite impossible to establish when or where the initial agreement was made or when or where other conspirators were recruited. The very existence of the agreement can only be inferred from overt acts. Participation in a conspiracy is infinitely variable: it can be active or passive. If the majority shareholder and director of a company consents to the company being used for drug smuggling carried out in the company's name by a fellow director and minority shareholder, he is guilty of conspiracy. Consent, that is agreement or adherence to the agreement, can be inferred if it is proved that he knew what was going on and the intention to participate in the furtherance of the criminal purpose is also established by his failure to stop the unlawful activity. Thus it is not necessary for the conspirators all to join the conspiracy at the same time, but we agree with the judge that the parties to it must be sufficiently aware of the surrounding circumstances and share the same object for it properly to be said that they were acting in concert at the time of the acts complained of. In a criminal case juries are often asked to decide whether the alleged conspirators were ‘in it together’. That may be a helpful question to ask, but we agree with Mr Brodie that it should not be used as a method of avoiding detailed consideration of the acts which are said to have been done in pursuance of the conspiracy.”
[117]So Mr Thompson directed my attention to the requirement that the claimant prove not just an agreement, but acts where two more people have combined to cause injury. Mr Tozzi QC directed my attention to the manner in which the element of agreement might be proved. I also note para 121, where Nourse LJ said:
“On the judge’s findings of fact the defendants’ principal purpose was no doubt to line their own pockets, but they cannot be heard to say that they did not intend to injure the claimants or that their acts were not aimed at the claimants.”
[118]Another case of deceit and conspiracy to defraud is Credit Lyonnais Bank Nederland NV v Export Credit Guarantee Department [1998] 1 Lloyd’s Rep 19. In that case it was alleged that one of the parties to the scheme were a Mr Chong and a Mr Pillai, who was a senior “underwriter” in the Bank Guarantee Division (“BGD”) of ECGD, and who, it was alleged, had been corrupted by Mr Chong. All three members of the Court were concerned at the need for careful consideration of each stage of a developing situation. At p18 Stuart Smith LJ said:
“The evidence shows beyond doubt to my mind Mr Pillai’s complicity by 1987 and perhaps as early as mid-1986. But the pattern of a corrupt employee becoming more and more deeply involved in the fraud of his corrupter is unfortunately all too familiar. I appreciate that the evidence as to his later complicity is equally consistent with earlier complicity; it is only to be expected that more evidence of this will become apparent as time goes on. But I am not persuaded that in October 1985 at the time of CBG 8 Mr Pillai was more than a tool, albeit a corrupt one, in the hands of Mr Chong. It seems to me that his action in calling for reports on Mr Chong’s companies tends to suggest lack of complicity at this stage.”

BURDEN AND STANDARD OF PROOF

[119]There was no dispute as to standard of proof, the burden of which rests on the claimant. It can be taken from Jaffray at para 64:
“As to the standard of proof, in Goose v Wilson Sandford & Co (No 2) [2001] Lloyd's Rep PN 189, Morritt LJ, giving the judgment of the court, said in paragraph 39 at p 198: “In considering whether the elements in the tort of deceit had been established the judge correctly directed himself as to the relevant standard of proof by reference to the statement of Lord Nicholls of Birkenhead in Re H (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563, 586 that: “… the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability. Fraud is usually less likely than negligence.”
See also eg Hornal v Neuberger [1957] 1 QB 247and The Ikarian Reefer [1993] 2 Lloyd's Rep 68 per Cresswell J at pp 71-2 and the cases there cited”. “… the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability. Fraud is usually less likely than negligence.”[120]It is to be noted that immediately before and after the words cited above, Lord Nicholls had referred to “an event”, that “if… the occurrence of the event was more likely than not” and to the “inherent probability of an event”.[121]In this case Mr Smedley has concentrated much of his fire on the issue of damages. I invited Mr Tozzi QC to direct me to any case which indicated whether the high standard of proof required to establish that a representation has been made deceitfully is also required to establish the damages that have been suffered by the claimant as a result. Although this was no part of Mr Thompson’s case, I invited him to assist me on this, if he felt able. He did offer his assistance, in effect to myself and Mr Smedley, for which I am indebted to him.[122]Neither Mr Tozzi QC nor Mr Thompson was able to find anything on the point. Given the rationale for the higher standard expressed by Lord Nicholls, it would appear that if the defendant’s deceitful state of mind is established to the elevated standard, none of the other constituents of the tort, in particular damage, are more unlikely than the corresponding constituents of the tort of negligence. So on principle it would not appear that it is necessary for the claimant to establish damage to the elevated standard. Of course, if the damage claimed is itself of a kind that is unlikely to occur, then the elevated standard may apply on that account (i.e. rather than on account of the fact that the action is based on the tort of deceit).

THE DOCUMENTARY EVIDENCE AND THE STERN REPORTS

[123]Where, as here, a claimant alleges that a defendant has made a representation that a debt exists with the intention and effect of inducing the claimant to advance money and take an assignment of the debt, the question of whether the representation is true or false could well be answered by looking at the representation, and then investigating the facts with the alleged debtor and by reference to contemporary documents.[124]This straightforward approach is not available in respect of any but a tiny number of the disputed debts purportedly assigned to GE. As appears from the contract, the representation that a debt existed was made by means of a notification communicated over the internet. And as noted above, there was a provision in the contracts that such notifications should include a guarantee in the terms set out in para 26.i) above. In the context that provision was probably unnecessary, in that such a guarantee would be implicit in the case of a notification made by a person who knew the contents of the agreement. In my judgment, any such person making a notification of debts pursuant to the contractual arrangements set out above must be taken to have been representing that the debts notified were debts that qualified for notification and entitled the company concerned to draw down the advances which it was the purpose of the notification to obtain.[125]The documents held by GE include their Asset accounts, which show the totals notified to them on each occasion. But there is little narrative and no breakdown of the figures. It is not possible to read directly from those documents any information about individual debts or debtors.[126]GE have disclosed one fax sent to them early on Monday 2nd July 2001 from Mr Ritchie. It relates to a sum of £1,704,961.00 which appears as a credit in the Asset Account of CLL for that day under the simple description “invoices”. It will be necessary to return to this.[127]Apart from such instances where there is direct evidence, what items were notified as debts is generally a matter to be inferred from other documents.[128]Mr Ritchie gave evidence that the documents supporting the notifications were last seen by him following the last of GE’s audit visits before December 2001. He said that they were in boxes which had gone missing by the time he tried to get the information from them for the audit at the beginning of January. Mr Smedley spoke of this on 30th June 2005, which was the day he gave what would normally be evidence in re-examination. He said that the last people he saw with the documents supporting notifications were the GE auditors and that he saw them on 2nd January 2002.[129]The main source of contemporaneous documents from the CTG companies has been retrieved electronically. Those companies had an IT system in which data was backed up in various ways in the normal course of business, including in particular upon tapes at sessions run at the end of each month. Four tapes have been recovered which were made by CTG personnel on 28 September, 31 October, 30 November and 31 December. Two further backup tapes were made by the Administrators’ team on 1 and 21 March 2002. Additional electronic documents were recovered from the hard drives of computers previously used by employees or directors of CTG companies. Each backup tape is a snapshot of the data on the CTG servers at the time the backup was made.[130]Mr Henderson of Advanced Forensics Ltd specialises in the acquisition and analysis of digital evidence. He was responsible for the analysis of the electronic information and documentation retrieved from the CTG companies.[131]Mr Henderson recovered and searched e-mails and other documents created by CTG personnel using Microsoft software. He also recovered information recorded on the Access Accounts software. In order to access this data Mr Henderson acquired from the distributors of the application a copy identical to the version used by CTG. He was then able to recreate a working copy of the Access Accounts kept by CTG. It was necessary to do this because the files in use before the 2nd January 2002 continued to be used on and after that date by staff of the companies and of the Administrators for the purpose of running the business.[132]Mr Henderson observed a marked change in the e-mail data recovered in the period from December 2001 onwards in respect of three users. He was unable to recover any e-mails after November relating to Mr Gee, Mr Smedley and Mr Mockford as the relevant e-mail container (a file with the suffix PST or EDB) was no longer present on the backup tapes created after that date. He was able to examine the copy e-mails sent to these three (that is those copied to them by using the cc or bcc box) retained by other employees who had sent or received e-mails. These showed that e-mails were sent or received by Mr Gee, Mr Smedley and Mockford during this period and it appears that the relevant PST or EDB files were deleted from the server sometime after November 2001. In the case of Mr Gee and Mr Smedley the source of the latest e-mails was the Exchange Server EDB file dated 21 November which was included in the 30 November 2001 backup, the backups of that file apparently being on a different cycle to the other backups.[133]Mr Smedley is critical of the fact that Mr Stern used data derived from the backup tapes and not from the Access data that was taken over by the Administrators. In the light of the concessions made in the course of the trial (see para 91), it is not clear to me why Mr Smedley continues to stress this point as he does. There have been many instances where it has been possible to take references in contemporaneous notes and e-mails and find the corresponding entries in Mr Stern’s data. There have been no instances where this has proved impossible. There is no evidence that anything is missing from Mr Stern’s data that ought to be there. Moreover, at no time has Mr Smedley sought to put before me information emanating from the Access data taken by the Administrators, or from any of the customers. His criticisms have been entirely theoretical.[134]Mr Mockford held a senior position with CTGSL as general manager and director of IT. He is a close friend of Mr Smedley. He did not give evidence. None of the witnesses, including Mr Gee and Mr Smedley gave evidence as to who was responsible for the deletions. Mr Gee and Mr Smedley said they knew nothing about it and were not themselves responsible.[135]Mrs Hindson asked Hammonds for copies of the documents which Mr Smedley told her were kept to support the notifications. No items alleged by GE to have been notified to them as debts which they now dispute are evidenced in the form of documents retained by any of the CTG companies. GE offers the following explanations for this. First, it is their case that no invoices were ever raised in respect of the items which GE allege to be fictitious. Second, they say that such documents as did exist in CTG offices went missing on or before 4th January 2002.[136]Mr Smedley was not satisfied with this answer. He points to the right that GE had to take soundings, as they are called. GE were entitled to ask for documents to support notifications above a figure set internally by GE. He contends that such soundings would have been taken, and that GE should therefore have the documents sent to them in response. Mr Broomhead gave evidence that they did not in fact take soundings every time a sounding limit was exceeded and that invoices and credit notes were not in fact sent to them by CTG when they did make checks. GE say that they have disclosed all relevant documents. These include some summary sheets together with a notification schedule concerning the total sum notified.[137]A significant number of items were, it is common ground, notified to GE as debts as a means by which Mr Smedley procured the repayment to CTG from GE of monies credited to the GE designated accounts in the form of cheques drawn on CTGSL’s RBS account. When I asked Mr Smedley whether documents he referred to as invoices in connection with these notifications were actually produced, and what they might have looked like, he could not answer. He said “I do not know what we actually did by way of paperwork”. He said that paperwork would be needed only for audit purposes, that he could not recall what the inter company invoices looked like, and that he has never seen any invoices from CTG companies. I conclude that at least in relation to the so called ‘invoices’ between group companies notified to obtain repayment of the value of CTGSL cheques credited to the GE designated accounts, no such documents were ever brought into existence.[138]Moreover, it is common ground that many of the items which Mr Smedley calls provisions and which GE call fictitious debts would not have been supported by invoices in the sums entered on the Sales Ledger. On Mr Smedley’s case the genuine invoice sent to the customer would have been issued in the normal way, and would not always have corresponded to the provision. His case (as explained more fully in his Closing submission cited in para 91 above, para 129ff of Mr Smedley’s Closing submissions) is that the provision was just that, and was an estimated figure, so that it cannot be matched to the genuine invoice issued in respect of a particular sale, and that, as it was a provision, the customer would not know about it as an item independent of the true debt. That is his explanation of why attempts to verify with customers whether the contested entries are genuine or fictitious all gave rise to the customers’ responding that they cannot verify the entries.[139]So far as Mr Smedley contends that GE have documents which they have not disclosed, or that CTG documents which are missing were last seen by him with GE auditors and so must have been lost or destroyed by them, I do not accept that GE have destroyed documents they have received from the CTG companies.[140]In so far as documents went missing in or before January 2002, I could not at this stage make a finding that that was as a result of anything for which Mr Gee or Mr Smedley are responsible. But I shall return to the question following the conclusions that I reach on the allegations of deceit and conspiracy and consider the issue again in the light of those findings.

MR STERN’S REPORTS

[141]Mr Stern prepared calculations which GE refer to in support of this claim, some of which have already been referred to. He did so mainly on the information derived from the Sales Ledgers in the manner described by Mr Henderson. His first report is dated 19 March 2004 and was provided to the Defendants shortly after that date. On the basis of this material, he identified in that report what appeared to him to be the means by which GE had been deceived by the defendants and he calculated the amount of the loss. It will be necessary to return to issues of quantum below.[142]Mr Stern’s second report is dated 8th February 2005. The purpose of this was to identify the source of the monies amounting to about £82m paid from the RBS accounts of CTGSL into the Designated accounts. He concluded that £55m had not been received from third party customers.[143]Mr Stern’s third report is dated 14th April 2005. The purpose of this was to consider points raised in their Re-Amended Defences by Mr Smedley and Mr Ritchie, that is mainly the contention that the sums added to and then removed from the Sales Ledgers were provisions.[144]Since no experts were instructed by Mr Gee and Mr Ritchie, and Mrs Hindson’s instructions from Mr Smedley were much later and more limited than Mr Stern’s reports, there was no formal agreement or disagreement to the bulk of Mr Stern’s reports. The points were put to Mr Smedley and Mr Ritchie in cross-examination by Mr Tozzi QC.

THE WITNESSES OF FACT

[145]Apart from the two expert witnesses, Mr Stern and Mrs Hindson, the witnesses fell into the following categories: those who were or had been employees or directors of CTG companies, those who had been employees or directors of GE, members of the Administrators’ team (Matthew Smith and Daniel Smith), and Mr Henderson who explained the provenance of the data recovered from the CTG companies. The three defendants gave evidence themselves, and Mr Gee called four witnesses who had held various positions with CTG companies, Mr King, Ms Callow, Mr Banwell and Mr Griffiths. There were thirteen GE witnesses, who dealt mainly with the making of the agreements, and the audits. GE called nine witnesses who had been employees, Mrs Hogan, Mr Noonan, Mr Gracey, Mr Steel, Mr Wilkinson, Ms Cartwright, Ms Roberts, Ms Gibb and Mr Murphy. Some of the witnesses require introduction.[146]Mrs Hogan is a Certified Accountant. She joined CLL in 1996 and was employed by that company until August 2002 when she was made redundant. She is now employed by North West Logistics Limited, for which she is the Company Secretary. That company was acquired by Mr Noonan for the purpose of taking over the warehousing and freight business which had been carried on by CLL (under the name City Freight) at Birch near Manchester in premises owned by Mr Noonan. That business had been acquired by CLL from Mr Noonan’s company Noonan Warehousing and Freight Services Ltd. Mrs Hogan had joined that company in 1987.[147]Mrs Hogan had obtained her accountancy qualifications, ACCA in 1993 and FCCA in 1996, while working for that company. After the appointment of the Administrators Mrs Hogan continued to work for CLL assisting in debt collection, and she provided reports and analyses of the accounts of CLL for the assistance of the Administrators. Some of these have been used by GE in the presentation of this claim. For this purpose she had at her disposal a copy of accounting records which had been made for CLL on the Access software. After City Truck Group went into administration, the Administrators arranged for City Logistics’ electronic accounting information to be copied onto North West Logistics’ server as the servers in Newport Pagnell were being decommissioned. This system was used throughout the administration to record payments received from debtors. Mrs Hogan continued to have access to this system at the time she prepared her witness statement dated April 2005.[148]Initially Mrs Hogan had reported to AB and to Mr Gracey, who had both been based at Newport Pagnell, and to Mr Smedley, after AB’s departure. Towards the end of 2001 she said that she felt as though she was reporting to Mr Ritchie, although he had no qualifications as an accountant.[149]In about 1998 she was given the role of Financial Controller of CLL. As such her duties over time were expanded to include the running and control of the sales and purchase ledgers, credit control, the upkeep of the cash receipts and payments books, bank reconciliations, the posting of nominal ledger journals and the preparation of the financial accounts (that is the profit and loss and balance sheets). By the end of 1998 she had a staff of three working in her team at Birch, one of whom was Debra Kermode, her sister.[150]The Sales Ledger was in part updated automatically by data downloaded from the systems used by the operating divisions, but warehouse invoices and Standard Trade Invoices from the self billing customers had to be entered manually.[151]In about February 2001 Mr Smedley suggested that CLL’s credit control be moved back to Milton Keynes, and Mrs Hogan felt that her responsibilities were gradually removed from her during that year. For this reason, and because she was not given a pay rise for several years, she considered that her services were not greatly appreciated.[152]Until the Sales Ledger function was removed from Birch in July 2001, once invoices had been raised and the details collated, Debra Kermode would fax the daily batch numbers and total sums invoiced to Mr Ritchie for inclusion in the notification by him to GE.[153]Mrs Hogan did not agree with the concept of notifying the invoices on the ZZ accounts to GE. Her reason was that the STIs and payments in respect of them came through fairly regularly from the customers. CLL received four to five BACS payments on a regular basis usually covering work that had been carried out the previous week. For example, Coca Cola would usually raise an invoice one week and pay the following week. CLL were not supposed to notify to GE the STIs sent through by the self billing customers where they had already notified what Mrs Hogan (and others) referred to as the "dummy" invoice on the ZZ account. The STI and the "dummy" invoice both represented the same job and notification of both invoices would have meant GE making 2 payments to CLL for a single job. If both were notified and payment received, then CLL should have notified GE of the "dummy" credit note that should have been raised to clear off the entry on the ZZ account. Mrs Hogan was concerned about these accounts as she did not believe that credit notes were always raised to cancel the "dummy" invoice or notified to GE if they were.[154]Mrs Hogan would go through the management accounts produced by Mr Gracey, and attempt to reconcile these with the financial accounts that she had prepared, on a monthly basis. She would prepare a spreadsheet having input details from Mr Gracey's management accounts. This would throw out the variances between the accounts. She would try to establish the cause of the variance and explain the reasons for this. As time went by she became increasingly concerned at the variances. When she referred her concerns to Mr Smedley she considered his response to be unhelpful, blaming her and Mr Gracey.[155]In May 2000, when she returned to work after a period of ill health, she wrote a memo. It is headed “How we may improve the efficiency of the accounts function within City Logistics Ltd”. In this she referred to “inventing” turnover and attributed the variances to what she then referred to as “fictitious debt” (the quotation marks are hers in each case). She notes that the Alcan account is carrying “fictitious debt” of £1.5m and the Akcros account £733,461.09. She refers to an unspecified figure “£xx” on the ZZ accounts. She does not recall whether she circulated that memo to anyone else, and there is no documentary evidence that she did. But there is no dispute as to the authenticity of the document, and it clearly evidences the nature of her concerns as early as May 2000. It was put to her by Mr Thompson that by “invent” she did not mean a debt that was not even a provision. She replied, as I accept was the truth:
“I think why I would have used the word ‘invent’ was that even by this time the provisions on the ZZ accounts were far in excess of the actual work being done on the self bill accounts, which is why I am saying we are ‘inventing’ turnover.”
[156]Mrs Hogan’s concerns were increased by the information she obtained from Mr Gracey as to his concerns, which he shared with her, and which are set out below.[157]As already noted, it was ultimately her concerns, expressed in late 2001 by her to Mr Noonan, and by him to an accountant, that gave rise to the appointment of the Administrators. Late 2001 is also the time at which Mr Gee had negotiated a proposal for the transfer of the business conducted at Birch to premises at Eccles where Akcros operated.[158]It was suggested to Mrs Hogan in cross-examination that she had learnt of the proposal, that she and Mr Noonan stood to lose from it (that is their jobs, and Ms Kermode’s job, and, in Mr Noonan’s case the benefit of the lease to CLL of the premises at Birch) and that the raising of their concerns at that stage was a device to prevent the move of the business from Birch and so to benefit themselves. Mrs Hogan and Mr Noonandenied that they had learnt of the proposal. So questions were also directed on behalf of Mr Gee to other witnesses with a view to establishing that the information as to the proposed move had leaked to, or become known at, Birch, and that the proposal did threaten the jobs of Mrs Hogan and Ms Kermode.[159]Only one witness provided any evidence that anyone at Birch had learnt of the proposed move to Eccles, namely Ms Callow. She was called by Mr Gee. She had worked for Mr Gee as Personal Assistant for much of the period of over twenty years she had worked with CTG companies. She had become responsible for Human Resources in 1996. She said that in December 2001 she knew that Mrs Hogan and her team, including her sister were to be made redundant. She said that she and Mrs Hogan had a telephone call in December 2001, before Mr Gee went up to Birch, in which she, Mrs Hogan, expressed concerns about her job, and Mrs Callow said that Mrs Hogan should speak to him when he was there. Mrs Hogan said she had no recollection of this conversation. Mrs Callow had no occasion to recall the incident before a conversation between her and Mr Gee only shortly before she made her witness statement on 29 April 2005. While I accept that Mrs Callow was doing her best to assist the court, I do not find that her evidence takes the matter very far. It would have been easy for Mrs Callow to understand that any concerns which Mrs Hogan was expressing were in a general sense about her job, when in fact they were much more serious.[160]In the event no other evidence was forthcoming to show that Mrs Hogan or Mr Noonan had become aware of an impending redundancy. But in any event, the point seems to me to be of little assistance to the defendants or to me. I have before me a substantial amount of contemporaneous documents, mainly e-mails, which show what Mrs Hogan’s concerns were throughout 2000 and 2001, and how she expressed them. It is common ground that within days of the meeting with Mr Gee in December 2001 Mrs Hogan had in fact complained to Mr Noonan about there being £5m overstated on the ZZ accounts, and it is now accepted that she was right about this. What matters is whether there were the deceits and other matters alleged, and if so whether Mr Gee knew about them. The evidence on these issues would not be materially affected even if I were to find, as in fact I do not, that Mrs Hogan knew about her impending redundancy. I would still have no hesitation in finding that that was not the issue she raised with Mr Gee.[161]Mrs Hogan gave her evidence voluntarily. It appeared to me that she foresaw that what she had done, or omitted to do, prior to the Administration might expose her to a critical cross-examination. She was in fact cross-examined on the footing that her evidence as to the suspicions she harboured about the accuracy of the CLL accounts was untrue, because, if she had held those suspicions, her professional duty would have required her to do more than she did, and to act sooner than she did. In the face of this attack, she stuck firmly to her guns, insisting that she had held the suspicions she said she held. In my judgment she was a conscientious and reliable witness, motivated to tell the truth at the time of the events in question and in court, and not motivated by any sense of personal interest or grievance.[162]Mr Gracey is a Chartered Accountant. He started work with the City Truck Group in 1995. In about 1998 or 1999 he was appointed the management accountant for CLL. He continued to work for CLL after the appointment of the Administrators until made redundant in April 2002. He was a reluctant witness, who gave a detailed statement only on 11th May 2005, after the trial had started and after service upon him of a witness summons. In 2000 and 2001 he was based in the Northampton office where his own office was very close to that of Mr Gee. His responsibilities included the preparation of monthly management accounts for each of CLL’s trading divisions. He provided these to Mr Gee and Mr Smedley. He also prepared other financial reports and attended monthly management meetings, which were held with CLL’s trading divisions, and which Mr Gee and Mr Smedley also attended. He was in daily communication with Mrs Hogan, by telephone, as well as by e-mail. Mr Gracey was able to view information on Access, but he did not have the ability to make entries or to edit them. In the case of managed contracts it was Mr Gracey who would raise invoices. He would do this using Microsoft Word software, sending the information to others for them to input the information on to Acces: until July 2001 to Mrs Hogan’s team at Birch, and thereafter to Julie Cartwright’s team at Newport Pagnell.[163]It was clear that Mr Gracey was uneasy with a number of the arrangements at CLL. The background to his unease was that the City business was always under pressure financially, that there was a constant demand for cash. In April 2001 one of CLL’s self bill customers who were also a supplier of fuel had threatened to withhold £600,000 which was due to CTG if the customer was not paid its invoice. On 9 July 2001 Mr Gracey was copied into an exchange of e-mails between Mr Smedley and Mrs Hogan concerning CLL suppliers chasing for payment.[164]Mr Gracey did not agree with the recording of self bill work on the Sales Ledger before it was invoiced. It was Mr Gracey who had asked that the accounts where these entries were made be marked ZZ to distinguish them from the normal accounts which recorded work that had been invoiced. One reason for his unease was his belief (well founded, as it turned out) that that procedure was likely to lead to double counting if entries on the ZZ accounts were not cleared down when the invoice was received from the customer and entered on to the customer’s normal account. He felt uncomfortable that entries were being made on the ZZ accounts, to be notified to the factor, when the self bill invoices were raised by the customer shortly after the work had been carried out, and when payment was usually made shortly thereafter.[165]Another reason for Mr Gracey’s unease was the discovery in May 2000, and again in October 2000, that someone had been recording entries on the Sales Ledger using his initials. On 31st May 2000 Ms Kermode queried with AB invoices totalling £674,935.47 bearing the reference CLNG. AB forwarded the query to Mr Gracey, and he replied including the words:
“Can you tell whoever is creating these invoices and credit notes to STOP USING MY REFERENCES”
. On 24 October 2000 he e-mailed AB in relation to an invoice CLNG02097 for £350,150 “STOP USING MY INVOICING SEQUENCE” .[166]On 6 September 2000 Mr Gracey had further occasion for unease when he complained to AB about two entries on the Sales Ledger. He suspected that an entry for a debt that was about to become more than 90 days old had been credited and re-entered with the result that it would appear to be a fresh debt. He was also uneasy at the issues raised by Mrs Hogan about entries on the Sales Ledger which were causing her concern, and which she set out in e-mails sent, or copied, to Mr Gracey. Mr Gracey came to believe that the accounts of CLL were not accurate.[167]On 26th June 2001 Mr Gracey became concerned at the discovery of entries on the accounts with a reference starting with the letters WH on the ledger of ABI and Cheshire Recycling, backdated to April and May 2001. He asked Ms Roberts about them and in turn she asked Mr Murphy. She reported that he did not tell her what they were about, but said they would be “off in a minute”. The reports generated from Access for these customers show that they were in fact credited off by Mr Ritchie the next day. This, as mentioned above, is one of the occasions when entries were put on the Sales Ledgers when the GE auditors were visiting. Neither Mr Gracey nor the auditors were told why the entries were being put on the ledgers and then removed. Mr Smedley said that the he did not see the need to tell people.[168]By the time that the Administrators were appointed Mr Gracey was concerned as to whether, by what he had done, or omitted to do, in relation to the accounts, he had exposed himself to criticism. Like Mrs Hogan, he was cross-examined to the effect that if his evidence given in court was correct (and it was put to him that his evidence was not correct), then he had been in breach of his professional obligations. Like Mrs Hogan, he stuck to his guns.[169]Mr Gee made a number of disobliging references to Mr Gracey, both professional and personal. But when asked why Mr Gracey might be motivated to give false evidence against him, he was unable to offer any plausible explanation. Such explanation as he attempted was based on the fact that Mr Gracey had been one of those who had worked on a scheme with Mr Gee and others to buy some of the business from the Administrators. This did not come off, and in the event, no place had been found for Mr Gracey in the new business that Mr Gee did go to. In my judgment Mr Gracey was giving what he believed to be truthful evidence. In so far as it was disputed, I shall give my findings in relation to the particular points of dispute on the basis of the evidence relating to each.[170]Julie Cartwright joined the CTG as a Credit Control Manager in November 2000, and remained employed after the appointment of the Administrators until made redundant in February 2002. She is a member of the Institute of Credit Management and had a number of years experience before joining CTG, having worked with another well known company. She worked at Newport Pagnell, the only other member of the team at that office being then Wendy Gibb. Initially she was to report to AB, but following that lady’s resignation about a month later, she reported first to Mr Smedley and then, at Mr Smedley’s request, to Mr Ritchie. By the end of 2001 the credit control team at Newport Pagnell had increased to include four new members, including Tamlyn Roberts and Elaine Attrill. Initially she dealt primarily with the CTR account, but as 2001 progressed she dealt with all three of the City companies. The Logistics functions were transferred to her from Birch in about July 2001. There was no suggestion that Ms Cartwright, Ms Gibb or Ms Roberts had any motive for not telling the truth. In my judgment they were giving evidence they believed to be true, and which I should accept unless the contemporaneous documents provided any reason for doubting what they said.[171]Stuart Wilkinson was an employee of Logistics from April 1998 to January 2002. He was employed as an Assistant, but was quickly promoted to Contracts Manager for the Akcros contract. He headed a team of nineteen people. Mr Wilkinson has over forty years` experience in the industry. There was no basis for impugning his reliability as a witness.[172]Mr Noonan’s involvement with City Trucks and the warehousing and freight businesses he ran before and since are referred to above. He became a director of CLL shortly after he sold his business to CLL in 1996. His former business continued to be a separate unit under the name City Freight, although owned by CLL. Mr Noonan was responsible for its operations at Birch and Spennymoor. He considered Mrs Hogan to be a highly skilled and competent person, whom he regarded as a friend.[173]Mr Noonan became concerned about the finances of CLL during 2001. In or around July to August 2001, he received a number of telephone calls from a contact at Akzo Nobel, the owners of Akcros. Akcros had been a long-term customer of Mr Noonan’s company since 1979, before the transfer of the business to CLL, and they were one of CLL’s managed contracts. CLL had allocated Mr Wilkinson as their contract manager to operate from Akcros's premises to co-ordinate deliveries and manage the costs of the contract. The arrangement between Akcros and CLL was such that Akcros paid the latter a fixed fee at the beginning of the month to cover work that was to be carried out that month. Any adjustments to the account were made quarterly. Mr Noonan’s contact told him that a number of freight forwarders had not been paid by CLL. He could not understand why the freight forwarders were not being paid as CLL had already received payment from Akcros. He assumed that CLL must have used the money for some other purpose. He suspected strongly and was aware from his discussions with Mrs Hogan that the City Truck Group was suffering from severe cash flow problems. Mr Noonan sought advice from an accountant in about July 2001 as to the concerns held by himself and Mrs Hogan. He was advised to say nothing unless he knew something more definite.[174]Mr Noonan was aware that towards the end of 2001, Mr Smedley had issued an instruction that there were to be no further cheque runs without his authorisation. Towards the end of November 2001, Mr Noonan contacted his former business accountant who was also Mr Noonan’s personal accountant. He reported that (on the basis of his own information and that of Mrs Hogan) he had strong suspicions that a fraud was being perpetrated and that National Insurance payments had not been made for some time. They met in the middle of December 2001. As already noted, it was through this channel that GE were subsequently contacted and informed of Mr Noonan’s suspicions.[175]Asked in cross-examination why he did not contact Mr Gee with his concerns, Mr Noonan explained that by the time he saw his accountant he had heard what Mrs Hogan described of her meeting with Mr Gee, and he no longer trusted Mr Gee. He said that he had discussed the non-payment of National Insurance with Mr Gee in about July, and the ZZ accounts. He said that he did not know of Mr Gee’s plans to move the operations from Mr Noonan’s site at Birch to the Akcros site at Eccles, nor of any planned redundancies amongst employees at Birch. He denied the suggestion that they went to see his accountant to save the jobs of people at Birch and to save the benefit of his lease of those premises to CLL. For the reasons discussed above in relation to Mrs Hogan, I find that Mr Noonan did not know of the intended redundancies and move away from Birch.[176]Mr King was a non-executive director of CTGL from 1998 until January 2002. He was called as a witness by Mr Gee. His background is in banking. He had worked for NatWest for forty years until his retirement in 1998, twenty-five of them in corporate finance, including as a director of NatWest Ventures, the venture capital subsidiary of Nat West. He had been the relationship manager for CTL for a short period after that company became a customer of NatWest in 1993 or 1994. In that capacity he had met Mr Smedley and Mr Gee at that time. His honesty and good faith were not in question. He was in a position to give evidence which I found very helpful, and to confirm the contents of his contemporaneous notes, parts of which are set out in this judgment.[177]Mr King worked about one day a month for the CTG. One of his first tasks had been to try improve the relationship of Mr Gee and Mr Smedley with Mr Gee’s fellow shareholder 3i. While he had some success, the relationship did not improve. One point of friction was the quality of financial information which Mr Smedley made available to 3i. Mr King himself was dissatisfied with the quality of financial information made available to himself as a non-executive director. He received only quarterly information, and then only at meetings, not in advance of meetings. Mr King had recorded his concerns in a note made on 3rd August 2000. In it he wrote “Regrettably Mr Gee, the Group Executive Chairman, still runs the business as if it were a small family business”.[178]Mr Smedley assured Mr King that all was well with the working of the GE facility, and Mr King was not aware of any problem until the meeting with GE on 20th December 2001 described above. Nor was he aware of the management accounts prepared by Mr Gracey. At board meetings Mr Gee told him on several occasions that the management accounts prepared by Mr Gracey showed a broadly similar picture to the quarterly accounts prepared by Mr Smedley. In fact they did not, as is discussed below.[179]Mr King did share one concern that Mr Smedley gave evidence of at the hearing. Both of them considered that the City group was expanding too quickly. THE CLL SALES LEDGERS, NOTIFICATIONS AND AGED DEBT REPORTS[180]As stated in para 48 above, it is common ground that a total of £4,575,722.03 has been added to the figures in the Sales Ledger of CLL to arrive at the total notified to GE in respect of May 2001, and recorded in the aged debt report sent to GE on 19 June 2001. One example of the make up of the £4,575,722.03 can be given by reference to the figure for Black & Decker, account number BLA014. That showed a balance of £181,028.68 on the aged debt report. That was not a true representation of the sum owed by Black & Decker to CLL recorded in the Sales Ledger as at 31st May 2001. The Sales Ledger for CLL, as it appears in a report printed out from Access by Mr Stern, shows that on 18th June Mr Murphy added four invoices, each for £22,250 plus VAT, which makes up £104,575, with a transaction designated as “INV” (for invoice) dated 31 May and references WHO50107 to WHO550110. This figure of £104,575 was deducted off the next day, 19th June, by Mr Ritchie with a transaction designated “CRN” (for credit note) and a transaction date of 30 May.[181]Although the issue has now been resolved by the admission made in Mr Smedley’s Closing submissions cited above, the way in which this change of case emerged is significant.[182]Mr Smedley did not challenge that what Mr Stern had printed out was an accurate report of the state of the CLL Sales Ledger. He said on 19th June 2005, day 20, (transcript p57) that he believed that there were four invoices not yet raised, but to be raised, for Black & Decker in respect of warehousing. He mentioned the name of the person at Black & Decker responsible, to whom, he said, he had spoken. No evidence was called from Black & Decker. When pressed on this Mr Smedley said that not all the figures making up the £4,575,722.03 were arrived at by speaking to representatives of the customer. He said that he had probably made no record of how he had arrived at the figure, and that there was no way in which his explanation could be checked by reference to a contemporaneous note or other record. It was suggested to Mr Smedley that if his explanation for the four entries on the CLL Sales Ledger for Black & Decker was correct, then the invoices actually in that amount should appear on the Sales Ledger of CLL at a later date. Mr Smedley did not dispute this as a matter of principle, nor did he identify any such invoices on the CLL Sales Ledger. None are to be found. His explanation was that they were billed through another company that acted as agent for Black & Decker. He was unable to identify the invoices.[183]Other examples of the make up of the £4,575,722.03 were put to Mr Smedley in cross-examination, of which the following is an extract from the transcript on 20th June 2005, day 21, pages 62-65: “….. Danisco 21 Cultor, Mr Smedley…. It is the 23 same values as the Black & Decker ones, coming up to 24 105,750 and Mr Ritchie crediting them out the next day. 25 Where do we see the genuine invoices for Danisco 1 Cultor on that ledger, Mr Smedley? 2 A. You probably would not on this one. This was I would say 3 my estimate or guess, informed guess, as to where the 4 revenue actually was. 5 Q. You see, I could carry on. Do you want to look at the 6 next one, page 645, British Bakels? 7 A. This is just going through the customers that were the 8 bigger customers, one assuming that the revenue 9 therefore could be apportioned between those bigger 10 customers. 11 Q. I want to test that answer in a minute. Let us just see 12 what is happening. In the middle of the page, we see 13 just one entry this time, 18th June, 118,000 plus VAT? …Mr Murphy adds 16 138,650 including VAT. Mr Ritchie credits it off the 17 next day. There are no invoices that follow that could 18 be matched to that entry, are there, Mr Smedley? 19 A. No, there had been an allocation of what was 20 outstanding. 21 Q. But which customer, Mr Smedley? 22 A. Sorry? 23 Q. Well, outstanding from whom? It is not outstanding from 24 British Bakels, is it? 25 A. As I said, I took what was still to be posted and 1 allocated it randomly but with informed opinion as to 2 what the turnover of the business was doing. 3 Q. I can see it is random, but what is informed about 4 putting it on British Bakels? 5 A. I knew we were doing business with them. 6 Q. But not on that scale. Those figures bear no 7 relationship to the business at all, do they? Let us 8 look at the next one. I am just literally going through 9 just to test your theory, Mr Smedley. Tab 4, page 650. 10 This time we see six invoices added, a total value of 11 132,000-odd and then credited off the next day. It 12 bears no relationship, does it, to the trading pattern 13 with Chep UK Limited? 14 A. Again, Chep UK, we were doing a lot of pallet work for 15 them. I thought we were doing a fair amount of business 16 with them. 17 Q. Mr Smedley, I will not carry on. We could carry on 18 looking at each one, but there is no point. 19 Mr Smedley, it is quite clear, is it not, that the 20 entries that were made on 18th June simply bear no 21 relationship in many instances to the trade that has 22 been carried out with the particular customers or to the 23 invoices which subsequently appear on the ledgers of 24 those customers? 25 A. Correct, because I was allocating turnover based on what 1 I thought particular customers were doing. 2 Q. So you made it up, Mr Smedley? 3 A. You could put it that way. 4 Q. Yes, I do. 5 A. It was a provision. 6 Q. But a provision for what? You see, if it is not 118,000 7 on British Bakels, who is it 118,000 on? 8 A. It could be several smaller amounts spread over the 9 whole customer base. It was impractical to do it on 10 every single customer. 11 Q. That does not work on British Bakels, Mr Smedley. Have 12 a look at the ledger. Invoices to that value simply do 13 not come into or on to that ledger. It cannot have 14 anything to do with them, Mr Smedley, and you cannot 15 tell us for whom that was a provision, can you? 16 A. I say it was a general provision I made, allocated 17 between a few customers rather than trying to do 18 individual ones against hundreds. 19 Q. You see, Mr Smedley, if you are making a general 20 provision, why allocate it across 32 different accounts, 21 or whatever it is, and why break it down into several 22 different invoices onto those accounts? That seems a 23 very laborious way, Mr Smedley, of making a general 24 provision, does it not? 25 A. It provided the debtor print that was necessary for GE”.[184]Mr Smedley accepted that he had not told GE that this is the way he was arriving at figures notified to them, and included in the aged debt reports, and that he did not explain it to any of the GE representatives who came to carry out audits. On the contrary, when GE came to audit on 27th June 2001, Mr Ritchie was instructed by Mr Smedley to put back on to the ledger all the entries that had been removed on 19th June, so that a print out would reconcile with what had been sent on 19th June.[185]During his cross-examination of Mr Stern, Mr Smedley had used the word “provision” and I asked each of Mr Smedley and Mr Stern to say what he meant by the word. Mr Smedley said (17th June, day 20, transcript p56):
“I cannot recall what the precise 13 definition of it is, but the way that I would look at 14 a provision, it could take several forms. It could be 15 classed as an accrual for expenses that had not been 16 included within any accounts; it could be a provision in 17 anticipation of some income or expenditure; it is 18 an accounting means by which to reflect a more accurate 19 position than the data that you have in front of you 20 actually shows. 21 In relation to the sales ledger, I was looking to 22 balance the summary print that was required by GE back 23 to their asset account, and to achieve that it was 24 necessary to include a provision for the invoicing that 25 was outstanding.”
[186]I prefer Mr Stern’s explanation of the term provision as commonly used in accountancy. He said:
“I would use the term "provision" as being an 4 entry in a nominal ledger for an item whose exact amount 5 is unknown, but the nature of the item is known and 6 relates to the accounting period in which the entry is 7 made. 8 So, to give you a very common example, my Lord, in 9 manufacturing companies they would normally make 10 a provision for what is called "bad workmanship". So, 11 in your set of accounts that you are preparing for 12 a particular period, you know that there will be some 13 additional costs associated with rectifying works done 14 in the period to which the accounts relate, but you do 15 not know how much it is going to be exactly, so you 16 would use an estimate based on your historic experience. 17 "Provision" is normally used, my Lord, in connection 18 with expenditure and providing for expenditure.”
[187]It is thus admitted that Mr Smedley made misrepresentations to GE as to the debts due from the customers of CLL whose accounts were increased to make up the total sum of £4,575,722.03 in respect of May 2001. What Mr Smedley does not admit is that the total sum is false, as opposed to his attribution to the customers identified on the Aged Debt Report.[188]The misrepresentation in respect of May was made on at least three separate occasions: first when the supposed debt was notified, second when it was included in the aged debt report sent on 19th June 2001, and third when it was included in the aged debt report prepared for the auditors on 27th June. While Mr Smedley did not in terms admit that the notifications included the same misrepresentation, I find that the notifications must have been misrepresentations. If the notifications had been accurately broken down between customers (assuming that to have been possible, i.e. that these were what Mr Smedley calls provisions), there would have been no need of the broad brush allocation of the provisions that was made in the Aged Debt Reports. The notifications must have totalled the same sum (that is the only way they could have got on to the Asset Account). Either they were supported by documents containing the same attribution as in the Aged Debt Report, or they were not supported by any such attribution.[189]The misrepresentations in the notifications and those in subsequent documents (Aged Debt Reports and Management Accounts), had different effects. The notification was, according to the contracts, an offer which GE might accept by crediting its notified value to the Asset Account. So a notification was a representation which had the immediate (and intended) effect of inducing GE to pay to the order of the company for which the notification was made a sum equal to 85% of the value notified. The representations in the subsequent documents did not have that immediate effect. If the representations were not made in the Aged Debt Reports, upon request at an audit, and otherwise in accordance with the contracts, then notifications made thereafter would, of course, not be met with a payment. So all representations subsequent to a notification were made with the intention and effect of inducing GE to continue making advances against the sums notified.[190]As stated above, the misrepresentations were false, even on the explanation put forward by Mr Smedley. That is to say, even if there had been on 31st May2001 uninvoiced debts to a total of £4,575,722.03, they were not, on Mr Smedley’s evidence, debts due from Black & Decker, and the other customers upon whose accounts the figures were entered. But in my judgment the misrepresentations were false in the further sense (denied by Mr Smedley) that uninvoiced debts of that amount were not due to CLL at all. If they had been, then (subject to doubts about the integrity of the data which I have dismissed) it would have been possible to find in the ledgers for the subsequent month normal entries showing where such sums had been invoiced and paid. Neither Mr Stern nor Mr Smedley were able to do that in relation to any of the examples. Mr Smedley did not appear to have checked any of Mr Stern’s schedules to demonstrate that that could be done. His answers in evidence appeared to be unprepared and speculative, and, on the rare occasions that they were sufficiently specific to be followed up, invariably proved impossible to verify. He asserted in general terms that entry of debts on to the Access system was always in arrears by two weeks or more, and that that was the basis of his belief in the propriety of making provisions. But he never descended to detail, or provided any credible evidence in support of this assertion. It was not supported by other witnesses and I reject it.[191]Mr Stern did elaborate calculations. The result of these appeared to show that if and to the extent that it was proper to make provision for work carried out on or before 31 May 2001 (and he did not accept that it was), the maximum sum for which such a provision could legitimately have been made was £106,533.67 (compared with the “provision” which was in fact made totalling £4,575,722.03). While this figure cannot be taken as exact (after this length of time, and given the incomplete information now available), I am sure that there were no material debts which could properly have been notified within that figure of £4.5m.[192]Mr Smedley’s case is that a reconciliation carried out in June 2001 by Mrs Hogan confirmed to him that the financial figures had been successfully reconciled to the monthly management accounts and the figures declared to GE, each showing CLL’s turnover at about £35m for the period six months to 30th June 2001. Mrs Hogan sent an e-mail to Mr Smedley on 30th July 2001, copying the e-mail to Mr Gracey. The subject line reads “Logistics Financial Accounts to 30/6/01” and she writes that these are now completed and the full and summary versions can be found at two separate locations on the K: drive to which she gives links. On 31st July 2001 Mr Smedley e-mailed back to her (but not to Mr Gracey) two sets of figures. They are in the form of an attachment to the e-mail with the name “Kim Variances.xls”. It is the figures in the attachment that he e-mailed to Mrs Hogan that Mr Smedley referred me to in support of his argument. There is only his word that they are the same figures as were to be found in the K: drive.[193]Mr Tozzi QC cross-examined Mr Smedley on these figures. While he insisted that the figures that he had e-mailed back to Mrs Hogan on 31st July were the same as the ones she had referred him to, I did not believe him. There are a set of management accounts which Mr Smedley had previously agreed (day 24 p16) to be prepared by Mr Gracey. These cover the calendar year and show a total turnover of about £67m for CLL. If the figures for the period January to June are extracted, the total turnover for that period is about £30.6m. The total discrepancy between these and the figures Mr Smedley e-mailed to Mrs Hogan on 31st July is £4.1m. For one division of the business, City Transport West, the discrepancy is a round £1,350,000. Mr Smedley was unable to explain these, and other, discrepancies. Moreover, Mr Gracey’s figures included inter company transactions and other debts which were not notifiable to GE.[194]One of the two occasions on which there was a notification in respect of which documentation has survived is the fax sent on 2nd July 2001 mentioned in para 126 above and considered again in para 251 below in relation to Mr Ritchie’s state of mind. The notification in question appears on the Asset Account for 2nd July 2001 as “invoices” £1,704,961. For the reasons given below the explanation given by Mr Ritchie is not a credible one in the light of the documentation available to me (whether or not Mr Ritchie believed it). There is no entry corresponding to the invoices which Mr Ritchie identified in his fax to GE.[195]Mr Smedley, like Mr Ritchie, explained in cross-examination that the invoice details and numbers were subsequently altered by Mr Gracey, and that the reference to an invoice from DHL (which was not a customer) was a mistake for LDH La Doria Ltd (which was). The evidence in relation to that customer provides an illustration of the difficulties in understanding what GE were being told. The trade with LDH La Doria Ltd appears from the Sales Ledger Account which is available in respect of the period 1st January 2001 to the end of trading with the Administrators in March 2002. There is a substantial number of invoices posted in sums varying from a few hundred up to a maximum of £18,908, but none approaching the single figure of £264,376 referred to in Mr Ritchie’s fax to GE. The invoices all are recorded as being entered within a day or so of the transaction date. I conclude that the information given to GE on 2nd July 2001 was all false.[196]During the trial it became common ground that the ZZ accounts were overstated (see para 92 above). Until then, Mr Smedley’s case had been that this suggestion by Mr Stern had been totally unfounded. It is a suggestion that Mr Gracey had been making contemporaneously in e-mails addressed to Mr Gee from 2nd July 2001 onwards. Mr Smedley sought to blame Mr Gracey, saying that Mr Gracey failed to pass information to Mr Ritchie. He commented to me that it was ironic that the only person who realised the true position of the ZZ accounts at the time was the person who was responsible for their being overstated.[197]This explanation for the overstatement on the ZZ accounts is not credible. There were credits posted to the ZZ accounts by Mr Ritchie on Mr Smedley’s instructions. But they did not correspond to invoices that had been posted to the normal accounts of the customers. Moreover, the information which Mr Smedley says Mr Gracey withheld is information which was contained in the self bill invoices. The true position is the opposite of what Mr Smedley states. It was Mr Gracey who received these from Mr Ritchie. They came late. The e-mails from Mr Gracey to Mr Ritchie dated 2nd and 10th October 2001 could not be more explicit. In the first the subject is “Selfbills on the way…” and Mr Gracey asks if there is “anything in the internal post to me”. In the second the subject is “WIP over £3m”. It reads “Kevin, Still no selfbill!! At this rate we’ll be over £3.5M at the weekend. Can you help”.[198]Mr Smedley also blames Mr Gracey for having marked the Cadbury’s account as a self bill account. But again the explanation does not fit the entries that can be seen on the Sales Ledger. The Cadbury’s ZZ account shows numerous credits were posted, generally by Mr Ritchie, including one or more in each month from May onwards. The entries appear very similar in date and amount and frequency to the entries on the British Gypsum ZZ account. So it is not a case of the account accumulating entries as provisions for invoices which were never credited off. There were credits. While Mr Ritchie states that the figures he posted came from Mr Smedley, Mr Smedley could not suggest where Mr Ritchie might have got the figures that he posted on the ZZ accounts.[199]Nor did Mr Smedley overlook what was happening on the Cadbury ZZ account. On 29th November 2001 he wrote an e-mail to Mr Gracey and Mr Ritchie expressing concern that Cadbury’s were saying that they would pay about £80,000 the next day whereas he had expected a payment in the region of £900,000. In answer to questions from Mr Tozzi QC Mr Smedley said that at that time he looked at the Cadbury’s accounts, including the ZZ account.[200]I find that Mr Smedley knew that the ZZ accounts were overstated, and that the credits to them did not correspond to the self-bill invoices that were received from customers. I do not accept that Mr Gracey was responsible for the Cadbury’s account showing the debts that it did show. But it makes no difference whether Mr Gracey was responsible or not. Mr Smedley gave the figures to Mr Ritchie that Mr Ritchie entered, and Mr Smedley looked at the account at the end of November. He knew that it was overstated, but did nothing to inform GE. As Mr Smedley himself states in his Closing submissions (see para 93 above) the overstatement was material, and would have been subject to scrutiny by the companies’ auditors. At a time when the CTG companies had cash flow problems it is not credible that Mr Smedley was unaware that GE had made payments against notifications of this non-existent debt. I have no doubt that GE would also have discovered the true position if and when they had been given the information they sought on one of their audits. I infer that the reason that they were not given the information and co-operation, the lack of which had led to the concerns they expressed in the December meeting with Mr King, was that Mr Smedley knew that he could not afford to let them have the information.[201]Each of the aged debt reports for April, May, June, July contained corresponding misrepresentations. From these I find that corresponding misrepresentations were made in the notifications for each of these months, and in the subsequent documents relating to these months.[202]For the period August to December the position is different. One reason for the difference is that there are not, for these months, the entries on the Access Sales Ledgers which correspond to the figures entered and removed the following day by Mr Ritchie and Mr Murphy. The explanation for that given by Mr Ritchie and Mr Smedley, it will be recalled, is that for these months these entries were produced on a parallel set of accounts generated from the backup server at Bletchley. Another reason is considered below under the heading Bank Accounts.[203]GE continued to receive Aged Debt Reports. In each month August to December they showed debts at about the same level as before, namely of about £19.5m, except for October, where the figure dipped to £18.9m. I infer that Mr Smedley continued in those months to notify fictitious debts, as he had before.[204]I am not asked to make findings in respect of each month of which purported debts were the subject of misrepresentations. Because of the missing documents, the evidence is not available for me to make such precise findings in all cases. There is therefore no point in my making individual findings in relation to each debt explored in evidence by Mr Stern or in cross-examination of Mr Smedley and Mr Ritchie.

THE CTL SALES LEDGERS NOTIFICATIONS AND AGED DEBT REPORTS

[205]GE also claim that the CTL ledger included fictitious debt. They illustrated this with examples, including the following.[206]The CTL Aged Debt Report for January 2001 includes an entry “REN004 Renault V I UK Ltd £1,703,456.50”. Of this £1,608,869 is in the column headed January and the balance of £94,587.50 is in the column headed December. The breakdown of the debtor balance on that account as at 31 January 2001 shows that the January total of £1,608,869 is made of fifty invoices each for £32,177.38, all entered by Mr Murphy on 19th 24th and 26th January, the transaction dates being given as 12th, 19th and 26th January. One of these invoices is no 9952 dated 12th January. It is in respect of a Renault truck registration number R96KNK. This truck was one of a large number which were the subject of a Sale and Repurchase Agreement 29th April 1999 made between CTGSL and Renault VI UK Ltd, by which CTGSL agreed to purchase the truck, and Renault agreed to sell it and to repurchase it at an agreed price at a future date (the agreed prices and dates being set out). The invoice is issued by CTL to Renault VI UK Ltd and includes the following: “To sale under buy back agreement of [this truck] … To secure clear title, please pay GE Capital Equipment Finance Ltd £19,621.83 as per the attached settlement confirmation and remit the balance of £12,555.55 direct to [CTGSL]”.[207]I infer from the invoice that it was not CTGSL which in fact purchased the truck from Renault, but GE’s sister company. The invoice is a statement by CTL that the net amount owed by Renault was only £12,555.55, and that that sum was owed not to CTL but to CTGSL. It is plain that it should not have been included in an Aged Debt Report sent to GE by CTL at all, and certainly not as a debt of £32,177.38.[208]Mr Smedley’s explanation for this given in cross-examination was that when a vehicle came to be disposed of it would be transferred to CTL at an appropriate transfer price and then sold on to a third party. But when pressed he acknowledged that so far as the Renault buy back agreement was concerned all that he meant was that CTL acted as agent, and that there was no assignment of any rights or property to CTL. He understood the trucks including R96KNK had been acquired under hire purchase contracts, under which title passed to the finance companies. He said the invoice went through CTL because that is how they had always done it and there were considerable tax advantages in doing it that way. Mr Smedley also said he was aware that one of the conditions of the agreement with GE was that debts should not be notified where a debtor was also a supplier or creditor, but, he said, GE were aware of what was being done and agreed to it. I shall return to this below.[209]Another example relates to Schmitz. One of the notification schedules for CTL is dated 1st August 2001. It is for the figure £131,306.25 inclusive of VAT. Attached to it is what purports to be a copy of an invoice in that amount addressed to Schmitz. It is dated 17th July and the narrative is “To Invoice volume rebates. 50 trailers @£2,235.00”. There is no indication as to which company issued the invoice (it appears to have been on a template designed to be printed on to pre-printed headed stationery), but it bears the VAT number which was common to CLL and CTGSL, but not to CTL. The CTL Asset Account shows a notification in that amount on that date. Apart from the fax of 2nd July 2001, this is the only instance where there are contemporaneous documents supporting a notification, and it is the only one where there is what purports to be an invoice.[210]No record of this invoice has been found in any of the sales ledgers on Access, whether for CTL or for any of the other companies. Mr Smedley raised a number of possible explanations for this, but he accepted that he investigated none of them, and none of them appeared to cast any light on the question. On the contrary, the enquiry raised further questions. There are entries on the Schmitz ledger in that precise sum, but they bear different dates - 21st July and 21st September under the transaction date, and 14th August and 15th October for the entry date. They also bear different references, they are designated as ADRs, not invoices, and do not include VAT.[211]There are other examples where debts in respect of trucks and trailers and related matters were notified. On 16th November 2001 Mr Ritchie faxed to GE the reconciliation sheet for CTL for the month ending 31st October 2001. It showed a month end balance on the Sales Ledger of £6.5m (these figures are rounded by me). That figure is the total on the aged debt report prepared for that month. The aged debt report was prepared on an Excel spreadsheet by exporting to Excel data from Access. But a comparison done by Mr Stern of the figures actually to be found on Access for that period shows that some £4.2m of debt appears on the Excel aged debt report which does not appear in the Access data.[212]Of this £4.2m the main components are entries on the accounts relating to Barclays (£1,586,250), Hays, Renault, Schmitz and Whitbread. The Barclays figure is not to be found on any of the CTL ledgers on Access as a debt outstanding at that date. Of course, as explained above, since this is an October report it was prepared on the parallel system on the back up server. An identical figure does, however, appear on the Access ledger and files for CTGSL. On 1st October 2001 CTGSL issued an invoice to Barclays Asset Finance Ltd in that sum with the narrative “to reimbursement of expenditure incurred on your behalf in respect of 75 new Schmitz Curtainsider trailers as described in the attached suppliers invoices … we have paid the original supplier for this equipment …”. And on the very same day there appears in the RBS bank statement for the account of CTGSL a credit for an identical sum.[213]The circumstances of how Mr Ritchie came to include it on the CTL aged debt report are considered again below in para 254.[214]These notifications by CTL raise a number of questions. They include debts purportedly owed to CTL, but which were not owed to CTL, but to CTGSL, if at all. Mr Smedley’s account of this in his witness statement includes the statement that “Logistics, Trucks and Rentals did not own their own assets or make payments to their supplier. These functions were controlled by CTGSL”. And Renault and Schmitz were suppliers as well as debtors, so their debts would not be notifiable, as referred to above.[215]Mr Smedley sought to explain this as being pursuant to an agreement reached with Mr Broomhead of GE at his visit on 8th May 2001. The GE visit report refers to no agreement. What it does refer to is a discussion of the possible restructuring of the CTG group requested by GE. The fact that assets were held by CTGSL (with which GE had no agreement) made it difficult for GE to compare the management accounts with the projections. There is no written record of the alleged agreement. Mr Smedley points to some developments in the management accounts which would be consistent with the proposal. But what the restructuring would require would not just be entries on management accounts. It would require transfer of title to assets, including contractual arrangements with third parties, such as Renault and the companies financing the Renault trucks. No such transfer occurred. I do not accept that there was an agreement as alleged by Mr Smedley. But even if there had been it would not assist him. The agreement would have had to have been implemented.[216]Mr Smedley goes on to seek to justify the notifications by CTL on the basis that CTL had long been a dealer in trucks, so that what was notified were trading debts, not debts relating to sales of assets. He says the sale and purchase of the group’s assets was always transacted through CTL. If this be so, it still does not help him, given that the debts were, on his own case, not due to CTL but to CTGSL. It is plain that a notification by CTL of a debt of CTGSL cannot effect an assignment of that debt to GE. The alleged agreement, absent any implementation (other than entries in the management accounts), makes no sense.[217]Mr Smedley alleges that Mr Broomhead nevertheless knew what CTL were doing. It was in this connection that he sought copies of e-mails exchanged between Mr Broomhead and himself, and documents that he contended would have been produced on soundings. However, I am not persuaded that any such documents existed.[218]It is clear that GE knew that debts to the debtors who were in fact truck and trailer suppliers were being notified. To prove that Mr Smedley does not need the e-mails or other documents he claims are missing from soundings. The proof is that the names of Schmitz and Renault and other suppliers appear on the Aged Debt Reports from April and other months. Accompanying the April one in the bundle is GE’s document “Invoice discounting monthly aged debt analysis and unapproved updated”. The debts reported as due from these are sufficiently large to have resulted in their being separately listed for consideration whether they exceeded the maximum debtor concentration. In fact they did not, but that shows that someone at GE directed their minds to these debts. But neither was there any retention made against them on the grounds that they were debts due from customers who were also suppliers. This is consistent either with GE not knowing that these were non-notifiable (as GE contend), or with them knowing that fact (as Mr Smedley contends). The significance of the point is that if GE did know that the debts were not notifiable, but nevertheless made payment against them, then they would not have been induced to do so by any misrepresentation.[219]If I had found that on other points Mr Smedley had been candid with GE, if I had not found that Mr Smedley was unco-operative at the audits, and withheld information from GE, I might have been persuaded that there was a doubt about whether Mr Smedley had communicated to GE that the truck and trailer related debts which were also genuine debts due to CTGSL were being notified by CTL for what they truly were. As it is, I find that GE did not know, and that Mr Smedley did know that the debts notified by CTL included some that were not debts at all (because they had been paid), some that were debts, but had never been debts due to CTL, and others that were non-notifiable for other reasons, in particular because they were debts from suppliers.

THE CTRL SALES LEDGERS NOTIFICATIONS AND AGED DEBT REPORTS

[220]The discrepancies found by Mr Stern on the CTRL accounts were small by comparison with those on the CLL and CTL accounts, and have not been the subject of detailed investigation by Mr Stern. Nevertheless, some entries on the Sales Ledger were explored in cross-examination of Mr Smedley and Mr Ritchie. Mr Smedley confirmed that “we would have been posting provisions on Rentals in exactly the same way as we would have been doing on Trucks and Logistics”. In relation to Robert Wiseman Dairies Ltd he accepted that a posting of £56,000 was a random but informed allocation, as he had called them. He accepted the same point in relation to a posting of £81,000 to the Ledger of NFT Distribution, that is that it reflected what he claimed were potential payments by other customers. He could not identify who those other customers were.[221]It follows that Mr Smedley admitted that the CTRL notifications were false in attributing debts to customers who did not owe them. I find that they were false in the further sense that the notifications included figures which were not debts at all.[222]As noted above in para 66 above, CTGSL cheques were paid into the CTRL account, in a similar manner to the payments into CLL’s and CTL’s account. This aspect of the case is considered in the next section below.

THE BANK ACCOUNTS

[223]It will be recalled from the table in para 39 above that the facility had been utilised to its limit by the end of August 2001, and from the figures in paras 65 above that in September, November and December about £9m per month was paid from CTGSL into the designated accounts (the figure dipping to £7.3m in October). The cheques were signed by Mr Ritchie and Mr Smedley. Mr Ritchie continued to notify debts to GE, but instead of the debts posted onto the sales ledger being reversed by credit notes (although this still carried on to a lesser extent), what was entered were more frequently described as ADRs which appeared to have been paid by and allocated to cheques drawn on the account of CTGSL. CTGSL was itself for the most part using funds advanced by GE. In effect the fraud became circular in nature – hence its description as a carousel. The position in relation to Mr Ritchie is discussed below at para 271.[224]I have found that there were no documents which could be called invoices raised in connection with these transactions, or any other document that could have been shown to GE auditors to support the entries. They did not correspond to any underlying debt. Even if they had done, they would have been inter company debts and not notifiable to GE.[225]These fictitious debts were entered without VAT to avoid making payments to H.M. Customs & Excise. The staff were instructed that the paying in book should record not the name of CTGSL, the drawer of the cheque, but of a customer whose name would be given to the person completing the paying in slip. An example of such an instruction is an e-mail from Mr Murphy to Ms Cartwright, copied to Mr Ritchie, and dated 28th August 2001. The e-mail ends:
“Please inform … your staff of this procedure as it is very important this is adhered to”
. A similar instruction had been sent by e-mail by Mr Ritchie to Ms Roberts on 16th July 2001.[226]The contract makes no provision for a CTG company to pay money into a designated account. It is not easy to see the legal effect of such a payment. The customer’s debt had already been assigned to GE, and the purported payment of the debt (if that is what it was) by CTGSL did not discharge the customer’s debt, the more so in that the cheque from CTGSL was credited as uncleared funds for three days, and in the meantime there would appear to be headroom within the facility against which further debts could be notified and paid (that being the point of the transaction). There was accordingly no contractual mechanism for repayment of those funds to CTGSL. Hence the need for notification of non-existant debts to procure repayment.[227]Mr Tozzi QC advanced an argument that the payment into the designated account of the CTGSL cheque itself amounted to a representation by conduct that the customer’s debt to which it was said to relate had been paid. I had difficulty following this argument. GE did not see the paying in book at the time of payment. All that they saw was the credit to the designated account. I do not rule out the possibility that it might be possible for Mr Tozzi QC to make good this argument. But neither do I accept it. I was not referred to the evidence from GE’s witnesses that might have supported it. I do not see that it adds very much. Very many such payments were followed by the notification of a corresponding fictitious debt in order to obtain repayment of the value of the cheque. That notification was undoubtedly a representation.[228]The Asset Account of GE shows a large number of notifications which correspond with the sums paid by cheques from CTGSL to other group companies. Mr Ritchie gave a list to Mr McMillan on 18 January 2002 in the form of a spreadsheet. It showed that for CLL in December 2001 there were twenty credits totalling £12.7m. Mr Ritchie refers to them as “dummy cash”. He recorded a total of £14.8m of dummy invoices notified by CLL. His figures for CTL in the same period are each over £5.5m and for CTRL over £600k. Mr Murphy had referred to some of them under the heading “City Trucks ‘Dummy Invoices’” in an e-mail to Mr Smedley dated 19 December 2001.[229]Mr Smedley did not dispute that these large payments from the CTGSL account with RBS to the GE designated accounts had been made. His explanation was that the payments from CTGSL were advances, and that if the money did not come back into the CTGSL account from customer payments then CTGSL needed to be refunded from the GE accounts, and notifications were made to achieve that. He said:
“What we would do is make a payment, trying to assess 2 whether the money was coming in and, if the money was 3 coming in, to try and make sure it came into Group 4 Services. If it was clear that it was not going to 5 happen, usually a day or a maximum of two days later we 6 would then issue effectively the invoice to get our 7 money back, and if it was then going to come in, say, 8 two days later than that, we would then make a payment 9 again.”
[230]What Mr Smedley refers to as “effectively the invoice” was, as I have found, not an invoice at all. It was the notification of a debt, but plainly a debt that was entirely fictitious. Mr Smedley does not contend otherwise. In his Closing submissions he sets out what he says was going on, and explains that “no disadvantage or loss is caused to the Claimant as a result of this process and none was intended”. He accepts that the effect of these transactions would be to make it appear to GE that the CTG companies were doing more business than they were actually doing. He adds:
“I acknowledge that this process did constitute manipulation of the facility – but the purpose was to maximise cash flow, not to defraud the Claimant”
. Mr Smedley appreciated that the drawing of funds from GE against uncleared cheques on RBS’s account for CTGSL exposed GE to a risk that the cheques might not be met. But he said “I did not actually perceive it as being wrong”. Mr Smedley gave an illustration in a document headed “Akcros cheque payments analysis”. It shows a series of three payments to GE entered on 25th and 31st October and 16th November 2001. The first two were for £280,000 and were reversed by the declaration of so called invoices to CTGSL on 25th October and 6th November, because (he says) it was discovered that Akcros’s cheque would be delayed (in this case due to the non-provision of a credit note for £35,028.51, genuinely required by Akcros). It is only the third payment into the designated account, which was for the sum of £246,971.49, and was made on 16th November, which corresponds to a genuine payment by Akcros, whose cheque for the same amount was paid into the RBS account. The genuine invoice for £282,000 was raised by Mr Gracey and entered on 9th November following the genuine credit note entered on 29th October. Thus, even taking his explanation at face value, it is only the third of the three payments where Mr Smedley’s explanation makes sense. In fact, most of the credits and so called invoices to CTGSL cannot be related to any particular payment due from a customer.[231]It is an incidental feature of these notifications that Mrs Hogan was not informed of what was going on. The result was that she was unable to reconcile the apparent turnover with the actual turnover. This is the subject of a number of e-mails she wrote.

MANAGEMENT ACCOUNTS

[232]As noted above in para 24.ii) above, one of the classes of documents required by GE was monthly management accounts. Such accounts were prepared by Mr Gracey. A different version was supplied by Mr Smedley to GE. Amongst the electronic documents recovered there is a version of the management accounts kept by Mr Smedley, which differs from that prepared by Mr Gracey and is similar to that disclosed to GE.[233]In his Opening address to me Mr Smedley offered an explanation for the differences. He said it was because Mr Gracey’s accounts were prepared on a 4/4/5 week basis for the quarter whereas GE required a calendar month basis to coincide with the daily notifications.[234]An examination of the differences in cross-examination very quickly led Mr Smedley to accept that that explanation would not suffice to account for the differences. Amongst large and conspicuous differences were figures for turnover. GE were told that the turnover for each of two of the CLL divisions were higher than the figures in Mr Gracey’s accounts. For the month of February, the differences were round figures of £450,000. Asked where that figure came from, Mr Smedley replied that he had altered the figures on Mr Gracey’s management accounts to reflect the sums that had been notified to GE. The total difference in the turnover as calculated by Mr Gracey and as declared to GE in the management accounts over the period February to October 2001 was £21m. In effect he was saying much the same as he had said in relation to the Aged Debt Reports. He started with the figures notified to GE, and altered the subsequent documents to ensure that they were consistent. What Mr Smedley declared to GE as management accounts were thus not management accounts at all.

WHAT MR SMEDLEY KNEW

[235]Mr Smedley was responsible for the preparation of all the figures and accounts notified or provided to GE, as discussed above. Figures entered into accounts or documents by Mr Murphy or Mr Ritchie were entered at his direction. Mr Smedley confirmed to me during closing speeches that he was not disputing what Mr Ritchie was saying.[236]I find that he knew that the figures communicated to GE were false in the respects I have set out, and on his own admission, in his Closing Speech, his intention in making these false representations was to induce GE to make and to continue making the payments they did make.[237]As discussed above, as a matter of law, where the other elements of the tort of deceit are made out, motive is irrelevant (see paras 97 and 112) . However, Mr Smedley did address me on his motives. In his Closing submissions at para 56 he said that he had been concerned at the rate of expansion of the group, as Mr King was also. He said that he had expressed his concerns to Mr Gee, but he agreed with Mr King that “David would listen but what he said went”. At paras 55 and 57 he wrote this:
“GE had provided a funding facility of £25m and Mr Gee had put his foot down on the accelerator. I was left in the wake of the smoke and exhaust fumes to try and pick up the financial pieces. The systems, and I, were failing in being able to successfully cope with the additional work that this expansion brought with it. …. I had hoped we could get through Christmas and then make a concerted effort to downsize and sell Rentals. Here, I have to agree with Mr Banwell who in his evidence said that in his opinion the Rentals company took too much investment and hence damaged our working capital. I wanted to sell Rentals and to this end I attended a meeting in December 2001 with Frank Andrews. We went to see a company called Dawsons (where Mr Gee had worked) to see if they would be interested in acquiring the company. I was already working towards reducing the size of the Group.”
[238]And at paras 228 and 231 he wrote: “When considering the claims made against me I would point out that I had absolutely no motive to defraud GE. So why would I? All my actions in relation to the accounting function were solely for the benefit of the future of the Group, not for myself. I was not a shareholder in the company and I was not even planning to stay in the employment of the Group. Everything I have done has been with honest intent and I have never sought to take advantage of GE... … my driving force at the time was to ensure that the Group continued to operate and could generate cash flows that were its lifeblood. I did not notify false transactions. Indeed I had no need to do so the Group was not short of either turnover or profits. It was the sheer volume of transactions that caused the accounts department to be swamped in the first place and the Access ledger to suffer a serious backlog. What we couldn’t do was collect the cash quickly enough, and it was this that that provided my motivation to ensure GE were paid as quick as possible. What I did I consider to be honest”.[239]In these submissions Mr Smedley appears to be using the word “defraud” to mean defraud for the purpose of making a personal gain for himself at the expense of GE. But the torts of deceit and conspiracy do not require proof of any personal gain, and the tort of deceit does not require proof of an intention to cause damage. And Mr Smedley’s account of his motives provides ample reason to find, as I do, that he did have a motive to deceive GE for the purpose of benefiting the CTG companies, and, through them, Mr Gee.[240]At the trial GE did not adduce any evidence that Mr Smedley had made any direct personal gain from the deception of GE. It may well be that Mr Smedley’s motives in making what I have found to be false representations were limited to keep the group in business until funds could be raised by a sale of part of the business or that something else would turn up. Since that is not an answer to the claims in this case, I do not have to make any finding whether it be true or false that his motives were so limited.

WHAT MR RITCHIE KNEW

[241]I have described above Mr Ritchie’s age and qualifications on leaving school. While working for CTG he had done a part of a course on accounting, but had obtained no qualifications. Mr Ritchie’s defence is set out above, and he repeated it in his evidence.[242]As a witness and advocate for himself Mr Ritchie appeared to me to be a person of greater intelligence than his qualifications might suggest. He appeared generally frank and open. Mr Ritchie and Mr Smedley did not cross examine one another. While their Defences and witness statements are not consistent, by the time they had given evidence there was little if any material inconsistency.[243]As part of their case, GE allege that Mr Ritchie made admissions that he had been involved in deceit. Mr Ritchie denies these admissions. The admissions are alleged to have been made to representatives of GE who were investigating the CTG companies on and after 2nd January 2002. Most of these allegations can be put aside at once. They are recorded in witness statements in what appears to be indirect speech, not in the words allegedly used by Mr Ritchie himself. The words used by Mr Ritchie were not written down at the time Mr Ritchie is alleged to have spoken them. The persons who say the admissions were made to them were acting on behalf of GE, and were already convinced that there was a fraud. While I do not question their good faith, their evidence is in substance what they understood Mr Ritchie to be saying. If there is other evidence on which Mr Ritchie’s complicity in deceit or conspiracy can be proved, the evidence of alleged admissions might in principle either be unnecessary, or add some weight to other evidence. If there is no such other evidence, then the evidence of admissions would not, by itself, satisfy me to the high standard of proof necessary to prove deceit or conspiracy.[244]Mr Tozzi QC referred me to Jones v Warwick [2003] EWCA Civ 151; [2003] 1 WLR 954 in pursuance of his duty to the Court. That case shows at para 27 that I have power under CPR 32.1 to exclude the evidence of admissions if I consider that is what is required to deal with the case justly in accordance with the over-riding objective set out in CPR 1.1and ECHR art 6. I was not asked by Mr Ritchie to exclude the evidence, and I do not know whether he was aware that he could ask me. His position was both that he did not make the admissions, and that arrangements at the occasions when he was alleged to have made them were unfair to him. In the event, I have not found that the evidence of admissions assists me in any way at all. It is too uncertain and I ignore it. So I have not found it necessary to make any ruling on whether the evidence should be excluded or not.[245]Mr Ritchie accepted that he had a position of trust with his employers reflected in his authority to sign cheques up to a value of £300,000. Importantly, he also accepted that he understood that the substance of the GE facility involved the CTG companies selling their debts to the bank. Although he had not seen the agreement, he did not pretend to be ignorant of it. It was quite clear from his answers in cross-examination that he was well able to understand what the substance of the agreement was. What he did not know was any of the detailed provisions, for example as to what were or were not notifiable debts.[246]Mr Ritchie was pressed hard in cross examination on documents which suggested that he knew that the figures posted as invoices in the Sales Ledgers were fictitious. On 9 November 2000 Mrs Hogan sent the following e-mail to AB and Mr Ritchie, with a copy to Mr Gracey:
“I am rather disappointed to note the call that Kevin Ritchie has just made to Debra regarding Utility International Limited. All statements were printed and sent out to customers yesterday, including this one showing an invoiced amount outstanding for £376,000. It now comes to light that this invoice has been “invented” and coded to SREH201, thus clouding the issue over reconciling turnover even further. I am concerned as to why we are “inventing” turnover on Logistics accounts. With the year end coming up this must surely be of serious concern as an audit issue. I’m sure I don’t need to point out that there are still “dummy” invoices outstanding on the Akcros and Alcan accounts which again are clouding the debtors position. I would expect to see these removed before 31/12/00.”
[247]He did not agree that what he might have said to Ms Kermode would have led her to believe that the invoice was fictitious. He considered that that was Mrs Hogan’s interpretation. He said that he referred e-mails such as this (and there were a number of such e-mails from Mrs Hogan, Mr Gracey and others) to Mr Smedley. He did what he did because Mr Smedley told him to. Mr Smedley was the Finance Director and his boss. For him, he said, a dummy invoice meant a provision (or in some instances an entry relating to money paid by CGTSL), because that is what Mr Smedley told him the entries were. Some of the entries he notified to GE came from various ledger clerks and some came from Mr Smedley. The ones from Mr Smedley were given to him on a piece of paper, and he transferred the information to a spreadsheet. Mr Smedley told him that the provisions were for invoices that had been raised but had not gone onto the accounting system and he believed that. When he posted the provisions on the ledger he did not see the other entries already on the ledger, so he did not know that they bore no relationship to the provisions. He could have checked, but he did not. He said he never had the time or any reason to. He accepted that he had for a month or two been responsible for entering some self bill invoices, but that he got behind with that work, and it was removed from him. He kept a record in boxes, and some of these have survived. He was aware of an e-mail in which Mr Gracey complained that someone was entering figures on the accounts using his ( Mr Gracey) reference, but he said it was not he who did it. He was told by Mr Smedley that some of the provisions were required because Mr Gracey was late in raising invoices and entering them on the system.[248]Mr Ritchie was asked about entries in respect of a customer listed as HDL, whom GE and Mr Stern have been unable to trace, and whose details are left blank on the Access system. Mr Ritchie said he automatically assumed until he came to court that that was a customer who did exist and which was known as LDH.[249]Mr Ritchie accepted that he prepared the aged debt reports, but he did so with the assistance of Mr Smedley. He faxed them to GE. He knew that GE thought they were getting an aged debt report that reflected the CTG ledgers, and he considered that the provisions he included in the reports meant that what they got was true. He did not go and interrogate Mr Smedley. He said he did not believe that he was just making the ledger appear to GE to balance with the notifications.[250]Mr Ritchie did not hesitate to disagree with Mr Smedley. He said that Mr Smedley’s Defence was incorrect to state that the information was collected by Mr Ritchie and Murphy from administrative staff. He said that Mr Smedley knew how to use the Access software and that he did use it.[251]As mentioned above (in para 126) GE have disclosed one fax sent to them early on Monday 2nd July 2001 from Mr Ritchie. It relates to a sum of £1,704,961.00 which appears as a credit in the Asset Account of CLL for that day under the simple description “invoices”. It appears that the figure had been notified the previous Friday because the text of the fax reads (including spelling mistakes):
“Please find attached copy invoices for Batchas per amount withheld on friday”
. In fact no invoices were attached. Instead there is a one-page list of seven items said to total the amount notified, not one of which can be traced to the Sales Ledger. Mr Tozzi QC put a number of points to Mr Ritchie, in addition to that fact. Two of the entries are one for “DHL”, which was not a customer, and one “Self Bill”, which identifies no one. The invoice numbers given are sequential 0207KR001 to 0207KR007. There is much to suggest that the list of invoices is simply made up or invented.[252]Mr Ritchie accepted that he could not remember the explanation, but he did not accept that there was none. He thought that this was the first occasion on which, as mentioned above, he had been asked to enter invoices for fixed monthly or managed contracts, and that he had had to have them checked by Mr Gracey or Ms Cartwright. The information he had written down had come from Mr Smedley. He suggested that the reason they were not on the system was that when they were sent to Mr Gracey for approval he did not agree with them and they have been keyed in under another reference.[253]Mr Ritchie was also asked about the ZZ accounts. He accepted that he was the person who dealt with them, and that he made credit entries on a monthly basis (and posted invoices for a couple of months as well). He also accepted that he did not post credits to the ZZ accounts when invoices came in from the self bill customers. He said he was told by Mr Smedley that he would get a credit note or advice from Mr Gracey for this, but he did not get them, and the account built up. So, he said, he was told to credit them off every 60 days. At the same time he accepted that he was notifying GE of the self bill invoices coming in from these customers. While it should have been obvious that this would involve double notification of the same debt, Mr Ritchie did not accept that he thought of it like that at the time, he did not realise he had to put something on the ZZ accounts, and he repeated that Mr Smedley’s instructions were to credit off sums on a monthly basis and he was not going to go against Mr Smedley’s wishes. He accepted that there are e-mails from Mr Gracey in which Mr Gracey had been complaining to him about not receiving the self bill invoices from Mr Ritchie, and there were no complaints from him to Mr Gracey. This explanation for not crediting to the ZZ accounts sums equivalent to the value of the self bill invoices as they were received makes little sense.[254]Mr Ritchie was asked how the figure of £1.58m appeared on the CTL aged debt report as described in para 211 above. He said that he would have keyed it in. “It would have just been one of the provisions that Kevin asked me to provide for”. He said the same in respect of the balance of the £4.2m which appears on the CTL aged debt report for October, but not in the Access data.[255]Mr Ritchie said that it did not at the time surprise him that he should add £4.2m of provisions to debts of some £2.3m, because CTL bought trailers in batches and did so regularly. He said he had no way of knowing that the provisions were overstated. He said:
“I would not have known it would have been paid into Group Services. How would I have known that, unless I interrogated the cashbooks just to find a provision? That would have taken two or three hours, and I would not query anything that Kevin and John would give me.”
[256]As to the notification of £131,306,25 in respect of Schmitz referred to in para 206 above Mr Ritchie did not dispute Mr Stern’s conclusion that it was false, derived from an investigation of the Access data. He said that he did not at any stage believe that it was false.[257]As to what GE call the carousel cheque payments, again Mr Ritchie said that he did believe it was genuine debt as that had come from the Finance Director. Similarly with the entries on the CTRL ledger, Mr Ritchie accepted that he would have keyed entries in, but only on figures given to him by Mr Smedley, and when the figures were keyed in he could not have compared them with other entries already on the ledgers because all he got was a header screen.[258]In 2001 Ms Cartwright and Wendy Gibb were often noticing substantial invoices being entered onto the sales ledger only to be credited out a day or so later. These transactions were ones recorded as having been carried out by Mr Ritchie or Mr Murphy. During 2001 the credit control team came to refer to these invoices as "Kevin Ritchie invoices" or "Paul Murphy invoices". Ms Cartwright was also copied e-mails referring to inaccuracies in entries on the sales ledger, including an e-mail from Mrs Hogan on 6 August 2001. On a number of occasions she contacted Mr Ritchie and Mr Murphy to query these.[259]Ms Cartwright and Wendy Gibb became suspicious. Matters that aroused their suspicions included an invoice for a substantial figure on an account which usually had a significantly smaller balance, an invoice where the numbering was irregular or where she was told that the invoice related to an internal transfer or to work in progress. There were occasions when she or Wendy Gibb asked Mr Ritchie and Mr Murphy for supporting documentation (such as proof of delivery) and it would also be lacking. In almost every case, the queried entry would be reversed shortly afterwards. She felt that she and her team were being fobbed off when they raised these queries.[260]Mr Ritchie was asked about the audits and the delays and difficulties encountered by the GE auditors, which they had given evidence about, and which is recorded in the contemporaneous documents. Mr Ritchie did not dispute that GE had suffered the delays and difficulties they described. As to matters of organisation, again he said it was Mr Smedley who co-ordinated everything, even when GE’s letters were addressed to himself. Putting what he called the provisions back on to the aged debt reports he said would take him and Mr Murphy two or three hours and printing out the reports would also take about two hours of processing time. He said they entered the data the night before the audit, or early on the day of the audit, but that and the printing was one reason why the GE personnel were kept waiting. He accepted that when providing the reports to them he did not tell them what he had been doing. He said Mr Smedley would not have let them give GE a sales ledger print without the provisions being on them. Mr Ritchie did not accept that his instructions from Mr Smedley were to be as un-cooperative as possible, but he did say that “Kevin did tell us that although we were to help the GE auditors our job was to come first so at times Paul and I felt we were between a rock and a hard place”.[261]Mr Ritchie was asked about the cheques on CTGSL credited to the designated accounts. He readily accepted that he had signed most of them. Although there are references to invoices in relation to them, he said he had seen no invoice. Where the reference is to ADR, he accepted that that is normally an adjustment to a ledger entry. He said he entered that because Mr Smedley told him to. And where there is no VAT he said he entered it that way because Mr Smedley told him to. He said that this had started on an infrequent basis, but the frequency increased and there came a point when Mr Murphy told Mr Ritchie that he was becoming suspicious. Mr Ritchie said that when that happened he asked Mr Smedley what they were doing, and Mr Smedley gave the explanation. Mr Smedley said that these were payments made in advance of the debtors themselves paying. That, he said, is why they had to be entered as payments from the debtors, not from CTGSL. When he was asked whether he thought that this explanation applied to cheques totalling the £82m, he said that he and Mr Murphy had Mr Smedley’s explanation, and after that he did not think about it and it became part of his daily routine work.[262]Mr Ritchie readily admitted that he knew that customers’ cheques were being paid into the companies’ RBS account and he knew that they should be paid to GE. But he had not seen the agreement with GE, and Mr Smedley told him to do it, and if Mr Smedley thought it was okay then there was no reason for him not to do it. Returning to the cheques from CTGSL, Mr Tozzi QC drew attention to the entries by which those sums were returned to CTGSL. This was done by Mr Ritchie notifying to GE that a debt was due in that amount. He said “I was just following instructions, both Paul and I were”. He accepted that he knew the group turnover was about £100m, but he did not keep a record of the cheques, or add them up, because it was just part of his daily routine. He said he and Paul Murphy did not think that the debts were fictitious. When asked about a part of Mr Murphy’s statement in which Mr Murphy said that later in the year he did get suspicious again because he was not seeing any cheques from customers, Mr Ritchie said that his position was different from Mr Murphy because he, Mr Ritchie, did not get to see the payment received from the customer; he did not see that side of it.[263]Mr Tozzi QC asked Mr Ritchie questions about the part of Mr Murphy’s witness statement dealing with the end of 2001 in which he said:
“By this stage, Kevin Smedley did not identify any customer to which the additional notification related and no entry was made on Access in respect of it. The amount to be notified appeared to be for whatever amount Kevin Smedley needed for that day. It was clear to me that these amounts were for debts which were false as they did not relate to any real debt that was being posted on Access to a customer account and appeared to be for random amounts depending on what Kevin Smedley thought that he needed for that day.”
[264]Mr Ritchie agreed with that, except for the reference to false debts. But his answers were confused. At one point in the cross-examination the exchanges (on day 25 24th June, p29-30) were as follows: “Q. So what was the debt that you were selling to GE when 22 you notified them of this 180,000 with a view then to 23 drawing down funds? 24 A. At the time I did not think -- it was just to get the 25 money back for City Group Services. 1 Q. Lets notify someone and get some money out of -- 2 A. Which is what they were explaining -- City Truck Group 3 Service had already paid in advance, the money had not 4 come in, Kevin [Smedley] wanted some money back. 5 Q. I suggest that you knew that these were not proper debts 6 that you were entitled to, or that City Truck was 7 entitled to notify to GE and that is the truth, is it 8 not? 9 A. I did not have an opinion at the time.[265]When Mr Ritchie was asked about it again (p148-9) the exchange was as follows:
“18 Q. Dummy invoices come to 14.8 million. The dummy cash 19 comes to about 12.8 million? 20 A. Yes. 21 Q. This is you referring, is it not, to the cycle of 22 invoice and payment that we have been looking at? 23 A. Yes, it is, yes. 24 Q. These are dummy invoices because you knew they were not 25 genuine invoices, are they not, Mr Ritchie? 1 A. That is incorrect, because I think from memory 2 Neil McMillan actually wanted me to write in there 3 fictitious invoices and fictitious cash and I said I was 4 not going to do that. I think this was a compromise. 5 Q. Whose word was "dummy", Mr Ritchie? 6 A. I do not recall, but possibly mine. 7 Q. Certainly Mr Murphy used to refer to these as dummy 8 invoices, did he not? 9 A. I believe so, yes. 10 Q. Long before GE audit you and Mr Murphy used to call 11 these dummy invoices, did you not? 12 A. I believe so, yes, I cannot recall exactly. 13 Q. You called them dummy invoices because you knew they 14 were not real invoices, did you not? 15 A. No, I have already explained what we thought they were, 16 but "dummy invoices" is probably easier than saying 17 "Invoice from City Truck Group Services to pay back the 18 money that..." It gets too long winded, does it not?”
[266]In relation to the final audit on 2nd January 2002 he said “The reason I did not give the bank statements was because I would be disobeying a superior [ie Mr Smedley] and I would be in trouble for it”. At one point in his evidence he said “I do not think that anybody in the company would stand up to Kevin”. When later that day Mr Andrew instructed him to be as co-operative as possible, Mr Ritchie described that as a different philosophy. Following the instruction of Mr Andrew, Mr Ritchie did cooperate and spent hours with Mr McMillan.[267]As already noted, Mr Ritchie denied making any admission that amounted to involvement in deceit. His motives for any deceit were not explored in any detail. There were suggestions that he was paid generously for a person of his age and qualifications, but that was not explored in detail. There was no evidence before me that he had any motive other than to keep his job.[268]I approach my conclusions as to Mr Ritchie’s state of mind in two stages. The first stage relates to all those entries on the ledgers and other documents where a figure is said to be a debt or provision for a debt due from a customer. This includes the ZZ accounts. So far as they are concerned, I cannot be sure that Mr Ritchie knew that what he was representing to GE was false. I accept that he entered figures on the instructions of Mr Smedley. The fact the other people within the companies suspected these entries were false does not advance the case. Mr Tozzi QC does not seek to establish a claim against Mr Ritchie on anything less than knowledge of falsity or recklessness. Suspicion of falsity is neither of these.[269]The fact that other employees, some of them senior ones, stated to Mr Ritchie that figures were invented, does not mean that I can be sure that Mr Ritchie knew that they were false. I accept that Mr Smedley told him what Mr Ritchie told me that Mr Smedley told him. Mr Ritchie was not in a position to determine who was right as between qualified accountants such as Mr Gracey and Mrs Hogan on the one hand and Mr Smedley on the other. I also accept that Mr Smedley was not a boss whom Mr Ritchie could have been expected to interrogate or challenge. I also bear in mind that the CTG group of companies were the only employer that Mr Ritchie had ever had. He did not have the benefit that other employees of the group had had in working previously for other companies. He had no other employment experience against which to compare the practices engaged in by Mr Smedley.[270]I also find that Mr Ritchie was not reckless in relation to these figures. Recklessness is not caring whether a statement is true or false. It is to be distinguished from irrationality, and from carelessness in the sense of negligence. It is also to be distinguished from other states of mind, such as trusting someone else’s judgment. It seems to me that it is a finding that is particularly difficult to make against a person who is making a statement on the instructions of another person in lawful authority over him, especially when that other person is better qualified and in a better position to be informed about the matter.[271]I turn then to the representations that Mr Ritchie made in notifying the so called invoices which were notified in order to obtain repayment for CTGSL of the value of the cheques drawn on CTGSL and paid into the designated accounts. They are discussed above under the heading The Bank Accounts. These seem to me to be in a different category. I have found that Mr Ritchie knew and understood that the substance of the GE facility involved the CTG companies selling their debts to the bank. I also find that Mr Ritchie knew that CTGSL had not provided to CLL, CTL or CTRL any goods or services in respect of which these sums were debts. He knew that they were not invoices or debts at all.[272]Mr Ritchie’s explanation in respect of these cheques is that he did ask Mr Smedley about the cheques, and that Mr Smedley said that these were payments made in advance of the debtors themselves paying. That, Mr Smedley said, is why they had to be entered as payments from the debtors, not from CTGSL. As to this explanation, there are some cases in respect of which I cannot find that it must be false. These are cases where there was indeed a payment from the customer within a day or two, and where the customer’s cheque was credited to the RBS account. But these cases represent a minority.[273]It remains to consider the notifications made by Mr Ritchie to GE of the so called invoices to CTGSL by means of which GE was induced to repay to CTG the sums credited to the designated accounts by means of the CTG cheques. If CTGSL were reimbursed by the customers’ cheque being deposited into the RBS account, there would be no need for these invoices designed to effect re-imbursement from GE. In relation to these, I accept that Mr Ritchie was acting as he did because he chose to obey Mr Smedley’s directions. But in these cases what Mr Smedley was doing was not telling Mr Ritchie that the facts which Mr Ritchie was representing to GE were true. The representation in these notifications was that CTGSL was a debtor whose debt was being offered for sale by the CTG company to GE. But there is no suggestion that CTGSL was itself a debtor, or that Mr Ritchie ever thought that CTGSL was a debtor. He knew that it was not. In effect Mr Ritchie was relying on Mr Smedley, not in these instances to support a belief that what he was representing was true, but to support a belief that he could represent to GE things that he knew were untrue.[274]It follows that in relation to the notifications of debts due from CTGSL I find that Mr Ritchie did know that what he was representing to GE was false. I reach this finding with regret. I have in mind the words of Stuart Smith LJ cited in para 118 above. “The pattern of a corrupt employee becoming more and more deeply involved in the fraud of his corrupter is unfortunately all too familiar”. This is clearly a case where Mr Ritchie has been corrupted by Mr Smedley and has become more and more deeply involved.

WHAT MR GEE KNEW

[275]Mr Gee states in his witness statement that until the meeting called by Mr King on 21 December 2001 there was nothing known to him to suggest there was a problem either with the group’s finances or with GE. He said that he was concerned with the operational and not with the financial side of the management. In cross-examination he went so far as to say that his knowledge of the finances of the group, and the agreement with GE that he signed, was so limited that he believed the invoice discounting facility with GE was in fact an overdraft. He told me that it was not until long after he signed the agreement with Mr Gee that he realised that GE were not the group’s own bankers and that the group still had its accounts with RBS. This is not what he says in his witness statement, as discussed below, and would in any event be entirely incredible coming from a man of Mr Gee’s education and business background. It follows that I found him to be an unreliable witness. Mr Gee claimed to be unaware that there were cash flow problems in 2001, and, as already stated, unaware of any fraud. When he gave evidence he stated that he still had not formed any view as to whether or not there had been a fraud.[276]Mr Gee obtained a BA degree in Business Studies in 1973 and took an MSc in logistics in 1996. Between 1973 and 1979 he worked for the National Freight Corporation and Dawsons Group, both of which were logistics companies whose business was storing and moving goods by road. He was in management on the operations side, and stresses that, as with the CTG group, the finance functions of these companies were separate from the operations functions. He started the CTG group in 1979 with a small fleet of commercial vans and eight or nine employees, operating an express delivery service. In the beginning the finance side was run by a chartered accountant who was a former colleague from Dawsons. The investment from 3i came in 1983.[277]In 1986 Mr Gee acquired control from Scania of a dealership that became City Truck Sales Ltd (the business of which was taken over by CTL in 1997). Mr Banwell had been responsible for the finances of that business and assumed responsibility for the finances of both businesses until that function was taken over by Mr Smedley in 1990. Mr Gee invited Mr Smedley to take over the finances. Mr Banwell was required for other management responsibilities. In addition to Mr Smedley’s qualifications as an accountant, Mr Gee valued his background working in IT and through Mr Smedley, Mr Mockford was recruited to become CTG’s head of IT. Mr Gee states that Mr Smedley established the group’s in house IT and communications department. The group expanded rapidly. In 1996 CLL was formed. Mr Gee states that CLL’s turnover rose to between £60m to £70m and accounted for about 60-70% of group turnover. He says that CLL’s employees number about 900 out of a total for the group of between 1300-1400 by January 2002.[278]Mr Gee describes his role as running CLL, and developing the business of the group. He devised and reviewed the ways in which the group worked for new and existing customers, and spent much of his time with customers.[279]In his witness statement Mr Gee describes the role of Mr Gracey, which included the production of weekly management accounts for distribution to the divisional managers and to Mr Gee himself. But Mr Gee says the amount of paperwork Mr Gracey produced was so great that it was impossible for Mr Gee to read and digest it all.[280]In his witness statement Mr Gee states that he was aware of the self billing process in so far as it operated from the point of view of the customers who used it. But he states there that he did not know how it was dealt with for the purposes of the GE facility. He did accept that he knew that the ZZ accounts were something to do with the self billing customers.[281]In his witness statement Mr Gee states that he was aware that all the assets of the group were owned by CTGSL, that Mr Steel was responsible for funding the acquisition of the assets, and that the trading companies used the assets and were charged for that use by CTGSL.[282]The ignorance that Mr Gee expressed in his oral evidence about the group’s banking arrangements was not consistent with his witness statement. There he recognised that up until 1999 the group been financed by bank overdraft and loans and that Mr Smedley had suggested to him the possibility of receivables financing, and that there was such a facility with RBS before the one with GE. It is clear from his witness statement that he was well aware of the different banking facilities available. In the witness statement Mr Gee describes how, when the discounting facility was moved to GE, he went to see the RBS director (at a Burns night supper in 2001). He said that they left on good terms, keeping RBS as the group’s clearing bank and with the clear understanding that the group would be welcome back to RBS if things did not work out with the discounting facility with GE. In his witness statement Mr Gee accepts that he was aware that GE audited the operations of the facility on a regular basis. He met Mr Broomhead on his visit to Northampton. He met two auditors on a visit there.[283]Whether or not Mr Gee read the agreements he signed with GE is immaterial. If he did not, then it was because he did not need to. I find that he was fully aware of the nature of the agreement and understood that it contained conditions which had the effect of those clauses which are set out or summarised above (under the heading The Contractual Framework) and are relevant to these proceedings.[284]Mr Noonan’s evidence and that of Mr King assist me in assessing what Mr Gee knew and did not know. In a note of a meeting on 4th August 2000 Mr King describes Mr Gee as still running the business as if it were a small family position. Even so, long after his appointment, Mr King was still concerned as to how he was to fulfil his role as a non-executive director. Mr King recorded that the CTG business “is still a one man band in that David is the dominant influence in many aspects of the business”. Mr King considered that he was not receiving sufficient information. Mr Smedley agreed with Mr King’s assessment of Mr Gee’s role, as set out in para 237 above.[285]Mr Noonan says that his own role (like that of the other heads of divisions of that company) was in fact more that of a general manager. He (and they) had very little say in the running of CLL. The business was run very much by Mr Gee who made the key decisions about strategy and finances. The heads of divisions knew very little about what was happening in CLL as a whole and were not invited to discuss the strategy for the company. He gave this example. Even though he was a director of CLL and was responsible for City Freight, he had very little authority to spend money. He was able to authorise expenditure up to a value of about £500. Further, if he wanted to recruit additional drivers or take on new customers, he would have to ask Mr Gee for authorisation. The two largest items of expenditure for the CLL divisions were wages and diesel fuel. These were both paid for centrally.[286]The different divisions of CLL all held management meetings. There were separate management meetings for each of the divisions. These were attended by the director responsible for the division, Mr Gee, Mr Smedley and/or Mr Gracey. In other words, Mr Noonan would be the only director (except for Mr Gee and Mr Smedley) in attendance at the City Freight management meetings. The other heads of divisions, Tony Ware, Colin Rust and Phil Constable, were not invited to attend these meetings even though City Freight was a division of CLL. Initially the management meetings were held on an ad hoc basis. Latterly, these were held quarterly. Mr Gee was always in attendance. He would usually be accompanied by Mr Gracey or Mr Smedley. The management meetings were fairly lengthy and detailed but related solely to the relevant division. Figures would be discussed at length including sales turnover, profit and loss. A budget would be set for the year and the meetings focussed on performance as against budget. Mr Noonan does not recall any notes being prepared of these meetings. Mr Gee demonstrated to Mr Noonan a detailed knowledge of the finances of the company at these meetings. He does not recall CLL ever holding a board meeting at which all of its directors were present.[287]I accept that there was a division of responsibilities within the business, and that Mr Gee did focus on the operational side, while Mr Smedley was responsible for the financial side. But I do not accept that the division was as clear as Mr Gee invited me to believe. There are a number of documents which show that Mr Gee took an active interest in the finances of the group as would be expected in a person with his role and interest in the company. He sent and received detailed communications about the finances, and he did so because he knew a lot about the financial situation of the companies. He received the management accounts, and Mr Gracey’s and other employees’ communications about the finances, because he needed and wanted to know the details. I accept that he did not read everything that was sent to him, but he did read some of it, and he replied to some of it or forwarded it on to others.[288]Against that background I turn to the particular matters relied on by GE as showing Mr Gee knew of and participated in the deceit and conspiracy alleged.[289]In or around September 2000, Mrs Hogan brought her concerns about the accounts to the attention of Mr Gee. This was at a meeting in Birch. She discussed with him the variances between her and Mr Gracey’s accounts. She recalls him telling her that he understood the reason for the major variances and saying that both he and Mr Gracey had a full grasp of the situation. Fuel was a major cost of the business, and I accept that part of the variances was due to technical changes in newly acquired trucks and their unexpected fuel consumption. Although Mr Gee demonstrated a detailed understanding of variances attributable to fuel, Mrs Hogan was also sure that he understood that this was not the only, or even the major, cause of the variances which she had raised with him. As far as she was concerned, the main reason for the variances was the posting of fictitious invoices to the accounts and the failure to credit out ZZ accounts.[290]On 2 October 2000 Mrs Hogan wrote to AB pointing out that the variance between the financial and management accounts could in the main be attributed to the City Transport divisions reporting actual sales in excess of management accounts to a value of £1,206,588.75. She commented that the discrepancy appeared to relate to adjustments made by her in the sum of £1,368,071.86 together with ZZ account entries and credit notes. She mentioned these concerns to Mr Gee when she spoke to him. Mr Gee gave her the impression that he was fully aware of and understood the finances of CLL.[291]On 10 October 2000 Mrs Hogan sent an email to Mr Smedley telling him that she had spoken with Mr Gee (as referred to above). In the email she referred to the fact that Mr Gee had “indicated that he understood the major variances (fuel in particular)”. She said that she drew attention to the fuel variances in the email because these were the ones that Mr Gee chose to discuss with her. He did not appear to want to discuss her other concerns. It was put to her in cross-examination that fuel was the only matter she was concerned about, and that Mr Gee could not have understood that she was concerned about anything else.[292]It is the case that none of Mrs Hogan’s e-mails are as explicit as her May 2000 note which, alone, refers to the entries on the ledgers as “fictitious”. But in the 10 October 2000 e-mail she wrote: “I spent a considerable amount of time reconciling turnover for the period 31/8/00. This issue is being clouded by “dummy” invoices being issued on several of the larger accounts and by the provisions on the “ZZ” accounts. There are also a large number of credit notes being issued by Transport, which I understand are not reported in the management accounts”.[293]It is suggested that it is possible to understand Mrs Hogan’s e-mails as referring only to innocent errors and discrepancies. A person in Mrs Hogan’s position who did suspect that the entries were fictitious might be concerned to use language that was more ambiguous, or euphemistic, than the word “fictitious”. But I do not consider that it is possible to read this e-mail as referring to invoices which were dummy in the sense that they were provisions for invoices which were to be issued a few days later by the self billing customers, and which were then reversed when the invoice was issued. I find that there was a problem, as Mrs Hogan describes, and it must have been because the invoices were either fictitious in the first place, or because they were not being reversed when the self billing customer did send an invoice which was posted to the Sales Ledger. And the memo of May 2000 demonstrates that Mrs Hogan was concerned about what appeared to her to be fictitious invoices.[294]In fact Mrs Hogan did again use more explicit language on 9th November 2000, referring to “invented” turnover in the e-mail to AB and Mr Ritchie, which she copied to Mr Gracey and forwarded to Mr Smedley, although not to Mr Gee: see para 246 above.[295]Mr Gee’s evidence is that he was not at Birch at the time Mrs Hogan said she had had the conversation. He based this on the fact that there is no entry in his diary showing that he was. He says that he only ever spoke of fuel variances, and he did not have the conversation with Mrs Hogan which her e-mail refers to.[296]I accept Mrs Hogan’s evidence on this point. I do this because in general I have found her to be a reliable witness, whereas I have found that Mr Gee is not, and because Mrs Hogan’s account is consistent with the contemporaneous documents, whereas Mr Gee’s account is not.[297]The next incident relied on by GE is one alleged to have occurred on an occasion when Mr Gracey was driving with Mr Gee to a meeting in Winsford. Mr Gracey states that during the drive Mr Gee spoke over the phone to Mr Smedley. Mr Gracey says that cheques had been presented for payment totalling some £200,000 without them realising that this was going to happen. Later that afternoon Mr Gee looked through an aged debt report and remarked to Mr Gracey, that the ZZ account for British Gypsum appeared to show that they owed a considerable amount of money. Mr Gracey states that he responded saying:
“No David, that is what Mr Smedley is doing with the work in progress on the ZZ accounts”
. Mr Gracey says that Mr Gee did not ask for any explanation or continue with the conversation. Mr Gracey explained in cross-examination that British Gypsum was a weekly account and it would be unlikely that it would be outstanding in more than £100,000. Mr Gracey understood that Mr Gee understood that the ZZ accounts were overstated. Mr Gee denies that Mr Gracey made the statement that is alleged.[298]There is an aged debt report which was sent to GE for February 2001 which shows a balance due from British Gypsum of £1,008,538.15 on the ZZ account and £452,977.95 on the normal account. The figure for British Gypsum’s ZZ account remains at approximately that amount on the aged debt reports through to December. Mr Gee recalled that the annual turnover on the British Gypsum account was about £6-7m. It appears from the e-mails sent by Mr Gracey to Mr Gee on the subject of Debtors and Work in Progress that British Gypsum was a weekly account.[299]There is a further incident relating to the early part of 2001. Mr Gracey states that he remarked to Mr Gee that Mr Smedley appeared to be directly banking monies into one of CTG’s own bank accounts rather than paying it to the factor. He says Mr Gee asked why Mr Smedley would do that, and that he, Mr Gracey, responded that this would give Mr Smedley money to play with in the current account and help him to keep old debts live. Mr Gracey stated that Mr Gee reacted as if he understood what he had been saying to Mr Gee. Mr Gracey described Mr Gee as a shrewd and intelligent businessman, which he plainly is. Mr Gee again states that that is a conversation which did not take place.[300]A further conversation alleged by Mr Gracey was in mid 2001. Mr Gracey states that he had a conversation with Mr Gee as they were driving to a meeting with a customer, who he believes to have been Cheshire Recycling. That company was a managed contract customer, for which Mr Gracey prepared the invoices. Mr Gracey said that at one point Mr Gee turned to him and said:
“Every invoice you raise, is one less that Kevin Ritchie has to make up”
. Mr Gracey said that he understood Mr Gee to be acknowledging that he knew of Mr Ritchie’s role in abusing the facility with GE. Mr Gee’s evidence is that that conversation did not take place. But he accepted that if these words were said, he could not offer an explanation of what they might have meant other than that Mr Ritchie was making up fictitious invoices.[301]On 27th June 2001, it will be recalled, the GE auditors visited the CTG companies, and the £4.5m of fictitious debt was added to the CLL sales ledger to produce an aged debt report for May to correspond to the one that had been sent to GE on 19th June 2001. On that day Mr Smedley sent an e-mail to Mr Ritchie headed “Sales Ledgers”. It reads:
“Colin Rust has been bending David’s ear re the invoices you have entered on the Hays Accounts. Is it possible to clear the ledgers tomorrow i.e. Thursday”
[302]The reports produced by Mr Stern show that on that day (as on 18th June) £227,480 had been entered on the Hays ledger by Mr Murphy in eight separate entries of £38,435, and in each case cleared off by credit notes entered by Mr Ritchie. In every case the transaction date for the invoice is given as 31st May and for the credit notes the transaction date is 30th May. Mr Gracey’s evidence is that Mr Rust had also complained to himself. A member of Mr Rust’s team had visited Hays, and they had queried an invoice on their account which had been fictitious. Mr Gee’s evidence is that this is not what the e-mail to Mr Ritchie is about, but that what Mr Rust raised with him was an issue relating to pallets.[303]There are e-mails in which Mr Gracey reports on the true position to Mr Gee. While it is Mr Gee’s evidence that he did not read these e-mails, nevertheless they do show that Mr Gracey was alert to the problems at the time and the evidence as to the conversations which he says he had is the more credible in that context.[304]On 2nd July 2001 Mr Gracey sent Mr Gee an e-mail. Mr Gee’s evidence is that he did not read it. The e-mail refers to “adjustments” that Mr Ritchie and Murphy have made to the Alcan and Akcros accounts in sums of £940k and £629.8k. It also refers to “ZZ codes £4.225m”. It concludes “Total debtors on the Report come to £12.998M or effectively £7.203M of collectable debtors”. Mr Gee’s evidence is that if he had received that he would have asked Mr Gracey what he meant, because such sums in uncollectible debt would have been of huge concern to him.[305]In July 2001 Mr Gracey stated that there was a conversation between him and Mr Gee in which Mr Gracey said that people were not happy with the entries on the ledger which were causing Mr Gracey concern. He says that Mr Gee asked him who was not happy, and he named Mrs Hogan. Mr Gracey states that Mr Gee turned to him and said “You can tell f***ing Kim Hogan to f*** off”. Mr Gracey says he was shocked and did not pursue the matter. Mr Gee’s evidence is that he did not say that. He accepted that language of that kind was used, CTG being, as he said, a transport company. But he said he would not use it to Mr Gracey.[306]Mr Gracey gave evidence of another conversation he had with Mr Gee in or after July 2001. The discussion was about the accounts and Mr Gracey was asking when they would be dealt with properly. He says Mr Gee said to him:
“If Smedley is lifting GE’s leg by one or two million, then that is OK by me”
. Mr Gee’s evidence is that he did not say this, and that Mr Gracey has made it up. However, Mr Gee recalled this unusual turn of phrase as one that had been used in his presence by people he had worked with in the Dawson group.[307]Mr Gracey gave evidence that on another occasion he had said that Mr Smedley had paid money into the RBS account rather than the GE designated account. He stated that Mr Gee remarked :
“I would expect him [Smedley] to be doing that anyway”
. Again Mr Gee’s evidence is that this is made up by Mr Gracey.[308]At about this time in mid 2001, Ms Cartwright’s evidence is that there was an unusual telephone call by Mr Gee to her. According to her evidence, and the evidence of Ms Roberts, in mid 2001, at a time when her suspicions had already been aroused (as referred to above), there was an incident when Ms Roberts, one of the credit controllers, had contacted a customer to pursue what appeared to be an outstanding invoice which indicated a substantial outstanding balance. The customer queried this with Ms Roberts, requesting copies of the invoices which appeared as outstanding on the CTG systems. Ms Roberts passed the query to Mr Ritchie and the invoices were removed from the system. Meanwhile, Mr Gee telephoned Ms Cartwright to ask what had happened, making it clear that the customer had been concerned to learn of the size of the balance and had contacted him to query this. This was the first time that Mr Gee had contacted her. She had barely spoken to him before. He was extremely angry. Ms Cartwright checked the accounts system (either whilst she was on the phone to Mr Gee, or afterwards with Ms Roberts before calling him back). She told him that the entry had been made by Mr Ritchie or Paul Murphy and commented that it was "one of those entries". Mr Gee appeared to accept this explanation and made no further enquiries. She intended to convey that the entry on the ledger was fictitious, and she felt confident that Mr Gee had understood her to be meaning this, because he did not ask what she meant. The context was such that she would have expected him to ask what she meant if he had not understood.[309]Mr Gee denied that any such conversation took place. He claimed that Ms Cartwright made the evidence up, although he could not offer any reason why she might have done so.[310]In October 2001 Mr Wilkinson had a conversation with Mr Gee. The background is as follows. Mr Gee had been concerned with the Akcros contract in particular detail, because in the period of about three months preceding the Administration he had been preparing to take over the entire logistics operation of Akcros, and to move the CTG operation from Birch to the Akcros site at Eccles. Mr Wilkinson had assisted in this project. Mr Wilkinson gave evidence that Mr Gee was fully aware of all matters relating to the operation and management of the contract on a day-to-day basis, including all aspects of the financial management of the Akcros business.[311]When Mr Gee came up for one his regular quarterly meetings with the Akcros management team Mr Wilkinson approached him in private. The date is uncertain, but may well have been October 2001. Mr Wilkinson gave evidence that he told Mr Gee of his concerns regarding the banking of Akcros monies into the RBS account, and the pressure that he was put under to collect the cheques. Mr Gee told Mr Wilkinson in no uncertain terms that he should do whatever Mr Smedley instructed him to do and that he should never question Mr Smedley’s instructions again. Mr Wilkinson was extremely shocked by Mr Gee’s reaction. Mr Wilkinson is not a man who I would expect to be easily or mistakenly shocked. He appeared to me to be a man of judgment with the knowledge of business to be expected from his long experience.[312]Mr Gee’s evidence is again that Mr Wilkinson has made this up. He said that there could be no circumstances in which such a private conversation would have been possible on one of his visits to Akcros.[313]Taking all of these alleged conversations by Mr Gracey, Ms Cartwright and Mr Wilkinson together, and having regard to the contemporaneous documents, I am sure that the evidence of these three witnesses on these matters is all true.[314]There was further evidence about e-mails and meetings in October and November. Mr Tozzi QC accepted that a meeting attended by Mr Gee that month, and the e-mails relating to it, did not advance his case.[315]It remains for me to address one further incident involving Mrs Hogan. She states that she tried to speak with Mr Gee about her concerns again in December 2001. She was aware that he was going to be attending a management meeting in Birch and asked if she could have a word with him. There is no dispute that they did have a meeting, and that she was sufficiently upset by it to have shed tears in his presence.[316]Her evidence is that she told him about the high level of irregular invoices she was seeing on the CLL account, about the cash flow problems and that she felt divested of all responsibility. She says that she expressed grave concerns about the accounts and mentioned to him the cheques moving between company accounts. She said she believed she also referred to the dummy invoices. She says she was surprised by what she perceived to be Mr Gee's complacent attitude and response. He did not look at all surprised by what she had told him and merely commented that he left that side of the business to Mr Smedley. Mrs Hogan states that she was somewhat taken aback by Mr Gee’s response. She had understood from her previous meetings with him and her discussions with colleagues and Mr Noonan that Mr Gee was very business minded and had a keen interest in the finances of the business that he had built up. Mrs Hogan sent Mr Gracey an email on 18 December 2001. It reads “I’ve had a little chat to DG this afternoon – perhaps not the wisest of things to do, however, I do feel marginally better – you know me ever the optimist!”[317]Mr Gee’s evidence is that Mrs Hogan spoke only about her fear of redundancy for herself and others, including her sister. He also said that he would have been surprised if, though she thought there was a fraud, Mrs Hogan had not tried to tell him about it. As I read the e-mail, she was saying that it might have been unwise because raising her true concerns involved risking her job. It is not so clear why raising concerns about possible redundancy would have been unwise.[318]I am sure that Mrs Hogan’s account of the meeting is true. There is no doubt that she did think there was a fraud. Having seen her, I agree with Mr Gee’s assessment that in those circumstances it would be surprising if she had not tried to tell him about it. Her e-mail to Mr Gracey seems to me to be consistent with her account, and not what I would expect her to have written if Mr Gee’s account were true. In my judgment Mr Gee’s evidence on this point was false, and the reason that he was lying was that he already knew and approved of what Mr Smedley was doing, but would not admit that.[319]Looking at the position more broadly, it is so very improbable as to be incredible that Mr Smedley would have done what I find he did do without Mr Gee knowing about it and encouraging it. Mr Gee was, as the majority shareholder and founder of the business, the person who stood to gain most from the deception practised on GE. He also stood to lose the most (apart from GE itself). Their longstanding relationship also makes it improbable that Mr Smedley would have deceived Mr Gee on such matters. And if Mr Gee had been deceived by Mr Smedley, it is improbable that he would react as I find that he has, that is to say in the manner which Mr King described in December 2001 as ‘protective’ of Mr Smedley. The reason why neither Mr Gee nor Mr Smedley have investigated or checked Mr Stern’s comprehensive report since they received it over a year ago is, I infer, because they know that there would be no point in doing so. They both already knew the true position. Having seen both men in Court, and having had an opportunity to asses their personalities, I am sure that Mr Gee knew of and encouraged what Mr Smedley was doing. He wanted the business to expand, that meant money was needed, and if Mr Smedley could find ways of obtaining that money from GE by deception, then that is what Mr Gee wanted Mr Smedley to do.

FURTHER FINDINGS ON LIABILITY

[320]It hardly needs saying that GE are a large and structured organisation. They have procedures for obtaining and analysing information from prospective customers and from customers. They have systems and structures for making decisions based on the information obtained and analysed. Mr Apps explained the position in relation to the documents that GE required in terms that I accept. He said:
“These were entirely standard documents which we required in the context of the operation of an invoice discounting agreement. This is because in invoice discounting, the financier is generally notified only a global balance of debts on each notification for funding. This global balance is not supported by any copies of invoices or even a break down of the debts. Because of this, after month end, the invoice discounter must reconcile its own records of debts notified (ie. its records of the sales ledger) with the sales ledger details of client from the documents provided after month end. After taking account of cash in transit and adjustments, the two sales ledgers should then balance. It was therefore vital that GE received the documents which were set out in the Special Conditions as required and that they were accurate.”
[321]I have no doubt that Mr Smedley and Mr Gee understood this. They did not take CTG’s obligations under the agreements very seriously, and their repeated failures to provide the required information gave rise to a number of occasions when GE representatives explained to Mr Smedley what they required. These made little difference. GE was not the only object of this secretiveness. His failures to provide adequate information to the directors of the companies had also caused frustration to Mr King. I find that Mr Smedley and Mr Gee had understood from before GE’s involvement with CTG what was required of by an invoice discounter.[322]Mr Ritchie had had a meeting with Mr Lyall, GE’s client manager. He had spent over half an hour in January 2001 explaining to Mr Ritchie how the systems worked and what GE would need. Mr Lyall thought that Mr Ritchie understood and Mr Ritchie did not dispute that. Mr Ritchie gave the same impression to me.[323]It is certain that GE would not have made the advances that they did make up to and including the last payments in December 2001 unless they had believed the information that was provided to them on behalf of the CTG companies. It is true that by then they had become very dissatisfied and suspicious. But Grant Thornton’s review in October had been reassuring, even if it did not allay their disquiet. The fact that they had their suspicions does not alter the fact that they acted on the faith of what Mr Smedley and Mr Ritchie told them, as, of course, they were intended to.[324]It is not clear what difference it might make whether the defendants are liable for the tort of deceit only, or for both torts, conspiracy and deceit. I make the following findings in respect of conspiracy.[325]In relation to Mr Gee and Mr Smedley I find that their principal purpose was to benefit the CTG companies, and in the case of Mr Gee, thereby to benefit himself. But they also intended to injure GE and their actions were aimed at GE. They were co-conspirators in the unlawful means conspiracy to injure GE. This would be so even if they hoped that GE would not suffer any damage in the end, for example if they thought that they could raise money in some way to pay off GE, should the need arise. What they were doing was intentionally exposing GE to the risk of what in fact occurred in the form of the insolvency of the CTG companies.[326]The position in relation to Mr Ritchie is less clear. There is nothing in principle to prevent a junior employee from being party to a conspiracy with the finance director and managing director of a large company. As to the representations by Mr Ritchie which I have held he made but did not know to be false, he was no more than a tool of Mr Gee and Mr Smedley. In relation to them he was not a conspirator. In relation to the false representations which I have held that Mr Ritchie did make knowingly, the question arises whether he shared the same object or intention as Mr Gee and Mr Smedley, that is the intention to injure GE, and whether he combined with them tacitly to achieve this.[327]It seems to me that this is a finding that can only be made if the standard of proof is a very high one. The event is not probable, both because it involves dishonesty, and because it involves an agreement between individuals of such different status, where the junior one is already under an obligation to act in accordance with the instructions of the senior. Their acting together does not therefore require the inference that there must have been an agreement in addition to that constituted by the employment contract.[328]I am not satisfied to the necessary high standard that Mr Ritchie shared any such intention, or that he deliberately combined, tacitly or otherwise, with Mr Smedley or Mr Gee to injure GE.

DAMAGES

[329]The submission that I have received on the law relating to damages came initially from Mr Tozzi QC alone. Some very late submissions from Mr Thompson are considered below. Mr Tozzi QC relied on the statement of the law by Lord Browne-Wilkinson in Smith New Court Ltd. v. Scrimgeour Vickers [1997] A.C. 254 at p267 where he said:
“… the following principles apply in assessing the damages payable where the plaintiff has been induced by a fraudulent misrepresentation to buy property: (1) the defendant is bound to make reparation for all the damage directly flowing from the transaction; (2) although such damage need not have been foreseeable, it must have been directly caused by the transaction; (3) in assessing such damage, the plaintiff is entitled to recover by way of damages the full price paid by him, but he must give credit for any benefits which he has received as a result of the transaction; (4) as a general rule, the benefits received by him include the market value of the property acquired as at the date of acquisition; but such general rule is not to be inflexibly applied where to do so would prevent him obtaining full compensation for the wrong suffered; (5) although the circumstances in which the general rule should not apply cannot be comprehensively stated, it will normally not apply where either (a) the misrepresentation has continued to operate after the date of the acquisition of the asset so as to induce the plaintiff to retain the asset or (b) the circumstances of the case are such that the plaintiff is, by reason of the fraud, locked into the property. (6) In addition, the plaintiff is entitled to recover consequential losses caused by the transaction; (7) the plaintiff must take all reasonable steps to mitigate his loss once he has discovered the fraud. ”
[330]The effect of the deceit that I have found in the present case is not simply that GE was induced to buy property, namely debts. In so far as the misrepresentation was that there were debts when in fact there were none, then the effect of the misrepresentations was that GE were induced to pay money for nothing. To the extent that any misrepresentation was that there were debts that were notifiable but in fact they were not notifiable, but they were genuine debts, then GE were induced to buy property, namely the debts. These misrepresentations, when first made, and when confirmed in Aged Debt Reports and other documents, had a further result: they induced GE to buy genuine and notifiable debts when they would not otherwise have done so. To illustrate this it is sufficient to see what happened on 4th January 2002. When GE discovered how the facility was being used by the CTG companies, they immediately refused to buy any further debts until the Administrators had been appointed. I find that this is what would have happened if, and immediately after, GE had at any earlier date found out that the information they were being given was false.[331]GE do not attempt to breakdown their claim for damages by reference to any classes of payments or any specific payments by GE. In a case such as this, where money was paid out in reliance on misrepresentations made over many months (that is to say since at least the commencement of the facility with GE), with sums being reimbursed over the same period by payments coming in from customers, it would be an impossible task to link any given payment to the loss that GE have suffered. But cases in which it is uncertain how a pecuniary loss is to be measured are common in the case law on damages. GE do not have to prove precisely which debts notified to it were fictitious, and what damage they suffered as a result of each such notification.[332]GE’s case is that the net shortfall is calculated by the Administrators to be between £16,044,000 and £16,268,000 (see their report of 10 December 2004). GE split this figure to arrive at £16,156,500 and claim this sum as its loss. In my judgment it is the lower figure that must be taken. GE also have the benefit of calculations of damage by Mr Stern. In submission Mr Tozzi QC did not base GE’s claim upon these calculations. He referred to these calculations, which arrive at a figure of £17.8m, but his reliance upon them is as a form of cross-checking.[333]The Administrators arrive at the lesser of these round figures as follows, in summary: Owed to GE at date of appointment of receivers (para 42 above) -£24,028,000 Net realisations, before costs of administration £ 10,133,000 Estimated costs of administration -£ 2,148,000 Total estimated shortfall -£16,044,000[334]There was no dispute about the figures themselves, nor any investigation in evidence of the facts said to give rise to them. What was investigated was whether constituents of them are recoverable as damages for deceit or conspiracy. I shall return to this below. While initially Mr Gee was reserving a point as to mitigation of damage arising out of the sale of part of the business to Mr Noonan, in the event no such point was pursued. During the trial it was not disputed that GE acted reasonably in applying for the appointment of the Administrators and in funding the business for the time they did fund it thereafter, with a view to seeing what could be done to retrieve the situation and finally to effect an orderly wind down of the businesses.[335]The principles set out in Smith New Court are an elaboration of the general principle that the correct measure of damages in the tort of deceit is an award which serves to put the claimant into the position he would have been in if the representation had not been made to him: McGregor on Damages 17th ed para 41-002. So where no contract is entered into the measure of damages is the actual damage directly flowing from the fraudulent inducement (McGregor para 41-029). So in Standard Chartered (as summarised in McGregor at para 41-033) the claim in deceit and conspiracy; “gave rise to a loss which led to a somewhat different measure of recovery. Payment having been made by the claimant bank to the seller of a cargo upon the presentation of fraudulently dated bills of lading, the bank successfully claimed as damages against a variety of defendants the difference between the amount of its payment and the amount it recovered on the sale of the cargo together with the additional expenses incurred in trying to dispose of the cargo. Mitigation was the main issue. There being no available market in which to sell the documents or the cargo the Court of Appeal held, affirming the court below, that it was reasonable to take the bank’s actual sale price, and at a later date than the commission of the deceit, despite the contention of the defendants that the market value of the cargo was at all time greater than the amount paid over to the bank”.[336]The issue in this case is whether all the damage claimed did follow from the misrepresentations that I have held to be deceitful.[337]If GE succeeds on that issue, then this is plainly a case where the misrepresentations continued to operate after the dates on which GE was induced to pay for each genuine debt, and GE were effectively locked in to the position, until they could extricate themselves in the manner they did. Had GE not funded the Administrators, the CTG companies would have been unable to fulfil their contractual obligations outstanding at the beginning of January 2002, and many of the customers whose genuine debts had been notified and assigned to GE would have suffered losses which they would have set off against such outstanding debts as they happened to have. GE would have thus been likely to suffer much greater losses. The costs of the Administration and of funding the continuation of trading (which were plainly reasonable steps taken in mitigation of damage) were consequential losses.[338]So far as the tort of conspiracy is concerned, GE submit that the law is that it is necessary to show pecuniary loss, but if that is done, damages are at large. They cite Lonrho v Fayed (No 5) [1993] 1 WLR 1489 at 1494B. On the facts they submit that there is no reason for the sum recoverable in conspiracy in this case to be any different to that recoverable in the tort of deceit. That submission is supported by Standard Chartered, as discussed above, and I accept it.[339]After CTG went into Administration on 10th January 2002, GE continued to provide funding to the companies during the Administration in order to provide the Administrators with working capital to enable them to continue trading. In the event, the CTG traded until around the end of March 2002. This further funding was provided under the existing invoice discounting arrangements with GE advancing payments against debts that were notified. The Administrators notified debts to GE on the GE Link system and GE paid against those debts.[340]Mr Smedley refers to the fact that the Administrators did not make a clear distinction between receipts in respect of pre-Administration trading debts and post-Administration trading debts.[341]The explanation is as follows. It proved very difficult for staff to allocate receipts correctly between pre and post Administration trading. Although new bank accounts were opened, the old ones were not closed, and customers made payment by bank transfer, and continued to use the bank accounts which they had previously used. Customers would make a single payment which reflected trading both before and after the appointment of the Administrators. Both before and after the Administrators were appointed GE made a practice of paying the sums due to each of the companies into the account of one of them.[342]The manner in which the Administrators apportion their figure for net realisations is to take the collections at £25.6m (which is not in dispute) and apportion £17.6m to post administration trading and £7.9m to pre-Administration trading. This is disputed by Mrs Hindson.[343]With the assistance of Mrs Hindson, Mr Smedley makes a number of points arising out of the figures. But neither he nor Mrs Hindson set out the principle of law which they submit justifies their approach. To some extent the principle is implicit and can be deduced. So he submits that there should be deducted from the shortfall claimed the £2.1m costs of the Administrations. This is in my judgment an error of law. The costs of the Administration are recoverable as consequential damages.[344]Next Mr Smedley calculates from the figures given what he submits must be post Administration advances in the sum of £4.6m, a sum of £4.8m attributed to bad debts, £5m which he accepts was double counted on the ZZ accounts (albeit, he says, not deceitfully by himself) and other immaterial small amounts. He submits that these are not caused by any deceit, and, when added together, amount to a sum of £14.2m which is nearly enough to explain the claimed shortfall of about £16m.[345]GE’s contention, supported by Mr Stern, is that it is wrong in principle to start with the claimed shortfall and seek to account for it in this way. The total value of the debts notified was in excess of £30m (see paras 40 and 41 above).[346]Mr Smedley submits that the figure of £34m is misleading, and out of line with the balances on the Asset Account in previous months. These are shown in a Schedule to his Closing submissions. The Schedule lists the balance on the Asset Account for each month and deducts a figure described as “Cash in transit”. This Schedule lists resulting closing balances which would be rounded to £30m to £31m or more for each of the months July to December 2001. It may be that the rise in the figure to £34m on 10th January 2002 is related to the fact that he and Mr Ritchie had no further control over the notifications after 2nd January (there was some discussion of CTGSL cheques which had been cancelled, but I have not found it necessary to explore this).[347]The point advanced by GE is that, by reason of GE only advancing 85% of the value of any notification, any shortfall between the value of a notified debt and the value recovered (net of costs of recovery) would cause no damage to GE, so long as they recovered at least the £24m owed to them at date of appointment of receivers. So GE say that if there are any figures to be deducted, such as bad debts at £4.8m, they are to be deducted from the starting figure of £30m or so, not from the claimed shortfall of about £16m.[348]In my judgment it is plain that GE are correct in their submission that any deductions fall to be made from the starting figure of notified debt (whether £30m or £34m), not from the claimed shortfall. It is plain that (subject to incidental expenses) if a debt notified in the sum of £100 is bad to the extent of £15 and no more, the fact that GE has advanced only £85 means that GE will suffer no loss, whether the overstatement of £15 is innocent, negligent or deceitful. Similarly, if the whole of the post Administration advances and expenses were lost, they too would fall to be deducted from the starting figure of notified debt at £30m plus, and not from the claimed shortfall of £16m. Mrs Hindson accepted this in her evidence at day 29 p37 line 18.[349]Having seen the force of this criticism of the approach in her first report, when made at the meeting she held with Mr Stern, Mrs Hindson produced her second report. In this she did start with the £34.8m balance on the Asset Account referred to above. To this figure she added the £14.3m of debts (net of credit notes) which Mr Stern agreed was notified and assigned to GE, and posted to the Asset Account, in the period after 10th January 2002. The resulting figure is £49.1m. Her explanation of this is summarised by Mr Smedley in his closing submissions as follows: £ £ Total pre and post-administration sales invoices 49.1 Deduct: Cash receipts 26.2 Non-qualifying and unposted cash items 6.8 ZZ accounts written off 7.7 __ Difference 8.4[350]Mr Smedley’s calculation remains as Mrs Hindson initially wrote it, although in cross-examination she was prepared to accept that the total pre and post-administration invoices should have been £1m higher, at £50.1m. The £26.2m is the sum of cash received in the post Administration period: see Mrs Hindson’s second report para 3.4, referring to her first report Appendices 3 and 6 and were agreed by Mr Stern. The balance to be explained, according to Mr Smedley is thus £49.1m - £26.2m = £22.9m. I have already referred to my findings in relation to the ZZ accounts. Mr Gee and Mr Smedley, but not Mr Ritchie, did make these representations deceitfully with the intention and effect that GE relied on them. The difference to be explained is therefore not explained by the ZZ acounts. That leaves the “non-qualifying and unposted cash items” at £6.8m.[351]Mrs Hindson notes that with a balance due to GE of £24m on a facility subject to a payment of 85% of notified debts, the figure of £24m would be reached if qualifying items of £28.2m were notified (£24m x 100/85). Since the Asset Account showed a balance of £34.8m, it follows, in her opinion, that the difference of £6.8m is logically referable to credit notes that were unposted to the asset account at the commencement of the Administration (according to para 3.7 of her second report, as corrected in evidence: see transcript day 29 p27). In the earlier part of that report, para 2.7, she had expressed the opinion that the excess of £6.8m would “in the normal course of events, consist of non-qualifying items, primarily debts that were 90 days old”. Logically her reasoning would apply equally if the starting figure were lower than £34m as Mr Smedley submits it should be. That would make no difference in principle.[352]However, on the facts that I have found, there was no normal course of events in this case. On the contrary, the notifications included non-existent and non-notifiable debts. It follows that the assumption that there were £6.8m of non-qualifying and unposted cash items is entirely undermined by the findings of fact that I have made. Moreover, there is no evidence that there were debts over 90 days old in any relevant sum. Mrs Hindson’s approach was entirely theoretical in that she had not examined any of the accounting records for herself. Her approach is to start from the assumption that there was no fraud, and seek to explain the figures in the light of that assumption, without having investigated the relevant papers. Given my findings that there were deceitful misrepresentations, that approach is of little assistance to me.[353]The difference of £8.4m referred to in the above calculation was attributed by Mrs Hindson to bad debts. Again the attribution is theoretical, based on her assumption that her explanation for the £6.8m and the £7.7m is correct, and upon informal discussions with her partners in the firm’s corporate recovery department as to the rate of bad debts that might be expected in administrations generally. Neither Mr Gee nor Mr Smedley identified any relevant bad debt in their evidence.[354]There is some evidence as to bad debts. Mrs Hindson refers to a figure of £4.8m for which the Administrators made provision in respect of pre-Administration trading. There is no evidential basis for any figure higher than this. But of this figure the largest item of bad debt identified was in respect of the rebates from truck and trailer suppliers which would have been payable if the companies had continued purchasing new equipment. The suppliers disputed their liability in a total sum recorded by Mr Daniel Smith as £2.2m. This is an example of debt which I have discussed above (in para 206) in relation to a particular Renault truck, where it was debt that should not have been notified by CTL at all, for the reasons there set out. The Administrators’ figures for bad debts on post-Administration trading are not material and can be ignored. The figures for bad debt were not investigated in any detail during the trial.[355]If I assume that Mr Smedley is correct to contend that of the figure of £8.4m arrived at in his calculation is to be attributed even in part to bad debts, I ask myself whether that makes any difference. I conclude that it makes no difference. The effect of the misrepresentations was to induce GE to make payments against genuine notifiable debts which, as I have explained, they would not have done if they had not been deceived. To put GE back in the position in which they would have been if the misrepresentations had not been made is to put them back in the position where they had not bought what have turned out to be bad debts.[356]A further point made initially by Mr Smedley, but adopted by Mr Thompson, relates to the lack of documentation in this case.[357]The burden of proof is, of course, on GE. Mr Thompson submits: “GE, for whatever reason, has been unable to carry out what, in theory, should be a straightforward exercise of calculating this loss. It cannot, or has not, provided notification schedules or the invoices themselves. It is submitted that because the evidence on loss actually presented is far from the best evidence, any doubts about its quality should be resolved in favour of the Defendants, and that must include doubts such as whether a notified sum remained uncollected because it was fictitious or for wholly unrelated reasons (such as third party insolvency or opportunism)”.[358]It is said that the best evidence would have been the invoices which supported the notification schedules. These are missing. Before turning to the effect of that, it is to be noted that there is the evidence of the credit control staff who remained in place until the businesses were wound down in March. In the early part of the Administration the Administrators were exploring possible sales of the businesses and in any event, supported as they were by GE, they had the means and the will to collect all collectable debts. I accept the evidence of Ms Cartwright, Ms Gibb and the two Mr Smiths representing the Administrators.[359]Ms Cartwright said that, in the first few weeks after the CTG companies went into administration, she assisted various individuals from both GE and Arthur Andersen (who were subsequently appointed Administrators) in reviewing the accounts. She said that the Administrators and GE were keen to establish what the genuine level of debts was so that they could go about collecting what was recoverable. She specifically recalled holding a number of meetings with Mr Hanlan of GE and Mr Daniel Smith of the Administrators. Ms Gibb said that she continued to work with representatives of the Administrators and GE to ensure that all possible debts were collected from the CTRL book debt ledger.[360]Mr Matthew Smith and Mr Daniel Smith were concerned in the collection of debts on behalf of the Administrators. Following his meeting with Ms Cartwright Mr Daniel Smith prepared a schedule headed “Initial Review of Book Debts”. The figures were provisional. There is no purpose in setting them out here now. They are not inconsistent with the damages now claimed. I accept the evidence that the Administrators did try to recover all the debts that they could. I reject the submission of Mr Thompson that approaches to debtors were inadequate. I reject as fanciful any suggestion that there might have been material debts (whether uninvoiced, or invoiced but not yet posted to the Sales Ledger) which were overlooked, or which the credit controller did not chase up, or which third parties avoided paying by “opportunism”.[361]GE also rely on the often quoted statement by Sir Arthur Channell in The Ophelia [1916] 2 AC 207 at 229:
“If any one by a deliberate act destroys a document which, according to what its contents may have been, would have told strongly either for him or against him, the strongest possible presumption arises that if it had been produced it would have told against him….”
[362]Absent the finding of deceit that I have already made (for reasons given above), I would not be able to make a finding as to who was responsible for the absence of the documentation which should exist to support the notifications that were made to GE. There is no direct evidence of when or how the documents went missing. So I did not take into account the fact that documents were missing to arrive at my conclusion that there had been deceit.[363]As to some of the entries on the Sales Ledgers, namely those in respect of what Mr Smedley called provisions and in respect of the CTGSL cheques paid into the designated account, my finding is that supporting documents were never brought into existence at all. In these circumstances, it is the act of Mr Smedley that has made it impossible for GE to carry out any meaningful checks with the customers (over and above what they did through the credit control staff). This is part of Mr Smedley’s own case: see para 91 above, para 129ff of Mr Smedley’s Closing submissions.[364]Given that they are themselves responsible for the fact that invoices do not exist, Mr Smedley and Mr Gee cannot rely on the absence of these documents to submit that GE have failed to carry out what they submit is the straightforward exercise.[365]However, many invoices certainly did exist. They are invoices which supported the notification of genuine debts. I accept Mr Ritchie’s evidence that when he was asked to get some information for the GE audit in January 2002, he looked for boxes left over from the prior audit which he had put away and he found that “there were loads of boxes missing”. In so far as these are no longer available, I can draw inferences. I feel sure that I can draw the inference that these documents have been destroyed or concealed, and that this has been done by, or by persons authorised by, Mr Smedley and Mr Gee. They had an obvious incentive to do that, given that they knew that they had been making false representations, and they had the opportunity to do it at the early stages of GE’s visit in January. GE were kept waiting some hours when they arrived and it took them some time even to start to obtain information, notwithstanding that they regarded the matter as urgent by this time.[366]Given this finding, then, in accordance with The Ophelia, the strongest possible presumption arises that if the missing documents had been produced they would have told against Mr Smedley and Mr Gee. It would have been possible to compare those entries on the Asset Account for which there was a supporting document, and those for which there was not one, and to conclude that where the document was missing (and otherwise unexplained) then the entry on the Asset Account corresponded to the notification of a fictitious debt.[367]Right at the end of the case Mr Thompson made a new and surprising series of submissions. I invited him to put them in writing. It reads as follows: “Remoteness” GE’s recovery of alleged consequential loss will be limited by the principles of remoteness (see, e.g. Lord Steyn’s speech in Smith New Court at pp.281B-282C and 285C). In considering the level of consequential losses, a claimant’s loss and damage will be too remote “in any case where the person deceived has not himself behaved with reasonable prudence, reasonable common sense, or can in any true sense be said to have been the author of his own misfortune” per Winn LJ in Doyle v Olby (Ironmongers) [1969] 2 QB 158 as cited and approved by Lord Browne-Wilkinson in Smith New Court at p.264D-265F. This is not a principle of mitigation (although that principle is also applicable in cases of deceit) nor one of contributory negligence (which is not). To the extent that the Court considers that Stern’s opinions on quantum do not evidence loss specifically related to fictitious notifications, it is submitted that such other sums are not recoverable because they are too remote; the most obvious example is the sum of £2,145,605 claimed in §111 of the POC (from §5.85 of Stern’s first report: [C1/89]). Such sums are too remote because GE failed to act with reasonable prudence or common sense before or after it discovered the fraud. In particular: - (during the currency of the factoring agreements) GE failed to have and/or implement systems to ensure that it could ascertain what it had actually bought from CTG; - (when the frauds were discovered) GE failed to ascertain within a reasonable time which purported assignments related to customer debts and which were fictitious. This latter failure is not (solely) a failure of the Administrators. Quite properly and in order to reduce all creditors’ losses, they focussed on the collection of the sales ledger and continued trading with the benefit of cash which GE provided them. GE’s failure to investigate the overstatement timeously or at all was the relevant failure; in that, GE was imprudent and perpetuated its inability to say how much false debt it had bought. One final point remains about the Administration: CTG’s continued trading (as opposed to simple collection of its debt) might have been sensible if it was profitable and/or led to a likely hive-down, but even that is opaque because of the way the Administrators maintained the accounts. It is not enough for GE only to say (or even prove) that the Administration led to greater recoveries of pre-administration debts than a liquidator would have obtained, because it was at the cost of ongoing overheads of the businesses. Accordingly it is submitted that GE has not shown that the whole of the costs of the CTG Companies’ Administration themselves (being over £2M) were incurred prudently or with common sense in mind.”[368]I can deal with this shortly. The principle set out by Winn LJ is a principle of mitigation, not of remoteness of damage. For reasons already given, in my judgment, GE are entitled to be put in the position in which they would have been if the misrepresentations had not been made. So claims in respect of debts which were bad for reasons unconnected with the deceit are not too remote, so long as GE were induced to pay for them by the misrepresentations. I do not accept that GE’s failure to ascertain promptly that they had paid for fictitious debts was the result of their own imprudence, but it would make no difference anyhow, because that is a principle of contributory negligence which does not apply in deceit. The factual argument that there was a failure to mitigate in the form of a failure to investigate timeously is rejected. So too is the argument that GE have not shown that the whole of the costs of the CTG companies’ Administration was incurred prudently. That is contrary to the case conducted earlier, where no such point was raised. The onus of proof on mitigation is on the defendant: McGregor paras 7-019 and 7-096. They have failed to discharge it. I accept the evidence of Mr Matthew Smith as to the reasonableness of the conduct of the Administration.[369]I conclude that GE have suffered the damage they claim in the sum of £16,044,000. I am in fact satisfied so that I am sure of this. But if I did not feel sure, and if for the reasons given in para 120 above the relevant burden of proof on damages was not the elevated standard, I readily find that that burden is discharged, in that it is more likely than not that damage in that amount has been suffered by GE as a result of the deceptions practised on it by Mr Gee and Mr Smedley.[370]The position with regard to Mr Ritchie is more complicated. Unsurprisingly, Mr Tozzi QC did not address me separately on the question of damages, on the basis of the findings that I have in fact made. It is not at present clear to me that I could find that the deceits that I have found Mr Ritchie practised did cause any damage. Before coming to a decision on that, I shall give GE an opportunity to address me further in the light of this judgment. If I were to find that Mr Ritchie was also liable in damages, there might also arise a question of apportionment or contribution as between him on the one hand and Mr Gee and Mr Smedley on the other. That too is a question on which no one had addressed me, and on which I would wish to give the parties an opportunity to be heard, if Mr Ritchie were to request me to make such an order in his favour.

REPRESENTATION, FAIRNESS AND OTHER PROCEEDINGS

[371]As noted above, Mr Smedley and Mr Ritchie have appeared in person at the hearing. Both had some legal advice and representation initially. Mr Ritchie’s Defence was settled by counsel.[372]Mr Smedley told me that his Defence was settled by himself with help from a solicitor and barrister. He was represented by solicitors until September 2004. Although Mr Smedley is a chartered accountant, and the case largely concerns financial matters in which he was personally involved, he has submitted at the start that the task of defending these proceedings in person would be a substantial one. Mr Ritchie did not have the benefit of Mr Smedley’s qualifications or experience and it was clear that the task for him would be greater.[373]Mr Smedley attended most days of the trial. Mr Ritchie attended very few days, preferring to carry on with his current employment so far as was possible. He put it as follows in his Closing Statement:
“I feel that it is impossible to tackle every single issue raised against me/ my involvement in an alleged fraud against GE, the reasons being. Resource – Since January 2005, I have been a litigant in person, I previously worked/acted on instruction from my solicitor/barrister, this advice was given sparingly as the capital I had was limited. I had used all available funds by the summer of 2004, this included the capital from a forced sale of my house. Time – In order to defend this claim to the best of my ability I would have had to cease employment, this would have freed up my time. Unfortunately It would have also made me bankrupt as I would have had no available funds to continue defending the claim as well as no income to pay for accommodation or “normal” living expenses. At present I am insolvent, and have been for nearly 12 months. It is documented that I did not attend court every day, It was said in court that this was my decision, Indeed, this was my decision, It was a very conscious decision made not to lose my job. As a result I have heard less than 50% of evidence give. Knowledge/understanding – I do not understand the legal side of this case at all…”
[374]Notwithstanding the great differences of interest between the parties, there has appeared to me to be considerable co-operation between them in practical matters in the course of the hearing. Mr Tozzi QC and Mr Thomspon and their instructing solicitors have assisted Mr Smedley and Mr Ritchie, and they have assisted each other, with matters such as locating and referring to documents, and keeping Mr Smedley and Mr Ritchie informed of the progress of the proceedings. I have myself tried to assist the defendants in person in so far as I have been able, for example by giving them time to read or prepare when they have asked for it, and the opportunity to call evidence or ask questions at times when it suited them. Mr Smedley told me in his final address to me that he had not had time to answer all the points made against him. But he accepted that I had not refused any application made by him for further time to prepare his case.[375]I have refrained from exercising case management powers that I might otherwise have exercised if they had been represented, such as requiring the Defendants to assist in clarifying the issues by making explicit what matters they agreed and what they contested. I have also been concerned about the possible impact of anything done in these proceedings upon the other proceedings involving these defendants referred to below, and for that reason too I have refrained from exercising powers which I might otherwise have exercised to expedite this trial. The result has been that the proceedings have taken much longer than they would have done if all the parties had been represented. The evidence occupied 27 days.[376]At the start of the trial I was informed by Mr Tozzi QC of the existence of related proceedings. These include criminal proceedings and disqualification proceedings, both arising out of the same matters as are the subject of this action. Mr Smedley and Mr Ritchie made submissions at the start and end of the case, questioning why the proceedings had been brought against them at all, and setting out the hardship they have suffered during the course of the proceedings, and the difficulties they face in defending the proceedings. Mr Tozzi QC made submissions in response. I am grateful for these submissions in so far as they drew my attention to matters to which I have had to have regard in managing the case, and assisted me in my endeavour to ensure that the trial be fair. But these submissions do not require any determination by me of whether the proceeding have in fact been fair. If that be an issue, it will be for others to decide.[377]The three defendants, and a number of other persons, including Mr Murphy, have been arrested in respect of the allegations of fraud made in this case and were on bail. A letter dated 19 May 2005 from the City of London Police to solicitors acting for Mr Smedley in the criminal proceedings informed Mr Smedley that, following a conference with counsel and the CPS it had been decided that his bail return date be postponed until the week commencing 3rd October 2005. Two reasons are given. First it is said that it would be inappropriate to further interview him and or charge him whilst the trial before me was ongoing. Second it is said that “It is important that due consideration is given to [my judgment in this case] before any decision is made to further interview and/or charge”. Mr Smedley’s new bail return date is 5th October 2005. A letter from those solicitors informed me that Mr Smedley voluntarily attended an interview at Luton Police Station with the City of London Police on 13th December, and that he has been on bail since then.[378]I have not been asked to decide any question as to whether or not these various proceedings should take place in this sequence. Mr Tozzi QC helpfully provided me with a note on the relevant authorities relating to the order of civil and criminal trials, and on self-incrimination.[379]Before Mr Murphy gave evidence I was informed that he too was on bail. I mentioned to him and each of the defendants the privilege against self incrimination and invited them to take advice before any of them gave evidence. In the case of Mr Murphy GE arranged for advice to be given by a solicitor experienced in criminal law. Before giving evidence Mr Ritchie and Mr Smedley told me that they had taken such advice as they wished to take in relation to privilege against self-incrimination, the effect of which I had explained to them.[380]At the end of the evidence, on 30 June, Mr Thompson told me that Mr Gee is a party to the disqualifications proceedings, that he has not served his final affidavit in answer to evidence adduced by the Secretary of State, and that an unless order was made in June requiring him to serve evidence by 5th September.[381]AB’s name is mentioned in a number of documents and by a number of witnesses in this case. She is not a party to the proceedings and has not been called as a witness. No representations have been made on her behalf. Fairness requires that I state that nothing in this judgment should be understood as a finding of fact by me that she did or said any of the things that she is alleged to have done or said. They are simply allegations in the documents or by the witnesses. That is why I have not set out her name in this judgment.[382]Mr Smedley and Mr Ritchie in their submissions raised the question why the action was brought against them at all. This is not a question for me to answer. If such a point is ever to be raised in an action, it must be raised on an application to strike out for abuse of process, assuming that the grounds for such a step are available. There are reasons for there being proceedings in tort other than the recovery of compensation. Some of these are discussed in Clerk & Lindsell on Torts 18th ed paras 1-16 to 1-20. GE have not addressed me on this issue. So I cannot say whether it is for these, or for some other reasons that the proceedings were brought against these defendants.

THE RESULT

[383]In the result the claim for damages for the torts of deceit and conspiracy succeed against Mr Gee and Mr Smedley in the sum of £16,044,000.[384]So far as Mr Ritchie is concerned, I have found at para 273 that some of the representations alleged by GE to have been made by him deceitfully were false to his knowledge, but that he was not a conspirator. I will give GE and Mr Ritchie the opportunity to address me further on the issue of damages against him if GE so request.

Cited in 1 later judgment