Hussain v Mukhtar [2016] EWHC 424 (QB)

Case No HQ14X05200[2016] EWHC 424 (QB)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 2 March 2016
Before
MR MARTIN CHAMBERLAIN, Q.C.(Sitting as a Deputy Judge of the High Court)
Between
RIZWAN HUSSAINClaimantSALEEM MUKHTARDefendant
Mr Steven Reed and Mr Christopher Pulman(instructed by Messrs Rainer Hughes) for ClaimantMr Alistair Webster, Q.C.(instructed by Morrisons Solicitors LLP) for DefendantHearing Hearing dates: 18, 19, 22 February 2016
JudgmentMartin Chamberlain QC :Introduction and summary
[1]Cabot Car Hire Limited (“CCHL”) was a family owned company founded by Saleem Mukhtar (“the Defendant”). It ran a chauffeuring business from premises in East London. Mr Rizwan Hussain (“the Claimant”) seeks damages in respect of losses that he said flowed from an investment in CCHL. The investment was made in instalments between 7 February and 9 June 2008. The Claimant says that he was induced to invest as a result of fraudulent misrepresentations as to the financial position of CCHL made on or around 1 February 2008 by the Defendant. CCHL was heavily indebted and went into administration on 31 October 2008. Its business, assets and employees were transferred to a successor company, Cabot Global Limited (“CGL”), under a “pre-pack” arrangement. The Claimant acquired a 25% interest in both CGL and another company, Star Vehicles Leasing Limited (“SVLL”), in lieu of his interest in CCHL. He contends, however, that this interest was worth considerably less than he paid for it and claims compensation for the difference.[2]The Defendant says that he made no representations to the Claimant about the position of CCHL prior to the latter’s decision to invest and that, in any event, the Claimant has not established any loss. The Defendant also submits that the claim, issued on 11 December 2014, is time barred. Given that the last instalment of the Claimant’s investment was made on 9 June 2008, the Claimant agrees that it would be, but for s. 32 of the Limitation Act 1980, which applies where (inter alia) “(a) the action is based upon the fraud of the defendant; or (b) any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant”. The claim is, as I have said, based on the fraud of the defendant. Additionally, the Claimant relies on the evidence of Mr Farooq Saleem, who said that the Defendant had given instructions that the Claimant should be kept in the dark about the true financial position of CCHL. The Claimant says that he did not discover the fact of the administration until January 2009. In those circumstances, he said that the claim is in time.[3]Pursuant to an order of Master Leslie, witness statements were exchanged on 25 September 2015. The Claimant filed just one statement: his own. The Defendant filed his own statement and statements from his father, Mr Muhktar Ahmed, and Mr Ashok Sonah, a Chartered Accountant. In January 2016, the Defendant applied for permission to adduce a second statement of his own together with statements from three further witnesses: his sisters, Ms Shamina Shaheen (who had also been CCHL’s book-keeper) and Ms Shazia Shaheen, and his brother Mr Nadeem Ahmed. I heard the application at the beginning of the trial. Initially it was opposed, but after some discussion Mr Alistair Webster QC (who appeared for the Defendant) agreed with Mr Steven Reed (who appeared with Mr Christopher Pulman for the Claimant) that the additional statements could be admitted, provided that the Claimant was also given permission to adduce evidence from Mr Farooq Saleem (also known as Mohammed Farooq Saleem) and some documents that had been disclosed late. In the light of that agreement, I gave permission to the Defendant to adduce his additional evidence and permission to the Claimant to serve a witness statement from Farooq Saleem by 4.30pm on the 19 February, the second day of the trial. The documents disclosed late were also admitted.[4]The Claimant and Farooq Saleem were cross-examined by Mr Webster. The Defendant and his witnesses were cross-examined by Mr Pulman. (Mr Reed was not present for the second and third days of the trial.) Farooq Saleem’s witness statement and oral evidence contained allegations that had not previously been in evidence and had not been put to the Defendant. He was briefly recalled to give his answer to these new allegations.[5]At the conclusion of the Claimant’s evidence on the first day of the trial, Mr Webster suggested that I need not hear any further evidence. He submitted that: the burden of proof was on the Claimant to establish that he could not with reasonable diligence have discovered the alleged fraud before 12 December 2008; on his own evidence he did not begin to discharge that burden; and no other evidence could affect the position. I declined to determine the limitation issue at that stage. I gave reasons at the time. They were essentially two. First, having permitted the Claimant to adduce the evidence of Farooq Saleem, I was not in a position to say (in advance of seeing his witness statement and hearing him give oral evidence) that there was nothing further that might be relevant to the issue of limitation. Secondly, given that there had been no application to determine limitation as a preliminary issue, and that I had already heard the Claimant’s evidence, it was preferable (in case another court took a different view on the question of limitation) to complete the trial and hear the remaining evidence with a view to resolving, so far as possible, all the disputed issues in the case.[6]In the event, it was possible to complete all the evidence in just over 2½ days. The remainder of the third day was taken up with oral closings. With my permission, each party filed written closing submissions on 24 February 2016.

The background facts and the scope of the factual dispute

[7]Certain aspects of the factual background are not in dispute.[8]The Defendant founded CCHL in 1996. Initially he was its sole director and shareholder. Soon afterwards, he was persuaded by his father (Mukhtar Ahmed) to allow his brother (Nadeem Ahmed) and his cousin (Farooq Saleem) to participate in the company. The Defendant, Nadeem Ahmed and Farooq Saleem each came to own 33%. Initially, the Defendant was keen to retain control of the company he had founded, so he procured that he was issued “A” shares, which carried voting rights, whereas Nadeem Ahmed and Farooq Saleem were each issued “B” shares, which did not.[9]The Claimant began working for CCHL as a driver in 1999 or thereabouts. He was promoted to car controller and, in 2003 or thereabouts, to operations manager, reporting to Farooq Saleem.[10]From small beginnings, CCHL grew quickly. It won a prestigious contract with the investment bank Morgan Stanley worth about £1 million per annum. By 2004-2005 it was turning over about £4-5 million per annum. Some time in mid 2006 it purchased the assets of Chauffeurcar plc, which had valuable contracts with Etihad and Emirates, with a view to expanding its client list to include these and potentially other airlines.[11]CCHL invoiced its corporate clients on a monthly basis. Payment was due within 30 days. This led to an inevitable delay between provision of service and payment. In addition, not all of CCHL’s customers paid on time. It used the services of an invoice factoring firm called Five Arrows, which offered credit secured by a debenture over the company’s assets.[12]In late 2007, the financial position of CCHL deteriorated. The parties are not agreed as to the causes of this deterioration. In any event, CCHL’s VAT was substantially in arrears. Its bill for the quarter to 31 December 2007 was £527,837. This had to be paid by 7 February 2008. CCHL did not have sufficient funds. It was against this background that, over the winter of 2007-8, two parallel plans of action were developed. The first involved securing an investment from the Claimant; the second involved obtaining finance from Barclays Bank and/or other sources.[13]CCHL’s financial position deteriorated further during 2008. Again, the reasons for this are not agreed, but the start of the “credit crunch” (which led to a drop-off in corporate business) and the withdrawal of the factoring services provided by Five Arrows (which had been taken over by GE Capital) appear to have played a part.[14]The circumstances in which the Claimant came to make his investment are contentious.[15]The Claimant accepted that he first discussed the investment with Nadeem Ahmed and Farooq Saleem in the absence of the Defendant. He alleged, however, that, on or around 1 February 2008, the Defendant made a series of representations to him. These were pleaded at paragraph 3 of the Particulars of Claim as follows:
“(i) That CCHL was a prosperous and highly profitable business with prestigious clients and turnover in excess of £5m/year; (ii) That due to its rapid expansion, CCHL was (in the Defendant’s words) ‘eating capital’ and ‘a victim of its own success’. In particular, due to its recent purchased of significant volumes of new vehicles and resultant spike of invoicing it was facing a significant VAT liability for which it lacked liquidity; it also required funds in order to meet liabilities to its legitimate trade creditors; (iii) That if the Claimant would invest £750,000 in CCHL his money would be used so as to pay CCHL’s legitimate trade creditors, in particular its VAT liabilities to HMRC and drivers’ wages; (iv) That in return for his investment, the Claimant would receive immediately 25% of the equity in CCHL and a monthly salary of £15,000.00 per month [sic] together with a car of his choice in addition to annual dividends in line with the profits of CCHL; and (v) That by making this investment the Claimant would enjoy a lifestyle similar to that of the Defendant and his family members involved in the management of CCHL: that lifestyle visibly and conspicuously of comfortable houses, investment portfolios abroad and top end vehicles such as Lamborghinis, Ferraris and Bentleys. The Defendant asked the Claimant to accept these outward manifestations of success rather than receive accounts and proper financial information concerning CCHL, because CCHL was a family company, and the Defendant was proposing to welcome the Claimant into his ‘new extended family’ and share the same benefits as the other family members.”
[16]At paragraph 8 of the Particulars of Claim, the Claimant added:
“…[the Claimant] was asked by the Defendant to transfer [the sum of £17,000] to an entity known as Cabot New York, which the Defendant informed the Claimant was a subsidiary of CCHL the company in which he was investing, and that the Claimant would benefit thereby as he was to be a 25% owner of the head company, CCHL (‘the New York representation’).”
[17]In paragraph 2 of a note filed on 20 February 2016 (over the weekend between the second and third days of the trial), Mr Pulman sought to reframe the representations on which he relied, based on what was in the Particulars of Claim “as supplemented by the Claimant’s Witness Statement”, as follows:
“(a) If the Claimant were to invest his money into Cabot Car Hire Limited (“CCHL”), this investment would be a good one. (b) CCHL was a lifestyle business and the Claimant would enjoy a relatively luxurious lifestyle if he were to invest. (c) CCHL had a temporary cash-flow problem caused by new purchases of cars, recent expansion of the business and the late payment of bills. The company was a victim of its own success. (d) The company had a VAT liability of over half a million pounds, but if that debt could be paid off, the company would be in a healthy state going forward.”
[18]The Defendant said that he never liked the Claimant and doubted his integrity. He described the Claimant as “Farooq’s mate”. When Farooq Saleem suggested that the Claimant should invest in CCHL, the Defendant resisted it initially, preferring to address CCHL’s debt by a loan of £350,000 from Barclays. The Defendant said, and this part of his evidence was not contradicted, that he took his family to Pakistan in December 2007 and when he returned in early January 2008 his young son fell ill with a fever, later diagnosed as typhoid. The son was in hospital, latterly at Great Ormond Street, for at least six weeks and the Defendant visited him every day. The Defendant adamantly denied making any representations about the business to the Claimant prior to the latter’s decision to invest, adding that he did not know what the Claimant might have been told by Farooq Saleem or Nadeem Akhtar.[19]The Claimant on any view made a substantial investment in CCHL. Some of it came from members of his family. It is agreed that he paid instalments of £94,500 on 7 February 2008, £18,500 on 11 February 2008, £59,500 on 13 February 2008, £22,000 on 27 March 2008, £173,000 on 7 May 2008, £32,000 on 6 June 2008 and £151,550 on 9 June 2008. The total of these instalments was £551,050.[20]The Claimant said that his total investment amounted to more: £650,000. The balance was accounted for by: a BMW car worth £20,000, which he had transferred to CCHL; four monthly salary payments of £15,000, which he agreed to forego; some holiday pay due to him; and the £17,000, transferred at the request of the Defendant to Cabot New York, which soon folded. In response, the Defendant said that: the car was worthless; there was never any agreement to pay a salary of £15,000 per month; nor to treat holiday pay due as part of the Claimant’s investment; the £17,000 paid to the New York entity was for an entirely separate venture with which the Defendant had no involvement and it was never agreed that this sum would count as part of the Claimant’s investment in CCHL.[21]Meanwhile, the Defendant had appointed Ashok Sonah, a Chartered Accountant and Partner in the firm Brebners, to advise CCHL. Ashok Sonah thought HMRC would be willing to accept periodical payments in respect of the liability for the last quarter of 2008, provided that VAT for subsequent quarters was paid in full. In his oral evidence he explained that he had telephoned the relevant HMRC official, who had agreed orally to accept monthly payments of £44,000, though this had not been confirmed in writing. Ashok Sonah was also involved in attempts to secure finance from alternative providers, though in the event no such finance materialised.[22]Ashok Sonah’s engagement came to an end in the summer of 2008. Some time after this, CCHL engaged Hacker Young LLP, who arranged what all the witnesses have termed the “pre-pack”, by which a new company, CGL, was incorporated on 16 September 2008, CCHL went into administration on 31 October 2008 and its business, assets and employees were transferred to CGL under the terms of an agreement dated 5 November 2008. Each of the Defendant, Nadeem Ahmed, Farooq Saleem and the Claimant was a director and 25% owner of CGL. There was at least one meeting at Hacker Young’s offices. Nadeem Ahmed said in evidence that the Claimant was present; the Claimant said that he was not.[23]The evidence of Shamina Shaheen was that, immediately prior to the administration, a team of two from Hacker Young attended CCHL’s offices. They were there for about a week examining files and liaising with the Defendant and Samina Shaheen. After a few days a formal announcement about the administration was made to the staff in order to reassure them that their jobs would be safe and that the business would continue under the aegis of CGL.[24]There is no doubt that the Claimant was left with something of value even after the administration. As I have said, he acquired 25% of the shares in CGL. He also acquired a 25% interest in SVLL, a new company created to hold the vehicles used in the business. In 2011, he sold his interest in CGL for £200,000 plus an increased stake in SVLL. He is now the majority shareholder in SVLL, although he was unable to say exactly what percentage of it he owns. SVLL has substantial assets, namely a fleet of BMW vehicles. In addition, there is evidence that he received cash payments from CGL, though some may have been repayments of loans. Some were not declared to the tax authorities. The Claimant was asked how many and, when warned that he was not obliged to answer, said that he could not remember.[25]On 10 November 2014, the Defendant issued two petitions in the Companies Court under s. 994 of the Companies Act 2006 alleging that the affairs of SVLL and CGL had been conducted in a manner that was unfairly prejudicial to the Defendant’s interests. The respondents to the first petition were the Claimant and SVLL. The respondents to the second were Farooq Saleem and CGL.[26]This claim was issued just over a month later, on 11 December 2014. The Claimant and Farooq Saleem filed a joint defence to the Companies Act petitions in February 2015, which included the allegations forming the basis of this claim. The Companies Act proceedings have yet to be determined.

The cause of action

[27]In the Particulars of Claim, at paragraph 9, the Claimant pleaded:
“In fact, the Representations pleaded in paragraph 3 above and the New York Representation pleaded at paragraph 8 above, were false and were made by the Defendant fraudulently or recklessly, the Defendant not caring whether they were true or false, whereby the Claimant has altered his position to his detriment and suffered loss and damage.”
[28]Misrepresentations made recklessly, “not caring whether they were true or false” are fraudulent: see Derry v Peak (1889) 14 App Cas 337, per Lord Herschell at 374; and AIC Ltd v ITS Testing Services (UK) Ltd (The Kriti Palm) [2006] EWCA Civ 1601, [2007] 1 Lloyd’s Rep 555, per Rix LJ at [256]-[258]. Accordingly, paragraph 9 of the Particulars of Claim identifies one cause of action only: fraudulent misrepresentation (ie deceit). This is consistent with the way the case was put in paragraph 17 of the Claimant’s Skeleton Argument:
“The Defendant’s representations were false and the Defendant must have known them to be false”
. It is also how the Defendant understood the claim, as is apparent from paragraph 1 of his Skeleton Argument.[29]In opening, Mr Reed suggested that, although the claim was primarily one of fraudulent misrepresentation, it would be sufficient for the Claimant to show that the representations had been made “negligently”. He explained that he was not suggesting that any duty of care arose so as to found a claim in the tort of negligence. Rather, he was relying on s. 2(1) of the Misrepresentation Act 1967 (“the 1967 Act”), which provides as follows:
“Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made the facts represented were true.”
[30]As noted in Chitty on Contracts (32nd ed.), at §7-076, this provision does not strictly impose a liability for negligent misrepresentation. Rather, it imposes, in the contractual context, “an absolute obligation not to state facts which the representor cannot prove he had reasonable grounds to believe”.[31]The pleadings did not foreshadow any claims based on s. 2(1) of the 1967 Act. I indicated that the Claimant’s counsel would need to consider whether they wished to advance an alternative case based on s. 2(1) of the 1967 Act and then either apply to plead it or explain why no such application was necessary. Mr Pulman initially accepted that his case was “fraud or nothing”. In his note of 20 February 2016, however, he submitted that it was open to him to advance an alternative case under s. 2(1) of the 1967 Act without any amendment to his pleading. This alternative case could arise, he submitted, only in respect of the representations pleaded at paragraph 2(a) and (b) of his note (set out at paragraph 17 above). If I were to find that these representations were made, and that they were false, Mr Pulman submitted that he would be entitled to succeed under s. 2(1) of the 1967 Act unless the Defendant could prove that he had reasonable grounds to believe, and did believe, that they were true. He submitted, further, that there was no need expressly to plead a claim under s. 2(1) of the 1967 Act if (as he contended) the facts pleaded could support such a claim.[32]For reasons that will become apparent when I set out my findings of fact, the circumstances in which Mr Pulman submitted that s. 2(1) of the 1967 Act would be relevant do not arise here, so the issue is moot. Since it has been raised, however, it is right to record that I do not agree with Mr Pulman’s analysis. A claim in the tort of deceit is very different from a claim under s. 2(1) of the 1967 Act. In the former case, the claimant bears the burden of proving the defendant’s mental state (knowledge of or recklessness as to falsity); in the latter it is for the defendant to prove that he had reasonable grounds for believing, and did believe, that the representation was true. Even leaving aside this difference, the ingredients of the two species of misrepresentation are not identical: claims under s. 2(1) of the 1967 Act can be brought only where the claimant has entered into a contract after the misrepresentation and only against a party to that contract; claims in deceit are not subject to either of those restrictions. Moreover, the limitation defences available may differ: a claim under s. 2(1) of the 1967 Act is not “an action based upon the fraud of the defendant” so s. 32 of the 1980 Act would not apply to it (unless a fact relevant to the claimant’s right of action had been deliberately concealed from him by the defendant). These differences mean that there may be advantages and disadvantages to a claim under s. 2(1) of the 1967 Act: see generally Clerk & Lindsell on Torts (21st ed.), §18-02. A defendant is entitled to understand whether a claim under s. 2(1) of the 1967 Act is being advanced or not, even if only as an alternative. It follows, in my judgment, that a claimant wishing to advance a claim under s. 2(1) of the 1967 Act as an alternative to a claim in deceit should plead the alternative claim in terms.[33]The importance of pleading a claim under s. 2(1) of the 1967 Act can be illustrated by the facts of this case. As Mr Pulman accepted, a person who invests in a company in return for shares might, but need not necessarily, enter into a contract with the existing owners of the company. The contract might be with the company instead. Mr Pulman submitted that in this case the Claimant’s agreement to invest in CCHL must have been one to which the Defendant, and not just CCHL, was party. He may be right, but I do not think the point is clear. The Claimant did not plead any contract to which the Defendant was party and the point was therefore not addressed in the Defence, Skeleton Arguments or by the witnesses. In those circumstances, I could not have resolved the issue properly if it had been necessary for me to do so. Relevant law Elements of the tort of deceit

Relevant law

[34]The elements of the tort of deceit are summarised in Clerk & Lindsell on Torts (21st ed), §18-01, as follows:
“The tort involves a perfectly general principle: where a defendant makes a false representation, knowing it to be untrue, or being reckless as whether it is true, and intends that the claimant should act in reliance on it, then in so far as the latter does so and suffers loss the defendant is liable.”
[35]There is a fuller discussion by Rix LJ in AIC Ltd v ITS Testing Services (UK) Ltd (The Kriti Palm), to which I have already referred, at [251]-[259]. One of the points made, at [255], is that:
“To found a claim in deceit, the representation relied on must be one of fact. A statement of opinion will not suffice unless the deceit is in the fact that the opinion was not, or not honestly, held or in some further implicit dishonest misrepresentation of fact to be derived from the statement of opinion.”

Limitation

[36]By s. 2 of the Limitation Act 1980 (“the 1980 Act”), the ordinary limitation period for tort claims (including claims in the tort of deceit) is six years from the date on which the cause of action accrued. Mr Pulman agreed that the cause of action was complete (in the sense that all its elements were present) by, at the latest, 9 June 2008, the date of the last instalment of the Claimant’s investment in CCHL. By that time, on the Claimant’s case, the representations relied upon had been made, he had been induced to make the investment in CCHL and he had acquired a right to shares in CCHL, which right was less valuable than what he had paid for it. That would mean that the claim was time barred on 8 June 2014, more than six months before the claim was issued, unless the Claimant can rely on the provisions of s. 32 of the 1980 Act.[37]Section 32(1) of the 1980 Act provides:
“Subject to subsections (3) and (4A) below, where in the case of any action for which a period of limitation is prescribed by this Act, either— (a) the action is based upon the fraud of the defendant; or (b) any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant; or (c) the action is for relief from the consequences of a mistake; the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.”
Subsections (3) and (4A) are not relevant here.[38]This claim is an “action based on fraud”. The Claimant has also adduced evidence that, if I accept it, would establish that the Defendant deliberately concealed from him the true financial position of the company. There are therefore two questions. First, when did the Claimant discover the fraud/concealment? Secondly, when could he with reasonable diligence have discovered it?[39]As to the first, the fraudulent misrepresentations relied upon in this case relate to the financial position and prospects of CCHL. Mr Pulman accepted, as I think he had to, that by the time the Claimant discovered that CCHL had gone into administration, he had discovered the truth about CCHL’s financial position and therefore discovered any fraud or concealment.[40]As to the second, there is authority on the interpretation of the phrase “could with reasonable diligence have discovered it”. In Paragon Finance v Thakerar [1999] 1 All ER 400, CA, Millett LJ (with whom Pill and May LJJ agreed on this point) said this at 418:
“The question is not whether the Plaintiffs should have discovered the fraud sooner; but whether they could with reasonable diligence have done so. The burden of proof is on them. They must establish that the could not have discovered the fraud without exceptional measures which they could not reasonably have been expected to take. In this context the length of the applicable period of limitation is irrelevant. In the course of argument May LJ observed that reasonable diligence must be measured against some standard, but that the six year limitation period did not provide the relevant standard. He suggested that the test was how a person carrying on a business of the relevant kind would act if he had adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency. I respectfully agree.” (Emphasis in original.)
[41]Although these remarks appear to have been obiter, they were taken up by Neuberger LJ (with whom Maurice Kay LJ agreed on this point) in Law Society v Sephton & Co. [2005] QB 1013, CA. Neuberger LJ said this at [116]:
“… there must be an assumption that the claimant desires to discover whether or not there has been a fraud. Not making any such assumption would rob the effect of the word ‘could’, as emphasised by Millett LJ, of much of its significance. Further, the concept of ‘reasonable diligence’ carries with it, as the judge said, the notion of a desire to know, and, indeed, to investigate.”
[42]Millet LJ’s formulation in Paragon Finance v Thakerar and Neuberger LJ’s in Law Society v Sephton were both cited with approval by Aikens LJ (with whom Richards and Davis LJJ agreed) in Allison & Co v Horner [2014] EWCA Civ 117, at [16]. Mr Pulman pointed out that the facts of that case, as described by Aikens LJ at [41]-[46], demonstrate that inconclusive indications of fraud may not be sufficient to put a claimant on notice. I agree, but I doubt that much assistance can be gleaned from examining the facts of that or other cases. What matter are the statements of principle, which are as set out above.[43]Finally, Mr Pulman also drew attention to the observations of Lord Hoffmann (with whom the other members of the Hong Kong Court of Final Appeal agreed) in Peconic Industrial Development Ltd. v Lau Kwok Fai [2009] HKCFA17, at [30]. Lord Hoffmann suggested that, in deciding whether the claimant has shown “reasonable diligence”, the court can take into account the claimant’s personal characteristics. In this case, Mr Pulman said that the material characteristics are the Claimant’s naiveté and inexperience in financial matters. I do not think that Lord Hoffmann was suggesting that characteristics of that kind could be relevant. At [31], Lord Hoffmann explained that the characteristic he had in mind was simply the fact that the claimant was a bank that had lost HK$400 million. The analogue here is that the Claimant was (at least from September 2008) a company director who had invested £551,000 (on his case £650,000). To go further, and allow a characteristic such as naiveté or inexperience to inform one’s view of what the claimant could with reasonable diligence have done, would to my mind involve a departure from the objective standard on which the English authorities insist. Lord Hoffmann, sitting in the Hong Kong Court of Final Appeal, was not bound to apply Millett LJ’s test in Paragon Finance v Thakerar and indeed expressly left open the question whether it was correct. Given the approval of that test in this jurisdiction by the Court of Appeal, I (unlike Lord Hoffmann) am bound to apply it. Findings of fact Did the Defendant make the representations relied upon?

Findings of fact

[44]Before resolving this issue, I should record a submission made by Mr Pulman about what was put to the Claimant in cross-examination. At paragraph 4 of his written submissions filed on 24 February 2016, Mr Pulman, taking up a point made in his oral closing, submitted that “the Claimant was not challenged upon his allegations of misrepresentation” and that “Farooq Saleem was hardly challenged on this issue”.[45]If I had considered it essential to verify the exact form of words put by Mr Webster to the Claimant, I would have deferred giving judgment until a transcript could be made available. In my judgment, however, it is not. The rule that a witness must be cross-examined on those parts of his evidence said to be untrue is well established and important: see Browne v Dunn (1894) 6 R 67, HL, relevant extracts from which are set out in Markem Corp. v Zipher Ltd [2005] EWCA Civ 267, [2005] RPC 31, per Jacobs LJ at [59]. But the requirement to challenge evidence is based on the need to give the witness a fair opportunity to respond. Provided that a witness is on notice that his account is being challenged as untruthful in the relevant respect, there is no requirement mechanistically to challenge each and every statement of fact. In Browne v Dunn itself, Lord Herschell said that the requirement to challenge did not apply where it is “perfectly clear that (the witness) has had full notice beforehand that there is an intention to impeach the credibility of the story which he is telling”: see the extract set out in Markem Corp. v Zipher Ltd.[46]I am satisfied that the Claimant understood perfectly well both before and during cross-examination that the Defendant challenged his account of the representations made by the Defendant. In paragraph 17 of his witness statement, the Defendant had said that he had made “absolutely no representations to the Claimant in order for him to invest money in exchange for shares”. My non-verbatim note of the evidence records Mr Webster putting to the Claimant that representations had been made to him by Farooq Saleem and Nadeem Ahmed “without my client present” to the effect that the company was sound. From the totality of Mr Webster’s questioning the Claimant could have been in no doubt that it was being put to him that his evidence was deliberately untrue, not merely mistaken. The Claimant had every opportunity to respond.[47]There is no documentary evidence bearing on the question whether the representations relied on were made. The Claimant said they were; the Defendant said not. Farooq Saleem said that the Claimant and the Defendant each told him that the two of them had met to discuss the Claimant’s investment, but he did not claim to have been present when the alleged representations were made.[48]As I have said, Mr Pulman described the Claimant in 2008 as “inexperienced in financial matters” and “naïve”. Up to a point, these descriptions are apt. Anyone who invests as much as the Claimant did in a company (even one for which he had been working for eight years) without undertaking any kind of due diligence must be reckoned somewhat naïve. He coveted the trappings of success that, as he saw it, the Defendant enjoyed: expensive cars and houses, first (or business) class trips abroad and the respect from family and community that these generated. I accept that this is what he believed and hoped he was buying into when he made his investment.[49]The Claimant was, however, hardly an ingénu. By 2008 he had been CCHL’s operations manager for four or five years and managed other staff members. He had worked closely with Farooq Saleem for some years. Farooq Saleem said that the two were at this point “friendly” but not yet “friends”. I find that Farooq Saleem was downplaying the extent of their closeness. Nadeem Ahmed gave evidence, which I accept, that the three of them (the Claimant, Farooq Saleem and Nadeem Ahmed) were good friends. It was these three who first discussed the idea that the Claimant might invest in CCHL; and I find that both the idea and the proposed amount of the investment (£750,000) were already reasonably concrete by the time it was suggested to the Defendant.[50]The Defendant gave evidence that he neither liked nor trusted the Claimant and, in any event, did not want to dilute his share of CCHL or lose control of the company. The weight of the other evidence is consistent with the Defendant’s on this point. Ashok Sonah gave evidence that he had been engaged to find alternative sources of finance to pay the VAT debt. The search for these alternative sources of finance is consistent with and supportive of the Defendant’s case that he did not want to accept the Claimant’s investment and tried to find alternative means to avoid it. Mukhtar Ahmed, the Defendant’s father, gave evidence about the efforts he had made, at the instigation of Nadeem Ahmed and Farooq Saleem, to persuade the Defendant to accept the Claimant’s investment. It was put to Mukhtar Ahmed that he had come to court to support the Defendant, his son, but his evidence was forthright and consistent and I accept what he said as truthful. It accords with the evidence of Shamina Shaheen, the Defendant’s sister, which I also accept: she too had been enlisted by Nadeem Ahmed and Farooq Saleem to persuade her father to prevail on the Defendant to accept the Claimant’s investment.[51]The representations pleaded could only have been made by someone trying to persuade the representee to invest. Yet the evidence as a whole suggested that the Defendant did not want to accept the Claimant’s investment in CCHL. He was also preoccupied by his young son, who was, on the evidence, seriously ill in hospital at the time when the Claimant said the representations were made. The fact that many of the Defendant’s witnesses mentioned the illness of the Defendant’s son is unsurprising; and I reject Mr Pulman’s suggestion that the similarities are suspicious. The Defendant’s son was Mukhtar Ahmed’s grandson, Nadeem Ahmed’s nephew and Farooq Saleem’s cousin. It is only to be expected that each of them would have recalled vividly an occasion when he had been hospitalised for at least six weeks. Accepting this evidence as I do, I find that the Defendant was prevailed upon by his father, for whom he said he had great respect, to accept the Claimant’s investment; and that this happened at a time when the Defendant was preoccupied and against his better judgment. That being so, I consider it unlikely, on the balance of probabilities, that he would have spent time and energy in trying to persuade the Claimant to invest by making representations about the financial health of the company or about the lifestyle the Claimant might lead if he invested.[52]That is not to say that no representations were made. I consider it more likely than not that some representations were made to the Claimant to encourage him to invest in CCHL. They may have been along the lines of those alleged by the Claimant. The weight of the evidence, however, suggests that they were made, not by the Defendant, but by Farooq Saleem and Nadeem Ahmed in the absence of the Defendant. Both Farooq Saleem and Nadeem Ahmed were strongly in favour of the investment, in large part because they hoped that, if the Claimant invested, CCHL would have some money left over after paying its debts, which they would be able to withdraw in return for the dilution of their shares. So both had strong incentives to secure the Claimant’s money. It makes sense in those circumstances that they would enlist the support of Mukhtar Ahmed to persuade the Defendant to accept the investment. I do not accept Mr Pulman’s suggestion that the account of the Defendant’s father’s involvement is “bizarre”. In my judgment, it is perfectly plausible: the family was one in which Mukhtar Ahmed enjoyed a position of particular respect; Nadeem Ahmed and Farooq Saleem had come to him arguing for a proposal that would make them personally better off and would also, as they saw it, save the family company; Mukhtar Ahmed was persuaded to intervene in what he thought was the interests of the family as a whole. In the event, once the Claimant had paid his money in, the Defendant decided to use it to pay off CCHL’s VAT debt. Nadeem Ahmed gave evidence, which rang true, that he had been unhappy about this.[53]It is not necessary for me to resolve the dispute between the witnesses about whether there were any meetings between the Claimant and Defendant before the former made his decision to invest. If there were, I find that the purpose of them was to enable the Defendant to assure the Claimant directly, rather than through intermediaries, that he no longer opposed the Claimant’s participation in the company, not to persuade the Claimant of the merits of the investment. I find that, if the Claimant met the Defendant at all in the run-up to his decision to invest, he had already decided to invest, as a result of his discussions with his friends Farooq Saleem and Nadeem Ahmed. Both were directors and 33% owners of the company and so would have been regarded by the Claimant as knowledgeable about the company’s financial position.[54]If, as the Claimant said, he was induced to invest such a substantial amount by representations made by the Defendant, I would have expected to see some evidence that he had complained, formally or informally, when he said he discovered the fraud in January 2009. There is none. Indeed, there is no evidence that the Claimant ever suggested that he had been defrauded by the Defendant until he filed these claims in December 2014. In my judgment, it is telling that this was just after he and Farooq Saleem had been served with the Defendant’s Companies Act petitions. This suggests to me that the Claimant’s allegation of fraud by the Defendant was contrived to bolster the defence to those petitions. On the basis of the evidence as a whole, that is the conclusion I draw.[55]It follows that I reject the evidence of the Claimant and of Farooq Saleem on this issue. I do so principally because it is inconsistent with the weight of the other evidence described above but also, in the case of the Claimant, because I found him to be a less impressive witness than the Defendant. The Claimant had a tendency, when asked a question that posed difficulties for his case, to say that he could not remember or to answer in vague terms. Having heard him give evidence, I am unable place much weight on what he said. The Defendant’s evidence was criticised in numerous respects by Mr Pulman, but I do not accept Mr Pulman’s submission that he was shown to be lying. On the contrary, on the key points, I found him to be a straightforward and frank witness.[56]I accordingly find that the Defendant did not make the representations relied upon by the Claimant.

If the representations were made, were they fraudulent representations of fact?

[57]In the light of my finding that the Defendant never made the alleged representations, it is unnecessary for me to say a great deal about whether those representations could have founded a claim in deceit. However, two points can be made.[58]First, some of the pleaded representations are not representations of fact at all. In particular, those pleaded at paragraph 3(iii) and (iv) of the Particulars of Claim (see paragraph 15 above) are in the nature of promises as to the future, rather than statements of present fact. A promise can be relied upon if it is contractual; it cannot found a claim in deceit.[59]Secondly, to the extent that the other alleged representations are representations of opinion or fact, the Claimant would have to show that the opinion in question was not honestly held or that the fact stated was not honestly believed to be true. It would not be enough for the Claimant to show, as was suggested to several of the Defendant’s witnesses, that CCHL was insolvent in January or February 2008. The Claimant would have to show that, on or around 1 February 2008, when the representations are said to have been made, the Defendant lacked an honest belief in its solvency. The evidence, however, suggests that, whatever the reality of the situation, the Defendant believed the company to be solvent and capable of trading out of its difficulties. His initial reluctance to accept the Claimant’s investment seems to indicate that he thought, maybe wishfully, that CCHL could survive even without the Claimant’s money. Ashok Sonah’s evidence indicates a genuine, if ultimately unsuccessful, attempt to save the company by securing alternative finance. It was several months after the Claimant decided to invest (and only after the last instalment of the Claimant’s investment had been paid) that Hacker Young were appointed and discussions about the “pre-pack” began.[60]In the light of these points, even if I had found that the representations relied upon had been made, I would not have found that they were fraudulent representations of fact in the sense explained in paragraphs 34-35 above.

Did Mr Hussain discover the alleged fraud before 12 December 2008?

[61]The Claimant’s case is that it was not until January 2009 that he learned that CCHL had gone into administration. It is common ground that CCHL had been trading under the name Cabot Global Solutions since the start of 2008: it had been thought that the addition of the word “Global” might help to attract international customers. The Claimant was not, he said, involved in discussions about the financial aspects of the business and had not been told about the administration. So there was no reason to suppose that the appearance of a new company called CGL in September 2008 indicated the impending demise of CCHL. Since the assets and employees of CCHL transferred seamlessly to CGL at the start of November 2008, and the business continued very much as before, there was no reason to believe that CCHL had gone into administration. It was not until January 2009, when the business moved offices from Poplar to Walthamstow, that he asked Farooq Saleem when he would receive his shares in CCHL and was told that CCHL no longer existed.[62]The Claimant’s evidence was supplemented, during the course of the trial, by the evidence of Farooq Saleem. In his witness statement, it was suggested for the first time that the Defendant had told Farooq Saleem not to tell the Claimant about the true financial situation of the company. He said that in January 2009 the Claimant asked him why he had not been allotted shares in CCHL and that he was surprised that the Claimant did not know about the administration.[63]In my judgment, the account given by the Claimant and Farooq Saleem is implausible and contrary to the weight of the evidence. My reasons for reaching this conclusion are independent of those for finding that the Defendant did not make the representations relied upon. They are as follows.[64]First, although there were not many contemporaneous documents in evidence, the few that I have seen are inconsistent with the suggestion that the Claimant was not included in discussions about CCHL’s finances. There is an email dated 9 July 2008 from the Defendant to Farooq Saleem, with the Claimant and an individual called Nadeem Mukhtar (who I understand to be the same as Nadeem Ahmed) copied in. It refers to a meeting on the previous day and confirms certain action points including:
“1) The need to tighten our belts”; “3) Make reductions where possible (NOT to take out any money from the Bank with immediate effect, until such time when feasible)”; and “9) Commit to attending Management Meetings (Tuesdays 14.00 hrs) points for the agenda e-mailed to Saleem by Friday afternoon”
. On 15 November 2008, the Claimant sent an email to Farooq Saleem with the heading “re banking 14/11/08”. It recorded that £50,000 in cash had been withdrawn and itemised what had been done with it. The Defendant replied on the same day saying:
“Thanks Riz, what’s left in the account?”
These exchanges suggest that the Claimant was treated as a key member of the management team of both CCHL and CGL and was included in discussions about the company’s finances. They also establish that the difficulties the company was in were not kept from him and that (at least by November 2008) he had access to the CGL’s bank account. This makes it unlikely that he was unaware until January 2009 of the administration of CCHL and the “pre-pack”, which had been under active discussion within CCHL in the period between the summer and 31 October 2008.[65]Secondly, Farooq Saleem said that it was when signing papers in January 2009 relating to SVLL that the Claimant asked him why he had not received his shares in CCHL. The difficulty with this is that January 2009 was not the first time the claimant had been asked to sign papers relating to a CCHL successor company. CGL had been incorporated on 16 September 2008. The documents indicate that by that time the Claimant had already signified his agreement to act as a director. Even if it were right to describe the Claimant as naïve, I do not find it credible that, having just invested substantial sums in CCHL, he would have made no enquiries at all (whether of the Defendant or of his friends Farooq Saleem and Nadeem Ahmed) as to why he was now being asked to sign papers in relation to a different company, despite having still received no shares in CCHL.[66]Thirdly, I do not see how a plan on the part of the Defendant to keep the true financial position of CCHL from the Claimant could have succeeded beyond the point when CCHL entered administration. Given the presence at CCHL’s modest offices of a two-person team from Hacker Young for about a week at the end of October 2008, it would have been very difficult to conceal the administration from any member of staff, even one who was not very inquisitive. As I have said, the Claimant was not just a member of staff: he was a substantial investor and would have had every reason to ask why two hitherto unknown individuals were on the premises going through the company’s files. Furthermore, the pre-pack involved not just the transfer of assets from CCHL but also the transfer of employees, pursuant to the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”). Clause 11.7 of the agreement for the sale of the business of CCHL to CGL required the buyer (CGL) to “inform and consult with all of the Employees in respect of the effects of [the TUPE Regulations] on the Employees”. Against this background, there would have been no point in the Defendant instructing anyone to keep the administration from the Claimant. The Defendant is an intelligent man and must have realised that any attempt to do so would be futile.[67]Fourthly, there was nothing to contradict the evidence of Shamina Shaheen, which I accept, that an announcement of the administration and “pre-pack” had been made to staff within a week of the administration, with the aim of reassuring them about the continuation of the business. There is no evidence about whether the Claimant was present at this meeting. He may not have been: the Defendant complained that he often came into work late. But he continued to come into the office in November 2008 and would have interacted with other members of staff. It is not plausible that he alone remained ignorant of the administration and “pre-pack”.[68]Fifthly, Farooq Saleem’s suggestion that the Defendant had asked that CCHL’s difficulties be kept from clients makes very little sense given the fact that its contracts with major corporate clients had to be novated (as would be expected if those contracts were to be taken over by CGL). The process of novating of the contracts would necessarily have involved some discussion with clients about the reasons for it; and Nadeem Ahmed’s evidence suggests that the Claimant and Farooq Saleem were in charge of liaising with clients about this.[69]Sixthly, if, as Farooq Saleem said, he had on the Defendant’s instructions kept the Claimant in the dark about the true financial position of the company, I would have expected the Claimant to be very angry with and disappointed in Farooq Saleem (his good friend) when in late 2010/early 2011 he eventually revealed what he had done. There is, however, no evidence that the Claimant reacted in that way. On the contrary, the Claimant went into and remains in business with Farooq Saleem. The continuing close relationship between these two is hard to square with an account in which Farooq Saleem had been party to, and had admitted, a significant deception of the Claimant.[70]Accordingly, I find that the Claimant probably learned of the plan to put CCHL into administration and transfer its business, assets and employees to CGL (the pre-pack) in September or October 2008. At all events he must have known about it by the middle of November 2008 at the latest. The story that the Defendant deliberately instructed Farooq Saleem to keep the true position from the Claimant does not stand up to scrutiny; I reject it in its entirety.[71]It follows from what I have said that, even if (contrary to my findings) there had been a fraud, the Claimant must have discovered it more than six years before the claim was issued.

Could the Claimant with reasonable diligence have discovered the fraud before 12 December 2008?

[72]Even if there was a fraud and the Claimant did not discover the fraud more than six years before the claim was issued, it would still be necessary for him to prove that he could not with reasonable diligence have discovered it: see the extract from Millett LJ’s judgment in Paragon Finance v Thakerar set out at paragraph 40 above.[73]The standard to be applied is “how a person carrying on a business of the relevant kind would act if he had adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency”: ibid. It is necessary to assume a “desire to know, and, indeed, to investigate”: see the extract from Neuberger LJ’s judgment in Law Society v Sephton set out at paragraph 41 above.[74]Applying this standard, the Claimant cannot begin to establish that he could not with reasonable diligence have discovered what had happened to CCHL before 12 December 2008. The first email referred to in paragraph 64 above put him on notice that, even after the Claimant had invested £551,000, the company was in financial difficulties. If he had had “a desire to know, and, indeed, to investigate”, he would have asked why. In any event, whatever the position before the incorporation of CGL in September 2008, the Claimant was a director of that company from the outset. As a director of CGL, with access to its bank account (see the second email referred to in paragraph 64 above), he could have sought up to date information from the company’s bank at any time.[75]The only possible basis upon which the Claimant could successfully have invoked s. 32 of the 1980 Act is that he was the victim of a conspiracy to keep him in the dark (so that even if had made inquiries he could not with reasonable diligence have discovered fraud). For the reasons I have given at paragraph 69 above, I have rejected the evidence that there was such a conspiracy. For the reasons given at paragraphs 66-68, it would have been ineffective anyway.[76]I therefore conclude that, even if there was a fraud and the Claimant did not discover the fraud more than six years before the claim was issued, he could with reasonable diligence have done so.

Conclusion on limitation

[77]It follows from my conclusions at paragraphs 61-76 that the limitation defence succeeds.

Loss

[78]Damages in deceit are assessed on the tortious, not the contractual, basis. This means that claimant is not entitled, as he would be in contract, to recover for loss of his bargain. Thus, the normal measure of damages in a case where the claimant is induced by a misrepresentation to purchase shares will be “the purchase price paid less the actual value of the shares when allotted; it will not be, as in contract, the represented value of the shares allotted less their actual value”: see McGregor on Damages (19th ed), §§47-002 and 47-010 to 47-021. Consequential losses may also be recoverable in principle (ibid., at §§47-022 to 47-024), but the aim is always to put the claimant into the position in which he would have been had the representations not been made.[79]Mr Pulman accepted that some of the heads of loss claimed – in particular the claim for loss of salary and for the value of the benefit of a car of his choice (see Particulars of Claim, paragraph 12(b)(i) and (iii)) – would only be claimable on the contractual basis. They are not available as heads of loss in the tort of deceit.[80]I agree with Mr Webster that the Claimant could never sustain a claim for “complete loss of investment, £650,000” (Particulars of Claim, paragraph 12(a)) because on any view the value of the interest in CCHL that he received (or was treated as having received) in return for his investment was not zero. On the other hand, given that the goodwill, client list and assets of CCHL were sold to CGL for just £50,000, there is material on which I could conclude that the value of that interest was substantially less than the Claimant paid for it. In the light of my conclusions on the other issues, it is not necessary and would not be sensible for me to attempt to reach a view on the extent of the loss, an issue that Mr Pulman candidly described as “triable… albeit with some difficulty”.[81]Whatever loss was suffered did not flow from any fraud on the part of the Defendant.

Other matters

[82]Much of the cross-examination, on both sides, was directed to factual matters said to go to the credibility of the witnesses and also to the quantum of any claim. These included, in particular: whether at the time he made his decision to invest the Claimant had been promised a salary of £15,000 per month (as he said); and how much money had been withdrawn from CGL by the Claimant and the Defendant and in what circumstances.[83]I have not determined these factual matters, for three reasons.[84]First, the documentary materials before me are few. I am not in a position to form a view about who, if anyone, is to blame for this. It would be unsafe to reach a view about what payments had been made, and for what purposes, without a full set of the relevant records of CGL and SVLL, including minutes of relevant board meetings, audited and/or management accounts and bank statements. For whatever reason, the materials before me appear to include no more than a small portion of these. It is unclear on what basis the few documents I do have were selected.[85]Secondly, the Defendant has issued separate proceedings (the Companies Act petition) against the Claimant and CGL. In those proceedings, the Defendant alleges that CGL made a series of unauthorised payments to various beneficiaries including the Claimant. The Claimant and Farooq Saleem have filed a joint defence. They have chosen not to plead to the allegations of unauthorised payments because they deny that the Defendant has standing to bring the petition. The question of standing will have to be determined by the Companies Court. If it is resolved in the Defendant’s favour, it will be necessary for that court to go on to determine whether there were unauthorised payments as alleged. If the issue has to be determined at all, it is in my view preferable that it should be determined in proceedings to which CGL and SVLL are parties and owe disclosure obligations. That way, it can be determined on the basis of fuller information than I have now.[86]Thirdly, in the light of the other conclusions I have reached, it is not necessary for me to determine the extent of any loss; nor could I safely do so (see paragraph 80 above). I have been able to make my findings on the other issues in the proceedings without reaching a view about these additional matters.

Conclusions

[87]I summarise my conclusions as follows: i) the Defendant did not make the representations relied upon by the Claimant (paragraphs 44-56 above); ii) even if I had found that the representations relied upon had been made, I would not have found that they were fraudulent representations of fact (paragraphs 57-60 above); iii) even if (contrary to my findings) there was a fraud, the Claimant discovered it more than six years before the claim was issued (paragraphs 61-71 above); iv) even if (contrary to my findings) there was a fraud and the Claimant did not discover the fraud more than six years before the claim was issued, he could with reasonable diligence have done so (paragraphs 72-74 above).[88]Accordingly, the claim fails, both because the Claimant has failed to establish it on the facts and because it is, in any event, time barred.

Cited in 14 later judgments

and 5 more of the most senior