ETL Holdings (UK) Limited v Kenneth McGregor Munn & Anor

This is my judgment on the trial of an assessment of damages, following summary judgment on the question of liability. It raises questions as to how far hindsight can be taken into account in quantifying compensation for breach of contract. In fact, the assessment of damages which I conducted was the second to be carried out, the decision on the first having been set aside on appeal. The underlying cause of action for the purposes of this assessment is breach of contract, in relation to warranties given in a share purchase agreement. The claimant was represented at the hearing by solicitors and counsel. Although there are two defendants to the claim, only the second defendant participated in this assessment of damages, when she was represented by counsel instructed through direct access. The first defendant (who was actually present at the hearing, but who did not participate) was made bankrupt in 2023, and his trustees in bankruptcy have not taken part in these proceedings.

The fact that the hearing which I conducted was the second attempt at an assessment of damages has had certain consequences. One is that the second defendant has this time had the benefit of being legally represented by counsel. This has meant that her case has been properly put. (The claimant was represented by solicitors and counsel on both occasions, though Mr. Harper KC did not represent the Claimant until after the appeal before Chief ICC Judge Briggs referred to below.) Another, perhaps even more significant, is that, because on the first occasion the judge heard significant oral evidence, both of fact and of expert opinion, the issues have narrowed. So far as facts are concerned, there are now relatively few disputes between the parties for the purposes of my assessment of damages. And the experts have now largely agreed on the questions of value on which they were asked to opine. I therefore did not hear from the experts in person, and I heard from only one witness of fact, Sara Brassington (the claimant’s managing director). The claimant had no cross-examination for either of the defendants. The remainder of the trial was taken up with submissions from counsel on the law and the (largely undisputed) facts. I should incidentally record that I was considerably assisted by the admirable submissions of both counsel. If I should make any mistakes in this judgment, it will not be for any want in the quality of advocacy on either side.

As I say, the only witness from whom I heard in person was Mrs Brassington. She was skilfully cross-examined, but my overall view is that she was trying to assist rather than to mislead the court. She knew her business and was straightforward in giving her evidence. She also accepted corrections. On the whole (making allowance for gaps in her knowledge and the effect of the passage of time), I accept what she said. As for the defendants, they were not cross-examined, and so there are limits on how far I can disbelieve their written evidence. Although I am not obliged to accept all such evidence (eg because a witness may be mistaken), and I can weigh it up in the balance with other evidence, for present purposes I am not at liberty to disbelieve the written evidence, unless I consider that it was manifestly incredible in light of all the circumstances: see Long v Farrer & Co [2004] BPIR 1218, [57], which the Court of Appeal applied in Coynev DRC Distribution Limited [2008] EWCA Civ 488, [58].

In commercial cases, at least, where there are many documents available, and witnesses give evidence as to what happened based on their memories, which may be faulty, civil judges nowadays often prefer to rely on the documents in the case, as being more objective: see Gestmin SGPS SPA v Credit Suisse (UK) Ltd [2013] EWHC 3560 (Comm), [22], restated recently in Kinled Investments Ltd v Zopa Group Ltd [2022] EWHC 1194 (Comm), [131]-[134]. This is indeed a commercial case, and there are a lot of documents available to me. I shall use those documents as primary sources of basic information, such as dates and times and also the substance of communications, but also as a cross check on the accuracy of the memories of witnesses.

The background to this matter is as follows. Carston Holdings Ltd (“the Company”) was a holding company. The first defendant and one Jonathan Rees were directors. They were then both qualified accountants. At some subsequent time, which I do not know, the first defendant was struck off the roll by the ICAEW. The Company had a number of subsidiaries, including Sinclairs Carston Ltd (“SICA”), SBL Carston Ltd (“SBL”), and Dormco Candco Ltd (“Dormco”). These were trading companies providing accountancy services. By two transactions, in 2004 and 2009, Dormco purported to transfer its goodwill to the Company for a total consideration of £1,469,586, which was however left outstanding as a debt. In 2013 the Company purported to transfer goodwill back to Dormco for a consideration of £975,670, which was again left outstanding as a debt. Later in 2013, Dormco purported to transfer goodwill to SICA for a consideration of £1,800,000, once more left outstanding. It then ceased trading. Its only creditors were HMRC.

In 2014 Dormco declared and paid a dividend to its parent (the Company). It could do this lawfully only if it had sufficient distributable reserves. It would have such reserves only if the debt due from SICA were a genuine asset of Dormco. It was on this basis that the Company thereafter declared and paid a dividend to its own shareholders, including the first defendant. The amount paid to the first defendant was £169,990.90. HMRC subsequently concluded that the dividend was unlawful, because they did not accept that the inter-company transfers of goodwill had been lawful. Accordingly, the debts generated by the promises to pay for them did not genuinely exist.

At the hearing of the summary judgment application on liability, the defendants did not dispute that, to the extent that the Company required the Dormco dividend in order to create distributable reserves, the dividend declared and paid by the Company was unlawful. Deputy Master Smith so held in 2021. The consequence for the first defendant was that he now owed a debt of £169,990.90 to the Company. In accounting terms, this appears to have been dealt with as an overdrawn director’s loan account. As such, it was an asset of the Company, although everyone was unaware of its existence until the dividend was declared unlawful.

On 6 February 2015, the claimant, the UK arm of a Europe-wide professional services provider, agreed to buy, and the defendants and Mr Rees agreed to sell, 40% of the share capital in the Company, for the total consideration of £2,880,000. For this purpose, the claimant borrowed the necessary funds from its parent company at the rate of 0.9% per annum. Later in this judgment, I shall have to refer to some of the provisions of the share purchase agreement (“the SPA”), but it contained various warranties, which were subject to matters disclosed in a letter between the parties, also dated 6 February 2015 (“the Disclosure Letter”).

At that date, in part because of the unravelling of the sales of goodwill referred to above, the Company owed the total sum of £3,106,158.11 to Dormco (“the Dormco debt”). However, this was not shown in the Company’s financial information provided to the claimant at that time, nor in the disclosure letter. Indeed, the existence of the Dormco debt became known to the claimant for the first time in July 2017 when, at a meeting in London, the first defendant mentioned it to Mrs Brassington.

Nor was the unlawful nature of the 2014 dividend (or the debt owed by the first defendant thereby created) disclosed. It was only after the first defendant had ceased to be a director of the Company, in 2017, that Mr Rees searched the first defendant’s work computer and discovered correspondence with HMRC relating to an investigation carried out into the first defendant. It was this investigation which concluded that the 2014 dividend had been made without sufficient distributable reserves, and was therefore unlawful.

On the same date as the SPA, and as part of the broader transaction including it, SICA purported to transfer to SBL the goodwill acquired from Dormco, for the sum of £1. Then SICA ceased trading, and subsequently went into insolvent liquidation. At the time of the summary judgment application, there were proceedings between the liquidator of SICA on the one hand, and SBL on the other, alleging that the transfer of goodwill was a transaction in fraud of creditors. I do not know what has happened to that litigation.

Over a year later, on 21 April 2016, HMRC presented a winding-up petition against Dormco in respect of unpaid tax. On 31 May 2016, the first defendant, as the sole director of Dormco, signed a certificate of solvency of Dormco. He could properly do so only on the basis that the Dormco debt due from the Company actually existed. Without it, Dormco would have been balance sheet insolvent. On 4 June 2016, relying on the certificate of solvency, Dormco was put into members’ voluntary liquidation. Ten months later, however, on 21 April 2017, Dormco went into creditors’ voluntary liquidation. On 13 July 2017, the liquidator of Dormco made demand of the Company for payment of the Dormco debt. The first defendant tried to settle the liquidator’s claim for £1.5 million, but the liquidator declined to accept his proposals for both the timetable for payment and security in the meantime. On 18 July 2017, he resigned as a director of both Dormco and the Company. On 28 July 2017, the liquidator of Dormco presented a winding-up petition against the Company. On 21 September 2017, the claim by Dormco’s liquidator in respect of the Dormco debt was compromised in the sum of £1.05 million, which was paid to his solicitors on 27 September 2017, and the petition was withdrawn.

Also on 21 September 2017, the Company wrote to the first defendant intimating a claim in the sum of £1,249,999.90. This was made up of three elements. The first was the sum of £169,990.90 owed to the company on the reversal of the unlawful dividend. The second was compensation for breaches of duty in relation to the Dormco debt in the sum of £1,050,000. And the third was the sum of £30,000 in respect of legal fees in dealing with the Dormco debt. Next day, on 22 September 2017, the Company served a Lien Enforcement Notice (pursuant to its articles of association) on both defendants, notifying them that, unless the sum of £1,249,999.90 was paid within 14 days, the Company intended to forfeit and sell their remaining 420 shares without further notice. I emphasise that the liability with which the Company was concerned was that of the first defendant alone, though the shares were owned jointly by the first and second defendants.

The Company valued the defendants’ 420 shares, without minority discount, at £958,211. On 9 October 2017 (the seventeenth day after 22 September 2017), no money having been paid by the first defendant to the Company in the meantime, the Company sold 49 of the 420 shares to the claimant for the price of £111,791, and the other 371 shares to EK Williams Accountants Ltd for the price of £846,420. The letters informing the defendants of this sale included a copy of the valuation relied on by the Company. EK Williams Accountants Ltd is an accountancy business owned as to 51% by Peter Brassington and as to 49% by the claimant. (Peter Brassington is married to Sara Brassington, the managing director of the claimant.)

In January 2019, the claimant discovered for the first time that a dilapidations claim been made in 2012 against SICA by the landlord of offices then occupied by SICA in London. Pursuant to a Licence dated 8 February 2011, the Company had acted as guarantor of SICA’s liabilities under the lease. The claim was in the sum of £277,237. The first defendant was aware of the claim at that time. But it had not been referred to in any of the documents disclosed to the claimant at the time of the SPA and it did not appear in SICA’s accounting records. Nor had the Licence (containing the guarantee) been disclosed to the claimant. The claim was settled by the payment of the sum of £90,000 to the landlord on 8 January 2019.

On 9 November 2017, the claimant’s then solicitors wrote a letter of claim to the second defendant, seeking damages for breach of warranty, and inviting her proposals to deal with the matter. It will be seen that this claim was intimated more than a year after a claim had been intimated against the first defendant alone by the Company, which claim had been partially satisfied by the forfeiture of the defendants’ remaining shares, and more than a year after the Dormco debt had been compromised by the Company. On 19 August 2019, the claimant issued a claim form under CPR Part 7, claiming damages (i) against both defendants for breach of the warranties given in the share purchase agreement of 6 February 2015, (ii) against the first defendant alone for fraudulent misrepresentation in relation to pre-contract representations, and (iii) against both defendants for negligent misrepresentations in relation to the accounts and management accounts of the company. The matters relied on included the non-disclosure of (i) the Dormco debt, and (ii) the dilapidations claim.

On 11 June 2020, the claimant applied for summary judgment on the claim. This application was eventually heard in December 2020. At the hearing the claimant was represented by solicitors and counsel, but the defendants appeared in person. On 23 April 2021 Deputy Master Smith handed down written judgment on the application, awarding the claimant summary judgment against both defendants on the issue of liability for breach of warranties, and declared the 2014 dividend unlawful (see at [41]). There was no similar summary judgment in relation to the misrepresentation claims. On 25 October 2021, Marcus Smith J on the papers refused an application by the second defendant for permission to appeal against that decision. She renewed her application, but on 6 December 2021 Adam Johnson J refused that renewed application.

The matter then proceeded to an assessment of damages. This was originally listed for two days in November 2021. However, because of related litigation being heard before an ICC Judge (see [2021] EWHC 3209 (Ch)), the hearing was adjourned by consent, and it was refixed for March 2022. But the hearing was adjourned again at least twice, once because the claimant wished to amend its particulars of claim, and secondly because the defendants wished to make a counterclaim. The assessment was eventually carried out by Deputy Master Arkush over three days in September 2022, followed by written submissions and a further one day hearing in November 2022. After the deputy master had reserved, and indeed was preparing, his judgment, he came to the conclusion that he needed to hear further from the parties’ experts. So there was a further one day’s hearing in January 2023. Once again, at these hearings the claimant was represented by solicitors and counsel, and the defendants appeared in person.

On 13 March 2023, Deputy Master Arkush handed down his written judgment. He assessed the damages as £1,242,463.24 in respect of the breach of warranty in relation to the non-disclosure of the Dormco debt, £66,608 in respect of the breach of warranty in relation to the non-disclosure of the dilapidations claim, and £25,100 (exclusive of VAT) in respect of the incurring of legal costs in connection with resolving the Dormco debt. In addition, he awarded interest (at the rate of 0.9% per annum) on that part of the loan from the claimant’s parent company that was unnecessary as a result of the first two heads of damage, though at that stage he did not quantify the amount of the interest. The Deputy Master held a further hearing on 24 April 2023 to consider consequential matters. He assessed the interest on the damages as £69,495.55. The Deputy Master himself gave permission to appeal to the defendants in respect of those parts of his order that related to the Dormco debt issue (but not the dilapidations claim issue), and stayed the enforcement of those parts in the meantime.

On 7 June 2023, Rajah J extended time for lodging the appeal bundle, but refused an application to stay further parts of the order. The appeal itself was heard by Chief ICC Judge Briggs (sitting as a deputy High Court judge) on 2 November 2023. The claimant was represented at the hearing by counsel and solicitors, and the second defendant by counsel instructed through direct access. By this stage the first defendant had become bankrupt (on 23 March 2023), but his trustees in bankruptcy took no part in the proceedings. The deputy judge handed down a written judgment on 27 November 2023 and dealt with consequential matters at a hearing on 12 December 2023. The deputy judge allowed the appeal in large part (though not completely), and directed a rehearing of the assessment of damages in respect of the Dormco debt. That is the rehearing that I have conducted, and in respect of which this is my judgment.

I said that the appeal was allowed “in large part”. However, it was not allowed in relation to (i) the diminution in value of the shares caused by nondisclosure of the dilapidations claim, or (ii) the claim to interest on that part of the claim, although both (i) and (ii) were stayed pending the rehearing. The award of interest on the main part of the claim was set aside, because the award of damages had been set aside, but the deputy judge did not criticise the deputy master’s calculations, assuming that he had been right to award the damages which he did.

The deputy judge allowed the appeal on two grounds. The first was that Deputy Master Arkush did not sufficiently address the defendants’ “single transaction” argument, nor the valuation of the retained shares. The second was that, in related litigation (between different parties) ICC Judge Jones found that the Dormco debt was obvious from the accounts, but Deputy Master Arkush had failed to take this into account. This second aspect of the case was not pursued on appeal. The claimant and the second defendants agree that ICC Judge Jones was referring to a different Dormco debt, and that Chief ICC Judge Briggs was mistaken. Moreover, Deputy Master Smith had found, in this litigation, that the defendants did not disclose the existence of this debt.

As to the first point, the deputy judge put the matter in this way:

In addition to the background which I have set out, there are a number of further matters with which I need to deal. The first is the terms of the SPA. As already stated, this was made on 6 February 2015. The parties were (1) the first and second defendants, Jonathan Rees and his wife Samantha (all four together referred to as “the Vendors”), (2) the Company, and (3) the claimant (referred to as “the Purchaser”). It is to be noted that the SPA was executed as a deed. This might have an impact on the limitation period applicable to a cause of action arising under the deed: Limitation Act 1980, s 8.

So far as relevant for the purposes of this case, the SPA provided:

The Disclosure Letter was also dated 6 February 2015. It was sent to Mrs Brassington, the managing director of the claimant, and was signed by the first and second defendants and Mr Rees. It relevantly read as follows:

The Disclosure Letter set out a number of matters which were thereby disclosed to the claimant. Those matters did not include any reference to the Dormco debt, the 2014 dividend, or the dilapidations claim, except that paragraph 15.4 stated that

Deputy Master Smith in his judgment (at [51]) noted that a provision had actually been made in the 2014 accounts for a dilapidations claim that had already been served. He regarded the statement set out above as “wholly inadequate” (at [53]) to disclose the existence of the claim to the claimant, and held that there was no real prospect of successfully defending that breach of warranty claim. For what it is worth, I respectfully agree with him.

There was also a shareholders’ agreement, entered into on 6 February 2015. It was made between (1) the first and second defendants, Jonathan Rees and his wife Samantha (defined as the “Original Shareholders”), (2) the claimant (defined as the “Minority Shareholder”), and (3) the Company. This agreement was also executed as a deed. Recital 3 to the agreement defined the expression “the Shareholders” as the “parties to this agreement”. The agreement relevantly read:

I have already referred above to the discovery by the claimant of the existence of the Dormco debt in July 2017 and the failure of the first defendant to resolve the problem. I further mentioned that, on 28 July 2017, the liquidator of Dormco presented a winding-up petition against the Company. The Company was under some pressure, as it did not want to be wound up, but it did not have sufficient funds to be able to discharge the debt claimed. However, it managed to negotiate a compromise with the liquidator to settle the matter for a payment of £1,050,000. There is no doubt that these funds were provided by the claimant’s German parent company, but the exact circumstances are disputed. There is a letter in the bundle from Dormco’s liquidator’s solicitors, dated 20 September 2017, addressed to the Company’s solicitors. The liquidator’s solicitors refer to their client as “Dormco Candco Ltd (in liquidation)” and their addressees’ client as “Carston Holdings Ltd”.

In part, this letter reads as follows:

On 21 September 2017, the Company’s solicitors wrote to the liquidator’s solicitors, confirming that the terms were agreed. As I have already said, on the same day they also wrote to the first defendant making formal demand for the total sum of £1,249,999.90 to be paid by him by 22 September 2017. This included the sum of £1,050,000, the schedule to the letter stating that “The Company has agreed to pay [Dormco] the sum of £1,050,000 in compromise of the Petition debt”. In an email dated the following day, the first defendant denied liability and in particular referred to the provisions in the shareholders’ agreement requiring prior written approval of shareholders for the settlement of the claim by Dormco. Also on 22 September 2017, the Company’s solicitors wrote to the first defendant serving a “Lien Enforcement Notice” under article 22 of the Company’s Articles of Association.

On 25 September 2017 Mrs Brassington, on behalf of the claimant (rather than the Company) requested funds from its German parent in the sum of £1,050,000. The document was headed “Attn. Mr Christian Gorny.” Dr Gorny was a director of the parent company. The funds were requested “As soon as possible. These must be paid within one week to comply with the legal requirements of the deal.” It is evident from the format of the document that it was an internal document in the form of a template request for funds which was completed or amended to suit the exigencies of the situation. The part dealing with the funds requested set out three items, of which the first two were “Salary payments (NAME)” and “Payroll TAX”. On this document they were marked as “n/a”, which I infer meant “not applicable”. The third item read as follows

Further down the page were these words:

Immediately below these words were set out the bank account details for Dormco’s liquidator’s solicitors. It is thus clear that the German parent was being invited to transfer directly to the liquidator the funds required by the compromise agreement between the liquidator and the Company. However, the request did not refer to discharging the Company’s liability to the liquidator. Instead, it referred to the purchase of shares in the Company itself. The trial bundle also contains a copy of the same document with manuscript annotations, dated 25 and 26 September 2017, presumably by Dr Gorny and a colleague in Germany, approving the request.

In cross-examination, Mrs Brassington said that she considered that the words “Purchase of shares in Carstons” were a mistake. Her understanding of the transaction was that the German parent was lending £1,050,000 to the claimant, and the claimant was lending the same sum on to the Company, so that the Company could discharge its liability to the liquidator of Dormco. Her evidence (which I accept) was that the template read “Purchase of shares in”, followed by a blank, where the name of a company would be inserted. The words in bold and underlined in paragraph 27 above have plainly been added to the template in completing the request. The particular “deal” in this case whose legal requirements are stated to have imposed a one week deadline is plainly the compromise of the Dormco debt.

Were it not for the fact that, contemporaneously, the Company had made a demand of the first defendant and fortified it by serving a Lien Enforcement Notice upon him, meaning that the defendants’ shares would almost certainly be sold to discharge the first defendant’s liability, I think that that would be the most likely interpretation. Internal documents are generally not completed or scrutinised with the same care as documents with external addressees. However, the coincidence in time with a company lien enforcement procedure and the ultimate sale of the defendants’ shares to the claimant and an associated company of the claimant does complicate matters.

Mrs Brassington also accepted that the Company did not seek or obtain the consent of the first defendant to settle the liability to Dormco. She said that she and her co-director Mr Rees were acting in good faith for the benefit of the business and to safeguard the jobs that depended on it. She was asked, but was not able to say, which of them had given the instructions to the Company’s solicitors to write the various letters to which I have referred. However, I accept her evidence that at that time those solicitors were dealing more with Mr Rees than with her, and that he certainly obtained advice from the solicitors on at least some aspects of this. On the whole, I find it more likely than not that the instructions for these letters were given by Mr Rees.

Given (i) that finding, (ii) the fact that the funds from Germany were paid directly to the liquidator’s solicitors, (iii) expressly to implement a “deal” consisting of the compromise of the Dormco debt, and also (iv) the fact that Mr Rees (not being also a director of the claimant) had no particular reason for viewing the settlement of the Dormco debt as part and parcel of a further purchase of shares by the claimant, my conclusion is that theCompany certainly did not see the various transactions in that way. In addition, overall, I am not satisfied that the claimant did either. In particular, having seen Mrs Brassington being cross-examined, I accept her evidence that the words “Purchase of shares in Carstons” were indeed a mistaken description of what was happening when the funds request was sent to Germany. It was a loan from the German parent to the claimant, and from the claimant to the Company, for the purpose of satisfying the liability under the compromise with Dormco, and not for the purpose of buying further shares. In context, I find that this was not “all one transaction”, even though the forfeited shares were then sold to the claimant and to Mr Brassington’s company.

It was common ground between the parties’ experts that the value of the shares purchased by the claimant as warranted would have been the same as the price paid, that is, £2,880,000. The experts were agreed that the difference in value of the Company between what should have been the case if the contract had been performed (“warranty true”) and what it was in reality (“warranty false”) was £1,242,463.23, that is, 40% of the value of the Dormco debt of £3,106,158. The claimant’s expert (Mr Stringfellow) gave his opinion that, on 9 October 2017, the defendants’ (forfeited) shares would have been worth £1,561,460. The defendant’s expert (Mr Mesher) did not give an exact value for those shares, but gave his opinion that whatever it was it exceeded the diminution in value claimed by the claimant. I accept that the forfeited shares were worth more than the diminution in value claimed by the claimant.

So far as concerns the damages for nondisclosure of the dilapidations claim, Deputy Master Smith found that the landlord’s claim was for £237,887, of which 70% (£166,521) was “estimated to be… payable”. The claimant bought 40% of the company, and 40% of £166,521 is £66,608. In fact, as I have already said, the whole claim was settled for £90,000 in January 2019. There was also the claim for the legal costs for dealing with the Dormco debt, amounting to £30,000.

The general rule in English law is that damages for breach of a contract to sell and purchase an object of commerce are assessed as at the date of breach. In Rodocanachi, Sons & Co v Milburn Brothers (1886) 18 QBD 67, the owners of a cargo sued the shipowners for the loss of the cargo through the master’s negligence. The market value of the cargo if it had arrived would have been greater than the amount that the cargo-owners had sold it for. The Court of Appeal held that the damages were to be assessed as at the market value if the contract had been performed, and the cargo had arrived. There was a market, and the onward sale was irrelevant.

Lord Esher MR said (at 76-77):

The other judges agreed. Lindley LJ said (at 78):

And Lopes LJ said (at 80):

This decision was affirmed by the House of Lords in Williams Brothers v Ed T Agius Ltd [1914] AC 510, which Lord Moulton at 580 called “a plain case of a failure to deliver a specified quantity of an article obtainable in the market” (a cargo of coals). The same rule was applied to sales of company shares in the case of Jamal v Moolla, Dawood, Sons & Co [1916] AC 175. Lord Wrenbury, giving the advice of the Privy Council, said (at 179):

These were all cases where there was in fact a functional market for the goods in question. As Lord Esher MR said in Rodocanachi, where there is no market, the value must be estimated (as price plus estimated profit). It was submitted to me that there are cases where it is appropriate in the assessment of damages in a case of breach of warranty to take into account events subsequent to the date of breach. I was accordingly referred to a number of legal authorities on the use of hindsight in assessing damages for breach of contract. The first of these was Bwllfa and Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Co [1903] AC 426, HL. In fact, this was not a contract case at all, but a statutory assessment of profits that were never made.

The owner of a coal seam gave notice under certain legislation to a waterworks of its intention to work the coal. The waterworks served a counter-notice under the legislation, which had the dual effect of (i) prohibiting the coal seam owner from working the coal, but also (ii) requiring the waterworks to compensate the owner for the profits which were never made. The price of coal increased after the notices were served, and before the assessment of profits was made. The argument was about whether that price increase could be taken into account by the arbitrator in calculating the lost profits. The House of Lords held that it could.

The Earl of Halsbury LC said (at 428):

He went on to say (at 429):

Lord Macnaghten, with whom Lord Shand agreed, said (at 431):

Like the Lord Chancellor, Lord Robertson (at 433) repeated the statement from the judgment of Phillimore J, and said:

Finally, Lord Lindley simply said that he was of the same opinion.

In my judgment, in this case the House was simply interpreting the relevant legislation as requiring the calculation of the profits that would have been made by the coal owner during the time in which it would have worked the seam. As their lordships said, this was not a sale of the coal at a particular moment, or even an assessment of its value. Instead, it was an exercise in calculating the profits that would have been made over a period. And, plainly, the price of coal from time to time would be relevant to the exercise of calculating profits over a period. But I do not think that this authority assists me in assessing the loss suffered by a share purchaser when, immediately upon the sale, he or she suffers a loss because what has been acquired is worth less than what was contracted to be supplied.

By contrast, Phillips v Brewin Dolphin Bell Lawrie [2001] 1 WLR 143, HL, was a case about the sale and purchase of (private company) shares. But the issue of hindsight did not arise in the context of assessing damages for breach of contract. Instead, it arose in an insolvency context, specifically that of a transaction at an undervalue. In October 1989, a company (AJB) negotiated to sell its stockbroking business to the defendant (BD) for the sum of £1.25 million. In preparation for the sale, AJB transferred that stockbroking business to a subsidiary company (BS) for £1. Two further agreements were entered into. By the first, AJB sold the shares in BS to BD for £1, and agreed to take over AJB’s obligations towards employees in the stockbroking business (and, pursuant to this agreement, BD discharged redundancy obligations of some £325,000). By the second, BD’s parent company (PCG) agreed to take a sublease of certain computer equipment, leased by AJB from two unconnected companies, for four years at a rent of £312,500 per annum. (It will be noted that 4 x £312,500 = £1.25 million.) The agreements were structured in this way for tax and regulatory reasons.

Unfortunately, the subletting agreement was in breach of a covenant in the lease against such subletting. Moreover, AJB was already in financial difficulty, and failed to make payments under its computer leases to the lessors. As a consequence, in early 1990 the leases were terminated by the lessors, and the equipment was repossessed. In April 1990 a winding-up order was made against AJB on the petition of the lessors. In May 1990 an administrative receiver was appointed by a debenture holder. The liquidator and administrative receiver was Mr Phillips, the claimant. Although BD had discharged redundancy obligations to the employees who had lost their jobs, no money was ever paid by PCG under the sublease. In June 1994 the claimant commenced proceedings against BD and PCG, contending that the sale to BD of the shares in BS (and therefore also its stockbroking business) was a sale at an undervalue.

Both the judge (Evans-Lombe J) and the Court of Appeal so held, although only as against BD. The claim against PCG failed. BD’s (and, curiously, PCG’s) subsequent appeal to the House of Lords was dismissed. However, the reasoning of the House differed from that of the courts below (which also differed from each other). Evans-Lombe J held that the value of the BS shares had been £1,050,000, and that the only consideration paid by BD was the £325,000 in redundancy payments made. The covenant of PCG was excluded from consideration because PCG’s intention had been to set off the payments under it against profits for the purposes of corporation tax, and PCG could not “blow hot and cold”.

In the Court of Appeal Morritt LJ (with whom Lord Woolf MR and Laws LJ agreed) said that, unless there had been an artificial division of the real transaction, or the sublease agreement was a sham, the form of the transaction entered into was determinative. He concluded that there had been no artificial division, and that the sublease agreement was genuine. Hence “the transaction” for the purposes of the Insolvency Act had been the share sale agreement alone. However, he agreed with Evans-Lombe J on the values to be attributed to the shares on the one hand (£1,050,000), and the consideration given for them on the other (£325,000).

In the House of Lords, Lord Scott (with whom the rest of their lordships agreed) did not agree with the approach of either the High Court or the Court of Appeal. But he nevertheless arrived at the same conclusion, namely, that the payment obligations undertaken by PCG added nothing to the discharge by BD of the redundancy payment obligations. He did so by accepting that they did form part of the whole transaction, and therefore could be taken into account, but that, in the circumstances, they had no value. This was because, by the time the question fell to be considered by the courts, the lease agreement had been terminated, the equipment had been repossessed, and it was clear that the subleasing contract had been unlawful. In vain did counsel for BD argue that they were all matters of hindsight, and should not be taken into account in considering whether PCG’s covenant had any value at the time of the transaction.

Lord Scott said:

In my respectful view, this case does not assist me either. The question before the House on that occasion was not whether hindsight could be used to value compensation for a breach of contract. In that case there was none. Instead, it was whether there had been a transaction at an undervalue within section 238(4)(b) of the Insolvency Act 1986. The law of damages had nothing to do with the matter.

The Golden Victory [2007] 2 AC 353, HL, was not a case of the sale and purchase of shares. But it was at least one about assessing damages for breach of contract, in this case a charterparty. In 1998 the shipowners chartered their vessel to the charterers for seven years. The charterparty (which contained an arbitration clause) provided that each party should have the right to cancel the charter if war or hostilities were to break out between certain countries. In December 2001 the charterers repudiated the charter, and three days later the owners accepted the repudiation. This was therefore a case of anticipatory breach of contract. They claimed damages, and the matter was referred to arbitration. In March 2003 the Second Gulf War (triggering the break clause) broke out. The arbitrator found that, in December 2001, a reasonably well-informed person would have considered war or large-scale hostilities within the break clause to be not inevitable or even probable but merely a possibility. The arbitrator, Langley J and the Court of Appeal all held that the charterers were limited to damages for loss to March 2003. By a majority, the House of Lords dismissed the charterers’ appeal.

In theoretical (or intellectual) terms, the principal speech of the majority was that of Lord Scott. Agreeing also with the other members of the majority, he said:

Lord Scott then referred to the Bwllfa case, from which I have cited above. He continued:

The second member of the majority, Lord Carswell, also agreed with the other members of the majority. In his speech, he set out the facts in some detail, and then considered the caselaw, again in detail. He then said:

The third member of the majority, Lord Brown, also agreed with the other law lords in the majority. He said:

The approach of the minority was however conceptually different. They saw the question as turning on the acquisition by the shipowner of an asset with a marketable value, namely the charterparty. Lord Bingham (the only law lord sitting on this appeal who had been a judge of the Commercial Court) went through the relevant caselaw in characteristically trenchant style. Then he said:

Finally, Lord Bingham said that he “wholly agreed” with the speech of Lord Walker.

The other member of the minority, Lord Walker, made clear that he agreed with Lord Bingham, but also said:

What I obtain from this case is that there was a profound cleavage of opinion amongst their lordships, culminating in a bare majority decision, as to whether this was the case of the valuation of a marketable asset (ie the charterparty) as at the date of breach, or the case of valuing the supply of a service over a period. This appears to turn on an appreciation of the facts. Lord Scott (at [34]-[35]) was plainly of the view that there was no market where one could establish the value of the charterparty. Lord Brown, also in the majority, thought that, although there was a market, the actual product to sell would have been different, ie a spot charter rather than a time charter: see at [81]. On the other hand, Lord Bingham (at [22]) clearly thought that there was a market and that the charter had a value there as it was. From my point of view, sitting here at first instance, I am plainly bound by the propositions of law laid down by the majority. But I am not bound by their view of the facts. In my judgment, the decision in this case is relevant to the value of the supply of a service over a period, but not to the sale of an asset for which there was a market at a particular date, or where market value can otherwise be ascertained.

Bunge SA v Nidera BV [2015] Bus LR 987, SC, was a case where a contract between Nidera to buy a single cargo of Russian wheat from Bunge was entered into on 10 June 2010, with delivery in August, later narrowed by notice to 23-30 August. On 5 August 2010 Russia introduced a legislative embargo on exports of wheat from its territory, to run from 15 August to 31 December 2010. On 9 August 2010, Bunge notified Nidera of the embargo and purported to declare the contract cancelled. Nidera did not accept that declaration, and treated it as a repudiation, which it accepted on 11 August 2010. Next day, Bunge offered to reinstate the contract on the same terms, but Nidera would not agree. Instead, Nidera began arbitration proceedings, to pursue a claim for damages.

The arbitration tribunal held that Nidera were right, yet awarded no damages, on the basis that the contract would have been cancelled anyway. The arbitration appeal tribunal also held that Nidera were right, but awarded substantial damages, on the basis that, even though the contract would have been cancelled later, as at 11 August there was a breach and a loss sustained then. There was an appeal to the Commercial Court, which Hamblen J dismissed. A further appeal to the Court of Appeal was also dismissed. Both Hamblen J and the Court of Appeal expressed doubts as to the applicability of The Golden Victory to a “single cargo” contract. But the Supreme Court had no such doubts, and allowed a final appeal, restoring the decision of the original arbitral tribunal.

Lord Sumption (with whom Lords Neuberger, Mance and Clarke agreed) said:

Lord Toulson (with whom Lords Neuberger, Mance and Clarke also agreed) said:

Lord Sumption emphasised the lack of difference between a “one-off” contract and a “successive performance” contract. Lord Toulson did not mention that. But both Lord Sumption and Lord Toulson emphasised the importance to the date-breach rule of the existence of a market in which the injured party could buy exactly the same good, neither better nor worse, as the comparator by which to measure the loss. It appears that both judges considered that what was available in the market in that particular case would not be the same as that which was contracted for. Hence, in that case, the date-breach rule was “unhelpful”. Both the contract and its hypothetical substitute would have been alike affected by the Russian government’s embargo. But that is not this case. In the present case, the property contracted for was actually supplied. It was simply less valuable – by an easily ascertainable amount – than it had been warranted to be worth. It was not even necessary to ascertain the market value of the shares to show that there had been a loss. They were worth whatever they were worth, but the problem was that they were in effect burdened by a company debt of a certain value which had been warranted not to exist.

The next case is Ageas (UK) Limited v Kwik-Fit (GB) Ltd [2014] EWHC 2178 (QB), a decision of Popplewell J, as he then was. On 1 July 2010, Ageas bought the entire share capital of Kwik-Fit’s insurance subsidiary for £215 million. Kwik-Fit breached the share sale warranties by the treatment in the accounts of two aspects of bad debt, which had the net effect of overstating revenue and assets. Kwik-Fit settled the claim against it up to a £5 million cap in the contract. But Ageas had insured the excess risk of a breach with AIG. Ageas claimed under the policy for the excess liability of Kwik-Fit in the sum of about £13 million. AIG said that the excess was only about £4 million. Ageas’s expert evidence valued the diminution in value of the shares purchased by grossing up bad debt levels in the first five months of 2010 (the latest trading figures available for the period prior to the sale) to represent the whole of 2010, and then projecting them forward for future years, assuming that they remained constant. However, the actual bad debt figures between June 2010 and April 2014 were much lower than those assumed by Ageas’s expert. The question therefore was whether in valuing the insurance subsidiary at the date of acquisition, account was to be taken of the bad debt experience of the business since the date of acquisition. 

Popplewell J considered the case law, and concluded:

So, that was a case where the calculation of the loss as at the date of the sale involved ascribing a necessarily estimated value to the bad debts expected in the years following the sale. As Lord Esher MR said in Rodocanachi, where there is no market, you have to estimate the loss. The estimate in this case was based on figures available at the time. However, these were shown subsequently to be an overestimate, because bad debts were at a high point at the time of the sale, but diminished thereafter. Nevertheless, the judge held that the assumption about future bad debts was one the parties would reasonably have made at the time of the sale if they had known that the incidence of bad debts had erroneously been excluded from the warranted accounts. So, there was no windfall for Ageas. Moreover, “[t]he bargain embodied in the SPA was the allocation of risk to Ageas of any benefit or loss arising either as a result of the way Ageas chose to run the business or as a result of external influences on the success of the business”. So, neither of the two qualifying conditions identified by the judge for the application of hindsight was satisfied, and Ageas succeeded in its claim.

The Hut Group Limited v Nobahar-Cookson [2014] EWHC 3842 (QB), [184], was another case of claims on warranties given on a share sale. It was factually more complex than Ageas, in that (1) the defendants had sold shares in a company to the claimant, which had (2) transferred shares in itself to the second defendant in part satisfaction of the sale price. Subsequently (i) the claimant complained of a breach of warranty in relation to the shares sold to it by the defendants, and (ii) the second defendant complained of a breach of warranty in relation to the transfer of shares of the claimant to the second defendant.

On the law in relation to breach of warranty on a share sale, Blair J cited the decision of Popplewell J in Ageas, and summarised and agreed with the law as stated by him and set out above. Then he added this:

I note that an appeal against the actual decision of Blair J was dismissed by the Court of Appeal ([2016] EWCA Civ 128), but without commenting on that part of his judgment.

Bir Holdings Limited v Mehta [2014] EWHC 3903 (Ch) was a decision of HHJ Cooke (sitting as a Judge of the High Court). Once again, it was the case of a share sale agreement, and a claim of breach of warranty. Once again, the judge cited the decision of Popplewell J in Ageas, and quoted paragraph 35 of the judgment, as set out above, with apparent approval. But the judge distinguished that case, saying that his own case was not one “of a valuation being made on the basis of an assumption as to future contingencies”. But, in any event, he concluded that the application of the breach-date rule would not result in any windfall offending the compensatory principle. Moreover, the negotiation of the contract and the price agreed involved an allocation of risk with which the court should not interfere. There was accordingly no room for the application of the benefit of hindsight.

In particular, the judge said:

In OMV Petrom SA v Glencore International AG [2017] 3 All ER 157, [53], cargoes of oil were systematically falsely described by the seller as what had been agreed to be sold, when in fact they were inferior. So, it was a case of fraud, and a claim in deceit. Christopher Clarke LJ, with whom Black and Kitchin LJJ agreed, cited paragraphs 35-38 of Ageas with apparent approval. He went on to say this:

In Equitix EEEF Biomass 2 Ltd v Fox [2021] EWHC 2531 (TCC), 198 Con LR 224, by a contract dated 23 December 2015, as amended on 5 August 2016, the claimant bought all the shares in Gaia Heat Ltd from the defendants. Gaia’s business was supplying steam to a single customer, Greenenergy Biofuels Ltd. However, there had already been, and were still considerable problems with Gaia’s boilers, and the relationship with Greenenergy broke down. Greenenergy terminated the contract between them by notice on 22 November 2017. On 30 October 2018, the claimant issued the present claim for damages for breaches of the share sale agreement. The judge (Kerr J) found that some of the warranties given by the defendants in the agreement were false.

The judge said:

Finally, in MDW Holdings Ltd v Norvill [2023] 4 WLR 33, CA, the claimant bought the entire issued capital of a company (“GDE”) from the defendants in 2015. GDE's business involved the collection, processing and disposal of waste. It depended on consents and permits from environmental regulators. The warranties given included warranties that GDE had conducted its business in accordance with all applicable laws and regulations, that it held the requisite consents and was not in breach of any of their terms and conditions, that no proceedings against GDE had been threatened and there were no circumstances likely to give rise to any such proceedings, that GDE's accounts showed a true and fair view, and that GDE had complied with environmental laws and permits and there were no facts or circumstances likely to lead to any breach of any such law, to the revocation, suspension, variation or non-renewal of such a permit or to any claims, investigations, prosecutions or other proceedings.

At first instance the judge held that the defendants had breached each of the warranties mentioned above, and assessed damages. In the Court of Appeal this was accepted, and there was no dispute about liability. Instead, the argument was about the measure of damages. Newey LJ, with whom Asplin and Whipple LJJ agreed, considered the case law, and concluded:

I add only that permission to appeal was subsequently refused by the Supreme Court.

Both parties accept that what is in play here is the so-called compensatory principle, that the claimant is entitled to be compensated fully for the loss suffered by the defendants’ breach of contract. This is a case where assets (company shares) were being sold subject to certain warranties. The loss suffered by the claimant on the breach of any warranty is accordingly the difference between the value of the shares if the warranty breached had been fulfilled (“warranty true” value) and the value of the shares on the basis that it has not been fulfilled (“warranty false” value). The claimant submits that in assessing that difference it is not permissible to take account of events that took place after the date of the breach, except in one case. That exceptional case (says the claimant) is where the value of the shares depends upon a future contingency which becomes certain before the court comes to assess the loss.

Moreover (says the claimant), the exceptional case applies only subject to two further qualifications which must both be satisfied. The first qualification is that it must be necessary to take the subsequent events into account in order to give effect to the overriding compensatory principle, or, in other words, to avoid a “windfall” (ie over-compensation) to the claimant. The second is that taking such events into account does not cut across the allocation of risk as between the parties by their contractual bargain. I will return to these qualifications further below.

The claimant further says that the only future contingency relied upon in the present case by the second defendant as affecting the value of the shares at the date of the breach is a combination of (i) the ability of the company in this case to forfeit the defendants’ jointly held shares in response to the first defendant’s breach of fiduciary duty and (ii) the ability of the company to negotiate and compromise the Dormco debt. The claimant says that these are two separate contingencies rather than one single contingency, but also says that these matters were not contingencies taken account of in the valuation of the company shares. This is because nobody (except the first defendant) knew of the Dormco debt, and no one (except the first defendant) knew of the prospect of a claim against the first defendant which might give rise to a forfeiture of the shares. No-one regarded the possibility of a debt to Dormco, or of a claim against the first defendant for breach of fiduciary duty, as a contingent event affecting the value of the Company. To the contrary, the whole point of taking the warranties was to provide certainty to the purchaser, by putting the risk of such things eventuating squarely on the defendants, who after all had been running the company up to that point, and should have known.

Even if the facts of the present case did disclose a contingency which had to be taken into account in assessing the damages as at the breach date, the claimant says that the second defendant cannot satisfy either of the two qualifications to the contingency principle, referred to above. As to the first, the claimant borrowed £1,050,000 from its German parent and lent it on to the Company. Accordingly, £1,050,000 of the damages assessed simply goes to make the claimant whole in that respect and does not amount to a windfall. As to the second, the claimant in entering into the SPA, and becoming a shareholder in the Company, was entitled to take the benefit of whatever the Company could subsequently do to improve its financial position as against third parties, including its creditor, Dormco. In this respect, the SPA had allocated the risks and benefits.

On the other side, the second defendant says that the lien imposed on and forfeiture of the defendants’ jointly held shares was only one half of the transaction. The other half was the sale of the forfeited shares to the claimant and its associated company EK Williams Accountancy Ltd. But (she says) the two halves of the transaction must be viewed together. If only one half is addressed, the claimant will be compensated twice. First, the claimant will receive the full difference between the “warranty true” value of the original shares and their “warranty false” value (their actual value). This difference arose predominantly because of the existence of the Dormco debt. Secondly, the claimant has obtained the forfeited shares (the second defendant says for less than their true value) at the same time and as part of the same transaction as increasing the value of the original shares by extinguishing the Dormco debt. In the present proceedings the claimant seeks judgment in the sum of 40% of the value of the Dormco debt, but has already obtained the forfeited shares. In his original witness dated 14 April 2022, which stood as his defence, the first defendant said “in these proceedings ETL are duplicating a claim which has already been settled by way of a set off”.

The second defendant also relies on the fact that the 2014 dividend declared by the Company was declared unlawful in 2021. That resulted in the treatment of the payment out as a debit to the first defendant’s director’s loan account. Accordingly, it was an asset of the Company in 2015, even though this was not realised at the time, and so not priced into the sale. Therefore, says the second defendant, she should have the benefit of 40% of the value of that claim to set off against any liability to the claimant.

The second defendant originally had two other arguments. One was that the claimant was estopped as against her because the forfeited shares settled all matters between them. The other was that the claimant fully mitigated any loss arising as a result of the breach of warranty by way of the forfeiture of those shares. In the event, however, neither argument was pursued at the hearing, and I say no more about them.

Before descending into the facts, I can state the most important legal propositions applicable to this case in this way. This is not a case of anticipatory breach of contract, where the date for performance has not yet arrived. So, subsequent events are not to be taken into account merely on that basis. It is however the case of the sale of an article of commerce in itself. Although there is no liquid market for unquoted shares, the price paid by the buyer in an arms’ length transaction is normally treated as the market value at that time (and the experts did so in this case). The mere fact that the shares increase in value after the sale does not of itself demonstrate a windfall to the buyer, and still less where the increase is attributable to the buyer’s own efforts. The contract of sale and purchase of the shares is usually taken to allocate the risk of subsequent changes in value. Normally the seller bears the risk of a diminution in value until the sale, and then the buyer bears the risk. Conversely, the seller takes the benefit if any uplift before sale (by fixing the price appropriately), and then the buyer takes the benefit of any uplift afterwards.

Turning to the facts, this case involves multiple parties, causes of action and sums of money said to be owing. I therefore begin with some clear anchor points. The first is that the Dormco debt was in the sum of £3,106,158.11. The claimant bought 40% of the shares in the Company in 2015. So, the warranty in relation to company debts being breached, the prima facie measure of loss to the claimant is 40% of £3,106,158.11, that is £1,242,463.24. The second anchor point is the fact that in 2017 the Company compromised the claim made by the Dormco liquidator in respect of the Dormco debt for the sum of £1,050,000.

The third anchor point is the claim made by the Company against the first defendant in 2017. This was in the total sum of £1,249,999.90. It was composed of three elements. First, there was the sum of £169,999.90 in respect of the unlawful 2014 dividend paid to the first defendant which had to be reversed, and (in accounting terms at least) had become an overdrawn director’s loan account as against him. Second, there was the sum of £1,050,000 in respect of the first defendant’s breaches of duty in relation to the Dormco debt. The figure of £1,050,000 was of course derived from the sum paid to compromise that debt. Third, there was the sum of £30,000 in respect of legal fees incurred in relation to the Dormco debt.

The fourth anchor point is that the Company enforced its claim for £1,249,999.90 against the first defendant by forfeiting the 42% of the shares in the Company still jointly held by the two defendants, and immediately selling them to third parties for a total sale price of £958,211. That left a shortfall on the Company’s claim of £291,788.90. The purchasers of those shares were (i) the claimant, which bought 49 of them for £111,791, and (ii) its associated company EK Williams Accountancy Ltd (49% owned by the claimant), which bought 371 shares for £846,420. If the sums paid for the forfeited shares represented the market value at that time, those shares could not compensate the claimant for its loss, because the claimant would have fully paid for them.

The question for the court is whether, in assessing the loss to the claimant caused in 2015 by the defendants’ breach of warranty in respect of the Dormco debt, the claimant can recover the prima facie measure of loss of £1,242,463.24, or only some lesser sum (or even nothing at all) by reason of the subsequent events in 2017 set out above. As the authorities make clear, the prima facie rule, from which departure must be justified, is that damages are to be assessed at the date of breach, and that only events which have occurred at that date can be taken into account. I can depart from that only where it is necessary to give effect to the overriding compensatory principle, and only where the parties have not by their contract already allocated the risk of subsequent events changing the value of the property sold and bought.

The first point is that the claimant’s loss accrues in 2015, on the making of the SPA. The loss accrued because the defendants failed to disclose a fact, that is, the Dormco debt. However, in 2017 the Company compromised the Dormco debt with the liquidator of Dormco in the sum of £1,050,000. It also forfeited the defendants’ shares because of the first defendant’s unpaid liability to the Company. The second defendant asks me to see this possibility of compromise of the Dormco debt and the forfeiture of the defendants’ remaining shares in 2017 as a contingency or contingencies affecting the value in 2015 of the compensation otherwise due to the claimant for breach of warranty.

I find this unreal. If it were true in this case, it would be true in the case of every SPA where a warranty were breached on the basis of non-undisclosed liabilities, and in every case where a company’s articles permitted shares to be forfeited for unpaid members’ liabilities to itself. The (subsequent) successful negotiation of a compromise of a debt claimed from the Company by a third party obviously increases the value of the Company, but that is an entirely separate matter from the amount of the loss caused to the claimant by the breach of warranty in 2015. It is the Company’s action, not the claimant’s. In my judgment, the possibility of compromise of an undisclosed debt of the target company that has been warranted not to exist, and the ability of a company under its articles to forfeit members’ shares for unpaid debts, are not a contingency or contingencies affecting the value of the shares sold in 2015.

The second point is that the Company had a claim against the first defendant in respect of his various breaches of duty. This claim was an asset of the Company. The value of this claim to the Company from time to time depended upon a number of factors. One of them was the availability of assets of the debtor to meet the claim. Another was the willingness of the Company to take legal action which might involve both expense to itself and potential liability to other parties. In the present case, the Company embarked on legal procedures which realised nearly 77% of its claim against the first defendant. By its efforts, therefore, the Company caused the claim as an asset of the Company to be worth a considerable amount of money. If the Company had instead owned land which it subsequently developed, so increasing the value of the Company itself, that increase in value would not go to reduce the claimant’s loss on the breach of warranty claim. For the same reason, it seems to me that the successful exploitation by the Company of a claim against the first defendant should not do so either. Once again, the Company’s own actions in vindicating its own claim are entirely separate from the valuation of the loss to the claimant attributable to the breach of warranty claim which the claimant made.

But, it may be said, here the asset concerned is a legal claim, four-fifths of which by value relates to the same source of loss to the Company as to the claimant, namely the Dormco debt. To the extent that the value of the claim is recovered, surely that should diminish the loss to the claimant? One answer to this is that the parties are different. The claim of the Company against the first defendant alone for breach of his fiduciary duty was the claim of the Company and not of the claimant. Another is that the causes of action of the Company against the first defendant and the claimant against both defendants are different. The claim of the Company against the first defendant was for breach of the latter’s fiduciary duty, in causing the Dormco accounts to be signed showing the Dormco debt as owed by the Company, and causing a statutory declaration of solvency for Dormco to be signed and filed confirming that the Company indeed owed the debt. On the other hand, the claimant’s cause of action against the defendants was for breach of warranty that there was no such debt as the Dormco debt. Both causes of action relate in some way to the Dormco debt, but the former relates to the creation and confirmation of the debt, whereas the other relates to not disclosing its existence. The losses that flow are different, and impact on different people. The company’s claim was intimated and dealt with in September 2017. The claimant’s claim was intimated in November 2017 and launched only in August 2019.

If the claimant had known of the false warranty in 2015, it would have paid less for the shares. So, it paid too much. Its loss accrued at that stage. But the Company would still have had its claim against the first defendant for his breach of fiduciary duty. Later recovery by the Company from the defendant, and the compromise of the Dormco debt at a reduced level, do not diminish the earlier loss of the claimant, any more than the claimant’s paying less for the shares at the outset would diminish the losses of the Company. Moreover, the sale and purchase agreement clearly allocated the risk as between the claimant and the defendants. Before the sale, the risk/reward was for the sellers. Afterwards, it was for the buyer. In my judgment, therefore, the claimant is entitled to claim the loss of 40% of the value of the Dormco debt, that is, £1,242,463.23.

Applying the same principles, the claimant is also entitled to damages for breach of warranty by reason of the nondisclosure of the dilapidations claim. I have already said that Deputy Master Smith found that the landlord’s claim was for £237,887, of which 70% (£166,521) was “estimated to be… payable”. So the damages are calculated as the claimant’s 40% of the 70% of the claim estimated to have been payable at the time of the sale and purchase agreement. Deputy Master Akush accordingly assessed these damages at £66,608. There was no appeal against this award or the award of interest upon it, although both were stayed pending this hearing. I will order that the stay now be lifted. Finally, there are the legal costs of dealing with the Dormco problem, which I find were £25,100, exclusive of VAT.

On the other side, I must deal now with the complaint that the forfeited shares were sold by the Company to the claimant and to EK Williams at an undervalue. This is a complaint against the Company rather than against the claimant (who bought the shares at the price demanded by the Company). But the second defendant has never taken any steps to vindicate this complaint, whether by an unfair prejudice petition or otherwise. It is difficult to see how I can take account of it in these proceedings, to which the Company is not a party. Mrs Brassington was very briefly cross-examined about the valuations obtained by the Company in relation to the defendant’s remaining shares, but the only evidence elicited was that one was prepared by Mr Rees, the independent director of the Company, and that another was prepared by her husband, but that she had nothing to do with either of them. In my judgment, whatever the merits of this complaint, which I am unable to decide in these proceedings, it cannot amount in law to a set-off against any liability to the claimant.

The next point is the second defendant’s submission that credit should be given to her in respect of the value of the director’s loan account created by the unlawful dividend payment in 2014. If the existence of this value had been known in 2015, it may well be that the price to be paid for the shares would have been greater, probably by 40% of the increased value of the loan account. However, if there had been no breach of warranty, and subsequently the 2014 dividend had been declared unlawful, the sellers could not have claimed extra money from the buyers on that account, at least in the absence of some mechanism in the share purchase agreement to do so. No such mechanism is suggested here. Nor was it suggested that there could be any claim for extra payment under the general law of mistake. Accordingly, if the sellers cannot get more money from the buyer because they have misunderstood what they were selling, and charged too little, in my judgment there can be nothing to set off against any liability which the second defendant has towards the claimant.

For the reasons given above, I assess the damages owed by the second defendant to the claimant as follows: £1,242,463.23 in respect of the Dormco debt warranty and £25,100 in respect of the costs of dealing with the Dormco debt. The award of £66,608 by Deputy Master Arkush in respect of the dilapidations claim warranty remains undisturbed, as does the award of interest upon it. Interest will be payable on the other sums in accordance with the statutory provisions set out in paragraphs 2 and 3 of the order of Deputy Master Arkush, that is, Section 35A of the Senior Courts Act 1981 for pre-judgment interest, and section 17 of the Judgments Act 1838 and CPR rule 40.8 for post-judgment interest. I assume that the parties will be able to make a precise calculation and agree it.

In the present case it is hard not to feel some sympathy for the second defendant. She trusted her husband to make proper disclosure about the fortunes of the company which he ran, and both he and she (as co-vendors of some of the shares in the company) gave a contractual warranty as to the result. Because her husband failed to tell the truth about the company, she is now liable for breach of contract, with the consequences set out above. I say nothing about the position as between the first and second defendant. But, as between the (innocent) claimant and the second defendant, it is right that its loss should fall upon her, rather than upon the claimant.

Lastly, I am sorry for the delay in the preparation of this judgment. It was caused partly by pressure of other urgent work, but also by personal circumstances beyond my control.