England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
CIVIL DIVISION
ON APPEAL FROM BOURNEMOUTH COUNTY COURT
(Judge Anthony Thompson QC)

		The Royal Courts of Justice The Strand London Friday 12 April 2002

Friday 12 April 200 2

1. LORD JUSTICE CHADWICK: These two appeals are from an order made on 23 April 2001 by His Honour Judge Anthony Thompson QC, sitting in the Bournemouth County Court, in proceedings brought by Mr Alan Daniel against Mr Derek Gregory, the executors of Mr Ronald Betteridge and Gregory Wright & Co, a firm of accountants. The proceedings arise out of the sale by Mr Gregory and the late Mr Betteridge in early 1993 of the two issued shares in Rakecare Limited, the parent company of a wholly-owned subsidiary, Phelps, Tiller & Nelson Limited. The subsidiary carried on the business of insurance brokers. Gregory Wright & Co provided accountancy services to the two companies. Mr Julian Gregory, the partner who had primary responsibility within the firm for the affairs of the two companies, is the son of Mr Derek Gregory.
2. The only business of Rakecare Limited was the provision of management services to its operating subsidiary, Phelps, Tiller & Nelson Limited ("PTN"). PTN was a registered insurance broker and, as such, was subject to the Insurance Brokers Registration Council (Accounts and Business Requirements) Rules 1979 made pursuant to the Insurance Brokers (Registration) Act 1977. Part III of those Rules requires an insurance broker to maintain a separate insurance broking account with an approved bank, to pay to the credit of that account all monies paid to and received by it from all sources which relate to insurance transactions of any kind in connection with its insurance business, including brokerage, and to make payments out of that account only for the limited purposes prescribed by Rules 6(4) and 6(5) of the 1979 Rules. In effect, the insurance broking account is to be used for holding client monies and is not available to meet the general liabilities of the business. The requirement is reinforced by the need, under Rule 7(iv), to keep accounting records which enable compliance with the relevant provisions of the Rules to be demonstrated at any time.
3. It is now common ground that, through inadvertence and the failure to put in place and to maintain adequate accounting systems, PTN was, by the end of 1992 and thereafter until October 1995 (when IBRC registration was withdrawn) in breach of the requirements imposed under Part III of the 1979 Rules. It is unnecessary to examine in any detail the reasons which had given rise to that breach. Put shortly, the problem arose because brokerage commission was taken from the insurance broking account before it had been fully earned. This gave rise to a need to repay to the account all or part of that commission in cases where, upon the cancellation of a policy during its term, a refund of premium was made to the client out of that account. Failure to recognise that need (amongst other reasons) led to the accumulation of shortfall in the insurance broking account. In the absence of proper reconciliation procedures between the balances at the bank and PTN's internal accounts, the extent of the accumulated shortfall -- and its cause -- was not fully appreciated until March 1996, when Mr Daniel received a report from accountants, Messrs Redman & Roker, whom he had instructed to review the position.
4. By the date of that report, the accumulated shortfall had reached an amount which was little short of £25,000. There is no agreement or finding as to the amount of the shortfall as at the end of 1992; but the figures in evidence suggest that it is likely to have been £10,000 or thereabouts. The claims in these proceedings arise because neither Mr Daniel as purchaser of the shares in Rakecare Limited, nor Mr Gregory or Mr Betteridge as vendors of those shares, were aware at the time of the share sale agreement that there was a substantial accumulated shortfall in what may loosely be described as the client account of PTN.
5. The terms upon which Mr Daniel purchased the two shares in Rakecare are found (i) in a document described as a supplemental agreement dated 30 December 1992 and made between Mr Gregory and Mr Daniel, (ii) in a share sale agreement dated 5 January 1993 made between Mr Betteridge and Mr Daniel, but to which Mr Gregory was joined in order to give covenants as a seller, and (iii) in an oral agreement made between Mr Gregory and Mr Daniel in or about April 1993. The structure of the agreement was dictated by the circumstances in which the parties found themselves. Mr Gregory and Mr Betteridge each held one share in Rakecare. Mr Betteridge was in ill health and could no longer attend to business. Mr Daniel had sufficient funds to buy out Mr Betteridge; but not to purchase the whole of the business. Mr Gregory wanted to retire within a few years; and was content to be bought out by instalment payments over that period. So it was agreed that Mr Daniel would purchase Mr Betteridge's share for an immediate payment of £35,000 on terms that he would become employed in the business and a co-director, with Mr Gregory, of the two companies; that Mr Gregory would undertake not to sell his share to anyone else without the consent of Mr Daniel; and that Mr Daniel would purchase Mr Gregory's share by payments made over a five-year period.
6. The agreement signed by Mr Gregory and Mr Daniel on 30 December 1992 (the supplemental agreement) reflects this arrangement. It is in these terms:

"As a pre-condition to a 50% purchase in Rakecare Limited, the 50% shareholding being obtained from Ronald J Betteridge, the above parties agree to the following:-

1. Mr Alan Daniel to immediately draw an annual salary of £22,000 on becoming a 50% shareholder.

2. Mr Alan Daniel to be provided with a fully expensed company car to a maximum purchase price of £10,000.

3. Mr Derek P Gregory to agree not to sell his 50% shareholding in Rakecare to anyone without Mr Alan Daniel's permission in writing and Mr Alan Daniel likewise not to sell.

4. Mr Derek P Gregory and Mr Alan Daniel to come to a mutually agreed formula for Mr Alan Daniel to purchase Mr Derek P Gregory's 50% shareholding in Rakecare over a period of five years for a price of £50,000.

5. The Companies Constitution to be put in order within 6 months."

7. The next contractual step was the execution by each of Mr Gregory, Mr Betteridge and Mr Daniel of the formal share sale agreement dated 5 January 1993. Although drawn in terms which are ambiguous and inept -- in that "the shares" which Mr Betteridge agrees to sell are defined as all the issued shares in the capital of Rakecare -- it is reasonably clear that the agreement is for the sale of Mr Betteridge's one share in Rakecare at a price of £35,000. Mr Gregory signed the agreement for the purpose expressed in clause 1(D):

"For the purposes of this Agreement DEREK PAYTON GREGORY of ... [address] ... covenants as if he were a SELLER under the terms of this Agreement and has executed this document accordingly and all covenants and obligations on the part of the SELLERS that follow are given by him and RONALD JOHN BETTERIDGE ... jointly and severally."

8. Subsequently, in April 1993, Mr Daniel and Mr Gregory agreed the terms upon which Mr Daniel would purchase Mr Gregory's one share in Rakecare. In place of the price (£50,000) mentioned in paragraph 4 of the supplemental agreement which they had signed on 30 December 1992, they agreed a formula. The price was to be two years' purchase of the general business earned by PTN for the year to September 1991, less (i) the amount outstanding on Rakecare's loan account with its bank at the end of 1992 (£42,000) and (ii) the amount paid by Mr Daniel for Mr Betteridge's share (£35,000). Taking the amount of the general business earned by PTN for the year to September 1991 at £67,175, that formula gives a price of £57,350 for Mr Gregory's share in Rakecare. That figure, £57,350, has been substituted, in manuscript, for the figure of £50,000 in the copy of the supplemental agreement which is before this Court; and it was confirmed by Mr Egleton (who appeared for Mr Daniel in this court as he had below) that that figure, as an agreed price, was not in dispute. It is common ground, also, (i) that the price was to be paid by Mr Daniel over a period of five years from 30 December 1992; (ii) that payments amounting to £25,000 were made by Mr Daniel between 30 March 1993 and 8 June 1993 and (iii) that the seller's covenants and warranties in the share sale agreement of 5 January 1993 extended also to the sale of Mr Gregory's share.
9. Following Mr Daniel's acquisition of Mr Betteridge's share in January 1993, Mr Daniel and Mr Gregory worked together in the insurance broking business carried on by PTN until October 1994. But by October 1994 they had fallen out. Mr Gregory ceased to attend at the office and Mr Daniel refused to make further payments under the agreement reached in April 1993. Both companies ceased to trade in June 1996, and PTN's clients were taken over by another broker, Swanage Insurance Brokers. It is common ground that the companies are now of no value. They have been struck off for failing to file accounts under the Companies Acts.
10. In February 1996 Mr Gregory commenced proceedings in the Bournemouth County Court. In those proceedings he claimed against Mr Daniel payment of £32,350, being the balance of the purchase price for his share which remained unpaid. A defence to that claim was served in May 1996. In paragraph 8 of that defence it is averred that Mr Daniel had refused to make any further payment to Mr Gregory because of inaccuracies discovered in the books and records of PTN. In particulars provided in September 1996 it is said that the only amount payable to Mr Gregory, after deductions which Mr Daniel was entitled to make, was £2,369.40.
11. Those proceedings were overtaken by, and became subsumed in, proceedings commenced by writ issued on 15 December 1998 in the Queen's Bench Division of the High Court. In those proceedings Mr Daniel claimed against Mr Gregory and the estate of Mr Betteridge (who had died on 22 September 1997) damages for breach of the warranties contained in the share sale agreement of 5 January 1993. After setting out the warranties in respect of the accuracy of information and accounts and post-balance sheet events contained in clauses 7-9 of schedule 2 to that agreement and the terms of a disclosure letter dated 5 January 1993, the statement of claim makes the following allegations, in paragraphs 14, 15 and 16:

"14. The warranties given by Messrs Betteridge and Gregory were inaccurate, misleading, false and untrue.

PARTICULARS

Notwithstanding the Insurance Brokers Registration Council Rules PTN did not keep accurate accounting records and such records as were maintained were inaccurate. There was a shortfall in the client account of between approximately £24,658.88 and £24,920.70.

15. By reason of the breach of contract of Messrs Betteridge and Gregory, Mr Daniel purchased the business at a price that did not accurately reflect the proper financial position.

16. By reason of the breach of contract of Messrs Betteridge and Gregory, Mr Daniel has suffered loss and damage. Full particulars thereof will be provided after discovery."

12. Gregory Wright & Co were named as third defendants to the High Court proceedings commenced in December 1998. The claim against that firm is founded on a comfort letter signed by Mr Julian Gregory on 23 December 1992. The letter, on the headed paper of Gregory Wright & Co, was addressed "To whom it may concern" and was in these terms:

"RAKECARE LIMITED

To the best of our knowledge and belief, when accounts for the year ended 30th September 1992 have been prepared, we consider that it is unlikely that the results shown in the unaudited consolidated accounts will show a position which differs from that at 30th September 1991 by plus or minus 5%."

13. It is alleged in paragraph 21 of the statement of claim -- and it is common ground -- that the letter was signed in circumstances in which Mr Julian Gregory knew that it would be relied upon by Mr Daniel, who was in the process of agreeing terms for the purchase of the shares in Rakecare. Paragraphs 22 and 23 of the statement of claim are in these terms:

"22. By producing and signing the letter dated 23rd December 1992 Gregory Wright was giving representation and assurances as to the accuracy of the accounts of Rakecare and in the circumstances where Gregory Wright knew that Mr Daniel would rely on those said representations and assurances.

23. The statement made by Gregory Wright was as Gregory Wright knew untrue and false and was made recklessly, Gregory Wright not caring whether it was true or false."

14. On the basis of those allegations Mr Daniel claimed damages against Gregory Wright. It is plain that the claim is a claim in the tort of deceit. It is not a claim for negligent misstatement.
15. In June 2000 the High Court proceedings were transferred to the Bournemouth County Court. Mr Gregory's claim for payment of the unpaid balance of the purchase price agreed for his share, made in the existing county court proceedings, was ordered to stand as a Part 20 counterclaim in the transferred proceedings.
16. The proceedings were tried before His Honour Judge Anthony Thompson QC over five days in February 2001. He gave judgment on 23 April 2001. By the order which he made on that day he directed that judgment be entered for Mr Daniel against Mr Gregory in the sum of £25,000 (paragraph 1), against Mr Gregory and the estate of Mr Betteridge jointly and severally in the sum of £6,264 (paragraph 2) and against Gregory Wright in the sum of £35,000 (paragraph 3). He dismissed Mr Gregory's Part 20 counterclaim (paragraph 4). He refused applications made by Mr Gregory and by Gregory Wright for permission to appeal.
17. The effect of the judge's order, as it stands, is that Mr Daniel does not have to pay to Mr Gregory the unpaid balance of the purchase price agreed in respect of Mr Gregory's share in Rakecare; and is entitled to recover from Mr Gregory the £25,000 which he had paid for that share. Further, Mr Daniel is entitled to recover from Gregory Wright the £35,000 which he paid for Mr Betteridge's share. And, further, he is entitled to recover £6,264 in respect of his claim for breach of the warranties in the share sale agreement of 5 January 1993.
18. It is not now in dispute that Mr Gregory and Mr Betteridge (or his estate) are liable for breach of the warranties in the share sale agreement. Nor is there an appeal or a cross-appeal in respect of the amount (£6,264) at which the judge assessed damages in respect of that warranty claim. It is, however, material to the issues which do arise on this appeal to see how the judge dealt with the warranty claim. The relevant passage in his judgment is found in the transcript between page 28D and 29E:

"I think Mr Daniel is also entitled to recover from Mr Derek Gregory and the executors of Mr Betteridge the shortfall pursuant to the warranty in the share agreement. That warranty is absolute. It does not depend upon knowledge and it survives completion of the agreement, whatever that amount might be. Mr Gregory when giving evidence accepted that if he had known at the time of the shortfalls, he would, as he put it, have put his hand in his pocket.

In his final submissions on behalf of Mr Gregory, Mr Bird [a mistranscription for Mr Bebb, who appeared as counsel] helpfully accepted certain figures, which total £6,264.28. Mr Egleton on behalf of Mr Daniel contended for more. Mr Counsell, somewhat audaciously, on behalf of the estate of Mr Betteridge tried for a much lower figure and certainly a lot of mystery surrounds the figures in this case. But I accept Mr Bird's calculations as being the appropriate approach to this matter. Adopting, without disrespect to Mr Bird, that broad brush approach and doing the best I can (for I can do no better than counsel in this matter) I accept gratefully Mr Bird's figure of £6,264.28.

Mr Daniel's other contention was that the company when purchased was worthless. I reject that argument. The material date is that on which the contract is entered into, not at the time when the companies were struck off. The companies clearly had a value in 1993. Mr Daniel happily drew a salary, had a company car until 1995 or 1996 and even after the companies were struck off and PTN had lost its IBRC status there was still some goodwill and the insurance company seem to have transferred their affections and their business quite happily to Swanage Insurance Brokers, Mr Daniel's new company. I do not accept that that happened simply by a process of osmosis or by a natural progression without the insurance companies becoming conscious of the fact that Mr Daniel, in whom they no doubt had great confidence, quite properly, was now with Swanage Insurance Brokers."

19. The judge's conclusion, that Mr Daniel could not be required to pay the balance of the purchase price for Mr Gregory's share -- and was entitled to recover the £25,000 that he had paid -- was not based upon breach of warranty. It was put by the judge on the basis that there had been a total failure of consideration. The judge expressed his conclusion in a short passage of his judgment. At 29G-30B of the transcript he said this:

"I think he is entitled to recover from Mr Derek Gregory the £25,000 which he paid as part payment for a consideration which has wholly failed, namely the transfer of Mr Gregory's share. Mr Gregory has never transferred it and indeed now is in no position to transfer the share. Consequently, Mr Gregory's counterclaim for the balance of the share price fails and in my judgment Mr Daniel is entitled to recover the part payment which he made for that share which he never received."

20. The judge did not reach – and, consistently with his reasoning, could not have reached -- a similar conclusion in relation to the price paid by Mr Daniel for the Betteridge share. That share was transferred by Mr Betteridge to Mr Daniel in January 1993; so it could not be said (on any basis) that there had been a total failure of consideration for the price paid by Mr Daniel under his contract with Mr Betteridge. But the judge held that the payment made to Mr Betteridge was made in reliance on the comfort letter issued by Gregory Wright; and, because he found that Mr Julian Gregory had written that letter recklessly -- that is to say, not caring whether it was true or false -- he held that Mr Daniel was entitled to recover that £35,000 payment from Gregory Wright. After referring to the observations of Morris LJ in Hornal v Neuberger Products Ltd [1957] 1 QB 247 as to the caution to be adopted before making findings of fraud -- and in particular against a professional man -- he said this, in a passage on pages 27G-28D of the transcript:

". . . despite reminding myself of those salutary words, I think that the conduct of Gregory Wright & Co here was fraudulent in the second and third categories of Derry v Peak; in other words there was recklessness in the writing of that letter as to whether it was true or false. If, as Mr Gregory said on oath, he had not prepared the draft accounts, nor had he looked at the books and his knowledge and belief was based only upon the directors' say-so then he should have said that; except of course that would have added nothing to the directors' own words. But by writing that letter he gave it the imprimatur of an accountant.

Mr Daniel clearly relied on the letter when on 5th January he bought Mr Betteridge's share and in my judgment he is entitled to recover that £35,000 from Gregory Wright & Co. That is loss flowing directly from that representation."

21. The reference in that passage to Mr Gregory is, in context, a reference to Mr Julian Gregory.
22. The judge made no similar finding against Gregory Wright in relation to the payments of £25,000 made by Mr Daniel to Mr Gregory senior. The reason appears at page 29F-G in the transcript of his judgment. By 3 February 1993 the accounts of the two companies to 30 September 1992 had been finalised and made available to Mr Daniel. As the judge put it:

"After 3rd February 1993 he had the accounts for 1992 made up to 30th September 1992. So when he was negotiating with Mr Gregory I think the letter of 23rd December was spent. He had wanted the letter when there were no accounts and he did not want to wait for them before settling his contract with Mr Betteridge."

23. These appeals are brought with permission granted by this court (Tuckey LJ) on 6 July 2001. By his appellant's notice, as served, Mr Gregory appealed against paragraph 1 of the order of 23 April 2001; that is to say, against the order that judgment be entered against him for the £25,000 which Mr Daniel had paid on account for the Gregory share. But Mr Gregory did not, in that notice, appeal against paragraph 4 of the judge's order; that is to say, against the paragraph dismissing his Part 20 counterclaim in respect of the balance of the purchase price.
24. The failure to appeal against paragraph 4 was an oversight. The two points go together. They turn on the same issue: whether the judge was correct to take the view that there had been a total failure of consideration in the circumstances that the Gregory share had never been transferred. This was appreciated, albeit at a late stage, when counsel came to consider the papers in preparation for the hearing of this appeal. We have before us an application for permission to amend Mr Gregory's appellant's notice by adding an appeal against paragraph 4 of the judge's order. The application to amend was opposed by Mr Egleton on behalf of Mr Daniel. He accepted, I think, that the proposed amendment did not give rise to any arguments which would not have been deployed, in any event, in support of Mr Gregory's appeal against paragraph 1 of the order. The issue, as I have said, is the same. But he submitted that, had his client been on notice at an earlier stage that there was to be an appeal against the dismissal of the Part 20 counterclaim -- an appeal, which, if successful, will expose Mr Daniel to a liability to make a substantial payment -- he would have been advised to "meet fire with fire" and seek to cross-appeal against the judge's assessment of damages flowing from the breaches of warranty at a figure which was as low as £6,264.
25. After hearing argument on the application to amend, we indicated that we would defer a ruling on that application until after we had heard the appeal; on the basis (i) that we would then be in a better position to decide whether there was any substance in Mr Egleton's objection; and (ii) that we would be hearing argument on the issue whether there had been a total failure of consideration in any event.
26. I would allow the application to amend; and I would allow Mr Gregory's appeal against paragraphs 1 and 4 of the order of 23 April 2001. In my view, the judge was plainly wrong to take the view that there had been a total failure of consideration under the contract between Mr Daniel and Mr Gregory. The point had never been raised by the pleadings; nor (we were told) had it been developed in argument at trial. It seems to have been the product of afterthoughts by the judge. But in reaching the conclusion which he did, the judge appears to have overlooked the terms of the agreement between Mr Daniel and Mr Gregory. Those terms are contained in the supplemental agreement of 30 December 1992. The fixing of the price in April 1993 was ancillary to that agreement; it had the effect of fixing, within the context of that agreement, a term that needed still to be agreed.
27. Under the agreement of 30 December 1992 Mr Gregory bound himself not to sell his share to anyone without Mr Daniel's permission during the period of negotiation. That was a valuable consideration, of which Mr Daniel had the benefit. Further, Mr Gregory agreed that Mr Daniel should immediately have a salary of £22,000 as an employee of PTN, or Rakecare, and that he should have a "fully-expensed" company car in that capacity. Strictly, it may be said that the agreement to pay a salary and to provide a car was an agreement to be made between Mr Daniel and the relevant company; but the effect of Mr Gregory's undertakings in the supplemental agreement of 30 December was to oblige him to use his power as a 50 per cent shareholder to vote in favour of such arrangements. Those are arrangements of which Mr Daniel took advantage and, as the judge observed, received the benefit.
28. The judge's finding, in the passage that I have cited, that Mr Daniel happily drew a salary and had a company car, is inconsistent with his conclusion that there was a total failure of consideration under the agreement between Mr Gregory and Mr Daniel. The agreement provided for the purchase of a share upon deferred terms. It provided for benefits to be obtained by Mr Daniel during the period of deferment. That was good consideration in part for the agreement; and that element of the consideration did not fail.
29. In those circumstances it was, perhaps, not surprising that Mr Egleton found difficulty in supporting the judge's conclusion. The difficulty was compounded, perhaps, by the fact that the judge had reached that conclusion without the benefit of any submissions by counsel in support of it. Mr Egleton sought to meet the difficulty by submitting to us that the judge had under-valued his claim for damages for breach of warranty; and that, in a sense, the decision that Mr Daniel should have the £25,000 returned to him was a way of compensating him for damages for breach of the warranties.
30. That, in my view, is an impossible submission in the light of the judge's judgment. It is clear that the judge had separated in his own mind the amount that he was awarding on the breach of warranty claim from the repayment of the purchase price on the basis of a total failure of consideration.
31. Mr Egleton submitted that, had he appreciated that there was going be a claim for payment of the balance, he would have sought to cross-appeal against the figure of £6,264. He pointed out (as appears to be common ground) that it is quite impossible to discover from the judge's judgment upon what basis he reached the figure of £6,264. Although the judge indicated that he had reached that figure with the assistance of Mr Bebb, Mr Bebb disclaimed any responsibility for that figure and was unable to offer any suggestion as to how it was reached. It seems that the judge must have made some computations of his own, which he has not disclosed.
32. Mr Egleton's difficulty, however, is that a claim for damages for breach of a warranty in a share sale agreement requires an estimate to be made of the diminution of the value of the shares purchased attributable to the fact that the warranty is not met. No attempt to adduce evidence as to the diminution in value was made at the trial. The accountant's reports, which were before the judge, do not address the question: what is the diminution in the value of the shares in Rakecare in the circumstances that there was an undisclosed shortfall of some £10,000 on the PTN client account?
33. The reason, perhaps, why no attempt was made to address that point is because Mr Daniel's position has been throughout that the extent of the shortfall was that the shares were valueless. Mr Egleton further submits that, had Mr Daniel known the position, he simply would not have entered into the transaction at all. That is a claim which could be made on the basis of an action for misrepresentation; but it is not a claim that can be made in reliance on breach of warranty as to accounts and information.
34. Because the judge had no evidence, there is no finding as to the difference in value arising from the breach of warranty pleaded other than the award of £6,264. It follows, in my view, that if Mr Egleton had sought permission to appeal that award of £6,264, it would have been refused. He would have been refused permission because there was no material upon which this court could consider the matter. There was no material because his client had not put the necessary material before the court below. Mr Daniel would, in effect, be seeking to persuade this court to order a new trial so that he could put before a judge at that trial material which he had not thought it necessary to put before the judge at the trial which did take place. That is a course against which this court, rightly, sets its face.
35. It is for that reason that I find no substance in Mr Egleton's objection to the application for permission to amend the appellant's notice lodged by Mr Gregory. Had I thought there was any substance in the point, I should have been sympathetic to the objection; and might well have taken the view that Mr Gregory had to bear the consequences of the obvious oversight. But there being no substance to the objection, I cannot see why Mr Gregory should be denied the opportunity to put before this court the whole of his appeal; albeit that he failed to do so in his appellant's notice as originally lodged.
36. It follows that, in relation to Mr Gregory's appeal, I would allow the application and the appeal.
37. I turn, therefore, to the other appeal, that brought on behalf of Gregory Wright against the award of damages in the tort of deceit.
38. I am conscious, of course, that the judge held Mr Julian Gregory to be dishonest after having had the advantage of hearing and seeing him give evidence at a trial. It is plain from the judge's judgment that he took a poor view of Mr Gregory's credibility. He did so, I think, because Mr Gregory was unable to provide any convincing explanation for the fact that -- although he was purporting to act only as accountant and not as auditor -- there were a number of letters relating to the audit which bore his reference and which were obviously prepared under his direction.
39. Mr Julian Gregory's difficulty in that respect stemmed from the fact that, as a recently-qualified certified accountant, he was not a person entitled to conduct audits in 1991 and 1992; and that, accordingly, the nominal auditor was a Mr Ken Day, who practised as a chartered accountant from the same premises. The judge plainly thought that that arrangement was a charade.
40. There is no basis upon which this court can make any finding on that matter. What can be said, however, is that if Mr Julian Gregory was dishonest in the explanations which he offered for his apparent involvement in the audit process, the judge failed to appreciate that there was an independent reason why he should be evasive and disingenuous in that respect. The fact that he was evasive in that respect should not have led to a conclusion that he would be dishonest in writing the comfort letter. It is difficult to avoid the conclusion that the judge's finding of dishonesty in relation to the comfort letter was made on the basis that, having found Mr Julian Gregory to be dishonest in another respect, the judge was unable to believe that any letter that Mr Gregory wrote could be an honest letter. That is not a safe basis upon which to make findings of dishonesty.
41. But I would not put my judgment on the ground that the judge was wrong to find Mr Julian Gregory dishonest. It seems to me that the matter turns on a matter which the judge simply overlooked. It was necessary for him to ask himself: what was the representation made in the letter of 23 December; in what sense was it relied upon by Mr Daniel; and was it, in that sense, false?
42. It is necessary to have in mind the circumstances in which the letter of 23 December 1992 came to be written. Mr Daniel was negotiating with Mr Derek Gregory, on behalf of himself and Mr Betteridge, for the purchase of the business carried on by PTN. The purchase was to be effected by a purchase of shares in a holding company, Rakecare Limited. Each side had instructed solicitors. There was in preparation a complex share purchase agreement containing the usual warranties as to information and accounts which would be given by the sellers of shares in those circumstances.
43. The warranties in the share sale agreement are (as is usual and necessary) linked to audited financial statements; those being the starting-point for any investigation of a company's value. The expectation seems to have been that the company's financial statements to the end of its accounting period on 30 September 1992 would have become available before the share purchase agreement was executed. An indication of that expectatin can be seen in the definitions in schedule 1 to the agreement, where, as typed, the accounts date is 30 September 1992. However, by the middle to end of December 1992 it had become apparent that the 1992 accounts would not be prepared, let alone audited, in time for the execution of the agreement. The latest audited accounts were the accounts to 30 September 1991. That was recognised by a change made in manuscript to the account date in the definitions in schedule 1. That left the prospective purchaser, Mr Daniel, in the position that there was a 15-month period between the last audited accounts and the date upon which he was going to purchase. It would have been surprising if, in those circumstances, he did not seek some comfort that there had been no material changes between the September 1991 audited accounts and the date of purchase. He would have, of course, been in a position to rely on the warranties as to the accuracy of the 1991 accounts; but in order to avoid litigation he would want to be assured that there had been no material change since that date.
44. One source of assurance would be the directors themselves; but a better source would be accountants who were engaged in the preparation of the accounts and could be expected to have some understanding of the company's position. That was recognised in an amendment made to a disclosure letter which was to be provided on execution of the share sale agreement by the vendors. A draft of that letter was sent to Mr Daniel's solicitors on 3 December 1992. As originally drawn, paragraph 8A of the disclosure letter was in these terms:

"The last audited accounts for the Company are those as at 30 September 1991. The Sellers believe that in the event that the accounts for the period as at 30 September 1992 are prepared in a similar fashion and using similar accounting principles that there will not be any material or significant difference in the Company's net worth and that there will not be any liability to Corporation Tax in excess of the amount of advance Corporation Tax already paid by the Company and available to offset such liability".

45. When returning that draft letter, Mr Daniel's solicitors added the following words at the end of that paragraph:

"and that the profitability of the Company should be in accordance with the attached letter from Gregory Wright and Co which has been countersigned by the Seller."

46. That is a reference to the letter which was to be signed by Mr Julian Gregory on 23 December 1992. When the disclosure letter was sent by Mr Gregory's solicitors to Mr Daniel's solicitors on 4 January 1993 -- that is to say, immediately before the formal share sale agreement -- it contained paragraph 8A in the amended form. It included the additional words which had been added by Mr Daniel's solicitors.
47. Against that background it is, to my mind, quite clear that the reason why Mr Daniel wanted the letter of 23 December 1992 in the form which it took was to give him reassurance as to the profitability, turnover and cash flow during the period from 30 September 1991 to 30 September 1992. He was not expecting to rely on that letter either as a verification of the audited accounts to 30 September 1991 or in relation to net worth. That is not at all surprising in the circumstances that these were companies of very little net worth, on a balance sheet assessment. The value in these companies derived from the contact with potential insurance customers. The price reflected the potential earning capacity -- that is to say, the future income stream by way of commission. Indeed, that was the basis upon which the price was computed in the agreement which Mr Daniel and Mr Derek Gregory made in April 1993.
48. In those circumstances, the right question is to ask whether representation in the letter of 23 December 1992 that the results -- in the sense of trading results -- in the unaudited consolidated accounts of Rakecare Ltd for the year from 30 September 1991 to 30 September 1992 would be unlikely to differ from the previous year by a margin exceeding five per cent was false. Although the letter talks of "plus or minus 5%", the concern clearly was that there should not be a deficit of more than five per cent.
49. That representation turned out to be true. It turned out to be true because, on the figures in the expert accountancy reports, the effect of the failure to keep proper records in relation to the insurance broking account and client monies had an effect on turnover which was either marginally less, or marginally greater, than one per cent - depending upon which figures are taken. The effect of the incompetent record-keeping was not such as to cause the 1992 results to differ from the 1991 results by more than five per cent.
50. Mr Egleton seeks to meet that point by submitting that the real complaint was not that there might be a marginal difference in turnover or profitability. The real complaint is that by the letter of 23 December 1992 Mr Julian Gregory was offering some form of warranty, guarantee or endorsement as to the accuracy of the September 1991 accounts which had been audited (nominally at least) by Mr Day. In my view it is quite impossible to read the letter of 23 December 1992 in that sense. The whole purpose of the letter is to take the position forward from audited accounts as at 30 September 1991. No-one reading the letter of 23 December 1992 with a proper appreciation of the background could have thought that Mr Julian Gregory was giving any form of endorsement or warranty as to the accuracy of the 1991 accounts.
51. In those circumstances, the claim in deceit was not made out. The representation that was made in that letter was not a false representation; and it caused no loss. I would allow the appeal of Gregory Wright & Co against the judge's order.
52. LORD JUSTICE LONGMORE: I agree with my Lord's judgment and do not find it necessary to add anything.
53. LORD JUSTICE PILL: I also agree. I add some words on the first defendant's appeal because one element of it depends upon an amendment to the notice of appeal for which permission has been sought only at the hearing. Consideration of that application does involve consideration of one aspect of the merits of the case as between the claimant and the first defendant.
54. The amendment sought is a fundamental one in that it seeks not merely to reverse the judge's finding that £25,000 should be paid by the first defendant to the claimant, but seeks to add a claim for £25,376 against the claimant. The fact that it was not included in the notice of appeal was the result of simple oversight. The claimant is not prejudiced by the delay in terms of the preparation of the case for the appeal. The point out of which the amendment arises, the judge's finding that there was a total failure of consideration, is the same point as that on which the appeal against the judgment against the first defendant, for £25,000, turns.
55. However, the point is forcefully put by Mr Egleton, for the claimant, that had the claim sought to be made by way of amendment been made when it should have been made, the claimant would have appealed against the judge's finding in paragraph 2 of the judgment, in which a sum of £6,264 was ordered to be paid by the first defendant to the claimant. It is submitted that a higher figure is obtainable. The claimant is legally aided and it is submitted that, in the absence of the present application to amend the notice of appeal, legal aid would not have been obtained to pursue this point because of the limited financial circumstances of the first defendant, who was also on legal aid. The position would have been different had it been known that a claim of £25,376 was to be made against the claimant.
56. On the face of it the argument is an attractive one, but in my judgment it does not survive closer examination because of the extreme difficulty the claimant would have had in obtaining a larger sum by way of damages.
57. The point of objection to the amendment is only as good as the prospect of the claimant mounting a successful cross-appeal. The claimant's case at trial was put on the basis that the shares purchased were valueless by reason of the alleged breaches of warranty by the first defendant. Counsel before this court are agreed that the case was put by both parties on an "all or nothing" basis. The judge found a total failure of consideration without invitation to do so by either party. For the reasons given by Lord Justice Chadwick, that was not a conclusion to which the judge was entitled to come. Mr Egleton, for what may have been good reasons, had submitted that the shares were worthless. Possible gradations in value by reason of breaches of warranty were not considered or supported by evidence.
58. From what we have been told, and from the content of the judgment, the diminution of value found by the judge originated in a sum of £6,264.28 mentioned to the judge by Mr Bebb, for the first defendant. Counsel have not been able to assist the court with the source of that figure. On a consideration of page 28 of the judgment, cited by Lord Justice Chadwick, I consider that it is likely to have been the judge's assessment of the deficit on the client account at the material time.
59. There was no valuation of the shares in any conventional way. To deduct from the value of shares pound for pound a deficit on a client account is not a tenable method of valuation, though it may have been relevant evidence along with other evidence in conducting a proper valuation. What was absent from the claimant's case was evidence supporting a conventional valuation of the shares at the material time. There was a significant error in the company's accounts. The claimant had the opportunity to produce evidence of diminution of value in a conventional way. That was not done. Worthlessness was alleged, and that submission was rejected by the judge: and rightly so, in my judgment. Any cross-appeal would have involved an attempt to establish that the sum for which the judge, in effect, gave credit to the claimant in his orders did not sufficiently reflect the diminution in value by reason of the relevant breaches of warranties.
60. The sums for which, in effect, the claimant now has credit are the sum of £6,284.28 and also a sum of £6,974 paid to the Inland Revenue; though it has not been explained to us on what basis that sum is conceded, save that it is an effort to save further costs in arguing the point. It would not have been right, in my judgment, to permit the claimant now to introduce further evidence of valuation. Mr Egleton submits that if the court is against him on the other points, there should be a remission of this question to the county court. I do not accept that submission. The claimant had the opportunity to put his case in a different way. For reasons which may have been good, he did not do so, and it would not be appropriate to permit him a further chance.
61. It may well be that, in the event, the substantial sums now credited to the claimant do fully reflect the diminution in value by reason of relevant breaches of warranty. In the circumstances, I would allow the oversight to be made good and I agree with Lord Justice Chadwick that the amendment should be permitted. Once that occurs, for the reasons given by Lord Justice Chadwick, the appeal of the first defendant must be allowed.
ORDER: Minute of order to be submitted by counsel.