England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM NORTHAMPTON COUNTY COURT
HER HONOUR JUDGE HAMPTON
8NN00973

		Royal Courts of Justice Strand, London, WC2A 2LL
		02/02/2012

Lord Justice Elias :

1. The appellants are appealing an Order of damages made against them by Her Honour Judge Hampton in the Northampton County Court. The appellants were the claimants in the case before her. They are companies engaged in the business of providing finance.
2. Mr Hawkes, the second respondent, is and was the director and shareholder in a number of companies, including Quotepool Limited, the third respondent, and MGP2, the first respondent. He formerly carried on the business of demolition and clearance works through a company registered as Michael Green Plant Limited (MGP1). (MGP2 was initially called Telerate Limited but its name was changed when, for reasons I give below, it effectively took over the business of MPG1.)
3. In autumn 2004 this company was in serious financial difficulties. It owed some £312,000 to the Revenue. On 7 October the Revenue presented a Winding Up Petition against the company and this was due to be heard on 17 November 2004. The company had assets in the form of plant and machinery and also approximately 45 acres of potential development land in Northamptonshire. The land was valued in January 2004 at £140,000.
4. Mr Hawkes wished to raise some £350,000 to pay off the debts. He was introduced by an associate to Andrew Kirkpatrick, the director and owner of the appellant companies. Mr Kirkpatrick was accompanied at the meetings by Gordon Cook. He introduced Mr Cook to Mr Hawkes as an independent consultant with experience in helping distressed and insolvent companies.
5. Mr Hawkes, on behalf of MGP1, authorised Mr Cook to act on behalf of that company. Subsequently, through the offices of Mr Cook, a number of agreements were entered into between the appellants and MGP1. The appellants paid £110,000 to purchase the land owned by and a further £115,000 to purchase various items of plant and equipment from MGP1, and from Green Plant Services Limited, another company in which Mr Hawkes had an interest. Subsequently, following some interim contracts the details of which are not relevant to this appeal, the equipment was leased to MPG2. It had always been understood that this would happen. Effectively MPG2 was taking over the business of MPG1. Had all the payments been made, MPG2 would have paid around £116,000 for the first lease of equipment and £42,000 for the second. MPG2 would never have gained ownership of the equipment; the property was to remain with the second appellant at the end of the lease.
6. The attempt to save MPG1 was unsuccessful and on 28 January 2005 it went into administration, and subsequently liquidation. Liquidators were appointed. MGP2 carried on paying the rental hire until November 2007 when it ceased to do so. Shortly thereafter the appellants terminated the agreements and issued proceedings on 26 March 2008 claiming delivery up or damages in default and outstanding rentals together with interest. We were told that at some point an order for delivery up was obtained against MPG2 and some, but not all, of the equipment was returned.
7. The defendants (respondents to this appeal) alleged that they have been the subject of negligent representations and had been induced as a consequence to enter into these arrangements. They conceded that rescission was not available but sought damages by way of counterclaim.
8. The trial took place between 16 and 19 August. The draft judgment was sent out in October 2010. The judge found in favour of the defendants, concluding that Mr Hawkes had on their behalf relied on and been induced by various misrepresentations. These included the representation that Mr Cook was an expert in assisting insolvent companies, would act in the interests of the respondent companies, and that his fees would be around £15,000. The judge found that he was in fact an undischarged bankrupt who put his own interests first.
9. Moreover, the fees paid to Kirkpatrick and Cook amounted together to some £135,000, and there were additional legal fees of almost £50,000.  It seems that MGP1 did not get more than about £40,000 from the contracts. It is difficult to dissent from Lord Justice Stanley Burnton's observation that the conduct of the appellants was scandalous.
10. The first respondent, MPG1 then went into administration in 2005 and it subsequently went into liquidation.   Shortly thereafter, MPG2 entered into the lease agreements. As the judge pointed out, the fact that there were no misrepresentations made directly to this company did not assist the appellants since in law the misrepresentations are deemed to continue in these circumstances. The judge relied in this context on Yorkshire Bank plc v Tinsley [2004] 1 WLR 2380. MPG2 continued to pay the rent on the equipment until November 2007 when it ceased to do so. At about the same time Quotepool, who had taken a lease back on the property, also stopped paying the rent on the property. This led to legal proceedings.  We are not concerned with the lease on the property in this appeal. Nor are we concerned with any claim which the liquidators of MGP1 might have had against the appellants or Mr Kirkpatrick or Mr Cook. No proceedings were in fact pursued.  The focus of this appeal is solely on the damages which MPG2 is entitled to recover from the appellants as a consequence of paying for the equipment.
11. Following the judgment, there was a further hearing at which the judge heard submissions on remedies and costs. This was on 29 November. At that stage the appellants applied to adduce evidence on the cost to MGP2 of hiring equivalent equipment elsewhere. The purpose, as the judge understood it, was to submit that MGP2 had suffered no loss because the rate at which it had been able to hire the equipment from the appellants was lower than the market rate. That application was refused on the ground that it was too late; the judge said that this was never the way in which the argument had been advanced at trial, and that the case had never been put to the witnesses of the respondent.
12. The judge awarded MGP2 damages. The judge concluded, correctly, that the appropriate measure of damages in a misrepresentation case of this kind was to ask what would have happened if the agreement had not been entered into. The judge accepted that there was little hard evidence about that. However, she concluded that on the balance of probabilities MGP1 would have gone into liquidation and Mr Hawkes would have made arrangements to acquire the equipment from the liquidator. She considered that he would have raised the money using the land on which the business operated - and, if necessary, his personal flat - as security. She then assessed that the cost of buying the equipment from the liquidator would have been £55,000.
13. The only evidence about this to which the judge expressly referred was the evidence of Mr Hawkes. It was his opinion that the equipment would cost between £40-£55,000 from the liquidator, and she took the top end of that bracket. She recognised that it was unsatisfactory that there was no independent evidence as to the value of the equipment.
14. Having identified what MPG2 would have done, she concluded that the measure of damages would be the sums actually paid by MGP2 under the leases less the cost of acquisition (which would include interest on the capital borrowed to make the purchase). The parties agreed what the figure would be on the assumption that the judge's analysis was correct. This was just over £50,000. Interest was also awarded at 8%. The judge recognised that in view of the fact that the appellants kept the equipment, this would not compensate MGP2 for the fact that on the alternative scenario they would have retained ownership of the equipment. She dealt with this by setting off the residual value against certain property claims which the appellants had against MPG2. Miss Williamson, counsel for the respondent, makes no complaint about that.
15. It should be noted that in fixing the value of the equipment at £55,000 the judge expressly considered and rejected two alternative assessments advanced by the appellants' counsel. First, Mr Hawkes himself had said in evidence that the "nearest reasonably available equipment cost more than £100,000". The judge did not accept that this was a statement as to the value of this equipment bought from the liquidator, but rather the cost on the open market of such equipment.
16. She also rejected a submission from the appellant that she should adopt the original transaction figure of £115,000 on the grounds that the parties put this value on the equipment not because it was a genuine estimate of the true value but in order to provide the requisite payments (the judge called them "kickbacks") for Mr Kirkpatrick and Mr Cook for their role in these transactions.

The grounds of appeal.

17. The appellants submit that the judge erred in law in adopting this approach to the measure of damages. There are essentially five grounds advanced by Mr Deegan, their counsel, in his written and oral submissions.
18. First, he submitted that the starting premise of the judge in her assessment was wrong. It was not appropriate to assume that the liquidator would have had the property in his possession at all. How, asks Mr Deegan, counsel for the appellant, could the judge properly speculate about that when she knew that in fact the liquidator never did have the property and indeed, he had chosen not to take any action to recover it? In my judgment, Miss Williamson gave the crisp and conclusive response to this submission. At all times Mr Hawkes was acting for MPG1. It is fanciful to think that he would have been unwilling to enter into the leasing arrangements on behalf of MPG2 but would have entered into the sale of the equipment on behalf of MPG1. They were inter-related transactions as all the parties recognised.
19. Accordingly, in my view the judge's assumption that MPG1 would not have entered into the equipment leases was plainly correct. Thereafter MPG1 would almost inevitably have had to go into liquidation but with the equipment then in the liquidator's hands. I therefore reject this argument.
20. Second, Mr Deegan says that no credit had been given for the fact that MGP2 had had the benefit of using the equipment. On the assumption that the judge was entitled to find that the equipment would have been purchased from the liquidator, there is no merit in this argument. In order to have the benefit of using the equipment MGP2 had to pay the lease payments to the appellant. The alternative, as found by the judge, was to pay £55,000 to the liquidator. This would also have given them use of the equipment. So the judge was comparing like with like and there was no justification in giving credit to the appellants for the use of the equipment.
21. Third, it is submitted that the judge was not entitled to conclude that the appropriate purchase price was £55,000. This, it is said, was merely an assertion by an interested party. Mr Deegan contended that it was at odds with Mr Hawkes' statements at various points as to what the value of equipment of
    this kind would be. We were taken to that evidence, as well as various passages in the evidence of other witnesses and a wide variety of estimates was given. Moreover, the price was significantly less than the price his company actually paid to the appellants.
22. In my judgment, it was open to the judge to make the finding she did. I accept that there was limited and to some extent conflicting evidence on the point. This was in part because when estimates of the value of equipment were given, it was often difficult to know whether the valuation related to the equipment actually transferred under the contracts or to other equipment retained within the company or a mixture of both. I also accept that the assessment of Mr Hawkes appears to have been based on certain statements of Mr Cook who asserted that it was often possible to acquire property from liquidators at dramatically knock-down prices. There was also evidence from Mr Kirkpatrick to that effect.
23. In addition, our attention was drawn to a document produced by the liquidator, Mr Valentine, which appeared to accept that the figure of £90,000 paid for the equipment (presumably he was only focusing on the first contract) was not unrealistic – in any event he did not seek to challenge it – and that in his view only £45,000 would have been obtained on a forced sale.
24. It seems that this evidence was not directly drawn to the attention of the judge, although she did know that there had been no challenge to the sums actually paid, but it does suggest that her estimate was not plainly wrong. She had a difficult task of having to put some figure on the assets and she had to do her best on the evidence available to her. She gave reasons, briefly recounted above, why she was rejecting other valuations proposed by the appellants. The judge accepted that Mr Hawkes was an honest witness, and she was entitled to have regard to his evidence.
25. Furthermore, she was also entitled to have regard to the fact that the price in a liquidation sale is often on the low side - indeed, sometimes significantly lower than market value - particularly where the equipment may have a limited market. That attraction of a quick sale to a liquidator is obvious, saving advertising costs, storage, maintenance and the extra administrative costs connected with those activities.
26. The fourth ground of appeal is that there was simply no evidence to show that the liquidator or administrator would have sold the equipment to Mr Hawkes, or indeed that Mr Hawkes would necessarily have been able to raise the money to purchase it. In fact, Mr Hawkes indicated in evidence that given the potentially advantageous terms that could be acquired from liquidators, he thought that Mr Cook should have pursued that option. In any event, it is an obvious step for someone in his position to take. He was desperate to try to keep this business afloat and there were ways of securing the assets which the judge identified. Further, once it is accepted that the price is seen as a realistic one from the perspective of the liquidator, the judge was entitled to conclude that there was every chance that the liquidator would have taken the sum on offer.
27. The appellants' final submission is that even if there was such a chance, nonetheless it was far from guaranteed that the liquidator would either have offered to sell the goods to MGP2 at that price, or that MGP2 would have been in a position to buy them at a higher price. Accordingly, the judge ought have assessed the chance that this would have occurred and damages should have been adjusted accordingly. Mr Deegan relied upon the well known analysis of Stuart-Smith LJ in Allied Maples Group v Simmons and Simmons [1995] 1 WLR 1602. The case holds that where a claimant who is seeking to establish loss has to rely upon how a third party would have acted in hypothetical circumstances in order to demonstrate loss, the claimant will be required to satisfy the court that there was a realistic, as opposed to a speculative, possibility that the third party would have acted in a way favourable to his claim. Thereafter the quantification of loss is determined by reference to the chance that a third party would indeed have acted in that way. It is typically calculated by fixing a percentage of the full loss which would have accrued had the third party acted in that favourable manner. Mr Deegan submits that the judge should have adopted that analysis here: she should have assessed the chance that the liquidator would have been willing to sell the property to MGP2 at £55,000 and adjusted the compensation accordingly.
28. I do not accept that the principles in Allied Maples apply to the circumstances in this case. MPG2 did not have to rely upon the reaction of the liquidator in order to prove his loss: this resulted from paying the rental on the equipment which, absent the agreement, MGP2 would not have paid. We are concerned with the different question, namely what should be set off against that loss in order not to over-compensate MGP2. There must be some reflection of the fact that the company had had the use of the equipment for a significant period of time.
29. The judge, therefore, had to give some consideration as to whether and how MGP2 might have secured that, or similar, equipment in order to carry on its business. In that context she had to make an informed assessment as to what would have happened by taking account of a range of more or less likely possibilities. In this case, for example, might MGP2 have rented the equipment from someone else? Or might they have bought it? If so, from whom and in what circumstances? There is no right answer to these questions. Nor can it be said that they can be resolved by the simple application of a balance of probabilities test. The judge has to weigh a variety of contending hypotheses and decide which most fairly reflects what she considers would have happened.
30. In my judgment, the position is similar to that which arises when a court has to assess the chances that a dismissed employee will obtain alternative employment. Assessments have to be made about when that will happen, and what the likely future salary will be. This also depends on the actions of third parties. In Wardle v Agricole Corporate and Investment Agricole Bank [2011] EWCA Civ 545, in a judgment with which the Master of the Rolls and Lady Justice Smith agreed, I said this, in relation to such assessments (para 52):

"In the normal case if a tribunal assesses that the employee is likely to get an equivalent job by a specific date, that will encompass the possibility that he might be lucky and secure the job earlier, in which case he will receive more in compensation than his actual loss, or he might be unlucky and find the job later than predicted, in which case he will receive less than his actual loss. The Tribunal's best estimate ought in principle to provide the appropriate compensation. The various outcomes are factored into the conclusion. In practice the speculative nature of the exercise means that the Tribunal's prediction will rarely be accurate. But it is the best solution which the law, seeking finality at the point where the court awards compensation, can provide."

31. In my judgment, these observations are applicable here. The judge made the best assessment she could on admittedly thin evidence. She concluded that the liquidator would have sold the equipment at £55,000. The evidence suggested that renting other equipment was not an option. Mr Hawkes said that there was only one company which might have rented equipment of the kind he was using; most contractors refused to hire equipment for demolition work. Moreover, the cost would have been far too high. Given the strong desire of Mr Hawkes to save his business, the purchase from the liquidator was the only realistic option if the business was to survive. The judge was entitled to fix compensation on the assumption that it would have happened at the price she identified. I do not think that her approach reveals any error of law.
32. Miss Williamson made a further submission in relation to this ground of appeal. She submitted that even if the appellants were right and the £55,000 should be reduced or virtually eliminated to take account of the possibility that the liquidator would not have sold to MPG2, paradoxically the effect would simply be to increase the measure of damages. The evidence demonstrated that the only possible alternative to a purchase from the liquidator was that the company would have been wound up. If that had happened, there would have been no rental payments at all and accordingly the full amount paid in rent would have been recovered as damages without any discount.
33. I would not have accepted that submission. Depending upon the extent of any reduction, the effect could be that MGP2 would have had the benefit of the equipment over a period of years whilst paying very little for it. However disreputably these appellants may have behaved, that in my view could not be a just solution. In my judgment, MPG2 would in one way or another have to give credit for the use of the equipment, however difficult it may be to assess the appropriate figure. But in the event, Miss Williamson does not need to rely on this argument.

Disposal.

34. I would dismiss the appeal.

Lord Justice Stanley Burnton:

35. I gratefully adopt Elias LJ's summary of the relevant facts.
36. This litigation reveals what to my mind is a scandal. Mr Hawkes was persuaded to enter into transactions that on the face of it should have raised £225,000 for his company, MGP1. If the company had received anything like this sum, it would have been available to the creditors of that company. It may even be that the Inland Revenue would not have pursued its winding up if a substantial sum had been paid to it, but in any event a substantial sum would have been available for the creditors. In fact, the finding of the judge was that the only sum received by MGP1 from the sale to the appellants of its equipment at the price of £115,000 and its land at the price of £110,000 was £40,000. The remainder went on commissions to Mr Cook and a kickback from him to Mr and Mrs Kirkpatrick, and on legal fees paid to the solicitors instructed at their suggestion. Mr Valentine, the insolvency practitioner introduced by Mr Cook, was appointed administrator of MGP1. In his report of March 2005 he said:

"Immediately prior to my appointment [on 28 January 2005] and whilst therefore still under the control of Mr Hawkes (albeit he realised that as the winding up petition had been issued no actual sale of the assets could be effected) a deal in principle for the assets and goodwill had been agreed which, based on professional advice, I had no hesitation in proceeding with, with the result that the company's land at Desborough Road, Glendon, Northants has now been sold for a figure of £100,000 and its tangible assets (which will include any goodwill) have been sold for £90,000."

I am unable to understand why Mr Valentine had "no hesitation" in proceeding with these sales at a total price of £225,000 when the only benefit to the company of which he was the administrator was £40,000.

37. It is quite clear on the facts found by the judge, to whose careful judgment I pay tribute, that in substance there was one transaction. The equipment and land of MGP1 were sold to the appellants, so that they could be leased to MGP2, the phoenix company of Mr Hawkes. But for the misrepresentations found by the judge, none of that would have happened. MGP1 was insolvent, and a winding up order would have been made on the Revenue's petition. The liquidator would have had to realise the assets of the company, and in particular its equipment. Mr Hawkes would have been a keen buyer for the equipment and goodwill. There was no reason to believe that the liquidator would have declined to deal with him, and indeed no evidence that anyone other than Mr Hawkes would have been interested in buying what was old equipment used in the demolition business. The judge accepted that the liquidator would have sold at the upper end of the bracket given by Mr Hawkes. The figure of £55,000 compares sensibly with the figure of £45,000 that Mr Valentine estimated that MGP1's equipment would fetch on a sale by a liquidator, albeit that the equipment leased to MGP2 included some equipment that had been sold by another company, Green Plant Services.
38. It is because there was in substance one transaction, consisting of a number of contracts, that I reject the appellant's submission that the judge was wrong to quantify the respondents' damages on the basis that but for the misrepresentations MGP1 would have retained the equipment.
39. I agree that this was not a case comparable with Allied Maples. That was an all-or-nothing case: either there was a realistic chance that claimant, if properly advised, would have negotiated with the third party for an appropriate contractual provision or not. Here the real question was: at what price would the liquidator have been willing to sell the equipment? I.e., what was its value? That is not susceptible of an estimate of a chance. If it were, one would also have to estimate the chance of the liquidator selling at a price less than £55,000 as well as more. Implicitly, the judge found that on the balance of probabilities a liquidator would have sold for £55,000. There was no error in her approach.
40. In a case such as this, with a defendant of modest means, a county court judge should do what she can on the evidence before her to do justice between the parties. That is what the judge did. These were not proceedings in the Commercial Court between substantial parties involving millions of pounds, in which the judge may insist on every value being supported by independent expert evidence.
41. I have some reservations as to whether it was right to credit the whole of the hypothetical purchase price of the equipment that Mr Hawkes would have paid for it (a capital sum), plus the interest that he or MGP2 would have had to pay on a loan of that sum, against the lease rentals (revenue items) paid by MGP2. It is arguable that the proper deduction should have been the depreciation of the equipment during the period in question plus that interest. However, if so, the judge's assessment was unduly favourable to the appellants, and it cannot be the basis of any appeal by them.
42. For these reasons, which in substance are the same as those of Elias LJ, I too would dismiss the appeal.

Lord Justice Ward:

43. I agree. There is nothing I can usefully add.