BIRMINGHAM DISTRICT REGISTRY
Bull Street, Birmingham B4 6DS
B e f o r e :
| Dr Navdeep Dhaliwal
|- and -
|Iklaq Hussain (aka Ikhlaq Hussain) (1)
Jaspal Singh Bachada (2)
Richard Oughton (instructed by Aspen Court) for the Defendants
Hearing dates: 19-22, 25-26 September 2017
Crown Copyright ©
HHJ David Cooke:
i) Misrepresentation, alleged to be fraudulent, alternatively actionable under s 2(1) Misrepresentation Act 1967. The statements concerned were made in replies to precontract enquiries given by the defendants' solicitors acting on the sale (who were not the firm now representing them) and were, the claimant says, to the effect that the practice had ceased to do NHS work after March 2006, such that its turnover of £404,000 shown in accounts provided to her in the following year from April 2006 was entirely from private patients. In fact (and unknown to her) the practice had a residual income from NHS work during that year and the income from private patients was only £229,000. The difference was important because the ability to do NHS work had ceased entirely by April 2007 so that the turnover she inherited was limited to that from private work and much lower than she had expected. As a result she says the goodwill was worth nothing, or at any rate very much less than the £300,000 paid for it.
ii) Breach of an express warranty that the financial position of the practice had not materially deteriorated since 31 March 2007, the date of the last set of accounts provided to her, in that by that date the individual dentists who (unusually) held the benefit of the remaining NHS contracts had all left the practice, with the result set out above that it had lost its ability to do NHS work.
iii) Breach of contract in that consumable stores, which the claimant says were to be sold to her under the contract, had all been removed before completion and had to be replaced by her at an estimated cost of £5,000.
"Please note, reason for drop in income year 2006 to 2007 was due to the practice converting to being independent from the NHS".
i) Q1.1: "[Please let us have…] [c]opies of the Sellers' accounts for the last three years and any draft accounts or management accounts prepared subsequently".
A: "Copy Profit and loss accounts herewith".
It is common ground that the accounts sent with this reply were only the two years profit and loss figures previously seen,. There was thus no third year's accounts sent, nor any management accounts for the period since 1 April 2007 so the reply did not provide all that had been asked for. There was no explanation why these documents were not provided, though elsewhere the form of enquiries asked for an explanation if any of the information sought could not be given. The defendants' solicitor's file has been disclosed but does not give any indication why he decided not to give a full answer to this question or whether before replying as he did he consulted the defendants for instructions.
In my view however the likelihood is that he would have done so. The nature of the enquiries as a whole is such that a solicitor, even if familiar in general with his client's affairs, would not be able to answer with specific information about one of the practices they owned without input from the client. The solicitor must have been provided with the accounts by the defendants, since those he sent were copies of those obtained by Mr Hussain on 12 September. It is possible they had been sent to the solicitor in anticipation of enquiries, but even if that had happened it is difficult to see why the solicitor, if speaking to his client after the enquiries were received, would not have told him that additional accounting information had been asked for.
The likely scenario on receipt of the enquiries, therefore, is either (a) that the solicitor had no accounts, told his client what had been requested and was in turn instructed that only the two full years accounts would be supplied, or (b) already had those accounts, told his client that management accounts had been requested in addition but was instructed that they would not be provided. Either way, the likelihood is that the defendants were told that management accounts subsequent to March 2007 had been requested and it was their decision not to provide them.
ii) Q2.9 "… Particulars of any change in the Business or in the manner of carrying it on during the last 3 financial years".
A: "Practice was changed from mixed private and NHS to purely private in April 2006".
It is this reply that is the foundation of the misrepresentation claim. It was not qualified or expanded upon elsewhere in the replies or correspondence, for instance by reference to the NHS work carried on after 1 April 2006 under the PDS contracts. The claimant said she took this as confirmation of what she had understood from Mr Blatter, ie that the practice had no NHS contract and therefore no NHS work after March 2006.
It is again unlikely that the solicitor would have been able to answer this without consulting his clients, and the defendants do not say that he did so. They say this form of wording was chosen by the solicitor, which must mean that either (a) they gave the solicitor a full explanation of the circumstances and decided in consultation with him to adopt this form of wording, or (b) they told him (at most) no more than that the practice had not obtained an NHS contract from 1 April 2006.
On either basis, the decision to withhold the information that there had been a substantial element of NHS work after April 2006, which had now ceased and resulted in a further loss of turnover not reflected in the disclosed accounts, must have been the defendants'.
"The Accounts (of which true copies have been furnished to the purchaser) are complete and accurate in all respects and show a true and fair view of the state of affairs and the financial position of the Business at [ ] and the profits of the Business for the financial period ended on that date and since [ ] … (b) the financial or trading position of the Business has not materially deteriorated…"
i) "the Accounts" refers to the two years profit and loss accounts that were supplied to the claimant, and
ii) 31 March 2007, being the date to which the last of those sets of accounts was prepared, is to be read in at both places marked.
i) The defendants' manager Sarah Greenhouse was not there to meet her at 2 pm as arranged. Ms Greenhouse, who gave evidence, says the appointment was at 1.30 and she could not wait beyond 1.50. If she was so pressed for time that even if they had met at 1.30 she could not have stayed longer than 20 minutes with the purchaser, it would seem surprising that she could have expected to achieve much by way of handover and introduction to the staff and operations at the practice in that time.
ii) There was no consumable stock left. She estimates in her witness statement this cost about £8,000 to replace (the Particulars of Claim refer to £5,000). Ms Greenhouse said she could not recall this, but stock would have been removed if the claimant had not agreed to pay for it. She had, of course, as part of the global figure of £80,000 for fixtures fittings and stock.
iii) The only staff on site were nurses and receptionists. The three associate dentists had been told there were no jobs for them and had gone home. A few days later they all presented her with grievance letters in similar form saying they had not been paid for their work for December and January. They told the claimant they had little work and had been badly treated and had past difficulties in being paid by the defendants. Although they were relatively quickly paid up to the transfer date by the defendants, the claimant could not establish a good relationship with them. One left immediately. Two worked for a short period and then left, leaving the claimant to find replacements.
iv) Patient treatment plans had been deleted from the computer, leaving the claimant to reconstitute the records and contact patients to prompt them to complete their treatments. Ms Greenhouse subsequently told her this was in order to calculate the amount due to the associate dentists for treatment to date. It seems doubtful this can be a proper explanation; the dentists were paid monthly so such a calculation must have been possible every month while maintaining the patient records.
The witness evidence
The Misrepresentation Claim
i) The defendants (or their agent acting with their authority) must have made a statement of fact (as distinct from a pure statement of opinion or future intention) which is false.
ii) The statement must have been intended to be relied on, or made in such circumstances that it would appear likely that it would be relied on.
iii) The claimant must have been influenced by and acted in reliance on the statement (but it need not necessarily be the sole cause of her actions).
iv) She must have suffered loss as a result of acting in such reliance.
v) If the claim is for fraudulent misrepresentation, equivalent to deceit, it must be shown the defendants knew the statement was untrue, or made it without believing it was true, or recklessly, without caring whether it was true or not (Derry v Peek (1889) 14 App Cas 337).
vi) Even if fraud in this sense is not shown, the defendants are made liable by s 2(1) of the Misrepresentation Act 1967 unless they can show that they believed honestly and on reasonable grounds that the statement was true.
False statement of fact
i) From and after April 2006 the practice was a purely private practice
ii) The turnover of £404,000 shown in the accounts for the year from 1 April 2006 was wholly private turnover with no NHS element
iii) The same turnover was derived wholly from private patients. No relevant distinction was drawn between this and (ii) above.
iv) The sustainable turnover of the practice for the years 2007-8 and after was £404,000.
"Please note, reason for the drop in income year 2006 to 2007 was due to the practice converting to being independent. From April 2006 practice being gradually converted from NHS to private. No NHS after April 2007 all treatment from April 2007 Private on Independent rates"
This, the defendants say, shows that the claimant was told that the conversion from NHS to private was not a sudden one taking place on 1 April 2007 but a gradual one which took place over the 12 months from that date.
"As per phone call, we are happy with your valuation of the practice and the following split:
… As you are aware this was an established NHS practice which has recently been converted from an NHS practice to a private practice. Up until April 2006 it was a fully NHS practice, between April 2006 – 31 March 2007 the conversion from NHS to private was gradually completed. From 1 April 2007 the practice has been 100 % private."
On the basis of that, they say, it is consistent that Mr Blatter would have prepared the 695 version, and that he would have given it to the claimant when they met.
i) If the 695 version was in existence when Mr Blatter met the claimant, he did not then or later provide a copy of it to her or give her any explanation about the change in the practice taking place gradually over the 2006-7 accounting year as set out in the final paragraph of that document
ii) What Mr Blatter told the claimant was, as he understood the position to be, that the practice had become private in April 2006 because it did not have an NHS contract
iii) Mr Blatter produced the 675 version at or about 18 September when he drew up the Memorandum of Sale. He sent it to the claimant at about that time, who took it with the other documents he had provided when she saw the bank manager. That was the only version seen by the claimant.
iv) Mr Blatter was responsible for the apportionment of the price that appeared in the Memorandum of Sale. He had not discussed that with the claimant, still less adopted it at her suggestion.
Statement intended to be relied on
i) That during the meeting he phoned the bank, which confirmed that loan documentation had been signed
ii) "Then talked about other issues arising from the documents… planning seems to be a problem… [the defendants] must either get planning and building regulations approval or obtain insurance…". This referred to the issue that had arisen from the planning search, ie that the first floor had been converted from residential use to make three additional dentists surgeries without any permission.
iii) "Looked briefly at other documentation including searches, mining reports, environmental reports, employment contracts and associate contract…".
i) The pleaded case was that she had showed no interest in recent turnover at all in her meeting with Mr Blatter and been only interested in the historic turnover of £700,000 from the prior year. That was not supported in any respect by Mr Blatter's written or oral evidence, and there is no indication how the defendants felt able to plead that case.
ii) Mr Oughton submitted that she had made her decision to purchase at the meeting with Mr Blatter in August 2007, alternatively on 27 November when she received Mr Vowles' valuation, and so could not have relied on information in the Replies which she became aware of at earliest on 29 November.
iii) It was suggested that she had been solely relying on the assumption that she would obtain a PCT contract so that she would be able to take on NHS work. In this respect she was taken to the notes of her meeting with the bank and the "Business Plan" document she prepared, which referred to that possibility, as well as her meetings with her solicitors, in which she also referred to that possibility, said she would be contacting the PCT to enquire why no contract had been awarded in 2006 (but did not do so) and instructed her solicitors not to ask any questions about the failure to obtain such a contract. It was pointed out that the reason she gave for seeking a reduction in price as a result of the planning issue was her stated concern that it might mean she could not use the upstairs for NHS work and so might not obtain the benefit of the goodwill she was paying for.
iv) Mr Oughton submitted that the following passage in the assistant solicitor's notes of the meeting on 13 December 2007, referring to the fact that there was no planning permission for the three surgeries on the first floor of the property:
"Client wants to proceed at £600,000. Does not want to proceed at the current level. Client believes that the property is not making the money. Would be losing 3/5 of the goodwill. May want to approach with a 2 surgery practice and move private practice upstairs."
meant that (a) she had valued the goodwill of the property according to the number of surgeries available rather than the turnover of the practice, and/or (b) she was aware that the turnover figures she had been given were excessive.
v) The claimant could have, but did not, request provision of any management accounts subsequent to the 2006 – 7 financial year.
"Insurance policy… client concerned about overpaying for the goodwill in the light of the difficulties. She is concerned that her understanding is that the PCT required three parking spaces and disabled access for any new surgeries and that therefore the three of the five surgeries which are upstairs (and would be covered by the indemnity policy) may not be available for the PCT contract she is hoping to obtain. She will speak to Gerry Blatter and explain her concerns and say she is willing to proceed at £600,000 but not more…"
As I understood it, the claimant's evidence was that her concern was that even if the lack of planning permission did not mean that she was forced to abandon use of the upstairs surgeries altogether, the fact that they did not have the disabled access and associated parking facilities that the PCT required might mean that she could only hope to obtain a PCT contract based on servicing work at two of the five surgeries available to her. That would be consistent with the assistant solicitor's note that she might have to "move private practice upstairs".
Knowledge of falsity
i) The defendants knew and intended that the reply would convey that the practice had become wholly private from 1 April 2007.
ii) They knew and intended that this would be taken to mean that the turnover they had disclosed for the following year was all private fees.
iii) They knew that both the above were false.
iv) They knew that if purchasers was aware of the true position it would be likely to make a significant difference to the price they could negotiate.
v) They gave the claimant this reply, and subsequently avoided disclosing the true position, in the hope that they could maintain this deception until after the sale.
vi) The false representation was accordingly made knowingly and with dishonest intent to deceive the claimant, as it succeeded in doing.
The warranty claim
The illegality defence
i) First by applying his 70% to the annualised rate of turnover shown (after completion) by the computer records for the period April to December 2007, which he calculated at £239,540, 70% of which would be £167,678. But he did not put that to Mr Miller specifically. Mr Miller did say in response to a question whether a purchaser would have regard to the 2005-6 turnover of £700,000 that purchasers would generally only rely on the last year's figures and be worried about a falling trend. It is not attractive to argue that the defendants should have the benefit of a valuation based on information they deliberately withheld from the claimant. In the end however I have come to the conclusion I should not have regard to this figure because, even on the hypothesis that the business was being sold with up to date information to a hypothetical purchaser other than the claimant, without the point having been put to Mr Miller I am not persuaded that the marginal improvement suggested by the interim figures would persuade the purchaser to depart from a price based on the last full year's accounts.
ii) Second by adding in some hope value based on the fact the practice had in the past achieved a turnover of £700,000. Mr Oughton submitted that if it returned to that figure the goodwill would be valued at 100% of that figure at least, and there must be some hope value attributed to the possibility of doing so, which he suggested was 10% of the £550,000 approximate possible increase in turnover. There was no foundation in the evidence for any of the steps in this chain of reasoning. Mr Miller rejected any suggested hope value unless there was some very good reason to think the extra turnover could be obtained, saying that in his experience it was now incredibly difficult to obtain any new NHS contract. Mr Oughton in effect invites me to disregard this and form my own opinion as to valuation, but I could only do that if satisfied Mr Miller must be wrong and that there was some reliable way in which I could make an estimate myself. On the contrary however what Mr Miller said about the lack of expectation of another NHS contract was consistent with all the other evidence I had. It is true that Mr Aulak got one some years later, but that was in exceptional circumstances and the evidence shows that no purchaser could have had any confidence in 2007 of doing so. I reject that suggested addition.
iii) In a similar vein Mr Oughton submitted there must be some value in the fact the practice had records of some 16,000 patients of whom 8,000 had been treated recently. But Mr Miller did not accept that as adding to a valuation based on turnover and there is no basis to conclude he must be wrong. The valuation to be determined is a market valuation, and the evidence before me is that at the time the market valued goodwill by reference to turnover. In the absence of any evidence that the market would also have recognised some additional value of potential turnover from under-exploited patients on the books (or even that the numbers suggested such potential) there is no basis for me to find any such value.
i) The defendants' evidence in their witness statement was that they had ascertained the value of the freehold by consulting a local agent (1/167). They did not name the agent concerned or say what value he had advised or on what basis. I can place no weight on that evidence.
ii) The parties had originally agreed an apportionment of £350,000. But I have already rejected that on the facts.
iii) Mr Vowles had given a valuation of £355,000 on the bank's "special assumptions". But the basis of that valuation is ambiguous for the reasons I have given earlier, and any suggestion that it can be relied on as a value of the premises alone is not supported by any other evidence. Neither party has obtained expert evidence of a separate valuation as commercial premises. Each side called an expert in residential property valuation, because of the defendants' contention before trial that the premises had a value for alternative use as a house that exceeded £245,000. However both experts gave values lower than £245,000 and neither was persuaded by any of Mr Oughton's questions to go any higher. In fact I am doubtful whether even the lower figures they gave were realistic; they were instructed to assume that the premises had been converted from commercial to residential use and so ignored the reality that any residential purchaser would have to incur the cost of such conversion himself. There is also the difficulty that if the premises were hypothetically sold for residential use the goodwill of the practice and its equipment would have to be sold separately on the basis that the practice relocated elsewhere, and there has been no evidence what effect that would have on the price they might achieve in that scenario.
iv) Mr Miller accepted that premises that were already converted and in use as dentists premises might attract "locational and historical goodwill" over and above their value as residential premises, based on (a) not having to incur the cost of converting a house to dentists surgery, which cost he thought might be £30-50,000 and (b) the chance of previous patients returning to a new practice at the address. Mr Oughton suggested I should add £50,000 to the figure of £245,000 for this element. But this is no substitute for a valuation of the premises in their actual condition and for commercial use. The evidence, such as it is, of value as residential premises does not show that even if one starts from the assumption they have been put in a condition to be used as a house they would be worth £245,000. Even if it were assumed it would then cost £30-50,000 to convert the hypothetical house into dentists premises, there is no evidence that the increase in their value on sale for that purpose would recoup the whole cost. Further, the suggested recognition of the possibility of patients returning amounts to double counting of goodwill which has been valued separately. Mr Miller's evidence lends no support to any goodwill value of the premises separate and additional to his figure based on turnover.
v) I should value the premises on the basis of the capitalised value of the stream of rent receivable under the lease the claimant granted to Mr Aulak in 2010, which he put at £400,000 approximately. He submitted that the claimant had conceded that credit must be given for this value, but that is not so. It is conceded that credit for the rent should be given against the claim for consequential loss by reason of the obligations incurred under the bank loan the claimant took to finance the purchase, which I will deal with later. There is no such concession in relation to the primary loss, and it would be contrary to the principle that that loss is assessed at the date of purchase to take into account the value of one of the assets at a later date.
i) The costs and disbursements incurred in connection with the purchase, in the pleaded amount of £18,002.09.
ii) Costs and disbursements incurred on the sale to Mr Aulak in the sum of £4,700.
iii) Trading losses incurred between the purchase and resale, in the sum of £71,941.69 as shown by her accounts for the relevant periods. That amount includes interest repayments on the bank loan she took to finance the purchase, but not her repayments of capital.
iv) Loan interest payments falling due after the sale to Mr Aulak. In closing, Mr Whitaker put this claim at £27,823.78, supported by a calculation attached to his application to serve particulars of this head of loss, which I allowed at the start of the trial.
a) Interest element of fixed monthly loan repayments in the period September 2010 (the date of sale to Mr Aulak) to January 2013 (when an interest fixture expired and the loan reverted to floating rate)- £91,998.
b) Plus interest charged at the floating rate between January 2013 and June 2017 - £32,004
c) Plus the amount of interest payable after June 2017 until the end of the loan term in 2027, on the assumption the present rate of repayment is maintained (calculated at £11,563 and capitalised at a present day value of £6,928 using a discount rate of 5%) . I am surprised that this figure can be as low as it is, given that the annual rate of interest charges between 2013-7 exceeds £6000, but that is not a matter explored before me.
d) The total of these amounts, £131,230, is then multiplied by a percentage to reflect the fact that the interest is charged on the full loan of £675,000, but (i) only £625,000 of it was originally used for the purchase (ii) the claimant could have applied the £200,000 Mr Aulak paid to reduce the loan but evidently did not, and (iii) it is assumed the capital balance is to be notionally further reduced by the capital value of the lease granted to Mr Aulak, which is said to be £245,000 as that was the original consideration paid by the claimant. Thus the capital balance outstanding in September 2010 (£628,190) is taken as reduced by £495,000 so that only the balance (£133,190 or 21.2%) is taken as the amount remaining attributable to the purchase.
e) The claim is thus for 21.2% of the total interest (£131,230) ie £27,823.
i) The pleaded case states that "The claimant will give credit for rental payments received" but the calculation provided does not do so. Given that the claimant has received rent from the asset acquired in the transaction, she should offset that gain against the remaining costs flowing from the same transaction and so is shown to have suffered no net loss: British Westinghouse v Underground Electric Railways Co of London  AC 673.
ii) The discount rate used to capitalise the future rent payments is too high and should be 2.5%
iii) The lease should be valued on the basis of the yield from the rent received. He puts that value at £400,000.
iv) He further submitted that the amount of rent received and/or the capitalised value of future rent should be deducted from the trading losses claimed or the primary loss claim or both.
"when in the course of his business [the claimant] has taken action arising out of the transaction, which action has diminished his loss, the effect in actual diminution of the loss he has suffered may be taken into account even though there was no duty on him to act".
Damages under the warranty claim
Claim for stocks etc removed
i) Para 53 (3) of the Particulars of Claim seeks "damages for breach of contract: value of consumable stores and fixtures and fittings sold to the claimant but removed by the defendants prior to completion (estimated) -£5000
ii) Para 33 pleads that on the completion date the claimant found that "All the consumable stores had been taken. Some of the fittings (as defined in the contract) had been taken, including the telephones".
i) If any stocks had been removed before completion, what they had agreed to sell by the contract was "the stock in trade of the business at the Completion date", so it was wrong to say that those items had been sold to the claimant. This unattractive submission ignores the fact that clause 6.2 of the contract contains an obligation on them to carry on the business in its normal manner between contract and completion. An abnormal removal of stocks (and I accept the claimant's evidence that that was what happened) would be a breach of that obligation, which I find is sufficiently pleaded as a breach of contract by para 53 (3) quoted above.
ii) There is no pleaded case of breach in respect of disrepair or lack of title to any items on the list of fixtures and fittings sold.
iii) The only item identified as removed is the telephones, but the contract provided only for sale of the items listed in the inventory attached, which did not refer to telephones.