England and Wales High Court (Queen's Bench Division) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		20/11/2014

The Hon Mr Justice Blair:

1. This is a claim by The Hut Group Ltd ("THG"), a company based in Northwich in northern England with an online retail business. The claim is against Mr Oliver Nobahar-Cookson ("Mr Cookson"), a businessman also based in northern England, and the Trustee, Barclays Private Bank & Trust Limited ("the Trustee") of Mr Cookson's family trust (Oliver's Sebastian led Trust 2011, which is a Jersey trust ("the Trust"). The dispute arises out of the sale of Mr Cookson's business to THG in 2011 pursuant to a Share Purchase Agreement dated 31 May 2011 ("the SPA").
2. His business was an online sports nutrition business known as "MyProtein", which was the trading name of a company owned by the defendants called Cend ("Cend"). As part of the deal, the defendants transferred their shares in Cend Ltd to THG, and THG transferred shares in the combined company to the Trust in addition to the cash consideration which was split between the defendants.
3. Each party's complaint is as to the value of the shares transferred to them. As at the end of the trial, the parties' claims and counterclaims are as follows:

(1) THG claims £8,567,085 as damages for breach of warranty regarding Cend's Management Accounts for the period 30 September 2010 to 30 March 2011.

(2) The Trustee claims:

a. £12.5m as damages for breach of warranty regarding THG's Accounts and Management Accounts in respect of that part of the consideration for the sale which consisted of shares in THG: liability is admitted by THG, and the issue goes to quantum;

b. Damages for deceit in the sum of £13.5m; in closing, this claim was limited to two allegedly deceitful representations as to THG's EBITDA and the state of its audit.

4. In summary, THG says that by reason of adjustments required to Cend's Management Accounts, the defendants are in breach of the warranty as to the Management Accounts which they gave in the SPA. Apart from accountancy and factual issues as to whether such adjustments were required, the defendants say that the contractual time-bar/notification provisions in the SPA rule out the claim.
5. In summary, the Trustee says that THG was in breach of the warranties it gave in the SPA as regards the shares the Trustee was receiving in THG as part of the price. The breach is admitted by THG and resulted from an accounting fraud within the company. THG says that the Trustee's loss is only £2.2m, and contends that the fraud is not to be attributed to the company with the result that a contractual cap on damages of £7.24m applies. As to the deceit claim, among other defences, THG denies that any fraudulent representations to the Trustee were made and/or relied on.
6. Though reduced during the course of the trial, a large number of disputed points of fact reside within these parameters.

The proceedings

7. The proceedings began on 17 October 2012, the trial taking place over four weeks in October 2014. The claimant's factual witnesses were Mr Matthew Moulding, the Chief Executive Officer of THG, Mr Steven Whitehead, the Group Commercial Director of THG, Mr Darren Rajanah, currently THG's Chief Commercial Director and formerly its Finance Director, and Mr James Pochin, the Group Legal Director of THG. So far as necessary I will comment on the witnesses below. However, allegations of dishonesty are made by the defendants against Mr Darren Rajanah, which I will have to decide.
8. The defendants factual witnesses were Mr Cookson, the founder of the MyProtein business carried on by Cend, and along with the Trustee, the owner of the business until the sale to THG in 2011, Mr Andrew Irving, Vice President of Barclays Private Bank & Trust (Isle of Man) Ltd, which acted as administrator of the Trustee, and Mr Leslie Cunliffe, Director of Barclays Private Bank & Trust (Cayman) Limited who was a director of the Trust at the time of the SPA. The defendants also cross-examined Ms Louise Wade, formerly employed as a management accountant by Cend and later THG on the contents of a statement attributed to her by one of THG's witnesses (Ms Wade gave evidence by video link). Again, so far as necessary I will comment on the witnesses below.
9. Expert accountancy and valuation evidence was given by Mr Nick Whitaker of BDO LLP for THG, and by Mr Robert Parry, of Baker Tilly Restructuring and Recovery LLP, for the defendants. Both are well qualified and experienced. However, I accept the defendants' submission that the credibility of Mr Whitaker's evidence was undermined by (1) a report tendered during the factual evidence at trial (his second supplemental report) in which he changed the basis on which he opined that a reduced multiple was applicable in the case of THG's damages claim (as explained below a reduction in the multiple has the effect of greatly increasing the claim), and (2) evidence given after the end of his cross-examination by which he adjusted the discount he considers appropriate in respect of the Trustee's damages claim. Both the multiple and the discount are central to the valuations.
10. However I should also state that Mr Whitaker and Mr Parry cooperated well with each other at trial to define the quantum issues without the necessity of a further hearing which might otherwise have been required. The court expresses its appreciation to both of them for their work in that regard.

(1) The facts

The parties

11. THG is an online retail business with a proprietary technology platform which powers its own sites and those of third parties. It was set up in 2003 by Mr Moulding, its CEO since 2008 when he joined THG full time. Since it started trading in 2004, the company has grown organically and also grown significantly by way of acquisitions. To give an idea of its current size, it had revenue for 2013 of around £185m.
12. From about 2009 Mr Moulding, then THG's majority shareholder, began to prepare the company for a future listing by way of Initial Public Offering (IPO) on the main market of the London Stock Exchange. As part of that process, PwC was appointed as THG's auditors at the start of 2009, and the board was strengthened (according to the agreed chronology, PwC are no longer THG's auditors, having resigned on 8 February 2013). A new Chief Financial Officer, Mr Paul Meehan, began work towards the end of 2010 (he started to be involved at THG part time from the summer).
13. Cend trading as "MyProtein" was founded by Mr Cookson, and like THG, his company started trading in 2004. Its annual online sales of whey-based sports nutrition products grew to £16m by September 2010, rising to about £27m by September 2011, the year of the sale of the company. From 2008, Mr Cookson started looking to sell Cend, which it is common ground was a successful business. With that in mind, KPMG became the company's auditors and audited its accounts to year end 30 September 2010.
14. On 4 December 2009, the Jersey Trust was set up by Mr Cookson for tax reasons. This led to a split in the shareholding of Cend:

(1) 100,000 A Shares were held by Mr Cookson personally.

(2) 100,000 B Shares in Cend (which, unlike the A Shares, had no voting rights) were held by the Trustee (the second defendant) in the Trust.

The offer for Cend made by THG

15. In 2010, Mr Cookson appointed financial advisers called Altium Capital Ltd ("Altium") to assist in preparing to sell the business and then manage the sale process of Cend. In fact, Altium was also (or became) one of THG's advisers in respect of the anticipated IPO. Mr Whitehead, who was the THG officer responsible for mergers and acquisitions, had previously worked for Altium.
16. On 4 February 2011, Altium circulated its Information Memorandum on the company to potential buyers. A number of non-binding offers followed. The private equity bidders eventually withdrew, but Mr Cookson says that Pepsico remained an interested party.
17. As part of its strategy of acquiring existing online businesses, THG was looking to enter the sports nutrition sector. In fact, by the time that Cend came to market, a target had already been identified. As at March 2011, THG had already raised nearly £21m from investors, part of which was earmarked for the acquisition. However, on learning that Mr Cookson was actively looking for a buyer for Cend, THG became interested in Cend as an alternative acquisition. Mr Moulding approached Mr Cookson directly, and there were then further discussions also involving Altium.
18. Following a meeting on 7 April 2011, THG made an initial, non-binding offer for Cend in an email sent on 8 April 2011 from Mr Whitehead to Altium together with an information pack attached. The email was duly forwarded to Mr Cookson, who was one of three people to whom Mr Whitehead addressed his message ("Oliver [Cookson], Simon, and Andy", the latter two being Altium people).
19. The offer was based on an enterprise value for Cend of £58m, made up of cash of £30m, plus shares representing 12% of the combined company with an indicative value of £28m (based on a combined company value of £233m). THG emphasises that Mr Whitehead said in the email that Mr Cookson would "need to undertake an exercise to demonstrate that the £175m pre acquisition Hut Group valuation is fair".
20. However, as the defendants say, he also expressed the view with considerable confidence that because of the IPO which THG intended for October, the "look-through" value of the shares would be £42m (12% of £350m) rather than £28m—in other words, an even better deal. He also said that the IPO would also give Mr Cookson "a second liquidity event"—in other words, the opportunity to realise more cash shortly.
21. Since the email of 8 April 2011 has some importance in the defendants' case (though they did not pursue a misrepresentation case based on it), I set out the relevant parts below:

"Offer Summary

(1) £58m EV

(2) £30m cash at completion

(3) £28m rolled equity in to The Hut Group … at a combined valuation of £233m (12% stake)

Hut Group Valuation

We fully appreciate that you will need to undertake an exercise to demonstrate that the £175m pre acquisition Hut Group valuation is fair, however, I am completely confident of this and we will provide whatever assistance is required. Not only is that valuation fair, but it is our express intention to ensure that your roll over value has an inherent value uplift at the point of IPO in October, hence the look-through' EV value is in fact higher than £58m. In a similar fashion, the roll over equity taken by the vendors on the Lookfantastic acquisition has nearly doubled in value to c£9m in 6 months.

To demonstrate this uplift, the combined business would be generating £19m EBITDA on a proforma basis (before any synergies) for the YE 31 December 2011. In 2010 The Hut Group generated 46% organic growth which is continuing in 2011, plus we have demonstrated that organic growth can be supplemented with selective acquisitions. As you are aware, the highest multiples are paid for businesses in strong sectors (FMCG online), demonstrating high levels of organic growth plus selective M&A and we feel passionately that the combined group could be listed at a value of £350m to £400m in October 2011 — this valuation approach is the basis on which advisers and brokers are currently being appointed.

Accordingly, the look-through' value of the equity roll over is £42m (12% @ £350m) rather than £28m and the combined EV is £72m not £58m. In addition, our intended October 2011 IPO would also provide a second liquidity event this year, where there would be a real opportunity to take further material value off the table.

Furthermore, the 12% stake in the combined would make Oliver [Cookson] the 2nd largest non-institutional shareholder behind Matt [Moulding].

Further Information on The Hut Group

To assist your understanding of our business at this stage, I have attached the pack we are on the cusp of issuing to brokers who are pitching for the IPO. Given this information is all now verified and must be supportable and 100% accurate for DD/public markets this document should be considered as wholly accurate."

22. The information pack of April 2011 attached to the email which Mr Whitehead said "should be considered as wholly accurate", stated that THG's actual (unaudited) EBITDA for 2010 was £4,100,000. THG effectively warranted this number in the SPA, and it turned out to be false because of the accountancy fraud later discovered within THG. It forms the first basis for the defendants' breach of warranty counterclaim.
23. On 14 April 2011, THG made a formal offer for Cend on the same basis as indicated in its email of 8 April, subject to a number of conditions precedent, including due diligence. Mr Cookson countersigned the letter, which said among other things:

"Consideration

We propose to acquire the entire issued share capital of Myprotein, on an excess cash and debt free basis, for an Enterprise Value of £58m with consideration payable as follows:

1. £30m payable in cash at completion; and

2. £28 million of equity roll over in to The Hut Group Limited …, valuing the combined Hut Group at £233 million ("Consideration Shares")."

24. THG says that Mr Cookson was desperate to sell the company, and that this was a very good deal which he was anxious to clinch, particularly since he was to stay on in the merged company. However, I accept his evidence that he was under no pressure to sell, and would if necessary have waited.
25. Nevertheless, it is correct (as THG says) that on 8 April 2011 Mr Cookson was told about Cend's actual figures for March, and they were disappointing, not only because of poor trading performance but also because of the need to account for stock adjustments. They were followed by disappointing figures for April.

Events through to closing

26. There was in fact some pressure on the part of THG to move forward speedily, and this appears to have been shared by Mr Cookson's adviser Altium doubtless because of expected remuneration on the sale. I am satisfied that THG considered that the MyProtein business would be a good fit for the company, as turned out to be the case.
27. Both parties began the process of carrying out due diligence on the other's business. Generally, there was considerable interchange between them and their advisers, and only the main points relevant to the issues in this case need be noted.
28. On 18 April 2011, Mr Whitehead sent Mr Cookson an email with various attachments being (i) a board pack from a THG board meeting in February 2011, (ii) an investor presentation pack dated March 2011 which had resulted in THG raising some £21m from investors for the purpose of acquisitions, and (iii) a trading update for the first quarter of 2011. Amongst the financial information contained in those documents were (a) EBITDA figures for 2010 of (in different places) £4,073,000 and £4,072,000, in other words roughly the £4.1m number stated in the information pack attached to the email of 8 April 2011; and (b) a budgeted EBITDA figure for the first quarter of 2011 of £767,000. This email forms the basis of one of two representations alleged by the Trustee in its deceit claim.
29. On 27 April 2011, Mr Whitehead emailed these and various other documents including THG's draft audited accounts for year end 31 December 2010 to Barclays. It had replaced NatWest/RBS as THG's main lender in the spring of 2011. Mr Whitehead said that THG would be warranting the accuracy of the information as part of the acquisition of Cend. He said that the draft 2010 audited accounts were in final form, though yet to be signed, were not going to change, were waiting final sign off, and that PwC would be happy to confirm the numbers if required.
30. An audit committee meeting of THG, which was scheduled for 20 May 2011, was postponed, and the parties are in dispute as to the reasons. I need make no findings in this regard. (It eventually took place on 6 June 2011, i.e. after the closing of the SPA. THG explains the absence of minutes on the basis that its counsel Mr Pochin was on honeymoon, and though the defendants challenge this, I accept it.)
31. On 24 May 2011, Mr Rajanah emailed KPMG a copy of THG's draft accounts for 2010. In his email he stated he attached, "Statutory Accounts (this has run through our PWC audit process and therefore reflects any items for adjustment - there are no more adjustments other than wording and narrative)". This forms the basis for the second representation alleged by the Trustee in its deceit claim, its case being that THG's accounts were nowhere near ready to be signed off (THG denies that there was any misrepresentation). The draft statutory accounts provided by Mr Rajanah showed the same c. £4.1m 2010 EBITDA as the materials which Mr Whitehead had already sent to Mr Cookson on 8 April and 18 April 2011.
32. On 25 May 2011, KPMG requested from Mr Rajanah the first quarter 2011 management accounts in respect of THG, which he provided later that afternoon. THG's EBITDA for this period was shown as £861,613. THG warranted in the SPA that this fairly presented the profits and losses of the company for this period. In fact, the EBITDA for the first six months of the year turned out to be minus £2.2m, and THG accepts that it was in breach of warranty.
33. On 26 May 2011, KPMG gave their due diligence report to Mr Cookson. Mr Cookson was reassured by the report, but he decided not to instruct KPMG to seek to value THG, since he did not want to pay £70,000 that KPMG had quoted for that exercise. I do not accept THG's submission that the real reason why Mr Cookson did not have a valuation done is that the cash element of the deal was so good that the THG share valuation was not sufficiently important. I am satisfied that both elements of the price for his company were important to him, that is, the £30m cash, and the £28 million of equity in THG, as stated in THG's offer letter of 14 April 2011.
34. On 27 May 2011, the SPA was signed, and the Trustee passed the necessary resolution, formal completion taking place in Jersey on 31 May 2011.

The warranties in the SPA

35. By clauses 7.1 and 7.8 of the SPA, the parties respectively acknowledged that they were entering into the SPA in reliance on the other's warranties.
36. By paragraph 1.2 of Schedule 4, the Defendants warranted that:

"[Cend's] Management Accounts have been prepared on a basis consistent with that used in the preparation of [Cend's] Accounts and the past practice of the Business in the 12 months prior to the date of Completion [31 May 2011] and fairly present the assets and liabilities and profits and losses of [Cend] for the period from the Accounts Date [30 September 2010] to the Management Accounts Date [30 March 2011]"

This is the clause of the SPA on which THG's breach of warranty claim is based. (The date of 30 March should probably read 31 March which is the date to which the management accounts go, but nothing turns on this.)

37. By paragraph 1 of Part 2 of Schedule 8, THG warranted that:

"1.1 The Buyer's Accounts:

(a) comply with the requirements of the Companies Act;

(b) comply with all current statements of generally accepted accounting practice and financial reporting standards applicable to a company incorporated in the United Kingdom and have been prepared in accordance with the historical cost convention and on a consistent basis and in accordance with the same accounting bases and policies as the corresponding accounts for the preceding 3 financial years; and

(c) give a true and fair view of:

(i) the state of affairs of the Buyer as at the Buyer's Accounts Date;

(ii) the assets and liabilities of the Company as at the Buyer's Accounts Date; and

(iii) the profit or losses of the Company for the financial year ended on the Buyer's Accounts Date.

1.2 The Buyer's Management Accounts have been prepared on a basis consistent with that used in the preparation of the Buyer's Accounts and the past practice of the business of the Buyer (Buyer's Business) in the 12 months prior to the date of Completion and fairly present the assets and liabilities of the Buyer as at the Buyer's Management Accounts Date and profits and losses of for the period from the Buyer's Accounts Date to the Buyer's Management Accounts Date."

38. In summary, by this provision THG warranted that its draft statutory Accounts gave a true and fair view of THG's state of affairs, assets and liabilities and profit and loss as at 31 December 2010 ("the THG Accounts Warranty"), and that its Management Accounts fairly presented its assets and liabilities and profits and losses for the period from 31 December 2010 to 31 March 2011 ("the THG Management Accounts Warranty"). It is not in dispute that these warranties were broken, and this forms the basis of the Trustee's counterclaim for breach of warranty.
39. A claim for breach of THG's warranty that it had calculated its pro-forma EBITDA of £8,945,000 for the year ended 31 December 2010 based on reasonable and honestly held assumptions and opinions was not pursued by the defendants in closings.
40. Clauses 7.12 and 10.2 of the SPA limited the parties' liabilities for claims for breaches of warranty "save insofar as it results from the fraud of [THG]" or "…the fraud of any of [Mr Cookson and the Trustee]". The relevant limitations were (1) by paragraph 3.1 of Schedule 5, £15m for claims by THG against Mr Cookson and the Trustee, which is not relevant in this case, (2) by paragraph 3 of Part 3 of Schedule 8, £7.24m for claims by Mr Cookson or the Trustee against THG, which is relevant in this case.

Events post-closing

41. On 7 June 2011, Mr Moulding, Mr Whitehead, Mr Meehan and Mr Rajanah attended a "kick-off" meeting in London with THG's advisers in order to commence the IPO process.
42. As part of the pre-IPO process, PwC was carrying out a half-year audit process of THG's accounts. Mr James McCarthy is a Chartered Accountant who joined THG in 2009 as Financial Controller, and served beneath THG's Finance Director, Mr Rajanah, and the Chief Financial Officer, Mr Meehan.
43. Over the weekend of 23 and 24 July 2011, Mr McCarthy and his team were in the office. Mr Rajanah was also in the office that weekend, though he says he was working on the long form due diligence report for the IPO. The defendants say that he was orchestrating the dishonest manipulation of the figures to reverse the serious shortfall in THG's EBITDA for the first half of 2011 to reach a target range of EBITDA. This is strongly disputed by Mr Rajanah, and I will have to return to the issue. What is not in dispute is that this weekend became known within THG as "the Saviour Weekend".

The fraud uncovered

44. On 16 September 2011, in relation to work on the accounts to 30 June 2011, PwC uncovered fraud in THG's accounts department. An investigation by the company ensued, which was in part PwC led, with independent participation, and included formal interviews conducted with the people concerned.
45. It is common ground that the position is summarised in a draft report prepared for the company by PwC on 16 December 2011 (the "Project Hydrogen" report) under the heading "Falsification of documentation". The summary is set out below. In brief, PwC state that on 16 September 2011, it came to their attention that there had been a falsification of documentation provided to it in its capacity as the Group's auditors. The Financial Controller, Mr McCarthy, had been manipulating profitability, on a monthly basis, by overstating off-line stock and debtors, and understating liabilities. In addition, an initial review revealed a number of occasions where it was apparent that PwC had been misled by the finance team.
46. PwC records that it then switched its focus to the audit of the year ended 31 December 2010. This "resulted in a number of further issues being identified". Before adjustments, EBITDA (earnings) had been stated as £4.1m. Following adjustments, the figure was restated as an LBITDA (loss) of £1.5m. There was also an adjustment to the 2011 management accounts, though no definitive revised accounts for the quarter are in evidence.
47. PwC state, "The IPO process having been halted, we focused with management on the finalisation of the 31 December 2010 financial statements. This involved re -performance of those areas of our audit work were there was the risk of further document falsification, as well as adjusting for the areas of falsification of accounting records identified in the investigation …". The accounts were filed on 30 September 2011, right at the end of the permitted period.
48. PwC noted "that the people associated with the falsification of documentation and accounting records have now left the business". Mr McCarthy had been dismissed for gross misconduct on 18 October 2011. Another employee in the finance department, Mr Sajith Hevamanage, was dismissed for the same reason, and others were given final warnings.
49. In early October 2011, Mr Rajanah was placed on gardening leave, returning at the end of November. The circumstances are in dispute between the parties.
50. Mr Cookson said in his evidence, "I was in total shock and dismay. Whilst I thought I had got involved with a highly profitable and attractive business, this could not have been further from the truth. It was my worst nightmare and I felt robbed and cheated". I accept that this is how he did in fact feel.
51. It must also have been a severe blow to THG's top management, particularly Mr Moulding. He said in his evidence that he was shocked when Mr Whitehead told him on 16 September 2011 of the falsification that PwC had uncovered which raised concerns about THG's accounts generally. I accept that this is how he did in fact feel.
52. Though THG suggested at trial that market conditions may have played their part in the abandonment of the proposed IPO, I am satisfied that the reason that the IPO went off was the fraud and the discovery of the losses concealed by the fraud.
53. A further consequence of the discovery of the losses was that Barclays was asked to waive THG's compliance with its banking covenants, which it did following a report by Deloitte under the name "Project Napoli". I infer that THG secured PwC's agreement to sign off its 2010 accounts on the "going concern" basis by arranging an equity injection from its shareholders at a price of £17.46 per share on 30 September to 4 October 2011. This compared with a price of £57.71 per share in the share issue on 31 May 2011 which funded the purchase of Cend.

The parties make their claims for breach of warranty

54. Mr Cookson had joined THG after completion, and was still with the company at this time (he left the employment of THG on 1 November 2011 and resigned as a non-executive director on 15 October 2012). It must have been clear that the effect of the fraud would be to result in a breach of the financial warranties given by THG in the SPA. Deeds of variation were entered into between him, the Trustee and THG the effect of which was to extend time to bring breach of warranty claims.
55. THG was considering its own breach of warranty claims, and the first notice of claim was sent on 2 February 2012. This issue is dealt with below under the defendants' contention that the timing/notification provisions in the SPA were not satisfied by THG.
56. In this regard, the defendants say that THG's management knew that they would be making very substantial damages claims against THG for breaches of the warranties given by THG in the SPA, and that their own claim was by way of pre-emptive strike. Although THG does not accept this, I consider that it is probably correct, and it is supported by a draft of the note with the date 11 January 2012 in which Mr Pochin appears to link the potential use of a multiplier in THG's claim with its use by Mr Cookson. In any case, it soon became clear that there would be mutual claims, and the incidence of which party would be claimant and defendant was largely a matter of the timing of the bringing of the proceedings.
57. The defendants place considerable emphasis on what they describe as the disparity between the circumstances of the claims. As they put it, THG's claim is for relatively small adjustments to Cend's management accounts (albeit subject on valuation to the effects of a multiplier), whereas the Trustee's claim arises out of an admitted discrepancy of £5.6m in THG's reported EBITDA following an accounting fraud. The latter had serious consequences for THG, and therefore for the Trustee as a holder of its shares following the deal. THG, on the other hand, acquired a profitable company, and the MyProtein business went on to make a considerable contribution to its earnings.
58. In closings, THG accepted that the MyProtein business proved to be a "significant generator of profit", but said that this was largely due to the fact that it had access to THG's technology platform. This may have played a part, but I am satisfied that the main reason was that MyProtein was a profitable business in a growing market.
59. As regards disparity, THG says that its accounts breach is an adjustment to historic EBITDA, whereas the required adjustments to Cend's management accounts are to its then current trading year. That is correct, but does not provide an answer to the fact that THG's breach of warranty relating to its draft 2010 accounts is clearly much more serious. Further, there is the admitted breach of the THG management accounts warranty, which related to the first three months of 2011. In any case, I consider that the defendants' factual submissions in these respects are broadly established.
60. On the other side, THG points out that the Trustee still has its shareholding, and that the company has not failed, and indeed it has been very successful. It points to the recent acquisition of a stake in the company by the US private equity group KKR. That said, it is common ground that no IPO is imminent, and that an IPO was seen at the time as a means by which Mr Cookson could get as it was put, a second exit opportunity.
61. Overall, the picture is nuanced, and in approaching the issues which require decision by the court, it is necessary to keep that sense of proportion.

(2)THG's breach of warranty claim

Introductory points

62. As set out above, the defendants warranted that Cend's Management Accounts for the period 30 September 2010 to 30 March 2011 had been prepared on a basis consistent with that used in the preparation of Cend's statutory accounts for the year ended 30 September 2010 and fairly presented Cend's assets and liabilities and profits and losses for the period 30 September 2010 to 30 March 2011.
63. It is common ground that there will be a breach of warranty if: (a) without the relevant adjustment Cend's Management Accounts did not fairly reflect its financial position; or (b) Cend's Management Accounts were prepared on a different basis to its prior statutory Accounts.
64. THG's case is that seven adjustments need to be made to Cend's Management Accounts for that period in order for those accounts to give a true and fair view of Cend's financial position and (as regards one of those adjustments for it to be prepared on a basis consistent with that used in the preparation of Cend's Accounts). As a result, the defendants were in breach of warranty.
65. The defendants deny that there was any breach of warranty, and their case is that the Management Accounts were fairly presented because none of the adjustments claimed by THG is made out.
66. If there was any such breach, relying on the time limits clause in the SPA, the defendants deny that the breaches are actionable. In summary, they say that (1) the required notices were not given in time, and (2) even if given in time, were not valid because the notices did not contain sufficient detail.
67. If THG can prove an actionable breach of warranty, the question of quantum of damages arises. The issues in that respect have narrowed considerably, and now concern the relevant multiplier.
68. It is convenient to take the notice points first. There were three such notices given by THG dated 2 February 2012, 20 March 2012, and 4 April 2012.

The time limits clause in the SPA

69. The relevant term is clause 5.1 of Schedule 5 of the SPA (which deals with limitations on the Seller's liability) and which provides that:

"The Sellers [the defendants] will not be liable for any Claim unless the Buyer [THG] serves notice of the Claim on the Sellers (specifying in reasonable detail the nature of the Claim and, so far as practicable, the amount claimed in respect of it) as soon as reasonably practicable and in any event within 20 Business Days after becoming aware of the matter."

70. For the purposes of the 20 Business Days cut off, THG accepted in closings that time counts back from the date of receipt of the notice (6 February 2012), so that the cut off date is 9 January 2012.
71. There are a number of points of dispute between the parties which go to construction. These are (1) what is meant by "becoming aware of the matter"; (2) who within the Buyer has to become aware of the matter, and (3) the level of detail required in the notices.
72. The dispute in point (3) is dealt with in the following section of this judgment.
73. The dispute in point (2) as to the identity of persons within the Buyer who count for these purposes resolved in closings when the defendants accepted that the matter had to come to the attention of somebody with knowledge of the SPA, and for relevant purposes limited that to Mr Whitehead and/or Mr Pochin.
74. As to point (1), THG submits that "matter" means "claim", and that the term refers back to the term "Claim" used earlier in the clause. It submitted in oral closing that what the clause requires is awareness that there is a proper basis for putting forward a claim for breach of warranty in respect of the relevant matter. On the present facts, that required the taking of professional advice from PwC, and the point at which time started to run is (THG submits) when PwC came back to THG and said it thought that there was sufficient basis for advancing the claims. That was on 20 January 2012, when PwC in a draft letter indicated an "initial view" that certain fair value adjustments constituted breach of warranty claims.
75. THG submits that there is nothing in the defendants' point that THG's construction would enable it cynically to postpone the running of time by delaying the instruction of lawyers or accountants, because although clause 5.1 puts the longstop date at 20 business days after it becomes aware of the matter, it also requires THG to serve notice "as soon as reasonably practicable". In other words, this is the basic requirement.
76. The defendants submit that "the matter" means the matters forming the basis of the claim, i.e. the factual grounds for a breach of warranty claim and not that those grounds may constitute an actionable claim. THG accepted in closing that if the defendants were right in that construction, the notification was out of time, because if knowledge was simply knowledge of the facts and matters which it is later determined give rise to a breach of warranty, then it knew, in one form or another, of the various points before the cut off on 9 January 2012.
77. The defendants point to clause 5.2(c) which imposes a limit of 12 months after the date of the agreement for notifying claims, and clause 5.3 by which claims are barred if proceedings are not brought within 9 months of notification. So, it is submitted, it is commercially not unreasonable if a person who is familiar with the SPA and knows the facts that would give rise to a claim, has 20 business days to work out whether to serve a notice in respect of it. If he does that, THG then has a further nine months to prepare and serve particulars of claim. That gives long enough to consult professional advisers, and in any case the 20 days allowed by clause 5.1 is sufficient.
78. Alternatively, if the court concludes that an element of legal entitlement must also be known to THG before the 20 business day period starts to run, the defendants submit that it must be a very low threshold, and it is certainly not as high as a "proper basis for advancing the claim" threshold. The test should simply be whether the Buyer was aware that it may have a claim for setting the 20 Business Day period running. It relies by way of contrast on the provisions in clause 12.1 dealing with third party claims, where the contractual language refers to "… 20 Business Days after the Buyer … becomes aware that it may be entitled to make the Third Party Recovery ...".
79. My conclusions on this point of construction are as follows:

(1) THG submitted that since the clause was capable of operating harshly, the time-bar provision should be construed contra proferentem. However, in this contract both parties were subject to time-bars in similar terms, so that each was subject to the same limitation (see e.g. Lewison, The Interpretation of Contracts (5^th ed, 2011) p.619-620). There is no reason to apply such a canon of construction to mutual rights and limitations.

(2) Further, breach of warranty claims following the sale of shares can be costly, and the parties are entitled to negotiate limitations in this regard. The authorities show that the court construes the particular terms they have agreed applying the settled rules of interpretation without any predisposition merely (for example) because the times agreed are tight (see the review in ROK Plc v S Harrison Group Ltd [2011] EWHC 270 (Comm) at [35] and following, a decision on a preliminary issue).

(3) However, I do not accept the defendants' submission that the fact that accounting practice required Cend's financial figures to be adjusted and incorporated into THG's following acquisition implies that the parties cannot have intended that a distinction could be drawn between THG being aware of a "matter" for the purposes of adjusting Cend's pre-acquisition accounts but be unaware of the same matter for the purposes of a claim. As THG said, the exercise is different.

(4) As to the wording of the clause, there is force in the defendants' submission that the word "matter" in clause 5.1 is different from the word "Claim" and should not be read as equivalent.

(5) I consider however that there is more force in THG's submission that read in context, the use in clause 5.1 of the phrase "aware of the matter" is a reference back to awareness of "the Claim" in the earlier part of that clause, of which THG is to give notice.

(6) There is no straightforward outcome based on commercial certainty in terms of when the 20 day period starts (both sides rely on commercial certainty arguments). Either party's construction involves a factual enquiry of some complexity. However the defendants' construction appears to involve a more open-ended enquiry.

(7) On the defendants' construction, time would start running when the relevant individuals were aware of the underlying facts even if unaware that they may give rise to a claim.

(8) On balance, I consider that THG's construction is more consonant with the wording of the clause and with commercial sense, and is the correct one.

(9) There is force in the defendants' submission that as a matter of construction a further qualification should not be added by way of awareness that there is a "proper basis" for putting forward a claim. (In THG's written closings it was described as awareness of a "likely claim".)

(10) However, on balance I agree with THG that without such awareness, it cannot be said that the relevant individuals at THG became "aware of the matter". As a matter of commercial sense, without knowing that a claim has a proper basis, a party to a share purchase agreement would not expect to (or wish to) have to notify the other party of it. In my view the clause should not be construed to have that effect.

Factual conclusion on the defendants' late notification defence

80. As stated, the agreed position as regards notification is that the cut off date is 9 January 2012, and that the individuals whose awareness of the matter is in issue are Mr Whitehead and Mr Pochin.
81. In summary, the defendants' case is that THG had the relevant awareness before 9 January 2012. If the relevant awareness is in accordance with its primary construction of the clause, that is admitted by THG. If the relevant awareness is in accordance with its alternative construction, that is, that the clause was triggered when THG became aware that it might have a claim, then it had the relevant awareness before 9 January 2012, and specifically it had it by 5 January 2012 in the form of Mr Whitehead, and at a date that it cannot further identify because there are no documents from Mr Pochin prior to 9 January 2012.
82. I have not accepted the defendants' case on construction in this regard, preferring THG's submission that the clause requires awareness that there is a proper basis for putting forward a claim for breach of warranty in respect of the relevant matter. However, I must go on to make factual findings as to knowledge.
83. The factual position is (probably inevitably) difficult to resolve. As regards the available material, the defendants complain that on the night before the trial THG disclosed over 90 documents purporting to relate to THG's instruction of PwC in January 2012. THG responds that this was a prompt response to a request that privilege in the documents be waived. I am not in a position to determine which party is correct, but I do accept the defendants' submission that the timing of the production of this material was unfortunate. Nevertheless, there has been a considerable volume of disclosure by THG as regards this issue.
84. The defendants' case is that Mr Whitehead is familiar with breach of warranty type claims since he had M & A responsibilities within THG. On 30 December 2011, there was an email exchange between him and Mr Hunter (who was the Finance Director of Cend and now employed by THG) which indicates, the defendants say, that Mr Whitehead must have had "an eye" on advancing a breach of warranty claim at this time. However, Mr Whitehead denied this, saying that at the end of December 2011 he was trying to understand what was going on in the business, and on balance I accept his evidence in this regard.
85. On 5 January 2012, Mr Whitehead sent Mr Hunter a spreadsheet which he seems to have authored, and which shows various items, including adjustments related to the pre-acquisition period. This shows, the defendants say, that Mr Whitehead was discussing with Mr Hunter what fair value items could be imported into THG's breach of warranty claim. The defendants submit, therefore, that it is "pretty clear" that by 5 January 2012, if not earlier, Mr Whitehead knew that it might be possible to make certain adjustments to Cend's management accounts which could be used in a breach of warranty claim under the SPA.
86. THG accepts that the adjustments had been identified by then as potential fair value adjustments. However, it draws a distinction between fair value adjustments following an acquisition, and the kind of adjustments that could give rise to a breach of warranty claim. Mr Parry accepted in cross-examination that it was a different exercise, and the defendants also accept this. Mr Whitehead's evidence is that it would be foolish to leap to the conclusion that fair value adjustments equate to a breach of warranty claim, and I accept this.
87. The factual position according to the available documents is that the forensic group within PwC was contacted by Mr Neil Chugani (THG's Chairman) on about 12 January 2012 (the formal letter of instruction dated 17 January signed by Mr Whitehead followed).
88. PwC emailed Mr Chugani back on 13 January 2012 outlining the approach it would take and saying:

"The objective of the above approach is to obtain an understanding of the items such that, based upon our experience, we can share our initial view as to whether they appear to be more or less robust as measured against the requirements of the SPA. In the time available, and with the number of items in play, we won't have time to get into the supporting documentation for the items, but I don't think that is essential right now. I think that of most value to you in the time available will be to form an initial view based upon your explanations. This will help you in your considerations as to which items you choose to advance as a claim. Again, to make best use of available time, I propose that we orally report our views."

89. Mr Chugani emailed back on 13 January 2012 agreeing and saying, "We will send a copy of the SPA as you suggest, as well as an internal note that has been prepared to summarise the issues".
90. This may be a reference to a note prepared by Mr Pochin dated 11 January 2012, which he said was prepared for THG's lawyers to seek legal advice as to the process of bringing a warranty claim. It has been heavily redacted. The metadata (THG says) shows that the note originated on 9 January 2012.
91. The defendants say that Mr Pochin's involvement shows the matter moving from Mr Whitehead to the legal department, and submit that this must have happened before the cut off date on 9 January 2012, so that both Mr Whitehead and Mr Pochin must have been aware that there was a breach of warranty claim before then. The later obtaining of advice from PwC, the defendants submit, which in any event when received was equivocal, does not affect this conclusion.
92. THG says that the note was a forward-looking document: if any of the fair value adjustments were to become breach of warranty claims, then THG "would be" asserting that the Management Accounts did not fairly present the assets and liabilities, profits and losses of Cend. THG wanted to know what the process would be in the event that PwC advised THG that it had a warranty claim. There is nothing in that to suggest, THG says, that Mr Pochin considered, as at the date of the note, that THG was likely to have such a claim.
93. On balance, my findings of fact in this respect are as follows. I am satisfied that by the end of 2011 at the latest Mr Whitehead was considering whether there might be a breach of warranty claim against the defendants, and was in communication with Mr Hunter in that regard.
94. At the latest by early January 2012, Mr Pochin became involved and prepared the note with the date 11 January 2012. This identified as fair value adjustments the items that would in due course form the basis of the breach of warranty claim, but did not commit as to whether or not there was such a claim. I am satisfied that this was because he believed that advice was needed from forensic accountants. This was received when PwC sent a draft letter to THG on 20 January 2012 (a letter into which Mr Whitehead had input) stating, "Our initial view is that certain of the items do not appear to have been recorded in accordance with UK GAAP and accordingly might provide the Hut with reasonable grounds on which to proceed with a claim under the SPA".
95. That is when time started running, in my view. Thereafter, a notice of claim was drafted, and sent to the defendants on 2 February 2012, well within the 20 day period allowed by clause 5.1. In fact, even on the defendants' alternative construction of the clause, which is that time started running when THG as buyer became aware that it may have a claim, the available evidence suggests that the notice was only a few days late. However, I do not accept that construction.
96. There is a further issue in relation to adjustment 3, which in the form it was argued at trial, is an asserted adjustment to Cend's management accounts of £61,773 in respect of stock write-off. It is common ground that this was not included in the notice of 2 February 2012, and only appeared in the second notice dated 20 March 2012.
97. The defendants point to the fact that both in the spreadsheet of 5 January 2012, and in Mr Pochin's note with the date 11 January 2012, there is an item "written off stock (e.g. out of date water) £36,000". There is no reason, the defendants submit, why the claim could not have gone into the first notice with the others, and so it is out of time.
98. THG submits that adjustment 3 consists of particulars of an existing claim, and so did not require separate notification. It says that notice was not given of adjustment 3 on 2 February 2012 because as at that date it had not been identified by PwC even as a fair value adjustment. There is nothing to suggest, THG says, that it became aware of a claim based on adjustment 3 before 21 February 2012 (the cut off date based on the date of the second notice).
99. On balance, I accept the last point. The main issue on adjustment 3 is whether there was a stock take undertaken by Cend at the end of March 2011. This is the point that is picked up in the second notice. In the absence of any material to the contrary, I conclude that THG became aware of this within the 20 day period of the second notice. There was otherwise no reason for omitting it from the first notice.
100. On this basis, I am satisfied that the notice of the adjustments the subject of the claim was given in time.

The defendants' "reasonable detail/amount claimed" deficiencies defence

101. Clause 5.1 of Schedule 5 of the SPA required the notice of the Claim on the Sellers to specify "… in reasonable detail the nature of the Claim and, so far as practicable, the amount claimed in respect of it …". As to this type of provision, see ROK Plc v S Harrison Group (ibid) at [61] and following.
102. Leaving aside adjustment 3 which is dealt with above, the defendants' case is that the notice of 2 February 2012 was defective because (1) it massively understated, for tactical reasons, the amount now claimed, (2) it contained no information about the basis of the calculation, and (3) it inaccurately described the nature of adjustment 1.
103. As to (1), this is based on the fact that the notice gives the amount of the adjustments but does not mention the multiple. The sum identified by way of adjustments in the first notice was £828,441 whereas (even the now reduced) claim is circa £8,400,000. The defendants rely on late disclosure, which shows, they say, that Mr Pochin's thinking was that quantification was best deferred until after it had been ascertained whether the Trustee would be putting its breach of warranty claim on a multiplier basis.
104. Based on an earlier draft of his note with the date 11 January 2012, there may be some force in that supposition, but even if that was Mr Pochin's thinking, I agree with THG that the notice provided all that was practicable by way of quantification at this early stage.
105. As to (2), the defendants point out that nothing was said about annualising the effect of the alleged stock deficiencies, which is a significant contributor to the quantum of the sum now claimed, or the "reduced multiple" which (in circumstances described below) is an even bigger contributor—the multiple on THG's case should be reduced from 10.7 x EBITDA to 9.8975. As the defendants say, the third notice dated 4 April 2012 specifically adopted the single multiplier approach:

"In order to quantify loss, it may be appropriate to annualise some or all of the Adjustments referred to in this letter and previous Notices and/or apply the transaction multiple used on acquisition (10.7x EBITDA for the period ended 30 September 2011)."

106. There are, as I shall explain, considerable issues as regards THG's case on the "reduced multiple". So far as the sufficiency of the notice is concerned, however, I agree with THG that the first notice of claim of 2 February 2012 was not invalidated by the fact that the method of calculation of loss was not supplied until later. I consider that it provided all that was practicable by way of quantification at this early stage.
107. Point (3) is based on the way that adjustment 1 (which has to do with stock valuation methodology) is stated. This is different from the pleaded case in that the notice characterised the adjustment as arising because the change to FIFO was not booked at the end of the management accounts period (30 March 2011) whereas THG now alleges that the change to FIFO affected the management accounts period. Also, the notice described the change to stock valuation arising out of Cend's switch to using the Maginus accounting system, which occurred in 2008. The adjustment is now put on the basis of a change to FIFO methodology on 28 February 2011. So in a real sense, the defendants say, the notice was advising the opposite of the claim which is now advanced.
108. These may be fair points when the validity of adjustment 1 comes to be appraised, but as regards the validity of the notice, I agree with THG that the issue was identified in sufficient detail. At this stage, not much was contractually required in my view, and details would quite likely follow.
109. On this basis, I am satisfied that the defence as to the deficiency of the notices of claim is not made out.

The adjustments

Introduction

110. The adjustments relied on by THG go to two main issues, namely stock, and points called "MyP Points" which were available to be used against future purchases. Though the individual adjustments are small, the application of a multiplier invests them with considerable value. The term "adjustments" refers to adjustments to Cend's management accounts for the period 30 September 2010 to 30 March 2011, which THG says are necessary fairly to present its financial position. Though the individual adjustments are small, the application of a multiplier to some of them invests them with considerable value (two of the adjustments are "one off" items to which the multiplier does not apply such that their effect is limited to their stated amount). The term ….financial position.
111. As regards stock, the background is that prices were rising at the relevant time, so that the method of valuing it becomes practically relevant.
112. The defendants make various points on the onus of proof, which (it is common ground) lies on THG. They point to the difficulty in the exercise of reconstruction that is required to make good THG's case, the fact that individuals who had responsibility for preparing the accounts at the time could have been (but were not) called by THG to give evidence, and the placing of reliance on non-contemporaneous documents. I consider that there is some force in these submissions, particularly the first, and, as the defendants say, THG's case has been the subject of change. It changed significantly even during the course of the factual evidence in the form of Mr Whitaker's second supplemental report.
113. Having said that, it would not be a matter of surprise if adjustments fall to be made to Cend's management accounts in respect of stock (given the nature of the MyProtein business), and it is common ground that the customer rewards points were not being accounted for in accordance with UK GAAP. Further, this part of the case was the subject of detailed submissions by THG in closing contained in Appendix 1 to its closing submissions.
114. The defendants resist in full all the claimed adjustments and the "one-off" items. The result so far as the individual claims are concerned is that each adjustment claimed is before the court on an all or nothing basis.
115. There is, notwithstanding, a considerable degree of common ground. It is now necessary to consider each of the eight items advanced by the claimants at trial.

Adjustment 1: FIFO stock valuation methodology (£79,137)

116. THG's case is that Cend's Management Accounts applied a stock valuation methodology termed "first in, first out" or "FIFO" whereas its statutory Accounts for the year ended 30 September 2010 applied a methodology termed "average cost". THG says that applying FIFO to the Management Accounts but not to the Accounts had the effect of increasing Cend's net assets as at 30 March 2011 and increasing EBITDA for the Management Accounts Period. As a result, Cend's assets and liabilities as at 30 March 2011 and profit and losses for the Management Accounts period were not fairly presented or presented on the same basis as in the 2010 statutory accounts. THG's case is that adjustment 1 corrects the Management Accounts accordingly. The amount of the claimed adjustment at the outset of the trial was £94,964, which was reduced in Mr Whitaker's second supplemental report to £79,137.
117. It is common ground that adjustment 1 raises issues as to (1) the stock valuation methodology applied to the statutory 2010 Accounts, (2) the stock valuation methodology applied to the Management Accounts, and (3) the effect of a shift to FIFO methodology during the Management Accounts period, if there was one. The defendants say that the key issue is the second one, namely, whether stock was valued on a FIFO basis in Cend's management accounts, as warranted by the defendants. Subject to the effect of a partial reversal in April, now taken account of by Mr Whitaker in his numbers, it is common ground that this adjustment would affect maintainable EBITDA.
118. As to (1), THG's case is that a weighted average cost methodology (WAC) was applied to Cend's Accounts and applied at the start of the Management Accounts period. The defendants' case is that a latest purchase order cost (LPOC) methodology was applied to Cend's historical management accounts, and continued to be applied to the management accounts which the defendants warranted in the SPA.
119. I reject the defendants' case in this respect. Although supported by Mr Parry, it was contradicted by Mr Cookson's oral evidence, and this was consistent with the disclosure letter of 31 May 2011 (at the same time as the closing of the SPA).
120. As to (2), there is no question that Cend switched to FIFO at some point in 2011. An email of Ms Wade of 19 October 2011 refers to, "… reclassification of the accounting policy on our overall stock from weighted average to FIFO which impacted on the p&l to the tune of £94K". There is an issue as to what was meant by the last part of this phrase, but no issue that (as the defendants say in their closings) in an environment of rising prices, if stock was valued on an average cost basis in the period prior to the management accounts (as THG contends), a change in valuation methodology to FIFO will increase (or as THG says inflate) Cend's EBITDA.
121. This was essentially a factual issue rather than an expert one—was the change to FIFO made during the management accounts period, or after it? Specifically, was the £94,000 stock variance shown as at 28 February 2011 a change to FIFO (as THG says), or was the post-management account 1 April 2011 "drip release process" the change to FIFO (as the defendants say)? As the defendants put it, it is one or the other, because you cannot change to FIFO twice.
122. The "drip release process" is a reference to the reversal out of the £94,000, and Mr Whitaker's revised figure takes account of £15,827 reversed out in April 2011. The idea originally was to reverse it out in six instalments, but in the event the balance was reversed out in May.
123. Among the points the defendants make is that (i) the disclosure letter deals specifically with the change to FIFO and dates it as from 1 April 2011, (ii) THG's pleaded case changed, though this was foreshadowed in its expert evidence, (iii) THG could have made it easier for Mr Hunter to give evidence rather than remind him of his confidentiality agreement, (iv) the auditors seem to have been unclear at the time as to the position, (v) there are no contemporaneous documents supporting Mr Whitaker's analysis, and such documents as exist support the defendants' analysis (vi) the February 2011 "all variances" calculation is consistent with a regular monthly procedure, (viii) the spreadsheet in which the variance of £94,964 is calculated makes no mention of FIFO, but rather refers to "LIFO Cost p/u", a point emphasised by the defendants, and (viii) emails from Ms Wade, of which the defendants say that the email of 27 April 2011 is more consistent with a later application of FIFO.
124. On this basis, the defendants submit that the most likely conclusion is that the change to FIFO valuation methodology took place on 1 April 2011, not 28 February 2011.
125. Among the points THG makes is that (i) looking at the journal entries, the effect of transactions as at 28 February 2011 was to increase the value of the stock in the balance sheet by £94k and reduce the cost of sales expense in the P&L account by £94k, the ultimate effect being to increase EBITDA by £94k (Mr Parry confirmed this), (ii) a screenshot from Cend's accounting system shows the £94k stock uplift sitting in Cend's balance sheet together with the narrative "Difference on valuation method as at 31.03.2011", (iii) Ms Wade's email of 4 August 2011 which refers to a journal entry moving increased stock value from stock to accruals as of 31 March 2011, and (iv) the narrative "Difference on valuation method as at 31.03.2011" is used of the £79k balance left after the first "drip release" of £15k confirming that the accounting entries relate to the change in valuation methodology within the Management Accounts period, the remainder of the £79k being released into Cend's P&L account as at 31 May 2011.
126. In my view, there is no one piece of evidence which settles this point. However, whereas I consider the points raised by the defendants are equivocal, those raised by THG have more substance in terms of establishing what happened when. Also, so far as it was a matter of expert evidence, on the whole I preferred that of Mr Whitaker on this issue. He was of the opinion that what he called the 'dangling debit' of £94k sitting in Cend's balance sheet as at 31 March 2011 was incompatible with any suggestion of FIFO being applied after March. I accept his view that the April and May 2011 £94k increase in cost of sales (and reduction in EBITDA) has its origins in the decreased cost of sales (and "enhanced" EBITDA) in February 2011. I was not persuaded by the defendants' submission that the February 2011 "all variances" calculation is consistent with a regular monthly procedure. Although the defendants describe it as a routine stock variance calculation, that has to be seen against the fact that they accept that Cend switched to FIFO at some point in 2011. The question is when. As to the spreadsheet reference to "LIFO Cost p/u", as THG says, no-one is suggesting a change from average cost to LIFO, and as Mr Whitaker said in evidence, this may be a mistake for FIFO.
127. On balance, I accept THG's submission and find that there was a switch to FIFO from WAC during the Management Accounts period, and I give particular weight in reaching that conclusion to the accounting extracts produced by THG in Appendix 1 to their closing submissions including the narrative "Difference on valuation method as at 31.03.2011" which is inconsistent with the defendants' case, and to the subsequent emails of Ms Wade (Cend's management accountant), particularly that of 4 August 2011.
128. As to (3), THG says (I believe correctly) that it is now common ground that the effect of a shift to FIFO methodology during the Management Accounts period leads to an uplift in EBITDA. This is because if opening and closing stock levels are not valued on a consistent basis, and if closing stock levels are valued according to a methodology that values stock at a higher value, then the cost of sales expense will be lower, and EBITDA higher.
129. I find that THG has proved its case on adjustment 1.

Adjustment 2: External stock write-off (£33,552)

130. THG's case is that Cend included an insufficient write-off in the Management Accounts for stock that had been returned to it from external suppliers. The background is that Cend sent some of its stock of raw materials to external suppliers for processing into finished goods. The stock remained in Cend's balance sheet, recorded as being held in external warehouses. When the processed goods were returned, the cost charged by the processor and the value of the raw material was recorded by Cend's accounting system (Maginus) as the value of the processed goods. This meant that the value of raw materials would be double counted in Cend's balance sheet, and this required a manual write-off.
131. THG's case is that prior to the SPA this was not working as it should have done. Cend did not consistently and properly manually write-off stock when it was returned from external suppliers as part of processed goods. As a result, the value of stock in Cend's Balance Sheet was overstated: its cost of sale was understated by the same amount (since cost of sale is in part made up of the opening stock less the closing stock, so the higher the closing stock, the lower the cost of sale), and the EBITDA thereby increased (THG says inflated) by that amount.
132. Factually, THG's case is that a £60,000 write off for external stock as at 31 March 2011 related to a review of only £80k (the precise numbers do not matter) of stock out of £124k of stock held by only eight out of the larger number of external suppliers. The £60,000 was made up of £18k and £42k, but the £18k was not a general provision for un-reviewed external supplier stock but related to specific, reviewed external suppliers. There was therefore no provision in the £60k relating to the un-reviewed external suppliers. The best estimate of the percentage of un-reviewed stock for which provision ought to have been made as likely to be needed to be written off is 75% of £44k, the same percentage as was in fact written off of the external supplier stock that was reviewed (i.e. the £80k). By way of extrapolation, this produces the £33k number.
133. The defendants rely on the shifting nature of the claim as showing that it cannot be proved. They point out that the central document relied on by THG is a spreadsheet created by an unknown individual on 16 March 2012 which must involve a reconstruction of what happened a year earlier. In her oral evidence, Ms Wade said that she would not have made a provision (i.e. £60,000) that she did not consider prudent at the time. The issue, the defendants submit, is whether secondary evidence of a tendentious pre-litigation exercise is sufficiently reliable to found a claim given all the surrounding uncertainties, and they submit that it is not.
134. THG has provided a detailed exegesis of the material it relied on in Appendix 1 to its closing submissions. It is not in dispute that not all suppliers' stock was reviewed in March 2011, and the question is whether Cend should have made some further provision. THG has demonstrated by reference to particular suppliers that there was stock which was not included in the £60,000. I agree with THG that the fact that the reviewed stock was not chosen as a representative sample is nothing to the point. I am satisfied that further provision is required.
135. Although Ms Wade was asked about the provision made (understandably) she could not remember the details of the exercise. An email she was sent by PwC on 9 March 2012, however, refers to "further discussions" with her. The commentary on the attached spreadsheet which was prepared in connection with THG's breach of warranty claim says:

"Louise Wade has undertaken a comparison of stock held at third parties to external confirmations, reviewing £80k out of a total of £124k held at third parties at 31 March 2011. Based on this review an accrual of £60k was included within the 31 March 2011 accounts (debit COS and credit accruals).

As the review covered only 65% of stock held at third parties and this resulted in a 75% write off of the stock reviewed, it is likely there are errors in the remaining 35% of stock. On a pro rata basis a further provision of £33,552.12 would be required."

136. Whilst I agree with the defendants that this narrative does not carry the same weight as a document which is contemporaneous, essentially, this has remained THG's case, and it supports it. On balance I find it proved. As I understand it, it is not in dispute that this adjustment affects maintainable EBITDA, and I am satisfied that it does affect it.

Adjustment 3: Stock write-off (£61,773)

137. Following the SPA, in the first week of July 2011 a total stock write-off adjustment of £123,466 was made to Cend's accounts. THG says that this adjustment reflected the variance between Cend's stock records and the stock physically held by Cend as at 30 June 2011. THG's case is that the June 2011 stock-take was the first full stock-take to take place in 2011 (the last having been in December 2010). Therefore, THG says that the June 2011 write-off of £123,466 must be evenly apportioned over January 2011 to June 2011 producing the claimed figure of £61,773.
138. The main factual issue is whether a physical stock take was undertaken as at 31 March 2011. THG says it was not, the defendants say it was. THG says that it is likely that if a physical stock take had been done then, stock would have been written off as missing or obsolete. Some provision should therefore have been made for missing and obsolete stock, and its case is supported by Mr Whitaker. Mr Parry considered it largely a matter of fact.
139. The defendants point to the changes in THG's case in this respect. They say that the figure of £123,466 represents the balancing item between vastly larger sums whose makeup Mr Whitaker has not investigated. The figure could be ascribed to items other than missing and obsolete stock. It relies on a statement from KPMG during the due diligence process that a full stock count was conducted at March 2011 month end. The defendants point to specific adjustments in its stock valuation upwards as well as downwards. Further, Mr Cookson's evidence was that there was very little obsolete stock in the business. In summary, the defendant's submit that the claim lacks any sound evidential basis.
140. On balance, I find that there was no stock take at the end of March 2011. There is no supporting material of such a stock take as one might expect, and Mr Cookson's evidence of his recollection in that regard was not convincing. Although, as the defendants say, an email from Mr Hunter of 10 May 2011 has to be read in the context of the question he was asked, it does suggest on its face that no "stock count" happened in March 2011. I consider that limited value can be placed on what was said by KPMG.
141. On balance, I accept Mr Whitaker's figure of £123,466, and his evidence in support of a write off in that sum following the stock take in June 2011 after the acquisition. Although the defendants suggested otherwise, Mr Parry accepted that it was improbable that a stock take at the end of March 2011 would not have revealed the need for any write offs relating to missing or obsolete stock or any other reason. I accept that this should be apportioned over January 2011 to June 2011 producing the claimed figure of £61,773 (I am not sure that this was in dispute by the end of the trial).
142. I do not understand the defendants to pursue the point that the absence of a stock provision in the management accounts would be consistent with the approach taken in the accounts, and would not accept it. I do not understand the defendants to pursue the materiality point they raised, and would not accept it either.
143. As I understand it, it is common ground that, if proved, this adjustment affects maintainable EBITDA and I am satisfied that it does affect it. On balance, I consider that it has been proved by THG.

Adjustment 3A: Stock annualisation (£271,066)

144. The "annualisation" issue goes to quantum, and now only arises as regards adjustment 1 (it being accepted by the defendants that annualisation is required if I find for THG in respect of adjustments 2 and 3, which I have).
145. Accepting on this premise that adjustment 1 should be made, the defendants' contention is as follows. It is common ground that one-sixth of the £94,964 (see above as this figure) was taken against Cend's accruals liabilities as at 30 April 2011, diminishing Cend's EBITDA that month by the amount of £15,827. The intention behind that movement was that the entirety of the £94,964 should be backed out in six equal monthly instalments over the period April to September 2011. This is the process I refer to above described by Ms Wade as "drip release".
146. The defendants contend that in forecasting the performance of Cend over the period May to September 2011, it would have been appropriate to factor those known future accruals liabilities into the monthly P&L. On 17 May 2011, Altium (which as I have explained were advising the defendants on the sale) provided THG with a "revised outturn" (the reforecast) for the year to September 2011. Although the figures behind the reforecast are unknown, there is no reason to think, the defendants submit, that the known accruals liabilities for the months covered by the forecast were omitted from it, and it is most likely that this occurred. Accordingly, if adjustment 1 is justified, there is no basis for annualising its effect, given that the unwind would have been built into forecasts that were provided to THG, and use of those forecasts would counteract any impact of the adjustment, as it would have been netted out completely by end September 2011.
147. THG's response is that there is no evidence that the point was taken into account as regards the forecasts for May to September. The natural inference is the other way. Mr Parry acknowledged that he did not know whether Altium had in fact taken into account the £94k drip-feed, and that he had seen no evidence that the forecast had been adjusted to take into account the intended drip-release. Similarly, Mr Whitaker's view was that there was nothing to suggest that Altium had taken the further £79k (to be released over the remainder of 2011) into account in its reforecast.
148. On balance, I accept THG's submission that Cend and Altium would be seeking to present the figures in a good light in the run-up to the sale, and it is unlikely that Altium would have reflected the intended drip-release in the May forecast, and do not think that there is the basis for a finding to the contrary. Accordingly, I accept THG's case that adjustments 1-3 are to be annualised in what is now an agreed calculation.

Adjustments 5, 5A and 6: MyP points

149. This has to do with customer loyalty points called MyP points. For every pound spent on products sold on Cend's website, customers were rewarded with a loyalty point with a value of £0.01, which could be redeemed against future purchases. It is common ground that the appropriate way to provide for loyalty schemes in accordance with UK GAAP is on an accruals basis (i.e. record as a cost against the sale when earned by the customer) and that a provision for a period should be based on the number of points earned during a period and expected to be redeemed in future periods, less the number of points redeemed during that period.
150. It is common ground that MyP Points had not been properly accounted for prior to the SPA. The points were accounted for when redeemed (by way a deduction from Cend's sales), and not when they were issued in accordance with UK GAAP. Had Cend been properly accounting for its loyalty scheme, Cend would have made a provision, reducing sales, reflecting the proportion of points issued it expected would ultimately be redeemed.
151. THG's claims are small:

(1) adjustment 5 = £114,974, a one off adjustment for the period to April 2010;

(2) adjustment 5A = £19,995, for the Management Accounts Period 30 September 2010 to 30 March 2011;

(3) adjustment 6 = £1,238, for the period April to September 2011, which goes to quantum.

152. As to (1), the defendants say (i) that the spreadsheet from which the adjustments derive is obscure, (ii) it has a flaw in that the starting figures for April 2010 cannot have taken into account points that had previously been redeemed so that the starting figure of £229,948 (halved to get the £114k number based on a 50% redemption rate) is an inappropriate starting point, and (iii) though PwC as auditors accepted the calculations, KPMG as Cend's auditors had approved its accounts without requiring a provision in respect of MyP Points, presumably because the net difference between treating them on a cash and accruals basis was insignificant.
153. Another point taken by the defendants in written submissions on the spreadsheet was abandoned in oral submissions. I did not understand a VAT point to be pursued in closing submissions.
154. However, although the spreadsheet is not entirely clear, I accept THG's submission that the £229k as at end April 2010 related to unredeemed points, and while there is force in the defendants' approach in that points may never be used at all, it appears in practice that the points were easy to use, with no expiry date, and I do not think that exception can be taken to an assumed 50% (or 58%) redemption rate for accounting purposes. On balance, I consider that THG has made its case good in relation to (1).
155. It is common ground that (2) and (3) go together, and in oral closing, it was in effect accepted as regards materiality that the mere fact that the numbers are small, does not affect the legitimacy of the claim when taken with other numbers. I do not think that exception can be taken to the redemption assumptions applied. It is a fair point that KPMG as Cend's auditors had approved its accounts, but that has to be seen against the fact (as explained above) that it is common ground that the correct basis of accounting was not applied. I consider that THG has made good its case in this respect as well.

Adjustment 4: Overseas VAT (£214,000)

156. The issue is whether the management accounts should have contained a one-off adjustment of £214,000 in respect of VAT, fines and penalties which might be imposed by EU states on the basis of on-line sales into those states. The question is as to whether the provision of £75,000 that was made was enough. The VAT regulations in EU states differ, and elaborate further calculations in support of the claim were produced by Mr Whitaker in his second supplemental report.
157. As claimed, it is a one-off adjustment to cover the actual VAT liability as at 30 September 2010 plus anticipated fines and penalties. As the defendants' counsel put it in oral closings, the short point is that on 2 March 2011 KPMG, in their vendor due diligence report, specifically assessed the scale of the known problem with EU VAT and put a number on it:

"What is being said is essentially, "Well, Cend should have known better, they should have got a more accurate number at about the same time to the same question than their auditors did who specifically addressed the problem". … doubtless with all the resources in the world and 20/20 hindsight, further digging could have been done. The management accounts only had to present a fair view and by not seeking to go beyond the vendor due diligence … that is what they did."

I agree with this submission, and regard THG's case as to the kind of calculations required to produce the sum claimed with the many variables involved as unrealistic.

VAT credit

158. THG accepts a point raised by the defendants in opening that the adjustments to EBITDA in its favour need to be off-set by £74,000 the other way on account of an over-provision relating to unpaid VAT penalties for the period of the Management Accounts (as distinct from adjustment 4 which relates to the pre-Management Accounts period). This must therefore be taken off the total amount of the adjustments.

Quantum of THG's damages

159. It is common ground that any loss suffered by THG is to be quantified as the difference between (a) the "warranty true" valuation of Cend (i.e. assuming no breach of warranty); and (b) the "warranty false" valuation of Cend (i.e. assuming that the management accounts warranty was false, to the extent that the adjustments are necessary). I have made my findings as to adjustments above.
160. By the end of the trial, a considerable degree of common ground had been achieved as regards the calculation of quantum in the event I found for THG on its claim (which I have to the extent set out above). On quantum, the following is agreed:

i) Cend's "warranty true" Enterprise Value was £58m;

ii) the appropriate valuation methodology on the "warranty false" basis is based on a multiple of EBITDA;

iii) a "starting" EBITDA (i.e. prior to any adjustments for breach of warranty) of £5.442m;

iv) subject to a "reduced multiple" contention advanced by THG, a multiple of 10.7x applies to value Cend;

v) subject to liability, whether and to what extent THG's proposed adjustments would reduce EBITDA;

vi) subject to liability, the amount of one-off adjustments in respect of VAT and MyP Points (it being accepted that the one-off adjustments would affect the price paid).

161. My conclusions as to liability on v) and vi) are set out above. In the light of those conclusions, arriving at the "warranty false" valuation of Cend is, as the parties say, an arithmetical exercise. I set it out below in the form of a table below based on the template provided.
162. As already noted, the multiple (or more accurately multiplier) is important on quantum because it invests relatively small adjustments with value. THG's "reduced multiple" point is the sole point of principle on Cend's valuation on which the court is asked to rule.
163. As already noted, in its third notice of claim dated 4 April 2012, THG said that in order to quantify loss, it might be appropriate to apply the transaction multiple used by THG on acquisition, 10.7 x EBITDA for the period ended 30 September 2011. That multiple is now agreed by the defendants for the purposes of quantum.
164. In his first report served on 16 May 2014, Mr Whitaker argued for a reduction of about 18% in the then multiple, producing a multiple of 8%. This was on the basis that the "existence of errors [in the form of the adjustments] would call into question the accounts as a whole and the concern that further issues would arise would lower the value of the business to the acquirer". It makes a big difference in the numbers—to the loss of £5.6m based on his then "base" multiple, he added a further loss of £5.3m based on the "reduced" multiple, making a total loss of £13.9m.
165. Mr Whitaker adhered to his position in his supplemental report dated 20 June 2014. Adjusted downwards slightly to reflect the fact that one of the claimed adjustments was not pursued, his calculation was THG's position at the opening of the trial.
166. In their opening submissions at trial, the defendants pointed out that this is not a legally coherent position. As they said, the true value of Cend, with fairly stated management accounts, would not have been discounted by a purchaser to reflect a (false) hypothesis that those fairly stated accounts might be unreliable. If anything, because the accounts would (ex hypothesi) have been entirely accurate, they would have withstood all due diligence probing and would have enhanced a purchaser's confidence.
167. During the course of the factual evidence, THG served without leave a second supplemental statement from Mr Whitaker. This corrected various figures relating to the adjustments, and applying Mr Parry's approach recalculated THG's damages claim. It also restated Mr Whitaker's evidence relating to the valuation of the shares in THG (part of the consideration received for the sale of Cend) based on Mr Parry's approach (this latter point is dealt with below). Whilst complaining about the disruptive effect of the timing of this evidence, the defendants did not object to it going in.
168. However, Mr Whitaker also in effect abandoned his previous evidence as to the reduced multiple. He expressed the opinion that a reduction of 7.5% was reasonable, which on the basis of a multiple of 10.7 produced a multiple of 9.8975. The revised damages claim was £8.562m of which about £4m is attributable to the reduced multiple.
169. On the warranty true basis, this opinion was said to be "justified by an assumption of a stable gross margin with a sustained high growth in revenues, the combination of which is necessary to give to a high growth in projected EBITDA" and by reference to comparisons with long term growth forecasts that had been give by Altium in 2011. However, as the defendants say, correctly in my view, this was little more than assertion, and the reference to "stable gross margin" was unexplained.
170. The defendants objected to this part of Mr Whitaker's second supplemental report being tendered, partly because it had not had a chance to put the points to the factual witnesses, particularly Mr Moulding, who had generally agreed in cross-examination about Cend's positive long term growth prospects. I allowed THG's application to adduce it, subject to the defendants' right to raise issues as to its credibility.
171. THG submits that Mr Parry accepted the basic principle of a reduction in multiple, depending on the size of the adjustments. It says that the factors relied upon by THG are powerful ones, and Mr Parry had no real answer to them other than to say that he was not persuaded that a seller would tolerate the discount or that a buyer would walk away. THG says that forecast EBITDA had fallen from £6.4m to £5.4m in the warranty true scenario and on a warranty false basis the drop would have been down to £5m. It is clear from Mr Parry's tentativeness, THG says, that on any view the drop was on the borderline of requiring a multiple reduction. THG's submission is that it had gone further: the "elastic had snapped" such that a reasonable hypothetical purchaser and a reasonable hypothetical seller would have had to revisit the multiple as well as the EBITDA. Only by the reduced multiple could the further deterioration in Cend's growth rate and shortfall against its forecast growth be fairly reflected.
172. These points are challenged by the defendants, who say that the change in Mr Whitaker's evidence has no credibility, and invite me to prefer the evidence of Mr Parry who said that his "personal view is that, actually, in the context of the business and the growth opportunities that are there, the price wouldn't have changed by the multiple reduction, just the EBITDA reduction".
173. My conclusion on this point is as follows:

(1) I do not consider that Mr Whitaker's justification of a discount to the multiple based on Cend's growth prospects has real force in the light of the factual evidence as to those prospects. I find that a reasonable hypothetical purchaser and a reasonable hypothetical seller would not have had to revisit the multiple as well as the EBITDA reduction.

(2) Further, the credibility of Mr Whitaker's evidence on this point was undermined by his change of case during the trial, which I infer happened because it was realised that his original position was untenable.

(3) I preferred the view of Mr Parry on this point who was consistently of the opinion that the multiple should not be discounted.

(4) Standing back from the calculations, my view is that the application of a discount to the multiple produces an unrealistic valuation of THG's loss. I am satisfied that a figure of £8.567m (the final calculation done by THG) is far more than is justified by these adjustments.

(5) By contrast, the application of the agreed multiplier of 10.7 reaches a number which is solidly based on an agreed methodology.

(6) No submissions were made as to the amount of any intermediate multiplier, and in any case I am satisfied that 10.7 is the correct multiplier.

(7) Accordingly, I reject THG's case in this respect.

174. On this basis, it is not in dispute that the quantum of THG's loss is £4,317,089. Using the agreed template, this is calculated as follows:


 




(2)The Trustee's counterclaims

Introduction

175. THG's acquisition of Cend was funded, in part by the payment of £30m cash of which £9.9m went to Mr Cookson and £21.1m went to the Trustee, and in part by the issue of a substantial number of shares in THG to the Trustee equivalent to a minority interest of about 12% in the combined company, and described as an "equity rollover". In support, THG was required to give warranties in relation to its own financial information (Schedule 8). THG warranted that:

(1) THG's consolidated profit and loss account for the period ended 31 December 2010, as stated in its Draft December 2010 Accounts (the accounts were still in draft at the time of the SPA on 21 May 2011) and including an EBITDA figure of £4,072,000, gave a true and fair view of THG's profit or losses for that period: Schedule 8, para 1.1(c);

(2) THG's EBITDA of £861,613, as stated in the THG Management Accounts for the period 31 December 2011 to 31 March 2012, fairly presented the profits and losses of THG for that period: Schedule 8, para 1.2.

176. It is not in dispute that THG was in breach of warranty in both respects. As against the warranted EBITDA figure of £4.1m in its draft 2010 accounts, following the adjustments made after the discovery of the fraud, the EBITDA was stated as a minus number, being £1.5m. As regards the management accounts, the warranted EBITDA figure of £861,613 for the first three months of 2012 became a loss over the six month period to 30 June 2012 of £2.2m. An individual calculation for the first three months is not available, but I reject THG's suggestion that the first half loss of £2.2m could be attributable solely to the second quarter.
177. Nor is it in dispute that the breach of warranty results from the fraud described above. The methodology for the quantum calculation is agreed. However, THG says it was due to the fraud of Mr McCarthy for which THG is not responsible, and so damages are capped.
178. The Trustee's deceit claim is in the alternative to its breach of warranty claim, and as limited in closing applies to two allegedly deceitful representations. The cap would not apply to this claim if established.

The Trustee's breach of warranty claim

The law as to quantifying damages for breach of warranty in the sale of shares

179. In the case of the valuation of Cend, the methodology to be used was agreed, as explained above. In the case of the valuation of the shares in THG that the Trustee acquired, the methodology was also agreed by the end of the trial, subject to variables dealt with below.
180. As to the principles to be applied, it is common ground that:

(1) The measure of loss for breach of warranty in a share sale agreement is the difference between the value of the shares as warranted and the true value of the shares, or as put shortly, "warranty true" vs. "warranty false", assessed as at the date of the share sale agreement since that is the date when the breach of warranty occurs.

(2) This involves a valuation, and as with any valuation the process involves establishing (as the defendants' expert put it), "The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in arm's length transaction, after proper marketing where the parties had each acted knowledgeably, prudently, and without compulsion".

(3) However, there is no one methodology to be applied in a valuation (Sycamore Bidco Ltd v Breslin [2012] EWHC 3443 (Ch) at [405], Mann J).

(4) As with any valuation it is necessary, as both experts agreed, to appraise the number in question in the light of the circumstances. As THG's expert aptly put it, "… you always have to stand back and say, does the answer give you a sensible result and not get too worked up in the model itself".

181. This case is an example of two different methodologies within the same case. Both claim and counterclaim involved shares in private companies, but in the case of the claim, the shares comprised the whole issued capital, whereas in the case of the counterclaim, the shares comprised a minority interest. It was common ground at the end of the trial that whereas the quantum of the claim was to be calculated by reference to the effect of the adjustments on the company's EBITDA, the quantum of the counterclaim was to be calculated by applying a discounted cash flow method.
182. THG has a contention founded on the well-known decision of the House of Lords in The Golden Victory [2007] 2 AC 353, which held by a majority that the principle that damages should be assessed at the date of breach is not inflexible, and that the desirability of achieving certainty in commercial contracts is subject to the "overriding compensatory principle" that the damages awarded should represent no more than the value of the contractual benefits of which the claimant has been deprived.
183. Counsel for the defendants set out a series of propositions of principle with which counsel for THG agreed summarising the effect of The Golden Victory in cases like the present. I also agree with them. They are as follows.
184. In the case of the quantification of damages for breach of warranty in an agreement for the sale of shares (1) The proper measure of damages is a comparison between the value of shares as warranted and their actual value, that is, "warranty true" vs. "warranty false". (2) The normal rule is to make that comparison as at the date of the breach, which is the date of the contract, taking account only of events up to that date. (3) Where value depends on the outcome of a future contingency, the known outcome of that contingency may sometimes be taken into account. (4) However that will only be done where "necessary to give effect to the overriding compensatory principle". (5) The prima facie rule from which departure must be justified is that damages are to be assessed at the date of breach without hindsight. (6) Hindsight cannot be used to confound the allocation of risk under the bargain. It is inappropriate for the court to deprive a buyer of the benefit of a contingency from which, under the contract, he is intended or entitled to benefit. (7) In a share purchase agreement involving a once and for all exchange of consideration, the party which receives the business or a shareholding in the business assumes the risks, or the rewards, of its subsequent performance or failure to perform. For these principles see Ageas (UK) Limited v Kwik-Fit (GB) Limited [2014] EWHC 2178 (QB) where Popplewell J reviews the authorities, and as to the general exclusion of hindsight see Joiner v George [2002] EWCA Civ 160 at [74], Sir Christopher Slade.
185. For the avoidance of doubt, it is not suggested that the mere fact that shares sold in breach of warranty later recover their value because the business in fact does well has any effect on quantum assessed as at the date of breach. Any such argument would be insupportable, not least because the buyer is entitled to the benefit of the upside, having taken the risk of the downside.
186. I set out my conclusion as to THG's claim in this regard below.

The elements of the valuation

187. In his first report, Mr Whitaker valued the THG shares on a "trade sale" basis, quantifying the loss at £2.560m. The defendants criticise him for changing to Mr Parry's discounted cash flow methodology at trial. I need to deal with specific criticism as regards his evidence on the discount rate, but he cannot be criticised for adopting Mr Parry's approach, and the adoption of a common methodology was instrumental in enabling the valuation exercise to be carried out despite the many potential variables.
188. As regards the discounted cash flow method, since dividends were unlikely to materialise, it was agreed that the calculation should be done by reference to an IPO of the company. The factual background is (as explained above) that in the lead-up to the deal, Mr Cookson was told by THG that an IPO was intended for October 2011 which would result in a higher "look-through" value for the shares that the Trustee was acquiring and "a second liquidity event"—in other words, the opportunity to realise more cash shortly. In practice, the methodology assumes this to be a partial exit with a second exit of the rest of the shares later. This gives a value for the shares as at 31 May 2011.
189. The exercise the experts have done is to limit the number of different combinations of variables by agreeing a range of intermediate scenarios, and jointly quantifying the outcome. The methodology is shown in the following table (the underlying calculations are not included).

Summary Alternative Valuations of THG Consideration Shares

Assuming shareholding of: 12.32%



The valuation: discussion

190. The parties are in agreement as to the appropriate level of dilution to apply, and agree that the shares the Trustee acquired in THG represented 12.32% of THG's issued share capital.

(i) Market capitalisation

191. A starting point for the IPO market capitalisation of £275m for the combined company is agreed. Mr Parry's view assumes a static market capitalisation in this sum on the basis that whilst profits might increase over time that would not increase the valuation insofar as the profit increases were in line with expectations. Mr Whitaker's view is that if the IPO is later than envisaged, the proceeds will be larger. On balance, I prefer Mr Whitaker's view in this respect.

(ii) The probability of an IPO

192. The next variable is the probability of an IPO. This is a hypothetical, since though intended at the time of the SPA in 2011, no THG IPO has yet happened, nor is an IPO currently planned.
193. The experts disagreed as to how, looked at from the perspective of a purchaser of THG shares on 31 May 2011, the probable timing of any IPO would have been viewed.
194. Mr Parry's view is that the prospect would have been assessed at a 90% chance of the IPO occurring during 2011. He thought that a 60% chance was "too low". In support, the defendants say that by the date of the SPA, (1) THG had raised money from institutional investors in anticipation of an IPO, (2) since April 2011 there had existed detailed IPO timetabling, (3) THG had retained all the necessary advisers from whom it had received expressions of confidence, (4) THG itself was presenting optimistic growth forecasts, (5) THG's own stance in seeking the SPA with Mr Cookson was that it intended to list in October, and based on what Mr Cookson was told by THG, he expected the IPO to happen in November 2011.
195. Thus, the defendants submit, there was a specific and longstanding intention by THG's management to float in 2011 and the company had expressly set itself on that course. In all those circumstances, they submit that there did indeed appear to be a far higher likelihood that matters would proceed, as planned, to an IPO in 2011 than at some later date and that Mr Parry's primary position (90% in 2011), alternatively secondary position (75% in 2011) should be accepted.
196. Mr Whitaker's view is that a probability of anything more than 33% was unrealistic having particular regard to (1) his own direct professional experience of IPOs going back to 1976, and (2) the very small window available to THG, given the impossibility of a December float given THG's seasonal trade, the fact that by Spring 2012 THG's June 2011 figures would be out of date and the need to upgrade their financial systems as pointed out by PwC in May. Mr Whitaker emphasised his experience of IPOs becoming derailed, the fact that there was a two month window during 2011 for the launch because of the Christmas period, and came to the view that an IPO would have been regarded as only 33% likely.
197. My conclusion on this point is as follows. I accept Mr Whitaker's point that the timing of any IPO is subject to uncertainties, and that there was a narrow window at the end of 2011, and I consider that Mr Parry's 90% probability is unduly high.
198. On the other hand, the court has to consider the position as regards this particular company. Having seen the top management testify, I consider that they are focused and able people who have real expertise in their field. As at the time of the SPA, it was believed that the company was on an increasing trajectory of profitability, which was what the numbers that were believed to be true showed. Professional advisers were in place, including PwC, and although the latter had pointed to improvements that needed to be made to THG's systems to comply with the stock market reporting requirements, I am satisfied that it was believed that this could be achieved. The bankers had produced detailed timetables which showed the position step by step. In his email of 8 April 2011 to Mr Cookson (and Altium), Mr Whitehead referred to "our intended October 2011 IPO", saying "we feel passionately that the combined group could be listed at a value of £350m to £400m in October 2011". This was expressing nothing like a 33% possibility. Although THG submits that "Mr Whitehead's enthusiasm cannot possibly be a good basis for reaching any view as to the realistic probabilities", this was his field, and he was in a position to know.
199. On balance, I find that the Trustee has proved its secondary case based on a 75% probability of an IPO in 2011. This is on a warranty true basis.
200. The fraud resulted in the falsification of the warranties, and I have held that the reason that the IPO went off was the fraud and the discovery of the losses concealed by the fraud. On a warranty false basis, the experts have agreed a 33.33% probability of an IPO in each of 2014, 2015 and 2016 (though of course it is now known that there will be no IPO in 2014). Therefore this ceases to be a variable on the warranty false basis.

(iii) The discount rate

201. Calculating the Net Present Value (NPV) as at 31 May 2011 of the future cashflows from the IPO requires the application of a discount rate. It is the discount rate that makes the biggest difference to the valuation number, and where the parties have the biggest disagreement.
202. Both experts accept that a discount rate of 16% should be applied to the cash flows that might have been expected from owning THG shares in the warranty true situation. In the warranty false valuation, Mr Parry's view is that a discount rate of 18% should be applied, whereas Mr Whitaker's view (subject to what is set out below) is that the rate should be 1.34% (from 2011 to 2014). The lower the rate, the lower the differential between warranty true and warranty false, and vice versa.
203. On the basis of his discount rate of 18%, Mr Parry calculated the warranty false value of the shares as £14m, or on the basis of the IPO value increasing (which I have held to the correct basis) as £17.3m. On the basis of a 75% probability of an IPO in 2011 (which I have held to be the correct basis) the shares were worth £28.1m on a warranty true basis. The difference is £10.8m, and on the basis of Mr Parry's evidence that is the Trustee's loss.
204. The position is more complicated as regards Mr Whitaker's evidence. In his second supplemental report, he adopted Mr Parry's approach, but taking a discount rate of 1.34% from 2011 to 2014 and 18% from 2015 to 2017. He took the 1.34% from the 3 year UK gilt rate.
205. THG has sought to justify the 1.34% rate on the basis that it is not appropriate to add a risk premium to that rate where the assumption (as Mr Parry makes) is that in both scenarios the exit event will happen (hence his assumed 100% probabilities of an exit in both scenarios). THG submits that the loss caused by a deferral of a cash receipt is properly measured by the risk free rate (i.e. the rate it would have earned had it received the cash earlier and held it on a secure deposit).
206. When Mr Parry was cross-examined on this point, he said that to proceed on the basis that an IPO was inevitable was not the correct approach. Far from being a risk free investment pending an inevitable IPO, money invested in THG shares was "hugely at risk".
207. I accept Mr Parry's evidence in preference to that of Mr Whitaker. I am satisfied that it is incorrect to use rates payable on risk free deposits in reaching the discount rate when valuing the THG shareholding, which is a completely different type of investment. The reasoning behind THG's submission is flawed: the fact that the expert calculations proceed on the basis of percentage probabilities of an IPO amounting to 100% does not mean that an IPO can be treated as a certain event like the repayment of money on prime deposit, importing the interest rate that would be payable on the latter as the discount rate. This is an impermissible inference from the methodology used in the valuation, and I accept Mr Parry's evidence in this respect. I am satisfied that his rate fairly reflects the risk involved.
208. Further, the consequence of Mr Whitaker's approach was spelled out in his second supplemental report:

"Based on my revised assumptions in the Warranty True situation, the value of the THG Consideration Shares is £28.4 million whilst in the Warranty False situation the value of the THG Consideration Shares is £28.5 million, a difference of £(0.1)m."

209. It was plainly untenable to suggest that the shares were worth £0.1m more on the basis that the warranties were false than if they were true, which meant that the shares were worth more if THG was making a concealed loss than if it was making a profit. Mr Whitaker effectively conceded this in cross examination, saying, "Yes, I mean that's a good point and I don't actually know the answer to that right this second, in that probably the logic does dictate that that shouldn't give that answer, but -- yes."
210. At the end of his cross-examination, THG's examination in chief was resumed, and Mr Whitaker said that a discount rate of 18% should be applied for the first six months, which materially reduced his warranty false valuations, thereby producing a positive number on the differential. I accept the defendants' submission that this evidence introduced in this way was not credible.
211. Based on it, THG's case in closing calculated the warranty false value of the shares as £27.3m on the basis of the IPO value increasing (which I have held to be the correct basis) as against £29.5m on a warranty true basis. The difference is £2.2m, but for the above reasons I reject that as a correct calculation of the Trustee's loss. I find that the loss was £10.8m.

THG's "The Golden Victory" point

212. The basic point is the extent to which matters following the breach date can be taken into account when quantifying damages. I have set out the principles above.
213. The way that THG put the contention in its opening submissions was that, "… in short summary, THG's position is that by reason of the admitted breaches of warranty the Trustee has either suffered no loss at all or only a modest loss which is significantly less than the cap for non-fraudulent breaches. If at first sight it seems surprising that the misstatement of THG's financial position does not give rise to a larger claim by the Trustee, a moment's further consideration shows why it is not so here. The short point is that the Trustee still stands to benefit from the proceeds of any IPO of THG. According to Mr Cookson (and his expert), the value of the THG shares was always tied up with a possible future flotation. It is common ground that the possibility of such an IPO has been deferred but there is no suggestion, let alone evidence, that the admitted breaches of warranty have had any lasting effect on THG's future prospects."
214. In closing, this submission was somewhat modified, THG saying that it was "… not suggesting that its commercial success since 31 May 2011 diminishes or extinguishes the Trustee's loss. … Rather, THG's case is that since the agreed methodology for calculation of the Trustee's loss is by reference to deferral of an IPO, the Court must consider what reduction on a notional 31 May 2011 purchase price would fairly compensate the Trustee for that period of deferral, knowing (as is now known) that, as of today, the company has not gone under and that any chance of a future IPO has not been lost".
215. THG says that "18% [the discount rate adopted by Mr Parry] corresponds to the rate of return which an investor would want in order to put his money at risk. As is obvious, if the risk of loss does not materialise and the investor receives his cash then the difference between the 18% and the 1.34% risk-free rate [the discount rate adopted by Mr Whitaker] is profit to the investor. It is his reward for accepting risks that did not in fact eventuate. 18% would be to give the Trustee a windfall profit, because "the relevant risks of loss have not materialised: THG remains solvent, indeed successful, and the Trustee continues to hold its shares".
216. By reference to the principles derived from the Ageas case set out above, the defendants' response is that the alleged contingency upon which THG relies is entirely nebulous. It is not like The Golden Victory where the outbreak of war triggered an outbreak of war clause. It is, the defendants submit, distinctly unclear as to what the contingency actually comprises. It is not the eventuation, or not, of an IPO, because there has not been an IPO, and may never be an IPO. Further, there is, the defendants submit, no evidence that THG's results have turned out better than the expectations which were built into the £28m value attributed to the THG shares at the time of the SPA. No windfall has been established, and essentially THG's case is that the Trustee still has its shares and the company is still a going concern. That is a long way from establishing a windfall such as offends the compensatory principle of damages.
217. Despite its formulation, in my view the defendants are right to say that THG's contention in substance is that the Trustee still has the shares, and the company is doing well, and that therefore the Trustee has suffered no loss. However, it is common ground that such a contention cannot affect the quantification of damages. The loss was suffered at the time of breach, and must be assessed at the time of the breach in accordance with the principles set out above. Improvements in the state of the company following the breach and the knock-on effect on the value of the shares do not affect that conclusion.
218. This is not, in my view, a case like The Golden Victory where the parties had cancellation rights in the event of a future contingency, in that case, the outbreak of war, which had happened by the time of quantification of damages. Nor is it a case in which the contract provided for the post-contract adjustment of the price, which is sometimes found in such agreements: see Ageas at [50]. As in that case, upon completion of the SPA the contract was fully executed, and the outcome of all contingencies were risks conferred on the Trustee, which was entitled to the benefits if the business did well.
219. Finally, there has been no IPO to date. For reasons already explained, I do not accept that the whole premise of Mr Parry's calculations is that "you are simply changing the timing of the IPO". In my judgment there has been no windfall to the Trustee, and there is no reason to alter that conclusion on the basis that there may be an IPO in the future. In short, it is not "necessary to give effect to the overriding compensatory principle" which is the fundamental premise of The Golden Victory. I accept the defendants' submissions in this regard.

The fraud cap

The issue

220. In the schedules to the SPA, there were mutual limits on liability for breach of warranty, being £7.24m as regards breaches by the buyer (i.e. THG) and £15m as regards breaches by the seller (i.e. the defendants). It is only the former which is relevant. This limit was imposed by clause 7.12 of the SPA and was subject to an exception as regards "any claim insofar as it results from the fraud of the Buyer". Clause 7.12 provides that:

"The liability of the Buyer pursuant to the Buyer Warranties is subject to the provisions of Part 3 of schedule 8 (Buyer Warranties), save that the provisions of part 3 of schedule 8 (Buyer Warranties) will not apply to any claim insofar as it results from the fraud of the Buyer."

221. The fundamental issue between the parties is that whilst THG accepts that its breach of warranty results from the fraud of Mr McCarthy, it submits that Mr McCarthy's fraud is not to be attributed to THG. The defendants submit that his fraud is to be attributed to THG, and raise other matters which they submit bring THG within the contractual exception.

The accounting fraud

222. As stated above, it is common ground that the position is summarised in a draft report prepared for the company by PwC on 16 December 2011 (the "Project Hydrogen" report) under the heading "Falsification of documentation". The summary is as follows:

"Falsification of documentation

On Friday, 16 September 2011, it came to our attention that there had been a falsification of documentation provided to us, in our capacity as the Group's auditors and Reporting Accountants. In the first instance, this led to the Group Financial Controller [Mr McCarthy] being suspended. In that same week, the remaining members of the finance function produced the management accounts for the month to 31 August 2011. The results that were produced were some £2.3m below the results that were anticipated based on the daily sales information. The explanation for this variance was that the Financial Controller had been manipulating profitability, on a monthly basis, by overstating off -line stock and debtors, and understating liabilities.

Management, led by John Gallemore, performed an initial investigation and determined that there had been a series of documents that had been falsified during the audits of the year ended 31 December 2010 and the period ended 30 June 2011. We had also been misled as to the recoverability of certain assets and the extent of unrecorded liabilities. The three key areas of manipulation were:

Offline stock: At 31 December 2010, an entry had been booked to recognise £1.6m of 'off –line' stock which was either double counted within the system stock balance, or which had been sold prior to 31 December. Senior members of the finance team verbally represented to us that this stock was held at the Warrington warehouse. We are also aware of a number of falsified goods despatched and goods receipts notes to support inappropriate sales and purchases cut-off;

Unrecorded liabilities: We became aware of a number of unrecorded liabilities at 31 December 2010. Upon investigation, it became apparent that members of the finance function (including the wider purchase ledger team) had falsified a number of supplier statements and withheld certain invoices and supplier statements from us. The Financial Controller had also released a significant number of smaller accruals which would be below the audit materiality threshold; and

Recoverability of debtors: At 31 December 2010, a number of debtors … were recognised on the balance sheet. These items were either recognised early or were not recoverable, despite formal representations from senior members of the finance team to the contrary. In particular, we were previously told by management that the [X] debtors could not be reconciled to specific bank receipts and that the typical length of time between credit card payments and receipt of cash by The Hut was 4 — 5 days. John Gallemore's work revealed that the debtor could be reconciled to specific bank receipts and that the typical length of time between credit card payments and receipt of cash by The Hut is only 2 - 3 days. We also believe that we were provided with a number of falsified documents to support the recoverability of these balances.

In addition, an initial email review, as part of the investigation, revealed a number of occasions where it was apparent that we had been misled by the finance team. For example, the Financial Controller had instructed a number of members of staff not to respond to our queries around new category investment costs which were to be treated as exceptional. The previous finance team had formally represented to us that these staff members were involved in the development of new websites or categories and that it was appropriate to treat their salary costs as exceptional."

223. On 18 October 2011, Mr McCarthy, who was Financial Controller, was dismissed for gross misconduct. The reason given for his dismissal was the fraudulent amendment of accountancy statements submitted to auditors. Another employee in the finance team, Mr Sajith Hevamanage was dismissed for gross misconduct for the same reason. Mr Fuad Jishi was given a final written warning, as were two other members of THG's finance team.

The legal principles

224. There is little dispute as to the relevant principles. Persons who fall within the term "the fraud of the Buyer" as used in the "fraud exception" in clause 7.12 of the SPA, and in particular whether Mr McCarthy does so. In this context, the issue is not as to the incurring of liability by THG, but rather the identification of the natural person or persons who are to be regarded as representing the juridical person for the purposes of the clause (Man Nutzfahrzeuge AG v Freightliner Ltd and Ernst & Young [2005] EWHC 2347 (Comm) at [154], Moore-Bick LJ).
225. Both parties made reference to Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500, where at page 507B-F Lord Hoffmann pointed out that the rules by which the acts and omissions of natural persons are attributed to a company depend on the proper interpretation of the policy underlying the substantive rules of law to which they relate. He said:

"The company's primary rules of attribution together with the general principles of agency, vicarious liability and so forth are usually sufficient to enable one to determine its rights and obligations. In exceptional cases, however, they will not provide an answer. This will be the case when a rule of law, either expressly or by implication, excludes attribution on the basis of the general principles of agency or vicarious liability. For example, a rule may be stated in language primarily applicable to a natural person and require some act or state of mind on the part of that person "himself," as opposed to his servants or agents. This is generally true of rules of the criminal law, which ordinarily impose liability only for the actus reus and mens rea of the defendant himself. How is such a rule to be applied to a company?

One possibility is that the court may come to the conclusion that the rule was not intended to apply to companies at all; for example, a law which created an offence for which the only penalty was community service. Another possibility is that the court might interpret the law as meaning that it could apply to a company only on the basis of its primary rules of attribution, i.e. if the act giving rise to liability was specifically authorised by a resolution of the board or an unanimous agreement of the shareholders. But there will be many cases in which neither of these solutions is satisfactory; in which the court considers that the law was intended to apply to companies and that, although it excludes ordinary vicarious liability, insistence on the primary rules of attribution would in practice defeat that intention. In such a case, the court must fashion a special rule of attribution for the particular substantive rule. This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc. of the company? One finds the answer to this question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy."

226. As Lord Hoffmann says at p.511, "It is a question of construction in each case as to whether the particular rule requires that the knowledge that an act has been done, or the state of mind with which it was done, should be attributed to the company". This discussion is framed in terms of the language of a rule, but it is not in dispute that a similar approach applies where the question of attribution arises in the context of a contractual clause such as the present, where a cap on liability is not to apply in the event of the fraud of the company, and the question is as to whether or not the fraud of particular people is to be attributed to the company for this purpose.
227. The defendants rely on the analysis in Morris v Bank of India [2005] 2 BCLC 328 at [126] to [131], a fraudulent trading case, where Mummery LJ said that the large measure of responsibility that the person concerned had within the bank, the policy of section 213 of the Insolvency Act 1986, and "… justice and good sense combine to justify the treatment of Mr. Samant's knowledge as the corporate knowledge of BoI …". He said at [127]:

"It is true that the Judge found that the members of the board of BOI personally had no knowledge of the fraud, but they were content to leave the conduct and completion of the negotiations in the hands of Mr. Samant. The attribution of Mr. Samant's knowledge to BoI does no injustice to the members of the board. The question is whether Mr. Samant's knowledge should as a matter of law be attributed to BoI for the purposes of section 213, not whether the directors of BoI personally knew of the fraud or should have knowledge of the fraud attributed to them so as to make them personally and individually liable for fraudulent trading (which they are not)."

228. THG submits that the approach in Morris is specific to its statutory context and does not apply.

Discussion of the factual issues

229. THG's case is that in relation to the warranties, the question of whose knowledge is attributable to THG for these purposes depends on who can be regarded as representing the company in relation to the conclusion of the SPA in which those warranties are given. It submits that the persons whose fraud would be sufficient for these purposes would be Mr Pochin, Mr Whitehead, Mr Moulding, Mr Rajanah or any member of the board, but not Mr McCarthy.
230. If any element of the approach in Morris v Bank of India "translates" to this case, THG submits, it is that attribution is more likely the greater the role and freedom given in relation to the performance of that role in the context of the particular transaction in issue. Although Mr McCarthy was involved in handing over certain financial information to Mr Rajanah to give to KPMG prior to the completion of the SPA, he had nothing to do with the deal itself, in the sense of having no outward facing role in relation to the SPA. The fact that, internally within THG, he was responsible for some of the warranted numbers is, THG says, nothing to the point.
231. Applying Meridian, THG says that when one asks in the context of a contract whose acts are to be attributed to the company for the purposes of its provisions, one would expect it to be only people involved in the deal to the knowledge of both parties unless the contract very clearly said something else, and that excludes Mr McCarthy.
232. THG says that it cannot have been the parties' intention, looking at it commercially, that the cap would be lost just because just somebody somewhere within the organisation had committed fraud.
233. The defendants submit that Mr McCarthy held a critical role within THG's finance department, that he was heavily involved in the acquisition, that Mr McCarthy's manipulation of figures was known to Mr Rajanah, supported by his department, and the manipulation was a product of the way THG's senior management ran the company. Consequently, this is not a case where an employee has gone off "on a frolic of his own"; it is one where the fraud was the result of the working culture and practices of the company as a whole. The defendants therefore say that it is a paradigm case for attribution.

(i) Mr McCarthy's role within THG

234. It is not in dispute that Mr McCarthy was the financial controller of the business, with a team working under him, and that from January 2010 among other duties he was responsible for the preparation of THG's management accounts at monthly intervals. He also prepared the draft December 2010 accounts which THG also warranted.

(ii) Mr McCarthy's involvement in the MyProtein acquisition

235. An important issue is as to the extent of Mr McCarthy's involvement in the MyProtein acquisition. In my view, THG tended to minimise this in its submissions and evidence, suggesting that "he performed a limited role internally of providing some information to Mr Rajanah to pass on to KPMG, but that was it".
236. A better picture is given in the evidence of Mr Moulding:

"Q. It was your understanding at this time that Mr Rajanah was heavily involved in working on the acquisition?

A. In preparing the data for the acquisition, that is correct ….

Q. It was natural that Mr McCarthy would also be heavily involved?

A. Yes, because he would be generating the financial information for Mr Rajanah to be sharing."

Numerous specific examples are given in the defendants' closing submissions, and the facts are not substantially in dispute.

237. The financial information was of central importance for the deal to get done, since Mr Cookson (or more accurately the Trustee) was acquiring a substantial minority stake in the merged company as part of the consideration for the sale of his business. I am satisfied that Mr McCarthy was well aware of the reason for providing the information, which was done through Mr Rajanah (to whom he was close personally) or Mr Whitehead. The fact that Mr McCarthy was not "outward facing" does not affect this conclusion.

(iii) Mr Rajanah's involvement in the acquisition

238. Mr Rajanah was a board member from 2009 until he returned from gardening leave in 2012, and was THG's Finance Director at the time of THG's acquisition of Cend. Again, in my view, THG tended to minimise the involvement of Mr Rajanah in the acquisition in its submissions and evidence. Though the arrival of Mr McCarthy and Mr Meehan had taken away some of Mr Rajanah's financial responsibilities so that he could concentrate more on the commercial side, the evidence demonstrates his active continuing involvement in financial and accounting issues.
239. There were suggestions that he had a limited role in the deal with Mr Cookson, but this is belied by THG's press release of 1 June 2011 ("The Hut Group adds Muscle with £58m Acquisition of MyProtein.com"), which says that, "The Hut team comprised Steven Whitehead, James Pochin and Darren Rajanah". I am satisfied that he was a full member of THG's deal team and dealt with financial information. As Mr Moulding put it in an email of 25 May 2011, "Darren has spent the last 48 hours living with the KPMG guy who is doing the work and he feels that the report should be supportive" (KPMG were Mr Cookson's accountants on the transaction). Numerous specific examples are given in the defendants' closing submissions, and the facts are not substantially in dispute.

(iv) Mr Rajanah's involvement in the fraud

240. The defendants say that "there is now clear and compelling evidence that Mr Rajanah was aware of, and participated in, the fraud perpetrated by Mr McCarthy; or, at the very least, shut his eyes to the fraud, knowing that it might be occurring, but wilfully choosing not to inquire any further (and, if so, he was reckless)". This is strongly denied by THG. The defendants rely on the following:
241. (1) Mr Rajanah's fraudulent character This allegation arises because a bonus of £50,000 which had been awarded to Mr Rajanah on 25 March 2011 was paid into Mr McCarthy's bank account to hide it from Mr Rajanah's wife, from whom he was undergoing a divorce. This is admitted, though THG says that the fact that Mr Rajanah was guilty of dishonest conduct in one respect, does not mean he was guilty of it in another. Whilst this is correct, in my view the matter shows the closeness of the relationship between the two men.
242. (2) Mr Rajanah's engagement in creative accountancy There are a number of matters relied on.
243. First, shortly after completion, Mr Rajanah and Mr McCarthy together agreed to make "corrective actions" to the recommendations made in PwC's audit report. This is factually correct, but THG says that there is nothing wrong with such actions, which can be accepted by the auditors or not. My view is that though this shows his involvement in the accounting process, and the extent to which THG focused on the process, it does not demonstrate fraudulent behaviour on Mr Rajanah's part.
244. Second, there is an email chain happening on Sunday 3 July 2011 beginning with Mr Rajanah asking Mr McCarthy and others about booking a sale in June in respect of goods still in the warehouse at the beginning of July. The reply from Mr Amery in the accounts department is, "We can class this as a June sales still can't we mate? Not as an accrual, just mark it as despatched". Mr Rajanah says that this may not be possible because the "auditors have seen and counted it". Mr McCarthy responds, "Might be able to frig something - will let u know". Mr Amery responds, "Let us know if you can create an illusion mate", to which Mr McCarthy responds, "Agreed, might need help from ant but I'll work it out". The email chain is copied into Mr Rajanah, who had incepted it.
245. The defendants say that this shows Mr Rajanah acquiescing in the potential falsification of a despatch note.
246. Mr Rajanah said in cross-examination that he was not in finance, and that an investigation needed to be conducted to understand whether this was a "ship to hold" deal.
247. THG says that this email was banter, and that there was no evidence that anything improper happened. In Appendix 5 of its written closing it says that the defendants could have pleaded a case that the various aspects of accounting treatment being discussed was improper which would obviously have required expert evidence. Also, this post-dated the SPA.
248. I do not accept that this was banter, nor that expert evidence is required to assess it. Elsewhere in its submissions, THG accepts that it makes "uncomfortable" and "unfortunate" reading. In my view, it at least shows that Mr Rajanah does not appear to have intervened when a suggestion was made that goods warehoused in July were treated as despatched in June.
249. I do however accept that there may be some doubt as to whether (as put in other parts of the emails) the goods were "quarantined". This email is not, in my view, conclusive evidence of fraud. It does however show the extent of Mr Rajanah's involvement with accounting issues, and the apparently poor standards prevailing at this time in the finance department. It makes no difference that it post-dates the SPA by a few weeks, and in my view may fairly be taken into account when considering the position prior to completion.
250. Third, on 5 July 2011, the June month end consolidated P&Ls were circulated. Mr Rajanah responded to the effect that they should have been further ahead of budget, and asked for suggestions. Mr Leigh responded, "We could invoice Bluechip for the July campaign, dated 30th June? The [purchase order] that we have from them is dated 23rd June". Mr Rajanah emailed back, "Get it in, Macca [Mr McCarthy] any issues?"
251. The defendants say that this is an example of invoice backdating.
252. In cross-examination, Mr Rajanah said that the campaign may have straddled June and July.
253. THG submitted that there is nothing wrong in principle with presenting your numbers in the best possible way, though of course you must do so honestly rather than dishonestly.
254. I agree with the defendants that Mr Rajanah's explanation of these emails (which he had incepted) was unconvincing. However, it is not certain what happened as a result.
255. Fourth, a few days later, on 13 July 2011, Mr Rajanah was emailing Mr Hunter who had been Cend's finance director and was now with THG about stock provisions. Whilst the emails show Mr Rajanah pushing for further provisions without much apparent connection to the state of the stock, I am satisfied that this does not show fraud on his part.
256. Fifth, the "Saviour weekend". This is a reference to the weekend of 23-24 July 2011. As part of the pre-IPO process PwC were carrying out a half-year audit process of THG's accounts, and Mr McCarthy and members of the finance team were working intensively at THG's offices. Mr Rajanah said that he had no part in this, since he was working on the "long form due diligence report" for the IPO.
257. The defendants say that Mr Rajanah was the moving force behind the "Saviour weekend". The aim of the process, they say, was a dishonest one, namely, to reverse the very serious shortfall in THG's EBITDA for the first half of 2011 by manipulating the figures in the accounts to reach a target range of EBITDA.
258. THG says that, "The idea that everyone involved in the Saviour weekend (including, to the extent that he was in fact involved in it, Mr Rajanah) got together and spent a weekend constructing a giant fraud is, with respect, fanciful and wholly unsupported by any evidence (as opposed to insinuation) that what came out of the weekend was in any way untoward". There is not, THG says, a shred of evidence that there was anything untoward about the Saviour weekend.
259. My conclusions in this regard are as follows.
260. At his first interview on 21 September 2011, Mr McCarthy was asked of the fraud generally, "Surprises me Darren [Rajanah] didn't know what was going on?" He said, "I wanted to keep him out".
261. At his second interview on 22 September 2011, Mr McCarthy was asked, "What else have you discussed with Darren?" He said, "On the Saviour weekend, we went through everything we knew was an issue in there". He was asked, "Who was at the Saviour weekend?" He said, "Saj, Fuad, me & Darren [Rajanah]".
262. Mr McCarthy was asked, "Prior to coming in for the weekend, what was the situation?" He said, "A week or two before, Fuad was pulling together the information and giving us feedback on the numbers. We started at a £1m loss — specific tasks were given. We got towards the Saviour weekend and we bounded ideas off him then said lets go through everything at the weekend. We identified areas we needed to address".
263. Mr McCarthy was asked, "Accounts to be manipulated?" He said, "Areas to look at again". He was asked, "Saviour weekend ... who came up with the name?" He said, "Darren came up with it. Saviour recognised the number, we had a target and we were coming in to get the result back. The intention was fair. It was a review".
264. This is the content of an interview untested at trial, but it has some value since it appears that Mr McCarthy was in effect candidly admitting his own fraud. Other material also suggests that Mr Rajanah was a participant in the Saviour weekend. The terms of his email to Mr Meehan the following Monday made it clear that (as the defendants put it) he was taking ownership of the process: "This is where I want us to end up and how we can get there". He was also the author of the "Saviour weekend" spreadsheet. Contrary to his evidence, I am satisfied that Mr Rajanah was a full participant in the "Saviour weekend", and probably came up with the name.
265. I agree with the defendants that there is good reason to question the activity at the Saviour weekend, given what is now known about the falsity of the warranted EBITDA number for the first quarter of 2011.
266. However, on balance I also agree with THG that had the defendants wanted to make a case about the legitimacy of what was done at the weekend and the spreadsheets that resulted from it, that required the assistance of expert evidence. That was not available, and a specific case was not put to Mr Rajanah. As THG says, in my view rightly, the defendants cannot invite the court to assume that the Saviour weekend was fraudulent. I do not think that the defendants have proved the allegation they make.
267. Sixth, the circumstances surrounding Mr Rajanah's suspension on gardening leave and his subsequent return are unclear. I agree with the defendants' submission in this respect, and the absence of any documentation (given that Mr Rajanah was a director of the company) is surprising. But I consider that this is of limited significance overall. Mr Rajanah said in evidence that he went to see the directors personally to assure them that he was not involved in the fraud. I infer that these assurances were accepted, which was why he was allowed to return.

(v) The manner in which THG was run

268. The defendants say that THG was run by its senior management in a manner that was open to abuses such as those organised by Mr McCarthy. This can be seen, they submit, from the following strands of evidence: (a) THG's target based culture; (b) the bonuses awarded to THG's finance team; and (c) management's knowledge of the unreliability of THG's financial figures.
269. THG responds that none of this has anything to do with attribution. Even if it was all true, it would not justify attribution to THG of Mr McCarthy's fraud. Of course, if senior management actually knew about and permitted the fraud, then that would be a completely different matter, because it could then be said that the breach of warranty resulted from the fraud of senior management which is attributed to THG, but that is not the defendants' case.
270. The "strands" the defendants rely on are as follows.
271. Strand 1 The defendants say that THG's most senior management put its finance team under pressure to hit figures which were consistent with the "growth story" which THG wished to present to the outside world, whether or not it reflected the reality.
272. THG says that there is absolutely nothing wrong with a target-based culture in and of itself. In fact, most businesses set targets, which everyone is encouraged to work towards.
273. Whilst I accept THG's general point, there is some independent evidence which tends to support the defendants' submission. In its lengthy Project Napoli report produced for Barclays Bank dated 10 January 2012, Deloitte says:

"The Group's finance team appears to have been influenced by senior management demands to see results and forecasts which fit with the growth 'story' and intention to IPO/sell. We are surprised to see that senior challenge to this situation … has not been maintained and that staff who are associated with this culture have been given new roles within the finance function. We have seen renewed evidence of pressure to produce the 'right' numbers for example in our work on short term cash forecasting. This does not give us confidence that the significant improvements in accounting systems, controls and policies required will be adequately addressed. Neil Chugani has been introduced as CFO (effective December 2011) and he may be able to provide sufficient challenge to the senior management team."

As THG says, however, Barclays did not in fact withdraw its support following Deloitte's report.

274. Strand 2 Mr Rajanah's bonus is dealt with above. Towards the end of May 2011, Mr McCarthy was paid a bonus of £50,000. I find that this was authorised by Mr Rajanah. In his interviews, Mr McCarthy said that he was paid a bonus of £50,000 to get THG to an EBITDA of £4.1m, and that is the defendants' case. This would be a serious matter, if true, because £4.1m was a false number. However, Mr Moulding's evidence is that the bonus would have been awarded because Mr McCarthy "dealt with all of his workload and delivered an audit to timetable". The defendants say that this makes no sense, because he did not meet that deadline.
275. The position as regards Mr McCarthy's bonus is not satisfactory on the evidence. On balance, however, I accept Mr Moulding's evidence on the point, not least because the draft accounts containing the £4.1m number were warranted by THG in the SPA on 31 May 2011. In other words, they were in effect treated as final, although there were adjustments later.
276. Strand 3 The main issue raised here revolves around the fact that Mr Meehan was not awarded a bonus. In an email of 14 September 2011, Mr Moulding explained the reason why: "… there have been some major issues and failings from within the finance function during the IPO process that have yet to be resolved and that have both put the timing of the IPO at risk and been damaging to the business". Mr Meehan emailed back saying, "I take your point and you know I take my share of the responsibility for this, but I made the mistake of believing the PR about finance and not assuming it was an issue from day 1 …". I need make no findings on this exchange which is self explanatory. It gives some insight into the perceived problems within the finance department even before the fraud was discovered by PwC two days later.

Conclusion

(1) Was Mr Rajanah fraudulent?

277. The first question I have to decide is the defendants' claim that Mr Rajanah was aware of, and participated in, the fraud perpetrated by Mr McCarthy, or, at the very least, shut his eyes to the fraud, knowing that it might be occurring, but wilfully choosing not to inquire any further. No other allegations of fraud are now made against any other individuals.
278. I keep in mind the rule long established at common law that fraud or dishonesty must be distinctly alleged and as distinctly proved (Three Rivers District Council v Bank of England (No 3) [2003] 2 AC 1 at [184], Lord Millett).
279. I am satisfied that Mr Rajanah's behaviour has been ill advised, and this is effectively common ground. It is sufficient to repeat that THG accepts that the emails set out above make uncomfortable reading. I find that he has to take some responsibility for an atmosphere within the finance department which allowed fraud to flourish. However, these matters do not in my view prove personal fraud on his part. The matters raised by the defendants do not explain why, as a member of the deal team, he would participate in the fraudulent preparation of numbers in circumstances where he knew that financial warranties would be given by his company. In my view, the case of fraud against him is not proved, and I reject it.

(2) Did the breach of warranty result from the fraud of THG?

280. As stated above, whilst THG accepts that its breach of warranty results from the fraud of Mr McCarthy, it submits that Mr McCarthy's fraud is not to be attributed to THG. The defendants submit that his fraud is to be attributed to THG, and raise the other matters set out above which they submit bring THG within the contractual exception.
281. As THG puts it, it cannot have been intended that the fraud of the post boy would count as the fraud of THG for these purposes.
282. I accept that this is correct, but Mr McCarthy was in an entirely different position from the post boy as regards this acquisition. As Mr Moulding accepted (rightly in my view) Mr McCarthy was heavily involved in the transaction because he was providing the financial information on THG which was essential for the deal to go ahead. He provided numbers which were prepared fraudulently, thereby placing THG in breach of warranty. In my judgment, his fraud is to be attributed to THG in such circumstances. The fact that he was not "front facing" is in my view irrelevant.
283. Further, this was not a case of the fraud of one person alone. One other member of the finance department was also dismissed, and three others were disciplined. PwC's summary set out above describes the scale of the falsification of documents, and the misleading of the auditors.
284. Attribution in these circumstances cannot in my view be limited to the persons of Mr Pochin, Mr Whitehead and Mr Moulding, and members of the board, with the addition of Mr Rajanah, as THG ultimately submitted.
285. I conclude that the fraud of Mr McCarthy viewed in the above context is to be attributed to THG. I agree with the defendants therefore that on a true construction of clause 7.12 of the SPA, the contractual cap does not apply to any claim because "it results from the fraud of the Buyer".
286. Though that in my view is enough, I further agree with the defendants that other matters can be taken into account on the question of attribution in this context. In this regard, I do not think that the approach in Morris v Bank of India is limited to cases of fraudulent trading. That was a case where attribution followed where the company was content to leave the conduct and completion of the relevant matters to the employee concerned. The present case is the same, but I agree with the defendants that it goes further. I am satisfied that Mr McCarthy was under pressure to produce figures which would be used in the acquisition, and that though not personally fraudulent, Mr Rajanah, as stated above, as Finance Director and a member of the board, has to take some responsibility for an atmosphere within the finance department which allowed fraud to flourish. In the context of the issue I have to decide, it is significant that he was also a member of THG's deal team for the MyProtein acquisition. For these reasons also, as a matter of construction of the clause, and of commercial sense, I consider that the admitted breach of warranty resulted from the fraud of the Buyer.

The Trustee's deceit claim

287. By the end of the trial, the deceit claim had been reduced to two allegedly fraudulent misrepresentations (out of an original six or seven). THG's response was largely consigned to Appendix 5 of its written closing submissions, and (save for two points) was not dealt with in oral closings. In reality, the claim adds little to the uncapped breach of warranty claim, though the quantum number may be slightly different.
288. It has to be kept in mind that it was the Trustee, not Mr Cookson, which got the THG shares as part of the consideration for the sale, no doubt for tax reasons. It can fairly be said based on the evidence of Mr Cunliffe, a director of the Trust company at the time, that the Trustee was (not surprisingly) passive during the deal.
289. The first allegedly fraudulent misrepresentation is Mr Whitehead's email to Mr Cookson dated 18 April 2011 ten days after the initial offer was made, attaching (a) the February 2011 board pack and (b) the March 2011 investor pack, which stated that THG's actual EBITDA for 2011 was £4,072,000 or £4,073,000 (the EBITDA representation). This email is referred to above. The email was brief, and attached the documents for information.
290. The defendants contend that the statements as to EBITDA were false, and that though Mr Whitehead did not know this, Mr McCarthy did, and that fraudulent knowledge need not pass through the representor, if another individual knows that the representation has been made and is false (Occidental Worldwide Investment Corp. v Skibs A/S Avanti [1976] 1 Lloyd's Rep. 293, GG 132 Ltd v Hampson Industries Plc [2011] EWHC 1137). It is contended that Mr McCarthy intended the Trustee to rely on the EBITDA representation, and that for these purposes, it is only necessary to show that Mr Cookson, as the Trustee's adviser, relied upon the EBITDA representation (relying on Gross v Hillman [1970] Ch 445 per Cross LJ at 461).
291. However, I accept THG's submission that insofar as by tendering the information, Mr Whitehead impliedly represented a belief on his part that the £4.1m figure fairly presented THG's 2010 profitability, then that was true. Further, I consider it to be implausible that any reliance could reasonably be placed on this email and attachments as creating actionable representations. By 18 April 2011, the stage had been reached when the due diligence process would proceed, and if the deal went through, whatever financial warranties the parties agreed would be given in the SPA. These numbers were (in effect) actually warranted by THG in the SPA. It is artificial to rely on this as a pre-contractual representation as to the accuracy of the same numbers. As THG says, this is an artificial approach to get round the contractual cap (if it applies, which I have held it does not).
292. Further, THG says that the defendants' case that there was any reliance by the Trustee must fail in the light of the Trustee's evidence at trial.
293. In that regard, clause 13.4(c) of the SPA provided that:

"Each of the parties acknowledges that it is not relying on any statement, warranty, representation, collateral contract or other assurance given or made by any of the parties in relation to the subject matter of this Agreement, save for those expressly set out in this Agreement and the other Transaction Documents. Each party waives all rights and remedies which, but for this clause 13.4(c), might otherwise be available to it in respect of any such statement, warranty, representation, collateral contract or other assurance not set out in this Agreement or any other Transaction Document."

294. This was put to Mr Cunliffe in cross-examination and his response was:

"Q. That was indeed the case, Mr Cunliffe, wasn't it? You were relying upon the warranties in the document, weren't you?

A. I can confirm that, my Lord."

295. The defendants say that the question and answer are unremarkable, and amount to no more than that Mr Cunliffe relied on the warranties in the document, as one would. In terms of actually excluding reliance on recommendations from others and the structure in which the deal had come before him, it does not really address that point.
296. However, the question was prefaced by the witness being taken to the terms of the clause. By it, the party including the Trustee acknowledges that it is not relying on any representation made by any of the parties in relation to the subject matter of the SPA, save for those expressly set out in it. It has to be recalled that the Trust company is the second defendant to this litigation, and must be aware of the issues. In my judgment, Mr Cunliffe knew what he was being asked, and what he was answering.
297. I prefer THG's case on this point. As it says, it is unsurprising that a professional Trustee, acting with the benefit of legal advice, should rely upon the financial warranties given in the contract rather than anything extraneous to it dealing with the same subject matter. It follows in my view that Gross v Hillman does not assist the Trustee, and that the Trustee cannot make good an essential step in making good the deceit claim. That applies to the second representation as well, which I now deal with.
298. The second allegedly fraudulent misrepresentation is Mr Rajanah's e-mail to KPMG, copied to Mr Cookson, dated 24 May 2011. He attached a copy of THG's draft accounts for 2010. In his email he stated he attached, "Statutory Accounts (this has run through our PWC audit process and therefore reflects any items for adjustment - there are no more adjustments other than wording and narrative)". Again, this email is referred to above, and the representation is described by the defendants as the Audit representation.
299. The Trustee's case is that this was a representation by Mr Rajanah that the figures in THG's draft statutory accounts could be relied upon as accurate and would not require further adjustment, and that it was false. It is said that the first PwC audit report, circulated on or about 16 May 2011, disclosed serious concerns about the state of THG's accounts, which were likely to require further adjustment. It was obvious at the time the Audit representation was made that PwC's audit process was continuing (and was far from complete), and that the figures in THG's draft statutory accounts could not be relied upon as accurate. Mr Rajanah, the Trustee says, knew that this representation was false. He intended that the Trustee rely on the representation, and (based on Gross v Hillman, supra) the Trustee did rely on it.
300. Unlike the EBITDA representation where the falsity comes indirectly through Mr Whitehead (whose honesty is not challenged) this allegation of dishonesty is made directly against Mr Rajanah. Given the fact that THG's 2010 draft accounts were on any view some way from being signed off by the auditors, and did in fact change substantially before the fraud was discovered, it is in my view a matter of surprise that Mr Rajanah felt able to express himself in the email in the way he did.
301. However, the gist of his evidence is that he believed that in substance the audit process was "pretty much" finalised. In particular, he said (and I believe that this is right) that the later adjustments in July and August did not affect EBITDA (that change came when the fraud was uncovered in September). On balance, I accept his evidence in this respect. Further, I have difficulty in accepting that this representation would be made by Mr Rajanah deceitfully (that is, knowing or suspecting it to be untrue) in circumstances where a few days later on the completion of the SPA THG actually warranted these draft 2010 accounts as giving a true and fair view of THG's profit or losses for the period covered.
302. It follows that the Trustee has not proved that the Audit representation was made with knowledge that it was false. For that reason in addition to my conclusion as to non-reliance by the Trustee already explained, the claim based on this representation fails as well.
303. In those circumstances, I need not deal with THG's contractual estoppel defence. Nor need I deal with its contention that the Trustee cannot show a loss because it will have suffered a loss only if the value of the B shares in Cend which it sold were worth more than the £21m cash plus the THG shares which it received, and Mr Parry was never asked to value the B shares and so the Trustee has no evidence of what they were worth as at 31 May 2011.

Conclusion

304. In summary I find that:

(1) THG's breach of warranty claim succeeds in the sum of £4,317,089;

(2) The Trustee's breach of warranty claim succeeds in the sum of £10,800,000;

(3) The Trustee's claim is not capped by clause 7.12 of the SPA.

(4) The Trustee's deceit claim fails.

305. I am grateful to the parties for their assistance, and will hear them as to any consequential matters arising.