Neutral Citation Number: [2009] EWHC 2471 (Ch)

Case No: HC08C00893
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 9 October 2009

Before :

THE HON MR JUSTICE ARNOLD
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Between :

	INVERTEC LIMITED	Claimant	
	- and -		
	(1)	DE MOL HOLDING BV
(2)	HENRICUS ALBERTUS DE MOL	Defendants	

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Romie Tager QC and Ian Clarke (instructed by Charles Russell LLP) for the Claimant
Stephen Cogley and Paul Henton (instructed by TLT LLP) for the Defendants

Hearing dates: 8-10, 13-17, 20 July, 2 September 2009
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Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

.............................

THE HON MR JUSTICE ARNOLD

MR JUSTICE ARNOLD : 

Contents

Topic											   Paragraph

Introduction								    		1-2
The contracts								        		3-10
	The SPA							     			4-5
	The Disclosure Letter						     		6-7
	The Tax Deed							         		8
	The MSA							         			9
	Other agreements						       		  	10
My approach to the evidence						  	      	11-13
The witnesses										14-28
   	Invertec’s factual witnesses						        	14-21
		John Ellison							        	14
		David Paulson							        	15
		Julie Wilkinson						        		17
		Karen Harris							        	18
		Mark Batha							        	19
		Ian King							        		20
		Paul Sutcliffe							        	21
   	Missing witnesses							        	22
   	The Defendants’ factual witnesses					        	23-25
		Mr de Mol							         		23
		Harald de Wit							         	24
		Harrie de Kok							         	25
     	The expert witnesses						         		26-28
		Christopher Clements						         	27
		Vanessa Winspeare						         	28
The facts in general							          	29-250
    	Volante								     		30-36
    	Volante’s financial situation in the first quarter of 2005		37-47
     	Invertec								          	48
     	ITS									          	49
     	Negotiations for a merger between Invertec and Volante,
     	Volante’s financial situation in the second quarter of 2005           50-87
     	Negotiations leading to the sale of Volante,
     	Volante’s financial situation in the third quarter of 2005	          88-245
      	Events after administration						  	246-250
The timing of the claim						  		  	251-252
Mr de Wit’s reward							  	      	253
July and August 2005 management accounts				   	254-295
    	The facts								   		258-293
       		Purpose of the warranty						258		
       		In-house and factored sales etc					259-269
       		July & August 2005 accounts before the changes		270-272
       		Management accounts for year ended 30 June 2005		273-276
       		The changes								277-293
     	Breach of warranty								294
    	Fraudulent misrepresentation							295	
Solvency											296-324
    	Construction of the Warranty					   	     	297-300
    	Discharging the burden of proof					   	301-302
    	No going concern warranty						     	303
    	The facts							               		304-322
    	Breach of warranty							         	323
    	Fraudulent misrepresentation							324
Corporation Tax										325-352
    	General considerations						   	     	325-326
    	The facts								   		327-344
     	Breach of warranty							   	345
     	Fraudulent misrepresentation					   		346
     	Tax Deed								   	     	347-352
The Alstom Contract							   	     	353-361
Misrepresentation by warranty					   	     	362-364
Reliance								   		     	365-377
     	July and August 2005 management accounts                                 369-374
     	Solvency								   		375
     	Corporation Tax							   		376
 	Alstom contract							   		377
Loss									   			378-387
     	Initial consideration						   		379-380
     	Loans								   		381-386
     	Sums paid under the MSA						   	387
Invertec’s alternative claims						  		388-390
   	Negligent misstatement						  	389
   	Misrepresentation Act                                                                    390
Entire agreement clause						   		391
Personal liability of Mr de Mol					   	    	392-393
Counterclaims								    	  	394-400
    	MSA								    		   	395-398
    	Debts Agreement							    	   	399-400
Conclusions                                                                                             	401

Introduction
1.	In this action the Claimant (“Invertec”) makes a number of claims arising out of the sale by the First Defendant (“DMH”) to Invertec of the entire issue share capital in Volante Public Transportation Interior Systems Limited (“Volante”) under a Sale and Purchase Agreement dated 6 October 2005 (“the SPA”). The Second Defendant (“Mr de Mol”) is a director of DMH and its sole beneficial owner. He was also, at the relevant times, the sole director of Volante. Invertec claims that it was induced to enter into the transaction by a number of fraudulent misrepresentations by DMH and Mr de Mol which became warranties in the SPA. These concern (i) Volante’s July and August 2005 management accounts, (ii) its solvency, (iii) its corporation tax liability with regard to the year ended June 2004 and (iv) a contract with one of Volante’s customers, Alstom Transportation SA (“Alstom”). In the alternative, Invertec advances claims for negligent misstatement and under section 2(1) of the Misrepresentation Act 1967. There is no claim for breach of warranty, but  I have found it convenient to consider this question as well. Invertec claims as damages: (i) the initial consideration it paid for the shares in Volante, namely £1,512,113; (ii) monies lent by it to Volante following the acquisition which it lost when Volante went into administration on 11 December 2006, in the sum of £1,521,441; and (iii) monies paid by it to DMH under a Management Services Agreement between Invertec and DMH also dated 6 October 2005 (“the MSA”), in the sum of €196,960 plus expenses estimated at €20,000. A separate claim is also advanced under a side agreement forming part of the transaction (“the Tax Deed”) in the sum of £87,403.06.
2.	The Defendants deny any liability. In addition DMH counterclaims for outstanding sums due under (i) the MSA and (ii) a Consultancy Agreement between DMH and Volante dated 27 May 2004 (“the Consultancy Agreement”). The Consultancy Agreement was terminated as part of the acquisition, but as at 6 October 2005 Volante owed DMH certain sums under it. Liability for those sums is said to have been novated to Invertec by an agreement evidenced by an exchange of emails dated 27 and 28 October 2005 (“the Debts Agreement”). The sums claimed by DMH under the MSA and the Debts Agreement total €428,995.
The contracts
3.	Since they are central to the claims advanced, it is convenient to begin by setting out the relevant terms of the various contracts.
The SPA
4.	The SPA provides:
“1	INTERPRETATION
1.1	Definitions
In this Agreement unless the context otherwise requires:
…
‘Company’
means Volante ….
‘Company 2005 Accounts’
means the audited balance sheet of the Company made up as at the Company Balance Sheet Date and the audited profit and loss account of the Company for the year ended on that date, and the notes, reports, statements and other documents which are annexed to the accounts, a copy of which has been initialled by or on behalf of the parties for the purpose of identification;
‘Company Balance Sheet Date’
means 30 June 2005
…
‘Company Management Accounts’
means the unaudited management accounts of the Company for the period from the Company Balance Sheet Date to the Company Management Accounts Date, a copy of which has been initialled by or on behalf of the parties for the purpose of identification;
‘Company Management Accounts Date’
Means 31 August 2005
…
‘Disclosure Letter’
means the letter of even date from the Vendor to the Purchaser (in the agreed form) disclosing:
(a)	information constituting exceptions to the Warranties (save those set out in paragraph 1of Schedule 4); and
(b) 	particulars of other matters required to be set out in the Disclosure Letter in accordance with Schedule 4;
…
‘Initial Consideration’
means the sum of £1,512,113;
….
‘Shares’
means the entire issued share capital of the Company being 20,000 ordinary share of £1 each a 1 B ordinary share of £1;
…
‘Tax’
means any form of taxation, duty, impost, levy, tariff of any nature whatsoever whether of the United Kingdom or elsewhere … and includes, without limitation … any penalty, charge, fine or interest payable in connection with any such taxation, duty, impost, levy or tariff;
…
‘Total Earn-Out Consideration’
means the part of the consideration for the Shares to be calculated and paid in accordance with clause 8;   
…
‘Warranties’
means the warranties given by the Vendor set out in Schedule 4.
…
3.	     PURCHASE CONSIDERATION
3.1	The total consideration for the sale by the Vendor of the Shares shall be the Initial Consideration plus the Total Earn-Out Consideration (as adjusted, if applicable, in accordance with clause 5.6 and the Tax Deed).
….
5	WARRANTIES BY THE VENDOR
5.1	Accuracy of warranties
The Vendor warrants to the Purchase that, save as fairly disclosed by the Disclosure Letter, the Warranties are true and accurate in all material respects.
5.2	The rights and remedies of the Purchaser in respect of any breach of the Warranties shall not be affected by:
….
5.2.2 	information relating to the Company of which the Purchaser has knowledge, actual or constructive save for that fairly disclosed in the Disclosure Letter;
5.2.3 	any investigation made by or behalf of the Purchaser into the affairs of the Vendor or the Company;
…
5.3	Knowledge of the Vendor
Save as qualified in relation to any particular Warranty in Schedule 4 where any Warranty refers to the knowledge, information or belief or awareness of the Vendor, it shall be deemed to include a warranty that the same is made or given after due and careful enquiry by the Vendor into the subject matter of the Warranty.
6	LIMITATIONS OF LIABILITY
6.1	Limitation of Vendor’s liability
The provisions of Schedule 5 shall operate to limit the liability of the Vendor under the Warranties save the Warranties set out in paragraph 1 of Schedule 4.
6.2		No limitation in cases of fraud etc			 	
The provisions of Schedule 5 shall not operate to limit the liability of the Vendor under or in connection with the Warranties where the liability arises as a result of fraud on the part of the Vendor, the Company or any of the officers or employees of the Company, or any agents or representatives of the Company or of the Vendor or where a matter has been deliberately concealed or withheld by the Vendor or any of the officers of the Company.
7	INDEMNITIES
7.1	The Vendor shall indemnity and keep indemnified the Purchaser and the Company from and against all losses, costs, claims, demands, liabilities or expenses which the Purchaser or the Company many suffer, incur or sustain (including, without limitation, professional costs reasonably and properly incurred on a full indemnity basis) as a result or in connection with
….
7.1.7	any loss resulting to the Company from performing or terminating the contract dated 30 November 2004 between the Company and Alstom Transport SA….
19	ENTIRE AGREEMENT
19.1	Entire agreement
This Agreement (together with the documents referred to herein):
19.1.1	shall constitute the entire agreement between the parties with respect to the subject matter of this Agreement; and
19.1.2	supersedes and extinguishes and any prior drafts, agreement understandings between the parties relating to such subject matter.
19.2	Fraud and entire agreement
Each of the parties acknowledge that in entering into this Agreement with the document referred to in it, they do not rely on, and shall have no remedy in respect of, any statement, representation, warranty or understanding of any person other than as expressly stated in this Agreement as a warranty, representation or undertaking. This clause shall not exclude any liability which any party would otherwise have to the other or any right which either of them may have to rescind this Agreement in respect of any statements made fraudulently by the other prior to the execution of this Agreement or any rights which either of them may have in respect of fraudulent concealment by the other.  	
…. 
SCHEDULE 4
The Warranties
…
2	SUPPLY OF INFORMATION
2.1	Accuracy of information
All information contained in Schedules 1 and 2 in this Agreement and (subject as provided below) all information provided by the Vendor and/or the Vendor’s Solicitors to the Purchaser’s Solicitors in the documents listed in Schedule 8 in the course of the negotiations leading to this Agreement was when given and is at Completion true and accurate in all material respects and the Vendor is not aware of any fact or matter or circumstance not disclosed in writing to the Purchaser which renders any such information untrue, inaccurate or misleading.
….
3	ACCOUNTS AND RECORDS
…
3.7	The Company Management Accounts
The Company Managements Accounts:
3.7.1	have been prepared in food faith (good faith being regarded for these purposes as being with the intention of achieving a reasonably accurate and not misleading view of the financial and trading position of the Company) on bases and principles  which are consistent with those used in the preparation of the unaudited management accounts of the Company for the financial year ended on the Company Balance Sheet Date [and] reflect with reasonable accuracy the financial and trading position of the Company for the period from the Company Balance Sheet Date to the Company Management Accounts Date.
3.8	Changes since the Company Balance Sheet Date
Since the Company Balance Sheet Date:
3.8.1	there has been no material adverse change in the financial position or turnover of the Company compared with the same period last year;
3.8.2	the Company’s business has been carried on in the ordinary course, 	without any interruption or alteration in its nature, scope or manner and 	with the intention of maintaining the same as a going concern up until Completion;
…
5	TRADING AND CONTRACTUAL ARRANGEMENTS
…
5.2	Contracts
The Company is not a party to any material contract, transaction, arrangement, understanding, obligation or liability which:
5.2.1	is of an unusual or abnormal nature or not wholly on an arm’s length Basis in the ordinary and usual course of business;
5.2.2	is of a loss-making nature (that is to say, known to likely to result in a	loss on completion of performance);
5.2.3	cannot readily be fulfilled or performed on time without undue, or unusual, expenditure of money or effort; or
5.2.4	invoices payment by reference to fluctuations in the index if retail prices, or any other index, or in the rate of exchanged for any currency.
….
6	LEGAL MATTERS
..
6.3	Compliance with Agreements
To the best of the knowledge, information and belief of the Vendor the terms of all leases, tenancies, licences, concessions and agreements of whatsoever nature to which the Company is a party have been complied with by all the parties thereto and to the best of knowledge, information and belief of the Vendor there are no circumstances likely to give rise to any breach of such terms.
6.4	Litigation 
6.4.1	Since the Company Balance Sheet Date no claim for damages or seeking any other relief has been made against (and notified to) the Company.
…
6.5	Insolvency etc
…
6.5.10 The Company is not unable to pay its debts with the meaning of s.123 Insolvency Act 1986.
…
9	TAX
9.1	Tax returns and compliance 
...	
9.1.2	The Company has discharged every Tax Liability of the Company falling due before Completion, due from the Company directly or indirectly in connection with any Event occurring on or before 	Completion and there is no Tax Liability of the Company or potential Tax Liability of the Company in respect of which the date for payment has been postponed by agreement with the relevant Tax Authority or by virtue of any right under any Tax Statute or the practice of any Tax Authority.
…
9.1.4 Neither the Company nor any director or officer of the Company (in his capacity as such) has any liability for any interest, fine, penalty or surcharge in connection with any Tax Liability of the Company.
..
9.1.11 All Instalment Payments are up to date.
9.1.12 The Disclosure Letter contains full details, by express reference to this paragraph 9.1, of ever subsisting formal or information arrangement or agreement (including without limitation any dispensation) entered into by the Company with any Tax Authority with regard to any of its Tax affairs.
… 
SCHEDULE 5
Warranty Limitations
1	LIMIT ON INDIVIDUAL RELEVANT CLAIMS
The Vendor shall have no liability whatsoever in respect of any individual claim arising under the Warranties (other than paragraph 1 of schedule 4) (a ‘Relevant Claim’) unless:
…
1.3	notice in writing of the Relevant Claim (stating in reasonable detail, so far as known to the Purchaser, the nature of the Relevant Claim and, so far as practicable, the Claim Amount) has been given to the Vendor:
1.3.1	on or before the second anniversary of Completion in the case of a Relevant Claim under the Warranties (other than the Tax Warranties);
…
1.4	proceedings  in respect of the Relevant Claim shall have been properly issued and served on the Vendor within the period of six months following the giving of notice pursuant to paragraph 1.3. 
2	MAXIMUM LIMIT FOR ALL RELEVANT CLAIMS
The aggregate liability of the Vendor in respect of all claims under this Agreement shall be the aggregate of the Consideration received by the Vendor and the aggregate liability of the Vendor in respect of all Relevant Claims (which expression shall for the purposes of this paragraph 2 include any claim under the Tax Deed and the indemnities in clause 7.1.5 (Transbus or Wrightbus claims), clause 7.1.7 (Alstom contract) clause 7.1.8 (fire certificate), clause 7.1.9 (injury or illness claims) and clause 7.1A (tax)) shall not exceed £1,300,000 (or if less the aggregate payments made or payable by the Purchaser under clause 8).
…
4	OTHER LIMITATIONS
4.1	The Vendor shall not be liable for a Relevant Claim if, and to the extent that, 
	4.1.1	it is fairly disclosed in the Disclosure Letter; 
	….
4.6	Any breach of this Agreement by the Vendor shall give rise only to an action in damages by the Purchaser and shall not entitle the Purchaser to rescind this Agreement.
….
4.8	The Purchaser shall take all reasonable steps with a view to mitigating the ultimate liability of the Company in respect of any Relevant Claim.
….
SCHEDULE 8
List of Documents
…
3 	Email from H Dewit [sic] to D Paulson dated 12 August 2005 and related financial information other than the budget (section 62 of the Disclosure Bundle).”
5.	I have not set out above clause 8 of the SPA. In short, this provided that that Invertec would pay DMH an earn-out payment of £260,000 a year for five years if Volante achieved EBITD of £650,000 in each year. It is common ground that Volante never achieved this, and accordingly no earn-out payment ever became due.  
The Disclosure Letter
6.	The Disclosure Letter states:
“Where there is any inconsistency between the contents of the documents referred to at 1 to 73 below and the factual statements contained in this Disclosure Letter, then the provisions and contents of those documents shall prevail save in so far as any disclosure is only effective for the purposes of the Agreement to the extent it results in information being fairly disclosed. The Seller is not to be put under any liability to the Buyer as a result of any such inconsistency or any failure to specifically refer to any of the documents referred to in 1 to 73 below.
For ease of reference the majority of disclosures are made under paragraph numbering which refers to particular paragraphs of Schedule 4 of the Agreement and, subject to the proviso below or as expressly provided elsewhere in this Disclosure Letter, they are numbered accordingly. Such headings are for convenience only. Accordingly, if the information disclosed is capable of applying in respect of any of the other Warranties, such information shall be deemed to be disclosed where it is capable of applying and save in so far as any disclosure is only effective for the purposes of this Agreement to the extent that it results in information being fairly disclosed the Seller shall not fail to avoid liability by reason of the fact that a particular disclosure is not made against a particular Warranty or that no disclosure is made against a particular Warranty.
This Disclosure Letter shall be deemed to include and there are hereby incorporated into by reference as having been fairly disclosed the following matters, but no warranty is given as to the accuracy of the matters or the information deemed to be disclosed in sub-paragraphs (a) to (k) save where the matters and documents referred to are specifically warranted in the Warranties and in such even [sic] such matters and documents shall be warranted in accordance with the terms of the relevant Warranties:
a) any matter referred to, noted or reasonably evident from the Company 2005 Accounts and the Company Management Accounts which are annexed to this Disclosure Letter at document 1 in sufficient detail to enable a reasonable and not misleading understanding of the matter to be obtained therefrom;
…
f) the documents listed in schedule 8 of the Agreement which are annexed to this Disclosure Letter at document 6
…
h) the contents of all documents number 1 to 73 copies of which are annexed to this Disclosure Letter
 ...
Warranty Number	Disclosure	Document	
3.8.1	The turnover in the period since the Company Balance Sheet Date (‘the Period’) has decreased and is less than that for the same period in 2004 (‘the 2004 Period’). Copies of the monthly profit and loss accounts (from the management accounts) for the months of July, August and September 2004 (together with quarterly profit and loss accounts for the periods July to September 2004, October to December 2004, January to March 2005 and April to June 2005) (attached at Annexure 7) and copies of the management accounts for the months of July and August 2005 (attached at Annexure 3) demonstrate the financial position and decrease in turnover over that period.	7, 3	
…			
5.2.2	The Company is a party to a contract with Alstom Transportation SA (‘Alstom’) for the manufacture or interior partitioning and panelling for TGV, the French high speed train, (‘the Alstom Contract’) (copy terms and conditions attached at Annexure 29) which has not to date been profitable and, unless the terms are renegotiated, will be loss-making. EDM has discussed the Alstom Contract with David Paulson at length.	29	
…			
9.1.1	H M Revenue and Customs (‘the Revenue’) enquired into the Company's tax return for the accounting period ended 30 of June 2004. The enquiries were in relation to whether or not the relationship between the Vendor and the Company affects the number of associated companies which the Company has. The result of the enquiry was a finding that an additional £20,000 of corporation tax was payable by the company for the accounting period ended on 30 June 2004. This is due for payment at the end of October 2005.
... 
Copy correspondence and the corporation tax computations for the financial years ending 30 June 2004 and 30 June 2005 are attached at Annexure 61A.	61A	
9.1.2	Additional corporation tax (and interest to thereon) is payable in respect of the matter disclosed at Disclosure 9.1.1.		
9.1.4	Please see Disclosure 9.1.1. Interest may be payable in relation to that matter.		
9.1.11	Please see the email dated 12 August 2005 from HDW to David Paulson and the budget for 2005/2006 attached at Annexure 62 which set out the Company’s position at that time in relation to corporation tax instalment payments.		
9.1.12	Please see Disclosure 9.1.11.		
 ”
7.	The Annexures to the Disclosure Letter occupy four lever arch files. Annexure 61A includes copies of Mr Swansbury’s letter dated 25 July 2005 and email dated 22 August 2005 referred to below. It does not include a copy of Volante’s letter dated 7 September 2005 referred to below. Annexure 62 is a copy of Mr De Wit’s email of 12 August 2005 together with a copy of Volante’s budget for 2005-2006 both of which are referred to below (although this copy has a Balance Sheet in place of the Profit & Loss account).
The Tax Deed
8.	The Tax Deed provides:
“1	DEFINITIONS AND INTERPRETATION
1.1	Unless the context otherwise requires and save as provided in sub-clause 1.2 all words and expressions defined in the Agreement shall have the same meaning in this Deed.
1.2	In this Deed the following words and expressions shall (except where the context otherwise requires) have the following meanings:
‘Event’
includes any act, omission, event or transaction and, without limitation. the receipt or accrual of any income profits or gains, the declaration making or payment of any distribution, the ownership of any asset membership of or ceasing to be a member of any group or partnership or any other association, death, any residence or change in the residence of any person for Tax purposes, the expiry of any period of time and Completion;
…
‘Tax Liability’
includes any liability of the Company to make a payment or increased payment of or in respect of tax;
….
2	COVENANT
2.1	Subject to paragraph 2.4 below, the Covenanter covenants to pay to the Purchaser so far as possible as an adjustment to the Consideration for the Shares an amount equal to:
2.1.1	any Tax Liability which arises directly, indirectly, before or after Completion by reference to:
(a)	any Event occurring on or before Completion;
(b)	any income profits or gains earned accrued or received on or before Completion;
….
2.4	The Covenanter’s obligation to make any payment under paragraph 2.1 above may be satisfied by way of set-off against amounts due from the Purchaser pursuant to clause 8 of this Agreement as if the amount of such payment payable by the Covenanter was payable pursuant to a Claim (as such term is defined in and in the manner provided in clause 8A of this Agreement).
3	DEDUCTIONS FROM PAYMENTS
3.1	All sums payable by the Covenantor under any Tax Claim shall be paid gross, free and clear of any rights of counterclaim or set-off and without any deduction or withholding unless the deduction or withholding is required by law …”
The MSA
9.	The MSA provides for DMH to supply services to Invertec in return for a monthly fee of €24,620. It is not necessary to set out the precise terms of the MSA.
Other agreements
10.	The transaction included a number of other agreements, including a service agreement between Invertec and Mr de Mol and a management services agreement between Invertec and HaWi Holding BV (“HWH”), Mr de Wit’s company, but it is not necessary to go into the details of these.
My approach to the evidence
11.	In approaching the evidence in this case, I have borne in mind that the allegations made by Invertec are serious ones and that, the more serious the allegation sought to be proved is, the more cogent the evidence relied upon to support it must be: see Re H (Minors) [1996] AC 563. In relation to the claim of fraud, Invertec must discharge the burden of proving that DMH had no honest belief in the representations made.
12.	I have also attempted to follow the well-known advice of Robert Goff LJ (as he then was) in The Ocean Frost [1985] 1 Lloyd’s Rep 1 at 57:
“Speaking from my own experience, I have found it essential in cases of fraud, when considering the credibility of witnesses, always to test their veracity by reference to the independent facts proved independently of their testimony, in particular by reference to the documents in the case, and also to pay particular regard to their motives and to the overall probabilities. It is frequently very difficult to tell whether a witness is telling the truth or not; and where there is a conflict of evidence such as there was in the present case, reference to the objective facts and documents, to the witnesses' motives, and to the overall probabilities, can be of very great assistance to a judge in ascertaining the truth.”
To this end, I have set out below a (perhaps excessively detailed) chronological account of the facts of the case by reference to the principal documents. Many of the communications between and within the parties took place by email and therefore have been disclosed, but it would be a mistake to suppose that these are comprehensive since it is clear that many communications took place by telephone.
13.	Counsel for the Defendants submitted that Invertec’s case should be treated with particular caution because it had changed during the course of the proceedings, in particular with regard to the July and August 2005 management accounts and corporation tax claims. I consider that this point has some validity. After all, a claim in fraud must be clearly proved. If the claimant has to change its case, that may indicate at the very least that it is not clear that the defendant has behaved fraudulently. This is not necessarily so, however, since the more skilful the fraud, the harder it may be to pin down. I certainly accept that in assessing the Defendants’ explanations it is necessary to keep clearly in mind the nature of Invertec’s case at the time the explanations were given. For the reasons explained below, I consider that this point has more force in relation the corporation tax claim than in relation to the management accounts claim. On the other hand, as I shall explain, the Defendants’ case and evidence have also changed in certain ways which were not merely responsive to changes in Invertec’s case. 
The witnesses
Invertec’s factual witnesses
14.	John Ellison. As related in more detail below, Mr Ellison is (with his family) the ultimate beneficial owner of the group of companies of which Invertec forms part. He is a US citizen and is based in the USA. He is an experienced businessman, in particular with regard to acquisitions. He was and remains a director of Invertec. He was the decision maker so far as Investec’s purchase of Volante was concerned, but at the time he was also engaged in selling another business for $80 million. As he accepted, he delegated much of the day-to-work on the transaction to Mr Paulson and he relied heavily on his professional advisors. As a result, he had a good grasp of the big picture, but not of the details. I found Mr Ellison to be a truthful witness, but he was candid that his recollection was limited in a number of respects. 
15.	David Paulson. Mr Paulson has been the managing director of Invertec since January 2005. I have no reason to doubt his competence as an executive, but he was inexperienced in transactions such as the acquisition of Volante. As discussed below, I have carefully considered whether the matters of which Invertec complains are the result of Invertec having made a bad deal due to Mr Paulson’s inexperience combined with inadequate financial due diligence. I found Mr Paulson to be a careful witness. He had the advantage that he had kept a day book in which he had kept notes of meetings, telephone calls and things to do, which assisted his recollection. Generally I consider his evidence to be reliable, although I think he became confused on at least one point.
16.	Counsel for the Defendants submitted that Mr Ellison and Mr Paulson had behaved dishonestly with regard to payment of DMH for its services under the MSA. For the reasons given below I do not accept this.  
17.	Julie Wilkinson. Ms Wilkinson is a Chartered Accountant. She was Volante’s Financial Controller from October 1999 to January 2007. She was also its company secretary for the latter part of this period. One of her primary duties as Financial Controller was to manage Volante’s finances, including ensuring payment of suppliers and wages and monitoring sales and production schedules As well as her financial responsibilities, she also had human resources and IT responsibilities. Since 2007 she has been employed in a similar capacity by another company. Ms Wilkinson was an important witness for two reasons. First, because of her knowledge of Volante’s financial affairs before and after its acquisition by Invertec. Secondly, because she is independent. It was not suggested that she had any reason to be untruthful. I found Ms Wilkinson to be a reliable witness whose evidence was corroborated by the documentary record. Contrary to the submission of counsel for the Defendant, I do not consider that her witness statement was materially qualified in cross-examination. Nor is it a reflection on Ms Wilkinson that counsel for Invertec indulged in a lengthy re-examination of her, which out of fairness to the Defendants I have treated with a degree of caution. 
18.	Karen (also known as “Kassy”) Harris. Ms Harris is a Certified Accountant. She was employed by Invertec from August 1989 to March 2009. From April 2000 to March 2009 she was Invertec’s Finance Director. Ms Harris was another important witness for similar reasons to Ms Wilkinson. First, because of her knowledge of Invertec’s financial affairs before, and Volante’s financial affairs after, the acquisition. Secondly, because she too is independent. Again it was not suggested that she had any reason to be untruthful. I again found her to be a reliable witness whose evidence was corroborated by the documents. Counsel for the Defendants attacked Ms Harris’ evidence as being unreliable, but I do not accept this.
19.	Mark Batha. Mr Batha was employed by Volante from March 2002 to December 2006 as Development Manager. Since December 2006 he has been employed by Elite Composite Products Ltd (“Elite”), a new subsidiary of Invertec which acquired Volante’s assets from its administrator. Mr Batha was a straightforward witness whose evidence was barely tested in cross-examination, but his evidence was only directed to the issue concerning the Alstom contract.
20.	Ian King. Mr King has been Invertec’s Sales Director for about eight years, and prior to that was Invertec’s Sales Manager. He was a director of Volante from 6 October 2005 to 11 December 2006. He is now a director of Elite. Mr King was again a straightforward witness whose evidence was barely tested in cross-examination, but his evidence was confined to the financial state of ITS and the meeting on 14 October 2005 (as to both of which, see below).
21.	Paul Sutcliffe. Mr Sutcliffe is a Chartered Accountant. In August 2005 he was employed by Grant Thornton. As explained in more detail below, he was seconded to Invertec for a week to prepare a financial due diligence report on Volante. He gave a short statement about his involvement and his report. He was not required by the Defendants to attend for cross-examination.
Missing witnesses
22.	Counsel for the Defendants submitted that an adverse inference should be drawn from Invertec’s failure to call two other witnesses, namely Helen Wilson and Gillian Coils, and in particular its failure to call Ms Wilson. Ms Wilson was Volante’s Sales Administration Manager. One of Ms Wilson’s duties was to input sales information into Volante’s computerised accounting system, EFACS, which functioned as the company’s general ledger. Mr Coils was Volante’s Credit Controller. For reasons that I shall explain below, I do not consider that Ms Wilson’s, let alone Ms Coils’, evidence would have been of such significance that an adverse inference should be drawn from Invertec’s failure to call them. 
The Defendants’ factual witnesses
23.	Mr de Mol. Mr de Mol (who is known to anglophones as “Eric”) is a Dutch citizen. He has a masters degree in Civil Engineering from the University of Eindhoven. He has experience in design engineering, project management and sales. Although he is based in the Netherlands, as related below he has had considerable involvement with businesses based in the United Kingdom. He speaks fluent English. I regret to say that, for reasons I shall explain below but which are not exhaustive, I did not believe his evidence on the key issues in the case.
24.	Harald de Wit. Mr de Wit is also a Dutch citizen. He is a qualified accountant. He also speaks fluent English. He had a prominent role in the negotiations between DMH and Invertec, and in particular he had primary responsibility for the provision of financial information to Invertec. There is no dispute as to his authority to act on behalf of DMH in this regard. As explained below, Mr de Wit had a personal financial interest in the sale of Volante since Mr de Mol agreed to, and did, reward him for his work if the sale was completed. Again I regret to say that, for reasons I shall explain below but which are not exhaustive, I did not believe his evidence on the key issues in the case.
25.	Harrie de Kok. Mr de Kok is another Dutch citizen. He is also a qualified accountant and works for the firm of Mazars Paardekooper Hoffman NV (“Mazars”). He also speaks fluent English. He was a straightforward witness, but his evidence was only directed to his letter dated 25 October 2005 and the telephone conference on the same day.
The expert witnesses
26.	It was common ground between counsel by the end of the trial that the expert evidence which had been adduced was not central to the issues. Accordingly, I will only make occasional reference to it in this judgment. I have taken it all into account, however, and indeed have found it of assistance. 
27.	Christopher Clements. Mr Clements is a Chartered Accountant and a partner in Grant Thornton UK LLP (“Grant Thornton”). In the Defendants’ skeleton argument counsel for the Defendants submitted that little or no weight should be given to Mr Clements’ report since he lacked independence for two reasons. First, because Grant Thornton were not only Volante’s auditors after its acquisition by Invertec, but had also seconded Mr Sutcliffe to Invertec to carry out the financial due diligence. Secondly, because Mr Clements was a witness of fact as to the events in later October 2005, and in particular the telephone conference with Mr de Kok on 25 October 2005. In his closing submissions counsel for the Defendants maintained this submission, but did not press it with any vigour. In my view Mr Clements was not an ideal choice of expert for the reasons given by counsel for the Defendants, but I am satisfied that he discharged his responsibilities as an expert entirely properly. 
28.	Vanessa Winspeare. Ms Winspeare is a Chartered Accountant and an Associate Director of Smith & Williamson Ltd. She too fulfilled her responsibilities as an expert entirely properly.
The facts in general
29.	In this section of the judgment I shall set out the general facts of the case. I shall return to the specific factual issues below.
Volante
30.	Volante was formed by Mr de Mol together with his then business partner John Park in March 1997. Mr Park and Mr de Mol had been working for a plastics company based in Newton Aycliffe, Perstorp Warerite Ltd, for about 5 years. Mr Park and Mr de Mol agreed a management buy-out of the transportation division of the company’s business, which produced interiors for buses and trains. They formed Volante to purchase the assets of the division, including its machinery and hire the division's staff. Volante then established a manufacturing facility at Trimdon Grange.
31.	DMH acquired 50% of the issued share capital of Volante and Mr Park acquired the other 50%. Mr Park became the Managing Director of Volante, and Mr de Mol the Sales Director. Mr de Mol was based in the Netherlands, and he visited Trimdon on average for three days every two weeks.
32.	DMH was not merely Volante’s holding company at this time. It also provided Mr de Mol’s services and perhaps other services.
33.	From 1998 onwards Mr Park and Mr de Mol consulted Bryan Nelson with regard to the management and finances of Volante. Mr Nelson is a Chartered Accountant with considerable experience in running companies. He is a British citizen, but based in France. Mr Nelson received a B share in Volante, and as related below it was agreed that he would receive a share of the proceeds in the event of a sale of Volante.
34.	From the inception of Volante Mr Park intended to retire at 60, and he and Mr de Mol planned to sell Volante at that point. Accordingly, Mr Park and Mr de Mol built up the business of Volante with a view to a future sale.
35.	In early 2000 Mr Park suffered a stroke. After he recovered, he decided he wanted to sell his shares and asked Mr de Mol to buy him out. On 12 December 2003 DMH acquired the remaining 50% of the ordinary shares of £1 each in Volante for a consideration of £1,500,000. DMH paid Mr Park £500,000 and the balance was satisfied by the allotment and issue of £1,000,000 loan stock in DMH. A charge over the shares was granted by DMH in favour of Mr Park as security for DMH's obligations under the sale and purchase agreement.  The first £500,000 of the loan notes were redeemed on 1 July 2004. The second £500,000 was due to be redeemed in July 2005. Failure to redeem the loan notes on the due date was an event of default under the sale and purchase agreement
36.	In the meantime Mr Park moved to working part-time. In about September 2002 Volante engaged Gerald Hancocks to act as General Manager on a consultancy basis. In mid 2003 Volante engaged Mr de Wit was a consultant.  Shortly afterwards, Mr de Mol asked Ms Wilkinson to report to Mr de Wit on financial matters. In about early 2004 Mr de Wit was appointed General Manager and Joe Winnie Operations Manager.
Volante’s financial situation in the first quarter of 2005
37.	In 2003 and 2004 Volante was very profitable due to a contract referred to as the Connex contract with Bombardier Transportation in Derby. This contract came to an end at the end of 2004, however. It is clear that this placed Volante under some financial pressure. Thus in a memo to Mr de Mol dated 25 January 2005 Mr Nelson commented that “the forecast sales … show the Company to be in some jeopardy” and “the Accounts … do not make good reading”, and went on to say that he “particularly concerned that John [Park] gets paid out in July and retires as planned”. Similarly, in an email to Mr de Mol dated 11 February 2005 Mr Nelson wrote:
“It is looking as though there may be insufficient cash to pay John, on the due date, which could have difficult ramifications for you if it is just left open.
Your contract guarantees John the final instalment, based upon the security of his shares. We do not want to get into that situation.
The other point that I would like to make is now is the time to organise finance, whilst the Company is still making profits. For my peace of mind and especially yours, I would like to see the sums, to show that sufficient cuts are to be made for the balance of the year to ensure at least break even over the remaining months, leaving us a profit for the year.”
38.	A particular problem was Volante’s cash flow. Thus in an email to Mr de Mol dated 17 February 2005 Mr de Wit wrote (as with all documents originally in Dutch, I quote from the agreed English translation):
“The cash situation is not getting any better as you can see ... After payments made to the Tax Department ... we have no money in the account to pay other creditors at the moment. Something needs to happen very fast on the sales side ... I think we are running big cash risks at the present time ... ”
39.	As a result, Volante engaged Mr Nelson under a new consultancy agreement dated 1 January 2005 to advise upon a plan to sell the company. In the meantime, steps were taken to reduce costs. In particular, Volante made 23 employees redundant in February 2005.
40.	On 24 February 2005 Mr de Wit sent Ms Wilkinson an email instructing her to chase suppliers for credit, reduce stocks and chase debtors.
41.	On 4 March 2005 Ms Wilkinson emailed Messrs de Mol, de Wit, Winnie and Park an analysis of Volante’s break-even position following the redundancies. She commented “It shows £375k in-house sales and £20k factored is the break even position.” (I shall explain the meanings of “in-house sales” and “factored sales” below).
42.	On the same day Mr Nelson sent Mr de Mol and Mr Park a memo in which he said:
“Please read this, the Company is at a cross roads and in my view significant decisions have to be made. 
... 
The two greatest threats that face the Company at the present time are lack of sales and lack of management. In the case of the former although Eric is bullish (and it is his job to be so!) there do not seem to be many definite orders on the horizon.”
He went on to pose a number of questions including:
“k)	How can strong cost control be introduced and managed as a discipline.
l)		Address the shortage of cash in July and carefully consider the alternatives listed below.”
43.	In an attempt to address the lack of sales, Mr de Mol was trying to get Volante appointed as a preferred supplier for the whole of the Bombardier Group, the world leader in train production. Bombardier indicated, however, that Volante’s existing turnover was too small and would need to be more than doubled.
44.	To address Mr Nelson’s comments about management, there was a re-organisation of Volante’s management in March 2005. Mr Winnie became General Manager and Mr de Wit became Finance Director.
45.	These measures do not seem to have allayed Mr Nelson’s concerns, however. On 30 March 2005 Mr Nelson sent Mr de Mol an email appealing for action on the latter’s part. In his memo Mr Nelson commented that “we all know the Company is facing very difficult times!”. He advocated the preparation of revised budgets for the current and following years and making further changes in the light of those budgets, which might entail refinancing.
46.	On 13 April 2005 Mr de Wit sent Messrs de Mol and Park a sales forecast for the period to June 2006. In his covering email he noted that predicted sales for the months of April, May and June 2005 were about £380,000 a month, but “After June we need work”.
47.	On 19 April 2005 Ms Wilkinson sent Messrs de Mol, de Wit and Park a spreadsheet reporting Volante’s results for March 2005 which included a detailed Profit & Loss account together with a draft commentary which included a summary Profit & Loss account. Both the detailed and the summary Profit & Loss accounts recorded actual “In-House Production Sales” in March 2005 of £332,299 (against a budget of £585,000), actual “Factored Sales” in March 2005 of £39,403 (against a budget of £25,000), actual “In-House Production Sales” in the 2004/5 financial year to date of £4,562,139 (against a budget of £5,645,000) and actual “Factored Sales” for the year to date of £986,144 (against a budget of £785,000). They also recorded that Volante had a loss before tax of £25,575 in March 2005 (rather than a budgeted profit before tax of £49,548) and that the profit for the year to date was £270,088 (rather than a budgeted £773,792). The detailed accounts also recorded that Volante made a loss of £58,333 in February 2005 (rather than a budgeted profit of £52,927).
Invertec
48.	Invertec is part of a group of companies owned by Mr Ellison and his family. Invertec’s principal business is in the manufacture of fluorescent lighting for the transport sector. In about 2002, James Valentine, the then General Manager of Invertec, arranged a meeting between himself, Mr Ellison, Mr Park and Mr de Mol to discuss a possible merger between Invertec and Volante, but this came to nothing.
ITS
49.	In about late 2003 or early 2004, Invertec set up a new trading division called Integrated Transport Systems (“ITS”) to make interior panelling for buses. ITS was run by Paul Smith and other employees who had left a company called Lydney Products Ltd after it had gone into receivership. Shortly after ITS had been set up with a factory in Gloucestershire, its principal customer was placed into administration. From this point onwards, ITS and Volante were competing closely for customers in the bus industry. Unlike ITS, however, Volante also supplied the railway industry.
Negotiations for a merger between Invertec and Volante, Volante’s financial situation in the second quarter of 2005
50.	In the spring of 2005 discussions started again between Invertec and Volante about a possible merger. It appears that the first approach was made by Mr Ellison to Mr de Mol in about February 2005. It is clear that Invertec’s approach to Volante was motivated by the fact that ITS was making a substantial loss, in large part due to the competition with Volante. Thus Mr Ellison said to Mr de Mol that Volante and ITS were “killing each other” in competition. Similarly, on 18 March 2005 Mr Park sent Mr de Mol an email reporting that that he flown back from Bristol with Mr King. Mr King had commented on the “crazy” prices Volante was offering in the bus industry, which Invertec was having to beat, and that only the customers were winning. In the year ended 12 December 2004 ITS made a net loss of over £357,000. Matters were no better in 2005: in the first nine months of 2005 it made a loss of over £237,000.
51.	Invertec’s management considered that combining Volante and ITS would offer the opportunity to reduce costs by relocating ITS to Volante’s factory. It would also have other advantages such as giving Invertec better access to the rail market. Thus both parties had good reasons for exploring the possibility of a merger.
52.	It is convenient at this stage to deal with the question of what each side’s “plan B” was if no deal was done. Invertec’s “plan B” was to close ITS’s factory and move production to its main factory. Mr de Mol’s evidence was that his “plan B” was for Volante to become a components (or second tier) supplier and to reduce its costs, in particular by making redundancies. I am prepared to accept that this was DMH’s plan B, at least until late in the negotiations with Invertec. Whether it was achievable is another matter, which I shall consider below. 
53.	On 25 April 2005 Mr de Mol met Mr Park and Mr Nelson to discuss a possible merger with Invertec. In preparation for this meeting Mr Nelson sent Messrs de Mol, Park and de Wit a memorandum in which he said:
“The Company is strong with a reasonable Balance Sheet but is facing problems of diminished trade, greater competition etc, and needs to take action before the lack of sales starts to weaken the Balance Sheet.
Problems:
1)	Lack of sales
2)	Intense competition
3)	Pressure on margins
4)	Lack of management
5)	Costs too high
6)	Lack of future planning
7)	High current assets
1)	Sales.
Why have they gone?
What has happened to Eric's extremely successful sales results in the early years?
What are the alternatives?
 ...
4) Sell out 
...
2) Intense competition: Invertec
They must be pouring money into putting us out of business instead of buying us, what do we do? 
... 
3)	Sell the Company to Invertec
4)	Do deal with Invertec
8)	Buy Invertec
9)	Arrange an amalgamation under a new umbrella company ... ”
54.	The minutes of the meeting on 25 April 2005 include the following:
“BN opened the meeting by pointing out the seriousness of the situation and the need for urgent action. In his opinion the Company was still strong, had only just broken into losses and there was sufficient time to reverse the trend.
 ... 
BN then talked about the deal between Eric and John to buy John's shares. He explained that in essence this had been an arrangement of Eric to buy John's shares without Eric personally having to borrow money. This worked for both parties up until now and it was obvious that the company could not find the cash to pay the last instalment.
 ... 
When questioned Eric stated that he wanted to sell at the earliest opportunity. Bryan insisted this was not the time to sell; everyone must work together to put the company back into sales and profitability. The American owner of Invotec [sic] had approached Eric and Bryan expressed the opinion that it was wise to do nothing at the moment. John also expressed concerns that if we open negotiations with Invite [sic] they would see our problems and fight harder to put pressure on us.
 ... 
Upon a question from John that if the Company was back into profitability in the short term and he could sell for a price of £2 million less the £5[00]k to John would Eric still want to sell, he replied that he would. Bryan replied that it was therefore essential that the Company was properly groomed for that sale with a full efficient management team and strong management techniques.
 ... 
Eric was of the opinion that sales would be around £400[000] per month for the foreseeable future. Bryan said that was dependent upon the selling over the next months.”
After the meeting, the three were joined for a management meeting by Mr Winnie, who estimated future sales at £350,000 per month.
55.	At the beginning of May 2005 Mr de Mol and Mr de Wit flew to North Carolina for a meeting with Mr Ellison and his son Gray Ellison on 4 May 2005. The parties agreed to negotiate for a merger of Invertec and Volante with a view to completion in July 2005. The proposal was for a new company to acquire both Invertec and Volante. In return DMH would receive cash and shares in the new company. The negotiations centred around the respective valuations of Invertec and Volante, which would affect the percentage of the new company held by DMH. Invertec did not want ITS to be included in the valuation of Invertec, which would have depressed Invertec’s share. Mr de Mol accepted at an early stage that DMH would have a minority share in the new company, but nevertheless was keen to maximise the valuation of Volante so as to either obtain a larger share in the new company or more cash.  
56.	On 6 May 2005 Mr Nelson sent Mr de Mol a memo setting out some thoughts and questions about the proposed deal in which he said:
“Before I start, I must warn you of a common problem: these the negotiations can take a long time and very often fail well into the agreements usually at the warranty stage, when the vendor realises just what he has to commit to! While all this excitement and frustration is going on, the business owner's mind is taken off his company and the Company starts to slide downhill. YOU MUST PROCEED FROM NOW UNTIL SIGNATURE AS THOUGH THERE WAS NO DEAL and keep your eye firmly on the ball. (Some institutional buyers have been known to use this to get the price down!!) In particular management must be brought back to Volante, whether or not it is owned by another company.
Questions
….
2)	Did you discuss warranties?
...
8) 	 Was due diligence discussed?”
57.	Also on 6 May 2005 Mr de Wit sent Mr de Mol, Mr Park and Mr Nelson a valuation of the new company which valued Volante at £2,803,000, 37% of the new company.
58.	On 10 May 2005 Mr Paulson met Mr de Mol and Mr de Wit for an initial discussion, but little was said about the details of the proposed merger.
59.	On 14 May 2005 Mr de Wit sent Mr de Mol a list of things to do while he (Mr de Wit) was on holiday. This included the following:
“Cash is a major problem. Julie will give you an update. NSAA is the victim of this particular right now. Julie is in discussions with the banks for conversion of the contract. Fortis has also taken up the business again in the UK (see my e-mail and information). Bryan is up to speed and will discuss it during his visit to Trimdon with a view to a possible (temporary) solution. If Invertec goes quick we will be free of a problem. But output is essential to it at the present time (Joe knows that only too well). ”
The reference to conversion of the contract is a reference to the fact that Volante’s existing invoice-discounting bank (RBS) had declined to continue since it was also exposed to Bombardier, and so Volante was seeking a new invoice discounter. NSAA is a reference to NSA Apparatenval BV. NSAA and NSA Metalindustrie BV, referred to as NSAM, were sister companies and both were among Volante’s suppliers. 
60.	On 17 May 2005 Mr Paulson met Mr de Mol again for a detailed discussion of the proposed merger. During the meeting Mr de Mol explained his objectives, which included paying off Mr Park, taking some personal cash and meeting a commitment to Mr de Wit which Mr Paulson recorded in his note of the meeting as being an option on 20% of (presumably Volante’s) stock. Mr de Mol put forward a six-point proposal which he repeated via email the following day. The first and main point was that Mr de Mol did not want to “lend money” to the proposed new company in the form of shares, but instead by way of a secure loan.
61.	Point 2 of the proposal as expressed in the attachment to the email was as follows:
“My advisors have described to me the personal impact of personal warranties and indemnities and I have come to the conclusion that I would not like to sign any warranties but I would like to discuss this further.”
This was the first appearance of what was to be a continuing theme of the negotiations, namely Mr de Mol’s reluctance to provide warranties. As related below, Mr de Mol came to accept that DMH would have to provide warranties, but remained concerned to limit their scope. 
62.	Either during the meeting or during a telephone conversation on 18 May 2005, Mr de Mol invited Mr Paulson to attend a meeting with Bombardier. From Volante’s perspective, the point of this was to assist Volante to secure preferred supplier status with Bombardier.
63.	Having spoken to Mr Ellison, Mr Paulson replied to Mr de Mol’s proposal in an email dated 19 May 2005 saying that Mr Ellison wanted to stick with his proposal with regard to shares. On the questions of warranties Mr Paulson wrote:
“We will provide warranties to show that we stand by our reported information. We would expect you would want to do the same. Neither of us should expect to be bound by projected numbers, but certainly we want you to trust our reported data as we want to trust yours: warranties make sense here.”
64.	Mr de Mol forwarded this email to Mr Nelson and asked Mr Nelson to give him arguments to support his proposal. Mr Nelson duly sent Mr de Mol a memo outlining arguments on 22 May 2005.
65.	On 23 May 2005 Mr Nelson emailed Messrs Mr de Mol, de Wit, Park and Winnie and Ms Wilkinson minutes of meetings he had on 18 and 19 May 2005. The minutes of the meeting with Ms Wilkinson on 19 May 2005 are telling and merit quotation in full:
“Subject cash Flow.
A request had been made to temporarily increase the factoring percentage from 80% to 90%.
The overdraft extension to £100k had been agreed to 30th June.
The Inspector had been contacted to agree an extended payment plan for the corporation tax spread over four months.
Julie was now using cheques instead of BAX [sic] to better control payments.
Creditors had been delayed to the maximum.
Julie had started upon the stock reduction exercise with Joe embracing:
Swap sale or use.
Laminates analysis and decide what could be used elsewhere
Joe was now signing orders and nothing was being ordered unless it was absolutely necessary.
Julie to check old and scrap stock items
The stock exercise would be complete by the end of June
The following meetings had been held with banks: GE, European Financial Factors, Barclays Bank and Lloyds TSB.
Two of the banks interviewed looked good and a decision would be made to the following week.
Julie had promised to let everyone have a simple weekly cash flow until the new Bank was appointed.”
66.	To explain some of the matters referred to this minute:
i)	The factoring percentage refers to Volante’s invoice discounting arrangement: Volante had asked to receive 90% of the invoice value rather than 80%. (Although this facility was often referred to as a factoring arrangement, it was not a true factoring arrangement since the bank did not deal with the customers.)
ii)	The overdraft extension was from Volante’s normal overdraft limit on its NatWest sterling account of £50,000.
iii)	The corporation tax was Volante’s corporation tax for the year ended 30 June 2004. At that time the tax payable was thought to be £119,774. This sum had been due for payment on 1 April 2005. Volante asked the Inland Revenue to agree to payment in four monthly instalments. It appears that shortly afterwards the Revenue did agree to monthly payments of just under £30,000 in July, August, September and October, or least that Volante thought that this had been agreed. Ms Wilkinson’s evidence, which I accept, was that the reason why she negotiated the instalment plan was that Volante did not have the money to pay the full amount due in April 2005. This is supported by the statement in the minutes that creditors had been delayed to the maximum.
iv)	The meetings with banks were in order to find a replacement for RBS as Volante’s invoice discounter.
67.	On the same day Mr Nelson sent Messrs de Mol, de Wit and Park and Ms Wilkinson a memo explaining in some detail what was likely to be required by Invertec during due diligence of Volante.
68.	Also on 23 May 2005 Mr de Mol sent Mr Paulson a revised valuation of the proposed new company prepared by Mr de Wit. This valued Volante at £3,553,000, 45% of the new company.
69.	On 24 May 2005 Mr Paulson and Mr de Mol met consultants engaged by Bombardier at Volante’s factory. It appears that during the course of the day both Mr Paulson and Mr de Mol spoke to Mr Ellison by telephone.
70.	On 25 May 2005 Mr Paulson emailed Mr Ellison a spreadsheet comparing Mr de Wit’s valuation of the companies with a version prepared by Mr Paulson using profit before tax data for Invertec prepared by Ms Harris. Some confusion was caused at trial by the fact that the copy of this document included in the trial bundle also wrongly incorporated copies of two Volante Budget Profit & Loss accounts for the year 2005-2006 which I am quite satisfied in fact date from later in time, as they are in substance the same documents as those attached to Mr Paulson’s email to Mr Ellison dated 18 August 2005 discussed below. As Mr Ellison rightly pointed out in cross-examination, those documents cannot have dated from before August 2005.  
71.	Also on 25 May 2005 Mr de Mol sent Mr Paulson a draft strategy document prepared for submission to Bombadier. This stated:
“Volante is in the final phase of a merger with a lighting and panelling supplier with operations in UK and the Far East. Due diligence phase is due to start in June 2005. The purpose of this merger is for Volante to offer low-cost integrated ceiling systems. Furthermore, this merger offers opportunities for sourcing components in the Far East. The combined group will be 27 million euros (50% in Railway, 50% in Bus), BT accounting for less than 20% of the overall turnover.”
72.	Mr Paulson forwarded this to Mr Ellison and commented:
“Look at the way Eric has committed himself to us!
The opening text describes well their expertise. But beyond that a large part of the credibility of his pitch rests on his future relationship with us and what we bring to the group.
It's nice for us that the rail market is already opening up for our lights.
But Eric has now put himself into a position where he really won't want to walk away from us, because part of the credibility of his relationship with his biggest customer is now dependent on the deal. This will put Harald and Bryan Nelson in a potentially difficult position if they want to be very hard-nosed in the negotiations (although in an extreme scenario their best alternative to dealing with us might take them to Teknoware for a similar lines ... very hard to see that, though).”
73.	On 26 May 2005 Mr de Mol telephoned Mr Paulson. As Mr Paulson recorded in his note of the conversation and reported to Mr Ellison by email the same day, Mr de Mol said that he “thinks we have a deal”. This optimism proved to be premature.
74.	On 29 May 2005 Mr de Wit sent Mr Nelson and Mr de Mol a third valuation of the new company which valued Volante at £4,228,000, 43.2% of the new company.
75.	On 31 May 2005 Mr Nelson sent Messrs de Wit, de Mol and Park a memo in which he said that “I do not understand the £1000k addition to Volante valuation”. He went to discuss a number of issues including the following:
“Volante’s trading future.
I have received Eric’s sales budget (which seems to include the Infotec [sic] sales) and Julie and Joe are putting together the budget upon this basis. What concerns me greatly is that this budget will show losses and upon DD the other side will at least be asking some difficult questions, but more probably seek a reduction in value. It is imperative that this budget is not discussed with the other side yet and it is even more important that neither of them attend any of our meetings until we have this well and truly sorted. I have already said that it needs thinking out of the box to correct this problem.”
76.	On 1 June 2005 Mr Winnie sent Messrs Park, de Mol, Nelson and Mr de Wit a first draft budget for Volante’s 2005-2006 financial year, including a Profit & Loss account for the year. This showed budgeted “In-House Production Sales” of £4,406,000 and “Factored Sales” of £111,000, making a total of £4,517,000. It also showed a budgeted loss of £234,494. In his covering email Mr Winnie commented “the key feature is that the forecast sales need to be significantly higher to support any sort of decent bottom line performance”.
77.	On 2 June 2005 Mr Paulson sent Mr de Mol and Mr de Wit a draft Heads of Agreement together with Invertec’s valuation for the new company. This valued Volante at £3,215,000, 40% of the new company.
78.	On 3 June 2005 Mr Nelson circulated a memo commenting on the draft budget in which he stated that “I do not feel the draft addresses the fundamental problems of the company”.
79.	On the same day Ms Wilson sent Mr de Mol Volante’s final sales figures for May 2005 broken down both by customer and into “manufactured” and “factored”. The “manufactured” sales totalled £345,481.88 and the “factored” sales totalled £70,000.70, giving an overall total of £415,482.58.
80.	On 4 June 2005 Mr Nelson sent Mr de Mol and Mr de Wit comments on the draft Heads of Agreements in which he identified two deal breakers. The first was the valuation of the parties’ respective shares in the new company. The second was as follows:
“Warrants and Data Accuracy
Both parties agree to be bound by warrants within the merger agreement, stating that all data submitted as part of the due diligence and negotiation phases is a true and fair representation of the state of both parties and their respective operations, managers, and directors.
In the event that such data is subsequently found to have been false or deliberately misleading, both parties accept that they will be entitled to pursue legal redress against the offending counter-party.
In my view this is the second deal breaker. Eric has already stated that he will sign no warranties and this section clearly states that full warranties will be signed by both sides. This sets out the real nonsense of this deal. Eric only wants to sell his shares and under normal circumstances would be advised to sign properly safeguarded warranties on what he is selling. In this deal he's been forced into carrying out DD into the other companies (one of which is Malayan registered) to safeguard his investment.
Both of you have got to really understand the implication of DD and warranties. Most of the deals that fall over are at the warranty stage and I realise that you will reciprocate and enforce warranties on the other side, however in the real world of warranties it is the richest person who wins.”
81.	On 5 June 2005 Mr de Wit sent Mr Ellison and Mr Paulson a revised valuation proposal which valued Volante at £3,848,000. There were telephone conversations between Mr Paulson and Mr de Mol and Mr de Wit on that day and the next. On 7 June 2005 Mr de Mol emailed Mr Paulson a letter commenting on those discussions and on the draft Heads of Agreement. The comments on the latter included the following:
“We would like you to take out the warrants on data accuracy on VPTIS. To our opinion it is not necessary to have this in because the valuation on VPTIS is based on audited annual accounts.”
82.	On 9 June 2005 Mr Paulson replied to Mr de Mol by email. One of the points he queried was the exclusion of Volante Verkleidungssysteme Gmbh (“Volante Germany”, also known as LVS) from the deal. On the question of warranties Mr Paulson said:
“As you and I discussed on Monday, we want to keep in the section on warrants because we want both of us to be fully confident in each others' statements, excluding of course sales projections for 2006 or similar data. By this we mean information which we share over and above anything covered in audited accounts and due diligence. So we would want warrants to be included, please.”
83.	On 10 June 2005 Mr Paulson and Mr de Mol travelled to Berlin to meet Bombardier. During the meeting Bombardier’s Vice President for Group Procurement recognised Volante’s technical competence, but said that it could not become a strategic supplier without strengthening its management. Mr Paulson sought to explain how this would be addressed by the proposed merger with Invertec.
84.	On the same day Mr de Wit replied to Mr Paulson. With regard to Volante Germany he explained:
“Volante Germany is excluded from the merge as it also not taken into account in the valuation formula. Eric is considering to give the shares back to the owners as it is a family owned business and it will be a problem to them that shares goes to a third party. We are talking about 10% of the shares. We do not have influence and never got any dividend out of it.”
85.	Also on 10 June 2005 Mr de Wit sent Mr de Mol, Ms Wilkinson and others in Volante an email with the subject “Chasing results and money!!!!!” which listed sums which “we need to collect … (via credit notes of suppliers or orders of customers) before yearend (end June)”.
86.	On 12 June 2005 Mr Nelson sent Mr de Mol a memo which included the following:
“PRIVATE & CONFIDENTIAL
This memo is for your eyes only and you must discuss paragraph one with both your legal advisor and tax advisor as soon as possible.
One) You mentioned to me this morning that you have to honour a share option scheme with Harald for 20% of the shares. I think this is an illegal act, arising out of your agreement with Jordan, which could give you legal problems and they could be tax problems, but more importantly could result in your losing the faith of your buyer. 
... 
Two) In the light of this morning's revelation it appears you are not going to get sufficient cash out of this deal to pay all your liabilities:
								£
Legal & Professional fees say		     30,000
John						   500,000
John interest say two months*7% 	     17,000
myself 2.5%*5%*3.2 million 		     80,000
father 						   100,000
Harold 20%*3.2 million 		   640,000

Total 						1,367,000

It would seem sensible to renegotiate a cash sum of at least £1.5 million, to leave you some spare cash in case any warranties are called in after the sale.
Three) It seems both you and Harald resolutely continue to believe the other side will be sparing with warranties and will carry out little due diligence. Your conversation of this morning and your note to me is very vague and can be interpreted to include everything. First and foremost I can tell you that no lawyer respectful of his career will allow his client to precede completion without legal due diligence …
The notes of your conversation memorandum state that you agree to warranties upon data accuracy, which in my book means everything the Company has done and is doing, as I have set out previously. I have already told Harald in previous conversations that you cannot hide behind audited accounts. This notion displays a total misconception of what warranties are all about. Unless you agree otherwise now, the vending agreement will arrive with a large number of warranties ... ”
87.	On 14 June 2005 Mr Nelson sent Mr de Mol another memo on this subject in which he wrote:
“I had a worried John on the phone last night to tell me that you had rung him during the day from an open office in Holland, in front of employees, to discuss my personal and confidential notes to you. You said that ‘Bryan Nelson’ had it all wrong and that Harald had ‘earned’ the Option and you only had to pay him the profits ... 
Harald Share Option Scheme
I can only take on board what you tell me on the phone last week you told me that you had a share option scheme with Harald and YOU OWED HARALD 20% OF THE COMPANY. I naturally assumed that Harold had taken up his option and owned the shares and that was the reason you owed Harald 20% of the share sale consideration. I then started to worry about how you were to accomplish everything. Now you tell John Harald has ‘earned’ the shares and you only owe the profit. I am now completely bewildered! … ”
Negotiations leading to the sale of Volante, Volante’s financial situation in the third quarter of 2005
88.	On 15 June 2005 Mr Paulson sent Mr de Mol a revised draft of the Heads of Agreement. Mr de Mol discussed this draft with Volante’s solicitors, Ward Hadaway. As a result Robert Thompson of Ward Hadaway sent Francis Rundall of Charles Russell, Invertec’s solicitors, an email on 21 June 2005 saying that the structure proposed was too complex for a number of reasons. Amongst these was that Volante had thought that ITS was a distinct legal entity, whereas it now understood that ITS was trading division of Invertec the losses of which were to be indemnified by the Ellison group and thus not taken into consideration in valuing Invertec. Accordingly, Mr Thompson on behalf of Volante proposed a simpler deal, namely a sale of the shares in Volante to Invertec for cash and a secured loan note.
89.	On 22 June 2005 Ms Wilkinson, Mr Nelson, Mr Park and Mr Winnie attended a Volante directors’ monthly review meeting to discuss the company’s performance in May. A Management Report for May 2005 was prepared for this meeting at the instigation of Mr Nelson. The minutes of the meeting and the Management Report were copied to Mr de Mol and Mr de Wit. This was the first time that such a Management Report had been prepared. Section 1 deals with the financial performance of the company. Paragraph 1 contains a table of summary results which include the following figures:
Profit & Loss account	May-05 Actual	May-05 Budget	2004/5 Actual	2004/5 Budget	
In-House Production Sales	377,199	640,000	5,252,656	6,895,000	
Contribution on In-house Production	200,673	330,480	2,522,513	3,495,140	
Factored Sales	64,326	25,000	1,087,975	835,000	
Contribution on Factored Sales	37,723	2,000	410,858	272,000	
Total Sales	441,525	665,000	6,340,631	7,730,000	
Total Contribution	239,396	332,480	2,933,371	3,767,140	
  
90.	Paragraph 1.4 contains a breakdown of factored sales into “Stadler”, “Nantes”, “Packaging” and “Other” accompanied by a statement that “other includes carriage charged to customers and other raw material sales”.
91.	Paragraph 1.4 contains an aged creditors analysis as at 31 May 2005 showing about 12% at 120 days or more, 15% at 91-120 days, 12% at 61-90 days, 25% at 31-60 days and 36% under 30 days. Five key creditors are listed as being over 150 days with explanation. These include Resopal due to 150 days end of month terms and NSAA “Requested delayed payment”.
92.	Paragraph 5.2 contains a bar chart plotting monthly actual sales and budgeted sales from July 2004 to June 2005 to date. Actual sales are shown as lower than budgeted sales in every month, but particularly so in March – June 2005.
93.	It appears that sometime in the week of 20-24 June 2005 there was a meeting between Mr Ellison, Mr Paulson and Mr de Mol at which the idea of changing the deal from a merger to purchase by Invertec was discussed. As a result, on 24 June 2005 Mr Paulson emailed Mr de Mol and Mr de Wit an outline proposal for a purchase of the shares in Volante by Invertec together with a first draft due diligence proposal prepared by Grant Thornton, whom Invertec had engaged to conduct due diligence on Volante for the purposes of the transaction. The purchase proposal envisaged a completion date of 31 July 2005. Mr de Mol forwarded this email to Mr Nelson. 
94.	Also on 24 June 2005 Ms Wilkinson sent Messrs de Mol, de Wit, Park and Nelson a second draft of Volante’s budget for 2005-2006. The Profit & Loss account showed budgeted “In-House Production Sales” of £4,731,000, budgeted “Factored Sales” of £171,000 giving a total of £4,902,000 for the year. It also showed a budgeted loss of £2,889.
95.	On 25 June 2005 Mr Nelson replied to Mr de Mol’s email of 24 June 2005 saying:
“I feel compelled to say ‘told you!’
You must talk to Robert about signing the vending agreement before DD is complete.
Before any DD is started you must have complete confidentiality from everyone involved. This is your competitor and if the deal falls over they walk away with all your secrets. 
We must decide who is going to be involved from the Volante viewpoint in the Commercial DD, it is an exhaustive list and will be very disruptive. Julie will be key in the finances, but you will have to be involved plus Joe, Gillian, Harald and John. ... ”
96.	On 27 June 2005 Mr de Mol sent Mr Paulson an amended draft of the purchase proposal. On the same day Mr Paulson sent Mr de Mol and Mr de Wit some further amendments. The proposal was then discussed by Mr Paulson with Mr de Mol and Mr de Wit in a telephone conversation on 28 June 2005 which Mr Paulson reported to Mr Ellison by email immediately afterwards. Mr Paulson’s report includes the following:
“2. Sale & Purchase agreement
He wants to have the agreement signed up before we do the due diligence. I said we didn't want to waste any more lawyer time or money, and that we would sign once we've done the diligence and seen the audited accounts.
Eric says they will be naked in the dd and therefore need protection. I invited him to get Robert, his lawyer, to write up a brief heads of terms if they were concerned: that and the confidentiality should give them the protection they need. 
Harald then said that if we were to do the dd before the agreement they would expect to see all warrants etc removed from the agreement because they would now be unnecessary. Again, I said this wasn't acceptable to us, seeing the paperwork doesn't remove their obligation to ensure the whole picture is revealed.”
97.	On 1 July 2005 Mr Nelson sent Mr de Mol a memo advising on a number of matter that Mr Nelson were of concern with regard to due diligence, including Volante’s year end accounts. In this connection Mr Nelson wrote:
“You must realise that any overstating of profit whether you feel is to be justified or not will provoke a writ from the buyer under the relevant warranty clause, within the warranty period the loss in sale consideration, brought about by the overstatement.”
98.	On 6 July 2005 Ms Wilson circulated the final June sales figures to Mr de Mol, Mr de Wit, Ms Wilkinson and a number of others at Volante. As with the May figures they were broken down by customer and into M (manufactured) and F (factored). The M total was £370,205.49 and the F total was £110,446.60 giving an overall total of £480,652.09.
99.	On 7 July 2005 Mr de Mol sent an email to Messrs Park, Winnie and de Wit recording that they had agreed to hire Mr Hancocks as a consultant again to solve the production problems Volante was experiencing with its contracts with Alstom and Bombardier to supply interiors for TGV trains. Of the two contracts, the more important and problematic was the Alstom contract.
100.	On 8 July 2005 Mr de Mol sent Mr Paulson an email expressing concern that Invertec was getting less interested in the deal. He went to ask “Why finish deal end September while we have everything ready end Juli”. It appears from this and from Mr Paulson’s commentary when forwarding the email to Mr Ellison that Invertec had asked for a lock-out agreement until the end of September 2005.
101.	On 14 July 2005 Ms Wilkinson sent Mr de Wit an email saying that NSAA had asked payment of its account by 20 July 2005. She had asked for until the end of the month, but NSAA was not happy. She did not want to promise NSAA something Volante could not achieve.
102.	Also on 14 July 2005 Mr de Wit sent Mr de Mol and Mr Winnie an annotated copy of the first draft budget for 2005-2006.
103.	On 15 July 2005 Mr de Wit sent Ms Wilkinson and Ms Coils a list of questions about the draft results for June. These included:
“1. Total factored sales in monthly report for May and June is GBP 174,773 but according Efacs and Excel of HW this is GBP 180,447. What is this difference of GBP 5,674?
2. Detail margin per project/client is needed on factored sales of June as I expect a much higher margin on it.”
104.	Also on 15 July 2005 Mr Paulson send an email to Mr de Mol and Mr de Wit with comments on a draft Heads of Terms.
105.	On 18 July 2005 Mr de Wit sent Mr Winnie and Mr de Mol a revised version of the second draft budget for 2005-2006 noting that Mr Winnie had increased the sales and Mr de Mol would review this.
106.	On 20 July 2005 Mr Winnie sent Mr de Mol a third draft sales forecast for 2005-2006 showing “in-house sales” of £5,271,000 and “factored sales” of £171,000, making a total of £5,442,000.
107.	Also on 20 July 2005 Ms Wilkinson sent Marlies Rijken of NSAA sent an email asking if she could delay the payment to NSAA which had been requested by that day until the end of the month because Volante was waiting for a payment from a customer. Ms Rijken replied later the same day in an email which she copied to Mr de Mol saying:
“There are a lot of old invoices open. Several times I asked you for a payment of the overdue invoices.
First there was a problem with the bank, and now you only can pay asked if the money from your customer is payed [sic].
There have been a lot of delays lately.
We need the money on our bank account on the 25th of July.
If we did not receive the money then, legal action will follow. We cannot accept another delay. At that time all the outstanding invoices will be send for collection. All the collected cost are for your account.
To prevent legal action, please make sure the next payments are on our bank account on the 25th of July:
NSAA  44.741,15 euro; and
NSAM. 3.965,40 euro.”
Ms Wilkinson responded in an email copied to Mr de Mol and Mr de Wit that she would make the payment as soon as she could. 
108.	Although it is out of sequence chronologically, it is convenient to interpolate at this point that the Defendants rely on a letter from NSAM dated 12 November 2007 saying that a particular invoice was never overdue. Ms Wilkinson’s evidence was that that invoice was a different invoice altogether. In any event, that invoice is for the total sum of €3,600.00, so this letter does not address the majority of the sum which NSAA was chasing in July 2005.
109.	On 21 July 2005 Invertec and DMH signed Heads of Terms for the sale and purchase of the shares in Volante. The Heads of Terms provided for a consideration of £1.5 million in cash on completion together with guaranteed loan notes in favour of DMH totalling £1.3 million to be redeemed in five equal annual instalments. In addition Mr de Mol was to receive a bonus of £525,000 if sales to rail customers averaged £7.5 million per annum over five years. Paragraph 4.1 of the Heads of Terms provided that DMH would not engage in discussions with or provide any information to any other person with a view to the acquisition of any of the shares in Volante until 30 September 2005.  Paragraph 9.1 of the Heads of Terms provided:
“The Vendor or the Purchaser agree:
9.1.1 that all information provided in respect of the proposed transaction by or on behalf of the Vendor is given in good faith, but is in no respects warranted by the Vendor will; and
9.1.2 the only warranties and representations that shall be given by the Vendor shall be those contained in the final form of Share Sale and Purchase Agreement.”
110.	On 25 July 2005 Invertec agreed with Grant Thornton that Mr Sutcliffe would be seconded to Invertec for a week to undertake the financial due diligence reporting to Invertec at a cost of £3,250 excluding VAT and disbursements. This was instead of Grant Thornton preparing a report at a cost of £30,000 as previously quoted. In the event Mr Sutcliffe spent a little over 6½ days working on the project.
111.	It is common ground that on the Volante side Mr de Wit took charge of all financial aspects of the due diligence exercise leading up to the SPA. This included not only dealing with Mr Sutcliffe, but all the other financial queries raised by or on behalf of Invertec. Volante’s other financial personnel, and in particular Ms Wilkinson, were not permitted to send information to Invertec or its advisors without clearing it with Mr De Wit, nor were they permitted to speak to Invertec personnel. Ms Wilkinson’s evidence, which I accept, was that as a result she grew uncomfortable about the lack of transparency. The Defendants contend that there was nothing sinister about Mr de Wit exercising tight control over the release of information to Invertec given the possibility that the deal might not go through. I accept that the mere fact that Mr de Wit exercised control is not indicative of any wrongdoing. What matters is what Mr De Wit did and did not disclose.   
112.	Also on 25 July 2005 Mr de Wit sent Mr Paulson a proposal for a sliding scale bonus for Mr de Mol which provided for a sales target of £4 million in the first year increasing to £11.5 million in the fifth year. Mr Paulson forwarded this to Mr Ellison the same day, commenting “It’s worrying … that they are expecting only £4m of rail sales in year one”. On 26 July 2005 Mr Paulson sent Mr de Wit a counterproposal.
113.	On the same day Mark Swansbury of Volante’s tax advisers Hindsight Tax Partners sent Ms Wilkinson a letter in which he reported that the Inspector of Taxes had raised a query on the 2004 corporation tax computation. This arose out of the fact that DMH went from owning 50% of Volante to owning 100% in the year ended 30 June 2004, making them associated companies and affecting the marginal relief calculation. Mr Swansbury enclosed a revised calculation of the corporation tax for the year 1 July 2003 to 30 June 2004 amounting to £140,398.58, an increase of some £20,625.
114.	On 28 July 2005 Mr Hancocks delivered a report on improving the efficiency of Volante’s work on the Alstom TGV project. The report identified a number of problems which needed correction urgently and proposed solutions.
115.	On 29 July 2005 Mr de Wit sent Ms Wilkinson and Mr Winnie a “final” version of Volante’s 2005-2006 budget. This showed projected “In-House Production Sales” of £4,689,000 and “Factored Sales” of £240,000, giving a total of £4,929,000. It also showed a profit before tax of £232,122. 
116.	On 1 August 2005 Mr de Wit sent Ms Wilkinson a revised version of the May 2005 Management Report. In his covering email he said:
“Hereby the adjusted reporting of May which you can discuss with the auditor of Invertec as an example. Tell him that this is our first reporting in this format and that in the former months we (had and reviewed also this information) but reviewed and official reported mainly only P&L and BS. Do not give him any other monthly reporting if we can avoid that. Furthermore, do not discuss actuals and budget 2005 2006. I want to do this after KPMG have confirmed the numbers. Furthermore, we have to have more closer look to BS and cash flow for future. Concentrate on efacs-system and procedures (not on numbers) with this auditor of Invertec.
Explanation of actual - budget: Sales (and result) are way below budget as Transbus went into administration and did not recover, we got competition in bus-business of ITS and margins on Connex were not as expected.”
The auditor of Invertec refers to Mr Sutcliffe. KPMG were Volante’s auditors who were then working on Volante’s statutory accounts for the financial year ended 30 June 2005. 
117.	The changes to the May 2005 Management Report in the revised version were mostly fairly minor. The figures in paragraph 1.1 set out above were unchanged, as was the breakdown of factored sales and the description of “other” in paragraph 1.4. The aged creditors analysis in paragraph 1.9 was unchanged except for the comment with regard to NSAA which was changed to “Delayed payment as POD of old invoices needed”. Paragraph 5.2 with its bar chart of actual and budgeted in-house sales was entirely deleted, however.  
118.	On 2 or 3 August 2005 Mr Sutcliffe attended Volante’s premises. During the visit he met Mr de Wit and Ms Wilkinson. Mr Paulson and Mr King were also present.
119.	On 5 August 2005 Mr de Wit emailed Ms Wilkinson a fourth version of Volante’s 2005-2006 budget “with +200k sales”. This projected “Sales” of £4,889,0006 and “Factored Sales” of £240,000, giving a total of £5,129,000. The profit before tax was £254,326.
120.	One the same day Mr de Wit emailed Mr Paulson four documents containing financial information relating to Volante which Invertec had requested. He described these as follows:
“- Actual P&L (and BS) compared with budget for 2003/2004; - Tie-in mgt-accounts 2003/2004 with annual report 2003/2004; - Cash flow/financing actual compared with budget 2003/2004; - Actual P&L compared with budget for 2004/2005 (and explanation for differences).”
The first attachment was a file named “Mgt accounts – final 2003-2004.xls” and the fourth attachment was a file named “Mgt accounts – final 2004-2005.xls”.
121.	Also on 5 August 2005 Ms Wilkinson sent Mr de Wit an email saying that Mr Sutcliffe had asked her for support for Volante’s break even analysis. She attached a document she had prepared earlier in the year showing break-even in-house sales ranging from £475,000 per month with no change to £375,000 with various savings, assuming monthly factored sales of £30,000. She asked Mr de Wit whether to send this to Mr Sutcliffe.  
122.	On 8 August 2005 Mr Nelson sent Mr de Mol an email saying that Mr de Mol and Mr Park had previously agreed to pay him 5% of their sale proceeds from Volante. 
123.	On the same day Mr de Wit emailed Mr Paulson four more documents containing financial information relating to Volante. It appears that this information had been requested by Mr Sutcliffe, and Mr de Wit asked Mr Paulson to forward it to Mr Sutcliffe.
124.	One of the attachments was Volante’s 2005/2006 budget. This is an important document in the case, or rather two important documents. The first is the budget Profit & Loss account. This is essentially the same as the version of 5 August 2005. It shows “Sales” rising from £340,000 in July 2005 to £443,000 in June 2006 to make the total of £4,889,000. Listed separately are “Factored Sales” of £20,000 per month, to make the total of £240,000. Profit before tax is shown as -£3,267 in July 2005 and -£5,609 in August 2005 rising to £37,442 in June 2006, making the total of £254,326. The second document is headed “Volante PTIS Ltd Budget – Factoring need (in GBP) 2005-2006” (“the Factoring Need Sheet”). The Factoring Need Sheet shows Volante’s monthly income from invoice discounting (at 85%) and debtor receipts together with monthly expenditure broken down into various categories. Amongst the expenditure shown are four monthly payments of £30,000 for corporation tax in July, August, September and October 2005.
125.	Also on 8 August 2005 Mr de Wit replied to Ms Wilkinson on the subject of the break-even analysis:
“We are not going to send him this break-even P&L!!!!! I told David already that from the budget 2005/2006 they can see the break-even.”
126.	On 9 August 2005 Mr Paulson duly forwarded Mr de Wit’s email of 8 August 2005 with the four attachments to Mr Sutcliffe and Ms Harris.
127.	Between 8 and 10 August 2005 Invertec’s board of directors, including Mr Ellison, held a strategy meeting at Invertec’s premises. One of the major issues discussed, although not the only one, was the purchase of Volante. Mr Sutcliffe attended the final day of the meeting and presented the due diligence report which he had prepared.
128.	Mr Sutcliffe’s report includes the following passages:
“2		Key Issues
2.1	Historic results
…
* turnover and margins have declined in 2005 due to
- loss of business following administration of Transbus
- higher than expected costs on a Connex contract
- increased competition
…
2.2 Forecast sales and sales mix
* Sales are forecast at £4.9m (below the current year levels)
* confirmed sales per management are £3.5m
* last years forecasts were £1.6m below budgeted
* management at Volante consider the forecasts for 2006 to be very cautious in comparison to last years
* Volante staff consider break even sales to be between 3.5 and £4m.
…
2.3 Balance sheet at 30 June 2005
…
* Corporation tax from the previous financial year remained unpaid at 30 June 2005
* the company had to extend its overdraft from £50,000 to £100,000 and to re-negotiate its debt purchase agreement due to cash flow problems around the year end.
….
3 Review of balance sheet
…
3.5 Short term creditors
….
Corporation tax
The corporation tax computations are incomplete for the current year. However the creditor relating to corporation tax last year remained unpaid at 30 June 2005 (£119,974).
Volante have come to an agreement with the Inland Revenue and have avoided penalties for late payment. However interest is being charged on the outstanding balance.
The client paid off an element of the balance post year end, but approximately half (per Julie Wilkinson) remains unpaid
…
3.7.Draft statutory accounts
Draft statutory account were received 9 August 2005, therefore there has not been time to carry out a full review of these, however the following points have been noted:
…
* The cash flow shows an outflow of £72,382 for the year and a significant increase in funding via debt purchasing
…
4 Review of results and forecasts
…
4.1 Historic and forecast sales
Sales were under budget in 2005 by approximately £1.6m and decreased by £416k from the prior year.
…
The sales forecasts for 2005 [sic – clearly 2006 in context] provided by management at Volante show 84% of in-house sales (70% of total sales) budgeted for are train related sales. Management accounts at May showed 76% of sales were train related compared to the 61% budgeted.
The gross profit margin achieved in 2005 was 21% before business overheads. (per 2005 management accounts in appendix A). All other costs totalled £1,141k. Therefore if costs remain as for last year break even sales would be £1,141k/21% = £5,433k..
However due to the change in sales mix and cost savings management at Volante anticipated that break even sales will be approximately £3.5m - $4m. We have requested the break even analysis prepared by Julie Wilkinson, however we are yet to receive a copy.
…
4.2 Confirmed orders for 2006
Of the £4.9m sales budgeted for, £3.5m are confirmed orders (per Harald). The order showed approximately £3.2m on 1 August 2005.
…
4.4 Full budgets for 2006
Although sales forecasts for 2006 were received during the visit to Volante during the week end 5 August 2005, the full budgets have just been received (9 August 2005). Therefore a detailed review of these has not been carried out. However on undertaking a brief review the following was noted:
* Sales have increased from the original forecast received as Volante management believed they had been over cautious initially
* margins are higher than for 2005 actual giving a break even sales of around £4 m.
…
Cash flow forecasts have been requested given the need for cash outflows in preparation for the larger train contracts.”
129.	During the meeting Mr Ellison asked Mr Sutcliffe and Invertec’s managers for their opinions as to the pros and cons of acquiring Volante. Someone (probably Mr Paulson) made a note. Among the negatives comments recorded were “red flags over financials” (Mr Smith), “financial discrepancies” (Ms Harris) and “cash flow” (Mr King).
130.	On 10 August 2005 Mr de Wit sent Mr de Mol, Mr Winnie and Ms Wilkinson “the budget 2005-2006 which has been agreed”. This included, in addition to the Profit & Loss account which had been sent to Invertec, various detailed breakdowns of the figures, including a breakdown of the sales budget. This shows 30 items under the heading “Sales” and 4 under the heading “Factored sales”. The latter are “ADT002 Volante Germany (LVS) … 71”, “STADLER Volante Germany (Stadler) … 30”,  “BOMB4 Clagi (Tram Nantes) … 10” and “Other/spares … 129”.
131.	As a result of the discussions at the meeting on 10 August 2005, on 12 August 2005 Mr Paulson sent Mr de Wit and Ms Wilkinson an email requesting further financial information for Volante including:
“Current status of 03/04 corporation tax and arrangements for repayment
…
Your actual cash flows for 04-05 and draft cash flows for 05-06 (by quarter if that's all you have)
Understanding of the factoring relationship as it relates the provision of cash flow to the business and the calculation of factoring need in the spreadsheet already provided
Your July management information pack”
132.	Ms Wilkinson prepared a draft response to this request which was amended by Mr de Wit and sent to Mr Paulson the same day. The answers to the questions set out above given to Invertec were as follows:
“Current status of 03/04 corporation tax and arrangements for repayment
Liability of corporate tax 03/04 was GBP 119k (see annual report 03/04). We are up-to-date with the two payments of GBP 30k each, which have been made according our payment schedule. This has been has also been displayed in the budget we have forwarded to you (Sheet: Factoring need).
…
Your actual cash flows for 04-05 and draft cash flows for 05-06 (by quarter if that's all you have)
The estimated cash flow 05/06 (per month) is in the budget which we supplied to you. The estimated factoring we need for our operations (incoming cash minus outgoing cash) can be seen on the sheet ‘Factoring need’. The estimated status of the outstanding factoring/cash can be seen on the sheet ‘Balance sheet’. Our actual cash flow can be seen in the draft annual accounts 2004/2005 which we have sent you. Bear in mind that we have paid out dividends of GBP 400k in 2003/2004 and GBP 500k in 2004/2005. Already confirmed to you (and in the budget) that we will not pay out dividends in 2005/2006 because of the potential deal.
Understanding of the factoring relationship as it relates the provision of cash flow to the business and the calculation of factoring need in the spreadsheet already provided
See point above.
Your July management information pack
Close of July is not finished as we have been very busy with the year end close, audit and DD. Our expectations is to have it available next week expected to be close to our budget.”
133.	On 14 August 2005 Mr de Wit sent Mr Nelson an email in which he said:
“Next week Eric sits with Invertec and then the decision will be taken by Invertec. I told Eric once again that we had to do the deal (and also the other party has to do the deal ... But you never know. Eric has to convince them about our budget/forecast next week. About warranties: we did not tell them any lies, so what would be the problems with warranties.”
134.	On 18 August 2005 Ward Hadaway served Volante’s Legal Due Diligence Replies in relation to the proposed acquisition.
135.	On the same day Mr de Wit sent Mr Paulson Volante’s sales forecast for after June 2006, divided into “Sales” and “Factored Sales”.
136.	Also on 18 August 2005 Mr de Wit sent Christine Stobbs of KPMG Volante’s business review 2004-2005 for inclusion in the annual report. He also asked her to reclassify one item in the draft annual accounts so as to tie-in with “our mgt-P&L”. One of the attachments to the email was a file named “Volante PTIS – mgt-P&L - 2004-2005.xls”. This file contains Volante’s Profit & Loss account for 2004-2005. There is a summary of the actual figures for the year, which include “In-House Production Sales” of £5,591,144 and “Factored Sales” of £1,203,421, and a monthly analysis of the actual figures against the budget.
137.	Also on 18 August 2005 Ms Coils sent Mr de Wit Volante’s draft management accounts for July 2005. In her notes to the draft accounts Ms Coils’ first comment was “Inhouse sales are £65k below budget for the month”.  The draft Profit & Loss account showed actual “Sales” of £274,869 against a budget of £340,000 and actual “Factored Sales” of £72,456 against a budget of £20,000. Mr de Wit replied later that day, saying:
“All I need more is the details of the factored sales/margins per project and the margins per project on the inhouse sales. I will come back tomorrow with my corrections.”
138.	Also on 18 August 2005 Mr Paulson sent Mr Ellison a “first pass at the combined ITS-Volante budget” which he had prepared based on work done by Ms Harris. In his covering email he commented:
“Harald’s projected £254k PBT for Volante alone in 05-06 doesn't stack up - if you apply the 04-05 ratios as Kassy has done, you get a loss of £100k.”
This refers to a revised version of the 2005-2006 Budget Profit & Loss account prepared by Ms Harris in which Ms Harris kept the projected sales of £4,889,000 (in-house) and £240,000 (factored) the same, but adjusted the projected costs so that the sales to costs ratios were the same as in Volante’s 2004-2005 accounts. As Mr Paulson commented, the result was to convert a projected annual profit of £254,326, representing a pre-tax ROI (return on investment) of 17% on £1.5 million, to a projected annual loss of £99,852, an ROI of -7%. Ms Harris’s model projected a loss in July 2005 of £30,532 and a loss in August 2005 of £32,441.  
139.	Mr Paulson also commented on the projected profitability of ITS and Volante combined, based on Volante’s projected sales. 
140.	On 19 August 2005 Mr de Wit sent Ms Coils an email saying:
“As we need to be careful with our cash, I want to see and approve all outgoing payments as of now. Furthermore, we will come to the final result for July on Monday.”
141.	Also on 19 August 2005 Mr de Wit sent Mr de Mol a draft of an agreement between HWH and DMH which provided for DMH to pay HWH £330,000 as remuneration for Mr de Wit’s services in connection with the proposed sale of Volante together with of a potential bonus of 20% of DMH’s earn-out under the sale. As I shall discuss below, it is not clear whether this agreement was executed or not.
142.	On 22 August 2005 Mr Paulson sent Mr de Mol and Mr de Wit an email asking for Volante’s July 2005 results “to see how things are progressing”. 
143.	Also on 22 August 2005 Mr Swansbury sent Ms Wilkinson an email replying to an email she had sent him on 10 August 2005 in response to his letter dated 25 July 2005. In his email Mr Swansbury said:
“I spoke to the Inspector of Taxes today, and I need to respond to him this week. Based on what you have told me, the rate of corporation tax should be adjusted to reflect the fact that D mol Holdings BV is an associated company and, subject to any views you may have, I will respond to the Inspector on this basis. I attached a computation to my letter of 30 June setting out the tax liability, totalling just over £140,000. From this should be deducted payments already made, being some £60,000, leaving £80,000 payable.
I know when we spoke in July you mentioned an arrangement had been entered into with the Collector of Taxes. When I just spoke to him the Inspector of Taxes was talking about the Collector being on the verge of issuing distraint proceedings. Can I help in speaking to the Collector?”
144.	It not clear precisely what happened following this email, since Hindsight’s file has not been disclosed. Counsel for Invertec told me that this was because the file was held to order of the administrator of Volante. It does not appear that either side attempted to obtain disclosure of the file, for example under CPR r. 31.17, although Mr de Mol obtained voluntary disclosure by Hindsight of a single document from the file just before closing submissions. Be that as it may, it appears from Volante’s letter dated 7 September 2005 (as to which, see below) and a subsequent email from Ms Wilkinson to Mr Paulson dated 23 January 2006 that in response to the threat of distraint Volante negotiated an agreement under which payment of the last two instalments of just under £30,000 payable under the instalment plan together with the additional £20,600 payable as result of the revised assessment was deferred to 31 October 2005 in consideration of the payment of an additional £7,001.44.
145.	On 23 August 2005 Mr de Wit sent Mr de Mol an amended draft of Volante’s July 2005 Profit & Loss account showing a number of proposed corrections. In his covering email he wrote:
“Here are the results from July 05 and the possible corrections (see the second worksheet). Let me know what you think. Don’t send this around!! For internal use only!!”
The corrections included adding £56,692 to “Sales”, so as to give £331,561 against a budget of £340,000, and deducting £56,692 from “Factored sales”, so as to give £15,764 against a budget of £20,000.  
146.	On 24 August 2005 Mr de Wit emailed the adjusted July 2005 accounts to Mr Paulson. The version sent to Mr Paulson did not show the changes that had been made. Nor did Mr de Wit tell Mr Paulson that any changes had been made.
147.	Mr Paulson forwarded the July 2005 accounts to Mr Ellison and Ms Harris with the comment “Not nice to see a loss of £9k, but much better than the £31k loss we had modelled”. The reference to the £31k loss is a reference to the loss of £30,532 projected in Ms Harris’s revised version of the 2005-2006 budget attached to the email of 18 August 2005 discussed above. 
148.	Also on 24 August 2004 Mr Paulson sent Mr de Mol and Mr de Wit an email requesting that Ms Harris visit Ms Wilkinson soon to start planning the financial integration of the companies. Mr de Wit commented on this to Mr de Mol:
“I think we need to impress upon him that we first have to complete the contract before we go any further! The emphasis must be on completing the transaction in the shortest time!!!!”
DMH declined to agree to Ms Harris visiting or speaking to Ms Wilkinson prior to completion of the transaction.
149.	On 25 August 2005 Mr de Wit tried to send Mr Hancocks various documents including a copy of the July 2005 accounts showing the corrections he had made “for your eyes only”. Either Mr de Wit inadvertently sent the email to an invalid email address or it was not delivered for some other reason. As a result the email was directed to an address for the email administrator, who was Ms Wilkinson. It does not appear from the evidence that Ms Wilkinson actually read the email at the time, let alone considered the attachments.
150.	On 26 August 2005 Ms Coils sent Mr de Wit two emails asking for permission to pay four suppliers that day.
151.	On 31 August 2005 Ms Wilkinson sent Mr de Wit an email saying:
“Did you have a chance to talk to Lloyds about agreeing to the 90% extension as it runs out tonight?
We have drawn all the money we can which gives us the £30k which we were to pay to the Inland Revenue.
Gillian and I are to look at payment proposals.
I need to call Kirsty this afternoon at Resopal and will give you an update on their account and make a proposal for payment. Eric may want to talk to Resopal to discuss this as well.”
152.	Later the same day Ms Wilkinson sent Mr de Wit a schedule of payments saying in her covering mail:
“This is the first draft of the payments to be made.
A lot of them are old April invoices and relate to the suppliers that are likely to take us to court or we require continued supply for.
Also the transport companies will not collect, which compounds the situation.
 ... 
I'm looking at the Resopal account to see how we can put together a payment plan, but I'm not sure how they will take it.”
The schedule shows a total of £232,710 as owing to suppliers. It does not include other creditors such as DMH and HMRC. 
153.	On 1 September 2005 Ward Hadaway served Volante’s Additional Legal Due Diligence replies in relation to the proposed acquisition.
154.	Also on 1 September 2005 Mr de Wit agreed an extension to the increase in the advance rate under the Lloyds invoice discounting arrangement to 90%, which had expired on 31 August 2005, until completion of the deal with Volante (which at that time was expected to by 30 September 2005).
155.	On 2 September 2005 Mr de Mol agreed terms with Mr Hancocks for further consultancy work by Mr Hancocks from 23 August 2005 until the end of the September 2005 to assist Volante with managing the Alstom TGV contract and in particular outstanding quality issues. The agreement provided for Mr Hancocks to be paid a daily fee of £400 if the deal with Invertec was completed, but only £237.50 if not. The moment the deal was finalised the agreement was to terminate. Mr Hancocks’ fees were to be paid by DMH and his expenses by Volante.
156.	On 2 September 2005 Ms Wilkinson emailed to Mr de Mol a scanned copy of a document on Volante headed notepaper which she had signed in her capacity as company secretary. The document is undated, but it is probable that Ms Wilkinson signed it that day. The document is headed “To Whom It May Concern”. It contains what appear to be a series of answers to questions, including the following:
6 In the UK the auditor’s report it is one of the criteria that the company is not bankrupt. If you refer to the financial accounts they are signed by an independent certified third party.
 ... 
10 In the UK the auditor's report it is one of the criteria that the company is not bankrupt and is a going concern. The financial accounts would not been signed unless the auditors would be satisfied of the economic stability of the company.
12 This statement allows NedTrain to undertake financial and/or quality audit at Volante PTIS Limited with the cooperation of Volante PTIS Limited.”
157.	On 5 September 2005 Mr de Wit sent Ms Wilkinson Volante’s draft annual accounts prepared for KPMG and asked her to review the tax position. In her reply the same day Ms Wilkinson said that KPMG would be likely to undertake a post-balance sheet review and look at the July accounts, and asked Mr de Wit if he had these. Later that day Mr de Wit sent Ms Wilkinson the July accounts which he had sent to Invertec, and asked her to forward them to KPMG.
158.	Also on 5 September 2005 Ms Wilkinson sent Messrs de Mol, de Wit and Winnie a production schedule showing current orders and the budget, commenting that “Overall order book is light by £200k against budget”. The attachment shows “in-house sales” of £284,000 in August against a budget of £335,000 and “Factored sales” of £66,000 against a budget of £20,000, making a total of £350,000 against a budget of £355,000.
159.	On 7 September Ward Hadaway served answers to additional enquires made by Invertec in relation to the proposed acquisition.
160.	Also on 7 September 2005 Ms Stobbs of KPMG sent Ms Wilkinson the final draft of Volante’s annual accounts for the year ended 30 June 2005 for signature that day. In her covering email Ms Stobbs asked Ms Wilkinson to arrange for payment of KPMG’s outstanding fee from the previous year in the sum of £1,600 plus VAT.
161.	The annual accounts recorded turnover for 2005 as £6,794,565 (down from £7,211,712), profit before tax of £285,306 (down from £574,973), profit after tax of £210,451 (down from £457,815) and an overall loss of £289,549 after the payment of £500,000 in dividends (as opposed to a profit of £57,815 after the payment of £400,000 in dividends). Net assets were £816,571. The cash flow statement showed a net cash outflow of £72,382 and an increase in debt of £308,357.
162.	 The directors’ report stated that the total turnover of the company had decreased due to decreased turnover in the bus market as a result of the administration of one of the main bus manufacturers and increased competition, but that the turnover in the train market had increased. It also said that the company was looking for external growth by acquisition or merger. KPMG’s auditors’ report contained an unqualified opinion that the accounts gave a true and fair view of the company’s affairs as at 30 June 2005.
163.	The figure shown in the accounts for corporation tax in the year ended 30 June 2004 is the original figure of £119,774 (less an adjustment of £13,195 in respect of an earlier year) rather than the revised figure of £140,399. Note 21 to the accounts records that during the year Volante paid DMH consultancy fees of £167,472 and that at the end of the year DMH owed Volante £8,607.
164.	One of the important documents in the case is a letter from Volante to the Commissioners for Her Majesty’s Revenue and Customs signed by Mr de Mol and dated 7 September 2005. It is necessary to set this out in full, and I shall do so here although it is not entirely clear that this letter was actually signed or sent on 7 September 2005. The letter reads:
“The duty on this statement on the statement below is unpaid, wholly or in part because of the failure of the company to meet its obligations under the Taxes Acts. On the basis that no proceedings are taken against the company for that duty or for the penalties and interest on it.
Volante Public Transportation Interior Systems Limited of Trimdon Court, Trimdon Grange, County Durham. TS296PE
Offers the sum 	£147,400.00
Less 			£59,996.94 already paid
The balance of 	£87,403.06 will be paid on or before 31st October 2005.
If the full sum has not been paid by that day, interest at the rate which applies for Section 86 Taxes Management Act 1970 and which may be varied from time to time will also be payable on any unpaid balance from that day. This interest will be payable without deduction of tax.
Statement of duties
Year ended 30th June 2004 Corporation tax £140,398.56”
165.	On 9 September 2005 Mr de Wit sent Mr Paulson a copy of the audited annual accounts together with a valuation of the shares in Volante calculated in accordance with the Heads of Terms. Mr de Wit commented “As you can see the final valuation is within 0.5% of the figures/valuation we forecasted”.
166.	On 12 September 2005 Ms Wilkinson sent Mr de Wit an email on the subject of the cash flow and payments for September and October saying
“I have been working in this, but really need a realistic sales target as the on order figures for nowhere near for the budget and our requirements. As previously advised we need £200k just for wages and overheads and we are struggling to achieve that with the order book I have. Eric has given me a couple of updates on the sales ...   ”
167.	On the same date Mr Paulson sent Mr de Wit the first draft of the SPA which had been prepared by Charles Russell.
168.	On 16 September 2005 Ms Coils sent Mr de Wit a draft of Volante’s August 2005 accounts.
169.	Also on 16 September 2005 Ms Wilkinson sent Mr de Wit and Mr Winnie a spreadsheet showing Volante’s current cash flow position. In her covering email she explained:
“Here is the current position as discussed.
I have three sheets [the first] with current availability and what we have already sent.
The next sheet is wages and inland revenue and €20k for EDM [i.e. Mr de Mol].
The final sheet is the minimum we need to send and does not include any additional for ALM [a supplier].
I cannot see us being able to pay Formica before the end of the month.
There will be some VAT and cash in, but I work at that later. 
Are you going to talk to Formica as they would normally be paid today at the latest?
As discussed we update the position daily so will send it to you.”
The last sheet shows a sterling cash requirement as at 26 September 2005, after taking into account Volante’s £50,000 overdraft facility, of £229,393.30. This total includes the following items:
“KPMG – accounts for 2004 – chq dated 30/9/05	- 1,880.00
….
Hogg – sue if not before 26/9				- 2,804.55”
170.	Later the same day Ms Wilkinson sent Mr de Wit a spreadsheet showing Volante’s sales. This includes two bar charts showing the sales from September 2005 to August 2005, one plotted monthly and the other plotted weekly. Both bar charts show a clear downward trend over the year. Indeed, the weekly chart includes a straight line which plots the downward trend.
171.	On 19 September 2005 Ms Wilkinson sent Messrs de Wit, de Mol and Winnie another spreadsheet showing Volante’s current cash flow position. This spreadsheet shows a potential shortfall of £3,393.27 rising to £19,073.72, as I understand it by the end of the month.  In her covering email she commented:
“There are a couple of things we need to discuss today/first thing tomorrow.
1 Formica - they called today and Gillian said that she thought it had been paid, but would look into it and get back to them. I was not sure if Harold had spoken to them so we need to talk to them tomorrow.
2 Recore - they are not happy. I advised Mike that we would try and pay before the end of September for the overdue invoices. Can you advise me on what has been said?”
172.	The paragraph about Recore referred to the fact that earlier that day Rediar Nygren of Recore had sent Michal Darnton of Volante, Ms Coils and others an email chasing for a response to three earlier emails about unpaid invoices. The first was an email dated 2 September 2005 requesting prompt settlement of two invoices due for payment on 22 July and 15 August 2005, the second was an email of 5 September 2005 also asking for prompt settlement of an invoice due on 8 June 2005 which had been omitted from the previous email, and the third was an email of 8 September 2005 chasing for a response to the first email and threatening not to deliver a current order if Recore’s terms of payment were not respected. The email of 19 September 2005 complained about Volante ignoring the earlier emails and asked for a response that day. Mr de Wit said that he would deal with the matter. 
173.	On 20 September 2005 Ward Hadaway sent Charles Russell an amended draft of the SPA.
174.	Later the same day Mr de Wit emailed Mr Paulson Volante’s August 2005 management accounts. As with the July accounts, the version of the August accounts sent to Invertec had been changed from the original version In particular £43,401 of sales had been reclassified from factored to in-house, so as to show in-house sales of £322,426 against a budget of £325,000 and factored sales of £25,371 against a budget of £20,000.  The version sent to Mr Paulson did not show the changes that had been made. Nor did Mr de Wit tell Mr Paulson that any changes had been made.
175.	On 20 September 2005 Mr Hancocks sent Mr de Mol, Mr de Wit and others a draft letter to Alstom regarding the TGV contract explaining that Volante’s costs were unacceptably high compared to its selling prices for a number of reasons. Mr Hancocks recommended, however, that the scale of the problem should be imparted face to face.
176.	On 21 September 2005 Nick James of Hay & Kilner solicitors wrote to Ms Wilkinson asking her to send him a cheque for £922.38 “by return in relation to my outstanding account which is now several months”. He went to say that he feared that his firm’s accounts department “will be taking action … unless the invoice is paid by return”. Ms Wilkinson replied by email on 22 September 2005 saying that she had passed the invoice and letter to Mr de Wit, but he was on vacation until 4 October 2005. She forwarded the email to Mr de Wit the same day. Mr James replied the same day saying that the invoice was overdue and he would appreciate payment following Mr de Wit’s return.
177.	On 23 September 2005 there were negotiations between Mr Paulson and Mr de Mol and their respective solicitors over the terms of the SPA. Mr Paulson reported to Mr Ellison by email later that day. One of the points he made was as follows:
“Fr [Mr Rundall] asked for extension of exclusivity into Oct to allow time to finish negotiation. Eric flipped, saying exclus only till 30/9 and sign within 1 wk ort he ‘goes to plan B’. We think he's bluffing but won't push on exclus till 31/10 as it also keeps his guys fast on docs turnarounds etc for a quicker close.”
178.	Also on 23 September 2005 Ms Wilkinson sent Mr de Mol, Mr de Wit and others an updated version of the sales order spreadsheet. This included a bar chart of weekly sales in 2005 through to week 39, whereas the previous bar chart of weekly sales ended at week 32. The new bar chart showed that the sales in weeks 33-39 were below even the straight line declining trend.
179.	Also on 23 September 2005 Ms Wilkinson sent Mr de Wit an email regarding a creditor of Volante called Percy Lane in which she said:
“I have had Paul Wright on the phone and he said you would call him every Friday to give him an update on the situation regarding the money we owe them.
I did not know who he was the time and said you were on holiday until 3rd October. 
... 
I advised him that I would mail you to let you know he had called.
 ... 
I think you should call him as he did not appear too happy.”
180.	On 26 September 2005 Charles Russsell sent Ward Hadaway an amended draft of the SPA.
181.	Also on 26 September 2005 Mr Hancocks sent Mr de Mol and others an email attaching an estimate of Volante’s losses if it were to withdraw from the Alston contract totalling £238,300 before taking into account any termination penalty.
182.	On the same day Mr de Mol telephoned Mr Paulson. Mr Paulson’s note of the conversation reads:
“- Concerns that TGV is not profitable on Alstom project
- Material + labour aren’t covered by cost price!
- Invested heavily to date
- EDM has called them + asked them either
1. to increase prices by 80-90% [or]
2. to find another supplier”
183.	After the conversation Mr Paulson sent Charles Russell an email saying:
“I called you a while ago to mention a concern flagged up by Eric this afternoon. Apparently one of their ongoing contracts, with Alstom, has proven to have been mispriced, as a result of which they occur a loss on every system they ship.
Eric said he wanted to be honest with us, and that he accepted we should ‘put it next to the Wrights clause’ in the warranties.”
By this, Mr de Mol meant that DMH was offering to indemnify Invertec in respect of these losses out of the earn-out payments.
184.	On 27 September 2005 Mr Paulson and Mr de Mol and their respective solicitors discussed the SPA line by line during a lengthy telephone conference. On 28 September 2005 Mr Paulson forwarded to Mr Ellison Mr Rundall’s advice after the meeting and added his own comments:
“Our session yesterday lasted for 7 hours. The basic problem in the negotiation has been Eric’s stonewalling position on the warranties, as you and I have discussed before. In the cold light of day, there are some key concerns which Francis has summarised very well in his email below:
1. Volante don't want to state the business as a going concern, or that it would be financially viable if the deal weren’t to go ahead with us. They also insist that we should have no warranty claim against them under £75k. There may be technical legal reasons form wriggling on this stuff, but it gives me an uncomfortable feeling about their real confidence in the prospects of their business. It also makes me wonder whether there is a financial hole waiting for is that we can't see at the moment.
2. I think Eric is getting a great deal in view of the current performance of his business, the possibility of the contract with Alstom (his #2 customer) going wrong, and considering what we will bring to him. In the circumstances, even if we still want to pay him £2.8M, the insistence of his lawyers that we subordinate Ellison Co debt to Eric's £1.3M instalment payments, can't do anything with the assets of Volante etc seems to me to be asking a lot.
3. I'm too suspicious, probably, but if you consider the demands of (2) in the light of the financial situation in (1) above, I wonder whether Harald knows will be disappointed and will quickly feel we've overpaid, hence the desire to bind us up tight so we can't try and grab back any of the £1.3M.
John, I apologise if I frustrate you would raise these points - maybe this is only my inexperience. But I really want to ensure we get best value of your money, and my hesitation and worry just reflect this. ….”
185.	Before replying to this email Mr Ellison sent Mr Paulson an email which may be a reply to an earlier email or voicemail from Mr Paulson saying:
“I don't think that Eric will buy the idea of a holdback. He has given us plenty of access to evaluate the bombardier preferred supplier status. reading between the lines, was bombardier expressing that we probably would not be a preferred supplier? if so can we still have significant bombardier sales as a tier two supplier? I think your options are: call the deal off because of the uncertainty (when Eric and Harold have stated they were confident we would be named); or go ahead on the strong belief that we can go grow significantly as a tier two supplier.”
186.	Later that day Mr Ellison replied to Mr Paulson’s email as follows:
“your comments and francis’s are valuable. in negotiations, you always need to keep asking yourself if you've made a mistake.
you and Francis are raising really good questions. we should not let eric's deadline prevent us from doing our due diligence
big red flags for me: 1. Volante don't want to state they are a going concern or financially viable if the deal isn’t done.
2. alstom problem and the cost thereof
3. bombardier and preferred supplier status
4. their lawyer' insistence on too much security on the debt.
5. current level of losses and cash flow problems for the next year.
6. their trying to limit the warranties after eric had agreed to cover that liability.
There are some important worries. if we need to slow down the deal to get the answers to bombardier and alstom, next 12 months cash flows, francis's questions on stock etc - I'm willing for us to say – ‘there are too many new issues. we need answers before we close. if you want to walk we are sorry, but we will not close without clarity on certain issues.’
on the other hand - how bad is our situation at its? how much would it cost to shut it down?”
187.	Also on 28 September 2005 Dietmar Graml of Volante GmbH sent Ms Wilson an email saying:
“As you surely know, Volante PTIS unfortunately has financial problems. For this reason it was agreed with Eric that Volante Germany will only supply against cash in advance.”
He went on to offer to supply certain items “as soon as the money is in our account”
188.	Also on 28 September 2005 Mr Hancocks emailed Alstom a revised draft of the letter he had proposed expressed as a letter from himself to Mr de Mol. The email confirmed that Alstom would visit Volante on 11 October 2005. 
189.	On 29 September 2005 Mr Paulson had a telephone conversation with Mr de Mol in which the possibility of an earn-out with regard to £1.3 million of the consideration for Volante’s shares was discussed. Mr Paulson’s note of the conversation records Mr de Mol as saying “£1.5m is holy but if you want to link the £1.3m to something over 5   yrs”. Following the conversation Mr Paulson sent Mr de Mol an email setting a proposal for a 5 year earn-out of £1.3 million under the SPA.
190.	On 29 September 2005 Ms Wilkinson sent Mr de Wit an email saying:
“I have not had a chance yet to go through the slow moving stock as yet. We have been trying to sort out cash and fend off supplier calls.
We're trying to work out what we have to pay at the moment and see the sales we have to allocate payment dates so we have something to tell the suppliers.
We will update fully tomorrow when we have the sales information for the month and an indication from Joe regarding the sales next week. …”
191.	On 30 September 2005 Mr de Wit sent Ms Wilkinson an email saying:
“I spoke to Paul Wright of Percy Lane and I have delayed payment again.
Sign off of the deal is planned on Wednesday.
Can you forward me the cash flow so that I can review it this weekend and we can discuss it on Monday!?!!”
192.	Later that day Ms Wilkinson sent Mr de Mol a spreadsheet showing the invoices due or overdue as at 30 September 2005. This spreadsheet shows a total of £198,672 as due of which only £21,031 was marked for payment, leaving £177,641.10 outstanding. Later still Ms Wilkinson sent Mr de Wit a spreadsheet showing Volante’s cash commitments commenting “We update this sheet every day”.
193.	On 3 October 2005 Ms Wilkinson sent Mr de Wit an email in which she said:
“… On another matter was the 90% just until the end of September? It appears to have gone. I will ask Mike for an extension as we are now £50k overpaid.”
194.	On the same day Ms Wilkinson sent Mr de Mol, Mr de Wit and others an updated version of the sales spreadsheet showing sales slightly up in September 2005, but still well below target.
195.	Also on 3 October 2005 Ms Wilkinson sent Mr de Mol, Mr de Wit and others a sheet showing the sales in September 2005. This recorded “in-house sales” of £344,000 against a budget of £365,000 and “factored sales” of £65,000 against a budget of £20,000. (On 4 October 2005 Ms Wilson circulated a slightly more detailed version of these figures, broken down into “M” and “F”.)
196.	Also on 3 October 2005 Ms Wilkinson emailed Mr de Wit a scanned copy of the letter from Volante to HMRC dated 7 September 2005 which she described in the covering email as “Letter regarding new tax payment schedule”.
197.	On 4 October 2005 Mr Paulson sent Mr Ellison the latest draft of the SPA. In his email he commented:
“Here is the latest draft of the SPA containing the earn-out. You’ll see there have been some changes but we've held firm on the warranties and have the earn-out itself, so I think this is still favourable. Of course, we could be super-pessimistic and worry about the ring-fencing of the £1.5 M, but as you and I have discussed before this would only be a problem for it if the company went into meltdown very quickly and I don't think this is going to happen.
 ... 
We are looking hard at the tax situation, as they have just disclosed an additional 04 charge levelled by the taxman for £20k which we're going to demand that they pay. We’re also looking at other tax again just in case there is other doubtful stuff in there.”
This is the first reference to the additional £20,000 on the Invertec side, and therefore it appears that this information had been disclosed that day.
198.	On the same day Mr Paulson sent Charles Russell his comments on the second draft of the Disclosure Letter which had been received from Ward Hadaway.
199.	On 5 October 2005 Mr Paulson forwarded to Mr Ellison an email on the subject of “Tax Info”. Unfortunately the email which was forwarded does not appear to have been disclosed, but judging by Mr Paulson’s comments it seems clear that it was an email from Charles Russell attaching the documentation which later became Annexure 61A to the Disclosure Letter, and in particular the email from Mr Swansbury to Ms Wilkinson dated 22 August 2005, which had been disclosed by Ward Hadaway with the second draft of the Disclosure Letter. Mr Paulson commented:
“This is the tax info which concerns us. Both Ruth and Francis are adamant that we shouldn’t sign until we're sure that the tax affairs are in order. Eric, who is now at the point of walking away, assures me his taxes all in order and he has never heard of the threatened ‘distraint proceedings’ (seizure of assets by the tax authorities) that are contained in the attached package. (By the way, none of this was mentioned in the disclosures.)
He has now gone away to check with Harald, but I've told him we’re not simply going to accept Harald's assurances and will need confirmation from the Tax Inspector that all is in order.
Eric is shouting that we've known all along about payments in instalments. My reply is that instalments for 04-05 might be acceptable, but why should WE be paying HIS tax from 03-04? After all, if he has £30k to pay why, shouldn't he find that from his £1.5 M? And if there are serious problems there, why on earth should we inherit them?
 ... 
I'm sorry that this is coming out at the 11th hour, but if they reveal key information only 24-36 hours before closing, it's difficult to do anything other than react at this late stage.
I’ll give you an update if Eric calls back. He assures me he will be moving to plan B tomorrow if we don't sign, but I think we must take that risk if the alternative is to land ourselves in serious tax problems, don't you agree?”
200.	Mr Ellison replied:
“I am sorry you are being subjected to this. it's difficult. i believe eric would be making a big mistake to walk. eric's old taxes - not yet paid should fairly be eric's. ee didn't own the company then and his taxes is not a liability like a trade payable. if there are questions about taxes from eric's ownership then he should indemnify us from any liability. with the earnout we have sufficient protection that he will pay via deduct from the earnout. i have never said anything other than eric's taxes should be paid by Eric and that he needs to indemnify us from future tax liabilities that arise because he, harald and his accountants did not file their taxes properly. every deal i've ever done contained this type of warranty.”
201.	On the same day, Charles Russell sent Ward Hadaway an email saying:
“Conversations today with David Paulson concerning the latest draft of the SPA and the second draft of the disclosure letter have led to the conclusion that Invertec should ask for three new indemnities in the SPA. These are in respect of:
* Tax liabilities. This should cover the £20,000 relating to the financial year ended 30 June 2004 but also any as yet unpaid instalments of tax relating to the year ended 30 June 200r or earlier periods.”
202.	As I understand it, this point was not in the event dealt with by the inclusion of an indemnity in the SPA since it was covered by the Tax Deed.
203.	Also on 5 October 2005 Mr Paulson sent Charles Russell an email on the subject of “Emails etc to be warranted” saying:
“… in principle these are all the things one would want to be able to count on.
1. Aug 05 financials.
2. July 05 financials.
3. Sales forecasts ... unlikely we can ‘rely’ on them, but if they were pure fantasies it would materially affect our view of the business’s future.
4. Their previous years’ management accounts (which we would also have seen during the financial dd) and cash flow, which materially affect our appreciation of their financial history.”
204.	On 6 October 2005 HMRC issued a statement acknowledging Volante’s amendment to its corporation tax return for the year ended 30 June 2004 showing the amount due as £140,398.56. This statement also shows accrued interest of £4,441.21. 
205.	On the same day Ms Wilkinson sent Mr de Wit and Mr Winnie an email attaching a spreadsheet analysing Volante’s cash position. This contains a list of suppliers owed money, against three of whom (Hogg, Aluminium Shapes and Wilson Tool) there is a note saying “Legal action”.  It does not appear that legal action had actually been brought by any of these three suppliers, but the note suggests that they had threatened legal action. (An earlier version of this document exhibited by Mr Clements to his first report and said to date from 26 September 2005 includes an additional supplier, Greenfield Polymer, with the same annotation. Presumably that supplier had been paid by 6 October 2005.)
206.	As at 6 October 2005 Invertec’s NatWest sterling account was overdrawn by £31,406.66.
207.	Also on 6 October 2005 the parties met to finalise and sign the SPA and associated documents. The documents were finally signed by Mr Paulson and Mr de Mol at about 1:30 am on 7 October 2005.
Events from completion to administration
208.	On 7 October 2005 (i.e. the day after the nominal completion date) Mr Paulson sent Mr Ellison an email in which he wrote:
“1. Cash
Kassy spoke to Julie at V today. She has an urgent need for £200k to meet pressing obligations, including £87k of tax, £7k of which is fines. Not good. However, we will make sure that we get the tax element back. Fortunately we've just negotiated a £300k overdraft facility and will be able to use that: V are up to the limit on their debt finance facility. No wonder Harald didn't want to disclose the cash position.”
It appears that this followed a visit by Ms Harris to Volante’s premises that day which I shall discuss below.
209.	Also on 7 October 2005 Mona Stoenescu of Clagi sent Ms Wilkinson saying:
“I tried to speak with you 3 times yesterday to ask you this:
1) What can you tell me about the payment of the last invoice? Mr Sperduti talked with Mr Eric de Mol on the phone, yesterday and they agreed that because of this huge delay of payment, Volante will also pay, this week, the last invoice….”
210.	On 8 October 2005 Mr Ellison sent Mr Paulson an email saying:
“this cash situation is a surprise to me and a pretty big negative. were you blindsided also?”
211.	Mr Paulson replied on 9 October 2005:
“I saw your note about the cash situation. Yes, I was blindsided, it's my fault not to have drilled into it in more detail and I'm sorry to have presented you with less than happy news right from the outset.
I've asked Kassy to ensure that we pay nothing that’s owing to Eric or Harald, as I think we’ve been treated unfairly. We’ll try to cut back that £200k as far as possible.
I don't want to start our relationship on a sour note, but I shall have to say something to Eric as I'm unhappy about it. Also I've asked Francis what the warranty situation is as far as cash is concerned, to [see] if any remedial action is open to us.”
212.	On 9 October 2005 Mr Hancocks emailed Mr de Mol and others a draft of a presentation to Alstom for the meeting on 11 October 2005 setting out in some detail Volante’s problems with the Alstom contract and asking for an increase in Volante’s prices. This document has been referred to in the proceedings as Mr Hancock’s “Report”, and I will adopt that terminology. 
213.	On 10 October 2005 Ms Wilkinson sent Ms Harris by email a schedule of suppliers who needed to be paid. This shows the sums of £96,816.90 and €125,477.72 (equating to £83,651.81), making a total of £180,468.71, as “due now”. It also shows the sum of £87,403.06 for “CT” (i.e. corporation tax) as due on 31 October 2005, giving a grand total due by the end of month of £267,871.77.  
214.	Also on 10 October 2005 Mr de Mol sent Mr Nelson an email on the subject “Volante Funds Transfer” saying:
“I wasn’t aware they stopped payment of your 1000 GBP. To be honest I wasn’t payed [sic] by my own company for the last 2 month because short of cash and most probably will not get that money at all with the new owner.”
215.	On the same day Invertec injected £100,000 into Volante
216.	On 14 October 2005 Invertec injected a further £70,000 into Volante.
217.	By 14 October 2005 Invertec had become aware of the changes that had been made to the July and August 2005 management accounts as well of Volante’s cash shortage. Mr Paulson decided to confront Mr de Mol and Mr de Wit. The meeting was also attended by Ms Harris and Mr King. Unsurprisingly, there were conflicting accounts of the meeting. The best evidence of what was said is contained in an email Mr Paulson sent to Mr Ellison reporting on the meeting later the same day. It is necessary to quote this in full:
“We had a difficult meeting with Eric. I thought it better to have Kassy and Ian involved and to say this was a board conversation (in case we need witnesses to anything), though in the event I did all the talking.
I showed him the 2 separate P&L's per month, and said that we felt the numbers have been set up in such a way as to persuade us the company was worth buying at their price, when in fact it wasn't.
I also explained that our legal advice was that this constitutes fraud.
Eric said he could explain it all. We asked Harald to step in, and sure enough he said there was an explanation for it all: tooling and packaging adjustments. He also denied the competence of their finance people to prepare the accounts (though Julie is a CPA and has been preparing for 6 years).
The upshot was this:
* I said we felt they had deliberately arranged the figures in order to push the sale through at a price they knew we wouldn't agree to.
* I said you and I would talk to Eric tomorrow to get his reaction
* I told Harald I didn't wish to work with him again
* I asked them both to leave and go home and not stay in the office any longer
We’re all very sorry that it happened like this. Eric is outraged at the suggestion of fraud (in retrospect, not a good word to have introduced at this point, but on the other hand there was no point in trying not to show him the gravity of the situation), while not seeming to understand why we could think they had done anything wrong.
For the record, all 3 of us thought that both he and Harold knew absolutely what they were talking about ... their protest is that what they did to the numbers was 100% legitimate business practice.
Also for the record, Harold was paid £100k by Eric at the close ... some motivation. According to Julie, John Park got his £500k, Harold £100k, Eric's parents £400k, Eric's lawyer £67k, leaving the balance (~£450k) to Eric.
 I very much fear Eric won't want to work with us in the future. If he does, his £400k in settlement of our claim would get us through the cash hole and leave him the chance to earn out £1.8M through performance BUT we may not want to work with him anyway if we think we can't trust him.”
218.	Although Volante’s “cash hole” is not expressly said to have been discussed during the meeting in this email, both Mr King and Ms Harris gave evidence that this was mentioned as well.
219.	A point which is not mentioned in this email, although it is mentioned in Mr Paulson’s email of 15 October 2005 quoted below, is that Mr Paulson set up a tape recorder to record the meeting but did not mention this to Mr de Mol at the beginning of the meeting. During the course of the meeting Mr de Mol became aware of the recording, and reacted angrily, at which point Mr Paulson destroyed it. There were minor differences of recollection between Mr Paulson, Ms Harris and Mr King as to why they planned to record the meeting and why they did not tell Mr de Mol about it, but the common thrust of their evidence was that the reason for making the meeting was to make sure that there was an accurate record of it without having to take notes and that the failure to mention it to Mr de Mol was an oversight due to the stress of the moment. All three were adamant that there was no intention to try and entrap Mr de Mol. I accept this evidence.   
220.	As indicated in the email of 14 October 2005, Mr Paulson asked Mr de Wit to leave Volante immediately. The consultancy agreement between HWH and Invertec provided for a six month notice period. HWH claimed the sums due to it during this period, but Mr de Wit did not pursue the claim for costs reasons. 
221.	On 15 October 2005 Mr Ellison discussed the matter with Mr de Mol. After the conversation Mr Paulson sent Mr de Mol an email saying:
“Further to your conversation with John today, this is how I suggest we approach next week:
1. We will engage an accountant to review the P&Ls and cash flow situation, and to interview the finance team at Trimdon. They will give us a review of the accounts and advise us of their reading of the situation. John and/or I will then review the results of their findings with you.
2. If the accountants’ views are negative, we and you will consider what our next steps are and how we should resolve our differences.
3. If their views are positive, i.e. if they agree with you that the P&Ls and cash flow situation are completely in order and that we were wrong to criticise you, we will of course apologise immediately. We will also withdraw any suggestion of fraudulent practice, which as I explained in our meeting is the legal terminology suggested to us: if it does not apply we will of course withdraw it and apologise unreservedly for using the word, as I know how much it has offended you.
4. If we are found to be at fault and have apologised, that will leave you with the decision as to whether you wish to work with us again in future. That will be your choice, but I can only say that I've enjoyed working with you so far and was looking forward to doing so in for the next few years, so I would regret it if we parted in those circumstances. But that is a decision for later, after the review has been completed and emotions have cooled.
5. If you choose not to work next week, I can't force you to. But I’d prefer to keep the relationship with De Mol Holding going, so that we can pay the people and keep the office going. I’d also prefer to keep up our momentum with the current projects, and I intend that we will continue to invest time and money in them. So if you can work, even if you prefer to communicate with John at the moment rather than directly with me, please do. ... 
Before I leave you, I have to say one last thing. You were rightly angry yesterday when you thought I was secretly taping our conversation. In fact, we switched on the machine only because I wanted to concentrate on talking rather than trying to make notes at the same time. I wanted there to be a record of the conversation for your protection as well as ours. But in the emotion of starting our conversation I forgot to mention it to you. I'm sorry, and I was embarrassed, and you were right to feel mad if it looked to you as though I had unfairly taken advantage of you. That's why I destroyed the tape.”
222.	Later the same day Mr Ellison spoke to Mr de Mol and Mr de Wit by telephone. During the course of the conversation Mr de Wit said that Invertec was at fault for doing inadequate due diligence. It appears that this comment particularly related to Volante’s cash flow situation. 
223.	Following the communications on 15 October 2005, both sides instructed accountants to consider the changes that had been made to the July and August 2005 management accounts. Invertec instructed Mr Clements and DMH instructed Mr de Kok.
224.	On 17 October 2005 Mr de Mol sent Mr Ellison a without prejudice letter containing proposals for resolving the dispute and demanding agreement by the end of day. This was followed by a number of telephone conversations between Mr de Mol and Mr Ellison over the next few days. 
225.	Later on 17 October 2005 Mr Ellison sent Mr Paulson an email asking “key question for francis or grant thornton – is harald correct that we did not ask about cash flows and therefore the cash flow surprise is our problem?”. Mr Paulson replied:
“We tried to arrange for Kassy to visit V 2 weeks before closing to sit with Julie and work on the cash flows. Eric refused, saying she was too stressed out by the deal and the people in the factory would be spooked by our visit, so Kassy would have to come after the close. Wanting to preserve morale in his business and prevent staff from defecting, we turned to the forecasts Harald had produced.
Of course, in hindsight I should have called off the deal as soon as it was stated that Kassy couldn't visit, but I was more trusting at that time. Sorry.”
226.	On 18 October 2005 Mr de Mol wrote to Mr Paulson stating that Mr Paulson’s accusation of fraud was defamatory and that together with the attempt covertly to record his response to the allegation amounted to a repudiatory breach of his service agreement which he accepted and to constructive unfair dismissal. Mr Paulson replied to this on 20 October 2005.
227.	On 21 October 2005 Mr Ellison sent Mr Paulson, Mr Rundall and Mr Clements an email saying:
“today i am also faxing you on behalf of david, emails that surround the cash flow issue and eric and harald’s obviscation [sic] efforts?
i hope these are helpful in clarifying this issue. clearly cash flow is the area that has cost us the most money (£400,000 between now and the end of the calendar year). david believes volante misled – herald believes we did inadequate due diligence and the fault is ours.”
228.	On 24 October 2005 Invertec injected a further £100,000 into Volante, making a total of £270,000 in October.
229.	After various further conversations and emails, a telephone conference was set up between Mr Clements and Mr de Kok on 25 October 2005. In advance of the telephone conference Mr de Mol emailed Mr Paulson a letter from Mr de Kok on behalf of Mazars to DMH concerning the changes which had been made to the July and August 2005 management accounts in which Mr de Kok stated:
“We have reviewed all of the reclassifications and adjustments that have been made by Volenti PTIS Limited. It appears to us that the reclassifications and adjustments are common practice reclassifications and adjustments in the process of preparing the monthly management accounts. The Company can provide sufficient evidence to support the reclassifications and adjustments. However, because we didn't perform an audit on the monthly management accounts, nor on the Financial statements for the year ended 30 June 2005, we don't have an opinion on the accounting policies which are applied in the monthly management accounts. The Financial statements for the year ended 30 June 2005 have been audited and signed off by KPMG LLP.”
230.	During the telephone conference, Mr de Kok was joined by Mr de Mol and Mr de Wit. During the course of the conversation Mr de Wit went through the changes he made, giving his explanations for them. Mr de Mol made comments at various points. Mr de Kok repeated that he considered that the reclassifications and adjustments were common practice in the process of preparing monthly reports. Both Mr Clements and Mr de Kok mad notes of the conversation, but nothing turns on these. 
231.	After the telephone conference, Mr Clements telephoned Mr Paulson. Mr Paulson’s note of the conversation reads:
“- Not a clear picture
- Not consistent with mgmt a/c but possibly with annual a/c
- Some ‘v, v grey areas’
- NB they were just looking at mgmt accts
They have adjusted by £50k but only £5k is completely unreasonable.”
232.	On 26 October 2005 Ms Wilkinson sent Mr Paulson an email saying that Volante’s current sales were less than £300,000 a month, but it needed sales of about £400,000 a month to cover its normal monthly costs. 
233.	On 27 October 2005 Mr de Mol sent Mr Paulson an email complaining about Volante’s non-payment of DMH’s invoices under the Consultancy Agreement:
“I just heard from account department that the invoices of DMH won't be paid. These invoices of service costs August, September, expenses of travelling of Rein, Harald, Eric and last the credit insurance.
You can imagine I have to pay these people as well and would like to ask you what we would do with these invoices. I had to pay next three months coming Monday and you can understand that this is not easy for me if they are not paid by Volante any more.
Please let me know what we will do with the invoices.”
234.	On 28 October 2005 Mr Paulson replied:
“We have a major cash problem at Volante. Invertec has put in £270k already, to pay creditors which had not been paid since June and to prevent the tax man taking legal action against us.
We now need to put in another £200k in order to place the pay suppliers and staff.
£470k was way in excess of the amount of cash which Harold told us would be needed.
A large part of the reason is that we have sales which are also way below those predicted.
I find myself in a difficult position. I have had to ask John for much more cash than we anticipated needing. I've also run up a huge bank overdraft at Invertec just to meet obligations which Volente occurred months before we owned it.
This makes life difficult for everyone, from the staff at Trimdon who are under severe pressure from suppliers, through to everyone else at Volante and now at Invertec, which has never even had an overdraft before.
On the other hand, De Mol Holding has just received £1.5m. I know you have paid out John, but would it not be possible from the remaining £1.012m for you to find sufficient cash to pay the staff and the rent?
Then will work together to build up sales rapidly and Julie, Kassy and the rest will be able to satisfy the taxman, the creditors, and the bank.
Eric, we are in a very tough situation which we were not anticipating because it was not predictable from the information we were given. It would help us to resolve it if you could take care of your immediate needs. Obviously we will meet our liability to you as soon as we can.”
235.	Also on 28 October 2005 Mr Paulson spoke to or met Mr Clements and Mr Rundall. Mr Paulson’s note of the conversation includes the following passage:
“FR on warranties: ‘good shout’ at wh. says co isn’t insolvent – it clearly is.
but we want to avoid elaborate warranty claim + set-off till 2007
[therefore] we’d need to claim an element of fraudulent misrep. wh. we  must show via mgmt a/c or/and cash flow” 
236.	During November 2005 Invertec injected a further £190,000 into Volante (£70,000 on 2 November, £70,000 on 18 November and £50,000 on 29 November).
237.	During December 2005 Invertec injected a further £72,000 into Volante (£22,000 on 9 December, £50,000 on 20 December). Thus Invertec lent a total of £532,000 during October, November and December. Thereafter further regular loans were made by Invertec until Volante went into administration.
238.	Over the period from 7 October 2005 to 15 December 2005 the business of ITS, and in particular its production, was slowly transferred to Volante. On 15 December 2005 ITS was closed and its staff made redundant. 
239.	On 16 January 2006 Volante was appointed as a preferred supplier by Bombardier.
240.	On 23 January 2006 Charles Russell on behalf of Invertec wrote a letter before action to Mr de Mol. The letter stated that Invertec had had the benefit of preliminary advice from Charles Russell and leading counsel and investigations were being undertaken by Grant Thornton. It went to allege “potentially fraudulent” misrepresentations with regard to the management accounts and cash flow and breach of the warranties as to solvency and as to the tax position. It said that as a result Invertec had a claim which was likely to exceed £2 million. The letter concluded:
“However, our client would prefer for this matter to be resolved without the need for expensive litigation. Our client is also keen to maintain the relationship it has with you and would like you to continue to work with the company, something that would be impossible if litigation was to be commenced. Our client values the contribution that you make to the Company and it is with this in mind that it proposes the following:
1 	Our client will agree not to bring a claim against to De Mol Holdings BV and you in return for your agreement that our client is not liable to make any payments under the earn out provisions in the Agreement. The initial consideration paid for the company will become the full consideration payable by our client.
2 	The £87,403.06 paid by our client in relation to the tax liability of the Company is to be repaid to our client. Our client is happy to discuss a repayment schedule with you and De Mol Holdings BV.
3 	Provided agreement is reached on points.1 and two above by 31 January 2006, our client will honour its contract with you and will pay forthwith all consultancy fees, salary and expenses payments due to you that have been occurred since completion of the Agreement.
4	Our client will thereafter continue to pay you the consultancy fee and salary agreed in the Agreement. It will also agree that you will continue to participate in the five-year bonus programme contained in Schedule 2 of the Agreement, and as such will be entitled to earn the maximum £525,000 bonus, subject to achieving the conditions of the programme.
You will appreciate that our client is keen to resolve this matter as soon as possible. For this reason, this offer will remain capable of acceptance until close of business on 31 January 2006. If we do not hear from you by this date, we will advise our client to issue proceedings and takings any such steps are necessary to protect its position without further delay.”
241.	Ward Hadaway replied on 2 February 2006 briefly rejecting the allegations made in Charles Russell’s letter. On 9 February 2006 Charles Russell wrote demanding a fuller response.
242.	Also on 9 February 2006 Mr Paulson had a conversation with Mr de Mol, which he reported to Mr Ellison in an email immediately afterwards as follows:
“He says he understands why you're unhappy. But says hed told you he wd have to ‘move to plan B’ and become a components supplier, as they weren't in good shape. I said it seems to us you weren't even in good enough shape to achieve that: you'd have gone bust by 1 January.
 I said you were aggrieved because you felt the true picture had not been shown. If it had been, you would still probably have wanted to be involved but at a way different price. Even so, we would still have looked to invest in business growth. As it was, we simply felt we hadn’t been given the true picture and had therefore paid £1.5m, and invested £600k, in something worth only £300k according to our advisers.
Eric says he's now got €2M+ of contracts lined up. He also says he knows people who would be willing to pay good money for V now in order to become a systems supplier: do we want him to introduce them to us?
I said you were upset and willing to spend money to right the wrong you had suffered. Eric says he'll make a proposal that meets you part way. But he'll only do that if I sit with him and his friend.”
243.	On 28 February 2006 Mr Paulson sent Mr de Mol an email outlining a further proposal to settle the dispute under which the £1.3 million earn out would be cancelled, Invertec would accept the tax liability of £87,000 and Mr de Mol would accept certain other liabilities totalling the same amount, some of which had already been paid leaving a net balance of £55,560. Mr de Mol did not accept this proposal. 
244.	There is a dispute as to what was said about the MSA in September 2006, and I will deal with that below.
245.	On 11 December 2006 Ian Brown and Neil Matthews of Deloitte & Touche LLP were appointed as joint administrators of Volante. By that date Invertec had lent Volante a total of £1,521,441.
Events after administration
246.	Shortly after the administration Volante’s assets were acquired from the administrators by Elite. 
247.	On 11 January 2007 Ward Hadaway wrote to Invertec pressing for payment of €156,927.80 owing to DMH under the MSA and threatening that proceedings would be issued unless this sum was paid by 18 January 2007.
248.	Also on 11 January 2007 Mr Paulson on behalf of Invertec wrote to Mr de Mol on behalf of DMH to confirm termination of the MSA.
249.	On 18 January 2007 Charles Russell wrote to Ward Hadaway saying that Invertec had claims under the SPA which significantly exceeded DMH’s claim under the SPA. On 4 April 2007 Ward Hadaway replied threatening proceedings. This led to several rounds of correspondence between Charles Russell and Ward Hadaway during April, May and August 2007 in which Charles Russell said that Grant Thornton were preparing a report and promised to serve it when ready. In the event no report was forthcoming at that stage. Instead, on 4 October 2007 Charles Russell wrote giving formal notice of Relevant Claims for the purposes of Schedule 5 paragraph 1.3.1 of the SPA. Ward Hadaway did not reply to this letter.
250.	On 31 March 2008 Invertec commenced these proceedings.
The timing of the claim
251.	Before turning to Invertec’s claims, it is convenient to consider a general point relied on by the Defendants, which concerns the timing of the claim. As I shall discuss below, the Defendants contend that Invertec knew about most of the matters about which it now complains by 25 October 2005. Despite that, Mr de Mol continued to be employed by Volante until it went into administration in December 2006. Invertec did not send its formal notice of claim under the SPA until 4 October 2007, two days before the expiry of the deadline under Schedule 4 paragraph 1.3.1 of the SPA. It did not issue proceedings until 31 March 2008, 4 days before the expiry of the deadline. The Defendants say that, if Invertec really had a good claim, and in particular a good claim for fraud, it would not have continued to work with Mr de Mol, but would have brought proceedings much earlier. Furthermore, the Defendants say that it can be seen from the pre-action correspondence that Invertec only brought the proceedings because DMH had made it clear that it intended to claim for the sums due under the MSA.
252.	In my view these points have force, and mean that it is appropriate to examine Invertec’s claims with a degree of scepticism. For reasons that will appear, however, I have nevertheless concluded that Invertec does have valid complaints. I have also concluded, however, that Invertec’s decision in early 2006 to keep Volante trading rather than bring proceedings has consequences for the quantum of Invertec’s claim.
Mr de Wit’s reward
253.	Another point which it is convenient to deal with at this point concerns Mr de Wit’s reward for helping DMH to sell Volante. Mr de Mol’s evidence with regard to Mr Nelson’s memo of 12 June 2005 was that Mr Nelson had misunderstood the position. Accordingly to Mr de Mol, Mr de Wit had made a proposal in August 2004 which would have resulted in Mr de Wit having a 20% option over the shares in Volante, but this had not been agreed. Mr de Mol said that after the deal closed he came to an informal agreement with Mr de Wit to give him 10% of the proceeds of sale. Mr de Mol did not address the draft agreement attached to Mr de Wit’s email dated 19 August 2005. When asked about this document, Mr de Wit neither confirmed nor denied that it had been signed, but said that he was paid €125,000 equating to around 10% of £1.5 million after deduction of the sums paid to Mr Park and Mr Nelson. I do not find this evidence entirely satisfactory, but I am prepared to accept it since it is supported by Mr Paulson’s email dated 14 October 2005. I do not accept, however, that this was only agreed after the deal closed. In any event, it is clear that Mr de Wit expected to be rewarded if the transaction proceeded, and thus had a financial interest in it.
July and August 2005 management accounts
254.	By Schedule 4 paragraph 3.71 of the SPA DMH warranted that the Company Management Accounts (1) “have been prepared in good faith (good faith being regarded for these purposes as being with the intention of achieving a reasonably accurate and not misleading view of the financial and trading position of the Company)” (2) “on bases and principles which are consistent with those used in the preparation of the unaudited management accounts of the Company for the financial year ended on the Company Balance Sheet Date”. Clause 1.1 of the SPA defines the Company Management Accounts as the unaudited management accounts of the Company from the Company Balance Sheet Date (30 June 2005) to the Company Management Accounts Date (31 August 2005). Although they are supposed to have been initialled for identification, they were not. Nevertheless, there is no dispute that they are July and August 2005 management accounts sent by Mr de Wit to Mr Paulson on 12 August 2005 and 20 September 2005. Invertec contend that, as a result of the changes made by Mr de Mol and Mr de Wit, the July and August 2005 management accounts disclosed to Invertec were prepared neither in good faith nor on bases consistent with Volante’s management accounts for the year ended 30 June 2005 and that those changes were made dishonestly.
255.	Counsel for the Defendants complained repeatedly that Invertec had shifted the goal posts by changing its case in relation to the July and August 2005 management accounts. I do not accept this. In my view Invertec’s case was reasonably clearly pleaded in its second set of responses to the Defendants’ Request for Further Information (see in particular responses 5(iii), 14(ii) and 15(ii)), although it was further clarified by amendments to the Particulars of Claim for which I gave permission on the second day of trial. It is fair to say that Invertec did supplement its evidence on this point at trial, but in my view this did not change the case advanced.
256.	Nevertheless, I have approached this claim with some caution for the following reason. Invertec’s pleaded case complains of 10 or 11 changes to the July accounts and 7 changes to the August accounts. These are alleged to have had the effect of reducing a loss of £39,895 to a loss of £9,993 (a difference of £29,902) in the July accounts and of reducing a loss of £33,670 to a loss of £13,464 (a difference of £29,206) i.e. a total difference of just over £50,000. In his opening submissions, however, counsel for Invertec stated that Invertec would confine its case to just two related changes to each set of accounts on the basis that, if Invertec did not succeed on those, it was unlikely to succeed on the other changes. This decision had the advantage of reducing the number of issues in a trial which was already of some complexity and which in any event proceeded to overrun counsel’s estimate. For reasons I will shortly explain, however, the changes which Invertec pursued had no effect on the losses shown in the accounts. Thus Invertec’s case as presented at trial is that Mr de Mol and Mr de Wit dishonestly made changes to the July and August accounts which did not affect the apparent losses made by Volante. At first blush, that seems an unlikely claim.
257.	The changes complained of are of the same kind with respect to both sets of accounts. In both cases, some of the “factored sales” were re-classified as “in-house sales”. £56,692 of sales were re-classified in this way in the July accounts, and £43,401 in the August accounts. In addition, and in consequence, some of the associated costs were also re-classified. It is common ground that the re-classification of the costs was proper if the re-classification of the sales was proper, and improper if not. Accordingly, it is only necessary for me to consider the propriety of the re-classification of the sales.     
The facts
258.	The purpose of the warranty. Volante’s financial position as at 30 June 2005 was covered by the audited annual accounts. It is common ground that the reason for the provision of the July and August 2005 management accounts was so that Invertec could see how Volante was performing in the two months after its financial year end. The purpose of the warranty was to ensure that Invertec could rely on the information contained in those documents.
259.	In-house sales and factored sales. It is common ground that for at least six years prior to August 2005 Volante had classified its sales into ”in-house sales” (also referred to as “in-house production sales” or sometimes just “sales”, and also as “manufactured sales” or “M”) and “factored sales” (also referred to as “F”). It appears that the origin of this division was a bonus system for production staff, for which purpose “factored sales” were stripped out of the calculation. Although the bonus system was discontinued in about 2003, Volante nevertheless continued to classify its sales in this way. It is clear from the evidence that Volante did so because the classification was regarded as a useful management tool. Thus almost all of Volante’s management accounts and similar internal documents feature this classification, although it does not appear in the statutory accounts. I have referred to a number of examples of such documents above. A particularly telling example is the May 2005 Management Report, which was revised by Mr de Wit prior to disclosure to Invertec on 1 August 2005, but without changing the split between in-house and management sales. As an illustration of the use of this information, a number of Volante’s documents include analyses of gross profit on in-house sales by customer.
260.	It is also common ground that the person who was responsible for collating and reporting Volante’s sales data was Ms Wilson. In particular, she was responsible for inputting sales into EFACS and for distinguishing between “in-house” and “factored sales” when doing do. Three particular categories of sales that were recorded in EFACS as “factored sales” were CASE (packaging), CARRIAGE and CADCAM (technical drawings).  
261.	When the trial started, it did not appear that there was any dispute as to what were “in-house sales” and what were “factored sales”. Thus Ms Wilkinson said in paragraph 9 of her witness statement that “In house sales are sales of raw materials, which are processed in the factory”. In paragraph 60 she said that:
“Factored sales are not sales made pursuant to Volante’s usual contracts; rather they are sales of parts, which Volante buys and ships to a customer for a price. Volante is not required to make any parts for factored sales.”
262.	In paragraph 14.2 of the Defendants’ Defence, which was verified by a statement of truth signed by Mr de Mol, the Defendants pleaded:
“Some of Volante’s products were made in-house and were known as ‘in-house sales’, whereas other products were bought in and finished from other companies and were simply sold on to the customer for a profit - these were known as ‘factored sales’.”
This was repeated almost verbatim by Mr de Wit in paragraphs 9, 15, 64 and 70 of his witness statement. Similarly, in paragraph 7 of his third witness statement (his principal statement for trial) Mr de Mol said:
“In-house sales (products that we manufactured at the plant in Trimdon) was from the outset organised by Helen Wilson….”
263.	Consistently with this evidence, in paragraph 5.5.5 of her first report served very shortly before trial Ms Winspeare stated:
“Mr de Wit and [Mr de Mol] have informed me that ‘Sales’ [which she had explained at 5.5.3 were also referred to as ‘in house sales’] represented components that were manufactured at Volante PTIS’ factory in Trimdon, Durham. Whereas ‘Factored sales’ were components that were purchased for onward sale, e.g. panels from Volante Germany.”
264.	Despite this apparent unanimity, during the course of the trial a dispute emerged as to the true distinction between “in-house” and “factored” sales, and in particular to the correct classification of items such as packaging and carriage. This dispute was connected with the Defendants’ justification for the changes which I shall discuss below.
265.	Invertec contends that sales of sheets of laminate, packaging sold separately, technical drawings sold separately and carriage invoiced separately to the customer (for goods sold ex works rather than c.i.f.) were all treated by Volante as factored sales prior to 12 August 2005. By contrast the Defendants contend that in many instances sales of laminate, packaging, drawings and carriage were properly to be regarded as in-house sales.
266.	The evidence of Ms Wilkinson and Ms Harris on this point was clear. Both said that “factored sales” were sales of a product or service which did not have any value added to it through production. As Ms Wilkinson put it during cross-examination:
“What we tried to do with the factored sales was to state that these were the abnormal exceptional items so that the in-house sales represented the underlying activity through the factory and to stop distortion by the one-off exceptional cost revenue coming into the line. That was the reason for doing it.”
According to Mr Wilkinson’s and Ms Harris’ evidence, items such as those described above were properly classified as factored sales. I accept this evidence, which is supported by the fact that it is clear that this is how such sales were treated in EFACS and by the documentary evidence such as the May 2005 Management Report. 
267.	Mr Ellison and Mr Paulson’s evidence was that Mr de Mol or Mr de Wit had explained the distinction between in-house and factored sales to them during the course of the negotiations, when Volante financial documents containing those terms had been produced, and had understood them in the same way. Again, I accept that evidence.  
268.	Mr de Mol and Mr de Wit, while broadly agreeing that the criterion for “in-house sales” was that of added value, suggested that value was added in the case of sales of sheets of laminate or of packaging even if only by storage, handling and wrapping. As for carriage, it was suggested that this should not have been classified separately from the main sale even if it was invoiced separately. I do not accept this evidence, which is not merely inconsistent with their witness statements, but also contradicted by the documentary evidence such as the May 2005 Management Report. Mr de Wit could give no satisfactory explanation of why he changed this, but left the material relating to factored sales largely but not entirely unchanged. As for Mr de Mol, his attempts to explain why sales were classified as in-house or factored became rather contradictory in the course of cross-examination. I can only view Mr de Mol and Mr de Wit’s suggestion as a late invention.
269.	Finally, I should note that there was a considerable amount of evidence at trial about the correct classification of various individual sales. I do not propose to burden what is already an over-long judgment with a detailed review of this evidence. I will confine myself to saying that in my judgment the overall effect of this evidence was to confirm that historically Volante’s policy had been to classify sales of sheets of laminate, packaging sold separately, technical drawings sold separately and carriage invoiced separately as factored sales.
270.	The July and August 2005 accounts before the changes. Counsel for the Defendants submitted that Invertec’s claim was fatally flawed because it had not proved that the July and August 2005 accounts prior to Mr de Wit’s changes were accurate. It was particularly in this regard that he submitted that an adverse inference should be drawn from Invertec’s failure to call Ms Wilson. I do not accept either submission for the following reasons.
271.	The issue with regard to the July and August 2005 accounts is not an issue about accuracy in the sense of compliance with some objective external standard. There is no external standard for classifying sales as in-house or factored, since this classification was peculiar to Volante and used for its own internal purposes. The issue is about the presentation of the financial information, and whether the reclassification of sales from “factored” to “in-house” gave a misleading impression of Volante’s financial position. In this context what matters is whether the accounts were consistent with those prepared by Volante previously.
272.	As for Ms Wilson, I do not regard her absence as significant. Ms Wilkinson gave evidence that throughout her employment by Volante prior to July 2005 she was responsible for the preparation of Volante’s management accounts, with the assistance of Ms Coils, and she was responsible for making any changes that were required. She also gave evidence that, when preparing the accounts, she would obtain a sheet from Ms Wilson which showed the split between in-house and factored sales and on which she would base the split in the accounts. Furthermore, it is clear from the evidence that Ms Wilson produced this analysis simply by running the appropriate report on the EFACS system.   
273.	Management accounts for the year ended 30 June 2005. Remarkably, there was a dispute as to the correct comparator with which the July and August 2005 accounts should be compared. Invertec contend that the Volante’s management accounts for the year ended 30 June 2005 are those contained in the “mgt-P&L 2004-2005” file attached to Mr de Wit’s email dated 18 August 2005.
274.	The case put to Invertec’s witnesses in cross-examination by counsel for the Defendants was that they were constituted by Volante’s draft statutory accounts immediately prior to signature. Mr de Mol said the same thing in cross-examination. This suggestion is obviously incredible. In any event, counsel for the Defendants expressly abandoned it in his closing submissions. Instead, counsel submitted that the correct comparator was the fourth attachment to Mr de Wit’s email to Mr Paulson dated 5 August 2005. He sought to justify this late change by alleging that Invertec had failed to disclose this document. In fact, a more complete version of the same document had not only been disclosed, but included in the trial bundles in two different places. Accordingly, I consider that this point is not open to the Defendants: it should have been put to Invertec’s witnesses and it was not. Furthermore, this suggestion is not merely unsupported by the evidence of Mr de Mol and Mr de Wit, but contrary to Mr de Mol’s evidence.
275.	Nevertheless, this point has troubled me for the following reason. Not only is the fourth attachment to Mr de Wit’s email to Mr Paulson dated 5 August 2005 called “mgt accounts – final 2004-2005.xls”, but also this document was undoubtedly disclosed to Invertec. By contrast, it is not clear that the “mgt-P&L 2004-2005” file attached to Mr de Wit’s email dated 18 August 2005 was disclosed to Invertec. The significance of the point is the sales figures in the former, unlike those in the latter, are not divided into in-house and factored. 
276.	Having pondered this point for some time, the conclusion I have reached that it does not cause me to alter the finding which I would otherwise have no hesitation in making, which is that the correct comparator is the “mgt-P&L 2004-2005” file. The reason for this is that this is the document which was prepared by Volante for its own internal management purposes and was reconciled with the statutory accounts. The document disclosed to Invertec is simply an abbreviated version of this with some comments added. In assessing the consistency or otherwise of the July and August 2005 accounts with the management accounts for the previous year, it is the former which matters. Indeed, when it comes to considering the consistency or otherwise of the split between in-house and factored sales, one can only look to the former document since this information is not included in the latter. In my view it does not matter that Invertec may not have seen the former at the time, because the purpose of the second half of the warranty was to ensure that the July and August 2005 were not prepared on a different basis to that which Volante had used before. Part of the gravamen of Invertec’s complaint is that in fact this is precisely what happened. Moreover, other documents disclosed to Invertec did show the split between in-house and factored sales and were prepared on the same basis as the “mgt-P&L 2004-2005” file, most notably the Budget Profit & Loss account 2005-2006.
277.	The changes. The changes to the July and August 2005 accounts complained of by Invertec were effected by the wholesale transfer of a number of sales of laminate, packaging, carriage and drawings from “factored sales” to “in-house sales”.
278.	Mr de Mol’s evidence was that he had proposed some of the changes to July 2005 accounts himself while others had been made by Mr de Wit “with the assistance of other members of staff”. In relation to the latter, he said in his witness statement:
“On reviewing the corrections that had been made I was satisfied that these adjustments were necessary adjustments that we would ordinarily make to the accounts.”
He gave very similar evidence in relation to the August 2005 accounts.
279.	I am unable to accept this evidence. First, there is no documentary evidence to support the suggestion that other members of Volante’s finance team were involved and the documents suggest the opposite. Certainly, Ms Wilkinson cannot have been involved in the changes to the July accounts because she was on holiday at the time, and the first draft was prepared by Ms Coils. Nor was it put to her that she was involved in the changes to August accounts, although she did prepare the first draft. Moreover, Mr de Wit evidence’s was that he had made the changes himself, although he had discussed them with Mr de Mol.
280.	Secondly, and more importantly, the reclassification of factored sales as in-house sales was not an adjustment that Volante would ordinarily make to the monthly management accounts. Indeed, Mr de Wit admitted in cross-examination that this was the first time it had been done. (It is fair to say in an email from Mr de Wit to Ms Wilkinson dated 16 June 2005 Mr de Wit did say that a particular invoice from LVS (Volante Germany) should be treated as an in-house rather than a factored sale; but this was not in the context of adjusting monthly management accounts.) 
281.	In this connection I should note that Mr de Kok explained during cross-examination that, when he had said in his letter dated 25 October 2005 and during the telephone conference that day that the reclassifications and adjustments were “common practice” in the process of preparing management accounts, he meant that as a general statement as to what was typically done. He had not investigated whether Volante had made the changes in question before.
282.	In my judgment it is clear that the July and August 2005 management accounts were not prepared on the same bases and principles as the management accounts for 2004-2005. Sales which would have been classified as factored sales in the latter were classified as in-house sales in the former. Contrary to the submission of counsel for the Defendants, this is a change in the content of the accounts and not merely in the process by which they were prepared. 
283.	In this connection, it may be noted that Mr de Mol and Mr de Wit claimed that the split between in-house and factored sales was a matter of no importance within Volante until it became necessary to warrant the July and August accounts. This is contradicted by a wealth of documentary evidence showing that Volante not merely consistently used this split in its financial projections and accounts, but also that its analyses depended on the split.
284.	Although it was not foreshadowed in the Defendants’ Defence or witness statements, at trial the Defendants contended that the reclassifications of “factored sales” to “in-house sales” were necessary to ensure that the July and August 2005 accounts were accurate and that, if this had not been done, the accounts would have mislead Invertec. Furthermore, the Defendants contended that, to the extent that there was a tension between the two parts of the warranty in Schedule 4 paragraph 3.7.1, the obligation not to mislead prevailed over the requirement of consistency.
285.	I do not accept this for a number of reasons. First, as I have already pointed out above, the changes made had nothing to do with making the accounts more accurate in the sense of compliant with some objective external standard. Accordingly, the reason for making the changes cannot have been a desire for greater accuracy. Secondly, the suggestion that it was the need to disclose and warrant the accounts to Invertec which made Mr de Mol and Mr de Wit appreciate the need to make these changes is contradicted by the fact that the Budget Profit & Loss account for 2005-2006 disclosed to Invertec only shortly before was not subject to any adjustment of this nature. Thirdly, neither Ms Wilkinson nor Ms Coils nor Ms Wilson was ever instructed by Mr de Mol or Mr de Wit that they had been erroneously classifying in-house sales as factored sales. Not only did they continue classifying the sales in precisely the same way when preparing the August 2005 accounts after the July 2005 accounts had been altered, but they continued to do so when preparing the September 2005 accounts. Nor were any changes made to the EFACS records. Mr de Mol and Mr de Wit suggested that the failure to communicate the changes to the finance staff was due to the pressure of work due to the audit, summer holidays and the due diligence, but this explanation cannot apply to the preparation of the August accounts in September 2005 when all of those factors had ceased to apply.
286.	A point which was heavily relied on by counsel for the Defendants in this connection was that, as Ms Winspeare noted in paragraph 5.5.16 of her first report, the draft July accounts showed a gross profit margin of 50.8% on factored sales, which was higher than the gross profit margin of 48.1% on in-house sales. (As Ms Winspeare noted in paragraph 4.4.7 of her second report, the position is similar, if not quite the same, in respect of the draft August accounts.) Counsel argued that this showed that the factored sales in the draft accounts were overstated and that, if the accounts had not been altered prior to disclosure, this would have given Invertec a misleading impression of Volante’s profitability. I am not convinced by the logic of this argument, since the profit margin depends on costs as well as sales. After Mr de Wit’s corrections, the margins changed to 14.6% and 50.3% respectively.  Even if it were correct that the factored sales were overstated, this would neither explain nor excuse the failure to disclose the change in the basis on which the accounts were prepared. In my view, however, it is not correct anyway. It is quite correct that the factored sales were parasitic upon the in-house sales, or to change metaphors the icing on the cake, and that Volante budgeted for a lower margin on factored sales than in-house. Nevertheless, it is clear from Volante’s historic management accounts that are in evidence that the apparent gross profit on factored sales was variable and could sometimes be quite high. For example, on 2 February 2005 Mr de Wit sent Mr de Mol a summary of Volante’s financial results from March to December 2004 which shows the gross profit margin on “factored sales” ranging from 26.5% in March 2004 (mislabelled “Jan 04”) to 53.9% in December 2004. The reason for this appears to be that, although the margin on packaging and carriage was low, with carriage sometimes being re-invoiced at cost, the margin on sales of sheets of laminate and technical drawings was quite high.
287.	In my view there is no tension between the two parts of the warranty. If Volante had appreciated during the course of preparing to disclose the July and August 2005 accounts to Invertec that it had previously drawn up its management accounts on an incorrect basis and therefore needed to change this in order to prevent Invertec being misled, then it would have been a simple matter for DMH to disclose to Invertec that the basis had been changed. It did not do so. On the contrary, the changes were carefully concealed from Invertec. In this regard I consider that it is of some significance that Mr de Wit stressed to Mr de Mol that the document showing the changes to the July accounts was “for internal use only”, told Mr Hancocks that it was “for your eyes only” and did not reveal the changes to either set of accounts to Ms Wilkinson.
288.	In their oral evidence Mr de Mol and Mr de Wit sought to justify the changes on the basis that sales had previously been incorrectly categorised as “factored” when they should have been classified as “in-house” since some value had been added. For the reasons given above I do not accept this. 
289.	In my judgment the correct explanation for the changes to the July and August 2005 accounts is that advanced by Invertec. The reason why Mr de Mol and Mr de Wit reclassified sales from “factored” to “in-house” was to make the results more consistent with the sales projections contained in the budget which Mr de Wit had sent Mr Paulson on 12 August 2005 and to conceal the decline in Volante’s (in-house) sales. Indeed, Mr de Wit himself said in paragraphs 64.1 and 71 of his witness statement:
“This reclassification [of sales from factored sales to in-house sales] is in line with the sales projects in the budget 2005/2006 under in-house and factored sales.”
290.	Mr de Mol and Mr de Wit knew full well that the value of Volante to Invertec depended on its sales, and that the true measure of these was the in-house sales figures. They had provided Invertec with a budget for 2005-2006 showing projected “Sales” (that is, in-house sales) of £4,889,000. The reality was that Volante was already behind that budget: as Ms Coils noted, the draft July accounts showed in-house sales £65,000 below the budget of £340,000. The position in August was no better. As Mr de Mol accepted in cross-examination, he and Mr de Wit appreciated that the reason why Invertec wanted to see the July and August accounts was to compare them with the budget as well as the audited accounts. Mr de Mol and Mr de Wit needed to keep the sale on track in order to obtain the cash payment of £1.5 million, which was needed in order to pay Mr Park as well as to benefit themselves. As discussed below, by mid August 2005 they knew that Volante was in serious financial difficulty.
291.	Mr de Mol and Mr de Wit suggested that the only figures which mattered were the total sales figures and that the reclassification was of no consequence because Invertec was only interested in the total sales. If that was really what they had thought at the time, they would either have not made any change at all or would simply have amalgamated the in-house and factored sales.
292.	Counsel for the Defendants posed two questions which merit an answer here. First, why would fraudsters make changes which did not affect the apparent profitability of Volante? Secondly, why would fraudsters make changes which could be so easily discovered by Invertec after the acquisition? I think that the answers to these two questions are related. In my view Mr de Mol and Mr de Wit made these changes precisely because they were quite subtle, and thereby hoped that even if Invertec discovered the changes they would be able to get away with them. 
293.	Finally, the Defendants placed some reliance on the opinion of Mr Clements as recorded in Mr Paulson’s email date 25 October 2005 that only £5,000 worth of the adjustments were completely unreasonable. In my view this is not particularly significant. It was an off-the-cuff opinion expressed just after hearing Mr de Wit’s explanations, but without having had the opportunity to investigate, and in particular consider the historic documentation. To the extent that it bears on this issue I prefer Mr Clements’ considered opinion in his first report. In any event, the expert evidence has very little bearing on this issue.     
Breach of warranty
294.	For the reasons given above I conclude that DMH breached the warranty contained in Schedule 4 paragraph 3.7.1 of the SPA.
Fraudulent misrepresentation
295.	I also conclude that DMH’s representations prior to and in the SPA that the July and August 2005 management accounts had been prepared so as to give a reasonably accurate view of Volante’s financial and trading position and on the same bases and principles as the management accounts for 2004-2005 were false and dishonestly made.
Solvency
296.	By Schedule 4 paragraph 6.5.10 of the SPA DMH warranted that Volante was “not unable to pay its debts within the meaning of s.123 Insolvency Act 1986”. Invertec contends that Volante was unable to pay its debts as at 6 October 2005 and that DMH knew this.
Construction of the Warranty
297.	Section 123(1) of the Insolvency Act 1986 provides:
“A company is deemed unable to pay its debts
…
(e)	if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due.”
298.	The Defendants contend that the effect of the words “within the meaning of s. 123 Insolvency Act 1986” is that paragraph 6.5.10 is merely a warranty that it has not been proved to the satisfaction of a court that Volante is unable to pay its debts as they fall due. I disagree. Such a construction would substantially deprive the warranty of effect and would make no commercial sense. In my judgment the effect of those words is that paragraph 6.5.10 is a warranty that the company is not “unable to pay its debts as they fall due” in accordance with section 123(1)(e) of the 1986 Act.
299.	In Re Cheyne Finance plc (No 2) [2008] 1 BCLC 741 at [25]-[56] Briggs J considered the predecessors to section 123 of the 1986 Act, authorities under  those predecessors, the changes made by the 1986 Act, academic writings and Australian authorities under the corresponding provisions in that country. He concluded that the effect of the words “as they fall due” is to require the court consider whether the company can pay debts which will fall due in the future. He described this as a “flexible and fact sensitive requirement”. His decision was followed by Lord Hodge in Macplant Services Ltd v Contract Lifting Services (Scotland) Ltd [2008] CSOH 158 at [67].
300.	Accordingly, in deciding whether Volante was able to pay its debts as they fell due as at 6 October 2005 one must consider not merely those debts which were actually due that date, but also those debts falling due in the future, and in particular those falling due in the near future. This, of course, also entails consideration of the resources which will be, or are reasonably expected to be, available to the company to pay those future debts when they fall due.
Discharging the burden of proof
301.	Counsel for the Defendants submitted that Invertec could not discharge the burden of proving that Volante could not pay its debts as they fell due without preparing a profit and loss account and balance sheet as at 6 October 2005, which it had not done. I do not accept this. Such an analysis might help to prove cash flow insolvency, but I cannot see that it is necessary. I find it particularly hard to see why a balance sheet should be required. A company can easily be cash flow insolvent although it is balance sheet solvent. In the present case it is common ground that Volante was balance sheet solvent as at 6 October 2005. Indeed, Mr Clements did in fact draw up a balance sheet for Volante as at 30 September 2005, which showed it to be balance sheet solvent at that date. 
302.	Counsel for the Defendants also submitted that expert evidence was required, and relied upon the fact that Mr Clements had not expressed in terms the opinion in his reports that Volante could not pay its debts as they fell due. Counsel for Invertec replied that such a statement by Mr Clements would have been inadmissible since it was a question for the Court. I disagree with that submission, since such statements of opinion have been admissible since section 3 of the Civil Evidence Act 1972. As counsel for Invertec also pointed out, however, Mr Clements’ reports did include evidence directed to this issue. Indeed, in paragraph 2.44 of his first report he said that the contemporaneous documentation “suggests that the Company was unable to meet its debts as and when they fell due before acquisition”.
No going concern warranty
303.	Counsel for the Defendants also relied upon that fact that, although Invertec wanted DMH to warrant that Volante was a going concern, DMH was not prepared to give such a warranty and accordingly no such warranty was included in the SPA. In my judgment this has little bearing on the question of whether Volante was able to pay its debts as and when they fell due. It has more relevance to the questions of fraud and reliance, and I will return to it in those contexts.   
The facts
304.	In my judgment it is clear from the evidence taken as a whole that Volante was unable to pay its debts as they fell due as at 6 October 2005. I do not propose to review all of the evidence bearing on this question, but I will mention the salient points.
305.	Perhaps the simplest and most compelling evidence is what happened after the acquisition. Almost immediately after completion Invertec discovered that Volante had a cash hole and had to arrange for the injection of £100,000 in cash. By the end of October 2005 Invertec had had to inject £270,000 and by the end of December 2005 Invertec had had to inject £532,000. In my view it is clear that without those injections of cash Volante could not have paid its debts and would have been wound up or placed into administration. The crisis would probably have come to a head at the end of October 2005 when Volante had to pay the outstanding corporation tax bill of £87,403 in addition to the wages bill and outstanding invoices from suppliers. The money available from sales, and in particular from the invoice discounting facility, was simply not enough. Nor did Invertec have enough headroom on its overdraft facility of £50,000.  
306.	The Defendants contend that Volante’s financial difficulties after its acquisition by Invertec were not due its having a cash hole at the date of acquisition, but rather due to losses sustained as a result of the integration of ITS with Volante. The Defendants say that almost immediately after acquisition resources were diverted from Volante’s business to that of ITS, in particular to deal with a contract to supply a bus interior to Singapore. Furthermore, they point out that Volante’s sales in the final quarter were well below budget, and suggest that this was attributable to the same cause. Finally, they say that under Invertec’s management good staff were lost and replaced by unsuitable ones.
307.	I do not accept these explanations. First, Volante needed an injection of £100,000 within days of the acquisition, and a total of £270,000 before the end of October 2005, well before the integration of ITS could have had any effect on its cash flow. It needed further substantial sums in November and December. As recorded above, the transfer of ITS’s business to Volante’s premises did not take place until mid December 2005. Secondly, Mr King gave unchallenged evidence that the amalgamation of ITS had not caused the problems. The point about the Singapore contract was not pleaded by the Defendants, was not put to Mr King (or any of Invertec’s other witnesses) in cross-examination and is unsupported by the documentary evidence. Thirdly, while it is quite correct that Volante’s sales were low in the last quarter of 2005, this was not attributable to Invertec. Rather, it was the continuation of an established trend. Moreover, I think that Mr de Mol knew in advance that the sales were likely to be below budget. In any event, Invertec’s calculations show that, even if Volante had achieved the budgeted sales in October and November 2005, Volante would still have been unable to pay its debts and Invertec would have had to inject some £228,000 during those months. Fourthly, the staff changes referred to did not take place until 2006.
308.	Ms Wilkinson’s evidence was that by June 2005 Volante could not pay all of its supplier’s invoices as and when they fell due for payment and that from then until October 2005 she was required carefully to prioritise payments to suppliers to prevent production stoppages. Thus she prioritised payment of the suppliers on whom Volante depended to keep production going. Other suppliers on whom Volante no longer relied were not paid. Ms Wilkinson and Ms Coils periodically prepared schedules analysing and prioritising the payments due. By the end of August 2005 the situation had become critical and she was required to report to Mr de Wit on the cash flow almost every other day. As shown by the schedule attached to Ms Wilkinson’s email dated 30 September 2005, by that date substantial amounts were owed to suppliers. Ms Wilkinson also explained Volante’s need for cash injections from Invertec after 6 October 2005 in order to pay its bills, and in particular the £87,403 payment of corporation due to HMRC at the end of October 2005.
309.	Ms Wilkinson’s evidence is supported by a considerable body of documentary evidence as to the mounting difficulties being faced by Volante in paying its debts from May 2005 onwards, and as to the efforts which Ms Wilkinson and Ms Coils had to make to obtain finance and credit from suppliers, to chase debtors and to hold off creditors. I will not refer to all the relevant documents, but they include the following:
i)	The minutes of the meeting on 19 May 2005.
ii)	The May 2005 Management Report, and in particular the aged creditors analysis.
iii)	The email exchanges between Ms Wilkinson and Ms Rijken of NSAA on 20 July 2005.
iv)	Ms Coils’ email to Mr de Wit of 26 August 2005.
v)	Ms Wilkinson’s emails to Mr de Wit on 31 August 2005 and the schedule attached to the second.
vi)	The extension of the factoring rate of 90% negotiated by Mr de Wit on 1 September 2005.
vii)	The email from Ms Stobbs to Ms Wilkinson on 7 September 2005 chasing for payment of KPMG’s outstanding fee.
viii)	Ms Wilkinson’s email to Mr de Wit of 12 September 2005.
ix)	Ms Wilkinson’s emails to Mr de Mol on 16 and 19 September 2005 and the attached spreadsheets.
x)	The email from Mr or Ms Nygren of Recore to Mr Darnton on 19 September 2005.
xi)	The letter from Mr James of Hay & Kilner dated 21 September 2005 and the correspondence which followed.
xii)	Ms Wilkinson’s email to Mr de Wit on 23 September 2005 and Mr de Wit’s email to Ms Wilkinson on 30 September 2005 about Percy Lane.
xiii)	The email from Herr Graml of Volante Germany to Ms Wilkinson on 28 September 2005.
xiv)	Ms Wilkinson’s email to Mr de Wit on 29 September 2005.
xv)	Ms Wilkinson’s email to Mr de Wit on 30 September 2005 and the attached spreadsheet.
xvi)	Ms Wilkinson’s email to Mr de Wit on 3 October 2005 regarding the 90% factoring arrangement.
xvii)	Ms Stoenescu’s email to Ms Wilkinson to 7 October 2005.
xviii)	Mr de Mol’s email to Mr Nelson on 10 October 2005.
310.	Ms Harris’ evidence was that she visited Volante’s premises immediately after the acquisition, it appears on 7 October 2005 itself. When she was in the office shared by Ms Wilkinson and Ms Coils the telephone was constantly ringing with creditors asking for money, and Ms Wilkinson and Ms Coils were constantly apologising. There were threats of legal action in the post. There were suppliers who hadn’t been paid for as long as seven months and who had stopped supplying. She discussed the cash flow situation with Ms Wilkinson, and discovered that Volante had a large cash hole. Ms Harris estimated the cash hole at £0.5 million, but Ms Wilkinson said that her estimate of the cash deficit was about £220,000. Ms Harris reported the latter figure to Mr Paulson from the airport on the way back. Either during this visit or later in October 2005, Ms Wilkinson told Ms Harris that prior to the acquisition she had withheld paying Volante’s outstanding corporation tax in order to pay its other creditors. Invertec had to inject around £600,000 by early January 2006 to clear outstanding creditors.
311.	Again this evidence is supported by the documentary evidence, as well as by Invertec’s actions in making the loans.
312.	Both Mr de Mol and Mr de Wit accepted in cross-examination that Volante was under cash pressure during the period prior to 6 October 2005, but suggested that the cash pressure not so great that Volante was cash flow insolvent. Mr de Mol said a couple of times during the course of cross-examination that it was not necessary for Invertec to put a large amount of money into Volante in October 2005. When I asked him why Invertec would have done this if it was not necessary, he replied that it was unnecessary for Invertec to put so much in. I understood him to be accepting that it was necessary for Invertec to put some money into Volante.
313.	In addition to this evidence, I think Mr de Wit’s attitude when confronted by Invertec about Volante’s cash shortage in mid October 2005 is revealing. According to Ms Harris, Mr de Wit scoffed and sneered during the 14 October 2005 meeting. Whether this is an accurate characterisation of his manner or nor, it is clear that either during the meeting or during the subsequent telephone conversation Mr de Wit said that the cash shortage was Invertec’s problem because it had failed to insist upon disclosure of Volante’s cash flow. 
314.	The Defendants rely upon Volante’s annual accounts and KPMG’s unqualified opinion of 7 September 2005 as showing that the company was solvent as at that date. I do not accept this. The accounts and KPMG’s opinion refer to the position as at 30 June 2005. Furthermore, they set out the company’s profit and loss, balance sheet and cash flow over the year, not its cash flow position on a day-to-day basis. It is true that KPMG conducted a limited post-balance sheet review, but this did not include an analysis of the company’s cash flow position at the end of the year. Nor is there any evidence that KPMG were informed of Volante’s failure to pay the September instalment of corporation tax or of the arrangement with HMRC proposed in the 7 September 2005 letter (as to both of which, see further below). In any event, the financial statements do not reflect the position as at 6 October 2005, and it is clear from the evidence that Volante’s cash flow deteriorated further during the intervening month.  
315.	The Defendants also rely on the fact that Ms Wilkinson accepted in cross-examination that the NedTrain document suggested that Volante was solvent as at the beginning of September 2005, but she qualified this by pointing out that the document was expressed by reference to the annual accounts, i.e. the position as at 30 June 2005, and that the questions she was answering were unknown. Again, I consider that this document sheds little light on Volante’s ability to pay its debts as they fell due as at 6 October 2005.
316.	The Defendants also rely on Ms Wilkinson’s acceptance in cross-examination that the threat of legal action by NSAA was not a serious one, but that does not alter the fact that it was made. Furthermore, it was not the only threat of legal action made by Volante’s creditors during the period leading up to 6 October 2005. Indeed, HMRC came close to issuing distraint proceedings, and that threat was only forestalled by Volante entering into the arrangement recorded in the 7 September 2005 letter.
317.	There was quite a lot of evidence at trial about the details of Volante’s trading terms with its suppliers and the extent to which payments were overdue. In addition to factual evidence from Ms Wilkinson and Ms Harris, Invertec adduced evidence from Mr Clements, based upon his analysis of records from EFACS. His analysis was that at least £225,214 was overdue as at 6 October 2005. Invertec also adduced evidence that further amounts fell due later in October 2005. The Defendants sought to demonstrate that, at least in many cases, the credit terms allowed by Volante’s suppliers were not exceeded or that the reason why the invoice had not been paid was there was a dispute between Volante and the relevant supplier. The Defendants also suggested that, following the acquisition, Volante paid some invoices before they were due. Again I do not propose to burden this judgment with a detailed analysis of all this evidence. I have carefully considered it, and I am wholly unpersuaded that the points made by the Defendants go anywhere near to rebutting Invertec’s evidence that Volante could not pay its suppliers in October 2005 and the following months without substantial cash injections from Invertec. Indeed, the problems with the Defendants’ evidence in this respect can be simply illustrated by quoting Ms Winspeare’s conclusion in paragraph 5.9.16 of her second report (repeated at paragraph 6.3.5):
“… Mr Clements’ analysis overstates the amounts due for payment as at 6 October 2005.”
318.	I will nevertheless comment on three specific points since they go to Mr de Mol’s credibility. The first is that one of Volante’s creditors as at 6 October 2005 was DMH itself. It is common ground that Volante owed DMH a total of €68,013.12, which forms the subject of one of DMH’s counterclaims in these proceedings. This sum included DMH’s monthly fees and expenses for the months of August and September 2005. Ms Wilkinson gave evidence, which I accept, that the reason why Volante had not paid the outstanding amounts was because it did not have sufficient funds. As I shall explain when I came to the counterclaim, DMH contends that this liability was novated to Invertec. This claim is in itself evidence that Volante was to Mr de Mol’s knowledge insolvent.
319.	The second is that Mr Clements’ evidence showed that there were a number of outstanding invoices from Volante Germany to Volante. As at 6 October 2005 €63,416 was overdue and €46,221 was to fall due that month. In paragraph 4.8 of his fourth witness statement Mr de Mol said that Volante Germany was “not pressing for payment of outstanding invoices”. Ms Winspeare repeated this on instructions from Mr de Mol in paragraph 5.9.11 of her first report. Mr de Wit did not even go that far, merely saying at paragraph 83.5 of his statement that Volante Germany was partly owned by Mr de Mol. In addition to this evidence, the Defendants relied upon an email from Erich Sperber, Volante Germany’s Managing Director, to Mr de Mol dated 7 July 2009 stating that Mr Graml’s email dated 28 September 2005 was incorrect and that the explanation for the request for upfront payment was that this has been agreed in relation to one large order.  Even if that is correct, as to which I am sceptical given that Mr Sperber did not give evidence and his email is nearly four years after the events in question, it does not address the outstanding invoices from Volante Germany. When pressed about those in cross-examination, Mr de Mol claimed for the first time that Mr Sperber had told him not to bother with paying the outstanding invoices. This evidence is materially different to the written evidence, it was not put to Ms Wilkinson in cross-examination and it is not even supported by the email dated 7 July 2009. Furthermore, Mr de Mol claimed that Volante Germany’s tolerant attitude was due to the fact that he was a shareholder, whereas during the negotiations Mr de Wit told Mr Paulson that Mr de Mol had no influence over Volante Germany. When this contradiction was put to Mr de Mol, he had manifest difficulty in explaining it. I regard this evidence as another late invention and I do not believe it. In any event, even if it is true that Volante Germany was prepared gratuitously not to insist upon payment, the fact remains that the sums were due and owing.
320.	Thirdly, a certain amount of time at trial was spent invoices from a supplier called Resopal. The Defendants, and Mr de Mol in particular, were very concerned to establish that the payment terms agreed with Resopal were 150 days from the end of the month, and therefore invoices from Resopal were not overdue at the relevant time or at least the sums outstanding were not as great as suggested by Invertec’s witnesses. It appears to be correct that Resopal has agreed to 150 days end of month, but this does not help the Defendants for two reasons. First, Mr Clements’ analysis proceeded on that basis anyway (see paragraph 6.16 of his first report). Secondly, even leaving aside Mr Clements’ evidence, it is clear from the documentary evidence, in particular Ms Wilkinson’s emails dated 31 August 2005, that Volante was behind in its payments to Resopal even on these generous credit terms. Ms Harris’ evidence was that when she arrived on the scene at Volante Resopal were demanding payment within 60 days. That may well be because the previous terms had not been complied with.     
321.	Finally, I turn to Mr de Mol’s “plan B” if the deal with Invertec did not go ahead. Implementation of this would have involved restructuring, and in particular making further employees redundant. In my view it is clear that Volante did not have the cash flow to achieve this. Even if Volante could somehow have achieved it, this would not have enabled DMH to pay the £500,000 it owed Mr Park. Mr de Mol’s evidence that Mr Park was prepared to wait for this pending completion of the deal with Invertec. I have no reason to question that evidence, but it does not mean that Mr Park would have been prepared to wait indefinitely. In my view these factors explain the increasingly tense state of the negotiations between Invertec and DMH as they approached completion, and Invertec pressed for further and better indemnities and warranties while DMH tried to ensure that the initial consideration of £1.5 million was ring-fenced.  
322.	In my judgment Mr de Mol knew that Volante could not pay its debts as they fell due at the time the transaction closed. At the very least he was reckless as to whether the warranty was true or false. He may have hoped that he had covered himself by declining to warrant that Volante was a going concern as requested by Invertec, but if so he was mistaken.    
Breach of warranty
323.	For the reasons given above I conclude that DMH breached the warranty contained in Schedule 4 paragraph 6.5.10 of the SPA.
Fraudulent misrepresentation
324.	I also conclude that DMH’s representation prior to and in the SPA that Volante could pay its debts as they fell due was false and dishonestly made.
Corporation Tax
General considerations
325.	I have approached this part of Invertec’s claim with some caution, for two reasons. The first is that it is in relation to this aspect that Invertec’s claim has changed most significantly. It has always been part of Invertec’s case that it relied upon the fact that £87,403 in corporation tax for the year ended 30 June 2004 was outstanding as at completion of the acquisition in support of its claim that Volante was insolvent and that it sought to recover that sum pursuant to the Tax Deed, but Invertec did not originally allege that there had been any fraud in this specific respect. The first intimation of such a case came in Invertec’s skeleton argument for trial. Only by an amendment to the Particulars of Claim for which I gave permission on the second day of trial was this pleaded. Furthermore, even at that stage, Invertec’s primary case was to dispute that HMRC had accepted the proposal contained in Volante’s letter dated 7 September 2005, although it pleaded an alternative case on the basis that HMRC had accepted it. Only in closing submissions did Invertec finally agree that HMRC had accepted the proposal. 
326.	The second is that, as noted above, Hindsight’s file has not been disclosed and therefore the documentation before the Court is not complete. Moreover, Ms Wilkinson’s evidence in relation to this claim was rather exiguous. Furthermore, as I shall explain below, the evidence of Mr Ellison and Mr Paulson was somewhat confused.
The facts
327.	The starting point for considering this claim is the Factoring Need Sheet attached to Mr de Wit’s email of 8 August 2005. As noted above, this showed four payments of corporation tax of £30,000 payable in July, August, September and October 2005. This information was incorporated into the Disclosure Letter in relation to Schedule 4 paragraphs 9.1.11 and 9.1.12 of the SPA. By Schedule 4 paragraph 9.1.11 DMH warranted that all Instalment Payments were up to date. “Instalment Payments” is not a defined expression in the SPA. By Schedule 4 paragraph 9.1.12 DMH warranted that the Disclosure Letter contained full details of any arrangement with any Tax Authority. “Tax Authority” is defined to include HMRC.
328.	In Mr de Wit’s email of 12 August 2005 he said that Volante’s corporation tax liability for 2003-2004 was £119,000 and that Volante had made the first two payments of £30,000 shown in the Factoring Need Sheet. DMH warranted the accuracy of that email and the related financial information other than the budget itself by virtue of Schedule 4 paragraph 2.1 and Schedule 8 paragraph 3 of the SPA.
329.	As noted above, on 4 October 2005 DMH disclosed to Invertec Mr Swansbury’s letter dated 25 July 2005 and email dated 22 August 2005 revealing the additional liability for £20,000 payable by the end of October 2005. This information was incorporated into the Disclosure Letter in relation to Schedule 4 paragraphs 9.1.1 and 9.1.2 of the SPA and copies of the documents were included in Annexure 61A. It was also disclosed that interest might be payable on that sum. By Schedule 4 paragraph 9.1.2 of the SPA DMH warranted that Volante had discharged every Tax Liability falling due before Completion. “Tax Liability” is not a defined expression in the SPA (as opposed to the Tax Deed), but “Tax” is given a very wide definition which includes any penalty, surcharge or interest payable in connection with any taxation. By Schedule 4 paragraph 9.1.4 DMH warranted that Volante had no liability for any interest, penalty or surcharge. 
330.	It is common ground that Volante did not pay the September and October instalments of £30,000 prior to 6 October 2005. Although it was not revealed by the Disclosure Letter, Invertec does not dispute that it became aware prior to completion that the October instalment of £30,000 was outstanding as well as the additional £20,000 disclosed by the Disclosure Letter. Invertec contends, however, that DMH failed to disclose that the September instalment of £30,000 had not been paid by Volante, and warranted that this sum had been paid. The Defendants contend that, although it was not revealed by the Disclosure Letter, Invertec was aware that the September instalment had not been paid either.
331.	Mr Ellison’s and Mr Paulson’s evidence on this point was confused. In cross-examination Mr Ellison initially accepted that the £30,000 referred in Mr Paulson’s email of 5 October 2005 was probably the September instalment. Later in cross-examination he said that he was not able to say. In re-examination he said that he thought that the September instalment had been paid and that the £30,000 referred in the email of 5 October 2005 was the October instalment. Mr Paulson’s evidence was that it referred to the instalment due at the end of September 2005, which is slightly ambiguous.
332.	Despite this, I consider that it is clear from the 5 October 2005 email and the surrounding circumstances that it referred to the October instalment. Volante had just disclosed to Invertec that an additional £20,000 was due in respect of corporation tax for 2003-2004. Mr Paulson had told Mr Ellison that “we” (which I take to mean he and Charles Russell) were looking at Volante’s tax position again. I infer that Mr Paulson (or perhaps Charles Russell) realised at this point that the October instalment would fall due after completion and raised this with Mr de Mol in the conversation which he reported to Mr Ellison in the email. If Mr Paulson had been aware that the September instalment had not been paid either, he would have referred to Mr de Mol having £60,000 to pay, not £30,000. Moreover, Mr Paulson recorded Mr de Mol as having assured him that the tax affairs were in order, which is quite inconsistent with Mr de Mol revealing that the September instalment had not been paid.
333.	Furthermore, neither Mr de Mol nor Mr de Wit gave evidence that they had told Mr Paulson that the September instalment had not been paid. On the contrary, both said in their witness statements that Volante’s outstanding tax liability was disclosed in the Disclosure Letter which they claimed revealed that £80,000 remained to be paid together with interest. In cross-examination Mr de Mol went further and claimed that he had discussed the total outstanding amount of £80,000 with Mr Ellison on 5 October 2005, a suggestion which was not put to Mr Ellison in cross-examination and which I do not accept. Indeed, it is far from clear that Mr de Mol spoke to Mr Ellison at all, as opposed to Mr Paulson, that day.
334.	Counsel for the Defendants submitted that Charles Russell’s email to Ward Hadaway of 5 October 2005 showed that Charles Russell were aware that more than one instalment had not been paid since it referred to “unpaid instalments [i.e. plural]”. I do not agree. It refers to “any as yet unpaid instalments of tax for the year ended 30 June 2004 or earlier periods [emphasis added]”. Charles Russell were clearly seeking to protect Invertec against the possibility that there were unpaid instalments not only for the year in question, but also other years, which Invertec did not know about.
335.	It is common ground that DMH did not disclose Volante’s letter dated 7 September 2007 to Invertec before completion. Despite this, counsel for the Defendants submitted that Mr Paulson was aware at least of its contents. I reject this submission. Not only was it not put to Mr Paulson in cross-examination, it is inconsistent with the contemporaneous documents. Accordingly, DMH did not disclose the additional liability of £7,000 due under the arrangement proposed in that letter.
336.	Why was the September instalment of £30,000 not paid by Volante, why did Volante enter into the arrangement documented in the 7 Sepember 2005 letter and why was neither disclosed to Invertec?
337.	So far as the September instalment is concerned, in his witness statement Mr de Mol acknowledged that it was not paid, but gave no explanation as to why not. In cross-examination he said that he was under the impression that it had been paid, but later said that he had found out about the non-payment around the time of the supposed conversation with Mr Ellison on 5 October 2005. Mr de Wit said in his witness statement that he could not remember why not, but imagined that it was just forgotten about because Volante’s personnel were very busy working on the due diligence and trying to run the business. In cross-examination he said that Volante could have paid this sum. He also said that at the time he thought it had been paid.   
338.	So far as the 7 September 2005 letter is concerned, Mr de Mol accepted that it was his signature on the letter, but said that he had no recollection of the arrangement at all. Mr de Wit said that he did not recall seeing the letter. He also said that at that time DMH knew that interest might be payable, but did not know how much. In cross-examination he said that he had either not seen the email or not opened the attachment. He accepted that the letter should have been disclosed.
339.	I do not believe either Mr de Mol’s evidence or Mr de Wit’s evidence on these points. Mr de Mol purported to have an accurate recollection of numerous points of considerable detail with regard to Volante’s financial affairs. Only in this instance did his memory completely fail him. I do not find this at all plausible: the arrangement documented in the 7 September 2005 was a very unusual and significant one which in my view he would be bound to remember at least something about. In my judgment Mr de Mol was feigning forgetfulness to avoid answering difficult questions about the letter. Nor do I find it plausible that Mr de Wit failed to see, or failed to open the attachment to, Ms Wilkinson’s email of 3 October 2005. There is no evidence of him failing to see any other email or open any other attachment at the time, and the description of the attachment in the email made its significance plain.
340.	Moreover, one has to ask why Ms Wilkinson sent Mr de Wit the 7 September 2005 letter on 3 October 2005. Given the disclosure made by DMH on 4 October 2005, the only plausible explanation is that Mr de Wit was assembling the relevant documents in order to decide what to disclose. When asked why, Mr de Wit said that Ms Wilkinson had sent the email to him out of the blue, an incredible claim.
341.	In my judgment it is clear from the evidence taken as a whole that the reason why Volante did not pay the September instalment and the reason why it entered into the arrangement documented in the 7 September 2005 letter was that it did not have the cash to pay the September instalment. Still less did it have the cash to pay both the September instalment and the additional £20,000. Accordingly, it made an arrangement with HMRC under which it agreed to pay an extra £7,000 in return for deferring payment of the two outstanding instalments of £30,000 and the additional £20,000 to the end of October 2005.
342.	The 7 September 2005 letter is unclear as to whether this sum represents a penalty or interest, but I do not think it matters. Either way, it was a high price to pay for a short deferment of £50,000 and even shorter deferment of another £30,000. Counsel for the Defendants argued that the HMRC statement dated 6 October 2005 showed that all that was due in addition to the total tax liability of just over £140,000 was interest of a little over £4,000. I do not accept this. It is clear that the amount that Volante actually paid on 31 October 2005 was £87,403 in accordance with the 7 September 2005 letter. 
343.	In my view the reason why DMH did not disclose these matters to Invertec was that they would have exposed Volante’s parlous cash flow situation. This is particularly true of the 7 September 2005 letter. Mr de Mol and Mr de Wit appreciated full well that revealing these matters would be likely to jeopardise the deal, at least at the price of £1.5 million plus earn out.
344.	I therefore do not accept that either the non-payment of the September instalment or the non-disclosure of the 7 September 2005 letter was an oversight. I find that Mr de Mol and Mr de Wit realised that they had to disclose the additional liability of £20,000, but deliberately decided not to reveal the other matters. I believe that they took a calculated risk, reckoning that if challenged they could argue that these matters were covered by the disclosure that had been made – as they did.
Breach of warranty
345.	I therefore conclude that DMH breached the warranty contained in Schedule 4 paragraph 9.1.2 of the SPA (and those in paragraphs 9.1.4 and 9.1.12) by warranting that that there was no outstanding tax liability other than those disclosed, but failing to disclose the non-payment of the September instalment or the arrangement set out in the 7 September 2005 letter.
Fraudulent misrepresentation
346.	I also conclude that the representations made by DMH both prior to and in the SPA that it was up to date with the payment of its 2003-2004 corporation tax save for the October instalment of £30,000, the additional £20,000 and the possibility of interest on the latter were false and were dishonestly made.
Tax Deed
347.	Invertec claims that DMH is liable to pay Invertec the outstanding corporation tax of £87,403.06 under paragraph 2.1 of the Tax Deed. The Defendants contend, however, that (i) the effect of paragraphs 2.1 and 2.4 of the Tax Deed is that this sum can only be recovered out of the earn-out payments under clause 8 of the SPA, and (ii) since no earn-out payment ever became due, nothing can be recovered. The Defendants also contend that recovery is in any event precluded by Schedule 5 paragraph 2 of the SPA.
348.	Paragraph 2.1 of the Tax Deed provides that “subject to paragraph 2.4” DMH covenants to pay the tax liability “so far as possible as an adjustment to the Consideration for the Shares”. By virtue of paragraph 1.1 of the Tax Deed “Consideration” has the same meaning as in the SPA. Consideration is defined in the SPA as the consideration set out in clause 3. Clause 3 of the SPA provides that the total consideration is the Initial Consideration plus the Total Earn-Out Consideration. The Initial Consideration has long since been paid, while no Earn-Out Consideration ever became payable. In my judgment it follows that it is not possible for DMH to pay the sum of £87,403 as an adjustment to the Consideration.
349.	Paragraph 2.4 of the Tax Deed says that DMH’s obligation to make any payment under paragraph 2.1 may be satisfied by way of set-off against amounts due under clause 8 of the SPA, not must be. It is permissive, not mandatory.
350.	Schedule 5 paragraph 2 of the SPA contains two distinct limitations. First, the aggregate liability of DMH in respect of all claims under the SPA is the aggregate of the Consideration received by DMH. Secondly, the aggregate liability of DMH in respect of all Relevant Claims, which include any claim under the Tax Deed, shall not exceed £1.3 million or, if less, the aggregate payments made or payable under clause 8. The effect of the second limitation is to bar Invertec’s claim under the Tax Deed, since the aggregate amount payable by Invertec under clause 8 was nil.
351.	This is subject, however, to paragraph 6.2 of the SPA, which provides that the provisions of Schedule 5 do not apply where a matter has been deliberately concealed or withheld by DMH or its officers. This means that the Schedule 5 paragraph 2 limitation does not bar Invertec’s claim so far as it relates to the September instalment of £30,000 and the additional £7,000 due under the 7 September 2005 letter.
352.	I conclude that, subject to the effect of the fraud claim, DMH would be liable to Invertec under the Tax Deed in the sum of £37,000. For the reasons given below, however, Invertec would not have entered into the Tax Deed if the fraudulent misrepresentations had not been made. Accordingly, Invertec has no, or at any rate no separate, claim under the Tax Deed. 
The Alstom contract
353.	Invertec’s claim in relation to the Alstom contract is something of a makeweight, and it was only addressed briefly by counsel for Invertec in his closing submissions. I shall follow his example.
354.	By Schedule 4 paragraph 5.2 of the SPA DMH warranted that Volante was not party to any contract which (1) was usual or abnormal, (2) loss-making or (3) could not readily be performed without undue or unusual expenditure or effort. Invertec particularly relies on (3). DMH disclosed in the Disclosure Letter in relation to this warranty, however, that Volante’s contract with Alstom had not been profitable to date and would be loss-making unless renegotiated. Moreover, DMH accurately stated that the contract had been discussed by Mr de Mol with Mr Paulson. Despite this, Invertec complains that DMH failed to disclose two matters.
355.	The first complaint is that DMH failed to disclose a number of non-conformity reports issued by Alstom which would have revealed that the contract was beset with technical and production problems. In my judgment this complaint is not open to Invertec since it is not pleaded even in the amendments to the Particulars of Claim for which I have permission on the second day of trial. In any event, I do not consider that there was any material non-disclosure in this respect. The non-conformity reports simply provide chapter and verse as to the reasons why the contract was loss-making. They do not change the bottom line that the contract was loss-making, and that fact was clearly disclosed. Moreover, Mr de Mol told Mr Paulson how bad the losses were in their conversation on 26 September 2005. Thus there was no misrepresentation.
356.	The second complaint is that DMH failed to disclose the involvement of Mr Hancocks at all, and in particular did not disclose his Report. So far as the Report is concerned, there is no evidence that this came into Volante’s possession prior to Mr Hancock’s email on 9 October 2005. Thus it could not have been disclosed to Invertec prior to completion. In any event, this again simply provides details of the reasons why the contract was loss-making. It should be noted that Mr Hancocks’ earlier report which he sent to Volante on 28 July 2005 was not disclosed by DMH to Invertec, but that is not the document relied on by Volante in its Amended Particulars of Claim, skeleton argument or closing submissions. Even if I were to assume that that is the document on which Invertec intended to rely (as is suggested by the evidence of Mr Paulson and Mr Clements), the answer would be the same.
357.	As for Mr Hancock’s involvement generally, it is true that DMH did not reveal this, but I am unable to understand why this falsifies any of the warranties DMH gave or otherwise results in any misrepresentation.
358.	The terms of Mr Hancock’s engagement are somewhat curious in the way that they depended upon whether the deal with Invertec was closed or not, but no complaint is made about this by Invertec and the matter was not explored in cross-examination. 
359.	Despite what I have said above, I agree with the submission of counsel for Invertec that Mr de Mol’s evidence in cross-examination about Mr Hancocks’ involvement was another instance of his unreliability as a witness. In his witness statement Mr de Mol said the reason why DMH paid Mr Hancocks was that it was in DMH’s interests that the profitability of the Alstom contract was increased since DMH was going to give an indemnity in respect of this issue and he wanted to maximise the earn-out. That explanation cannot be correct since Mr Hancocks was engaged for the second time at the latest on 2 September 2005, which is well before the Alstom contract became an issue in the negotiations between Invertec and DMH. It was only on 26 September 2005 that Mr de Mol revealed the loss-making nature of the contract to Mr Paulson and only on 29 September 2005 that Invertec proposed paying the deferred consideration by way of an earn-out. 
360.	In cross-examination Mr de Mol said that it was because he was putting right an error by a Volante salesman called John Darlington who (as he had explained in his witness statement) had provided the initial quotation too quickly and as a result had under-estimated job. Leaving aside its inconsistency with the first explanation, this makes no sense. Why should DMH pay to rectify a mistake made by a Volante employee?  I accept that Mr Darlington had subsequently moved to DMH, but that does not mean that his mistake was DMH’s responsibility.
361.	I think the real reason why DMH paid Mr Hancocks was that Volante did not have the money.
Misrepresentation by warranty
362.	Counsel for the Defendants argued that, because Invertec’s claims are all framed by reference to warranties in the SPA, Invertec cannot have any claim for misrepresentation, fraudulent or otherwise, but only a claim for breach of contract. I do not accept this argument for the following reasons. First, two of the claims (those relating to the July and August 2005 management accounts and its corporation tax liability) concern information which was supplied by DMH to Invertec during the negotiations prior to the SPA, albeit that its correctness was warranted in the SPA. In the case of the first of these Invertec’s pleaded case has always clearly relied on the representations made prior to the SPA. As discussed below, the second was only pleaded by amendment at trial.
363.	Secondly and more fundamentally, the warranties in question also amount to representations of fact as to the state of Volante on 6 October 2005. The warranties were negotiated between Invertec and DMH over a considerable period prior to the execution of the SPA. As a result, Invertec knew prior to signing that the agreement it was about to enter into contained those warranties. In those circumstances I cannot see any reason in principle why Invertec cannot claim that it was induced to into the agreement by the representations made by those warranties so as to found a misrepresentation claim if they were false, particularly if they were fraudulently made.
364.	Whether Invertec relied upon those representations and whether its claims are precluded by clause 19 of the SPA are separate issues which I shall consider below.     
Reliance
365.	It is clear that in general terms Invertec did rely upon the warranties contained in the SPA: that was their purpose. Moreover, the warranties were closely negotiated between the parties. During the negotiations Invertec pressed for further and better warranties, while DMH moved reluctantly from not wanting to give any warranties at all to accepting that it had to give some. The essential compromise that was reached was that DMH would not give any “forward-looking” warranties, but would give warranties as to the state of the business as at completion.
366.	Mr Ellison accepted in cross-examination that he did not rely upon any representations and warranties other than those which were incorporated into the final version of the SPA, but that does not detract from his evidence that he did rely on those which were incorporated. He also accepted that he knew that DMH would not give any warranties as to the future, but that does not affect his reliance upon the warranties it gave as to the present. More significantly to my mind, he accepted that he authorised Mr Paulson to complete the deal even though he knew that some of the “big red flags” mentioned in his email to Mr Paulson of 28 September 2005 had not been addressed. On the other hand, some of them had been. The upshot was that Mr Ellison was happy to proceed on the basis of the deal as finally structured and in reliance upon the warranties that were finally given.
367.	The Defendants suggest that Invertec did not really rely on any of the warranties because it was desperate to do a deal in order to solve its problem with ITS. I do not accept this. ITS’s financial situation was not so bad that Invertec was prepared to do a deal at any price. On the contrary, Invertec negotiated hard over to secure what it thought was an acceptable deal. Thus, shortly after the “big red flags” email, Invertec succeeded in negotiating an important change in the structure of the deal whereby the second tranche of consideration, amounting to £1.3 million, ceased to be guaranteed to DMH and became an earn out dependent on Volante’s performance.
368.	On the other hand, the fact that Mr Ellison was prepared to proceed despite knowing that not all of his concerns had been addressed means that it is necessary to consider the warranties individually.      
July and August 2005 management accounts
369.	There can be no doubt that, in general terms, Invertec did rely upon the July and August 2005 accounts when entering into the transaction: Mr Paulson specifically instructed Charles Russell of this in his email of 5 October 2005. Furthermore, they were subject to the warranty in Schedule 4 paragraph 3.7.1 of the SPA. That does not necessarily mean, however, that Invertec relied on the parts of the accounts in question.
370.	The July and August accounts not only purport to report the actual results achieved in those months, but also compare them with the budgeted figures i.e. the figures contained in the 2005-2006 budget which had been disclosed to Invertec previously. Mr Ellison and Mr Paulson’s evidence was that they both considered the July and August 2005 accounts and compared the actual figures with those budgeted. I accept that evidence, which makes obvious sense. I doubt that Mr Ellison or Mr Paulson paid any particular attention to the split between in-house and factored sales as such, which although it was mentioned in passing in Mr Sutcliffe’s report featured little in the contemporaneous discussions. This does not mean that they did not rely on the sales position represented in the July and August accounts, however. The July and August accounts as presented to Invertec have a line labelled “Sales” right at the top of the page, which is the figure for in-house sales. Then the accounts set out all the costs associated with those sales. Factored sales and total sales are set out after these in the middle of the page. This presentation accurately reflected the importance of the “sales” i.e. the in-house sales. It also reflected the way in which the 2005-2006 budget was presented. It follows that, when comparing the July and August results with the budgeted figures, Mr Ellison and Mr Paulson will necessarily have compared the “sales” figures in the former with the “sales” figures in the latter. As result of the changes, the July accounts showed “sales” of £331,571 against a budget of £340,000 (-8.4%) and the August accounts showed “sales” of £322,426 against a budget of £335,000 (-12.6%). The accounts as originally drawn prior to Mr de Wit’s changes would have shown “sales” which were much further adrift from those budgeted.
371.	Counsel for the Defendants argued that Invertec did not rely upon the sales figures, but at most on the figures for loss shown in the accounts. He also argued that Invertec placed little reliance even on those figures as opposed to the figures in its own models. The revised 2005-2006 budget prepared by Ms Harris and attached to Mr Paulson’s email of 18 August 2005 and Mr Paulson’s email to Mr Ellison dated 24 August 2005 are central to both these arguments.
372.	Mr Ellison’s evidence was that Ms Harris’s model was a worst case scenario; that he did not consider it appropriate because it used outdated cost figures when Invertec had been told by Mr de Wit that Volante’s margins on rail business (on which it was now concentrating) were higher than on bus business and that it had reduced its costs; that he therefore relied on Mr de Wit’s budget; and that he relied upon being able to test the projections contained in that budget by reference to Volante’s monthly management accounts. I accept that evidence.
373.	In any event, I consider that what matters for present purposes is that Ms Harris’s model did not change the sales figures from Mr de Wit’s budget. In my judgment it is clear from the evidence that, while Invertec may have treated Mr de Wit’s profit projection with a degree of caution, it did base its analysis on the sales projection contained in the budget. Invertec was aware that, under the terms of the SPA, DMH was not warranting the sales projection and that therefore it could not rely on the sales projection as such. This was one of the reasons why the provision of the July and August 2005 accounts was important to Invertec, so that it could test the projection by reference to figures which DMH would warrant and therefore it could rely on.
374.	Accordingly, I am satisfied that Invertec did rely upon the sales figures in the July and August 2005 accounts, and in particular upon the in-house sales figures.   
Solvency
375.	In my view Invertec’s strongest case of reliance is in relation to the warranty that Volante was cash flow solvent. As related above, Invertec wanted a warranty that Volante was a going concern, but DMH refused to give this. Mr Paulson was worried by this and, as he said in his email to Mr Ellison on 28 September 2005, it made him “wonder whether there is a financial hole waiting for use that we can’t see at the moment”. In these circumstances Mr Paulson pushed for the next best thing: as he put in his email to Mr Ellison on 4 October 2005 “we’ve held firm on the warranties”. Mr Ellison’s evidence was that he had understood that DMH had finally given a warranty that Volante was a going concern. I think he misunderstood the position: what DMH gave was a warranty that Volante was solvent. In any event, his evidence was clear that he relied upon the understanding that Volante was solvent. I accept that evidence.
Corporation tax
376.	The position regarding the corporation tax is less clear cut. Invertec knew that £50,000 in corporation tax was outstanding and that there might be interest on £20,000 of that, but it did not know the whole truth. It is clear from the contemporaneous correspondence that this was another area for concern for Invertec. As a result, it secured the protection of the Tax Deed. Nevertheless I do not think that this means that it did not rely upon the warranties that were given. I think it was a case of belt and braces. Mr Paulson wanted confirmation from the tax inspector that Volante’s tax affairs were in order, but that was not forthcoming, no doubt because it was not practicable in the time available. In those circumstances Invertec had to rely upon the assurance that, save as disclosed, Volante’s tax affairs were in order as expressed in the warranty. In my judgment there is sufficient evidence that it did.
Alstom contract
377.	In my judgment it is clear from the evidence that, not only did Invertec know that the Alstom contract was loss-making, but also what Invertec relied on was the indemnity contained in clause 7.1.7 of the SPA. This provides a further reason why the claim in respect of the Alstom contract fails.
Loss
378.	As set out above, the three heads of loss claimed by Invertec are (i) the initial consideration paid under the SPA, (ii) the sums it loaned to Volante between 6 October 2005 and 11 December 2006 and (iii) the sums it has paid to DMH under the MSA. The principles to be applied in considering these heads of loss are those laid down by the House of Lords in Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254, and in particular the seven principles stated by Lord Browne-Wilkinson at 266H-267D.
Initial consideration
379.	Invertec is entitled to be put in the position it would have been had the representations which I have found to be false not been made. In the light of my findings on reliance, I consider that it is clear that, if the representations had not been made, then Invertec would not have entered into the transaction constituted by the SPA and the associated agreements. Mr Ellison’s and Mr Paulson’s evidence was that, if Invertec had known the truth, it would probably still have been prepared to purchase Volante, but only at a significantly reduced price. Mr de Mol’s position at the time was that he was not prepared to accept less than £1.5 million in cash, whereas other elements of the deal were negotiable. In those circumstances the most likely outcome is that the deal would not have been concluded. It is conceivable that if the truth was known Mr de Mol would have had to reduce his asking price, and that if Mr de Mol had dropped his price low enough, then a deal could still have been done; but that is to speculate about a different transaction to that which the parties actually negotiated. That is not the correct approach to assessing damages in a fraud case: see Lord Steyn in Smith New Court at 283F-G.
380.	The Defendants have not suggested that the shares in Volante had any real market value as at 7 October 2005. In my view it is clear that they did not, particularly in the light of my finding as to its insolvency as that date. Accordingly, Invertec are entitled to recover the initial consideration of £1,512,113 as damages.  
Loans
381.	Invertec contends that it is also entitled to recover as consequential losses the loans it made to Volante on the basis that it was “locked into” the transaction alternatively on the basis that these sums were lost as a result of a reasonable attempt to mitigate its loss incurred as a result of entering into the transaction. The Defendants dispute both contentions. Furthermore, the Defendants contend that Invertec had knowledge of all, or at any rate almost all, of the facts it now relies upon as giving rise to the claims for fraudulent misrepresentation by 25 October 2005, and accordingly any losses sustained by Invertec after that date were not caused by the misrepresentations.
382.	In assessing these contentions, I consider that the starting point is to consider Invertec’s state of knowledge. It is clear that that Invertec did know almost all of the facts now relied upon by the end of October 2005. The only significant piece of information it lacked was the letter from Volante to HMRC dated 7 September 2005, but it knew broadly what the position was in relation to corporation tax. In my view it was reasonable for Invertec to take a little time to assess the position in the light of that knowledge, and in particular see to how Volante performed financially in the months after the acquisition, and to take professional advice before deciding what to do. In my judgment, Invertec was in a position to take a decision by early-mid January 2006. By that time Invertec was aware not of the facts giving rise to the claims, but also of Volante’s poor sales performance in the months of October, November and December 2005, and Invertec had had to lend Volante £532,000 to kept it afloat. By that time Invertec had obtained advice from Mr Clements, from Charles Russell and from leading counsel, and was not only in a position to but did instruct Charles Russell to write a letter before action.
383.	The next question is whether Invertec was “locked into” the transaction. I accept that Invertec could not have sold Volante to a third party, but I do not accept that this means that it had no alternative but to keep Volante trading. It had two alternatives. The first was to rescind the SPA. Counsel for Invertec submitted that rescission would not have possible. I do not agree with this: I think it would have been possible if Invertec had acted promptly, in particular before the transfer of the ITS business in December 2005. The second alternative was to allow Volante to go into administration or liquidation.
384.	Instead, Invertec decided to continue to support Volante and to keep it trading. In my view this was a commercial decision on the part of Invertec. In this regard I think two points are telling. The first is that Invertec did not instruct Charles Russell to write the initial letter before action until after Bombardier had made its decision on preferred supplier status and then to propose rather modest terms for settlement. The second is that, despite having accused Mr de Mol of fraud, Invertec retained his services. In my judgment the explanation for these facts is that Invertec had confidence in Mr de Mol’s abilities as a salesman and were optimistic that, having integrated ITS’s business and gained preferred supplier status with Bombardier, Volante could trade its way out of its financial difficulties. As it turned out, Invertec were over-optimistic about this, but the over-optimism was not caused by the fraudulent misrepresentations. I therefore conclude that losses Invertec sustained from January 2006 onwards were not caused by the fraudulent misrepresentations.
385.	Finally, I turn to consider the question of mitigation. In my judgment Invertec’s decision to keep Volante trading was not a reasonable attempt at mitigation, but a commercial gamble. As counsel for the Defendants submitted, by keeping its claim against the Defendants in reserve during this period, Invertec was effectively treating the Defendants as insurers of the monies advanced to Volante. In my view Invertec was entitled to take the commercial gamble, but not to treat the Defendants as insurers if the gamble went wrong. 
386.	Accordingly, Invertec is entitled to damages in the sum of £532,000 as consequential loss caused by the fraudulent misrepresentations, but no more.
Sums paid under the MSA
387.	Invertec entered into the MSA as part of a package with the SPA. If it had not entered into the SPA, then it would not have entered into the MSA either. Accordingly, Invertec is entitled to recover as damages the sums it has paid under the MSA. I do not understand there to be any dispute as to the amount, which is set out in paragraph 1 above.       
Invertec’s alternative claims
388.	Since I have concluded that Invertec succeeds on its principal fraud claims, it is not necessary for me to consider its alternative claims. I shall nevertheless set out my views on them very briefly. For the avoidance of doubt, I am not considering Invertec’s claim in relation to the Alstom contract here since there was no misrepresentation. 
Negligent misstatement
389.	Even if the statements in question were not fraudulently made, I am satisfied that DMH owed Invertec a duty of care in relation to the statements and they were made negligently. 
Misrepresentation Act
390.	Even if DMH did not owe Invertec a duty of care, Invertec has a claim under section 2(1) of the 1967 Act. Even if the relevant misrepresentations were not made fraudulently, I am not satisfied that DMH had reasonable grounds to believe and did believe that the facts represented were true. This is particularly so in the case of the representation of solvency. 
Entire agreement clause
391.	Counsel for the Defendants accepted that clause 19.2 of the SPA did not preclude claims by Invertec for fraudulent misrepresentation, but submitted that it did preclude Invertec’s claims for negligent misstatement and under the Misrepresentation Act. I disagree: the first sentence allows Invertec to claim in respect of representations and warranties contained in the SPA. Counsel argued that this only allowed claims for breach of warranty for anything labelled a warranty, and not a claim for misrepresentation. This is not what it actually says, and I do not construe it in that way.
Personal liability of Mr de Mol
392.	The fraudulent misrepresentations I have found established were largely made by Mr de Mol on behalf of DMH. He was the sole negotiator on behalf of DMH, and he signed the transaction documents on behalf of DMH. To the extent that the representations were made by Mr de Wit, Mr de Mol authorised Mr de Wit to make them. Mr de Mol knew that the representations were false and he made, or authorised Mr de Wit to make them, dishonestly. It follows that Mr de Mol is personally liable for the fraudulent misrepresentations: see Standard Chartered Bank v Pakistan National Shipping Corp (Nos 2 and 4) [2002] UKHL 43, [2003] 1 AC 959.
393.	Had I concluded that DMH was not guilty of fraudulent misrepresentation, but only of negligent misstatement, the position concerning Mr de Mol’s personal liability would be otherwise. In my judgment Mr de Mol did not assume a personal duty of care in relation to those statements distinct from DMH’s duty of care. It follows that Mr de Mol would not be personally liable for DMH’s negligent misstatements: see Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830.  
Counterclaims
394.	As noted above, DMH has two counterclaims.
MSA
395.	Before turning to the counterclaim itself, it is convenient to deal at this juncture with two related matters.
396.	The first is as to what happened in September 2006. Mr Paulson’s evidence, consistently with Invertec’s letter dated 11 January 2007, was that on 5 September 2006 there was a meeting between Mr Paulson and Mr King and Mr de Mol at which Mr Paulson told Mr de Mol that Invertec was terminating the MSA. Mr King did not corroborate this and Mr de Mol disputed it. Mr de Mol’s version of events receives support from the fact that on 15 September 2006 Mr Paulson sent Mr de Mol an email confirming that “there are no problems with paying the invoices for the management fee according to the plan we proposed already”. I can see no reason why Mr Paulson should lie about the matter, however. My conclusion is that the email refers to fees which had already been incurred, whereas what was discussed at the meeting was the future.
397.	The second is the allegation of dishonesty levelled by counsel for the Defendants against Mr Ellison and Mr Paulson. This is that they strung Mr de Mol along by accepting DMH’s services under the MSA and promising to pay for them, when in fact they had no intention to pay for them because they intended to rely on Invertec’s fraud claim as an answer to DMH’s claim. In my judgment Mr Ellison and Mr Paulson were not dishonest. To begin with they tried to reach an accommodation with DMH. When that failed at the end of February 2006 their attitude was to wait and see what happened to Volante. Duing this period Invertec and DMH had a common interest in trying to make a go of Volante. If Volante had been successful, I do not think Invertec would have brought the present claim, and I think it would have paid DMH. Mr Ellison and Mr Paulson never disputed that, subject to Invertec’s claim, Invertec was liable to pay DMH the sums due under the MSA. Invertec did make some payments to DMH under the MSA, hence the claim for Invertec’s third head of loss. Mr Paulson evidence was that the reason why Invertec did not pay the remaining amounts which fell due prior to the termination of the MSA was that, as a result of lending large sums to Volante, Invertec was short of money and he prioritised other creditors. I accept that evidence. 
398.	That brings me to the counterclaim. As I have just said, Invertec does not dispute that, subject to its own claim, it is liable for the sums counterclaimed. Invertec’s answer to the counterclaim is, as a result of its claim, the sums owed but not paid are extinguished by circularity of claim. I accept this analysis. 
Debts Agreement
399.	There is no dispute that as at 6 October 2005 Volante owed DMH a total of €68,013.12 under the Consultancy Agreement or that it did not subsequently pay those sums (“the Debts”). DMH contends that it was agreed between Invertec, Volante and DMH that the Debts would be paid by Invertec in consideration for DMH releasing Volante from liability for them (“the Debts Agreement”). The Debts Agreement is said to be “evidenced by” Mr de Mol’s email to Mr Paulson of 27 October 2005 and Mr Paulson’s reply of 28 October 2005, but DMH does not rely upon any oral agreement or any agreement by conduct and so one is left with just the emails themselves.
400.	In my judgment the exchange of emails does not constitute a novation agreement as alleged. When Mr Paulson wrote “Obviously we will meet our liability to you as soon as we can”, in context “we” meant Volante. He did not say that Invertec would assume the liability. Still less did Mr de Mol agree that DMH would release Volante from it.
Conclusions
401.	For the reasons set out above, I conclude that:
i)	Invertec succeeds in its claims for fraudulent misrepresentation in relation to the July and August 2005 management accounts, Volante’s solvency and Volante’s corporation tax liability, but not in relation to the Alstom contract.
ii)	Invertec is entitled to the sums of £1,512,113, £532,000 and €216,960 or its sterling equivalent as damages.
iii)	Mr de Mol is personally liable for these sums.
iv)	DMH’s counterclaims fail.