Case No: HC10CO3460
Neutral Citation Number: [2012] EWHC 3443 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Rolls Building, Fetter Lane, London EC4A 1NL

Date: 30/11/2012

Before :

MR JUSTICE MANN
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Between :

	Sycamore Bidco Limited	Claimants	
	- and -		
	(1) Sean Breslin
(2) Andrew Dawson 	Defendants	

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Catherine Newman QC and Adam Smith (instructed by Addleshaw Goddard LLP) for the Claimant
Andrew Neish QC (instructed by PriceWaterhouseCoopers Legal LLP) for the Defendants

Hearing dates: 2-4 May, 8-11 May, 14-18 May, 21-25 May, 28-31 May, 1 June, 13, 14, 18 & 19 June, 2-6 July, 19 & 20 July 2012.
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Judgment
Table of Contents
	Para	
Introduction	1	
The facts said to amount to breach of warranty and misrepresentation in outline	6	
The warranties, manner of breach and the misrepresentation	11	
Witnesses	13	
Mr Giles Derry	15	
Mr Jonathan Ma	16	
Mr Shaun Middleton	17	
Mr Barnes	18	
Miss Suzie Nedza	19	
 Ms Louise Prager	20	
Mr Bruce Eaton	21	
Ms Cheryl Brennan	22	
Mr Gogel	23	
The defendant's witnesses	24	
Mr Andrew Dawson	25	
Mr John Fenn	26	
Mr David Brooks	27	
Mr Tom Calvert-Lee	28	
Mr Sean Breslin	29	
Mr Andrew Kilbey	30	
Mr Archibald Jenkins	31	
Mr Christopher Hine	32	
Mr Andrew Cottle	33	
GAS, GCLS and their relationship	34	
The factual framework of the alleged wrongs	44	
The Liberata transaction and compensation	45	
The background to the IALOB issue	80	
The commissions and rebates background	84	
Dunedin's criteria and methodology of assessing business	102	
The chronology	108	
The sale process	109	
Completion and the completion documents	182	
Post-completion events	188	
The commencement of this action and the separate claim against Mr Brooks	199	
Are the warranties capable of supporting a claim in misrepresentation	200	
The alleged wrongs - general	212	
The Liberata payment	213	
The correct accountancy approach to the Liberata payment	215	
The impact of form	224	
Substance - how far can the sum be treated as being compensation for lost clients in a relevant sense	229	
The allocation of the compensation between GAS and GCSL	242	
Materiality	246	
The alleged failure to comply with accepted accountancy practice in relation to the Liberata compensation money	255	
Conclusion on the  inclusion of the Liberata compensation as turnover	256	
The absence of a related party transaction note	259	
Decision on the Liberata payment	265	
The dispute on the AXA payment and its resolution	266	
The commission points – the cliam	274	
The client rebate sums - details	283	
Decision on the client rebate sums	293	
The Bank of New York matter	318	
Commission - related claim - Rotch Property Company	340	
The rebate practices of GAS	346	
Rebates and commissions in 2008 and 2009	350	
Aggregating the shortcomings	352	
Conclusion on liability thus far	355	
Did Mr Brooks attempt to hide the Liberata compensation and the other matters?	357	
Dunedin's knowledge of the Liberata compensation matter	359	
What did Grant Thornton know, and what is its significance?	375	
Is GT's knowledge attributable to Sycamore?	380	
Is the knowledge of Mr Brooks, Mr Kilbey and Mr Barnes attributable to Sycamore for the purposes of clause 8.1.10?	382	
Damages	390	
Damages - the claimants' case	391	
Damages - the defendants' case	392	
The defendants' prior point - has any loss been caused at all?	393	
The claimants' case on loss	398	
The defendants' case on loss	399	
Loss - issues arising	401	
What would Dunedin have done - relevance	403	
What would Dunedin have done - the facts	407	
The importance of the models	408	
The importance of acquisitions	413	
What would have happened in a deemed renegotiation?	420	
The role of the Accounts in the transaction	432	
Conclusion on the non expert evidence on loss	443	
The expert view of loss and my decision	444	
Decision on the main claim	467	
The LTIPs claim	469	
The LTIPs claim - decision	481	
Appendix	Page 230	
Disclosure letter	Page 235	

Mr Justice Mann : 
Introduction
1.	On 9 November 2007 the claimants ("Sycamore") purchased the shares in a private limited company known as Gissings Group Ltd, the principal asset of which was a subsidiary known as Gissings Advisory Services Ltd  ("GAS"). It paid over £16 million for it. The sellers included the two defendants, selling shares which they held in their own right (in Mr Breslin’s case) and as trustee. Sycamore now complains that the sale was brought about as a result of misrepresentations in relation to the accounts of GAS and claims damages as a result both at, law and under the Misrepresentation Act 1967. Alternatively it claims that the same default amounted to breaches of various warranties in the relevant share sale agreement (”SPA”) and claims damages in respect of those breaches.
2.	The purchaser of the shares in GAS was Sycamore.  That company was set up for that purpose.  Its ultimate principal shareholders were funds managed by a private equity firm called Dunedin Capital Partners Limited.  Managers of GAS had a minority interest as well, so to that extent it was a management buy-out (“MBO”).  However, Dunedin was the substantial purchaser and unless strict accuracy requires otherwise I shall so treat is in this judgment, only distinguishing between Dunedin and Sycamore where necessary or convenient.
3.	There is an elaborate history to this matter, and it can best be understood by setting out the basic facts which are said to constitute breaches of warranty, or misrepresentations, and identifying the warranties relied on.  I can then deal with the chronology and the underlying facts in a manner which makes more sense.  Gissings Group Limited (“GGL”) was the company whose shares were actually sold, but for the purposes of this narrative it will be convenient to set out the story as if GAS was directly the target company  whose shares were sold. I shall only refer to the holding company so far as may be necessary.
4.	There is also a claim made in a separate action for sums known as the LTIP sums.  This is a relatively minor claim in financial terms in the context of the action.  It is a claim for additional consideration payable under their SPA.  I shall deal with it separately at the end of  my decision on the main claim.
5.	Miss Catherine Newman QC and Mr Adam Smith represented the claimants.  Mr Andrew Neish QC represented the defendants. 

The facts said to amount to breach of warranty and misrepresentation in outline
6.	Before the sale GAS was a subsidiary of Gissings Group Ltd (”GGL”).  Its business was that of consultancy and brokerage in relation to insurance and allied products, the services being provided to businesses of various sizes.  A sister company called Gissings Consultancy Services Ltd (“GCSL”) dealt in the pensions field.  Some bought-in services were shared between GCSL and GAS.  
7.	A concern called Liberata provided IT-related services to the two Gissings companies, though the contract to do so was between Liberata and GCSL.  There were problems with the services and a claim was made by the Gissings companies for compensation.  The claim was compromised as recorded in a letter dated 17th July 2006.  The compromise involved giving the two Gissings companies a reduction of £500,000 in the charges made by Liberata, at a rate of £41,666 per month.  £260,000 of that total was treated as due to GAS, and in the accounts in question in this case that sum was included in the turnover of the business.  This gives rise to the first of the claims made in this action on the footing that it should not have been so included.
8.	AXA provided insurance services to an association of small banks known as the Insurance Association for London and Overseas Banks (“IALOB”).  AXA provided the insurance, GAS was the broker and GAS collected the premiums from its clients for the benefit of AXA.  By arrangement with AXA, GAS was allowed to keep the interest on premiums between the date of their receipt by GAS and their onward transmission to AXA, and this gave rise to significant sums from which GAS benefited.  This particular arrangement  came to an end in 2005, and AXA provided compensation to GAS in GAS’s financial year ended 30th September 2007 in the sum of £43,000 to make up for GAS’s lost benefit.  This, too, was taken to turnover in the relevant accounts, and the alleged inappropriateness of this gives rise to the second claim made in this action.  
9.	The arrangements that GAS had with its clients as to remuneration varied.  In respect of some, GAS was remunerated by commission from the insurers.  In relation to others GAS charged a fee to the client.  In some cases GAS charged a fee but the insurer still paid a commission.  In some of those cases it is said that GAS was obliged to account to the client for the commission or part of it.  It is said that GAS failed to do that in relation to some clients in the 2006 and 2007 financial years, and instead added the relevant sums to turnover.  That gives rise to the third claim in this action.
10.	On occasions GAS received commissions from insurers in excess of its entitlement.  There is nothing sinister in that - the size and complexity of the operation, and the way in which some insurers dealt with commission, made it inevitable.  Working out true amounts to repay to (or on occasions to claim from) insurers was difficult and time consuming.   After a while, and if the insurers had not claimed the sums due, GAS took unallocated or unclaimed sums to its profit and loss account (treating it as income).  It is said in this action that GAS’s policy was not to do that until after 2 years after receipt of the funds.  It is further said that, despite that policy, GAS did take some money to its profit and loss account inside that 2 year period, and that the 2007 accounts reflected those sums.  This is the fourth matter complained of in this action. 

The warranties, manner of breach and the misrepresentations
11.	The relevant warranties and representations (if any - there is an issue as to whether they amount to representations) are set out in the Appendix to this judgment, for ease of reference.  The warranties provide for a Disclosure Letter.  Such a letter was signed by the sellers, and again its relevant terms appear in the Appendix.  The relevant accounts which are said to contain errors are the accounts for the year ended 30th September 2007 (“the Accounts”).
12.	The SPA was not entered into until after the Accounts had been signed off.  The profit and loss account and turnover in those accounts are said to reflect the four matters identified in the previous section of this judgment.  It is said, broadly speaking, that that treatment is inappropriate.  It is said by the claimants that none of those four matters should have appeared in those accounts as part of turnover, either because it should have appeared elsewhere, or there should have been a note qualifying the figure, or because the sums should not have appeared as sums to which the company was entitled at all.  All four of them are said to render the accounts inaccurate for the purposes of warranty 4.1 (the accuracy of accounts), and to give rise to a breach of warranties 2.3 and 3.12 (the existence of claims of potential) in respect of the rebate- and commission-related matters.   This claim is said to be worth about £6m.   In the alternative (indeed, as the preferred alternative) the terms of the warranties are said to be representations which are falsified by those four matters and the claimants seek damages under the Misrepresentation Act 1967 and/or at common law.  The damages claimed are very substantial, because the company is now said to be worthless – more than the consideration paid.

Witnesses
13.	I heard evidence from the following witnesses for the claimant, and make the following findings about them.  
14.	One over-arching point applies in relation to those in Dunedin who participated in the acquisition.  Dunedin plainly thinks that it has not got a worthwhile asset for its investors out of this transaction.   There is likely to be a commercial and reputational effect of what has happened, and those who were involved on the part of Dunedin will naturally be sensitive about that and seeking to make amends.  Part of Dunedin’s case depends on  forming judgements with hindsight  as to what Dunedin would have done had matters not been presented by the sellers as they were.  In circumstances such as those in which Dunedin now finds itself, such hindsight judgements have to be treated with special care, and I have done that throughout.  There is a danger that, without actually fabricating evidence deliberately, ex post facto rationalisation can lead to matters being thought to have a greater significance now than they would have had at the time.  This, too, I have borne in mind in assessing the evidence from Dunedin’s participants.

Mr Giles Derry
15.	Mr Derry is a partner in Dunedin LLP (the successor firm to Dunedin) and was at the time of the transaction in question a director of Dunedin.  That is a position of seniority.  He joined Dunedin in November 2005 from another private equity firm called Sand Aire.  In relation to the transaction in issue in this case, he was one of the two lead directors, and was effectively the principal lead.  This was his first transaction in that role.  While his witness statement did demonstrate a certain lack of care in its finalisation, in that there were some significant errors, he gave his evidence with considerable care and thought.  A daily transcript was available in this case, and he revealed that he read his own evidence every night (he was in the witness box for several days).  That demonstrates a careful approach and a clear devotion to the cause.  He did not strike me as being a man who would tell a deliberate untruth.  However, I do think that he has approached this case with a view that it is important that his company should find a claim and I think it possible that his approach has led to a certain tendency to ex post facto rationalisation that leads me to approach some of his evidence of reliance with greater caution than I would have wished.

Mr Jonathan Ma
16.	Mr Ma is now an investment director in Dunedin.  At the time of the events in question in this action he was an analyst working within the investment team.  In that role he was responsible for assisting Dunedin’s directors in evaluating potential investments.  He was heavily involved in many of the activities which comprised that evaluation in the present case.  He is an obviously conscientious and able man and was apparently anxious to give his evidence clearly and in a thoughtful manner.

Mr Shaun Middleton
17.	Mr Middleton is a chartered accountant by background and at the time of the events in question in this case he was Managing Director, New Investment.   The purpose of the New Investments team is to source new investment opportunities.   He was the “second director” on the GAS acquisition, with Mr Derry taking the lead.  He came across as a quietly determined man, and having looked back at this transaction he has apparently formed a strong view that Mr Brooks (GAS’s finance director) was seriously to blame  in the manner for which he accounted for some of the turnover.  His personal view was that Mr Brooks hid things, though he was unable to suggest a motive for it.   I think that he has been actively looking for someone to blame for this transaction and got the impression that he was one of the serious drivers behind the action.  Accordingly, I view with special care his evidence so far as it goes to reliance and causation.

Mr Barnes
18.	Mr Barnes joined GAS in 2005, having spent 29 years working in the insurance industry.   In January 2005 he joined GAS as Head of Risk.  The Risk team dealt with policies including life insurance, income protection and death in service.  He stayed on after the sale of GAS and was part of the MBO team.  On completion he became Client Services Director responsible for all products, and he is still a director of GAS.  He gave evidence of his participation in certain meetings during the course of the acquisition and also gave evidence about the operation of the system of reviews that are said to underlie decisions as to whether to credit and pay sums to insurers and clients.  I think that he tried to give his evidence in a straightforward fashion, though I had the impression that on occasions he was slightly anxious to echo certain refrains which are part of the claimant’s case, and in particular an allegation that  the Liberata compensation monies were used to plug a gap in the income of GAS, and its characteristic as non-recurring income.  While I did not think he demonstrated that he had somehow become partisan, that makes me treat his evidence with caution.

Miss Suzie Nedza
19.	Miss Nedza is now Head of Client Services at GAS.  At the times relevant to this action she worked in the Risk side of GAS’s operations.  She started as an administrator, then became an  Adviser (an Adviser is GAS-speak for the salesperson with the client contact) and in March 2005 moved back to administration as Risk Operations Manager with overall responsibility for the administration of the Risk side.   Her roles included making sure that invoices were properly raised and assisting in ensuring that all commissions received were properly allocated.  In particular she participated in the monthly meetings to sort out the backlog of allocations that had arisen by 2006.  She gave her evidence clearly and conscientiously.  Her email traffic demonstrates that she brought the same level of conscientiousness to her work.

Ms Louise Prager (née Butcher)
20.	She joined GAS in a sales role in 2005, but in 2006 she became a manager of a group of “co-ordinators” (GAS’s name for administrators backing up the Advisers) on the Healthcare side.  Her principal evidence in chief was as to the operations of the commissions ledger (which recorded debts and payments to and from insurance companies), the rebate ledger (which recorded sums apparently due to clients), and the systems for resolving long-standing failures to reconcile the entries on those ledgers.  There were some indications that she did not check the exhibits to her witness statement properly, but she was probably doing her best to help.

Mr Bruce Eaton
21.	Mr Eaton joined GAS a manager of the Healthcare team in 2007, after a year with GCSL.  He gave evidence about rebates to clients, and was principally cross-examined about the justification for retaining sums that would otherwise have been repayable as fee rebates to former clients, and about attempts to sell additional products to existing clients.  He gave evidence under a witness summons, but that was not because he was himself a reluctant witness; it was because he is now employed by someone else, and his new employment circumstances required the summons.  He did his best with the questions he was asked and was, again, an honest witness.

Ms Cheryl Brennan
22.	She is now a director of GAS but at the times relevant to this action she was the manager of the Risk advisor team, and as such became involved in the monthly meetings to reconcile commissions though in cross-examination she said she rarely attended them.  She gave evidence of that, and related matters. In giving her evidence she was doing the best she could. 

Mr Gogel
23.	Mr Gogel was brought in by Dunedin in January 2010 as chief executive officer of GAS, because he was a “turnaround CEO”, that is to say someone who could come into a business which was not doing well enough and identify how to improve it (and carry out the improvements).  He was its chairman between August 2011 and March 2012.  Coincidentally, he was CEO of Liberata at the time of the Liberata agreement.  His principal evidence started with his attempts to get to the bottom of what he thought was wrong with the business.  I think that he is someone who would form quick and firm views (which was, probably, one of the reasons he was hired) but sometimes I think he was a bit too quick in relation to some of the problems he identified with rebates.   I think that he was looking for what he regarded as wrongs done in relation to the sale rather more, and rather earlier, than he was prepared to admit.  

The defendants’ witnesses
24.	The following witnesses gave evidence for the defendants.

Mr Andrew Dawson
25.	Mr Dawson is one of the defendants and was a minority shareholder in GAS.  He was not involved in the day to day running of GAS’s business and although he was copied in on various email exchanges in relation to some of the underlying facts (such as the Liberata compensation negotiations) he had little direct knowledge of most of the matters in dispute in this action.  He was a careful and honest witness on whose evidence I can rely where it assists matters.

Mr John Fenn
26.	Mr Fenn is a qualified chartered accountant with a background in KPMG.  After a short period as a pensions review settlements officer in the Gissing group, starting in 1999, he became financial controller to the group in 2001 until he retired in March 2009.  He had a limited role in recording the Liberata compensation in the books of the company, and an involvement in an important meeting with GAS’s auditors shortly before completion of the purchase.   He had some limited involvement in commission and rebate reconciliation processes.  He was cross-examined at length on accounting and book-keeping processes within the group.  He was at all times an open, careful and patently honest witness who did not embellish or over-elaborate.  His recollection was at times understandably thin at this remove in time, but that is in no way a criticism of him.  I consider him to have been a reliable witness.

Mr David Brooks
27.	He is a qualified chartered accountant and at the material time he was the finance director of the group, and his activities were central to the claim made in that he negotiated the Liberata agreement and was responsible for the accounting treatment of the main disputed items, and for running monthly meetings which tried to sort out outstanding problems with allocation of commissions and client rebates.  He has been painted by the claimants as the man responsible for what has happened in this case, and in parallel proceedings they have sued him for breach of warranty and in fraud in respect of these and later events.  They seek to paint him as a dishonest man who set about hiding money in the accounts and deceiving Dunedin.  I shall have to consider the quality of his acts (so far as relevant to these proceedings) in some detail in due course.  For the moment I will confine myself to saying that he was cross-examined strongly, and while at times he acquitted himself well on other occasions his answers were not always convincing, particularly when trying to explain how he prepared forecasts of future income.  He was strangely insistent that an audit committee meeting took place in November 2007 when all the evidential pointers were to the contrary, and when I think it plain there was none.  Nonetheless he did not come over as a dishonest man of the kind portrayed by the claimants, and many of the attempts of the claimants to present his acts as dishonest failed, in my view.  On some (but not all) occasions when he was shown to have acted in a less than fully principled way (which happened) he was acting within the culture of the industry, which is a partial explanation.   Nonetheless, as will appear, in some areas I am unable to accept his version of events, and (at least in relation to his account of forecasting renewals) I think he was to a significant extent making it up.

Mr Tom Calvert-Lee
28.	He is a solicitor and was the compliance officer at GAS for the period in question.  He gave evidence of GAS’s compliance framework, though his direct involvement in the matters at the heart of this action was limited.  He was a straightforward witness whose credibility and reliability was not challenged.

Mr Sean Breslin
29.	Mr Breslin was the principal vendor because he was the majority shareholder.  By the time the sale came to be negotiated he was no longer involved in the day to day business of the company, though he kept an eye on what was happening and met management from time to time to receive explanations and set targets.  So far as his role in the sale process was concerned, he largely left matters to others since the provision of information to Dunedin involved the provision of information to which he was not privy.   He did, of course, have the final say as to whether or not a sale should take place and its terms.  In the witness box he seemed to wish to present a pose which it is hard to think represented his real attitude from time to time.  On occasions he sought to present himself and his case as if somehow the matters which were put to him were ones which had not really occurred to him before he was asked the question he was being asked, and he was hearing the point (and considering its answer) for the first time.  Since he had been in court for most of the trial before he gave his evidence, it is unlikely that the matters in question could have come as a surprise to him.  His demeanour was of a man who was faintly puzzled that the subject matter of the action was being raised at all.  This was, in my view, a pose that he had decided to adopt in his evidence.  He was plainly not a “detail man”, as is demonstrated by the fact that he had not appreciated (until  it was pointed out to him in cross-examination) that one of the rebate matters that had originally been relied on was no longer being relied on.  His evidence was that he did not have his own computer and that he reviewed his Defence in this case on a Blackberry. If true, it does not suggest that he wished to pay much attention to its detail; if untrue it does not speak well for his credibility.  His witness statement as to his involvement with the business (or lack of it) was at odds with other evidence which was more acceptable and which indicated that he had a closer contact with the running of the company than he had originally sought to portray.   I had to view his evidence with caution.

Mr Andrew Kilbey
30.	Mr Kilbey’s background was in sales.  He was apparently very good at it.  In November 2004 he was made managing director of GAS at the comparatively young age of 30.  He gave evidence about the business of GAS, about the Liberata contract and compensation, about IALOB and AXA, about rebates and about the sale process.  I thought he was an impressive witness.  His failures to recollect detail were entirely understandable and his general evidence was careful, thoughtful and completely unembellished.

Mr Archibald Jenkins
31.	Mr Jenkins is a former tax partner at KPMG.  At the time of the transaction in question he was the non-executive chairman of GGL (the holding company of GAS).  He was a genuine witness who gave his evidence honestly, but in truth most of what he said added little or nothing to the evidence that had been given by others.

Mr Christopher Hine
32.	Mr Hine is a chartered accountant and a director RSM Tenon Ltd.  He gave expert evidence on liability and quantum for the claimant.  I thought he was an impressive witness who had approached his task conscientiously and with the legal requirements for expert evidence in mind.  I acquit him of the charge levelled against him by Mr Neish that he was towing a Dunedin party line in his evidence. 

Mr Andrew Cottle
33.	Mr Cottle is a partner in the Forensic Accounting Department of BDO LLP.  He gave corresponding expert evidence for the defendants.  I thought he was equally as impressive a witness as  Mr Hine was with the same regard for his duty to the court.

GAS, GCLS and their relationship
34.	The Gissings group had been selling insurance and pension products for some decades.  Its principal owner was Mr Sean Breslin; Mr Dawson had a minority stake, having been allowed to acquire one by Mr Breslin who admired his business capabilities.  In 2004 it was decided to split the business into two elements, probably with a possible sale of one or the other in mind.   GAS, which had hitherto been a dormant company, took over the insurance and employee benefits side, and GCSL took over the pensions side.   In effecting this split the owners also had in mind that, at the time, pensions business was much more regulated than insurance business, so it was useful to effect the split for that reason too. 
35.	The holding company of GAS was GGL of which  Mr Dawson owned just over 5% and Mr Breslin owned or controlled the rest.  In fact he owned 27.85% personally and with his wife, was a trustee of the remainder under two separate trusts. GCSL was held by Gissings Holdings Ltd, whose shares were in turn held by Mr Dawson and Mr Breslin in similar proportions.  When the sale in the present case took place, it was actually a sale of the shares of GGL, but as I have pointed out it will be convenient to treat the sale as if it were the sale of GAS itself.  For the moment only one thing turns on the distinction - neither Mr Dawson nor Mr Breslin was a director of GAS, though Mr Breslin was a director of GGL.
36.	Although there was a split of business, there were still some shared services and costs.  This had a consequence for the sale because a presentation of the business of GAS as a separate basis for the future had to allow for this.  The costs (and the accounts) had to be presented on what was called in this case a “stand-alone” basis, with the shared costs appropriately treated and an appropriate part allowed for in the financial statements of GAS.  
37.	After the sale GAS changed its name to Enrich Reward Ltd.  Some of the later documentation in this case refers to the company as Enrich; I shall refer to it as GAS throughout.
38.	The business of GAS was not simply selling individual policies to individuals.  It had a large number of substantial corporate clients who wished to provide benefits to their employees, and it dealt at that sort of level.  Its clients included a number of household names.  In that way it arranged for a number of policies which benefited a large number of individuals, but generally operating through the employer.
39.	GAS had 4 divisions, departments or business units - Healthcare, Risk, Flex and Wellness.  Healthcare’s main business was in relation to private medical insurance, dental insurance and travel insurance.  Risk’s business involved similar services for more complex risk products such as group life assurance, income protection, permanent health insurance and critical illness cover.  The Flex team offered services in relation to a software product of the same name, which, when contracted for by their employers, enabled employees to tailor certain insurance packages online.  The Wellness team offered services aimed at improving health, such as smoking cessation programmes and stress management seminars. 
40.	GAS’s business, and particularly the Flex side, required IT support.  It shared the provision of that support with GCSL in the form of a contract between GCSL (after novation) and Liberata (called a Business Processing Outsourcing agreement) dated 31st  August 2004, under which benefits were provided to both companies. 
41.	The original product which I have called Flex above is also known as You Flex.  It was a reasonably complex product, and was not suitable for any employers other than the bigger ones.  In order to tap other areas of the market, GAS developed a simpler product called Flex Direct, capable of delivering fewer benefits than You Flex but more suitable for smaller employers.  At the time of the sale GAS had high hopes for this product, which was in its infancy at the time.
42.	GAS’s year end was 30th September.  Hereafter in this judgment I will refer to accounts by reference to the year in which the accounts fell to be drawn – thus the 2007 accounts are those drawn to 30th September 2007.
43.	A couple of years after the sale of GAS, GCSL was sold to Capita.  Mr Breslin and Mr Dawson thus have no remaining interest in either business.  The sale to Capita has had one potential impact on this case in that it was said from time to time that some documents which were relevant to issues in this case had been left in GCSL on the sale of GAS, and now that GCSL has also been sold neither party has formal rights of access to those documents (so far as they still exist).  However, it did appear in the course of Mr Calvert-Lee’s evidence that he had  been given access to the GCSL documents by Capita.

The factual framework of the alleged wrongs
44.	In the following three sections of this judgment I set out the basic factual framework in relation to each of the three principal areas of alleged wrongdoing.  In each case I return to consider further details of those areas when I come to consider whether there was a wrongdoing or not.  In what follows any narrative of fact should be taken as a finding by me unless the contrary appears.

The Liberata transaction and compensation
45.	Since a large part of this trial, and the complaints of the claimants, turns on how the Liberata matter developed and was dealt with, I need to set out some more detail about that relationship.
46.	As pointed out above, at the relevant time the contract was between Liberata and GCSL. Under that contract Liberata provided inter-alia services for Flex and some payroll services which GAS and/or GCSL provided for clients. It also provided pensions administration for GCSL. So far as Flex is concerned, Liberata provided the initial installation and was thereafter responsible for maintaining, servicing and operating the product. The relevant terms of the Liberata contract (which was dated 31st August 2004, and in respect of which the relevant Gissings company counterparty at the time was Gissings Techonology Managed Services Ltd) were as follows:
(i) The term of the agreement was 15 years unless terminated in accordance with the terms of the agreement.
(ii) Clause 4 provided for “Service Credits”. The agreement provided for various Service Levels, and clause 4.2 provided that if Liberata failed to meet any of those levels then it would provide Service Credits in accordance with Schedule 5.  In that way a failure to achieve a service level would attract a price adjustment, but that was without prejudice to the rights of Gissings to recover any other losses recoverable under the agreement. Any penalties which Gissings had to pay to their customers would be reimbursed by Liberata.
(iii) Clause 21 provided for termination. One of the circumstances which might justify termination was a repeated failure by one or other of the parties to remedy breaches. The details do not matter.
(iv) Clause 26 contained “Limitations on liability”:
“26.1 Each party agrees that it has accepted the terms and conditions of this agreement in the knowledge that the other party’s liability is limited as set out in this Agreement and that the Service Charges payable have been calculated so as to reflect such limitations and thus represent a reasonable and commercial allocation of risk between the parties.
… 26.4 Except as expressly provided in clause 26.3, the maximum liability of each party to the other shall not in any event exceed 125% of the total Service Charges paid by the Client in the previous 12 month period … 
26.5 The Supplier shall not have any Liability to Client in respect of any indirect or consequential loss or damage including loss of anticipated savings or of the use of money.
… 26.6 For the purposes of this agreement, the following shall be considered to be direct losses and reasonably foreseeable:
26.6.1 loss of client relationship (including loss of profit, business or goodwill); and
26.6.2 loss of or corruption of data arising as a result of any act or omission of the Supplier
Provided That in the case of clause 26.6.1 the Supplier shall have no liability to the Client for any loss of a client relationship (including loss of profit, business or goodwill) unless such loss was solely and directly attributed to an act or omission of the Supplier.”
(v) Clause 27 provided that in the event that the Flex business was sold separately from the pensions administration business, a significant sum of compensation would be paid to Liberata. The sale of GAS was such an event, and the desire to achieve it led in due course to a negotiation to buy out Liberata’s rights under this clause.

47.	The implementation of Flex for any particular client involved a significant amount of work. The evidence demonstrated that GAS was not always able to recover the full cost of that work from the client in question, and where that was the case GAS would seek to recover those costs over the ensuing months and years, through the monthly payments that the client paid to GAS for the Flex services.  This point assumes a significance later on in the narrative.
48.	By a process of novation, the Gissings end of the Liberata arrangement ended up with GCSL. It was that company that was the contracting counterparty. There was no direct contractual relationship between GAS and Liberata. Accordingly, Liberata always invoiced GCSL, and GAS reimbursed GCSL for appropriate sums attributable to those services which GAS contracted to supply to its clients, and was invoiced by GCSL accordingly.
49.	Mr Jenkins gave evidence that he was never in favour of the Liberata contract, and did not think that it would do GAS any favours. He turned out to be right. Almost from the beginning there were problems with Liberata. They were, apparently, bad at supplying the services that should have been supplied. That led to discontent within GAS’s (and GCSL’s) customers, who claimed compensation from time to time and, it is said by the defendants, some terminated their relationship with GAS as a result. GAS had a complaints committee, which, as its name suggests, dealt with complaints made, and it spent a lot of its time dealing with complaints about Liberata.  Complaints routinely led to GAS and GCSL having to compensate clients, and that compensation amount was passed on to Liberata.  GAS and GCSL obtained service credits under the contract where the problems justified it - an adjustment of sums otherwise due.
50.	Matters did not improve, and more fundamental issues arose.  Gissings considered that it was losing clients as a result and it was decided that the Gissings group should make a more fundamental claim for compensation. I accept that the internal Gissings view, held inter alia by Mr Brooks and Mr Calvert-Lee, was that clients were being lost as a result of Liberata inadequacies.  That the Gissings group considered that it had lost clients is apparent from correspondence emanating from Gissings, and minutes of an audit committee meeting of 19th January 2006.
51.	Mr Brooks set about putting such a claim together. There was some correspondence and various meetings took place between Mr Brooks on the one hand and Liberata representatives on the other. On 24th April 2006 he sent a document to Liberata called “Gissings Costs of Poor Liberata Performance”. All sums were in thousands of pounds (except for the first mentioned). The first heading on the page was “Lost Clients” and the following were listed:
“Annual value of lost clients since start of contract – £3m.

Specific claims:
Lost pension and Flex clients Year 1 – 		293
[letter dated 11.0 8.2005]

Lost clients Year 2 to date
D S G			200
Swiss Re		210
EC Harris (payroll)		60
Sauer Danfoss		250
				720
Right for Work systems development		375
[Letter dated 11.08.2005]

Claims Paid
– Baker Hughes late investments		245
– Baker Hughes pension scheme accounts	20
– audit overruns on pension scheme accounts	45
(e.g. KLM, ABB)
				_____
				310

Other Costs
– 50% of Jim Gunn			75
– Pensions administration catch up project 09/05	25
– Unit reconciliation Project 09/05		28
– IT rectification following move from London to WGC	149
– Microsoft Outlook upgrade		72
– secondment of Richard Everitt to WGC		65
– VAT write off due to incorrect charging of VAT by Liberata	110
 – Contribution towards A Day Project		146
				______
		Grand Total		2268”

52.	The letter of 11/08/2005 is missing. Liberata responded by asking for more details of the claim, including claims for lost clients. A response came on 4th May when Mr Brooks provided a breakdown of the annual value of lost clients of £3m. In Year 1 (that is to say, the first year of the Liberata contract) the £293,000 said to have been attributable to lost clients is broken down as between EC Harris, Daimler Chrysler, Toshiba and Keymile. Year 2 is broken down slightly differently as between the four entities listed in the earlier document. Three are described as three years “admin income”; one (EC Harris) is described as two years of “payroll income”.
53.	What then followed was what was described by Mr Brooks as a “horse trade” at a meeting with a Liberata representative. The negotiation was not easy. In the end the level of compensation was agreed at £500,000. Mr Brooks had deliberately set his original bargaining figure high, and with elements that he did not really believe he would be able to recover, in order to be able to get closer to a figure which he thought was reasonable. There is no doubt that the Gissings group felt itself badly let down by Liberata, and perceived that it had suffered serious losses as a result. In the negotiation, or rather in the final settlement of terms in principle, there was no appropriation of the amount of compensation as between the various elements originally claimed.
54.	The ultimate deal with Liberata was contained in a letter dated 17th of July 2006 from Liberata to Mr Brooks, the relevant text of which is as follows:
“Following the recent series of meetings between us I am pleased to confirm Liberata’s proposals, representing our best and final offer, as follows:
Adjustment of Fees for 2006/07
It is recognised that some servicing difficulties emerged shortly after the outset of the contract and were evident through 2005. These were documented in various schedules and summarised in your undated document entitled “Gissings Costs of Poor Liberata Performance” (the “Claim Document”) first presented to me by you at our meeting on 20 April in your offices. This document formed the basis for preliminary meetings, and latterly provided a common understanding on which to develop our discussions on 21 and 28 June. Subsequently, we have reached agreement on terms to the effect that the most appropriate way of reflecting an outcome that satisfies both parties would be to offer you a discounted charge rate for 2006/07.
The agreed proposal is that we shall discount charges from September 06 to August 07 inclusive at £41,666 per month, representing a total offset in your favour of £500,000 in full and final settlement of:
 1. All your claims as outlined in the Claim Document referenced above, and;
2. All other claims potentially arising up to the date of this letter (including but not limited to potential SLA penalties in respect of bank reconciliation work, for example).”

55.	For the purposes of this action, the significant parts of that deal, as expressed in that letter, are as follows:
(a) The compensation sum is a round figure not expressly attributed to any particular element of the claim made. In particular, the claimants relies on the fact that it is not expressly attributable to “lost clients”.
(b) The settlement sum was not paid, or payable, as a lump sum. It was to be effected by deductions from ensuing monthly payments.
(c) The settlement sum was not apportioned as between the two Gissings companies.

56.	Despite the absence of an express appropriation to “lost clients”, the main witnesses for the defendants were adamant that the compensation was, in their eyes, properly viewed as compensation for their having lost clients as a result of Liberata’s defaults. Mr Brooks and Mr Breslin both viewed it as such, and therefore viewed the compensation as effectively replacing lost turnover. Mr Jenkins viewed the compensation as replacing lost turnover, and it was Mr Kilbey’s understanding that money was paid to compensate GAS for lost income as a result of Liberata’s poor performance. I find that whatever the letter from Liberata may have said, it was a generally and genuinely held view within the Gissings group that the Liberata concession (I deliberately use a neutral word here) was properly viewed as compensation for lost income.  This was despite the terms of the letter, and despite the fact that Liberata had insisted that the compensation sum be taken as periodic credits against its charges rather than the payment of a lump sum.  I am satisfied that Mr Brooks and Mr Dawson (among others) regarded that as being the substance of the matter.  The overall effect of these views was that the compensation was thought to be properly treated as turnover in GAS (and, apparently, in GCSL, though other than demonstrating consistency that does not matter for the purposes of this action).  
57.	Mr Brooks then set about dealing with two accountancy matters which flowed from the compensation agreement. The first was an apportionment of the compensation between the two Gissings companies; and the second was the manner in which the compensation was to be treated within the books and records of GAS.
58.	So far as the former is concerned, the evidence of Mr Brooks was that he prepared a manuscript schedule of his view of the losses in respect of which the compensation was sought and paid, and that that generated a division as between the two companies of £260,000 for GAS and £240,000 for GCSL, or at least contained material from which one could infer that such an apportionment was appropriate. His aim was to produce an apportionment which reflected the two companies’ losses at the hands of Liberata.   He showed this schedule to Mr Kilbey as managing director of GAS and Mr Dawson as managing director of GCSL (as he then was) and achieved agreement from each of them on behalf of their respective companies. That then became the binding apportionment. That note, if it existed, has not survived. Neither Mr Kilbey nor Mr Dawson had any recollection of such a handwritten note, but they both accepted they must have agreed the apportionment on behalf of their respective companies. Mr Dawson says he would not have done so without supporting material. Mr Kilbey could do no more than say that he assumes that Mr Brooks told him how the sum was calculated and he imagined that he thought it acceptable. He was at the time a young and relatively inexperienced managing director, and it may be that he made fewer enquiries than a more experienced man might have done. However, I am satisfied that both managing directors were presented with material on the basis of which each of them agreed with the apportionment proposed by Mr Brooks. I think that there probably was such a handwritten note and accept Mr Brooks’s evidence to that effect.  Mr Brooks said it was in his files which were handed over to Mr Fay, a new financial controller, when Mr Brooks left GAS.  I accept his surmise.  I consider that there was a conscientious approach to the division of the compensation, whether or not it can not be seen to have been justified on accountancy grounds (a point taken by the claimants).  
59.	Mr Brooks sought to reconstruct what was in the schedule, and was vigorously cross-examined as to its make-up.  His reconstruction was not always convincing, but that is because it was a reconstruction and he was not working from the same information as he had at the time.  I think it likely that at the time the apportionment exercise had more of the rough and ready about it than the scientific, but it was nonetheless a genuine exercise as opposed to a contrivance.
60.	 Within GAS, when it came to taking the benefit of the Liberata compensation, Mr Brooks decided that it should be taken in certain monthly amounts, and GAS would invoice GCSL. On 7th November 2006 Mr Brooks emailed Mr Kilbey, Miss Haslett (who dealt with Flex) and Mr Barnes (Risk) and said:
“Dear all,
As you know we have been discussing with Liberata compensation for lost clients. This is now concluded and GASL’s share is as follows:
– Flex £200k
– Risk £60k
To enable you [sic] treat this as turnover this year please follow the following procedure:
– Flex to invoice GCSL in November £67k
- Risk to invoice GCSL in November £20k
– Flex to invoice GCSL in January, April and July £45k
– Risk to invoice GCSL in January, April and July £14k.
You must raise the invoices in the normal way as part of your invoicing routine and physically send them to Kelly Cochrane who will ensure the correct accounting treatment.”
61.	Mr Barnes passed this on to Miss Nedza, commenting “It must be nearly Christmas!”. This was probably a reference to a hope on his part that the amount would fall to be treated as part of his departmental budget and, perhaps, as the basis on which bonuses would be calculated. He was ultimately disappointed in the latter respect.
62.	Mr Fenn became involved in the internal accounting processes. On 8th November 2006 he sent an e-mail to Mr Brooks, Mr Kilbey, Ms Haslett and Mr Barnes attaching a schedule (a spreadsheet) “detailing the exact amounts to be billed by GAS to GCS in November, January, April and July… Please note that the narrative on the invoices will be “Reduction in Current Fees due to lost Clients”. The income will actually be phased monthly from November and the schedule shows how much income will be taken each month.”
63.	His schedule showed monthly amounts of £16,666 split across various months and allocated to various elements of GAS. Those elements were “Flex lost clients Year 1”, “FlexiHealth IPR uplift” and “Right for Work”. This last category was allocated £60,000. The reference to “Right for Work” cannot have been a reference to a lost client; it was another internal project, within the Risk department.  It does not seem that “FlexiHealth IPR uplift” can refer to a lost client either.   Mr Fenn was unable to explain those particular designations, though he said it would have been logical to think that Mr Brooks had given him the headings. At the same time he said that Mr Brooks had told him that the compensation was in respect of lost clients, so it is not possible to see why Mr Brooks would have given him that particular heading.
64.	Mr Fenn added some more cells to the spreadsheet once he had received Mr Brook’s e-mail the next day.  In the bottom half of the spreadsheet he set out invoicing allowance under headings “GAS Fees to be raised to GCS and delivered to Kelly Cochrane” and “Narrative on invoices – Reduction in Code Fees due to lost Clients”.  He then broke down the various amounts per month in line with the e-mailed instructions.   This spreadsheet was then circulated. The actual circulated version of the schedule did not have the original headings apparent, because they were “hidden” by collapsing the cells in the spreadsheet.  At one stage it seems that the claimants were making a case that this was somehow sinister.  If that remains their case, I do not think there is anything in it.  The relevant rows could easily be unhidden.  I think that the reasons lying behind the detail in this spreadsheet have been lost in the mists of time.
65.	Of more significance is what the claimants say this document shows about Mr Brooks’s real belief and state of mind in relation to the nature of the Liberata compensation.  It is suggested that the schedule is likely to reflect any allocation note prepared by Mr Brooks, and it demonstrates that he was not treating all the money as compensation for lost clients.  Looking at the matter in the round, I do not think that the existence and creation of that spreadsheet does necessarily clearly demonstrate that.  I think that it may demonstrate some uncertainty as to the intended internal accounting mechanism, but it does not gainsay the strong impression that I got from various witnesses to the effect that the compensation was, in the round, indeed regarded as compensation for lost clients.
66.	Over the course of the following months, invoices were apparently rendered in accordance with the instructions, and as a result, through the accounting systems of GAS and for the purposes of drawing the accounts for GAS for the year ended September 2007, the £260,000 was taken to and included in the turnover of GAS.  The invoices themselves bore various narratives - “Reduction in current fees due to Lost Clients”, “Compensation payment from Liberata for lost clients” and “Liberata Compensation for lost Clients.”  The theme throughout is “lost clients”.  In my view Mr Brooks plainly viewed the compensation as being to compensate for what he saw as that factor.  As late as 1st May 2008 he was writing to Liberata to claim more compensation, and referred to the previous agreement as being “with regard to compensation under the BPO contract for clients lost to that date as a result of poor service from Liberata”.  That is how he subjectively viewed it.  There was no element of late contrivance about that.  I shall have to return to the accounting propriety of this, and further related factual material, when I consider questions of breach and misrepresentation.
67.	The result of this way of dealing with the matter was that £260,000 was taken to turnover within GAS. The claimants’ case is that this was improper and inappropriate treatment. Its practical effect was that when Dunedin came to look at the company its turnover was said to be stated to be £260,000 more than it in fact was.
68.	The claimants also relied on Mr Brooks’ e-mail of 7th November as having sinister import and somehow demonstrating a great anxiety to have the sums included in turnover at that stage. At this stage the sale process had not been  started, though it seems that PwC were instructed within a month or so.  If Mr Brooks was in fact making a choice to include the compensation as turnover with a view to improving the turnover beyond its proper levels, then he was playing a very long game.  He may have known that a sale was in the wind, but he still had no great motive to inflate turnover improperly.  I think that his decision to treat the compensation in that way, and therefore his e-mail of 7th November, were born of a genuine belief that it was justifiable to treat the compensation from Liberata as making good losses deriving from lost clients.  I do not think that there was anything sinister in his decision to treat the sum as turnover.
69.	There was obviously some discussion about these sums with the auditors (Messrs Rees Pollock) as part of the audit processes for that year.  There was a meeting with the auditors on 20 December 2006 to discuss and finalise accounting and audit processes, involving Mr Brooks and members of the auditor’s firm, including a Mr Moulsdale.  As well as noting a possible sale in the next two months (demonstrating that there was by this time a sale on the horizon) there was apparently a reference to the £500,000.  A note of “Issues” records:
“5.  “Liberata compensation”
The contract with Liberata was renegotiated during the year and £500k  is receivable as compensation for poor past service.  This will be received by way of a fee reduction in the coming year.  This has not been accounted for in 2006 or there [sic] is no certainty that the contract with Liberata will remain unchanged in 2007 and it is possible that the £500k will be negotiated away.  The audit committee should confirm that they agree with this treatment.”

70.	That is how the note reads.  The English seems to have gone slightly wrong; this note reflected Mr Brooks’ desire to take the income in 2007 and not earlier, because there were doubts as to whether GAS would ever get the benefits of it.  The same caution led him to accrue it monthly across the year.  At the time Liberata was perceived as being in financial difficulties, and I find there were genuine concerns within GAS as to whether it would survive.  If it did not survive then the recoupment of the £500k would not be achieved.  I find that that was a genuine concern on the part of Mr Brooks.  Again, I find that it was not part of a contrivance to inflate the turnover for 2007.  I do not think that at the time Mr Brooks thought that he would be  a member of an MBO team, and if that is right then he had no motive for fiddling with the accounts.  He was ultimately part of the purchasing team, but he was a relatively late addition to it very many months later.
71.	Accordingly, no part of the Liberata compensation featured as an accrual in the 2006 accounts (that is to say, the accounts to 30th September 2006).  However, in connection with the audit of those accounts, the directors, including Mr Brooks, signed a representation letter dated 25th January 2007 accepting responsibility for the accounts.  Annexed to that letter was a schedule of “Unrecorded journal entries” one of which was:
“Cr  Liberata charges	200,000”
with 200,000 under the Profit column.  The stated reason for this is:
“Being journal to reflect GAS proportion of Liberata compensation due for previous poor performance.”
72.	There are two inconsistencies between this entry and the manner in which Mr Brooks sought to deal with the Liberata compensation.  First, the sum is wrong (or at least it was inconsistent with Mr Brooks’s prior apportionment) – it should have been £260,000.  Second, it is reflected as a credit against Liberata charges.  That is how the matter was dealt with as between Liberata and GCSL (and therefore, for these purposes, GAS), but it is not how Mr Brooks said that he saw it.
73.	Mr Brooks accepted that this note did not reflect his understanding of how the matter should be treated, but said that the points simply did not come up in dealings with the auditors.  His concern in relation to the accounts for that year was to avoid taking the income in the y/e September 2006 because of the uncertainty that there would be any, and if so what, effective recovery from Liberata.  In my view he was careless in signing up to this entry, but I do not think that it casts any material doubt on the genuineness and bona fides of his view that the sum represented turnover.  The origins of that go back to November 2006 when he was giving instructions for the matter to be treated as turnover.   It is this later note which is inconsistent with his previous intentions.
74.	Accordingly, during the course of the year ended September 2007 entries were passed, and invoices raised, which had the effect within the books of GAS of treating the Liberata compensation as turnover and not merely as a reduction of costs.  This in my view  reflected the  subjective views of those concerned within GAS, including Mr Breslin, Mr Brooks and Mr Fenn.  They, and Mr Jenkins, thought that the substance of the matter was that Liberata was paid compensation, and the reduction in cost was merely the form which giving effect that substance took.  I consider that those views were genuinely held.  Whether or not they are correct from the point of view of proper accounting is a different matter, to which I have to return much later on in this judgement.
75.	The point emerged once more before completion of the SPA.  The year-end accounts for 2007 were prepared and audited in some haste so that they could be available by the time of the completion of the sale of GAS.  The auditors, Messrs Rees Pollock, apparently took the view that the £260,000 ought not to be within the turnover figure.  They prepared a document entitled “Audit Highlights and Points for Closing Meeting” which included  the following paragraph:

“RP have put through a reclassifying adjustment in the P & L  to net  260k of Liberata compensation received in the year off the associated expense.   The client had shown this in the draft accounts as turnover and it was felt this was overstating performance in the year.”

76.	Thus they seemed to be saying that the £260,000 ought to be removed from turnover.  However, they ended up certifying the accounts as being accurate, and the accounts reflected the £260,000 as being written back into turnover.  How the auditors came to do that was the subject of challenge by Miss Newman.  
77.	Mr Fenn had received advance notice of the Rees Pollock views because he saw the note which I have just set out.  He drew it to Mr  Brooks’s attention in an e-mail which said:

“Initial review shows that RP have transferred the Liberata compensation we included with turnover by netting off against Liberata work done”.

78.	He and Mr Brooks were therefore aware of the Rees Pollock views.  The closing meeting took place on 18th October.  On the Gissings side it was attended by Mr Brooks and Mr Fenn.  They gave evidence to the effect that there was no serious debate about the point.  It is apparent that at the time the meeting started it was the Rees Pollock view that the £260,000 should be taken out of turnover, and by the end of the meeting they had changed that view.   No one from Rees Pollock gave evidence as to how that change of view came about, and there is no note of the meeting about the changes either.   Mr Brooks has no recollection of a discussion about the point; nor does Mr Fenn.  However, it is plain that something happened at that meeting to cause Rees Pollock to change their mind, and it is likely (and I find) that Mr Brooks expressed his disagreement with the auditors’ view and that he  ended up convincing them that they should change their minds.  Miss Newman suggested that Mr Brooks somehow pressurised them into doing so in a manner which was improper.  Mr Brooks denied this, and I accept that he did no such thing.  I do not accept that Rees Pollock would have succumbed to such pressure, and Mr Fenn would have remembered if that sort of thing had happened.  It would have stood out in the mind and in the recollection.   If Mr Brooks had done it then he would not have forgotten it, and would be more likely to have contrived a “recollection” of the meeting which contained an anodyne discussion rather than expressing himself as having no recollection of the meeting.  I think there was a genuine exchange of views as a result of which Rees Pollock accepted that they would certify the accounts with the £260,000 written back into turnover.
79.	I can now leave this part of the background on one side until I have to come back to consider the proper accounting treatment in the context of considering the expert evidence in this case.

The background to the IALOB issue
80.	The Insurance Association of London & Overseas Banks (which is where the above initials come from) is an association of smaller banks and similar concerns in the City, set up with the objective of enabling its members to get better terms and lower rates for insurance than they get on their own.  The committee of IALOB appoints brokers to source insurance, and GAS acted as brokers for permanent health insurance and private medical insurance in the period relevant to this action.  GAS sourced the relevant insurance products from AXA.  Before the IALOB agreement which is important to this action GAS derived benefits from this relationship in various ways.  First, it got commissions in the way in which a broker normally gets commissions.   In fact GAS got a better rate of commission, because in addition to a standard commission of 5% it also got an additional 5% known as “Administration Expenses Contribution” (“AEC”).  This was payment for an additional range of tasks that a broker would not normally perform, such as managing the portfolio, collecting premiums, producing invoices, producing documentation and sitting on a committee which dealt with the arrangements.   It also had an arrangement under which GAS would collect the premiums from payers of the premiums and bank them, and GAS was entitled to retain the interest on those premiums for the period during which it held them.  It was the view of those close to the agreement, including Mr Brooks, that this interest was part of the remuneration package from AXA. 
81.	When Mr Kilbey became managing director in November 2004 there was impending regulation which was to come into effect in January 2005 and which would require advisers to disclose all income received from insurers if asked to do so.  If this were done in relation to the then existing IALOB relationship, it would appear that GAS were getting much more commission than one would have expected, which Mr Kilbey viewed “as a risk to the business”.  It was also proposed to impose regulation on the collection of client monies which made it less desirable for GAS to collect premiums.  Mr Kilbey therefore discussed a redefining of the relationship and the remuneration, but with a view to linking remuneration not to administration but to marketing so that the payments could be facilitated out of a different budget.   As a result GAS moved from being paid a percentage of premiums to being paid a flat monthly sum (£14,000).  GAS would lose out because it would no longer be able to obtain the interest on premiums, and AXA would benefit correspondingly.  AXA agreed to examine the possibility of some compensation for losing the interest element.  At the time Mr Kilbey’s understanding (acquired from others) was that the interest was worth £100,000 per year, though that looks to be a very inflated figure.
82.	A Mr Lewars negotiated two payments for lost interest.  The first was about £50,000, paid in October 2005.  When it came to the second payment, Mr Kilbey discovered that it was linked to an increase in the AXA portfolio which made the arrangement fall foul of certain regulatory requirements so he stopped that payment and it was renegotiated.  At the same time there was a renegotiation over VAT on the new monthly payment.  In the end the second payment was negotiated to £43,000.  Mr Brooks conducted this negotiation because Mr Kilbey (who would normally have done it) was not available.  Quite how the negotiation went is not clear, because Mr Brooks did another horse-trade.  However, the bottom line seems to have been that he negotiated a figure of £43,000, and this probably related to what was described as “the interest earned buyout” (that was a term used in a letter from Mr Brooks to AXA dated 20 December 2006 and in an invoice for £20,000, being part of the £43,000).
83.	When it came to accounting for that sum in the books of GAS, Mr Brooks apparently considered that it did not really fit into the category of interest.  He regarded it as a fee to supplement the remuneration package rather than interest in its true sense.  In the circumstances it seemed to him to be correct that it should be treated with the rest of the income earned from AXA, and it is apparent that it was entered in the books in such a way that it ultimately appeared in the turnover for the year ended September 2007.  Whether this treatment was proper was the subject of expert evidence to which I will come.

The commissions and rebate background
84.	The third major element which lies at the heart of the complaints of the claimants against the defendants relates to the process of reconciliation of commissions and client fees. Problems arose because of the manner in which insurers calculated and paid (or did not pay) commission, and because of the interrelationship between fees paid by clients and commissions paid by insurers in some cases.
85.	The income of GAS came from two sources. The first was commissions paid by insurers to GAS when GAS made arrangements for a client to take out a particular insurance product. The second was fees from clients. Some clients were on a fee-paying basis. In its purest form, such fee paying arrangements involved clients paying premiums net of any commission (so it was cheaper), and paying a fee to GAS for its services. GAS was in fact trying to move its clients onto this basis where possible. However, there were complicating factors. On occasions, a client was fee-paying but the premium was calculated on the basis of a commission, which was paid to GAS. In those circumstances, GAS paid the commission to the client (and was contractually obliged to do so). Other clients had “capped” arrangements – in the case of these clients, GAS retained commission to a certain level and thereafter was obliged to account to the client (rebate) for the remainder. In a further class, GAS got commission, but also got a fee from the client on top. 
86.	The problem so far as commissions were concerned arose because of the level and complexity of GAS’s business and the manner in which many insurance companies dealt with them. In relation to a large range of its business, GAS was entitled to commission from insurers. However, when insurers paid sums in respect of commission, it was not always easy to reconcile the sums paid with the transaction in question. Sometimes there were delays in payment. Sometimes commissions were paid to the wrong Gissing company – GAS instead of GCSL, or vice versa. Mistakes were made. In a large number of cases premiums were fixed at the beginning of a year by reference to the number of employees of the relevant client company, and were subject to adjustment when the employees and their benefits were finally determined over the course of the year (or even later). This might mean that there was an over- or under-payment of premium, and therefore of commission. Reconciliation of the sort of accounting problems that arose as a result of these and similar problems was very time-consuming, and was not always at the top of the list of tasks of advisers to do. It would typically take 18 months or 2 years to achieve a finally reconciled position with insurers. Some insurers were given to making claw-backs which were basically imposed on GAS, rightly or wrongly – GAS often could not challenge them successfully. 
87.	All commissions paid or apparently paid by insurers were entered on the commissions ledger in GAS’s accounting records, as were sums calculated as repayable. Sums payable to clients were entered on a client rebate ledger.
88.	Further complexity was introduced by the interaction between commissions and fees. The interaction between fee arrangements and the problems with commissions added its own level of complexity, simply in terms of administration. Problems in identifying proper amounts of commissions impacted on the activity of accounting to the client for an appropriate amount of rebate (in the case of clients who had such arrangements). Furthermore, a full evaluation of any particular rebate might at least theoretically be impeded by the fact that in a number of cases there was no current form of signed contract with the client - clients were not always keen to sign up, and GAS advisers did not always press as they (theoretically) ought to have done; though Mr Kilbey’s evidence was that this did not usually present problems in the real world. Risk insurers were more inclined to quote premiums net of commission, so the interaction between fees and commission was less likely to arise in relation to such products, and rebate problems were therefore more likely to arise in relation to Healthcare.
89.	 As referred to above, a rebate ledger existed in which sums apparently due to be rebated were entered; though the state of account between insurer and GAS, and the client and GAS, from time to time was such that it was not always clear what sums ought to be rebated. There was also a client ledger in which sums due from clients in respect of fees were recorded. The evidence of Ms Prager was that clients received periodic statements which showed, inter-alia, rebates to which they might be entitled, where that was possible. I say “might be” because rebates were subject to adjustment during the course of the reconciliation period, which might be over 18 months because of difficulties in reconciling figures with the insurance companies.
90.	All this required a lot of reconciliation activity, and as pointed out above it was not always done. Accordingly, in order to address growing amounts on the ledgers, and a growing need for reconciliation, a system of monthly meetings, was set up in 2006 (or possibly before) at which the state of each ledger was considered, any further investigations that were required were noted and any sums which could be released to GAS (released to income) could be released. Sums payable to clients by way of rebates were also identified; one of the major disputes in this case is the extent to which those sums were properly paid. These monthly commission meetings were usually chaired by Mr Brooks, at least from mid-2006, and attended by representatives of the various departments who were in a position to provide information to enable a determination of whether sums could be taken to income, rebated, or otherwise dealt with. It seems that the meeting was not always attended by those whose attendance was necessary. It was apparently not a favourite activity in the company. 
91.	There was a dispute on the evidence as to whether or not, at least during the period of the committee, reconciliation took place only through the committee or whether straightforward reconciliations were done outside it. The claimants’ witnesses suggested that the former was true. Mr Brooks suggested that the latter was true. I prefer Mr Brooks’s evidence on this point. Once the matter was in the committee, information was provided by those who would have it (mainly the advisers). The claimants’ witnesses sought to say that decisions as to taking items to income, or rebating (or not rebating) to clients were basically taken by Mr Brooks. Mr Brooks did not quite accept that slant, but he did accept that he had the ultimate say at these commission meetings. I am satisfied that he did have the final say and that people would look to him for guidance. While he sought to present a picture in which he could be outvoted on the commission committee, I doubt very much whether that ever happened. People would naturally defer to him.
92.	It emerged from the evidence that there were certain parameters or guidelines that were said to be applied to the questions that arose at this committee. First, items less than £500 were not really investigated and were simply swept into income by “sweep up invoices” - internal invoices which were not raised so as to be sent to any particular client (or insurer), but which were raised internally on the system to allow sums to be taken to income in GAS’s books and records. Second, if the commission ledger seemed to show an overpayment of commission by an insurer and that entry were outstanding for two years without any claim by the insurer, then it was taken to income (that is to say, treated as income and removed from the records as a sum potentially owing to the insurer). Mr Brooks said that that accorded with industry practice (indeed, it was a policy which was more beneficial to insurers than standard industry practice in that two years was a longer time than normal). He sought to justify it on the footing that insurance companies operated on a two-year cycle which would mean that they would be highly unlikely ever to claim it, or to consider it due to them. It also seems to me to have been a robust counter to the practice of insurance companies of imposing clawbacks which GAS could not successfully argue against and was simply forced to accept. 
93.	On the same basis, sums which were shown as owing from insurance companies but unpaid after 2 years were written off as irrecoverable. GAS acknowledged that it would not be possible to convince insurance companies that such sums were payable after two years because the insurers themselves would have done their own reconciliations, and it would not have been possible to persuade them to reopen the point. This “two-year policy” was a policy which operated within the Gissings group before Mr Brooks joined. It was described in the Disclosure Letter as a conservative policy by industry standards, and apparently acknowledged as such by Grant Thornton, tasked by Dunedin with carrying out due diligence in this case. 
94.	There was evidence from the claimants’ witnesses, which I accept, that GAS (and Mr Brooks) was reluctant to repay sums which were apparently shown as owing to clients. Mr Brooks and others demonstrated an understandable preference for trying to add such sums to the company’s income if possible. Thus Mr Kilbey promoted a scheme in 2007 for trying to convince clients that sums otherwise due to be rebated could usefully be applied in providing extra services for the client. This scheme was not very successful. 

95.	 Mr Brooks plainly wished to avoid paying sums to clients if he could. What has been an issue in this case is the propriety of the steps that he took in that respect. He certainly required staff to investigate properly whether rebates were in fact due. He also on more than one occasion told staff not actually to pay clients who seemed to have rebates due unless that client was pressing. Miss Prager in particular referred to this, and identified a sequence in 2007 which showed it.  I find, however, that this was not so he could procure that GAS could “steal” the money. It was so that he could try to arrive at a situation in which the money could be legitimately kept, by way of agreeing its use for payment of extra services or otherwise.
96.	He also demonstrated considerable reluctance to paying rebates to clients who did not renew their relationship with GAS. I accept Miss Newman’s submissions that in those circumstances Mr Brooks adopted a policy of not paying outstanding rebates unless he had to. The belief was that those clients would not be aware of their entitlements (despite the fact that some of them at least must have received periodic statements showing them). Mr Brooks sought to justify his stance by reference to unpaid-for work. The renewal cycle for client products would start halfway through the insurance year. If the client terminated the relationship some time into that cycle, and particularly towards the end of that cycle, it would do so at a time when GAS had done significant work towards the next renewal (the amount of which would depend on when in the cycle the client terminated). This work would have been done on the assumption that there was going to be a renewal. If there was money standing to the client’s credit on the rebate ledger it would be treated as money available to GAS by way of remuneration and taken accordingly. Mr Brooks’s view of this was basically that the apparent rebate should be taken in these circumstances. It was not his view that any entitlement should be measured against the terms of the contract or the work done. 
97.	His attitude is summed up in an exchange of emails between him and Mr Kilbey in June 2007. Mr Kilbey had written to Mr Brooks and to Mr Barnes on the same date about his rebate project. He sent them an email with three schedules and said:

"Please find attached the commission rebate spreadsheets split into rebate, negotiate and retain worksheets. Each is fairly self-explanatory. Those clients listed as a rebate are classified as such based on my knowledge of the account and/or the contact. For instance there is no way this chap at River Island will forego his rebate.

I intend to set Bruce a project to tackle the negotiate clients and I will ensure he liaises closely with JB and JH prior to any approach.

David, please can you confirm that you are happy with this.”

98.	The second of those schedules (presumably the "negotiate" schedule) contains a Notes column with various queries, often commenting "Out of scope? Profitable?" On the same date Mr Brooks responded:

"The only point I would make is that if there are any lost clients on the negotiate list (which your notes says there are) I would transfer them to the retain list. I have always taken the view we neither negotiate or rebate to lost clients. They can get lost!

Otherwise fine. Tell Bruce 50% would do nicely!"

99.	When this was put to him in cross-examination he agreed that it reflected his view, and that he based it on advice from Mr Calvert-Lee who, Mr Brooks said, had advised that clause 19.4 of the client contract justified it. That clause read:

“19.4 On termination you [the client] will pay any fees accrued to the date of termination and any additional expenses incurred as a result of termination.”

Mr Calvert-Lee in his evidence denied that that was what he advised. His advice concerned recoupment for work done prior to a renewal which did not come about. He envisaged an attempt to recover the cost of such work in a more considered or rational way. It was not a blanket policy of the sort apparently referred to by Mr Brooks. This chimed with evidence given by others as to the intended justification for the retention of rebates, and I find that Mr Calvert-Lee is accurate in what he says about the focus of his advice.  However, that is not how Mr Brooks viewed matters.  
100.	Mr Brooks’ evidence on this explains the evidence of Mrs Prager, Miss Brennan and Miss Nedza, all of whom gave evidence of lost clients’ rebates being taken to income simply because they were lost clients, though the first two of those witnesses thought that the 2 year rule applied to them, which was wrong (and Miss Brennan accepted that she might have been mistaken about that). Mr Eaton, too, thought there was a blanket practice of crediting lost clients’ rebates.  Given Mr Brooks’s stated views, one can understand why they all had this impression.  I find that Mr Brooks did have the views that he expressed in his email, and that he was prepared to take lost clients’ rebates to income merely because they were lost clients, and not because it was objectively justified in any given case.  He rationalised this on the basis that lost clients were likely to have cost GAS money in wasted preparation activity, but he was not concerned to check whether and to what extent that was true in any particular case, or whether the contractual or other circumstances which obtained in any particular case justified it.  Other witnesses (including Mr Kilbey) thought that there would have been a negotiation with the clients, but that was merely an expectation flowing from their own more accurate views of Mr Calvert-Lee’s advice.  It does not follow that such negotiations took place, and in the light of Mr Brooks’s views (which I also find that in this respect he imposed) I think they were unlikely.  No relevant invoices have been disclosed which might support an agreement as between GAS and the client in these sort of circumstances.
101.	I therefore find that reconciliation and payment of client rebates took place for a year or more before the SPA against the background of Mr Brooks’s view that lost clients should not receive rebates because they were lost.  I shall have to return to consider the impact of this when I consider the claimed breaches of the SPA, and will also have to consider further details of the commission and rebate reconciliations in that context.

Dunedin’s criteria and methodology of assessing business
102.	The Dunedin group is a group of entities in the private equity business.  It has over £400m under management for its investors, which are substantial institutions and certain high net worth individuals.  It manages its funds by investing in companies and selling on the investment in a 2 to 5 year time frame.  The actual investment that it made in GAS was split between two Dunedin entities.  By and large it is unnecessary to distinguish between them for the purposes of this judgement and I shall treat them as if they are one and call them “Dunedin”.  I shall also treat the purchaser as being Dunedin, even though it was actually Sycamore.
103.	The principal person involved in this transaction on the Dunedin side was Mr Derry, assisted by Mr Ma.  Mr Middleton also had some involvement.  
104.	Dunedin operates a form of team approach to its decision making.  Although someone like Mr Derry is active in the negotiating procedure, any buying opportunity is presented to a team of people in Dunedin, which holds a weekly meeting every Monday.  Opportunities such as the acquisition of GAS are put before this team meeting to perform an additional screening, and may be discussed there thereafter.  The actual decision to invest is taken by an Investment Committee, and this committee considers an elaborate model in reaching its decision.  Dunedin has general investment criteria  and views, which were summarised by Mr Middleton and not challenged:
(a)  They adopt a scoring technique, applying scores of 1 to 5 to various criteria set out below.
(b)  They look for a proven management team with the desire to create and deliver value, and in the case of a management buyout will be looking at the level and experience of the Chief Executive and/or finance director.
(c)  They look for strong market position, a strong niche or a strong brand.
(d)  They look for clear organic growth potential.
(e)  They look forward to  techniques for expanding the business.  The first is “buy and build” – the possibility of acquiring other companies in the same sector and to grow them both organically.  The second  is “roll-out” – the introduction of additional sites to the existing business which will enable it to grow its market share and turnover.
(f)  They look to see whether the company operates in a sector of the market in which it is difficult for new entrants to participate.
(g)  They look to see if  there are any legislation-driven products or services.
(h)  Importantly for the present case, they had a “minimum enterprise value” of £10m at the time of this transaction.  That is said to mean that if an enterprise, on their calculation of worth, was less than £10m, they would not pursue the purchase.
(i)  At the time of this transaction, Dunedin had a minimum equity investment of £5m to £10m.  They prefer to do few investments for larger sums.  It is very selective in its choice of investments.  In the last 10 years it has participated in 28 investments.
105.	A new project which might be attractive is put before a Monday morning meeting of the whole investment team (directors and investment directors).  If, following such a meeting, the meeting decides that the prospect looks interesting, an investments deal team is put together.  This is made up of two directors – a lead director with primary responsibility for the deal and a second director who is there as a sounding board to discuss issues as they arise.  There is also an associate or analyst who assists the directors in reviewing the investment and in progressing the deal.   In the present case, Mr Derry was the lead director and Mr Middleton was the second director.  Mr Ma was the associate.  In addition, a third director reviews all the due diligence and quality control exercises.  In the present case that role was undertaken by Mr Brian Scouler.
106.	Once an investment team is formed there is generally a meeting with the management team in the prospective business; these meetings take place from time to time during the currency of the transaction.  Following the meeting, and if the deal continues to look promising, the deal team prepares  the first draft of an “Investment Preview Paper”, containing detailed information about the business from an Information Memorandum (”IM”) provided by the target, supplemented by additional information which has been obtained from elsewhere.  At the same time, a financial model is prepared in order to test various potential prices.  The first draft of the Investment Preview Paper and the financial model are sent to the Investment Committee which is made up of all the directors of Dunedin.  Ultimately the investment committee decides whether an initial offer should be made, and if it is then the matter moves onto the next step.  The next step involves further dealings with the company, due diligence and other investigations.  All this material then goes back to a later meeting of the investment committee which takes the decision as to whether to invest or not.  Further financial models are prepared in order to assist the process.
107.	Those models need to be described a little more.  They take the form of an elaborate spreadsheet containing a large number of elements.  They include current financial information about the company, forecasts, the length of holding and various assumptions as to growth and  possible levels of return.  Various matters can be varied (“flexed”) to see the effect of changes on other numbers.  The models are not used to generate a price to be offered.  Rather, they are used to test various possible prices.  They are structured so that  Dunedin can insert a range of possible purchase prices, exit prices and periods of time during which the investment will be held,  so that levels of return (thrown up by the model) can be judged.  In this way possible prices are tested rather than generated.  This was the process that took place in the present case.  Dunedin’s preferred multiple for assessing the worth of company, and returns, is EBITDA (Earnings before interest, tax, depreciation and amortisation) or EBITA (the same without depreciation).  It also assesses the IRR of a potential transaction (internal rate of return).  Purchase and sale prices are judged by reference to multiples of the former, and by reference to the latter.  It has its preferred parameters, or ranges, for those.  It also likes to carry out its assessments without what it called any element of “arbitrage” in the multiples – it does not assume a sale at a higher multiple than the purchase (though obviously it would be ultimately happy to see one and will try to get one).  Dunedin’s assessment parameters can probably fairly be described as cautious.  The approach was not, of course, purely mechanical.  There was a strong element of judgment applied to various aspects of the target business.

The chronology
108.	I have already set out the general nature of GAS’s business, so I can now turn to the chronology of the sale.  In what follows I set out how the deal developed.  It will be necessary to return to the facts and consider some of them in more depth when I come to consider the alleged wrongs, and causation.

The sale process
109.	At the end of 2006 or the beginning of 2007 Mr Breslin and Mr Dawson decided to try to sell GAS.  They went to PricewaterhouseCoopers (”PwC”) for assistance, and PwC put together an Information  Memorandum (”IM”), which is a substantial document containing details of the company.  It was compiled with the assistance of the company’s management and starts with substantial disclaimers:
“The sole purpose of this Memorandum is to assist the recipient in deciding whether it wishes to proceed with a further investigation of the Business.  It is not intended to form the basis of any investment decision or decision to purchase the Business…

Neither the information nor the opinions contained in the Memorandum have been independently verified by [PwC]…”

No representation or warranty, express or implied, is given by [PwC], the Vendors, their respective advisers or any of their respective directors or employees or any other person as to the accuracy or completeness of the contents of this Memorandum or to the accuracy or completeness of the projections included within this Memorandum or of any other document or information supplied at any time in connection with the proposed sale of the Business or as to any information contained in this Memorandum or any other such document remaining unchanged after its issue.  The only representations and warranties that will be made are those that may eventually be included in a definitive agreement to the proposed sale.

Neither this Memorandum nor any of the information contained in it shall form the basis of any contract for the sale of the Business or any part of the Business, nor does it constitute an offer or invitation to purchase or acquire any shares in the Business or any interest in it.…

Neither the receipt of this Memorandum by any person nor any information contained in it or supplied with it or subsequently communicated to any person in connection with the proposed sale of the Business constitutes, or is to be taken as constituting, the giving of investment advice by [PwC] to any such person.  Each such person should make its own independent assessment of the merits or otherwise of acquiring the Business and should take its own professional advice.

The Vendors expressly reserve the right to alter or terminate the sale process and to accept or reject any preliminary or final offer at any time, in either case, without giving reasons therefore.  In furnishing the Memorandum, the Vendors undertake no obligation to provide any additional information or to update this Memorandum or any additional information or to correct any inaccuracies in this Memorandum or any additional information which may become apparent.”

110.	The IM was obviously prepared for use in relation to a number of potential purchasers; the version provided to Dunedin bears the document number 30.
111.	Section 1 was headed “Key Investment Highlights”, and it contained a number of bullet points designed to attract attention.  Among them were:
●	High degree of recurring revenues with some 88% of F Y 2008 revenue budgeted to come from pre-existing clients, much of which is secured under contract.
●	Considerable scope for GAS to grow its share of PMI, life and income protection distribution through its differentiated approach, benefiting from relatively high levels of industry client “churn”
●	Demand for flexible benefits systems is growing rapidly.

112.	An Executive Summary sets out a summary of various sections which follow.  Section 3 gives a Market Overview and section 4 gives a Business Overview.  Paragraph 4.3.4 deals particularly with both types of Flex.
113.	Section 5 contains a Business Development Strategy.  Amongst other things, it suggested that management believe that, given sufficient resources, they would be able to grow sales more aggressively through the recruitment of additional high-profile sales professionals.  A “stretch” forecast (i.e. an ambitious rather than cautious forecast) provided in the IM assumed the recruitment of two such professionals in the year to September 2008.  It was said that management believe that cross-selling of products was also a highly cost-effective method of realising growth.  Cross-selling describes the process of selling product B to a client who was already taking product A.  There was also an expression of view that Flex Direct was important in achieving increased Flex penetration.
114.	Section 6 contained a “Financial overview”.  At page 34 it set out a table of “Consolidated Profit and Loss, Base Case Forecasts, 2005 A – 2009 F”.  The “A” stood for “actual” and the “F” stood for forecast.  The table set out figures for the financial years just referred to.  The figures for 2005 and 2006 were actual figures.  The figures for 2007 were based on four months to 31st January 2007, with a forecast for the figures for the following eight months to 30th September 2007.  It also contained forecast figures for the years ended September 2008 and 2009, based on the “stretch” case referred to above (which assumed the availability of capital to enable the recruitment of additional sales personnel).
115.	Some of the figures in the table are central to this case.   The “total revenues” figure for the year ended 2007 is 5,959,000, and for 2008 it is 6,754,000.  That gives an EBITDA  figure for 2007 of 2,033,004 (2008 - 2,305,000).  Those figures were justified in the text which follows:
“Total revenues are forecast to grow more strongly from FY 2006 – 2009, with a CAGR of 14%, as management execute their growth plan.
Revenue: Existing Clients
The primary driver of revenue growth has historically been recurring revenue generated from existing clients.  In FY 2005 and 2006, revenue from pre-existing clients comprised more than 93% of total revenues.
Existing client revenues are categorised as either renewal revenues, derived from pre-existing clients renewing products purchased in previous years, or initial revenues, comprising revenues derived from the sale during the year of additional products to pre-existing clients.
Management forecast strong growth in initial revenues, with a CAGR of 29% from FY 2006 – 2009, as a result of the increased focus on cross sales.
Revenue: new clients
Increasing new businesses is the key element of management’s growth strategy.  Revenue from new business is forecast to grow rapidly, with a CAGR of 40% from FY 2006 – 2009, as a result of additional focus and resources.”

116.	The central figure in this case is the “total revenues”, or turnover, figure.  This is the one that lies at the heart of this matter.   The parties were proceeding on the assumption that the 2007 turnover would be that stated, until it was modified upwards slightly at the year end to take account of the actual position.  It is the warranty as to that increased figure which is central to this case.  
117.	A number of adjustments had been carried out to the actual figures to present the GAS business as a “stand-alone” business, that is to say a business which did not share facilities and costs with GCSL.  As matters then stood, there was such sharing, but obviously after a sale that would not happen, so the IM sought to present GAS’s business as one which operated independently of that sharing.  The management team had allowed for a fixed price interim contract with GCSL to cover the services that it would still need from that company.
118.	It was accepted that the Liberata compensation sum and the IALOB £43,000 sum were effectively included in the total revenue figures because, so far as paid by the time the IM was prepared, they will have appeared in the actual figures included in the IM, and so far as intended to be paid in the course of 2007, they would be within the forecast.  The Liberata sum was in fact included within the GAS categorisation of  “Initial” business, that is to say business of a new type based with an existing client (effectively a cross-sale of something that the client had not hitherto been buying).  This was apparently because no better home could be found.  The AXA sum was probably within renewals.  Be that as it may, that is where those sums were logged, and, having been thus logged, they appeared in the projected turnover for 2007.
119.	Dunedin was but one of a number of potential buyers whom PwC and the management sought to interest in GAS.  As well as presenting the opportunity to entities like Dunedin who might wish to buy GAS as an investment, there was also an attempt to interest trade buyers (i.e. entities in the same or a related business who might want to buy GAS and add its business to theirs).  A sale of the latter kind would be less likely to preserve jobs for all of the management and staff of GAS.  An MBO would be promoted by a sale of the first kind.  Mr Breslin’s evidence, which I accept, was that all other things being equal he preferred an MBO to a trade sale, because it preserved more job opportunities for the existing employees.  
120.	Thus the IM went out to a number of potential purchasers.  One of them was Dunedin.  Dunedin received the IM on 15th June 2007.  Mr Derry was particularly interested in references to the size of established relationships, the high degree of recurring revenues, references to the scope for GAS to grow its share of business through its “differentiated approach” and an apparent growth in the demand for Flex.
121.	The person at PwC who had the most material dealings in relation to the proposed sale of GAS was Mr Mark Speller.  He contacted Mr Derry whom he obviously knew might be interested in the prospect of buying GAS; this must have happened on or around 12th June 2007, because that is when it was first entered on Dunedin’s work in progress list.  Having signed a non-disclosure agreement on 13 June 2007 Dunedin received a copy of the IM.  From then on Mr Derry took the role of lead director for Dunedin, with Mr Shaun Middleton as the “second director”.  Mr Ma provided a lot of assistance to Mr Derry.
122.	Mr Derry, assisted by Mr Ma, considered the IM.  Mr Derry accepted in evidence that he knew at this stage that the transaction was an “auction sale” and that he could not rely on the IM in order to decide whether to buy the business or not – a potential investor such as Dunedin would have to conduct its own investigations.  Nonetheless, the IM was obviously a starting point for Dunedin’s deliberations because it was all they had, and a number of the figures in the IM found their way into Dunedin’s first attempt at financial modelling of a proposed purchase.  It is therefore necessary to set out further parts of the IM.
123.	Of particular interest to Mr Derry was the EBITDA figures.  Crucial to that assesement is the turnover figure, because it is really the starting point.  Hence its importance in this case.  I have set out above certain figures on management’s “base case”.  However, the IM at page 39 showed a “stretch” case for 2008 and 2009, under which the revenues would be £7,454,000 and £8,684,000 respectively, giving an EBITDA of £2,705,000 and £3,722,000 for each year, generating margins of 36% and 43% respectively.  Mr Derry was also particularly concerned to see what the true cost base would be going forward, and it was therefore important for him to see the figures for GAS on a stand-alone basis.  His initial impression was that the IM presented an interesting business with good levels of forecast growth and a good base of existing clients with a high level of recurring or “sticky” revenue.  Mr Derry was also keen to see the turnover of the business.
124.	The interest of Dunedin was sufficiently piqued to pass the initial interest threshold, and a meeting was set up with the management of GAS, at which the management team presented the business to Dunedin.  It took place on 5th July 2007 and was attended by Mr Brooks, Mr Kilbey and Mr Barnes from GAS, Mr Derry, Mr Middleton and Mr Ma from Dunedin and Mr Speller and Mr Chris Reyniers from PwC.  Neither Mr Breslin nor Mr Dawson attended.  The meeting was held, inter alia, to enable each side to assess the other and sell itself to the other.  The financial information was not probed in any great depth.  However, the management of GAS noted the point that they had a high degree of recurring revenue, which Mr Derry said he found attractive.  There was the possibility of cross-selling as well.   One of the presentation slides used by the management team showed a growth strategy for four categories – “client-based initiative” (involving cross selling and Flex Direct); new business; bolt on acquisitions; and increasing the product range.
125.	The management team (Mr Brooks, Mr Kilbey and Mr Barnes) presented slides at the 5th July meeting.  One of them is headed “History” and presents a timeline of Gissings.  It has a handful of date points, one of which is “Aug 04 - Liberata BPO deal”.  Although no-one had a positive recollection of what was said about it, Mr Derry accepted that the Liberata contract, and difficulties under it, were probably discussed.  I find that he is right about that.  However, at this stage this was merely discussed as a piece of history, at a meeting in the initial stages of the transaction.  Mr Ma said that his side did not seek to probe the financial information that was provided, and I accept that evidence.   I find that the compensation was not discussed, and if it was referred to at all it is likely to have been as a historical footnote rather than a point of significance.  This has a consequence for the question of whether Dunedin knew about the Liberata compensation for the purposes of the SPA.   
126.	One of the things that interested Dunedin was that GAS appeared to have a high level of recurring or “sticky” income.  This was significant for Dunedin because it would support a reasonable level of bank debt.  The IM forecast that 88% of the revenue forecasts for the year ended September 2008 would come from pre-existing clients.  Dunedin took the view in particular that it could grow Flex.
127.	After this meeting Mr Ma (whose function it was in this case to prepare such things) prepared an Investment Preview Paper setting out the key reasons why he and Mr Derry thought the GAS business was attractive.   It was supported by a financial model of the kind referred to above, which utilised the information provided in the IM and at the July meeting.  For present purposes its significant features were the following:
(i)  the IM had not provided any growth projections beyond 2009.  Dunedin’s model added some forecasts for 2010 and 2011, assuming  10% growth in turnover each of those years.  Mr Ma and Mr Derry agreed that that assumption was reasonable if not conservative, as it was consistent, in their eyes, with the 06/07 growth rate of 9.7% shown in the IM and was lower than the growth rates for the  succeeding years shown in the IM.
(ii)  Mr Ma ran a model on possible EBIT multiples or six, seven, eight and nine and assessing the impact if Dunedin were to sell the business after three, four and five years.  Returns were measured in two different ways – IRR (internal rate of return) and cash multiple.
(iii)  The turnover figure included in this model for 2007 and the preceding years were those in the IM, so that the 2007 figure was £5.959m.  This figure for 2007 remained part of the modelling until it was superseded by a slightly higher figure in the autumn.

128.	This modelling, based on some of the figures from the IM including the forecast for 2007, indicated that a price of about £16m would be justified.  This was within Dunedin’s policy of investing in businesses with an enterprise value within the range of £10m and £75m.   As well as looking at the level of return that that would generate, that price also took into account comparable earnings multiples for public listed companies, the level of risk in the deal and the level of debt that the business could support.
129.	The investment paper itself described the business and personnel, as one would expect.  Of Mr Kilbey it said:
“Andrew is relatively young at 33 years old.  Refreshingly he acknowledges that he is not the finished article…”
Of Mr Brooks it says:
“David is a street wise old school FD with a focus on cash.”
130.	Under the heading “Strategy and business plan” it set out several elements where management had plans for improving the business including:
“Profitability” – the renegotiation of fee arrangements with a number of low margin clients.
“Refocusing and Strengthening of Sales Function” under which  it described a “Significant opportunity to cross-sell to existing client base” and plans to increase marketing.
“Flex Direct” – it was recorded that the management believed “that it will appeal to companies that wish to promote their existing benefits in a modern and effective manner.”
“Potential Acquisitions - In addition to their organic growth plan, management have identified a number of acquisition targets.  These include businesses and books of broking business.”

The “Business attractiveness” was described as follows:
“A plain vanilla MBO.
High renewal retention with existing customers (> 97%) leading to good clarity on forward revenues.
Considerable opportunity to enhance profitability without further new business generation through enhancements to existing contracts.
Cross sell capacity.
Significant consolidation opportunities.
MD is still young.
Some of the growth comes from unproven products.”
The conclusion was:
“This is an opportunity to back a high-quality management buy-out team with several years experience in the target company.  The business has a very high level of repeat business, considerable opportunity to cross sell to its existing client base and to consolidate a fragmented market.  An investment into Gissings is strongly recommended.”
No reference was made to the Liberata Compensation (or the AXA moneys), and there was no qualification of the turnover or other figures by reference to it.
131.	It was sent to the Investment Committee on 16th July and discussed at a meeting of that committee later that day. The Committee considered that this was an opportunity worth pursuing and approved an indicative offer of  £16m.  Among the points that were recorded as requiring “follow-up” work were:
“Acquisitions: possible targets and how far have management progressed?…
Concern around flat revenues in past years and high growth in future years …
Ross identified possible competing product called Staff Works.  JM to investigate further.
…
Acquisitions –
	High potential here
	How far have management progressed with targets?
	Who else is looking at consolidation in these markets? …
FD [Mr Brooks] is experienced and is crucial to success.”

132.	One of the issues which arises in this case in relation to reliance is the extent to which the decisions of Dunedin were driven by a perception that the future of GAS lay in making acquisitions.  I shall make some further findings about this in due course, but for the moment, and at this stage in the narrative, I record that the modelling which led to the indicative price did not have built into it any assumptions about acquisitions.  It assumed internal or organic growth.  Nonetheless, the prospect of making acquisitions of other companies in the industry was something which Mr Derry and others plainly found attractive, and they undoubtedly viewed part of the future of the company as lying in making such acquisitions.
133.	The indicative offer was not made immediately.  On 17th July Mr Ma and Mr Derry had a dinner with Mr Brooks, Mr Kilbey and Mr Barnes.  Mr Derry described the dinner as being an opportunity to find out if the two sides could get along and work together.  Mr Derry recalls a conversation at about this time about Flex and what Mr Kilbey and Mr Brooks saw as being the real opportunity for expansion that Flex provided to GAS.  I accept his evidence on that point.  Mr Neish submitted that it was likely that Liberata, problems with it and the compensation payment would have been likely to have come up.  I doubt that it would; I am unable to conclude on the balance of probability that it did.
134.	On 20th July Dunedin made its indicative offer of £16m in a letter addressed to PwC.  It contained the following matters:
“We would expect management and employees (both present and future) to own 25% of the Newco set up to acquire GAS.  This would include equity of up to 2%  to be made available to an independent non-executive Chairman of the Board.…
As discussed above, we would also expect to be actively involved with supporting management in growing the business.  This is at the lower end of Dunedin’s investment size range, leaving plenty of capacity for follow on funding was required for investment in the business or acquisitions.…
5) Conditions
This offer is subject to our satisfaction with, inter alia:
The results of confirmatory due diligence; and
The final terms of the Sale and Purchase Agreement and Investment Documentation.

We would need to carry out confirmatory due diligence customary for a transaction of this nature including:
Financial: a review of historic, current-year outturn and forecast information, adjustments made in determining financial performance as set out in the Information Memorandum, analysis by office and business line, working capital analysis, analysis of capital expenditure forecasts,  net debt analysis and tax/pensions issues;
Legal: covering key commercial contracts, nature of asset base, corporate structure, environmental, employment and intellectual property;
Commercial: covering market dynamics, the competitive environment, barriers to entry and confirming GAS’s proposition and competitive position;
IT: to verify the robustness and scalability of core systems used by the Business; and
Management: assessment of the management teams and the areas in which we can help them grow and develop”

135.	On 6th August, before Dunedin was informed it had got through to the next round of the process, PwC informed Dunedin of the contents of an electronic data room.  This was a notional room, accessible on-line, in which electronic versions of a large number of documents about GAS were placed so that bidders could find out more about the state of the company and carry out their due diligence once they were provided with login details, which Dunedin in due course was.  A letter of 8th August 2007 of PwC to Dunedin confirmed that Dunedin was through to the next round, and stated that final offers were to be made in writing by 5pm on 3rd September.
136.	Mr Derry and Mr Ma met the management team (Mr Brooks, Mr Barnes and Mr Kilbey) again on 9th August.  Mr Derry took a note of that meeting.  It is apparent from that note that various aspects of the business were discussed.  One line of the note reads:
“Liberata – termination payment made by Gissings Holdings £520K.”
That is not a reference to the compensation sum of £500,000.  It is a reference to  a sum that it was anticipated would have to be paid to Liberata, because part of management’s plans going forward involved terminating the Liberata arrangement so far as it concerned Flex and taking the activities in-house.  Doing that would require compensation to be paid to Liberata (see above).  It is therefore apparent that Liberata was discussed at this meeting.  Mr Derry’s evidence in chief stated that there was a discussion of historic problems with Liberata.  There is no reference at all in the note to the prior compensation agreement in favour of Gissings.
137.	Despite the absence of a note Mr Neish nonetheless submitted that it is probable that the Liberata compensation came up as a natural extension of the discussion about the future termination payment.  Mr Derry’s evidence was that if the sum had been mentioned, and particularly if mentioned as a non-recurring item, he would have noted it.  The thrust of his evidence was that the absence of any note is that it was not mentioned.  I accept Mr Derry’s evidence.  Mr Derry’s note is unlikely to record everything that was mentioned at the meeting, but it is likely to have recorded things of significance.  The absence of any reference to the Liberata compensation indicates that either it was not mentioned, or it was not mentioned as something of significance, and in particular it was not mentioned as a significant contributor to non-recurring items in  the IM figures.
138.	Following the meeting Mr Ma sent an email seeking further information.  Amongst other things, he asked for a breakdown of GAS revenues by department and client.  He got figures for 2005 and 2006 on 14th August.
139.	By this time Dunedin had had access to the data room, and an e-mail from Mr Ma to Mr Derry the day after this meeting, recording points to take to an internal Dunedin meeting three days later, refers to “a detailed trawl of the data room” and “a very productive discussion with management” which meant that “we have a good understanding of their business and confidence in the assumptions that underlie the financial forecasts.”  Mr Neish submitted that since the data room by this time contained forecasts which remove non-recurring income, and since the Liberata compensation was an example of such income (and would have been likely to have been mentioned during the previous discussions), it was inherently probable that the Liberata compensation had been  discussed by this stage.  He pointed to some very cautious evidence from Mr Kilbey about possible discussions about non-recurring income and, in that context, possible discussions about the compensation.  I think that Mr Neish does not have a sound foundation for his submission.   Mr Kilbey’s evidence verges on the speculative.  The discussion at the 9th August meeting, even in the context of a “trawl” of the data room, would not necessarily have contained any specific reference to the Liberata compensation.  It is no more likely that it did than that it did not (so far as the inherent probabilities are concerned), and the failure of Mr Derry to note it tips the scales in favour of  an absence of any reference, or at least any relevant reference.  If it was mentioned at all it will have been mentioned only in passing; again, the absence of a reference to it in Mr Derry’s note is significant.
140.	Mr Derry’s note of the meeting of 9th  August contains a list of companies operating in areas which competed with Flex.  Mr Derry thought that the list was a list of competitors.  Mr Neish suggested that it was a list of entities that might be right for acquisition.  Looking at the list and the context, I think that Mr Derry is probably wrong about that.  I think that this list demonstrates that possible acquisitions were in the minds of the management team and the Dunedin team, and increasingly so as time went on.  This is supported by a statement in the e-mail of Mr Ma of 10th  August which records:

“Good potential for buy and build strategy, through either consolidation in the employee benefits consulting industry, or complimentary acquisitions (e.g. IT specialist flex provider (Staffcare) or Occupational health specialist (Project Owl).”

141.	Mr Ma’s e-mail of the 10th  August also contains this note:

“Management have kept some extra revenue up their sleeve and we expect steady, but strong growth in 2008 and 2009, rather than a hockey stick.”

This demonstrates that, as Dunedin’s witnesses said, they had an eye to the rate of growth.  The reference to “hockey stick” is a reference to a growth curve that takes off sharply, so a graph of the growth pattern would resemble a hockey stick, as opposed to a  more gradual  rising line.  This is a concept that becomes relevant later in this judgment.
142.	On 14th August there was another meeting between Mr Kilbey, Mr Brooks, Mr Barnes and Mr Derry.  Mr Derry reported on this meeting to Mr Middleton and Mr Ma.  Mr Derry was given some clues by Mr Brooks as to how the bidding was going.  He seems to have been told that there were three bidders, but Dunedin was the management’s preferred partner.  No trade buyer had presented a “knock-out” bid.   Of the other PE (private equity) houses, one of the other bidders had, Mr Brooks felt, bid too high.  Mr Derry guessed that the bid was  £18m.  Mr Derry was assured that the management team would ensure that they had an opportunity to “tweak the price” to get the deal. Mr Derry considered that the main competition would come from other private equity buyers who would price the business in a similar fashion to Dunedin. The sellers were reported as being keen to complete the deal by the end of September if possible.  Mr Brooks reported that PwC were trying to move to an end of October completion so that the audited September 2007 accounts were available.  Mr Derry recorded:

“This would, in my opinion be a nice [sic] to have, but would rather see whether we could drive the deal in order to convert.”

He concluded his e-mail:

“In summary – I am delighted and think this is one we can convert.  The more I get into this, the more I think we can use this as a base business to acquire several other companies and build a business of real scale that we could float or sell to one of the large EBC’s.”

143.	In his witness statement Mr Derry sought to say that he considered that he had been misled by Mr Brooks at this meeting as to the presence or absence of other bidders.  In doing so Mr Derry relied on a document which did not in fact demonstrate that what Mr Brooks said was wrong, and a subsequent document demonstrated that it was right, or at least that Mr Derry’s criticism was wrong.  Mr Neish sought to paint this as an instance of Dunedin in general, and Mr Derry in particular, seeking to paint Mr Brooks in a bad light and viewing him critically at every available opportunity.  I think that Mr Neish’s criticism is right in this respect – it is an example of Dunedin taking a dim view of Mr Brooks and viewing him critically, and indeed over-critically, at most available opportunities.
144.	Dunedin set about instructing Grant Thornton to be due diligence providers.  Grant Thornton were inter alia to assess the reasonableness of forecasts, whether there were any inaccuracies in the historic and forecast balance sheet and cash flows and whether the business was particularly exposed to any one client.  
145.	Due diligence had not started by this stage, but on 28th August Dunedin received a first draft of the SPA from PWC.  Dunedin set about preparing their final offer.  They carried out an alteration to the spreadsheet model which I referred to above (to produce the “Final Offer Model”), and tested a price of  £18m to assess how it affected the returns they would make from the business.  While this gave them a lower IRR in year three and a lower cash multiple, they were content with this as a price.  All this, and more, was contained in an updated paper and updated financial model and put before the Investment Committee for decision on 3rd September.  
146.	The paper was similar in content to that put before the first Investment Committee, but one of the differences was that it was more specific about future potential takeover targets.  The paper recommended a final offer price of 18m.   On the same day the Investment Committee gave approval to an offer at that level.  It was felt that an increase in price could be justified by increasing both the debt and equity contribution by £1m.  
147.	The new price was offered in a letter dated 3rd September.  The letter repeated some of what had appeared in their initial letter offer.  On page 2 it set out that Dunedin typically looked for companies with certain characteristics, including “the opportunity to drive roll-out or buy-and-build strategies.  These are all characteristics which we believe are possessed by GAS.”  It put forward a cash offer of £18m to acquire 100% of the equity in GAS on certain assumptions, which included:

●	The information you have provided to us is accurate and accurately described GAS, its activities, financials and prospects;
●	A debt free cash free business is acquired with normalised working capital; 
●	Our financial and commercial due diligence will confirm the Business’s growth, profitability and cash projections; …
●	There will be no adverse changes to the financial affairs and prospects for the Business, which would cause margins to differ substantially from the projections;…”

148.	The Conditions of the offer required that they needed to be satisfied with “the results of confirmatory due diligence” and the final terms of the SPA.  Within the financing package there was to be a £9m debt package.
149.	A number of entities were given responsibility for various aspects of the due diligence.   Grant Thornton were instructed by Dunedin to carry out financial due diligence and KPMG were to carry out commercial due diligence.  Quinn dealt with management and Intuitus was to carry out IT due diligence.
150.	On about 10th September Mr Breslin and Mr Dawson signed a copy of the offer letter to denote that Dunedin thereafter had the exclusive rights to negotiate in good faith.  By this time they had received an indicative offer from a trade purchaser at around the £18m mark, but Mr Breslin preferred Dunedin.
151.	On 10th September Dunedin set out an offer made to the management team (Mr Kilbey, Mr Brooks and Mr Barnes) to support them in the MBO.  An essential term of the financing was that Dunedin itself would invest £10.6 million for a 75% share of the equity in a new company to be formed for the purposes of the transaction.  The management team would have 25%, paying £375,000.  The difference in the purchase price was to be made up by bank finance – loans of £6,000,000 and £3,000,000.  The funding figures allowed for a figure of £500,000 for “working capital and contingency” and  £1.5 million for “Costs”.  One of the appendices to the letter set out  the requirements in terms of a shareholder’s agreement and provided that:
“The Company and Directors shall provide Dunedin with such warranties and indemnities as are usual in a transaction of this nature, to be agreed.”
Although there is no version of that letter signed by the directors by way of acceptance, other documents suggest that it was signed as accepted.  No one suggested it was not.
152.	The due diligence exercise then commenced.  Mr Derry and Mr Ma had frequent contacts with those conducting it, though Mr Derry went away on holiday from 12th to 30th September.  Mr Middleton played a more active role in that period. 
153.	Grant Thornton (“GT”) were formally instructed to carry out financial due diligence on 13th September 2007.  Among their instructions were an instruction to provide a detailed assessment of GAS’s accounting policies and trading results, including identification of any “exceptional items” and “non-trading income”.
154.	GT were slow in starting but on 18th September, their Mr Gagg confirmed to Mr Ma that they would  deal with various things, including:

“2.  GT to perform initial analysis on the forecasts with focus on the material movements in EBITDA in view of providing comfort  over the explanations of these movements (e.g. the cancellation of the outsourcing contract with Liberator).  A summary of these findings to be provided by close of play Tuesday (25th) ahead of the weekly catch up on Wednesday.”  

155.	On 19th September 2007 Mr Gagg wrote to Mr Brooks and asked for a contact at the auditors so that they could agree access to the audit working papers for 2006 “as instructed by Dunedin”.  Mr Brooks responded within 2 minutes, identifying the audit manager, the auditors and providing a telephone number.  These audit working papers would, if inspected, have revealed the reference to the Liberata payments in the note.  Mr Brooks’ prompt response to this request points away from the allegation, frequently made by Dunedin, that Mr Brooks was anxious to hide what had happened in relation to that payment.
156.	On 19th September Mr Gagg wrote to Mr Brooks, indicating some of the ground that he wished to cover in a forthcoming meeting.  The items he referred to included:

“2.  A list and explanation of all assumptions used in producing the 2007 – 2009 forecasts (e.g. assumed increases in staff costs, overheads etc) …

4.   Identification of any non-recurring/one-off items included within the forecasts  (although I note following our meeting on Monday that some of the forecasts may have been prepared on this basis – please confirm).”

The next day he confirmed again what he was going to cover, in an e-mail sent to Mr Brooks and copied to Mr Ma.
157.	This email of 20th September from Mr Gagg to Mr Brooks (copied to Mr Ma) suggests that a meeting was planned for the next day (21st September) to discuss, inter alia:

“2.  Walk-through of the forecast models relevant for the due diligence including identification of key assumptions/basis of the forecasts and how the models have been constructed.

3.  Identification and details of any one-off/non-recurring items (both income and costs) within the forecasts.

4.  Specific discussion around the impact to forecasts of the Liberator [sic] outsourcing contracts, plus any other items that have a material affect.”  

158.	Mr Brooks said, and I accept, that that meeting was also attended by Mr Fenn and Mr Ma.  Mr Brooks does not recall the detail of the discussion. No witness had a particularly positive recollection of it.  Mr Gagg, who would presumably have taken notes (the meeting was to provide information to GT) was not called to give evidence.  Mr Ma had no real recollection.  Mr Brooks remembers Mr Fenn operating a computer, but does not seem to have a recollection of what was actually said.  He does, however, seek to reconstruct it (in part).  Given that one of the purposes of the meeting was to walk through the forecast models, he thought that it must have been the case that he took Mr Gagg through each individual line of the renewal projections (the income which the MBO team thought would be renewed in the year ended September 2008).    
159.	If one looks at the renewal figure projected by the team and compares it with the income figure for the year ended September 2007 (as it was forecast to be - the year had not ended) it is apparent that there was £765,000 of non-recurring income, that is to say income received in 2007 which would not, as such, repeat itself in September 2008.  Within that number is the Liberata £260,000 and the AXA payment.  Mr Neish submitted that a combination of GT’s desire to understand the non-recurring items in the forecast, the line by line analysis of the forecast which Mr Brooks reconstructs and the fact that the termination of the Liberata contract was on the agenda for discussion, it is inherently probable that the compensation would have been discussed in terms of its being within the non-recurring items in the September 2007 year.     
160.	I do not think I can draw that inference from that material.  I am prepared to accept that there was discussion of the forecast,  and a reference to non-recurring items.  In that context there may well also have been discussion about  the intention to terminate the Liberata agreement.    However, that discussion does not necessarily require a discussion of the historic agreement with Liberata under which compensation was paid or a breakdown of non-recurring items.  The discussion was about forecasts, not about history.  Whatever might have been discussed, I do not think it is particularly likely to have figured at this meeting.   I deal below in a little more detail with the knowledge of GT, in a separate section.
161.	By 23rd September Mr Ma was able to report good progress from various other participants, but the activities of GT were described as “underwhelming so far”.  They responded to a request to up their game and on 25th September Mr Gagg was able to provide some information to Dunedin about a reconciliation exercise designed to verify (or otherwise) figures for GAS which were on the stand-alone basis as opposed to the figures in previous statutory accounts.  They also carried out an exercise to adjust the GAS figures previously provided in order to reflect the fact that by now (September 2007) GAS had figures for 11 months of their financial year as opposed to the four months actual figures on which the IM was based.  The document provided for this purpose included the following statement:

“Results have been prepared by management by taking actual results further management accounts and adjusting for the following:
1.  Any non-operational items.
2.  One-off items that would not be expected to recur going forward.”

162.	GT discussed sections of their due diligence report from time to time as they were produced.  A first draft of the report was sent to Mr Ma on 5th October 2007.  After a meeting between Mr Ma, Mr Brooks and GT, costs figures were revised and an updated draft was sent to Mr Derry and Mr Ma on 15th October.  
163.	During this process Mr Brooks engaged heavily with Dunedin and the due diligence team.  Mr Derry found him to be helpful in many areas, but in others he said he could be “quite obstructive”.  He gives an example of that in Mr Brooks’ refusing to allow Dunedin to contact clients directly to confirm that they were aware of money owed to them on the rebate account.   This was not put to Mr Brooks as being in some way obstructive, or worse still as part of his plan to hide things.  I think that a more likely explanation is that GAS were sensitive to clients knowing about a sale of the business  and consider that this is another example of Mr Derry’s putting an unfairly bad gloss on perfectly understandable conduct of Mr Brooks.  
164.	On 23rd October 2007 there was a further presentation by the management team at Dunedin’s offices in Savile Row, this time to a wider group of people within Dunedin.  It was a chance for the whole Dunedin Investment Committee to meet the management team prior to completion.  Mr Derry said that there was no mention of the Liberata compensation being paid by way of discounted invoices or the allocation of £260K to GAS, or of the AXA compensation.  I think he is likely to be correct about that.
165.	Shortly after the beginning of October, GAS heard that they were to lose one of their big Flex clients, namely VT Group.  This was thought to be because of poor service from Liberata, or at least that was a contributing factor.  This was potentially a damaging blow, because VT was a major client and turnover would be affected.  Mr Kilbey and Mr Brooks went round to Dunedin to tell them of this.  (There was a dispute as to whether Mr Brooks attended this meeting - I find that he did.)   Mr Kilbey followed this up with an e-mail dated12th October in which he set out what he viewed as the impact of losing VT.  In the year 2007/08 the revenue loss would be £120,000 and in 2008/09 it would be £160,000.  However, the net impact on EBITDA would be less than that in each of those years (£92,000 in the first year and £104,000 in the second) because there would be staff cost savings.  His e-mail said that his figures did not take into account the following:

“…Any compensation payable as a result of this lost client…”

166.	The effects of this were discussed at a meeting on 24th October between Mr Derry, Mr Middleton and Mr Ma on the Dunedin side, and PwC, Mr Jenkins and Mr Simon Gregory on the GAS side.  This time Mr Brooks did not attend for GAS.  The view had been taken on the GAS side that Mr Brooks was faced with too many conflicts, since he was by now to be a purchaser as well as a provider of information for the vendors.  Accordingly Mr Jenkins attended this meeting.  Mr Brooks had been made a director of Sycamore, which was to be the purchasing vehicle, the day before.  There was discussion of a price reduction (required by Dunedin), but there was no agreement and the meeting broke up amidst concerns that the deal would now not happen.
167.	Mr Speller of PWC e-mailed Dunedin on 26th October, extolling the virtues of GAS as it stood, the strong numbers that had been produced (supported by due diligence), and the fact that those numbers showed significant growth.  He said the given those facts Mr Breslin was not prepared to reduce the agreed headline price though he was prepared to agree the provision of working capital and to fund a reduced bank debt offer for one year.  Dunedin apparently did not amend their model to test any new pricing at this stage.
168.	In a further conversation with PwC there was a horse-trade and a reduction in the purchase price was in fact agreed.  Mr Breslin wanted to do a deal with Dunedin, but he did not want to do a deal at any price.  He had some trade buyers in the background (though they had receded during the period of Dunedin exclusivity), though his preference was for an MBO buyout because that would preserve employment opportunities.  The new deal was summarised in  an e-mail from Mr Speller dated 30th of October 2007 in the following terms:

“Headline offer price of £17.25m.
Free cash of £0.17m payable on completion
Deduction for LTIP and associated NI of circa £1.135m
Proceeds payable on completion of and ca. £16.285m …
Hence total deal value before expenses and tax for Shaun Breslin is £16.625m”

169.	During the month of October the statutory accounts of GAS for the year ended 30th September 2007 were being prepared.   It was in the course of that exercise that the discussion between Mr Brooks and Rees Pollock about the Liberata compensation took place – see above.  The sending of a final draft was preceded by management accounts, a report from GT and information from PwC, all of which were seen by Dunedin and all of which contained a higher figure for turnover, namely £6,007,000 – an increase of about £40,000 over the earlier figure on which the parties had been working.  This change was presumably because as the year end approached the final figures (which had been the subject of forecasts) became clearer.  A final draft of the accounts was ready by 31st October, on which date Mr Brooks sent Mr Derry and Mr Ma a copy, apparently in response to a request from Mr Ma of the preceding day.  His covering e-mail said:

“Attached are final draft stat accounts for 30/09/07.
I intend to have a board meeting on Friday to sign them and get them out of the way.
I will send you the reconciliation of management accounts to stat accounts which contain all the items that you and GT were expecting.”

170.	That reconciliation duly followed.  It reflected the fact that the profit as per the management accounts needed to be increased by a couple of matters and reduced by other amounts.  The detail of that reconciliation does not matter.  What is significant for present purposes is that the previous management accounts (and other documents) had showed a turnover figure of £6,007,192.  The statutory accounts showed the same figure (minus the £192).  It is therefore the figure which Dunedin were expecting.  Mr Derry said, and I accept, that the turnover figure was very important to them because it formed the basis of growth projections.  The key for Dunedin was maintainable EBITDA of the business as a stand-alone entity.  As a result of the reconciliation figures it had changed a little (an increase of about £40,000), but Mr Derry had been forewarned of adjustments which might bring that about and they did not concern him.
171.	Before the transaction could be completed, the matter had to reviewed by the Dunedin Investment Committee so that they could give their final approval.  Mr Derry and Mr Ma prepared a final model and a final Investment Paper, which was a more detailed version of the previous Investment Preview Papers.  It included a summary of the results of the due diligence process.  The attached version of the spreadsheet modelling has been called the Completion Model.  The Paper supported the purchase in these terms

“This is an opportunity to back a high-quality, management buy-out team with several years’ experience in the target company.  The business has a high level of repeat business, a considerable opportunity to cross sell to its existing client base, and with Dunedin’s help the ability to consolidate a fragmented market… An investment in GAS is strongly recommended.”

172.	The Completion Model was an updated version of what had gone before.  It contained the £6,007,000 turnover figure, and the same growth projections as before.  Dunedin’s normal criteria required an IRR of 20 – 30% and a cash multiplier of 2-3.  The Completion Model, on the basis of the new price, showed a cash multiple of 2.1 and an IRR of 20%.  At that price, and on the available figures, the deal was at the bottom end of the transactions which Dunedin would contemplate.  The Investment Committee approved the deal.  No great discussion is recorded.  Mr Ma’s note of the meeting records merely:
“100 day plan
-	Infrastructure
-	Sales & marketing specialist

Hunt acquisitions actively
-	Real returns to be made through acquisition”
These last two remarks demonstrate the significance of acquisitions in the thinking of Dunedin, as Mr Neish submitted (though, as will appear later, not to the degree that he submitted).  A separate fund within the Dunedin empire the Equity Harvest Fund, which was participating in the purchase) approved the investment 3 days later, with another remark about returns being obtained through acquisitions.
173.	The final version of the GT due diligence report was dated 7th November, though its contents were well flagged before that date by the circulation of drafts.  Its overall summary contains the following points:

●	The underlying business was solid with income growth for that year expected to be 10%.  The healthy EBITDA margin of 32% was forecast to be maintained but might be difficult to grow significantly.
●	The business had a strong client base with high client loyalty.

It claimed to identify three significant issues which GT believed might compromise the strength of the proposition, though it then listed four:
●	The finance function might not be sufficiently robust going forward, “especially to support acquisition growth is…”
●	It was likely that IT would need to be brought in-house.
●	The organic growth strategy was largely reliant upon the success of Flex Direct, which was new and had limited client penetration so far.
●	The executive team might need to grow in size and board meetings should therefore be held regularly to ensure suitable oversight and governance of the business.

174.	Table 1.6.2 set out the management accounts for the last three years..  In the last of those years (to 30th of September 2007) the commissions and fees (turnover) were shown as £6,007,000.  
175.	Section 8 contained forecasts to 30th September 2009.  The forecasts had their roots in figures provided by the management team, but ultimately they were GT’s.   The report set out the assumptions on which the forecasts were based, and they included the following:

“Renewal income

The renewal income for F08 has been included in the amount of £5194K.  This amount is included in the ‘Existing Clients’ income of £5972K in the F08 forecasts
The renewal income for F09 has been included at the amount of £6079K.  This amount is included in the ‘Existing Clients’ income of 6898K in the F09 forecasts.”

In the adjoining column headed “Validity” the following appears:

“The renewal income for F08 is based upon the 2007 renewal budget.  Lost clients as per TMS are deducted.  Initial/new business is added to this amount and 3% contract value uplift is applied.

We consider that the starting point for F08 income may be too low and suggest that further work may be required to determine with certainty, the appropriate starting point.  In any event, having a lower starting point would understate the revenue and make the forecasts more prudent.

The lost clients amount included in the forecast is not materially different to the lost client report provided by Gissings.  As such, assuming this trend continues, this lost client figure appears reasonable.”

176.	The manner of calculation of some of the forecast income emerged as a significant point of difference between the parties and as a test of the honesty and evidential reliability of Mr Brooks.  It is a point to which I will have to return below.
177.	The statutory accounts of GAS were signed off on 2nd November 2007, and Mr Brooks signed them personally on behalf of the board.  Mr Brooks’s evidence was to the effect that he thought that they were signed off at a meeting of the audit committee rather than a meeting of the board, but it is in my view clear from the evidence that there was no meeting of the audit committee on that day.  They were signed off at a board meeting.  Mr Brooks was curiously insistent that there was an audit committee meeting.  Miss Newman sought to say that that was because he wished to make a case that a member of the auditors was present in order to bolster the defendants’ case by saying that the auditors approved the form of accounts again.  I doubt that this is why Mr Brooks took the line that he did, though it is curious.  He was somewhat obstinate about it.  
178.	The accounts were, of course, not on a stand-alone basis.  The turnover figure was the now familiar £6,007,000.  The accounting policies contained the following entries germane to this action:

“Turnover
Turnover, which is stated net of value added tax, is derived from fees and commissions arising from advice given to clients.  Credit is taken for income on the following bases in order  to approximate to requirements of FRS 5 to recognise revenue to the extent that the company has performed its contractual obligations by the balance sheet date:
(i) Credit for recurring annual policy renewal fees is taken on the inception of the policy with the insurance company,
(ii)  Credit for other recurring and all non-recurring fees is taken when the service has been rendered,
(iii) Credit for commissions is taken once the service to which the commission relates has been rendered after making provision for any outstanding costs relating to the transaction including clawbacks or commissions payable.”

179.	Note 19 bears the heading “Related Party Transactions”.  It refers to some recharging of expenses and an exemption from other disclosures under FRS 8.  No reference is made to the invoicing as between GAS and GCSL in connection with the Liberata compensation.  A note on the accounting policies again refers to the exemption.

180.	Note 2 again deals with turnover:

“2.  Turnover
Turnover represents the amounts (excluding value added tax) derived from the activities of employee benefits consultancy and is earned wholly within the United Kingdom.”

181.	Rees Pollock signed the accounts, as auditors, on 5th November.  It is not clear when  Dunedin received signed  statutory accounts, and how soon, if at all, they were received prior to completion.  However, in my view nothing material turns on this.  The SPA clearly refers to the statutory accounts, and even if  Dunedin did not have the final signed form prior to completion they nonetheless had an unsigned equivalent document and a clear indication that that would be the final form.  This, again, is a point I have to develop below.  

Completion and the completion documents
182.	Completion took place on 9th November.  The SPA was entered into, and the Disclosure Letter was provided, signed by Mr Breslin and Mr Dawson.  
183.	The headline price remained that reached as a result of the renegotiation after VT gave notice that it was leaving Gissings.  The main element of consideration stated in the contract was some £16.289m.  Most of the difference between that and headline price was accounted for by the fact that a liability (the LTIP liability - see below) was left in the company.  Nothing turns on that detail, at least at this stage of the narrative.  
184.	A separate agreement was also entered into between the MBO team (Mr Brooks, Mr Kilbey, Mr Barnes and Mr Laws) (“the Investment Agreement”) which set out the obligation of the MBO team to subscribe for shares on completion.  It also contained various warranties (and provided for disclosure in an Investment Disclosure Letter).  
185.	The claimant company had been formed in order to make the acquisition of the shares.  Its own shares were held by Sycamore Topco Ltd (“Topco”).  This company too was specially formed, and it was in this company that the shares were held by Dunedin (75%) and the management team.  As I have already indicated, it is unnecessary for the purpose of this judgement to distinguish between Dunedin (or any of the Dunedin companies), Sycamore and Topco, save for one point which arises about the attribution of directors’ knowledge.  It is technically Sycamore that has any claim in this case, and the action proceeded on the assumption that  it had always been the person dealing with the vendors and the management team.
186.	Mr Brooks, Mr Kilbey, Mr Barnes and Mr Laws had all been made directors of Sycamore on 22nd of October 2007.  Mr Derry also became a director of Sycamore.
187.	As anticipated in some of the pre-completion dealings, the financing of the companies post-completion involved a mixture of share capital and bank borrowing.   Dunedin (through another entity) injected its own funds.  The detail of this becomes relevant  to certain damages claims, but it is relevant only to the misrepresentation claims.  It was agreed at the hearing before me that that area of the damages claim could and should be left over to a separate enquiry should my findings make that relevant.  In the circumstances I do not need to go into the detail of this sort of structure for the purposes of this judgement.

Post completion events
188.	About a month after completion GAS prepared a “GAS Acquisition Strategy paper”, setting out an acquisition strategy which had been part of a Business Plan prepared by management during the course of the GAS acquisition process.  One of the targets was a company called Staffcare Ltd.  This company was pursued and an initial offer of £6.5m was made.  Some due diligence was then carried out and Mr Derry and his colleagues felt that the business was nothing like as worthwhile as the MBO team thought it was.  They required a much reduced offer to be made, as a result of which no further meaningful negotiations took place.  Other acquisitions were looked at but not pursued.
189.	Mr Derry said that he grew concerned about the way Mr Brooks approached the acquisition of Staffcare, his inconsistent financial reporting (as Mr Derry saw it) and his reluctance to appoint a financial controller, which Dunedin wished to have.  Mr Derry procured the appointment of an independent consultant (Mr Haig) to come in and look at the way the financial department was being run.  He did this while Mr Brooks was away on holiday, so Mr Brooks came back from holiday to find someone looking at his department and activities.  He resigned the next day.  As well as being unhappy (unsurprisingly) about the way Mr Derry went about that particular activity, he was also unhappy about what he saw as Dunedin’s wrong approach to acquisitions.  I think that the way that Mr Derry went about introducing Mr Haig shows how hardheaded he is prepared to be in the pursuit of Dunedin’s interest.  There is nothing wrong with that in itself, and it doubtless increases Dunedin’s business capabilities, but I think that the way that he went about the matter shows how determined he is, and whilst that does not make him necessarily a person who would tell untruths in the witness box, is one of the factors which causes me to view his slant on, and version of, events with more care than I would have wished.  
190.	Mr Brooks had an involvement with the business until the following February and technically only left in April.  He retained an involvement in GCSL until that company was sold to Capita in June 2009.  That sale is said to have put documents out of the control of the defendants.  From time to time it was suggested that a few documents which might be relevant to these proceedings were with Capita and therefore not available (or at least not readily available).
191.	Mr Kilbey resigned in June 2009.  He considered that there was a breakdown of trust between him and the Dunedin side of the business.  He felt that Dunedin did not trust the strategic proposals being put forward by the MBO team.   He had been asked to rewrite the MBO team’s business plan following the deal but Dunedin had then retained a consultant without telling him.   Furthermore, he, like Mr Brooks, felt that the Staffcare transaction had been mishandled.   He felt he was suffering from stress, so he resigned from his then position (Chief Executive).
192.	The business did not perform as Dunedin had expected.  A Mr Robert Morgan was appointed as executive chairman on a temporary basis but the business continued to underperform.  Dunedin decided that what they needed was a full-time chief executive.  They therefore appointed Mr Gogel to be chief executive in January 2010.  He became chairman in August 2011.  Mr Gogel set about investigating why the business was not performing as expected.  Mr Gogel then turned up the fact that the  Liberata compensation had been allocated to turnover, what he thought was evidence that monies belonging to GAS clients held in the client rebate account had been transferred to  income instead of being paid back to the clients, evidence that monies had been taken to income from insurer rebates inside  a two-year period (referred to in the Disclosure Letter and in conversations with Mr Brooks), and evidence that the £43,000 AXA compensation had been included in GAS turnover as well.
193.	Mr Gogel’s evidence demonstrated some inconsistencies as to how it was, and at what stage it was, that he discovered the matters that now lie at the heart of this action.  He vigorously disputed that he was looking for warranty claims from the outset.  He said he first came in and investigated why the business was doing badly, was puzzled by various matters and after several months eventually began to query and investigate (through two colleagues) the rebate ledger, which seemed to him to have overly large balances.  It was as a result of reports about those ledgers that he concluded that the transactions which make up the commissions and client rebate element of this action had taken place and ought not to have taken place.  His witness statement identified two particular emails from Mr Brooks  which he considered showed that Mr Brooks had been stopping staff from paying rebates that were due, which he said was concerning.  One of them (dated 2nd October) certainly shows that Mr Brooks was anxious not to pay rebates while they were clearing year end matters, and then wanted a meeting to consider them.  The other indicated he wanted to see if there was a justification for claiming sums otherwise apparently due by way of client rebate.   Both, and particularly the first one identified, might be said to raise questions which needed answering.  Neither seems to me, without more, to lead to the strong conclusion adverse to Mr Brooks which Mr Gogel’s witness statement said he reached.   
194.	So far as the Liberata compensation was concerned, his evidence was that he stumbled across that when he searched for  the name “Liberata” (and, he speculated, the expression “lost client”) in Mr Brooks’ e-mails.  He said he was looking for “Liberata” out of curiosity, because at the time of the Liberata compensation deal he was in fact CEO of Liberata (by coincidence).  I must say that I did not find that part of his explanation particularly plausible.  His job was to run the company, and in particular identify where things had gone wrong.  He did not strike me as the sort of man who would give way to flights of curiosity of the kind which would have led him to search for his former company’s name.   Had he done that, he would, on his own admission, have thrown up a very large number of e-mails.  I cannot imagine what he was looking for when he skimmed through those and, as he said, stumbled upon the e-mail in which Mr Brooks gave instructions as to how the Liberata compensation was to be dealt with internally (see above).  He found this e-mail sinister.  I do not know why he should.  All in all I do not accept this version of his evidence.  I think he was conducting a rather more focused search into the activities of Mr Brooks then he was willing to admit to me.  I also think (and find) that his starting point was Mr Derry’s previously expressed concerns as to Mr Brooks.  Mr Gogel was looking for adverse material, rather than reading a lot of emails with a completely open mind.
195.	Having said that, the significance of those findings as to his investigatory activities  is of relatively limited significance to this case.   Liability, or lack of liability, in this case does not turn on what Mr Gogel thought of Mr Brooks.  However, although Mr Gogel was not part of the Dunedin team as such, he was looking at the company for Dunedin, and he becomes somewhat aligned with them.  The fact that he seems to have jumped to conclusions about Mr Brooks, or not disclosed his thought processes fully,  together with the fact that Dunedin was conducting, or was beginning to conduct, a focused search into what went wrong in the sale process reinforces the need (which exists independently) to approach with great caution hindsight statements as to what Dunedin would have done had the matters complained of not happened.  
196.	Mr Gogel reported his findings to Mr Derry.  Mr Derry’s evidence was that he was shocked and felt deceived and angry when Mr Gogel told him what he had found.  He said that he also felt the business had been misrepresented by the vendors, PwC and Mr Brooks, and that they had brought a different business to the one that they thought they were buying.  It was a business which had over £300,000 of non-recurring turnover items of  which they were unaware.  Those items affected, or knowledge of them would have affected, their understanding of the profitability of the business.  Mr Derry’s prior awareness in this respect is one of the matters which I have to decide in this action.
197.	To complete the picture, Mr Gogel had a review carried out of the rebate ledger for the two years following the sale.  GAS (and Sycamore) claim to have identified several hundred thousand pounds of sums wrongly taken to income and which ought to have been paid to clients, or sums which ought to have been paid to insurers and which had not been so paid, and claimed to have set about rectifying the situation.  There was a certain limited amount of evidence as to this exercise, but full disclosure was not given.  The details of the exercise, and whether the findings of GAS were justified, is not something  on which I shall make any findings.  As a result, the 2008 and 2009 accounts were formally re-drawn and re-stated.  The auditors (KPMG) considered that the decision as to whether or not the changes in the figures were sufficiently significant to be material for the purposes of a prior year adjustment was a marginal one, but recorded that the management thought that the effect, particularly on profit, was sufficiently great to require it.  It was therefore carried out.  By then separate proceedings had been started against Mr Brooks, to which the figures in these years were directly relevant.
198.	Nonetheless, what is perhaps striking is a comparison between the substantial six-figure sums which have been apparently identified  as wrongly dealt with in those two years and the very much smaller sums (and lower number of relevant transactions) identified in the years ending September 2006 and September 2007.  Mr Gogel attributed this to the fact that for the later years the record-keeping was better, and GAS was able to have a higher degree of confidence about matters that were wrongly dealt with.  This discrepancy, while odd, may be of limited significance when it comes to ascertaining whether the transactions complained about in this transaction were wrongful or not.  They will still have to be treated on their own respective merits.

The commencement of this action and the separate claim against Mr Brooks
199.	This action was commenced on 29th October 2010.  On 13th May 2011 two Dunedin companies, GAS, Topco and Sycamore started proceedings against Mr Brooks, based on the provisions of the Investment Agreement, alleging that it contains representations and that some of those representations were false to the knowledge of Mr Brooks.  It is an action firmly based in fraud and dishonesty, and it has not yet been tried.  Mr Brooks is, of course, not a defendant in this action, though he was a very important witness for the defendants.  It is important that the conduct of this action, and the terms of this judgment, do not unfairly trespass into the territory of that action.

Are the warranties capable of supporting a claim in misrepresentation?
200.	There is no dispute about the efficacy of the warranties as warranties (in accordance with their terms).  The claim that is made in this action is, in part, a contractual one based on the contractual effect of those warranties.  However, the claimants also run an additional case in misrepresentation.  It is said that the warranties are also capable of being representations so that, if there is a contravention of their terms, there is also a misrepresentation, and claims are made in the tort of negligent misrepresentation and under the Misrepresentation Act 1967.  The defendants take the point that the warranties do not contain representations, so this claim fails at that level.  
201.	The point has a real significance in terms of the measure of damages (and also the date at which damages should or can be assessed), so it is necessary to deal with it.  If the claimants are right about it, and can otherwise put their claim successfully in misrepresentation, then they may be entitled to recover damages which would not be available under a contractual claim.   At their highest, the misrepresentation claim damages are equivalent to or exceed the consideration paid.  At its highest the warranty damages claim is about £6 million.  Hence the point’s importance.
202.	It is to be noted that the claimants do not rely on anything other than the terms of the warranties in the SPA as amounting to representations for this purpose.  There is no reliance on any pre-contract representations; the warranties are relied on as both warranties and representations.
203.	It does not seem to me that they have that dual quality.  I find that they are warranties only, and not representations, for the following reasons:
(i)  There is a clear distinction in law between representations and warranties, and that would be understood by the draftsman of the SPA.  That is likely to be the case in any transaction of this nature, but is also apparent from the SPA itself.  Representations are referred to in clause 16.3, and Warranties (with a capital “W”) are referred to elsewhere.  

(ii)  The warranties in this case are clearly, and at all times, described as such, and are nowhere described as representations.  Those giving the warranties are described as “Warrantors” (again with a capital “W”).  The relevant wording is always in terms of warranties.

(iii)  The words of the warranting provision (clause 5) are words of warranty not representation.  There is a legal distinction between the two and (subject to a point made about a later reference to representations, as to which see below) there is no reason to extend the words beyond their natural meaning.  In order to make the relevant material a representation one has to find something in the SPA which is capable of doing that.  It is not enough that the subject matter of the warranty is capable of being a representation.  One has to find out why those words are there.  One finds that in clause 5; and what one finds is words of warranty, not words of representation.  

(iv)  The Disclosure Letter (itself referred to in the SPA) also distinguishes between representations and warranties - “The disclosure of any matter shall not imply any representation, warranty or undertaking not expressly given in the Agreement …”.  

(v)  Clause 8 of the SPA contains significant limitations on the liability under the “Warranties”.  It does not refer to representations.  The clause is obviously a significant part of the overall structure of liability.  If the warranties were capable of amounting to representations as well, then on the strict wording of this clause it would not apply to any such misrepresentation.  The sellers would thus be deprived of a large part of their protection and limitation.  That would be a strange and uncommercial state of affairs, and can hardly have been intended.  This is strikingly so in relation to clause 8.2 containing the overall cap on recoveries and on what could be recovered from each warrantor, (unless, in relation to the overall cap a  misrepresentation claim were construed as a claim under the Agreement, which would be a forced construction).  If this cap does not apply then Mr Dawson could find himself liable for £17m, when he had contracted for a cap of £317,000.  It is also true of clause 8.1.  This consequence would be avoided if one construed claims under the “Warranties” as including representations made in the warranty provisions, but again that would, in my view, be a very forced construction.  

(vi)  There is a conceptual problem in characterising provisions in the contract as being representations relied on in entering into the contract.  The timing does not work.   The normal case in misrepresentation involves the making of a representation, and as a result the entering into of the contract.  That does not work where the only representation is said to be in the contract itself.  Miss Newman expressly disclaimed the relevant representations being made at any earlier time.  In some cases that problem is solved by an express provision making certain contractual statements representations.  In such a case the parties have agreed as to their nature and how they should be treated.  However, that is not the present case.
204.	Miss Newman said that the SPA contained a clear indication that the warranties were capable of amounting to representations.  Clause 16.3.2 provided that there had been no reliance on any “representation other than those expressly set out in the Transaction Documents”; and clause 16.3.3 excluded liability for “a representation that is not set out in the Transaction Documents”.  There was nothing in those documents which expressly described itself as a representation, and in fact there was nothing which was a candidate for a representation other than the warranties.  The terms of the SPA just referred to assumed that there was something capable of being a representation (otherwise they were writ in water); so one should construe the only candidates (the warranties) as in fact being representations as well.
205.	I disagree.  She is right that the provisions just referred to seem to presuppose the possibility of some representation.  However, that is not sufficient reason for forcing that characterisation on something that would otherwise not bear it, particularly in the light of the countervailing matters which I have held as pointing firmly the other way.  When one looks to the documentation to find representations, there are none.  
206.	Miss Newman also relied on authority.  In particular she relied on Invertec Ltd v De Mol Holding BV and another [2009] EWHC 2471 (Ch), a decision of Arnold J.  This case, like the present one, was a claim based on the provisions of warranties in a share sale agreement.  Arnold J found that there was a claim for breach of warranty.  The claim was also based on misrepresentation, the representations being in the warranty provisions.  The judge addressed that claim in paras. 362 and 363 of his judgment:  

“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 Volente 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 enter 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.”

207.	Miss Newman submitted that the facts of that case were in substance, and where relevant,  the same as the present case, and that it demonstrated that there was no problem about treating warranties as representations in the present case; she submitted in substance that Arnold J had found that one could.
208.	The actual warranties in that case were different, but nothing turns on that.  Technically speaking, the relevant factual matters were not precisely the same, because the wording of the warranty provision was different:

“5.1  Accuracy of warranties

The Vendor warrants to the Purchase [sic] that, save as fairly disclosed by the Disclosure Letter, the Warranties are true and accurate in all material respects.”

209.	That is not the same as the warranty provision in the SPA in this case.   However, I do not think that that difference explains the difference between my views expressed above and the determination of Arnold J in that case.  I believe that Arnold J would have decided his case the same way even if the wording were the same as in the present case.  The difference between the result in that case and in this is because, with respect, I disagree with the views of Arnold J.  For the reasons given above, I think that there is no satisfactory answer to be given by those claiming representations to have been made, to the question which has to be asked: Why have the warranty provisions been inserted in the contract?  The answer is to be found in clause 5 in each case – they are there because they are warranted.  There is nothing more to make them into representations.  I do not think it affects the position that in the present case, as in Arnold J’s, the parties (and in particular the warrantors) knew what was coming because drafts have been exchanged and the terms of the contract negotiated.  What the warrantors knew to be coming, or more precisely knew they were going to be providing, were expressed to be warranties, not  representations.  
210.	The claimants made certain submissions seeking to meet a case which they perceived  the defendants to have been making to the effect that clauses 16.3.2 and 16.3.3 of the SPA excluded the right to bring a claim in misrepresentation under section 2(1) of the Misrepresentation Act 1967, and submitted that if that case was being made then section 3 of the same Act prevented those clauses from so operating because  the clauses  did not satisfy  the test of reasonableness within that section.  I am not sure that that was in fact the case of the defendants (their pleaded case was couched in double negatives which were pretty impenetrable), but in any case I do not consider that those clauses have a material effect for the purposes of section 3.  What prevents the relevant warranties from being representations is that, on the true construction of the document in which they are contained, they are simply not representations (much less “any misrepresentation made… before the contract was made” within the meaning of the section).  I therefore do not think that section 3 has any relevance to this matter.  However, were I wrong about that, it is my clear view that, insofar as it operates to prevent anything being a representation which would otherwise have been a representation, it satisfies the requirement of reasonableness within the section.  The SPA was part of a suite of documents, negotiated at arms length by commercial parties, one side of which (the purchasers) was highly experienced in such transactions, and where both parties were assisted by experienced professionals (solicitors and accountants).  The structure of potential liabilities was clearly set out, and the claimants must be taken to have satisfied themselves as to what they needed.  They were content with warranties (and extensive warranties at that).  There is nothing at all unreasonable about excluding any parallel liability for misrepresentation in those circumstances.
211.	For those reasons, therefore, I hold that there is no claim in misrepresentation in this case.  It follows that I do not have to consider questions of duty of care or other questions as to the reasonableness of belief under the Misrepresentation Act which would have arisen had I decided otherwise.  I shall hereafter consider only breaches of warranty in relation to the claims of the claimants.

The alleged wrongs - general
212.	In the next few sections of this judgment I will take each of the facts and matters said to be breaches of warranty separately, and match them against the warranties to which they are said to relate.  This will involve considering some more of the facts relating to each of them, the accountancy evidence and the terms of the warranties.

The Liberata payment
213.	The following points arise in relation to this payment at this stage of my consideration: 

(a)   Does its inclusion in turnover, without any explanatory note, mean that the accounts for the relevant year failed to show a true and fair view of the state of affairs of GAS, its assets, liabilities, profits or losses; and/or does it mean that the accounts have not been prepared in accordance with generally accepted accounting practice - see warranty 4.1?  

(b)  Does its inclusion in turnover without a related party transaction note  mean that the accounts did not comply with generally accepted accounting practice?  

(c)  Does the absence of a note properly disclosing the item mean that warranty 4.1 is breached?

214.	The resolution of these points involves a consideration of the proper accountancy approach to the treatment of this payment, which in turn involves a consideration of the expert evidence. 

The correct accountancy approach to the Liberata payment
215.	There was a large measure of agreement between the experts as to the principles to be applied to the question of whether the accounts failed to comply with the tests in Warranty 4.1 by reason of an erroneous treatment of the Liberata compensation as turnover.
216.	First, in determining how a sum such as the Liberata compensation ought to be treated in the accounts, the relevant standards to be applied were UK GAAP, and the relevant standard was FRS 5  (Reporting the Substance of Transactions).  This (as the summary suggests) requires entities to report the true substance of transactions, not merely their form; and so far as “turnover” is concerned it defines it as:
“The revenue resulting from exchange transactions under which a seller supplies to customers the goods or services that it is in business to provide.”

217.	Second, they agree that any departure from the strict application of the standard has to be material for it to be relevant to the fairness of the accounts.  For example, an error which led to turnover being over or under-stated by £10 would be immaterial in determining whether the accounts presented a true and fair view.
218.	Third, they both agreed that the 2007 accounts failed to comply with UK GAAP in failing to contain a “related party transaction” note in relation to the Liberata payment.   I shall come back to this question later.
219.	Fourth, they agreed that subject to any concerns relating to the future ability to invoice and collect a sum due, a business should recognise turnover based on when the relevant service was provided, rather than the date from when it was agreed it could be invoiced.  
220.	In his first report Mr Hine considered that the Liberata payment could not fall within the relevant definition of turnover because it was not a transaction between a seller and a customer – it was a transaction between GAS and its supplier.  Furthermore, it did not arise from an exchange transaction from a supply of services by GAS.  He also placed significant reliance on the fact that the provision by Liberata was a credit against future charges.  He seemed to have regarded that as being the substance of the transaction.  His view was that the Liberata credit ought to have been accounted for as a reduction in administrative expenses.  He also took a point in relation to quantum.  He noted the amount of the Liberata credit which was attributed to GAS and expressed the view, based on his comparison of such things as the value of work done by the two companies, that too much had been allocated to GAS and the proper amount which ought to have been allocated was between £100,000 and £180,000.
221.	Mr Cottle took a different line in his first report.  He acknowledged that the invoices issued by Liberata demonstrated that the compensation was apparently taken as a reduction of costs.  However, he considered that it was relevant and important to look beyond that and look to the substance of the transaction.  He acknowledged that there was material in the evidence which indicated that the compensation was in lieu of income that was lost.  He further indicated that he had been told that some of the items that were included in the claim were in the nature of claims that were potentially claimed by Gissings in the event of the termination of the contract with Liberata and that in some instances the amounts had not by then been incurred by Gissings.  This inclusion of potential future costs indicated to him that the nature of the claim document was a starting point from which negotiations could commence rather than a definitive quantification of actual losses.  The significant distinction for Mr Cottle was whether the compensation reflected income from lost clients that had accrued due but which had not been paid (was lost) because the client was lost, on the one hand, and future income from lost clients (income which would have accrued had the client relationship been maintained, but which was never earned) on the other.  The latter could not properly be regarded and accounted for as turnover; the former could.
222.	Mr Hine did not accept the paragraph in Mr Cottle’s report in which he set out the significant distinction to which I have just referred as being one with which he agreed in the circumstances of this case.  However, a proper view of his evidence demonstrated that, in my view, he did not dissent from it as being a relevant distinction, at least to the extent that the future income could never properly be treated as turnover.  What he seemed to be disagreeing with was the notion that, on the facts of this case, it would be right to treat past non-recovered debts as being turnover, without more.  His point was tied up with the proper accounting treatment of up-front work as giving rise to an accrual where GAS did not charge for the upfront work but planned to recover its costs over the period of the relevant contract with the client.  It is unnecessary to go into this refinement in any depth.  Miss Newman’s final speech wisely did not go into it, and concentrated on the question of whether there was any evidence which would make it right to treat the Liberata sum as compensation for unpaid work as opposed to a lost opportunity to earn more.  The distinction remains important in this case.  Her point was that, on the facts of this case, it could not be shown that the Liberata payment represented anything which could, on proper accountancy principles, be described as turnover because it did not fall within the relevant definition (as being a payment for services rendered) because:

(a) the Liberata compensation agreement did not so provide; and

(b) the attempt by the defendants to categorise it as payment for past services rendered failed on the facts; and

(c) the apportionment of the overall Liberata compensation sum as between GAS and GCSL did not support the GAS portion as being compensation for lost clients in any relevant sense.

223.	Before moving on from this overall point, it is significant to note that "Turnover" was described in the Accounting Policies contained in note 1 to the 2007 accounts.  It was described thus:

"Turnover
Turnover, which is stated net of value added tax, is derived from fees and commissions arising from advice given to clients.  Credit is taken for income on the following bases in order to approximate to the requirements of FRS5 to recognise revenue to the extent that the company has performed its contractual obligations by the balance sheet date:…
(ii) Credit for other recurring and all non-recurring fees is taken when the service has been rendered…"

This supports the application of the general definition of turnover in accountancy terms in which it is appropriate to include sums paid where work has been done, and not to include sums where it has not.  It follows that Mr Cottle's distinction is a significant one within the terms of this definition too.  If it is the case that the Liberata sum did seek to compensate for lost clients, but could not be demonstrated to compensate for sums due but unpaid (as opposed to loss of future opportunity to lose fees after the termination of the relationship), then it would not be right to include the sum as turnover.  I accept Mr Cottle's evidence that it would be right to include it as "Other Income".

The impact of form
224.	The first point is whether the nature of Liberata sum is correctly to be gleaned from the Liberata settlement letter itself, and the manner in which Liberata  “paid” the sum (by deduction from its own bills).
225.	Both of the experts agreed that substance not form governed the correct accountancy treatment of any given sum.  In those circumstances the terms of the Liberata settlement agreement, and how the sums are actually dealt with thereafter, are no more than a starting point, albeit a significant one.  In many cases it will be neither necessary nor appropriate to go beyond the apparent form of the transaction pursuant to which monies paid.  In the present case that is not so.
226.	There is no doubt that the terms of the Liberata letter dated 17th July 2006, which were accepted by Gissings, propose a settlement which was effected by an offset against charges.  If matters had stayed there it would be hard to see how that could be classified as turnover, whatever else the proper classification might be.  Miss Newman relies on the fact that that is how one would expect compensation for poor service to be paid and again that does not support a turnover analysis.  It also wrapped up other claims that might otherwise be made in relation to the provision of poor service.  She pointed to the provisions of the BPO which refers to Service Credits and limits on compensation properly so called – see the extracts set out above.
227.	However, the enquiry does not stop there.  The letter itself acknowledges that one of the starting points in the negotiation was the Claim Document, which puts the claim heavily in the realms of lost clients and not merely some form of compensation for poor service which might adequately be reflected by discounts in the future.  A "discounted charge rate" was apparently chosen as a mechanism for achieving the end result which the parties agreed they wished to achieve.  I have already found that all those involved in Gissings considered that what they were getting was compensation for lost clients, that is to say compensation for monies that would otherwise have come from clients who were lost; they were not merely looking for reimbursement of compensation claims which they had had to pay to their own clients.  I accept that from their point of view they agreed to instalments, and to the instalments being achieved through deductions, because they could not get the cash sum that they were seeking.  The deduction was, for Gissings, merely a mechanism.  It also seems likely that Liberata did not wish to pay a substantial lump sum up front because of its own financial position.  All this, and indeed the terms of the settlement letter itself, mean that it is in my view appropriate to go beyond the terms of that letter, and the mechanism adopted, and to carry out a wider enquiry as to substance.  I do not consider that this letter carries the weight that the claimants maintain.  Its true construction is one thing.  The proper accounting treatment of the sums which are the subject of it is another.
228.	It is therefore appropriate to consider what the substance of the transaction was.  The defendants’ original case was that the substance was that it was compensation for the consequences of losing clients.  Mr Brooks always regarded that as the equivalent of turnover.  As will appear, by final speeches it was accepted by the defendants that that could not be the case in relation to the whole of the £260,000, but they maintained that it was as to a proportion.  It is therefore relevant to consider the extent to which that case can be made out on the facts.  

Substance - how far can the sum be treated as being compensation for lost clients in a relevant sense
229.	At this point the distinction drawn by Mr Cottle comes into play.  Sums which fall to be treated as compensation for income not received in respect of work that was never done (because the client was lost) can never be properly treated as turnover because it is not a substitute for services actually rendered.  However, compensation which can be said to replace payment which ought to have been made by a lost client for services rendered prior to the client leaving can qualify as turnover.  It therefore becomes necessary to consider whether the Liberata sum falls to be treated in one category or the other, or partly in the one and partly in the other.
230.	One does not get any assistance in determining this question from the Claim Document itself.  That just refers to lost clients in a generalised sense and identifies certain specific clients and matters without indicating how the claim arises.  Nor was much assistance given in the first round of evidence from the defendants' witnesses; that evidence mainly described the compensation as being for lost clients, without suggesting how the losses from lost clients arose in any detail.  It was only when Mr Cottle raised his distinction in the course of preparing his expert evidence that further consideration was given to the point, and the result was a second witness statement of Mr Brooks.
231.	In that witness statement Mr Brooks gave more details of the process of reaching the settlement with Liberata, and what was thought about on the Gissing side.  He is quite clear that they regarded a very substantial part of the claim as being for lost clients.  He said that the £260,000 was:

“Intended, in its entirety, to restore levels of turnover for services rendered or to be rendered as part of existing contracts with clients but for their premature termination as a result of Liberata's service failures."

He goes on to admit that the distinction that Mr Cottle now draws was not in his mind and that an analysis between payment for services rendered and payment for loss of opportunity to render further services was no part of his analysis.  Having had that distinction drawn to his attention, however, he then embarked on a form of reconstruction as to how that analysis might be performed.  He had no documentation to assist him in that task, and he carried out a theoretical exercise based on what he knew about how the business was conducted, in relation to one client (Toshiba).
232.	In seeking to identify services rendered which might not have been paid for by the time a contractual relationship with a client came to an end, Mr Brooks identifies only one real candidate.  As pointed out above in the narrative of the Liberata agreement, when setting up a system such as Flex there are significant upfront costs.  Sometimes those costs were recovered by means of an initial sum (to be followed by monthly service payments and additional payments for future services); sometimes the costs were recovered partly by an initial sum and partly by the client paying periodic charges which were increased or that which would otherwise have been charged (though not in a way which was transparent to the client – the costs would merely de facto be recovered in that way); and sometimes there was no initial charge and the cost had to be recovered over a period of time through setting the service charges at an appropriate level (again, this process was not transparent to the client).  If a contract with a client in the second and third of those categories were terminated short of the period which would have allowed full recovery of the initial costs, then there were services rendered which were unpaid for.  Mr Brooks sought to say that some of the compensation received from Liberata was designed to compensate for services for which payment was not received within those last two categories.  Mr Cottle would accept that, so far as that was what the compensation was for, then it would be appropriate to treat it as turnover.
233.	It was in order to give an idea of the sort of likely level of those sums that Mr Brooks set out his example of Toshiba.  Working through his example he sought to suggest that a termination of Toshiba at the end of year 2 of 3 would, on his workings, mean that 60% to 66% of a figure of £34,000 paid in respect of Toshiba would be payable in respect of services rendered but not paid for (i.e. turnover).  Based on that calculation, he suggests that a range of between 60% to 70% of the compensation should fairly be attributed to turnover.
234.	The trouble with Mr Brooks' exercise is that it is hypothetical and based on assumptions.  The first point is that Toshiba is not a particularly good example because it was not a lost client.  It was a client to whom a discount had to be given because of poor service, but it remained a client.  The second is that he does not know whether or not Toshiba paid any up front sum, and he puts a case based on two assumptions – payment of no upfront sum and payment of an upfront sum which was less than the cost of the initial services.  So it is not an actual case.
235.	As appears above from the documents relating to the Liberata settlement, other clients were identified as being lost and in respect of whom a claim for compensation was made.  Mr Brooks was cross-examined on those instances to test whether they could provide support for a case that there were losses in respect of lost clients of the nature relied on by Mr Brooks.  In the following analysis it should be remembered that the relevant inquiry is, according to Mr Brooks’s analysis, whether any, and if so what, Flex upfront costs were left unrecovered as a result of a termination by a Flex client within the anticipated period of recovery (typically 3 years).  The evidence as a whole does not assist the defendants at all.
236.	First, Mr Brooks agreed that the only lost clients who had to be considered for these purposes in relation to GAS were EC Harris, Daimler Chrysler, Toshiba and Keymile.  The other clients referred to in the Liberata claim documents were not GAS clients.   
237.	Second, it became apparent that Keymile was not a Flex client, so an analysis which depended on upfront costs for installing Flex would not apply to that.
238.	In relation to the other 3 clients:

(a)  There was no evidence that there were upfront charges which were not recouped at the outset other than Mr Brooks’s generalised description of what might happen.  

(b)  In the case of EC Harris there was a strong pointer to there being none which were not recovered by the time this client was lost within 3 years, as posited by Mr Brooks, because the contract was not a 3 year contract.  It was terminable on sliding scale of periods, the longest of which was 18 months, which would suggest (if Gissings was acting in a business-like manner) any unrecovered initial costs should have been recovered by then.  The contract was entered into with effect from 1st March 2002.  

(c)  EC Harris was lost as a client some time between September 2004 and  August 2005.  Its contract may or may not have been terminated within 3 years of its commencement - that is not known.  But even if it was, there cannot have been much of the initial cost left unrecovered by then.  So even if (which is unlikely) upfront costs were spread over 3 years, this is not going to help to justify much, if any, of the Liberata sum as being turnover.

(d)  Email evidence demonstrated that Daimler Chrysler had been a Flex client for 3 years by 18th April 2005.  Thereafter it remained a client on a short term rolling contract.   Its contract was not available, but that email evidence does suggest an initial 3 year term.  So if (which is not known) the upfront costs were spread over 3 years, they had been recovered by then, and no recovery was lost as a result of Daimler Chrysler becoming a lost client thereafter.  

(e)  As already pointed out, Toshiba was not a lost client at all.  It is said by Mr Brooks that a significant discount was given every month.  The invoices that were available do not bear that out.  It is not apparent that there was a regular discount at all.

(f)  It appears that most of those 4 client relationships started before GAS was an active company.  If they never were a GAS client then GAS could not have suffered the loss from a premature termination of the Flex contract.  The defendants’ answer to that point was that there was evidence (oral) that there was a general novation of the contracts of categories of clients, including Flex clients, when GAS started trading.  I am prepared to assume that in favour of the defendants.  

(g) EC Harris was also a payroll client of the group, as was Keymile.  The Liberata claim documents suggest that claims were to be made in respect of that activity.  However, it is not apparent that the termination of the relationship left any payroll debt unpaid, so as to enable compensation attributed to it to amount to turnover.  Mr Brooks’s evidence on the unpaid services point related to Flex only.  There is also a question-mark as to whether they were GAS clients (as opposed to GCSL clients) in respect of payroll services.  I think they probably were (there was a dispute as to whether GAS took over any payroll services when it was formed) but I do not have to decide that point.

(h)  Of the £260,000, £60,000 was allocated to Risk.   Risk did not suffer from lost clients in the same way as Flex did.  This allocation cannot have been on the basis of lost clients, and while it might be viewed as a convenient internal allocation which should not reflect a view of whether there was in fact £260,000 worth of relevant lost client business in GAS, it certainly does not assist Mr Brooks’s attempts at allocation to lost clients.

239.	In the light of that I return to consider its impact on the case of the defendants that the Liberata payment falls to be treated as turnover because it replaced sums which ought to have been paid and which amounted to turnover.  The totality of the evidence demonstrates that that case cannot be made out.  In his written final submissions, Mr Neish accepted that a case based on the assumptions of Mr Brooks might lead to too high an element being treated as turnover, but submitted that since there was a horse-trade it would be appropriate for the court to form some view as to what part should be treated as turnover.  In the light of the evidence that is not, in my view, possible, save for the conclusion that the relevant sum is zero.
240.	What I find happened was this.  Mr Brooks negotiated with Liberata on the footing that he was looking for substantial compensation to make good losses across the group (both GAS and GCSL) and sought to make a strong case.  He particularised his claim with Liberata, and plainly Liberata did not accept it, and was not prepared to pay anything like the sum claimed.  Mr Brooks deliberately put his claim high (I do not suggest that he did so in bad faith) so as to give himself a negotiating position.  He is not to be blamed for that.  Liberata was able to fight for itself.  In his evidence to me Mr Brooks admitted that he did not distinguish for these purposes between unrecovered costs for services rendered, as opposed to loss of opportunity to do further business with a lost clients.  I strongly suspect that what he was really thinking about was the latter.   That is not in the least surprising.  He obviously treated the whole of the sum obtained by GAS as being turnover, without drawing that distinction.  His advocacy with Rees Pollock no doubt proceeded on the same basis.  When the relevance of the distinction to this case became apparent (as a result of Mr Cottle's engagement), he sought to reconstruct a possible scenario, but he was doing so without the benefit of any real information.  He was, I am afraid, trying to achieve an end rather than carrying out a proper analysis.  He fairly made clear what his assumptions were, and made it doubly clear that he was attempting a reconstruction, but that reconstruction cannot stand in the face of what the evidence demonstrates about the four instances on which he relied in this respect.  I am therefore unable to accept Mr Neish's submission that there must have been some unrecouped expenditure and that the court should make some sort of assessment as to what it was.  The actual evidence trumps Mr Brooks's generalised statements and reconstruction and points clearly to the conclusion that his attempt to find some unrecouped expenditure fails.
241.	For the sake of completeness I should record that the other items in the claims document do not assist the defendants on this point.  They either relate to GCSL customers or do not qualify as being in any form compensation for lost clients.

The allocation of the compensation between GAS and GCSL
242.	A separate point was taken in relation to this.  It will be remembered that the compensation agreed with Liberata was £500,000.  At that time it was not allocated as between the two Gissing companies; that allocation came later, and was performed by Mr Brooks and agreed by the managing directors of the two companies.   In his first report Mr Hine took the point that it seemed to him that GAS had been allocated too much of the £500,000.  Having commented on the various ways in which Mr Brooks explained or rationalised the allocation, both historically and in the course of his evidence in these proceedings, he compares the proportion of the compensation taken by GAS with the proportion of Liberata costs contributed by it in 2006 and 2007 (52% vs 20%); and analyses the proportion of the compensation claim in the Liberata compensation document and again compares it with the GAS’s proportion of the compensation (said to be 36% as against 52%).  Having been unable to reconstruct Mr Brooks’s own apportionment which was carried out at the time, Mr Hine concludes that a different apportionment should have been carried out, giving a lower percentage to GAS corresponding to one of the 20% or 36% figures, or some figure in between.  This means that he considers that the amount that GAS should have received is between £100,000 and £180,000.
243.	The significance of this is that Mr Hine’s view was that this point does not go just to turnover.  It goes to profit.  If GAS received more than it should have received, in his view, the excess would come off profit and that would make what he regarded as a material difference to profits.  Mr Cottle agreed that if the amount of the Liberata sum received by GAS were overstated by between £60,000 and £180,000 (as Mr Hine claimed), and if GAS should be treated as not having received it, the resulting overstatement of accounts would indeed be material.  
244.	I do not accept Mr Hine’s view of this part of the world.  GAS received what it received.  It received it by way of agreement between the relevant parties.  At times this point smacked of a misfeasance action, but such a view would not, on the facts, be sustainable.  Mr Brooks achieved an agreement between the two managing directors of the companies.  As a result, and by way of compromise, the £500,000 was carved up in the manner specified.  It does not seem to me that any part of it should fall out of account, or of the accounts, because GAS did a better deal than might now be seen to be justified.  It is the case, on the basis of what I have found above, that none of it can be attributed to turnover.  However, I do not consider that the exercise performed by Mr Hine necessarily justifies taking any of it out of profit.    There might be such a justification if it were the case that there was a liability on the part of GAS to repay GCSL.  Mr Hine gave evidence that a prior year adjustment might be appropriate if that had been the case.  However, the evidence did not establish that there was such a liability.  In its absence the fact that GAS may have got a good deal is not a reason for challenging the split itself and reducing the profits of GAS as a result.
245.	What would be potentially relevant would be the accounting treatment which would result.  If, in fact, the £260,000 represented far more than a fair share of compensation for services rendered but not paid for then it would not be right, in accordance with  normal accounting principles, to include the excess in turnover. That is the significance of any debate about the split.  However, since I have concluded that there is no evidential case for saying that there were any such unpaid for services (see above) the point becomes academic for the purposes of this action.  No part should be included in turnover anyway.  Miss Newman’s written final speech recognised that, in those circumstances, there was no need to decide what she called the “reallocation of the split”, and I shall not do so.

Materiality
246.	My findings above lead to the following conclusions:

(a)  Looking at the substance of the matter, it was not wrong to treat the £260,000 as compensation for lost clients in a broad sense.  It was not necessary to treat it as a reduction of expenses.
(b)  However, since there was no evidence that there was any unrecouped expenditure, or any unremunerated provision of services, at the date of the agreement, it could not be treated as compensation in respect of any such matters.
(c)  As a result, there was no element of the £260,000 which could, as a matter of substance, be treated as compensation for such loss and therefore no element of loss to GAS which could be treated as lost turnover. Accordingly the accounts were wrong in including that amount of turnover.  The turnover figure was inappropriately inflated.
(d)  It should (on the basis of the accountancy evidence) probably have been treated as “Other income”.

247.	However, that is not the end of the inquiry.  As recorded above both experts agreed that a departure from accountancy standards, or a judgment as to whether an error led to the consequence that a true and fair view of the affairs of the  company was not given, required the additional factor of materiality in that departure.  
248.	The Financial Reporting Faculty of the Institute of Chartered Accountants of England and Wales has published guidance on materiality.  This guidance was exhibited by Mr Cottle; its usefulness was not disputed by Mr Hine.  It sets out part of a statement of principles from another document, one of which is the following:

“3.30	An item of information is material to the financial statements if its misstatement or omission might reasonably be expected to influence the economic decisions of users of those financial statements, including the assessments of management's stewardship.

3.31	Whether information is material will depend on the size and nature of the item in question judged in the particular circumstances of the case.  The principal factors to be taken into account are set out below.  It will usually be a combination of these factors, rather than any one in particular, that will determine materiality.

(a)	The item's size is judged in the context both of the financial statements as a whole and of the information available to users that would affect that evaluation of the financial statements.  This includes, for example, considering how the item affects the evaluation of trends and a similar considerations.…

If there are two or more similar items, the materiality of the items in aggregate as well as of the items individually needs to be considered.…”

249.	The document itself goes on:

"19.  The Statement of Principles regards financial statements as providing information that is useful to a wide range of external users.  It notes a rebuttable presumption that "… Financial statements that focus on the interest that investors have in the reporting entity's financial performance and financial position will, in effect, also be focusing on the common interest that all users have in that entity's financial performance and financial position."  Such users include actual and potential investors, employees, lenders, suppliers and other trade creditors, governments and their agencies, and members of the public with access to financial statements.  In making judgements on materiality, preparers should therefore be concerned with identifying relevant users."

250.	Mr Hine’s view was that the error was material to turnover, and therefore material to the true and fair view of the affairs of the company or, to be more precise, of its assets and liabilities or profits and losses (“state of affairs” probably being a balance sheet concept); and the departure from GAAP was by the same token material.  He pointed out that it amounted to 5% (it is actually more like 4.3%) of the turnover.  While there was no absolute dividing line as to percentages which would and would not be material, the view of the profession was that an amount of between 1% and 2% was likely to be material.  A fortiori, according to that rule of thumb, 5% (and indeed 4%) must be.  He did not rely solely on that view, however; he took an overall view and reached his conclusion.
251.	Mr Cottle disagreed.  He acknowledged that his own firm applied a test of 0.5% to 1%, and that that coincided with a training manual for accountancy exams.  However, he said that there was an element of judgement which meant that one could not simply apply those figures unthinkingly.  He considered it to be significant that the error (recording the £260,000 as turnover and not as "Other Income") made no difference to the bottom line profits figure, and made no difference to the net assets.  Accordingly, and looking at the numbers in this case, he did not think that the error was material.
252.	The question of materiality is, as the experts accepted, one of subjective judgment on which views of accountants might differ in any given case.  In the present case the burden is on the claimants as part of their case to establish the failure of the accounts to portray a full and fair picture and to comply with accounting standards.  Since materiality is a subjective concept, and there is room for a difference of views within a range, in order to dismiss the views of one accountant or another I would have to find that that accountant’s views were ones that no reasonable accountant could hold.  If a reasonable accountant would think that the difference was immaterial, then the claimants would not have fulfilled their burden.  That is a heavy burden to fulfil.  
253.	Despite that, I find that the claimants have fulfilled that burden.  I preferred the evidence of Mr Hine and consider that, despite the conscientious way in which Mr Cottle prepared and gave his evidence, his view should not be accepted even as being reasonable within a band.  This is so even though Mr Cottle told me that he had carried out a cross-check by asking his colleagues in his firm whether they thought the difference was material, and they thought not.  I do not know quite what question was asked, how much information they really had, or how long they had to think about it.  4% is a significant overstatement in monetary terms.  The amount of money at stake (£260,000) is of itself a significant sum.  The amount of a company’s turnover is a significant item for anyone viewing the accounts, and the need to separate income out into other categories (such as Other Income) demonstrates that.  It also has to be borne in mind that in October 2007 Mr Brooks thought the amount was significant enough that he wanted to argue about it with Rees Pollock and to have it put back where he thought it belonged (though strictly speaking that particular fact in this case does not go directly to the purer accounting point of whether the sum is, in the circumstances, material - Mr Brooks’s views on the point are not directly relevant and  I would have reached the same conclusion even if this event had not happened and the money had been in turnover all along).  Rees Pollock themselves apparently originally took the view that the £260,000 ought to be taken out of turnover, so presumably they thought that it was material.  The thrust of the evidence suggests that when they changed their mind, it was not because they changed their mind about materiality - they changed it because they changed their mind about the proper categorisation.  The fact that the amount makes no difference to profit or assets is not a compelling point.   A true and fair view, in accountancy terms, requires that each item of income be placed in the correct pigeon-hole. 
254.	This position is, in my view strengthened by considering the interest of a user within the meaning of the professional publication cited above.  In the context of the preparation of these accounts, one potential user was known to be Dunedin.  Dunedin was obviously interested in the shape of the business (or trends).  One of the items in the shape of the business was turnover.  As appears from the narrative elsewhere in this judgement, Dunedin were particularly interested in turnover.  I do not find that Gissings and its shareholders were particularly aware of Dunedin's particular interest, but they will have known that, at least for these accounts, there was a potential purchaser-user.  That consideration in my view weights the significance of the turnover figure and emphasises why an error in turnover of the magnitude which I have held to have existed would be material.  If there were doubt about materiality in the absence of this consideration, this consideration pushes the balance further down in favour of the claimants, though in truth I believe that they would succeed without it.

The alleged failure to comply with accepted accountancy practice in relation to the Liberata compensation money.
255.	The same facts lead to the conclusion that the accounts failed to comply with accepted accountancy practice within the meaning of the warranty.  That practice requires the correct categorisation of income in the accounts of a company, and there was a failure to achieve that in this case in relation to the £260,000 Liberata compensation sum.   A failure of that nature becomes a full failure within the warranty if it is material - otherwise it is not viewed as such.   I find that it was material for the same reasons as those appearing above.  

Conclusion on the inclusion of the Liberata compensation as turnover
256.	Accordingly I find that by including the Liberata compensation sum in turnover the accounts for the year ended September 2007 failed in a material way to present a true and fair view of the state of affairs of the company or its profit and losses - probably the latter, because the experts seemed to agree that the expression “state of affairs” was more apt to refer to balance sheet questions rather than profit and loss accounts.   That failure was material in the circumstances.
257.	I also find that the same error was a failure to comply with the GAAP standards, and that there was a failure to comply with accepted accounting practice, and that that too was material.
258.	It follows that there was, in this respect, a breach of warranty 4.1.
The absence of a related party transaction note
259.	The accountants were at one on this issue.  UK GAAP requires accounts to contain a related party transaction note, and the 2007 accounts did indeed contain such a note at note 19.  In regard to GCSL it read:

"in the prior year an amount of £273,545 was recharged by [GCSL], both companies are under common control with the Gissings Group Limited."
There are also two references to an intra-group exemption – see above in the description of the Accounts.

260.	No reference was made to the allocation of GAS’s part of the compensation.  It is common ground that it did not do so.
261.	Both experts were agreed that the failure to include a reference to that transaction was a contravention of UK GAAP and therefore of normally accepted accountancy standards.  Mr Hine went so far as to draft an appropriate form of words:
"Compensation has been agreed with a supplier which provides back office accounting services to GCSL and indirectly to GAS.  The compensation was in the form of reduced charges made by the supplier from September 2006 to August 2007.  The allocation of the share of compensation from GCSL to GAS is £260,000 and has been included within turnover."

262.	Mr Hine records that Mr Cottle agreed this wording in an email, though this agreement is not recorded in their joint report.  The wording was not challenged in the course of the trial.  I do not take it as selling the pass on the substance of the Liberata compensation (I do not take Mr Cottle to agree that it fell to be characterised as a reduced charge rather than compensation) but the rest of the wording has an apparent significance.
263.	The experts both agreed that the concept of materiality had no part to play in a judgment as to whether the omission of such a note was or was not a failure to comply with UK GAAP.  The point was a technical one unadorned with such considerations.  Since they both agreed that the matter ought to have been recorded in a related transaction note, and materiality did not come into it, it follows that their agreed position was that there was indeed a non-compliance with UK GAAP.  It follows that there was, in this respect, a breach of warranty 4.1.

Absence of other notes
264.	A further claim was made that the absence of a note explaining the presence in turnover of the Liberata sum also made the Accounts non-compliant.  This is really the counterpart of the claim that the money ought not to have been there in the first place.  It is another way of putting the same point.  I do not need to make any further finding about it. 

Decision on the Liberata payment
265.	It follows that there was a breach of warranty 4.1 by reason of the inclusion of the £260,000 Liberata payment in turnover in the September 2007 accounts, and a further breach by reason of the failure to include a related party transaction note.

The dispute on the AXA payment and its resolution
266.	The area of dispute on this point reinvokes the requirement that the accounts should reflect substance and not form.  Therefore the areas of dispute are potentially whether the classification of this sum as turnover in the September 2007 accounts is correct as a matter of substance, and (so far as incorrect) any shortcomings are material.  I say “potential” because there was a significant level of agreement between the experts on the facts of this particular item.  
267.	First, they agreed that not all of it could be properly classified as turnover, and second (and perhaps more importantly) they agreed that even if it was all wrongly classified as turnover, that error would not, by reason of the size of the sum involved, be material to turnover and that it would not make the accounts not full and fair, and would not mean that they contravened GAAP.  The sum is, of course, not material to profits because it would still be included within profit no matter how it was characterised.   They also agreed that insofar as any part of the sum was in substitution for interest, it should have been included as “Other income”, and so far as it related to past services it would have been appropriate to treat it as turnover.
268.	Because the experts were agreed as to the immateriality of any error to turnover, Mr Neish suggested that it was of marginal relevance because it would add nothing material to a decision on the much bigger Liberata sum.  He therefore addressed virtually no submissions to the proper accounting treatment of this sum.  However, it seems to me to be relevant to the scale of the breach, which in turn potentially goes to damages, so I will briefly address the question of the extent of any shortcomings.
269.	The nature of the enquiry involved on this issue is the same as that involved in relation to the Liberata sum.  The experts were agreed that if and insofar as any part of the AXA sum was attributable to services rendered, then it would be appropriate to treat it as turnover.  It is therefore necessary to enquire whether any, and if so what, part of the AXA sum was so attributable.
270.	Like the Liberata negotiation, the AXA negotiation was a horse-trade.  There was no refined break-down of the negotiation into various areas.  The various items that were under discussion with AXA were the consequences of AXA's insistence that a new remuneration payment be made inclusive of VAT rather than exclusive of VAT (which reduced the return to GAS), a reduction in the amount received by virtue of the new arrangements (irrespective of the VAT point), and the loss of interest on client monies that GAS were no longer going to hold.  It is impossible to put a realistic value on any element of these claims.  No one has attempted to value the first two, and there were wildly differing views as to the amount of interest that would be lost.  Mr Kilbey at the time considered that the lost interest was more than £100,000.  When required to do so by Mr Cottle's analysis, Mr Brooks put the lost interest at a tenth of that most.  He did so purely as a matter of reconstruction.
271.	The real question that matters in this area of the case is the extent to which it is right to treat any part of the £43,000 as payment for services already rendered.  In the light of the evidence on the point, I find that it is impossible to treat any part in that manner.  The contemporaneous documentation seems to refer to the compensation as being in respect of lost interest.  So far as that is the case then it cannot qualify as turnover.  The attempt to appropriate it to the two other matters came only in this litigation.  Looking at that evidence, not only is it very difficult to work out what part should be so appropriated (because the evidence does not really allow quantification); it is not even clear that, to the extent that that might be done, it would be appropriate to treat that part as payment for services actually rendered, as opposed to a payment for the lost opportunity to render further remunerated services, or something like that.
272.	It is therefore not possible to characterise any part of the AXA compensation sum as being in respect of such services, on the  balance of probabilities, and I therefore find that no part of this sum should have been treated as turnover.
273.	As I have already indicated, since the experts agree that this sum of £43,000 was, taken by itself, immaterial in the context of the actual turnover in the case, there was no breach of UK GAAP solely as a result of this shortcoming, and the shortcoming was not, by itself, sufficient to render the accounts neither true nor fair.

The commission and client rebate points - the claim
274.	I have set out above the general procedures of GAS which form the factual basis for a consideration of this part of the claim.  Against that background the claimants maintain that the failure to disclose certain fee and commission matters leads to a further claim under the warranties.  This requires a return to the detail of how commission and fee matters generally were dealt with, and certain matters in particular.

275.	Those claims in this case arise in relation to the following matters.
(a)  The claimants rely on a wrongful failure to rebate client commission to the following clients in the year ended September 2007, and in the following amounts:

Credit Suisse - £3,283.82
Moore Capital Management - £9,782.75 (in three parts) 
Fuji Film - £1,327.43
C & C Marshall - £2,143.85
Chubb - £4,332.41
Man Group plc - £43.96
TOTAL          - 20,913.50.

(b)  They also rely on a failure to rebate commission to Bank of New York (”BoNY”) in the sum of  £36,000  in the year ended September 2006.

(c)    The policy in relation to lost clients.

(d)  A sum of about £5,000 paid as commission in respect of a policy taken out by Rotch Property, and which is said to have been taken to income inside the 2 year period which the Information Memorandum states to have been the period after (not before) which unreclaimed commissions would be taken.

(e)  Any improper taking to income inflates turnover, and indeed profit.

276.	Warranty 2.3 is said to have been broken in that in that matters (a) to (c)were breaches of the agreements with the clients which were material in the context of the business of the company.  In particular: 
(a)  it is said that the specific sums were taken to profit and loss account when the individuals involved knew that there was no proper basis for doing that. 
(b)  If the Warrantors had made due inquiry of Mr Brooks and others they would have been aware of the matters in (a) and (c) above. 

277.	So far as warranty 3.12 is concerned, the client rebate matters were matters giving rise to claims and if the defendants had made due inquiry of Mr Brooks and others they would have been aware of the same.
278.	So far as warranty 4.1 is concerned, the items in (a) mean that the accounts were materially inaccurate.
279.	The resolution of these disputes involved a lot of evidence about history and detail, despite the fact that actual recollection of the detail of these particular transactions was thin on the ground.  It might be thought to be disproportionate to the amounts involved, but it is a point which figured heavily in Dunedin’s case because it is said to go to the culture of the business that it bought and in relation to which (they say) they would not have bought if they had known the sort of thing which they say was going on.  It is therefore necessary to go into these matters.
280.	The claim based on these matters so far as the client rebates are concerned starts from what the claimants say was the intended procedure in relation to rebates.  At some point in the procedures, either when commission from insurers came in if the position was clear, or at some later date, particularly through the monthly commission meetings if it had not been made clear before then, sums were determined as repayable to clients (where appropriate) and were thereupon credited and posted to the rebate ledger.  Thus were the sums payable to the clients recorded.  If additional work were done for the client which merited payment, then GAS's systems required that an invoice be raised, and if there were moneys standing to the credit of the rebate account then it would be reduced accordingly.  That, however, was not what happened in relation to the disputed client rebate amounts.  They were all swept up by "sweep up" invoices which were not related to work done (or at least not on their face).  Those sweep up invoices recorded no more than an appropriation by GAS of monies to which it was not entitled.  An invoice would not be rendered to the client.  Where one sees this happening one should infer that work was not done and the appropriation was wrongful.  There was no more than a dressing-up of a wrongful internal cancellation of records showing monies due.
281.	In the case of lost clients, a policy was in place to see if some spurious justification for the taking of money could be contrived.  It was contrived because chargeable work was not actually done, a proper invoice for the client was not actually raised, and it was not GAS policy to inform the client that monies had been due but had been offset against this apparent work.
282.	Having sought to establish that this was the general framework of the way that GAS operated, the claimants then point to the particular transactions in question and analyse them to seek to show that they fit into that pattern.

The client rebate sums - details
283.	These are the sums referred to under head (a) above, totalling almost £21,000 - I shall refer to them in that round sum.  The claimants’ concerns are said to have come to light when Mr Gogel’s researchers found them in the course of their investigation.  Initially they identified another smallish sum which it was thought fell into the same category (in relation to a client called V2 Music), but on further research that particular sum was abandoned as part of the claim.
284.	The £21,000 sums (in aggregate) all started their life as being credited to the various companies referred to above on the client rebate account.  That, say the claimants, is a strong indication that they were moneys to which the clients were entitled.  
285.	Then GAS’s accounting system shows the £21,000 being moved from the rebate account, to which it had hitherto been credited, to the insurer ledger, whence it was credited to turnover, on 28th February 2007.  Mr Brooks agreed that that was the route taken.  The system’s records shows that the sum was taken to income by raising an invoice of that date, which was headed “AXA PPP Healthcare (IALOB)”, and whose narrative read:
“Details: Other

Commission invoice sweep up raised as agreed on the meeting on 27th February 2007 which includs [sic] balances below £500 up to March 2006 in AXA, selected transactions in the Rebate account and transaction for £7k in AIG account”.  

The various transactions which gave rise to this invoice are complex, but it was not disputed that the invoice amount (which was £3000 greater than £21000) reflected taking these particular payments to income.  
286.	The next chain in Miss Newman’s reasoning is to establish that the amounts had not originally been credited to the rebate account in error.  Three of the clients (Chubb, Fuji and Man Group) have draft unsigned contracts on the file which provide for the rebating by GAS of commission.  In respect of Chubb there is a particular email which evidences the treatment of the sum as a rebate to Chubb; the internal email (from 2005) records receipt of the relevant sum from BUPA and a request to rebate it.
287.	Then she relies on 2 “investigations” (as she calls them) of the account.  “Review” might be a better word, but her point is that whatever they were, the rebate account was looked at and it was not concluded that there had been an error.  That is true so far as it goes, though the second of those activities did generate the question in relation to each of the 6 clients: “Accounts why is this old invoice appearing”. Further studies of these entries did not suggest that they were wrongly made.  
288.	I am invited to infer from this that these were sums which were, absent some further factor, properly rebatable to the clients concerned.  I think that that is the prima facie inference from the facts so far.  The ledgers reflected entries which indicated that someone in history treated these as being rebates due (and in the case of Chubb it is clear when that happened), in circumstances in which rebates were capable of falling due, and although the scope of the subsequent investigations was not readily apparent (they may, for example, have assumed the original correctness of the entry rather than have checked) it is right that in the course of those investigations no irregularity occurred to anyone.  There are prior entries and queries in the preceding months, showing the 6 items.
289.	Having established that, Miss Newman submits that some positive and good justification must be given for taking the sums to income, in the absence of which it was improper and the sums could still have been claimed by the client.  She submits that there was no hint of such a justification in the investigations referred to above, and the sweep up invoice pursuant to which the sums were taken is inconsistent with any suggestion that real services may have been rendered to the client which justified it.   The invoice is said to be too early for it to be suggested that it was the legitimate fruit of Mr Kilbey’s commission rebate exercise which he had had carried out after the beginning of 2007.  If there had been some genuine services raised which would have justified the taking of the apparent rebates to income, then it is highly unlikely that there would not have been a proper invoice directed to each client.  Apart from anything else, the client would want it for its own records.   There is also evidence that 3 of the clients were not shown in future client income projections during 2007, from which it is to be inferred that they were “lost clients” by this time and their rebates were therefore hoovered up in what she alleges was a wrongful policy to take such rebates otherwise due to such clients without genuinely providing work or other services for it.  In those circumstances it is said that this court should find that the sums were wrongly taken to income.
290.	Miss Newman seeks to bolster this case by relying on Mr Brooks’s involvement.  She says that the evidence showed that in the post-purchase period he was prepared to take sums improperly to income, with no proper basis, and that since he was involved in the 2007 process this was more of the same.  I find that Miss Newman is not entitled to make this point on the evidence of the subsequent years that was before me.  It is true that the claimants sought to raise a case that the 2008 and 2009 turnover was inflated by improperly taken moneys, but that is not part of the pleaded case, and it was made clear by Miss Newman in her closing speech that this point was raised by way of rebuttal of a point made by the defendants by way of comparing the turnover of those years with the turnover for 2007, but since that is an area into which this case is not going to go Miss Newman cannot make this evidential point.  What went on in those two subsequent years was not sufficiently tested.  I deal shortly with those two years in a later section in this judgment.
291.	She is, however, entitled to rely on other parts of the evidence about Mr Brooks’ conduct and attitudes and the fact that he was concerned not to have to pay rebates if it could be avoided, and on his own admission he chaired the monthly meetings and would be involved in decisions as to what to do with rebates.
292.	Mr Neish criticises this case as being built on speculation and an absence of evidence, and further criticises the drawing of inferences about the likelihood of impropriety from the involvement of Mr Brooks.  He points out the evidence that has not been obtained (contemporaneous emails, for example, or evidence from the advisors involved) and contrasts what happened in relation to V2 Music when more information was looked at (V2 Music fell out of the picture).  Since the invoice was coded “Initial” in the books of the company (which is the code for new work for an existing client) it is as likely an explanation than any other that these rebates were “spent” (my word, not his) on other products that were sold to these clients.

Decision on the client rebate sums
293.	There is no direct evidence of why these sums were moved from the rebate account and treated as income to which GAS was entitled.   There is no record of the contents of the meeting at which some sort of decision was reached about it.  There is therefore no record of who participated in that decision-making process.  There are no supporting documents for the decision other than the invoice.  It is not clear that there has been a  search for emails or other communications which might have passed between the relevant  GAS advisers and the clients; there was no evidence from such of the advisors as are available to the claimants (and there is at least one); and no evidence from the clients themselves.  Periodic statements given to the clients which would have reflected admitted entitlements to rebates have not been produced.  
294.	However, there are significant pointers which indicate that it is unlikely that the inference which Mr Neish invites me to draw (that these sums were used to fund the purchase of products) is the correct one.  
295.	I start again at the beginning of the logic.  The starting point is that these 6 clients were fee-paying clients who were to some extent, entitled to rebates.  There are unsigned contracts for 3 of them, and it is unlikely that there would have been any entries in the rebate ledger for them if there were not that starting point.  It is then a sensible inference, which I draw, that at some point the receipt of commissions from the insurer triggered an apparent rebate requirement on the information then known, though it was probably not paid at the time because of the inherent uncertainties in the system as referred to above.  The amounts then stayed on the rebate ledger awaiting clarification for some considerable time.  The two investigations did not reveal that the initial entries were a mistake, but they did not reveal clarity as to whether the sums should be paid over either.  
296.	The later Investigation bore the following fruit.  It had its roots in an email from Louise Prager to Shobha Shishodia on 2nd January 2007.  It read

"You will be aware of the existing outstanding commission rebates on account for healthcare further to the spreadsheet you sent around a while ago.  Much of this seems to have not been cleared for one reason or another (quite a lot of it are AXA rebates which were not allocated until recently).  Please see attached an up to date list.

This has been raised as a project by Andy.  I would like you to be responsible for investigating all outstanding rebates so that we are in a position to issue these to clients.  This will not at this stage involve you sending out the cheques to clients.”

The project should involve:
1) checking that we have received the commission from the insurer (you may want to speak to the relevant coordinators re-their insurer commissions – I know for example I have asked CPS to hold onto commission from CMS as there are problems with Cigna's commissions).
2) checking that the amounts received are correct
3) checking if there is any specific reason why the rebates have not been sent out previously – as some of these are quite old.

End result should be a column at the end of the spreadsheet to confirm ok to send to client.  This should also state what period the commission is for.  I have added two columns at the end for you to complete.

There will be quite a bit of investigating to do, you may need to look into each invoice raised plus fee agreements etc.  You can carry this out in whatever way you see fit, whether you take a whole day out or just a couple of hours a week.  This will need to be completed in readiness for all relevant cheque reqs to be raised by 24th January.

297.	The spreadsheet included a large number of items, including the six sums which are an issue in this action.
298.	By 22nd January Miss Shishodia had apparently done her work, because Miss Prager sent a copy of an updated spreadsheet to Mr Kilbey under cover of an email which read:

"Further to our conversation on 2nd Jan concerning the rebate account and the outstanding amounts please see attached a spreadsheet which has been updated by Shobha as requested to confirm which rebates can now be issued.

You requested for this part of the project to be complete before any rebate action.

Please let me know if you are happy for all the entries that can be rebated to be actioned and I will arrange with the team.  I will also arrange for accounts to action their points and for CPS to investigate the ones that are for her attention as they are AXA clients."

299.	Mr Kilbey forwarded this email without comments to Mr Brooks on 25th January.  On 29th of January Mr Brooks sent all the material to Mr Fenn and Kelly Cochrane saying:

"Can we discuss at Thursday's AXA meeting particularly the large amount of old balances."

300.	The reference to an AXA meeting was probably a reference to a particular meeting to discuss AXA who presented a particularly large number of issues.
301.	Miss Shishodia had added her comments in a new column in the spreadsheet.  Against a number of items (but not against any of the six disputed items) she had marked: "To be rebated" or similar words.  Against each of the six disputed items (and others) she had written: "Accounts why is this old invoice appearing."  Against C & C Marshall Ltd she had added the words "– to query with MC – commission not to be rebated??".
302.	Neither of the witnesses who was cross examined on this document (Mr Fenn and Mr Brooks) knew what those words meant.  It was suggested to Mr Brooks that they were intended to signify that Miss Shishodia had already cleared them and could not understand why the sums had not been paid.  He did not know whether that was right or not, but could not suggest another meaning.  For my part I am not satisfied that that is what she meant.  On other parts of the spreadsheet she indicated that in her view rebates ought to be paid, and if that was her view in relation to these six items (and the others against whom the same words appeared) I think she would have used some of the same words.  It is not possible to make any finding as to what these words meant.
303.	It is not clear that these items were discussed at a meeting in January; it is not even clear that there was such a meeting.  However, a much later email contains a further version of the spreadsheet with a column at the end entitled "Finance Comments 30/01/07".  Against the Credit Suisse item the words were added: "has to be credit note?".  Against the others were written the remark: "rebate?  Paid direct in the old invoicing system" (or some immaterial variation of those words).  The same remarks are made against other items.  Yet further items record agreement that a rebate should be paid and state that a cheque requisition form should be raised.  The words against the six disputed items are therefore not a ringing endorsement for the concept of paying the rebate.  It was suggested that the words might be a reference to a piece of history in which clients paid premiums including commission and GAS accounted for net sums.  It is impossible to be confident about that.  All one can say about the state of affairs at this point in time is that there was not a clear written approval from anyone to the effect that the relevant sums should be rebated.
304.	Obviously some subsequent decision was taken not to rebate the sums but to take them to income.  As observed above, there is no direct evidence of who took that decision, what it was and the reasons for it.  All we have is the invoice.  However, the chronology makes it unlikely that the basis of the decision was an agreement with the client that the money could be offset against future or past work.  I doubt if the chronology allows time for that between 30th January and 25th February, and in my view it is very unlikely that there would have been an agreement with the client over the small sum of some £43 odd owed to MAN Group.  Bearing in mind Mr Brooks's preferences not to make payments which would require a lot of work to sort out and where he felt, rightly or wrongly, that work had been done which was not properly charged for and that a case can be made for taking sums in respect of that, I think it more likely that a robust decision was taken to keep sums where a case for rebating could be made but was not overwhelming, as a practical matter, perhaps influenced by the fact that at least some of the clients may have been "lost" clients.  I am not satisfied that the evidence is sufficient to make out a case for a deliberate withholding of monies which GAS (and particularly Mr Brooks) knew ought to be repaid.  That would be a case based in dishonesty, and bearing in mind the quality of evidence necessary to prove dishonesty, I do not think that the evidence in this case goes far enough in relation to this particular transaction.  The spreadsheets to which I have referred clearly acknowledge that some rebates had to be paid, so they do not demonstrate at that moment in time that GAS was generally helping itself.  I do not know from the evidence in this case whether or not those particular items were repaid, but the claimants have not sought to produce any evidence that they were not.  Their case on this part of the litigation is based on the six clients only.
305.	The issues in this case require me to determine whether the above facts amounted to a breach of the agreements with the clients.  Since it is not clear what happened, it is not easy to determine whether there was a breach or not.   It all depends on what the reasons were for not paying the sums were, and whether they were good reasons or not (I can discount the fact that there might have been other reasons for not paying not known to the company and not considered at the time).
306.	Once again I start with the evidence of these sums being on the rebate register in the first place and staying there for months (and years).  On the facts of this case that is prima facie evidence of an entitlement.  By the end of January 2007 no-one had identified a good reason why they should not be there, though the position was apparently less than clear (because otherwise the accounts department’s observations would have been more clearly in favour of payment).  For the reasons given above, one should, on the balance of probabilities, discount any supervening agreement with the client that the money could be kept as payment for additional services or some agreed reconciliation.  That is not likely.  I should make a finding that there was a possible claim by the client, unless, on the balance of probabilities, it is more likely than not that an objectively good reason for resisting the claim had come to light.  I cannot make such a finding, so that leaves me with, on the balance of probabilities, a claim by the client.  This view is given weight by the background of Mr Brooks’s robust attitude to the repayment of client rebates.  On the evidence that I have before me, I find that those particular rebates remained due to the clients.  I do not find, however, that the failure to pay them was the result of a deliberate decision not to pay sums known to be due.  It was more a decision to be robust in relation to sums as to which there was some apparent uncertainty.
307.	Miss Newman also made a case that the decision to take those items to income would have "required the authority of Mr Brooks".  I do not think that that is a correct way of putting it.  If the decision was taken at a meeting on 25th February, and if he was not present at that meeting, then it would have been done without his authority.  I do not think that the system required that he authorised such acts in every case.  I accept his evidence that he did not attend every monthly meeting, and there was no suggestion that no decisions can be taken at a meeting which he did not attend because of his absence.  I'm sure that decisions to rebate, or to take to income, could be taken without him.  On the other hand, I find that he participated in more meetings then he missed, and I think it probable that he attended the meeting on 25th February, or whenever the meeting was that took the decision.  The email correspondence which I have quoted shows he was very much in the loop on this matter, and what he regarded as the proper treatment of rebates was something which always caught his attention.  Of course, the meetings were immensely detailed, and it is not surprising that he should have no recollection of this matter.
308.	Those findings now have to be put in the context of warranties 2.3 and 3.12. and 4.1.  I shall take the first and last together.
309.	A breach of warranty 2.3 requires:

(a) the identification of an express term
(b) a breach of that term
(c) the materiality of that breach in the context of the contract
(d)  the materiality of that breach in the context of the business.

310.	As to the express term, this part of the claim is posited on there being an obligation to refund commissions.  Signed contracts have not been found for any of the 6 clients, and draft contracts for 3 only.  However, if they were fee paying clients, then it is likely that there was an express term that commissions would be rebated - that was at the core of the relationship.  If it does not appear in any written document, it must have been expressly agreed orally in the negotiation.  It is possible, but unlikely, that they were clients who paid a fee but were entitled to no commission rebate.  That would probably have been discovered before January 2007 had it been the case.  So there was a relevant (or potentially relevant) term for the purposes of this warranty.
311.	As to breach, this follows from my decision in relation to the 6 clients, above.  There was probably a breach in respect of each of the clients.  
312.	Next there has to be materiality in the context of the contracts in question.  In this context I think that “material” means significant as opposed to de minimis.  The amount involved in the Man Group element is too small to be material. The others, however, are probably capable of being material.  They are significant sums in their own right, but I do not know how they compare with fees and commissions involved (which would be capable of being relevant).  The nature of the breach (much relied on by Miss Newman) is also of relevance.  The client would be unlikely to know how the calculations would work out (it was often difficult enough for GAS, who at least had the figures) and so would be particularly reliant on GAS to account properly.  A failure to account in such significant sums would be capable of being material in the context of each contract.
313.	The last element is materiality in the context of the business. This is probably not the same question as the materiality question which arises in relation to the accounts but no doubt some of the same factors are relevant in considering each of them.  In terms of the amounts involved I do not think that they are material for these purposes.   They are a very small proportion of turnover.  They are also very small in terms of liabilities.  An additional liability on the balance sheet of £20,000 would not be a very high proportion of the numbers involved - it would have increased the liabilities by just over 1%.  As an amount I do not regard it as material.  
314.	The experts expressed some views about materiality, albeit in the context of a warranty 4.1 breach.  Neither expert considered that, just looking at quantum, the sum was in itself material to turnover.  However, Mr Hine considered that the quality and nature of a breach was relevant in determining materiality in accountancy terms.  As a matter of principle I accept that.  He said that in this case, the amount by itself was “significant” in relation to profits,  and the fact that it involved client money made it material to profits.  He was suggesting that from an accountancy perspective, in the same way as he was expressing a view of materiality in relation to the two more major sums. That is actually a different concept from the test in warranty 2.3, but in any event I do not accept his point, in the circumstances.   If it were a deliberate fraud on clients, then that might create materiality where none would otherwise exist, for the purposes of the accounts warranty, and probably for warranty 2.3 as well.  However, I do not find it to be such, for the reasons appearing above.  It is not sufficiently clear how these 6 items came to be taken to income, and whether they really were taken knowing that they should not have been.   The same reasoning applies to the fourth limb of warranty 2.3.  The sum of itself is not material to the business, and it is not rendered material by the motivation which underlay the decisions to take the moneys to turnover, because that motivation has not been proved.   A breach is not material in the context of the business (for the purpose of the warranty) just because it involves not paying money due to a client.  
315.	I therefore find there is no breach of warranty 2.3.  By the same token, so far as relevant, there is no breach under warranty 4.1 either. 
316.	Next is the claim under warranty 3.12.  Miss Newman said the 6 amounts were commissions taken to income where there was no entitlement to them.  Mr Neish said that the rebating of commissions to clients was not “brokerage, commissions or fees” which had been “collected” or taken to “credit”, or which were potentially reversible or repayable.  I think that Mr Neish is right about this. These are not commissions which fall to be repaid.   When the sums were paid they were paid as commissions.  There is no question of that payment being reversed.  As sums payable to the client they are not commissions.  They are rebates in the amount of some part of what were once commissions.   Nor can the claimants establish that the sums represented fees.  Their whole point is that they are not fees.  I do not think that this sort of transaction falls within this warranty, which is aimed at something else.  It is aimed at situations in which commissions have actually been paid, or fees actually paid (in some real sense) and where those transactions have to be unravelled (otherwise than in the ordinary course of business).  The most that has happened in relation to this money is that it has not been paid over to the clients.  A debt arose and it has not been paid.  That is capable of falling within warranty 2.3, but not 3.12.
317.	That being the case, there was no breach of warranty 3.12  and I do not need to go on and consider the other questions that would otherwise arise as to awareness and the likelihood of any reversal.
The Bank of New York matter
318.	A further particular instance of dealing with commissions and rebates arose in relation to the Bank of New York (”BoNY”). The underlying facts were as follows.
319.	This part of the claim concerns a sum of £36,200. The complicated story starts in 2006. At that time BoNY was a fee-paying client. The claimants say that GAS came under an obligation to rebate that sum, but wrongly failed to do so. It was taken to income in 2006, and that gives rise to a claim by BoNY and, therefore, a breach of warranty.
320.	The story is complicated and starts with arrangements under which GAS was to receive a fee of £45,000 and rebate commissions in excess of that. Because “net of commissions” policies were not in place with the insurer BoNY paid a gross sum, and became entitled to the excess of the commission element over £45,000, which was £36,200. That starting point is common ground. At this time BoNY changed its insurers from Swiss Life to Generali. 
321.	At the time a credit note in favour of BoNY was raised on the old accounting system. Thereafter the position gets confused. No witness had any recollection of the facts that occurred at the time. Miss Newman’s case is based on entries in the Swiss Life ledger, and on an apparent discovery by Miss Prager in 2007 that something seemed to have gone wrong.
322.	The entries in the Credit Suisse ledger show 7 entries. Some of them seem to reflect (I say seem to reflect, because with one exception none of the underlying documentation is available) sums due to GAS from, or in relation to Swiss Life, and others show sums owing by GAS. One of the sums shown as owing to GAS is a sum of over £21,000 owing to GAS in respect of, and possibly from, BoNY.  If one nets them off against one another there is a balance of £10.132.04. That sum was reflected in a sweep up invoice on 6th April 2006 by which means it was taken to income. The narrative reads:
“Details: Swiss Life
Commission sweep up agreed with RD and Finance”

“RD” is almost certainly a reference to Richard Davey, an Adviser who had a relationship with BoNY some time later that year, but who was not their prime contact at the time.
323.	The effect of that invoice in internal accounting terms was to take the balance ostensibly struck by taking the various items in the entries, and then turning it into a sum treated as due to GAS. 
324.	It is not easy (or indeed possible) to see, from the entries, why that would be justified as a netting off exercise of the kind that was apparently being carried out, and to my eyes it seems to have been treated as generating a balance going the wrong way. It ought to have shown a net liability. But it was treated as a net sum which was taken to income. No explanation was offered for that. It is likely a number of people were involved in that decision - those involved with BoNY, someone from Finance (perhaps Mr Brooks), and Mr Davey, yet no explanation is apparent. It must have seemed like a good idea at the time.
325.	Then there is the fact that at least one of the entries ought not to have appeared on the Swiss Life ledger at all, namely the £36,200. By the time that featured, the insurer had become Generali. 
326.	There was a lot of debate in the evidence about the nature of the netting off exercise that was going on in this transaction. Miss Newman suggested in cross-examination of Mr Brooks, and ultimately submitted, that what was happening was that moneys due to BoNY (the £36,200) was being taken to discharge the debts of others (the entries on the ledger going the other way), and then £10,000 was in effect misappropriated. Mr Brooks accepted that there was a netting off exercise, but said it was not as Miss Newman suggested. It was an exercise for accounting purposes only, to strike a balance which could be taken to income. It was not one in which any particular sum was appropriated to the discharge of any other particular sum. The essence of what he described was that it was a mathematical exercise, not an appropriation exercise.
327.	Having heard his evidence on that point I am satisfied he is right about that. What happened in the accounts and records seems to have had the effect of an informal appropriation, because the £36,200 disappeared from clear view as being a sum owing to BoNY, but that is probably because of errors in book-keeping. The entries on the ledger might have justified setting off the £36,200 owed to BoNY against the £21,000 odd apparently (or potentially) owed by it, though no-one knows that the £21,000 falls into that category.  But if that is right then as a result of accounting netting-off, that sort of netting off would be justifiable. On the other hand, if the £21,000 represents commission owing in respect of BoNY (in earlier periods the BoNY arrangements were full commission arrangements) then it would not be. No-one knows.
328.	The picture emerging from this is one of confusion. Any analysis now, in the absence of more underlying documentation (which was not disclosed at the trial, and which may or may not be available), is one of uncertainty as to what this exercise was about. In my view there was more than one accounting error. 
329.	The extent of those errors is not clear. Nor was it clear when Miss Brennan discovered in 2007 that the credit note she had created for £36,200 in favour of BoNY had apparently been swept up with sums due from, or in respect of, other clients (a reference to the accounting entries referred to above). She expressed her concerns and puzzlement to Miss Nedza in an email. In cross-examination Miss Nedza sought to reconstruct what might have been happening, but it was a reconstruction, as she admitted. In emails in August 2007 she expressed her puzzlement at what happened, and her view that a credit had to be raised in favour of BoNY in the amount of £36,200. Miss Brennan expressed her own puzzlement. Although the view was that it appeared that BoNY should apparently have £36,200, no-one could explain what had happened, and no-one was particularly certain about what the then situation should have been.
330.	Miss Nedza had forgotten about this exchange when she emailed Magdalena Szulc on 28th March 2008 asking her to investigate what had happened to the £36,200. She could not remember what the response was. She did not raise a credit note at this time, and speculated (she had no recollection) that this was because she was instructed not to by Mr Brooks. I regard this as speculation and do not find that this actually happened. 
331.	BoNY do not seem to have been particularly concerned about this, because when their representative was contacted by GAS (through a Mr Heatley) he said it did not want any money back and would prefer that he be sold something.  
332.	Miss Newman invited me to find that Mr Brooks was aware of the situation throughout.  She relied on his general participation in decisions about sweeping up, and the approval that was required from him.  If he approved it, then he must have sought to understand the position at the time.  Furthermore, a later reference to the need to check the income taken in the BoNY account is referred to at a commission meeting on 25th June 2006, and that could only be a reference to this point.  
333.	Accordingly, the claimants say that there was a culpable failure to account to the BoNY for £36,200, and that that sum was (in substance) misappropriated by off-setting it against the liabilities of others, and that Mr Brooks knew about this, and indeed approved the netting off procedure by approving the sweep-up invoice.  This means that there was a breach of the contract with BoNY, and hence a breach of warranties 2.3 and 3.12.  
334.	In my view that is a conclusion which cannot be reached on the evidence before me.  It is important to bear in mind that the claimants have the burden of proof on this issue.  They are entitled to start with some puzzling entries, and with the position that BoNY apparently had an entitlement to £36,200, but what happened thereafter does not entitle one to find, on the balance of probabilities, that all accounting entries which reduced it to zero were wrong.  They may have been, but the evidence is too thin to allow for that conclusion.  Much may turn on the nature of the £21,000 entry referred to above.  If there was some justifiable offset in that amount, then the BoNY claim, if there was one, was some £14,000 or so.  As I have pointed out, a number of people must have been aware of the accounting entries which effectively apparently wiped out any BoNY credit, yet the entries were passed.  When people like Miss Nedza came to investigate, they were unable to determine what had happened, and unable to be clear that there was no justification for the reduction or removal of the BoNY credit.  Even BoNY itself was not particularly bothered about it, though I assume that they were offered the whole lot.  
335.	In the circumstances the evidence is not sufficient to justify on the balance of probabilities (and bearing in mind the burden of proof) a finding of a liability of £36,200 to BoNY.  Having said that, I think that it is sufficient to justify a finding that there were probably accounting mistakes and that there remained an apparent liability of the difference between the £36,200 and the £21,000 figure.  I find that that arose as a result of accounting errors and not as part of some wider or more sinister plot to keep moneys due to clients notwithstanding the absence of justification.  I do not find (if it is relevant) that Mr Brooks was in any meaningful way aware of any breach or shortcomings.  So far as he was informed of what was happening he was not sufficiently aware that there were mistakes (so far as there were) and that the result was the existence of an outstanding liability.
336.	Having thus concluded, I have to set those facts against the warranties to see if they amount to a breach.  Having set out the appropriate analysis above, I can do this briefly.
337.	So far as warranty 2.3 is concerned, the failure to account for excess commission would have been, to the extent of the £14,000, a breach of the express terms of the BoNY contract but for BoNY’s apparent lack of concern and indication that they did not want it back.  That lack of concern probably removes it as a breach.  Alternatively, BoNY’s lack of concern removes its materiality in the context of the contract.  Furthermore, any breach was not material in the context of the business of GAS.   Its nature (an accounting muddle) and its amount, even when combined, do not in my view allow that conclusion.  There was therefore no breach of warranty 2.3 in this respect.
338.	So far as warranty 3.12 is concerned there is no breach because a failure to account for rebated commission is not something which requires reversal or repayment of the nature referred to in that clause, which is about something else.
339.	Since any effect of the breach would have been reflected in the accounts for the year ended September 06 rather than September 07, that error is not relevant to warranty 4.1, which refers only to the later year.  
Commission – related claim - Rotch Property Company
340.	This claim relates to another amount which was taken to income (and therefore turnover) in the year ended September 07 and which the claimants say was wrongly so taken, so that there is a further breach of warranty 4.1.   (Miss Newman’s written reply submissions disclaimed any reliance on the other warranties.  Her opening made clear that this claim related to warranty 4.1.)  This aspect of the claim relates to commissions as between GAS and the insurer – it is not a client rebate matter.   The relevant client was Rotch Property Company.  This company apparently had some risk insurance with Canada Life, placed through GAS.  
341.	Few facts are known, or were adduced in evidence, in relation to this.  The books and records show 4 sums (755.30, £1524, £580.32 and £2311.72) on the insurance ledger against Canada Life (and related to Rotch) being aggregated and (subject to a set off of a sum of about £7) taken to income via a sweep up invoice on 15th May 2007.  The dates involved show that this sweep up occurred only some 5 months after the sums were received on to the ledger.  The invoice records the sweep up as being of commissions.  
342.	That is all that is known.  Miss Newman says that the fact that the sums were entered on the ledger shows that they were recorded as owing to the insurer, and the absence of a proper form of invoice directed to that insurer shows that they were not taken pursuant to a proper transaction.   Accordingly, GAS was helping itself to funds that it was not entitled to, and they wrongly inflated the turnover for the year.  Since the sweep up was within 2 years, then it did not fall within the 2 year sweep up disclosed in the Disclosure Letter.
343.	Mr Brooks and Mr Fenn were cross-examined about this particular matter.  Neither knew anything about it, and both could do no more than comment on the ledger entries.  The person who might have known about it was Mr Davey, whose name appears on the ledger as having some association with it.  He was not called.  Nor was there any evidence from Rotch Properties or Canada Life. 
344.	This evidence is too thin to enable me to draw the conclusions sought by Miss Newman.  Mr Brooks could only comment that, since the sweep up was within the 2 year period, there must have been some reason for it but he did not know what it was.   The burden of establishing that the sweep up invoice and the taking to income was wrongful, and therefore wrongly appears in the Accounts, lies with the claimants.  They have failed to discharge it.  They do not discharge it merely by pointing out that balances on the insurance ledger were taken to income within 2 years, and in truth this all that they have established.    The fact that the moneys were taken within 2 years does not, of itself, give rise to a claim.  It merely means that the defendants could not have relied on the disclosure to resist a claim based on the matter if otherwise the claim appeared to be good.
345.	This part of the claim therefore fails.  I would add that the inclusion of this matter demonstrates the determination of Dunedin to assert any claim, no matter how small, which they considered might ram their case home.  In the context of this case it was never, in my view, going to make a difference.  Success or failure was going to come with the major matters, and this point was not going to make a difference to that.  It is regrettable that it was included and that time was taken on it in the trial (though, to be fair, not a lot of time was taken).

The rebate practices of GAS
346.	In addition to the specific rebate matters dealt with above, the claimants say that the existence of the policy of Mr Brooks was a matter going to the second part of warranty 2.3 (so far as the Warrantors were aware, there were no facts or circumstances in existence which were likely to give rise to material breaches of express terms).  This element of the claim was pleaded, and referred to, after a fashion, in Miss Newman’s final written arguments, and in her oral closing speech she referred to it again.  However, as a separate claim it did not otherwise figure largely in the action.  The focus was on the six specific matters that I have referred to above.  However, it is relied on as a separate matter, and I should deal with it.
347.	I find that the policy stance taken by Mr Brooks in relation to rebates payable to lost clients was a fact or circumstance likely to give rise to a breach of the obligation to pay in relation to the future.   There were, at the time of the SPA, likely to be more occasions on which it would have been invoked, to the detriment of lost clients.  Materiality remains an ingredient of this limb (“such a breach”) and this time, in my view, the requirement is fulfilled in relation to it.  It goes to important aspects of the client relationship. 
348.	That means that liability turns on the awareness of the Warrantors.  This is elaborated in clause 1.2.9 of the SPA (see the Appendix).  It was not demonstrated that either Mr Breslin or Mr Dawson actually knew of that policy as propounded by Mr Brooks, so the question becomes one of what they would have discovered had they asked the people referred to in clause 1.2.9.  Had they asked any of them other than Mr Brooks they would not have learned of the policy as Mr Brooks operated it.  It is Mr Brooks’s version that is the most extreme.  What the others understood to be involved (at least in the case of some of them) was an approach to the client to get an agreement.  But I do not need to consider such individual refinements as they might have gleaned from the others, because from Mr Brooks they would have learned of a blanket policy that was inappropriate.  It was, in my view, likely to lead to future breaches of express terms when applied in future years.  
349.	I therefore find that there was therefore a breach of the second limb of warranty 2.3.  However, its significance must not be overstated.  The evidence was that there were not many lost clients, so the scope for this having a serious financial impact on the business was very limited.  The best endeavours of the claimants have only turned up the 6 cases of apparently wrongly taken rebates in the 2007 financial year.  I think it likely that so far as it was ever intended to operate, it would not operate in relation to individual large sums.  I do not consider that Mr Brooks’s robustness would go that far.  It was his way of dealing with tiresome  small sums.   Because it was only his policy, I do not consider that it would, of itself, have had a widespread affect in the future, and while its nature probably makes it material, its financial significance would be limited.
Rebates and commissions in 2008 and 2009
350.	As foreshadowed earlier in this judgment, there was some reference in this case to the accounts and trading in the two years following the acquisition.  Part of Mr Gogel’s evidence, and part of the evidence in the case, went to the question of whether the manner of doing business after the SPA betrayed the same faults in terms of how commissions and rebates were dealt with as were said to be apparent in 2007.  However, this point was introduced by Miss Newman only by way of rebuttal of an allegation by the defendants which sought to rely on the apparent figures for 2008 and 2009 as being consistent with the figures for 2007 and with Dunedin’s projections.  The claimants were prepared to say that the later years’ figures were inflated by similar matters to those debated in relation to 2007 as inflating turnover.  
351.	To have gone into that point would have required an intensive and detailed analysis of a large number of transactions in those two years.  It would have required voluminous disclosure and a lot more oral evidence.  None of those things had been done before the trial.  However, that is (mercifully) not a problem because the approach of the parties meant that I did not have to go into the point.  Since it was a rebuttal point, it depended on how the rebutted point was pursued.  Mr Neish did not pursue it in such a way as made the rebuttal case necessary, so I do not need to make findings about those later years.

Aggregating the shortcomings
352.	So far I have considered each of the alleged breaches separately.  So far as concerns turnover, there is an additional point.  Had I not decided that the Liberata turnover point was material to the accounts, it would have been necessary to consider whether a combination of the other established claims going to turnover which were not material in themselves should be aggregated with the Liberata sum so as to establish a greater shortcoming which might be material for the purposes of warranty 4.1 (the accounts warranty).  Although it may not be strictly necessary to deal with this point for liability purposes in the light of my conclusions elsewhere, I will nonetheless state my brief conclusions on it.  The point may have a relevance when considering causation and damages.
353.	There was not much debate about the appropriateness of aggregating these sums, but in principal it seems to me that they should be, for these purposes.  The relevant test for these purposes is whether the accounts showed a true and fair view of the affairs of the company and of profit and losses.  In asking that question one asks what the accounts showed, and what they ought to have showed.  The latter question involves taking relevant shortcomings in aggregate, because properly drawn accounts ought to have shown their effect in aggregate.  Imagine this warranty given in relation to accounts in respect of which a £50,000 error would be material, but a £500 one not, and then imagine 100 £500 errors.  It would be nonsensical to say that since none of individual errors were individually material the accounts were therefore not materially mis-stated.  On those facts, there would be a £50,000 error in the accounts, and the fact that it was made up of a number of small, and otherwise immaterial, items cannot matter. 
354.	 When it comes to assessing damages, the experts are at one as to the correct approach, which is that a purchaser would be considering the real value of the company on the true turnover figures, and they therefore take out all the disputed items.  This is a different aggregation point, as to which there seems to have been no dispute, unless it is within a point taken by Mr Neish about a failure of the claimants to prove what damages flow from the breach, which I deal with below.
Conclusion on liability thus far
355.	Thus far in the reasoning I therefore conclude:
(a)  There was a breach of the accounts warranty (4.1).
(b)  There was no breach of warranty 3.12
(c) There was a limited breach of warranty 2.3.

356.	Before moving on to consider the effect of that in terms of causation and damage, I need to deal with certain other defences and other matters relating to knowledge.

Did Mr Brooks attempt to hide the Liberata compensation and the other matters?
357.	Although it was not strictly a necessary part of Dunedin’s case to say that Mr Brooks took steps to hide the presence of the Liberata and AXA compensation sums in the turnover, it seems that senior people within Dunedin (Mr Derry and Mr Middleton) believed that he did do something like that.  In fairness to Mr Brooks in this litigation, I should make some findings about it.
358.	I find that Mr Brooks did not do that, and I find it for various reasons:
(a)  There is no obvious motive for his doing so.  He was not himself a vendor, so he had no motive as a vendor to inflate the price or propel a sale which would otherwise be affected by the sums involved.  Indeed, he was a purchaser, not a vendor.  The absence of motive is not fatal to an allegation of “hiding”, but the absence of a plausible motive is a pointer against it.
(b)  As an experienced accountant he would have realised that the amounts might be found at any time, and especially after the completion.  Dunedin had access to whatever financial information they wanted.  He would have anticipated that they might, at any moment, come across it, either in the records of GAS or from contacts with Rees Pollock and a study of their audit papers (which a draft GT report recommended be looked at).  The treatment of the Liberata compensation as turnover was there for all to see if they looked at emails (though I accept that they would not have been looked at during the purchase procedure) and various individuals knew of it.
(c)  Because various other individuals knew of it, he ought logically to have conspired with them to make sure they did not let it slip.  However, there is no suggestion that he did that.
(d)  For him to have taken that deliberate step he would have had to have appreciated just how significant it was to Dunedin.  There is no evidence that he did, and it is not plausible that he can have known that.  He would have appreciated that there was a possibility that the greater the turnover, the higher the price, but he cannot have known by how much, and cannot have known that it would have made all the difference to Dunedin’s models, which is its real significance.  The lack of appreciation of that fact makes it less likely that he would have gone out of his way to hide the true position, or to disguise it in the first place.  

Dunedin’s knowledge of the Liberata compensation matter
359.	This point is capable of going to various aspects of the case:
(i)  There is no claim under the warranty if the matter was “fairly disclosed” within the meaning of clause 8.1.1 of the SPA.

(ii)  There is no liability under the warranties to the extent that Sycamore (having made due inquiries of Mr Derry and Mr Ma)  was actually aware of facts which actually constituted a claim for breach of warranty, pursuant to clause 8.1.10 of the SPA.  

(iii)  It is capable of going to the question of reliance, so far as misrepresentation is relevant, and whether Dunedin would have acted differently had the accounts treated the compensation differently, which goes to the question of loss.
360.	It is the case of the defendants that Dunedin knew enough about the Liberata compensation to bring the matter within those two clauses of the SPA, and Dunedin (and therefore Sycamore) knew enough such that the actual accounting treatment of the compensation made no difference to their view of the transaction and therefore to the price paid by Dunedin.
361.	In considering this matter it is necessary to revisit some of the chronological narrative appearing above, though I have dealt with some of the points that arise in the course of that narrative.  It will be convenient to draw the strands together here.
362.	 The case of the defendants is as follows:
(i)  It is inherently probable that the Liberata compensation would have been mentioned at the initial meeting on 5th July, because the Liberata contract and the reasons for its intended termination were discussed.  It would have been natural to discuss the compensation.

(ii)  Since Flex was discussed at the meeting on 17th July, it is inherently probable that Liberata and its problems, and therefore the compensation, would have come up.

(iii)  Liberata was plainly discussed at the meeting on 9th  August, and it is inherently probable that the subject of the compensation would have come up as a natural extension of the discussion.  This probability is said to have been increased by the fact that Mr Kilbey’s evidence was that the MBO team’s forecasts and methodology were discussed at a meeting which was most likely this meeting.  Since the renewal forecast removed non-recurring items, of which Liberata was one, it is said that there is every reason to suppose that the Liberata compensation would have been mentioned in that context.

(iv)  Bearing in mind the purpose of the meetings, and bearing in mind the documents to which GT had access, it is inherently probable that the compensation was mentioned to Mr Gagg at meetings attended by him, Mr Ma and Mr Brooks on 17th and 21st September.  In this context Mr Neish invited me to note that Mr Gagg had not been called by the claimants to give evidence.

(v)  Mr Kilbey gave evidence that he had specifically discussed the circumstances in which  Flex clients, including Daimler Chrysler, had been lost, in discussions with Dunedin, by reference to the information he provided on 21st August 2007 in response to a request from Mr Ma.  Mr Ma could not recall the detail of these discussions.

(vi)  Last, there is said to be what happened in relation to communications as to the loss of VT in October.  This point requires a little further factual elaboration.
363.	When Mr Kilbey and Mr Brooks told Dunedin (Mr Derry and Mr Ma) that VT had been lost, they gave as one of the reasons the shortcomings of Liberata – VT was a Flex client.  That much is accepted by Mr Derry, and I find that that was in fact said between them.  Mr Kilbey also observed in his evidence that he could tell that complaints about Liberata were not new to Mr Derry.  Mr Derry accepts that too, and again I find it as a fact.  In his follow-up e-mail Mr Kilbey refers to amelioration as a result of “any compensation payable as a result of this lost client”.  Mr Neish vests this reference to “compensation” with considerable significance.   He says that the fact that this was mentioned without elaboration being sought indicates that Mr Derry and Mr Ma already knew what  was being talked about.  
364.	Drawing on all this material, Mr Neish submitted that Dunedin not only knew about the Liberata compensation in a generalised way; they also knew that it accounted for £260,000 of GAS’s income for the y/e September 2007.  
365.	I have considered this evidence carefully, and do not consider that it goes as far as Mr Neish says it goes.  I have set out my conclusions as to the extent to which the Liberata compensation was mentioned at the earlier meetings in the course of the chronological section of this judgment.  It is an inevitable conclusion that problems with Liberata were mentioned in those meetings.  That was the reason why management planned to terminate the agreement.  Mr Derry admitted that he knew of those problems.  That is why such problems were not a surprise when mentioned at the first meeting about VT.  However, it does not follow that the compensation agreement, and the payment of compensation, was also mentioned at these meetings, and I find it was not, or at least not in any more than a passing fashion which meant it got lost in the rest of the apparently more important material that was being conveyed.  It was not brought home to Dunedin in such a way as to lead Mr Derry or Mr Ma to realise it was a point of any significance.  This applies even to such reference as might have been made in the course of the meetings at which Mr Brooks was dealing with non-recurring items.  The focus of those meetings was likely to have been on the future forecasts, not the current year, which makes it less likely that it was referred to in such a way as to vest it with any real significance so far as the Dunedin participants were concerned.  
366.	The stress laid by Mr Neish on the reference to compensation in the e-mail which followed the VT disclosure meeting is misplaced.  I think he would invite me to draw the inference that it must have been mentioned at the meeting because it was mentioned in the e-mail.  He draws attention to the fact that Mr Kilbey said he was working from an aide-memoire, and I think would wish me to draw the conclusion that his e-mail was drawn from that aide-memoire.  If that were the case then Mr Neish might have been able to take some comfort from the fact that the question of compensation was raised at the meeting and was in no way challenged or queried by Mr Derry or Mr Ma.  However, I am not prepared to find that there was such a reference at the meeting.  The e-mail does not read like an e-mail which summarises what had been said at the meeting.  It reads more like an e-mail which seeks to develop what was said at the meeting, by providing some detail as to why it was that it was said by GAS that the financial consequences of the loss of the client were not as bad as they might seem.  One of the ameliorating factors was the possibility of compensation being paid.  The relevant paragraph of the letter does not read as a cross-reference to history.  It really is merely an additional ameliorating factor.  That being the case, there is no inference to be drawn adverse to Dunedin from any failure on the part of Mr Derry to react to the reference to compensation.
367.	Various things stand out in this respect.  The first is that no GAS witness was actually able to say from his own recollection that the compensation agreement, and the sum paid under it, was actually referred to at any of the meetings.  All Mr Neish’s submissions are couched in terms of its being probable or inherently probable that it was mentioned.  It is of course the case that a lot of detail surrounding negotiations such as those which took place during the acquisition of GAS will get lost in the mists of time.  However, if the point was of any significance, one might have thought that someone would remember it. 
368.	Perhaps a little more significant is the fact that, with one exception, there is no reference to it in any of the documents in the case, and in particular in Mr Derry’s note where he does refer to compensation in the future which would become payable when the Liberata agreement was terminated.  I think that the attention to detail of the Dunedin representatives was such that, had it been mentioned, it would have been noted somewhere.
369.	The one exception to the general absence of a note is what can now be seen to be a reference to the compensation in a three-page small print schedule sent by Mr Fenn  to Kelly Gaves of Grant Thornton on 3rd October 2007.  The e-mail stated that he attached
“The schedule analysing all debits over £10k as agreed with David [Brooks]”

370.	The attached schedule lists a large number of transactions of varying degrees of obscurity, but the fifth is listed (so as to be visible to those with a magnifying glass) as:

“Flex Inv Prepay – Liberata Comp… 33,000”

And the sixth is:

“Flex Inv Prepay Lib Comp … 33,000”.

371.	The purpose of this document was obviously not to disclose that compensation.  It was to disclose something else.  As a reference to apparent compensation (if it would be fair to say that “Comp” was intended to be a reference to compensation) it was pretty obscure.  In my view it plainly cannot be said to amount to a conveyance of any worthwhile detailed knowledge about the Liberata compensation to someone who knew nothing about it before reading this document.  It might have some significance if there had been some relevant prior disclosure of the point, but in that case the real disclosure would have come from that prior disclosure and not from this document.  In the absence of any prior ground-laying, it would not convey anything useful on the point.  For the reasons given above, there was no such prior ground-laying.  It cannot be said this reference “enable[d] the Buyer to make an informed assessment of the matter concerned and its significance” if that matter is the Liberata compensation and its position in turnover.  Furthermore there is no suggestion that it ever came to the attention of Dunedin, as opposed to Grant Thornton.
372.	For the sake of completeness, I should also add that there is one further document which, with the assistance of further information, can be seen to be a reference to the Liberata compensation sum.  On 4th October Mr Calvert-Lee started to put together two schedules.  They are each entitled “GAS Fee Income YTD September 2007 by Client”.  The longer one lists a significant number of entries running to 5 1/2 pages and totalling £4.5m.  The first entry is “Gissings Consultancy Services Limited - 260,000.00”.  That is a reference to the Liberata compensation sum.  It also contains a reference to “AXA PPP Healthcare" in a sum of over £163,000 – this was apparently a reference to sums due under the AXA arrangement.  The second, shorter, document lists the top 20 clients in terms of income, but omits the Liberata (GCSL) and AXA amounts.  These lists were sent to PwC on 25th October 2007 and were placed in the data room shortly thereafter.  The shorter document was also expressly referred to in the Disclosure Letter.  Mr Ma, who looked at documents in the data room, could not remember whether or not he saw the longer of the two documents.  Whether or not he looked at it, he would not have been able to see from that document that there had been any compensation agreement relating to Liberata (or anyone else).  While it refers to a sum which can now be seen to relate to that agreement, it does not do so in terms.  Again, therefore, it does not amount to the means of knowledge or disclosure within the meaning of the relevant provisions.
373.	What this amounts to, therefore, is that scattered through the chronology there were various bits of a jigsaw which, with the benefit of hindsight, can be seen now to be a reference from time to time to the Liberata compensation agreement and to the amount of that compensation.  However, at no time did all those pieces come together so as to enable Dunedin to see the whole picture to such an extent that Dunedin can be said to have known of the compensation and, critically for the purposes of this case (as accepted by Mr Neish) that it formed part of the turnover figure for the y/e September 2007.
374.	In this section of this judgment I deal only with the knowledge of Dunedin employees and directors.  Separate questions arise in relation to the knowledge of GT, and the attribution of any such knowledge to Dunedin, and a yet further separate question arises in relation to the attribution of knowledge of Mr Brooks.  I deal with those points separately in this judgment.

What did Grant Thornton know, and what is its significance?
375.	What GT knew has, or may have, a double significance.  First, if GT knew something relevant about the matters which are in issue in this case then a question arises as to whether or not that knowledge should be attributed to Dunedin, and thence to Sycamore.  Second, if GT acquired some relevant knowledge, then a question arises as to whether or not they actually communicated it to Dunedin so that Dunedin thereby actually knew, or had additional material which they could put together with what they otherwise knew.
376.	What GT actually knew has to be a matter of inference because the claimants did not call any witness from GT.  This is slightly surprising in a case in which each side has adduced evidence going into large amounts of detail.  From time to time Mr Neish drew attention to this failure.  There was no apparent, or apparently good, reason for not calling Mr Gagg (or some other witness), and in this case I treat that as having some evidential significance as going against the case of the claimants.  I consider that it betokens that GT may have some less than helpful evidence to give (from the claimants’ perspective).
377.	There is material from which it can be inferred that GT had probably identified at least some aspects of the Liberata payments as part of the income for the year ended September 2007.  At page 4 of their final report they said they had performed a detailed review of the historical trading results for the three years to September 2007:
“in order to understand both the underlying operating results of GAS and to identify the exceptional items occurring in the period.”

They had access to all ledgers, and could ask for whatever accounting records they wanted.  As appears from the narrative above, in mid-September, and in particular at the meeting on 21st September, they were seeking, and probably had, a discussion with Mr Brooks about the forecasts and how they were made up. 
378.	However, I do not consider that they acquired enough relevant knowledge of the Liberata compensation and its presence in, and impact on, turnover for these purposes.   It is likely that most of the debate centred on forecasts for the years ended September 2008 and 2009.  It must be remembered that at the time of that meeting the figures for the year ended September 2007 were still forecasts in that the year had not finished, albeit that most of the data was likely to be in and any missing elements highly predictable, but the emphasis was probably on the future, and in particular on how Mr Brooks had predicted the income for future years.  It is probable that at a meeting like that there will have been some reference to the non-recurring items, but it is unlikely that there was a detailed discussion of them, precisely because they were non-recurring and therefore would not directly feature in a forecast.  The aggregate of the sums for which GCSL was invoiced would presumably have been treated as a one-off item for that year.  If  there was a reference to one-off items, I do not think it likely that there was an extensive reference to the matter in the form of a reference to and discussion (in any meaningful sense) of the compensation deal itself.  Mr Brooks was unable to say that there was, and I think it quite likely that he would have remembered it if there had been. What I think more likely is that there was a reference to it, among a lot of other things, in such a way as to relate the sums in some non-developed way to Liberata.  And it is highly unlikely that any debate was sufficient to enable GT to identify that the compensation should not have appeared in turnover.  All that is not enough for the defendants’ purposes since it would not fall within the closing words of clause 8.1.1 of the SPA.  Since Mr Ma was at this meeting, it would follow that he received the same general information.  It passed him by as having no significance in the context in which it was uttered. 
379.	For the sake of completeness I need to return in this context to the email of 3rd October (see above) and the document in the dataroom which shows GCSL as a debtor in the amount of the Liberata compensation.  These do not amount to material which increases the knowledge (such as it was) of Grant Thornton, for the reasons appearing above.  
Is GT’s knowledge attributable to Sycamore?
380.	Since I have held that GT did not have any relevant knowledge this point does not arise.  There was a certain amount of debate about it.  Miss Newman submitted that since GT were independent contractors, and further not carrying out an audit but a due diligence exercise, their knowledge was not and could not be Sycamore’s for these purposes.  Mr Neish pointed out what he said was the absurdity of that position - if GT had actually identified something that would be a breach of warranty it would not come within the knowledge provisions unless they actually told Dunedin (and thereby gave the latter actual knowledge). That, he said, could not be right.  
381.	The point was the subject of obiter disagreement in the Court of Appeal in Infiniteland v Artisan Contracting [2006] 1 BCLC 632, with the majority expressing the view that Mr Neish’s claim would be wrong.  Mr Neish pointed to the minority dissent of Pill LJ.   There is much in Mr Neish’s point, but I doubt that it would be right for me to adopt a view contrary the majority view, even if it was obiter.  But on the facts that does not matter.

Is the knowledge of Mr Brooks, Mr Kilbey and Mr Barnes attributable to Sycamore for the purposes of clause 8.1.10?
382.	Mr Neish points out that by the date of the SPA and of completion these three gentlemen were directors of Sycamore.  Since they knew of the relevant facts on all breaches of warranty (or at least Mr Brooks did) then it is said that Sycamore (as Buyer) was actually aware of the facts because their knowledge is the “actual knowledge” of Sycamore.  He relies on what he describes as the principles of attribution in Stone and Rolls v Moore Stephens [2009] 1 AC 1391, and says that the situation is nothing to do with agency attribution.  Not surprisingly, Miss Newman disputes this, by reference to authority and to the absurdity of the situation were Mr Neish to be correct.
383.	Mr Neish's submissions on this point are extremely brief.  Although he does not articulate it in this way, they seem to be underpinned by the proposition that anything that the directors of Sycamore knew about the affairs of GAS would be attributed to Sycamore without more.  Such a simple proposition does not represent the law.
384.	Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500 is a case involving liability under a statute, in which the court had to consider the attribution of acts and knowledge in the context of regulatory requirements.  In that context Lord Hoffman said:

“But there will be many cases in which neither of these solutions is satisfactory; in which the court considers that the law was intended to apply to companies and that, although it excludes ordinary vicarious liability, insistence on the primary rules of attribution would in practice defeat that intention.  In such a case, the court must fashion a special rule of attribution for the particular substantive rule.  This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply?  Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc of the company?  One finds the answer to this question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy." (at page 507 D-E).

385.	The Court of Appeal considered the point in a contractual context in Jafari-Fini v Skillglass Ltd [2007] EWCA Civ 261.  At paragraph 97 Moore-Bick LJ said:

"In the context of an obligation which arises under a contract the task of identifying the natural persons whose knowledge or state of mind is to be attributed to the company for the purpose of that obligation can easily be identified as one of construing the contract.  It is therefore necessary to ask who among PAL's directors, employees and agents did the parties intend should be regarded as the company for the purposes of acquiring information that must be disclosed under clause 21.8.2.  In other words, whose knowledge is to be treated as the knowledge of PAL for these purposes?"

386.	Those citations alone demonstrate that the general proposition underlying Mr Neish's submission is false.  As Hoffman LJ observed in El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 at 715h:

“English law has never taken the view that the knowledge of a director [is] ipso facto imputed to the company - see Powles v Page (1846) 3 CB 15.”

The enquiry is more subtle than that.  It involves construing the contract and considering it against its factual background.  Furthermore, the capacity in which the knowledge was acquired is an important factor - see Jarafi-Fini at paragraph 92.
387.	The context of the contract in this case is that it is between two parties, one of whom is known to have a lot of information about the target company, and who is in a position to acquire more, and the other of whom is a purchasing company that has little relevant information without inquiry but which partly protects its position by taking promises from those who have knowledge or who can acquire it.  Hence clause 1.2.9.  That clause identifies certain individuals (including those whose knowledge Mr Neish relies on for these purposes) as being those who can provide information to the sellers.  They are, for these purposes, on the seller’s side of the line.  Their capacity as directors or employees of GAS is the one in which they acquired the relevant knowledge, and the SPA implicitly acknowledges that.  Although they were going to be part of the management buy-out, they remained in many ways on the seller’s side of the line until the SPA was entered into.  The promises were given to the buying party which was relying on those promises as giving real protection.  That buying party was, for these purposes, much more Dunedin than the MBO directors.
388.	In those circumstances it would, as Miss Newman submitted, defeat the purposes of the warranties if, having been made directors prior to completion, the directors brought with them all their knowledge and had it attributed to Sycamore for the purposes of clause 8 of the SPA.  Their knowledge was acquired whilst directors of GAS and not as directors of Sycamore, and there is no basis in law, commerce or common sense why that knowledge should suddenly magically be treated as the knowledge of Sycamore for the purposes of the SPA.  Whilst good order probably required that they be made directors before the sale was completed, that was not necessarily required by the structure of the transaction.  It would be absurd if this attribution of knowledge alleged by Mr Neish depended on whether they were made directors before or after the SPA was entered into.  The result ought to be the same in both events.  In my view it is, and the result is that their knowledge is not attributed to Sycamore.
389.	There is nothing in Stone & Rolls v Moore Stephens which adversely affects this conclusion.  While there were issues of attribution in that case, the context was different.  What the case demonstrates is the importance of context (in that case the application of the ex turpi causa maxim).  The context of the present inquiry is the SPA and in particular clause 8.1.10 and the concept of “actual knowledge” there. In my view Sycamore did not acquire “actual knowledge” of the relevant facts merely on Mr Brooks (and the others) becoming directors.  On its true construction that expression does not include what was in their heads at that time, for the reasons appearing above.

Damages
390.	It is therefore necessary to consider what damages the claimants are entitled to recover as a result of the breaches that I have found to exist.  To recapitulate, the breach or  breaches are breaches of warranty 4.1 in that the turnover of in the 2007 accounts was inflated by the Liberata amount, the AXA amount, the failure to include a related party transaction note;  and breach of warranty 2.3 by virtue of the consequences of Mr Brooks’s policy.   In fact, the way the case was put, the last two of those add nothing material to the others.  If the notice had been there it would have added nothing material to the correct amount which would have appeared in turnover anyway, and the correct reflection of those two major amounts in the right part of the Accounts (which is the converse of their removal from turnover).   It might have made a difference if I had not held the Accounts to be inaccurate by reason of the overstatement of turnover, because it would have been capable of drawing attention to what was in turnover, but since they ought not to have been there, and since that means that (for the purposes of damages) I have to imagine the situation as if they were not there, the related party notice breach adds nothing.  I can leave it out of account from now on.  The same applies to the last of the breaches.  It would not have had a perceptible financial consequence, bearing in mind its nature, and the real difference is made (if at all) by the overstatement of turnover.

Damages - the claimants’ case
391.	The claimants accept that damages for breach of warranty are to be calculated as at the date of the transaction.  Any other date was disavowed for these purposes.   (Contrast the position with the misrepresentation case, in which the date of the trial was proposed.)  They say that the measure of damages is the difference between the value the company would have had had the warranty been true, and the actual value of the company.  Since no-one suggested that the claimants had overpaid, the amount that it paid should be taken to be the former value.  So far as the latter is concerned, Mr Hine carried out a valuation of the company on an earnings basis and valued it at £11m if all the claimed elements were inappropriately included in turnover, or approximately £12m if only the £260,000 was so included.  In the light of my findings, the £11m is the one which falls to be tested.  In her final speech Miss Newman did not advance a vigorous separate case on the assumption that she won only on the other warranties, and in the light of my findings above it is not necessary to deal with that separate case. 

Damages - the defendants’ case
392.	The defendants do not dispute the date of assessment, or the relevant measure.  They do, however, have a prior point on loss, which is that no loss was caused because it is said that neither Dunedin’s decision to proceed nor the price it paid was affected by the Accounts.  Questions of both fact and law arise in relation to this.  They also do not agree on quantum.  Their first point is that when the forecasts are properly understood, the inflation of 2007 turnover should not affect those forecasts, so there would be no basis for a purchaser paying any less than Sycamore paid.  If they are wrong on that, then they rely on an exercise done by Mr Cottle in which he substitutes some different variables into Mr Hine’s exercise and comes up with a range of figures for the true value of the company at between £14m and £16m.

The defendants’ prior point - has any loss been caused at all?
393.	This part of the defendants’ case seeks to establish that the particular figures in the accounts did not impact on the decision to purchase in the sense that had the accounts been re-written to take out the turnover that ought not to have been there, Dunedin would still have purchased, and at the same price (allowing, of course, for the VT reduction).  
394.	In terms of legal submissions, this part of the case has its roots in the decision in Senate Electric Wholesalers v Alcatel Submarine Networks [1999] 2 Lloyds Ref 423. Mr Neish submitted that this case established the relatively simple causation proposition, that if the facts demonstrated that Dunedin would have purchased at the same price even if the accounts had not contained the inaccuracies alleged, then, as a matter of causation, Dunedin (Sycamore) has suffered no loss.  He claimed that the facts established that it would have made no difference if the accounts had been entirely accurate.
395.	I do not think that Senate Electrical v Alcatel establishes such a proposition.  The case is a complicated one involving share sale warranties, and it certainly centred round a consideration of what the seller would have done had it been aware of the inaccuracies (there, a mis-statement of profits).  It is also true that the trial judge considered what the sellers would have agreed to in a renegotiation had the inaccuracies come to light in the sale process.  However, it does not amount to a decision which demonstrates that that process goes to causation in the sense meant by Mr Neish.  
396.	What had happened in that case was that the trial judge rejected the basis of assessment of damage put forward by the plaintiff because it was too large. The way of calculating it was faulty because the way of calculating the lower (true) value of the company was done by deducting from the purchase price a sum that was too great to reflect the error properly.  The plaintiff had put forward no other method of calculation but the judge embarked on his own.  He chose to consider what price would have emerged in the negotiation had the negotiation proceeded on the accurate figures as representing the real value of the company on the footing that the warranties were accurate.  The Court of Appeal held that he should not have done that on the way the case was advanced before him.  
397.	Mr Neish’s point did not arise in that case, either at first instance (judging from the appellate report) or in the Court of Appeal.  I think Mr Neish would draw support from the fact that the trial judge considered what would have happened in the putative alternative negotiation, and infers that that goes to causation in the manner which he suggests, and that the Court of Appeal did not criticise that as an approach.   If that is his analysis then it does not seem to me to be right.  What the trial judge was trying to do in his exercise was to work out what the shares in question were really worth (i.e. with the right figures in the accounts).  He rejected the plaintiff’s method of assessment and embarked on a different one.  He thought he would get guidance by working out what the plaintiff would have paid if it had known the truth  - hence his putative negotiation.  He came up with a figure which generated a smaller difference than the plaintiff’s rejected approach.  The Court of Appeal held that there was a good case for saying that his alternative figure was too low, and that it might well be said that the plaintiff would have paid the same as it actually paid (see paragraph 65) but made no finding on the point.  But this was not a causation point in the sense intended by Mr Neish.  It is a way of measuring the actual value, which is different.  The question of what Dunedin would have done if it had known is capable of coming in in that way, but not as a causation question.  
The claimants’ case on loss - detail
398.	Mr Hine set about valuing the company on the basis of restated accounts (that is to say, accounts with all the claimed moneys omitted from turnover).  He did so by assuming that a purchaser would have prepared a similar model to that used by Dunedin in assessing value and price.  He used the following assumptions:
(a)  He used a lower figure for growth.  The Completion Model had assumed growth figures of 10%, 12% and 17% in each of 2007 and the following years.  Mr Hine took £329,000 out of the 2007 turnover (the aggregate of the sums complained about in this action) and £75,000 out of the 2006 turnover (about £14,000 for the BoNY matter and the £60,000 AXA compensation received in that year).  Taking those moneys out of turnover means that the actual growth for 2007 was 6%, and he scaled back the future years’ growth to 9% and 12% (and scaled back further future growth as well).  Overall, he viewed the business as having a lower growth potential.

(b)  By way of a cross-check, he carried out an alternative exercise based on forecasts by PwC on a division by division basis.  In the Information Memorandum PwC had provided forecast figures for the three divisions for the years 2007 to 2009 (together with some historic figures), broken down into Renewals, Initial and New, and some cost figures.  Dunedin (not Mr Hine) then took those figures and reverse engineered a model which created the anticipated growth shown by those figures.  Mr Hine then flexed this by making adjustments to the 2007 accounts to take out the amounts that should not have been reflected in those figures (Liberata etc).  This had an effect for the turnover figures in future years because it was assumed that forecasts of renewals was dependent on previous initial and new items, which were reduced for 2007 by taking out the larger items in issue in these proceedings.  This produced a pattern of growth which aligned itself with the pattern referred to in (a) (at least up to and including 2009) and gave Mr Hine comfort in relation to his first model.

(c)  He took his new growth figures and plugged them into the Completion Model. Having done that he then set about assessing (with the aid of the model) what level of consideration could be justified while still producing an acceptable rate of return.

(d)     An estimated consideration of £11m gives p/e ratios, IRRs and EBITA multiples which he considers to be comparable to those taken by Dunedin to be acceptable, when applied to a mixture of debt and equity that would be appropriate to a business which he believes to have had a lower growth potential.   That therefore gives him his £11m figure.

(e)  He then did the same sort of exercise just taking out the Liberata sum and got to about £12m.   

(f)  He also commented that a prospective purchaser would be interested in the accuracy of the target company’s forecasts.  The achievability of the 2007 forecast would therefore, as an item, be of interest to a purchaser of GAS, and the 2007 turnover figure with the disputed items taken out would make that figure fall short of forecast.  

The defendants’ case on loss - detail
399.	Mr Cottle produced his report on valuation after Mr Hine had produced his.  He starts by pointing out that Mr Hine’s valuation turns on the forecasts in the Completion Model, and queries whether this is appropriate as a matter of law.  Then he makes the following observations:

(a)  The Completion Model (and GT) seemed to have proceeded on a false assumption in relation to its growth figures for 2008.  The figure adopted in that model was taken from the Information Memorandum.  The 2008 income projection included a figure for projected renewals of policies.  GT and Dunedin seem to have assumed that the overall forecast turnover figure for that year was arrived at simply by applying a flat percentage growth to the various elements of turnover.  According to evidence from Mr Brooks, that is a wrong assumption.  The renewals element of the 2008 forecast figure (which was large - £5.1m) contained an assumption as to renewals of contracts that were “first time” contracts in 2007 – that is to say renewals of items that were categorised as Initial (sales of new products to existing clients) and New (sales of new products to new clients).  This element had in fact been conscientiously established by a transaction by transaction assessment,  not by simply applying some percentage to 2007 figures which Mr Hine had believed to be the case.  Accordingly the forecasts for 2008 were not affected by the appearance of the disputed matters in turnover (and by the presence of the Liberata amount in Initial).  

(b)  He points out that GT agreed the forecast for 2008 but reduced the forecast for 2009 by £58,000, which was agreed by management.  They also said that they thought the starting point for 2008 might be too low and suggested further work to achieve it, but that the then present figure would understate revenue and make the forecasts more prudent.  

(c)  The Information Memorandum forecasts stopped in 2009.  The two years forecasts after that which appeared in the Completion Model (and earlier versions of the Dunedin model) were Dunedin’s own projections.

(d)  Since the renewals forecast for 2008 was built up on a client by client considered basis, and therefore excluded the Liberata and AXA sums, those sums were not included in turnover for forecasting purposes so arguments about turnover in this context were irrelevant.

(e)  The actual turnover results for 2008 demonstrated that a year on year growth rate of 15% was achieved in turnover in that year, assuming the exclusion of the Liberata and AXA sums in the 2007 figures.  If one excludes from the 2008 actual turnover figure the sum of £116,000 (which was taken out of the re-stated accounts for that year) there is still a growth rate of 12.5% in turnover. This would have achieved 94% of forecast turnover for 2008.

(f)  The £21,000 client rebate figure should be retained in turnover, as should the Rotch sum.

g)  The £36,000 BoNY figure should be retained in turnover for 2006.  

(h)  However, he agrees that whether or not the Liberata and AXA sums were properly classed as turnover as an accounting matter, a purchaser would want to exclude them from an assessment of turnover for the purposes of preparing future projections because such a purchaser would want to exclude one-off non-recurring items from turnover.

(i)  Forecasts prepared as Mr Brooks said the 2008 forecast was prepared will not have included unknown, unforeseen non-recurring items.  However, in practice it is in the nature of brokerage business to have receipts that are incapable of being allocated and in many cases those balances will ultimately be written back to income.  On that basis, the approach of Mr Hine of excluding all non-recurring items from 2007 actual figures and then downgrading growth assumptions will understate turnover for 2008 and future years.

(j)  He acknowledges that the approach of Mr Hine, based on a misunderstanding as to how the 2008 forecasts were prepared, and which therefore apply a mere mathematical factor to previous figures in order to achieve forecast growth, would cause a purchaser to have lower expectations as to the achievability of future growth, which would in turn lead to a reluctance to pay the same level of consideration for the business.  Nonetheless, he observes that the forecasts and the manner in which they were prepared were not the subject of warranties.

(k)  If the 2008 forecasts were prepared in the way described by Mr Brooks, then those forecasts were unaffected by arguments about the whereabouts of the Liberata and AXA compensation.  If the business was purchased primarily for its future growth prospects and the forecasts in the IM and GT reports (the latter being based largely on the former) were reasonable, then the whereabouts of the compensation should not have affected the purchase price.

(l)  He notes that the Completion Model is an artificial and mechanical exercise, and does not necessarily reflect what would have happened in a bargaining situation.  Furthermore, if Mr Brooks is right in how the 2008 forecasts figure for turnover was arrived at (i.e. real assessments of renewal income as opposed to the automatic application of a percentage increase across the board) then the model does not reflect how parties at the time would have perceived the real world to operate.

(m) Whilst acknowledging that matters of fact are for the court and not for him, he wonders whether the view of Mr Derry that there was potential for growth through acquisition would have made it less likely that Mr Derry would have risked losing the whole transaction because of a lower 2007 turnover figure.

(n) He reworks the model removing £329,000 from turnover for 2007 (and £75,000 for 2006, as Mr Hine did) and keeping the growth rate assumptions from the original model and leaving the debt repayment and financing structure the same as well.  On those assumptions, a purchase price of around £16m would be appropriate to produce the same rates of return as Dunedin's Completion Model.

(o) In a second model he reduces the turnover in the same way whilst maintaining the original growth percentages and profit margin assumptions.  In order to reflect uncertainty he has adopted the same assumptions as Mr Hine in respect of the financing structure, debt repayment and exit multiple.  The appropriate price on that basis would be approximately £14m.

(p)  He carries out a third exercise which utilises the negotiated effects of the loss of VT Group.  In the negotiation which followed the disclosure of this loss a reduction in the price paid was agreed at £750,000.  The turnover figures from that Group for 2008 was £120,000.  If one applies that ratio of price paid to reduce turnover (750,000:120,000) to £329,000 (the aggregate of all the sums claimed to have been wrongly included in 2007 turnover) one comes up with a reduction figure of just over £2m, taking a consideration down to approximately £15,000,000.

400.	It should be noted that in all this Mr Cottle neither explicitly accepts nor repudiates the use of the Completion Model.  When plugging in different figures he merely assumes Mr Hine’s approach in doing so, and varies the assumptions.  Accordingly, other methods of arriving at a value are not considered by him, apart from looking at the circumstances of the VT Group price reduction, which he uses as a sort of check.

Loss - issues arising
401.	Since the basic measure of damages is agreed, and it is agreed that (subject to the defendants’ point on causation which I have just rejected) the relevant inquiry is as to the value of GAS on the transaction date, it is necessary to isolate the issues that arise, or have been made to arise, in that exercise.  They are as follows:

(a)  Is the Dunedin Model an appropriate way of arriving at a valuation of the business as it actually was?
(b)  If so, what assumptions should be made about forecasts, returns and funding models for the purposes of considering that model?
(c)  Is an inquiry as to what Dunedin would have done if informed about the warranty breach matters relevant?
(d)  If so, what is its relevance, and what is its result?
(e)  What figure is thrown up by the correct exercise?
(f)  Mr Neish also raised an issue as to whether Dunedin relied on the audited accounts at all.  This point relies on timing - the audited accounts in their final form only appeared very late in the day.

402.	I shall deal with all these points, though not in that order.

What would Dunedin have done - relevance
403.	I have already rejected Mr Neish’s submissions that it is necessary to consider what Dunedin would have done if they had discovered the breach of warranty material before completion so far as those submissions are said to go directly to causation.  However, it is necessary to revisit the point in the context of a calculation of damages.  In Senate Electrical v Alcatel the trial judge adopted an approach which involved an equivalent inquiry.  As already pointed out, he did so not as a causation point of the kind propounded by Mr Neish, but as a way of approaching the measure of damages.  He considered he had material for concluding that had the true (warranted) profit figures in that case been available, the purchaser would have done a deal at a lesser price which he felt able to identify, and that one incentive for doing the deal at that price was the presence in the market of an alternative purchaser.  He took the resulting figure as being the value of the company.
404.	As stated above, the Court of Appeal held that he should not have done that on the evidence that he had and on the way the case had been run before him.  They did not, however, disapprove of the approach as a way of getting to the proper value had the material and course of the trial before the judge justified it.  It is also relevant as part of this inquiry to consider the effect of another potential purchaser in the market.  Such a purchaser might support the existing price despite the warranty breach material - see paragraph 66.
405.	This accords with principle.  The exercise is a valuation.  The purpose of the valuation is to find what a willing purchaser would pay to a willing seller.  There are various ways of conducting this investigation.  In the absence of an apparent market from which a price can be derived, other techniques have to be used.  Assuming a purchaser who would use a model like Dunedin’s is one technique (to which I will come later).  But the views of the  actual purchaser and of another potential purchaser are not irrelevant.  If the purchaser would have paid the same sum anyway, then that goes to value.  If another purchaser is in the wind, so that that purchaser’s price has to be beaten to secure the transaction, then that goes to value too.  
406.	It is therefore necessary to consider Mr Neish’s point in this context.  Its success depends on the facts, to which I now turn.

What would Dunedin have done - the facts
407.	Mr Neish advanced strongly the case that the difference in the turnover figure would have made no difference to what Dunedin would have done even if they had known about it.  Dunedin would still have purchased at the same price.  The same applies in relation to the absence of the related party notice – Dunedin would still have bought, at the same price, even if the related party notice had been in the Accounts.  His reasoning depended on what he said was the overall approach of Dunedin, but it can be analysed under the following headings:

(a)  The Completion Model and its predecessors were not as important to the final decision as Dunedin made out.   It was a way of checking pricing, but that sort of modelling was not as significant as the prospects of acquisitions and the result of horse-trading.

(b)  The purchase was attractive to Dunedin because of the possibility of expanding the business by making future acquisitions.  This was a real driver of the acquisition, and would not have been affected by the turnover adjustment.

(c)  Mr Breslin would not have tolerated a further deduction (after the VT deduction) and would have walked away from the transaction.  Dunedin would not have wanted to lose the deal, and if the real effect of the inflation in turnover from the two principal items (the Liberata and AXA sums) had been explained it could have been demonstrated that they did not have the effect on Dunedin’s judgment that the Dunedin witnessses alleged.  Accordingly, there would have been no negotiated adjustment and the transaction would have gone ahead at the same price.

(d)  The 2007 Accounts in fact played no role in the modelling or the agreement to acquire GAS.

I shall take those points in turn.

The importance of the models
408.	Mr Neish starts by pointing out how much of the models is said to be Dunedin’s own work.  The forecast figures for 2007 to 2009 were taken from the IM for the first  model, but they were not warranted and the IM made it clear that the defendants took no responsibility for the figures in it.  It was up to Dunedin (or anyone else using the IM) to form their own views.  The risk was therefore on Dunedin.   The forecasts for 2010 to 2012 were all Dunedin’s own work, and contained growth models which Mr Derry considered to be conservative.  The model was not used to generate a price; it was used to check a price.  It generated the multiples which any given purchase and sale prices would give rise to and forecast returns based in part on Dunedin’s own forecasts about the business.  The same is true of later models.  
409.	Thus the Completion Model too was not used to generate the eventual price.  It was used to check a price which had been arrived at otherwise, and indeed which had been agreed as a matter of horse-trade dealing.  By this time the model contained some input from GT (who had reduced one of the forecast sales figures by £58,000).  Mr Neish said that since the price was agreed, the model had little significance.  This was the model which had the first reference to the £6,007,000 turnover figure in it as an actual and even that figure did not come from the Accounts (which were not yet prepared) - it came from management accounts.  (It will be remembered that previous models had contained a forecast which was about £40,000 less).  Despite the fact that by the time of the Completion Model the loss of VT was known about, no attempt was made to remodel the particular effect of that loss, which shows Dunedin’s lack of concern about such matters.  Even with that loss, the returns on the finally agreed price were going to be well within Dunedin’s usual target multiples.
410.	Based on all these factors, Mr Neish says that the models were not nearly as important as the Dunedin witnesses maintained.  That being the case, model-related effects of the removal of the disputed sums from turnover would not have had the dramatic effect of making Dunedin back out of the transaction.  Indeed, if they had had disclosure they would have left the price where it was.
411.	The correctness of the last conclusion (no reduction in price) will have to await a consideration of all relevant factors together.  For the moment I will consider the strength of Mr Neish’s submissions on the importance of the models.  I consider that they do not represent reality.  I find that the modelling exercise was a very important one for Dunedin.  It was obviously something that they carried out on a regular basis (probably for every transaction), and was something that they obviously found of the greatest assistance.  I accept the evidence of the Dunedin witnesses about the sort of financial parameters (especially those relating to returns) which they said governed their transactions.  They could only assess those by their model.  They were not doing it for fun, and they were not doing it as a casual adjunct to an even more judgment based assessment of things such as the likelihood of acquisitions.  If the numbers in the models did not stack up, then they would not be likely to do the deal on which those numbers were based.  Though the models were not used to generate a price  they were used to show the returns to be expected and thus to confirm (or otherwise) the merits of a price. They obviously had great significance.  
412.	The failure to remodel them specifically in relation to the VT disclosure does not affect this conclusion.  Dunedin obviously took a view on how that would affect the transaction, bearing in mind the amounts involved and the saving of cost that would result.  That was a judgment call rather than detailed calculation fed into the model, but it does not mean that the models did not have much significance otherwise.

The importance of acquisitions
413.	As a corollary to his submissions as to the lack of importance of the models, Mr Neish says that the role of future acquisitions was much more in the minds of Dunedin than they were prepared to admit. They really saw a very large part of the future of GAS in making profitable acquisitions, and this was where a very large part of the future benefit lay as far as they were concerned.   Since this was the case, and since removing the disputed sums from turnover would not affect this, this was said to be strongly supportive of the view that disclosure of the warranty breach matters would have made no difference to Dunedin, who would have gone ahead at the same price.  
414.	Mr Neish relied on a large number of references in the documents to the significance of acquisitions.   I have set out some of them above.  He also relied on the following (I set them out briefly):

(a) Mr Derry’s interest in acquisitions started as early as 20th July 2007 when he wrote in the offer letter that he saw there was "plenty of capacity for follow-on funding as required for investment in the business and acquisitions".

(b) Target acquisitions were discussed at the 9th August meeting, and in a subsequent email he wrote that "There is a strong appetite from our side in funding further acquisitions and we are hopeful that we may be able to bring some previously unidentified acquisitions in your direction, not least the occupational health business".

(c) The day after that meeting Mr Ma wrote about "Deal dynamics" and wrote about a "Good potential for buy and build strategy…".

(d) Mr Ma’s minutes of the final Investment Committee meeting records: "Hunt acquisitions actively; Real returns to be made through acquisitions".

(e) A post-acquisition paper drafted by Mr Derry and Mr Ma for the Staffcare deal says: "The investment in [GAS] was predicated on supporting a buy and build strategy for the business.  Nothing to date either in the performance of GAS or in the market suggest that the strategy requires alteration."

415.	Mr Neish relies on other material but I do not need to set it out; I have borne it in mind.
416.	Mr Derry was heavily cross examined on this material.  It was put to him that acquisitions were very much something that Dunedin had in mind as underpinning the deal.  Mr Derry's line was that they certainly had acquisitions in mind, but it was an additional benefit and not the rationale of the deal.  The central thing was that the deal had to work in monetary terms without acquisitions; hence the modelling.
417.	I do not fully accept Mr Derry's line here.  I think that acquisitions played a rather greater role in his thinking, and probably in the thinking of others in Dunedin, than he was prepared to admit.  I think that he saw this company as being one that would thrive by expanding its activities through other companies, and that this was a very material part of the attraction for the deal that he was driving.  I do not think that future acquisitions were merely icing on the cake (my metaphor, not Mr Derry's, but it sums up the evidence that he sought to give).  I think that they were rather more integrated into his perception of the cake than that.
418.	However, I also find that acquisitions were not as important as Mr Neish submitted they were.  It was of the essence of Mr Neish's case that they were the predominant driver, or at least a more important driver than the modelling, capable of driving the modelling exercise into a somewhat subordinate position.  I do not think that that reflects reality either.  The deal was viewed as a combination of the two.  The modelling was, in my view, still central and the prospect of acquisitions would not trump the modelling exercise.
419.	I do not have to reach some sort of conclusion as to the proportional part in the thinking that each of those two elements played.  What I have to do is to weigh the strength of this factor along with the other elements relied on by Mr Neish in coming to a conclusion as to whether or not all these factors combined would have led to Dunedin not thinking the shortfall in turnover was sufficiently significant to change the terms of the deal.  I shall carry out that assessment later on.

What would have happened in a deemed renegotiation?
420.	Sycamore’s case is that had they known of the inflated turnover caused by the two principal matters, they would not themselves have bought GAS.  The figures would have fallen to be readjusted, and while the bottom line profit figure would not have been adjusted, the business would have looked different and unattractive to them.  In particular the pattern of projected growth would have caused great concern.  The prime measure used in looking at GAS was EBITA, to which turnover properly so called was crucial.  Growth in turnover was also crucial, and projected growth figures had to be plausible.  If the 2007 turnover was depleted by the removal of the two principal figures the growth figures for the ensuing years would be falsified, and would present too steep a curve for plausibility (the “hockey stick” point).  If it had been revealed that £200,000 of the Liberata payment had been applied to Flex, thus increasing the apparent turnover, then it would have revealed a rather more bleak picture for Flex itself when that figure was taken out.   Furthermore, it would mean that GAS had not met its own projections as to turnover for 2007, and whether or not the existing management has met its own targets is a material consideration in the purchase.  They also believed that they would be falsified in that they believed that the growth figures contained a purely mathematical calculation of growth in that the 2008 renewal figures were believed to be a simple percentage increase on the 2007 figures, with no greater science than that.  A crucial part of the projected turnover concerned renewal income.   In calculating that income it is necessary to work out what percentage of New and Initial income should be likely to recur (be renewed) in the next year.  Dunedin said that this was done by applying a simple mathematical exercise - it was assumed that 50% of Healthcare, 60% of Risk and 50% of Flex  New and Initial elements would recur in the following year.  Since later figures were also reached by applying fixed percentages to the earlier figures, later figures would be contaminated by the earlier error. If these factors had been applied to an appropriately adjusted model, it would have produced a transaction which GAS would not have wanted to proceed with because it would have produced returns which fell outside its parameters.  The funding arrangements would probably have had to have been different, and looking at the deal overall they would not have been sufficiently attractive to Dunedin to proceed at all, not even at a lower price.  It was a condition of the lending bank (AIB) that sales be shown to be £6m in 2007, so if it was apparent they were not then that bank would apparently not have lent.
421.	The defendants’ case, as already outlined, is that disclosure of the turnover figures would have made no difference to the deal in a further renegotiation of it.  Dunedin were keen to do the deal.  The figures in the models did not have the central relevance which the Dunedin witnesses attributed to them, so modification by taking out the disputed turnover would not have made a difference.  The prospect of future acquisitions was a real driver and would have remained so even if the numbers were altered.  There was an alternative trade purchaser in the wings who had expressed a real interest at £18m, and while Mr Breslin preferred an MBO (because it preserved more jobs and kept the business more intact than would have been the case with a trade buyer) he would not have been pushed below what became his bottom line (reached as a result of the VT Group disclosure) because he could have gone off and negotiated with a trade purchaser.  Broker Networks (the trade buyer who had expressed real interest) remained interested even after Dunedin got exclusivity on the deal (an email of 7th September 2007 records as much), and they were assured by PwC on behalf of the sellers that:
“Happy to confirm that if deal doesn’t proceed as anticipated with the PE bidder you’ll be the first port of call.”  

422.	It was submitted that Mr Derry accepted that he knew there was a trade bidder, though there was a dispute as to whether he knew who it was.  He would have known of a person in the background by the time of final deal, and would have been aware that pushing Mr Breslin further on price than he had been pushed in relation to the VT negotiation would have brought the deal to an end, which he would not have wanted.   
423.	Central to Mr Neish’s submissions was a case based on an attempt to demonstrate that the overstatement of turnover for 2007 did not, in fact, impact on the projections for 2008 and thereafter in the manner suggested.  Dunedin’s apparent concerns stemmed from the fact that they believed that the projected turnover for 2008 was calculated as a mathematical function of parts of the turnover for 2007.  They were wrong about this, so it could be demonstrated that, if properly explained, they would not have lost confidence in the 2008 (and later years’) growth figures.
424.	Mr Neish adduced evidence from Mr Brooks to seek to demonstrate that they were wrong.  In his fourth witness statement Mr Brooks described how the 2008 forecast contained in the IM, and on which Dunedin relied in their planning, was arrived at.  He described a process in which he participated and in which the Liberata and AXA payments were left out of account in arriving at the forecast figures for the business to be done in 2008.  He accepts he would have started with the 2007 figures (or what they themselves would have been projected to be).  The Liberata sum was included in the Initial figures for 2007.  It was necessary to make an assessment of how much of the Initial and New work would be renewed in 2008.  To do that he first had to strip out items which were incapable of recurring.  Since the Liberata sum fell into that category he would have taken it out of the calculation.  In fact this would have resulted in a low number, because he thought that the only Initial items that he forecast as renewing were the relatively low number of cross-sales that in fact occurred.  He could not recall his actual number, and any documents he created in this process have not survived.   He gave illustrative figures, and the figure that he gave for this element of the calculation under Flex (which was where the £200,000 of the Liberata sum was allocated) was £100,000 (which can be contrasted with a sum in the order of £506,000 projected for renewals in 2008 of New Flex business in 2007).  Having done calculations in relation to Initial and New for all three areas of business, he came to a figure which he cannot now recreate but which it seems may have exceeded £800,000 or £900,000.  In the interests of prudence he reduced that, and told me that he wanted to get to about £600,000.   Then he looked to see what percentages he needed to apply to the 2007 budget figures for Initial and New to arrive at something like that and he or somebody else came up with a 50/50/60% figure, applied differentially to the Initial and New figures across the three major departments and he came up with £583,000. A 3% uplift was then applied to that (nothing turns on that for these purposes).   Thus, he said, his forecast figure can be seen not to have included any element of the £260,000 (or, by the same token, the AXA £43,000, which was in Renewals and which therefore did not figure in the exercise - renewals of already established business were conscientiously calculated on a client by client basis).  He arrived at the correct renewals figure for New and Initial business by leaving out of account the major disputed sums (though technically when he sought to reproduce it by applying his triple percentages he was then applying them to figures which included those sums, because they were in the 2007 budget).   The triple percentages were then applied to the 2008 figures to generate forecast figures for 2009 and then to 2009 figures to get figures for 2010.  
425.	As a matter of fact, the forecast for 2008 in the data room reflected the 50/60/50 method of calculation of the conversion rate as applied so as to create the status figure for 2008.  It was also shown in the GT due diligence report as being the manner in which the 2009 and 2010 conversion rate was calculated.  Anyone reading these documents would therefore have believed this was how the figures for all three years were reached, and even Mr Brooks accepted that that is what a reader would have thought.
426.	Mr Brooks said that comfort can be gleaned for the validity of his exercise from the fact that, by the time of the deal, the managers of the relevant departments had prepared a budget for 2008 which was prepared from the bottom up (i.e. by assessment of the likelihood of transactions, not by the imposition of flat mathematical calculations), and whose results confirmed the figures from his exercise.  
427.	There are problems with Mr Brooks’s evidence on this.  First, it was hard to follow, even allowing for the fact that he was reconstructing detail from 5 years before.  Second, it was hard to understand.  One can understand the technique of arriving at a deliberately assessed figure for renewals of Initial and New items, in general terms, and the desirability of doing so as opposed to applying some potentially inappropriate percentages (which were untested by reality).  One can also understand the need for caution, and to reduce assessments which seemed to throw up a big number, but quite why he had to exercise such a degree of caution if his original exercise was done carefully was not clear.  (At least on this Mr Brooks would be able to pray in aid an observation by GT that the starting figures for 2008 seemed low when considering forecasts for 2009.)  However, the need to translate that into some sort of percentage figure is questionable, especially when the percentage figures are not intended to reflect assessed reality but are intended to be flexed until they come up with the number he first thought of (his £600,000 approximation).  Mr Brooks explained that percentage figures were necessary so as to be able to apply something to forecasts for 2009 and 2010, but if that is right one would have expected figures which had some basis in reality, not figures which were a contrivance designed to justify a figure.  The first appearance of those figures in the documents (at least as far as the evidence before me went) was in an email from Mr Paul Breslin (Mr Sean Breslin’s son) dated 7th March 2007, but that email merely adds to the mystery of where those figures came from.  It is apparent from other documents that other percentage figures were being played with – 35% appears in a couple of documents.  It is not easy to see how all this fits together in a rational explanation of the kind put forward by Mr Brooks.  Third, Mr  Brooks himself was not presenting the exercise in this way when he might have done so back in 2007.  On 24th October 2007 he wrote to GT giving some explanations about the renewal model, and he wrote:
“The initial income in any year always include one off fees.  Our target is to ensure we get the same level of such fees from across our whole client bank each year (it may be from different clients each year).  Remember that our model assumes that only 50% of one year’s initial fees are converted into renewal income the following year and this % is based on historic performance.”
That seems to me to be inconsistent with what he says he had been doing earlier in the year.
428.	All in all I do not think that Mr Brooks’s account about this was at all satisfactory.  In the end I do not find that Mr Brooks is lying about whether or not he carried out a real, as opposed to a mathematical, assessment of the renewals for the 2008 forecast, but the details of the exercise have not been made at all apparent.  He may have carried out some sort of check of percentages against reality, but I do not accept that he did what he describes himself as having done.  I am afraid that at the end of the day it did not make sense, or tally with what happened in the forecasts thereafter.
429.	However, I remind myself of what this evidential exercise is all about in this action.  It is carried out in the context of an inquiry as to whether disclosure of the overstatement of turnover would have had the effect of putting Dunedin off - whether it would still have completed at the same price.  If it would, then Mr Neish would be able to pray that in aid in support of his proposition that that meant that GAS was still worth what they had agreed to pay for it - they would not have agreed to a reduction on account of the disclosure and were still sufficiently keen on the deal to do it on the agreed basis.  It is a limited valuation point.  I am not invited to work out what any particular deduction would have been.  I am merely invited to find that there would not have been one.

430.	In that context I do not think that the point helps Mr Neish.  The burden of this particular factual point is on him - he is asserting it, so must prove it.  He needs to prove what would have happened to the agreed pricing had the accounts been accurate.  As Mr Derry said, and I accept, had Dunedin had disclosure of the two misplaced turnover elements, they would have sought to work out where they were in the accounts and what effect that had on the information that Dunedin had been given.  They would have been concerned about the hockey stick pattern of growth that the proper figures reflected.  I accept that they would.  Furthermore, there would still have been fundamental questions about forecasts.  Had they been told that the turnover was lower than they thought, but given reassurance that the forecasts did not depend on a mathematical link with that turnover, I find that they would not have been satisfied that the forecasts still stood up so that the pricing needed to be unchanged.  Mr Derry would probably, first, have been puzzled as to how the forecasts were arrived at, and how the triple percentages became relevant.  Mr Brooks is not convincing on this.  Then if he had understood sufficiently what is said to have happened (even if Mr Brooks is right) he would have realised that the 2009 and following forecasts were based on the application of a percentage increase of the previous year’s income (50/60/50) which was not justified rationally but which happened to produce the number Mr Brooks wanted for 2008.  When coupled with the steeper rise in the growth graph (the “hockey stick”) that would have justified more caution.  I do not think that Dunedin would have been content to let that go at the existing price, or at that stage would have been happy to maintain it.  If faced with the threat of Mr Breslin walking away, I do not think it more probable than not that Dunedin would have capitulated and gone ahead with the deal.  If Mr Breslin had played that card, (assuming he had one) I do not think that Mr Neish has proved that Dunedin would have treated themselves as trumped.  There would have been three possible outcomes - the deal went ahead, the deal broke down, or the transaction went ahead at a reduced price.  I do not consider the first of those three to be more likely than the other two.
431.	Accordingly, bearing in mind the nature of this point as advanced by Mr Neish (viz as a supporter of value) I do not think that Mr Neish has thus far proved his case. 
The role of the Accounts in the transaction
432.	The defendants say that the Accounts (the final 2007 accounts, as identified in Warranty 4.1) played no role in, and were of no importance to, Dunedin’s modelling or its agreement to acquire GAS.  This is probably mostly a reliance point in relation to a misrepresentation case which I have held fails, but it is also capable of working its way back in to the warranty claim valuation exercise, like the points that I have just been considering, so I will deal with it.
433.	The defendants’ point here turns on two things.  First, there is the timing of the availability of the Accounts as defined in the SPA, that is to say, the accounts for the year ended September 2007.  Second there is the difference between the Accounts of GAS, reflecting its position in the year in question, and the financial view taken by Dunedin which was to view the affairs of GAS on a stand-alone basis (which was, of course, not the basis on which the accounts were drawn) and on the basis of its own models and due diligence.  

434.	So far as timing is concerned, the Accounts were signed off by the directors on 2nd November 2007 and received the auditors’ signature on 5th November.  Final approval for the purchase was given by the Investment Committee of Dunedin on 2nd November, at which point they had not seen the final accounts as signed, and they may not even have been signed off by then.  Mr Neish says it is not clear that Dunedin had received the Accounts even by the time the SPA was signed on 9th November.  So they cannot have relied on them.
435.	So far as the second point is concerned, Mr Neish submits that the claim in this case is not based on the Accounts at all, but on statements in the IM and some sort of disclosure duty.  The complaint in these proceedings is just about one line in the profit and loss account (the turnover line), but when the number in that line (the £6,007,000 figure) was put in the Completion Model it did not come from the Accounts, but came from earlier documents.  In reality the claimants were basing themselves on the stand-alone figures which did not appear in the Accounts.   What Dunedin was interested in was the EBITA (or EBITDA) of GAS on the re-stated basis, both past and future.  That has nothing to do with the Accounts.
436.	I find that it is true that the claimants were viewing the future of the business in a way which was not reflected in the entirety of the Accounts, because parts of those accounts were not directly relevant to the stand-alone basis which would obtain after the purchase.  However, the turnover figure remained important and was not re-stated in the stand-alone figures.  Turnover is the top line in an EBITA (or EBITDA) calculation.  In their calculations as to whether to buy the business, and in their calculations as to price, a turnover figure was included.  It was revised towards the end of the period by increasing the forecast turnover by some £40,000 to arrive at the £6,007,000 figure.  That change (being a change for the better) was not sufficiently large to affect the modelling much.  But the turnover figure remained an important one.  Dunedin did not take a warranty as to the figures in management accounts.  They took a warranty as to the Accounts.  They could have completed the deal before the Accounts were forthcoming, and Mr Derry said that if that had happened he would have required other warranties to protect his position, and I accept that evidence.  But that did not happen.  The parties were apparently working towards a completion after the year end even though the meat of the deal was agreed before then.
437.	It is apparent from the evidence that the final accounts were to be relevant notwithstanding the activity that had gone on before in relation to forecast figures and management figures.  On 30th October 2007 Mr Ma asked Mr Brooks in an email to send him the statutory accounts.  The next day (see above) Mr Brooks sent his email saying:

“Attached are final draft stat accounts for 30/09/07.
I intend to have a board meeting on Friday to sign them and get them out of the way.
I will send you the reconciliation of management accounts to stat accounts which contain all the items that you and GT were expecting."

438.	The figure for turnover in these draft accounts was the same as in the final accounts and the same as had previously appeared in management accounts, namely the £6,007,000 figure.  At some point the reconciliation was provided, but since there had been no change in the turnover figure no reference was made to that in the reconciliation.
439.	Mr Derry explained in his evidence that he had expected to see the final accounts very close to completion, and I accept that evidence.  In a transaction with timing like that, it is inevitable that the parties will be working on less than final figures, and will expect the final figures to remain the same if the transaction is to proceed.  This relevant figure did remain the same, and the transaction proceeded.  Dunedin were expecting the final accounts to be in the same form as the draft that they had been sent, and proceeded on that basis.  Their expectation was justified and fulfilled.  They were assured that the draft that they were sent would be the same as the accounts as signed,  and they were.
440.	Accordingly, even if Dunedin did not actually see the final form of signed accounts before they agreed to purchase, and then signed the SPA, they were in a real sense able to rely on the final Accounts because they were clearly told what they would say.
441.	There is therefore nothing in the timing point taken by Mr Neish. So far as Mr Neish’s second point is concerned, of course much of the assessment of the future of the business was done without direct reference to the material in the final Accounts, not least because it was based on forecasts.  But that does not render the final Accounts irrelevant.  Mr Brooks sent a reconciliation of previous management accounts to the proposed final Accounts.  That is doubtless because he perceived, correctly, that Dunedin would wish to know what those Accounts would contain and that their interest was not merely academic.  If there had been material differences which affected Dunedin’s judgment, then they would have taken them up.  The importance of the final Accounts in this respect, as a matter of practice, is that they confirmed the then state of the company which was a very material part of what Dunedin had been working to.  One of those aspects was the turnover.  
442.	In the circumstances, therefore, Mr Neish’s point about the Accounts gives him no support on valuation (or, so far as relevant causation).
Conclusion on the non-expert evidence on loss
443.	Taking all the above considerations separately and in the round, in the circumstances there is no material on which it can be demonstrated that GAS was worth what Dunedin paid for it based on a consideration of what Dunedin would have done if they had appreciated the true turnover.  It is therefore necessary to turn to the expert evidence on the point.
The expert view of loss and my decision
444.	I have set out above an outline of the views and reasoning of the two experts.  Once the dispute about the growth forecast is out of the way, on analysis they both start from the same technique, which is to see what the Dunedin model would look like if more appropriate figures were put in; or rather, Mr Hine starts from that position, and Mr Cottle does not dissent from it and joins the game by differing on the variables.   They both take the approach of leaving all the disputed figures out of the figures that a purchaser would review.  They therefore aggregate the alleged shortcomings, on the footing that the purchaser would, in any event, leave them out of turnover.  Accordingly both experts seem to be at one in arriving at their decisions by applying a financial model to truer figures.  Mr Hine’s evidence was that any institutional purchaser would do the same sort of thing (would apply a similar sort of model), and that a trade purchaser would carry out some sort of modelling exercise though he might give different weights to various factors when compared with an institutional investor.  His own firm had models, but they were not as sophisticated as Dunedin’s.  So he used Dunedin’s.  Mr Cottle’s evidence does not start with a de novo approach.   It starts with Mr Hine’s and works out from there.
445.	What I take from this is that a modelling approach is an appropriate approach to valuing GAS as at the date of the SPA if one is looking at an institutional investor.  The next question is the important one of the variables to be applied in it.  That is where the real difference between the experts lies.  The two key variables are the growth predictions and the financing, and otherwise assuming a Dunedin-like model.  The wild card is the possibility of a trade purchaser who might bring additional factors to bear.  
446.	Before sorting all this out I need to deal with an initial point of Mr Neish, which is that there is in fact no evidence which goes to what he called the correct measure of loss.  The correct measure is the difference in value of GAS by reason of the breach of warranty (his emphasis).   The breach of the accounts warranty is the over-statement of turnover in the Accounts and the failure to include a related party transaction notice.  He says one needs to assess what loss arose from those.  He says it is difficult to see what loss did arise, and the claimants have adduced no evidence directed to that.  Mr Hine addressed something different, judging by his stated instructions:
“I am to form an opinion upon the value of the share capital of GGL (and its subsidiary GAS) at the date it was purchased by the Claimant, taking into account in particular the turnover and EBITDA of GAS as it actually was at the time, and the matters which the Claimant contends makes the Statements untrue and inaccurate."

447.	He points out that EBITDA is not the same as turnover (it includes costs as a vital element), and says that the effect of his instructions was not to evaluate the difference in value by reference to the breach of warranty but, rather, by reference to the fact that the forecasts in the IM (by reference to which Dunedin partly modelled its price) were not accurate.
448.	He also renews his submissions, dealt with above, to the effect that the Accounts played no role in the valuation of the company by Dunedin or in Dunedin’s modelling.  
449.	I confess to having had some difficulty in following some of these submissions on this, but so far as I do follow them I do not accept them   Both sides agree that the relevant measure is the difference between the price paid (the value of the company as warranted) and the actual value (in light of the breaches of warranty).  The exercise for present purposes is therefore to value the company as warranted, that is to say as if the turnover were accurately stated at the lower amount (and otherwise correctly reflected in the accounts).  So one imagines the company as correctly described, and values that.  That is, in my view, what Mr Hine has sought to do. 
450.	Where Mr Neish’s point may have some impact is on the techniques adopted by Mr Hine in doing this.  He has accused Mr Hine of following the Dunedin approach to valuation, and in particular paying a lot of attention to the hockey stick view of growth.  This has a reflection in Mr Hine’s statement of his instructions insofar as he was asked to take into account in particular “the turnover and EBITDA” of GAS.  The warranty was not as to EBITDA.  EBITDA was Dunedin’s favoured measure.  A reference to it immediately sets the expert off in the direction of valuation techniques which rely on EBITDA as a central tool.  But that does not mean that overall inquiry is wrong.  It means, at most, that the valuation techniques have been wrongly trammelled.  It must be remembered that turnover is one of the constituent parts of EBITDA anyway, so Mr Hine’s appointed direction of travel was turnover-based.  
451.	He also has a point, at least prima facie, in relation to how Mr Hine went about his exercise.  He did not merely do a modelling exercise which could be seen to be of the same general nature as Dunedin’s.  He did not even use his own firm’s models.  He used Dunedin’s model and tweaked the sums and some of the variables.  This does assume a Dunedin-like purchaser (as Mr Hine admitted) and is in danger of adopting a Dunedin-like approach to things such as growth and returns.  Although I acquit Mr Hine of the more major accusations of being an advocate for Dunedin, advanced by Mr Neish, his report does give the impression of merely following the Dunedin approach.   
452.	Having said that, in his report and in his oral evidence Mr Hine did say that any institutional purchaser would do the same sort of thing (modelling), and since he plainly admired the sophisticated quality of Dunedin’s model he might be said to be adopting the best tool to hand.  It is to be noted that Mr Cottle did not query this approach.  He merely varied the variables.  He thought that Dunedin’s model was typical.  The essential difference between the two of them was as to the assumptions that should be made as to growth and funding mechanisms.
453.	This leads me to conclude that the exercise which Mr Hine was carrying out was in essence the correct one, that the use of a model to carry it out was a valid one, and that in principle a Dunedin-like model (in terms of techniques, factors and links) is acceptable.  However, the apparent adoption of other aspects of Dunedin’s approach has to be viewed with caution, and I shall do so.  One must be careful before accepting Dunedin’s judgment on assumed matters.
454.	I have to assess what a willing purchaser would pay a willing vendor.  The purchaser would not make a judgment on one year’s accounts alone, so I have to determine what else it would take into account.  No-one has suggested that Dunedin’s modelling took anything odd into account, so I can assume that it reflected the sort of thing a purchaser would look at.  Historic financial figures speak for themselves.  My findings require that the correct figures for 2007 be applied, adjusted so as to reflect a stand-alone basis.  The variable with the biggest effect is likely to be growth.  The possibility of growth would obviously be of crucial interest to a purchaser.  
455.	Mr Hine’s evidence proceeds inter alia on the following assumptions:

(a) A purchaser would model the transaction in the same way as Dunedin did.

(b) Although he understood that the 2008 forecast was constructed on a bottom up basis rather than by the application of a mathematical figure to income figures, he still reduced it on the footing that the growth implicit in the 2008 figure provided by Dunedin looks high when compared with the proper turnover figure for 2007 and the growth in that year implicit in that figure.

(c) Future growth figures needed to be scaled down because of uncertainties about the early growth figures.

(d) A purchaser would pitch a price based on what the financial modelling told him.

(e) He was envisaging an institutional purchaser and not a trade purchaser.

(f) An institutional purchaser would be looking for the same returns as Dunedin.  Furthermore, such a purchaser would not be looking for any arbitrage gains in the model (again like Dunedin), so that it would be looking for exit multiples which were the same as the entry multiples and price accordingly, rather than looking at the possibility of increased multiples applying on exit.

(g) He adopted the same degree of conservatism in the forecasts for 2010 onwards as Dunedin, though his figure was slightly different.

456.	The principal difference in the approaches of Mr Cottle and Mr Hine lay in the appropriate assumptions about growth and funding.   There was no material dispute about the modelling technique itself, and Mr Cottle accepted that if one used the Dunedin model, and put Mr Hine’s figures in, then the prices that he identified in his report were those which passed the test of generating the specified returns and multipliers.  
457.	Mr Hine’s case on the growth factors was that he was assessing what a purchaser would be likely to do if told that the relevant sums were taken out of turnover.  He started with Dunedin’s actual model and figures and considered the adjustments that had to be made to it to reflect the deemed new fact that the turnover was less than the £6,007,000 originally appearing there.  He concluded that the results thrown up were those that a deemed purchaser would arrive at.  His view was that a purchaser would no longer accept the previous forecasts that he had made (or taken from the IM) as being accurate because of the failure to meet the 2007 forecast, and the steep improvement that would have to be made to reach the 2008 forecast.  This was so even if the purchaser was told that the 2008 forecast was not a mathematical projection from the previous 2007 figure, but was the result of a calculation or assessment of management based on looking at the actual results and predicting future renewals in an assessed way.  He insisted that a purchaser would not be satisfied with that.
458.	 Mr Cottle’s view was that once it was apparent that the 2008 forecasts were built up independently of the turnover figures for 2007, then the question of turnover became irrelevant to growth.  This was particularly so where the 2008 forecast had been considered by the due diligence process.  That really lies at the heart of his approach, and doubtless explains why he has not remodelled the figures to cater for projected reduced growth.  
459.	Mr Cottle’s approach really involves establishing a disconnect between the turnover figure and growth projections.  If one is imagining the deemed transaction, the purchaser knows about the true turnover, is capable of spotting the growth figures that that gives rise to (both historic/actual and forecast) but is satisfied that the then projected growth figures are right because it is satisfied that 2008 forecast was calculated reliably.  Hence the disconnect, on the assumed facts.  If that disconnect does not exist then the growth projections have to be revisited and, if revised downwards, there is inevitably going to be an effect on the modelled price (or, strictly, the price which passes the test of the model).  
460.	I do not think that Mr Cottle’s approach is justified.  First, it assumes a purchaser starts from the originally proposed growth figures.  That is not a given.  Second, even if that is the starting point, it assumes too great a degree of confidence in the 2008 projection figures.  Several matters call those figures into question:
(a)  First, the hockey stick point.  The growth would be all the more striking, and therefore all the more questionable.  Even if the purchaser were being told that the forecast was a real assessment and not just a mathematical calculation he would, in my view, be likely to be sceptical.  Once the 2008 figures come down, so do the others (because they are each straight projections of the previous year’s figures).

(b)  If a purchaser had had revealed to him Mr Brooks’s description of how he arrived at the predictions of the renewals of  New and Initial for 2008, he would not have had his confidence increased.  Apart from anything else, the purchaser would know that part of the forecasts for later years (the forecast for conversion of New and Initial business to renewed business) was based on a percentage calculation which was a contrived figure and not a rationalised approach.  

(c)  If one assumes an investigation would reveal the true position of the wrongfully included turnover, it would have become apparent that it was included in Initial, and would have had a material effect on that particular number for the future.  The figures in the IM showed £626,000 as being the likely income from Initial for 2007.  £260,000 is a large portion of that.  The projection for 2008 Initial revenue was £778,000.  That would be a very large jump from the adjusted figure for 2007 Initial (which becomes £366,000).  It would have to more than double.  Even Mr Cottle (who did not know about that attribution of the £260,000 when he wrote his report) was constrained to admit it would require a reconsideration and that the growth in this respect had  become “very ambitious”.

(d)  One factor in the equation was that, on the re-stated figures, GAS would not have met its forecast for 2007 turnover (sales).  The failure of a company to meet its own forecasts is a material factor for a purchase to consider, as the experts agreed.

461.	Accordingly, I prefer Mr Hine’s view that a different assessment of future growth would have been carried out by the purchaser.   It would be at lower figures than applied by Dunedin.  Mr Hine has made his own suggestions as to what are the sort of growth figures that a purchaser would apply.  In fact, as in other areas of his assessment he has really suggested what he thinks Dunedin would have applied, having started from an earlier and higher figure.  That does not necessarily reflect what the theoretical purchaser would do, because that purchaser might not have started out with Dunedin’s models and figures as a starting point from which to embark on a consideration, and that means that the numbers might be different.  However, Mr Cottle has not suggested any alternative numbers, and has not suggested that Mr Hine’s lack rationality if one is to tone down the forecasts, so I am prepared to take them as a starting point.  
462.	That would be likely to generate a significant reduction.  Mr Hine’s next significant factor is his differing funding model.  That, too, is a significant factor, as is demonstrated by the fact that in Mr Cottle’s own calculations the adjustment of that factor makes a £2m difference.  Again, Mr Cottle does not suggest that, once one reduces the forecasts, Mr Hine’s modelling of this part is irrational or unlikely, and does not suggest an alternative on Mr Hine’s growth figure.  So I take that as confirming the starting point.
463.	If matters stopped there Mr Hine’s figures would prevail, and since one is taking out both the Liberata and AXA sums it would be around his £11m figure (I bear in mind his calculations take out slightly more sums in respect of breaches than I have held to exist).  I do not think that Mr Cottle’s extrapolation from the agreement achieved when the VT Group matter was disclosed assists Mr Cottle to justify his figures.  Care must be taken in relation to that.  It was a loss of rather lower net sums from the accounts than those in issue in this case (£92,000 in 2008 and £104,000 in 2009), and does not impact on potential growth in the same way as taking out over £300,000 from the 2007 figures. 
464.	However, I do not think it would be right simply to stop with Mr Hine’s figures.  What one has to imagine is a price that a willing buyer would pay to a willing seller.  Mr Hine’s exercise establishes what price would be acceptable to a seller who models on precisely Dunedin’s  lines and who is not prepared to haggle and acknowledge that a seller might be expecting more.  It is a very technical exercise.  I accept Mr Cottle’s evidence that one has to inject a haggle factor into the exercise.  This was, ostensibly, an attractive business with real perceived growth prospects.  Dunedin viewed it as such, and while they did not build it into their own pricing mechanisms (or price checking mechanisms), it does not follow that others would not wish to get the business for a price which exceeded the technical approach to pricing which Dunedin’s approach demonstrated, or be prepared to be less conservative on the variables.  Trade buyers also have to be considered, and they would have a different approach.  Mr Hine accepted that they might pay more (or less).  They would view things differently from Dunedin.  I acknowledge that Mr Cottle exhibited one of his firm’s surveys which tended to show that private equity buyers were buying at higher multiples than trade buyers in this general market at the time, so one cannot assume over-enthusiasm on the part of the latter, so care has to be taken in trying to build in a potential trade buyer.  However, such a buyer (and there were some in the market) would mean that the price would have to be kept up – in the words of one of the documents in this case, they would ensure that a private equity buyer was kept “honest”.  The VT negotiation shows that non-scientific haggling has a part to play in this sort of transaction, though for the reasons just given it does not provide a scientific platform for working out what the price would have been.  I would also wish to make an allowance for the fact that Mr Hine’s revised growth projections are probably at the pessimistic end of the projection.
465.	I do not have the modelling skills, to flex Mr Hine’s model, and in any event the determination of the question of the right value is not a matter of exact scientific calculation in that way.  Doing the best I can with the variables, both mathematical and human, I find that the relevant value for these purposes is £12m.  That gives a damages figure of, I believe £4.75m, treating the price as being the headline price of £16.75m, or roughly £4.25m if the correct upper figure is the stated consideration in the SPA.  I believe that Mr Neish accepts that the correct upper figure is £16.75, but this point was not clearly addressed in final submissions before me (there was a lot of other material to concentrate on, and a higher figure of about £17.25m is also a candidate) and if it remains necessary to have a debate about it I will hear it after the handing down of this judgment.
466.	As a footnote, I add that the experts’ exercises, by common consent, take the turnover as reduced by all the disputed items.  I have found one of them (Rotch) to contain nothing wrong, so strictly that should be taken out.  However, it is so small that it would not make a material difference to the reasoning, either the experts’ or mine.  I have therefore disregarded it for these purposes.  

Decision on the main claim
467.	I therefore find on the main claim that:

(a)  There was no representation, and therefore no misrepresentation.

(b)  There was a breach of warranty in respect of the Liberata sum, the AXA sum, the absence of a related party notice, and Mr Brooks’s policy in relation to list clients, but not otherwise.

(c)  The loss is the difference between the purchase price and the value of GAS at the date of the SPA, that value being £12m.
468.	Treating the headline price of £16.75m as  being the relevant purchase price for these purposes, the damage claim emerges at £4.75m but there may have to be some further debate about that upper figure after handing down of this judgment.  Clause 8.14 of the SPA (not set out in the Appendix) requires the grossing up of any claim that is subject to tax.  I make no finding as to how that works in relation to my judgment, because I did not have the material available to me to do so, and there will have to be an inquiry, or other investigation, as to that if the parties are not agreed on its operation.  If there is any grossing up, and if it takes the claim over £6m, there may have to be a further debate as to whether that excess is affected by the cap in clause 8.2.   In my view the limited breach of warranty 2.3 adds nothing to this calculation.  It does not decrease the value further over the serious decrease arising out of the turnover matters.
 
The LTIPs claim
469.	This claim took up very little of the trial time.  It is brought by a separate action between Mr Breslin, Mrs Breslin and Mr Dawson as claimants and Sycamore as defendant.   It is largely a matter of construction of the SPA, and it arises in the following manner.
470.	GAS had entered into agreements with Mr Kilbey, Mr Brooks and Mr Barnes called long term incentive plans (hence LTIPs).  Under those agreements those gentlemen were entitled to be paid (by GAS) sums equivalent to certain percentages (they varied according to the individual) of the consideration paid on any sale of GAS, with some adjustments.  That obligation to pay was triggered by the sale of GAS in this case.  Those payments, when made by GAS, entitled GAS to tax relief in respect of them (or so it was perceived).  The buyer agreed to pay the amount of that relief, whatever it was, to the sellers as additional consideration.  Relief has been obtained, but the additional consideration has not been obtained.  The sellers claim that consideration (£322,920).  The buyers dispute that entitlement because they say that on the true construction of the SPA (and the various LTIPs agreements) they are not obliged to do so, or are obliged only to pay a reduced sum.  That is the dispute which I have to decide.
471.	The obligation to pay under the LTIPs agreements is in the following terms:

"In the event of any such disposal you will be entitled to a payment equal to [x] % of the net sale proceeds.  Net sale proceeds for this purpose is the consideration actually received by the shareholders of the Company or the Company for the sale of the shares/assets as the case may be for the disposal less all costs.  Costs will include legal and advisors fees, any compensation payments to Liberata UK Limited and any other direct transaction costs.  Consideration would include all proceeds on completion (either in cash or any other form) plus any deferred consideration when achieved less any successful claims for warranties under the legal disposal agreement."

472.	Clause 3 of the SPA provides for additional consideration based on those payments.    Additional consideration is provided for in clause 3.1.2:

"3.1 The total consideration for the purchase of the Shares shall be the payments by the Buyer to the Sellers of:

… 3.1.2 additional consideration in the form of a cash sum payable pursuant and subject to the terms of clause 3.3…"

3.3 provides:

"3.3 Within 5 Business Days of [GAS] and/or any other member of the Buyer's Group obtaining an LTIPs Saving and/or an LTIPs Repayment from time to time the Buyer shall pay to the Sellers, by way of additional consideration for the Shares, an amount equal to such aggregate LTIPs Saving or LTIPs Repayment (as the case may be) less an amount equal to the Second Tranche LTIPs Payments."

473.	Clause 3 contains some definitions for its purposes.  The relevant ones are as follows:
"LTIPs Payments" means the aggregate payments of £1,147,565.00 to be made by [GAS] pursuant to the LTIPs;
"LTIPs Relief" means any Relief of [GAS] and/or any other member of the Buyer's Group which is not an Accounts Relief (as defined in schedule 5) and which arises in consequence of the LTIPs Payments;
"LTIPs Saving" means a reduction in the amount of corporation tax for which [GAS] and/or any other member of the Buyer's Group is liable to pay as a result of the utilisation of an LTIPs Relief (not being corporation tax in respect of which the Warrantors are, or would (but for the utilisation or availability of such LTIPs Relief) be, liable to make a payment under the Tax Covenant or for breach of any Warranty);
"LTIPs Repayment" means any repayment of corporation tax which is not an Accounts Relief (as defined in schedule 5) and which is received by [GAS] and/or any other member of the Buyer's Group as a result of the utilisation of an LTIPs Relief;
"Relevant Date" means the date which falls 12 months after the filing date… for the corporation tax return of [GAS] for the accounting period current at Completion or, if earlier, 30 September 2010 unless in either case at that time there shall be an open HM Revenue & Customs enquiry into such return which in whole or in part relates to the LTIPs Payment…
"Second Tranche LTIPs Payments" means an amount equal to the aggregate of 6% of any aggregate LTIPs Savings and/or LTIPs Prepayments and employer's secondary national insurance contributions in respect of such 6% at a rate of 12.8%."
474.	Clause 3.4 contains a deeming provision as to dates:

“3.4 For the purposes of clause 3.3 [GAS] and/or any other member of the Buyer's Group shall be deemed to:

(a) obtain an LTIPs Saving on the Relevant Date;

(b) obtain an LTIPs Repayment on the Relevant Date or if later the date that the relevant repayment is received."

475.	Pausing there in the narrative of the content of the SPA, the factual position is that GAS has paid to the three LTIPs recipients an aggregate of £1,147,565.00 under the LTIPs agreements.  That, it will be noted, is the sum referred to in the definition of LTIPs Payments.  That payment was included in corporation tax returns for the year ended 30th September 2008 as an administrative expense and relief was obtained.  It was obtained in the sum of £322,920.  The enquiry window for GAS's tax return closed on 30th September 2010.  The sellers say that in those circumstances all the events that are necessary to entitle them to their LTIPs payments have happened.  The LTIPs Payments have been made, and they have actually been made in the sum provided for in the SPA, though that is perhaps an irrelevance because the amount of the LTIPs payments is actually prescribed in the definition.  Relief has been obtained, and the amount of that relief is known.  There is in fact no Second Tranche LTIPs Payment which falls to be taken into account, so no deduction falls to be made for that.  The Relevant Date passed some time ago because the relevant corporation tax return was submitted some time ago.  The deeming provision in clause 3.4 has come into effect (so far as necessary).  Accordingly, all conditions necessary for payment have been fulfilled.
476.	Sycamore resists this claim because, in essence, it requires that the amount of the warranty claims be taken into account in calculating the liability.  It starts by pointing to the obligation to make an LTIPs payment to the three recipients and the reference to the need to deduct "any successful claims for warranties under the legal disposal agreement".  Accordingly, since it has now been determined that there is a successful claim (and the amount of that claim), it is to be deducted in calculating the LTIPs payment.  True it is that the LTIPs payment was made in full, but at the time of the payment Sycamore did not know about the warranty claims and the payment therefore arose out of a mistake as to the entitlement of the recipients to receive the payments.
477.	Sycamore goes on to submit that the effect of the matters referred to in the previous paragraph is that it can now be seen that only part of the sums paid to the three recipients was actually a sum paid "pursuant to the LTIPs" for the purposes of the definition of "LTIPs Payments" ("the aggregate payments of £1,147,565 to be made by [GAS] pursuant to the LTIPs").  In due course the recipients will have to be told of the overpayments and the position will have to be rectified.  Accordingly the amount of the "Relief" is not known, and the LTIPs Saving is not known either.
478.	It was submitted that on its true construction the definition of "LTIPs Payments" makes it plain that the relevant base sum is the sum that GAS is in fact liable to pay.  Accordingly, if there are warranty claims, they fall to be deducted and the LTIPs Payments are not £1.14m but a lesser sum.  It would be neither workable nor commercially sensible if the LTIPs Payments were treated as being £1.14m irrespective of any potential deductions.  Relief could not properly be obtained on any sum other than the sum properly paid to the LTIPs recipients.
479.	Miss Newman also relies on Second Tranche LTIPs Payments.  She refers to the obligation on Sycamore to pay those sums and says they fall to be deducted from the main payment otherwise due to the sellers.
480.	Last, Miss Newman relies on rights of set off at common law and in equity – Sycamore is entitled to set off any sums due under the warranty claim against any sums due in respect of LTIPs Relief and the LTIPs Payments; and alternatively she says any judgments should be set off against each other.

The LTIPS claim - decision
481.	I consider that this claim, as a claim, succeeds in full.  In my view the terms of the SPA require the payment of the sum claimed, though that is without prejudice to possible recoupment under the general law if and insofar as the Relief obtained falls to be adjusted and insofar as that might give a claim for relief under the general law for mistake or otherwise; or perhaps a claim for recovery can be made under the SPA itself.
482.	The structure of the LTIPs obligations is in my view one in which through a combination of time limits, definitions and deeming provisions the sum which is claimed has now fallen due.  That can be demonstrated by asking the following questions and answering them in the following manner:

(a) What has to be paid?  Answer – the amount of an LTIPs Saving.

(b) what is the LTIPs Saving?  Answer – the relief on LTIPs Payments.

(c) Have LTIPs Payments been made?  Answer – yes.  They have actually been made in full in accordance with the terms of the relevant agreements.

(d) Has Relief been obtained?  Answer – yes.  The evidence establishes that, and establishes the amount of the actual relief obtained.

(e) Has the date of payment arrived?  Answer – yes.  The date is five days after obtaining the relief (the LTIPs Saving) – see clause 3.3.  That date is deemed to be the Relevant Date, and that date has long passed (see the definition).

483.	In my view the provision is tightly regulated as to obligations and dates, and it does not have built into it the sort of flexibility which would be required in order to allow a deemed unscrambling of the amount of the LTIPs payments and the amount of the relief for the purposes of determining entitlement.  The key is what relief has been obtained.  If relief has been obtained then the obligation to pay the LTIPs payment to the sellers arises, and it arises in that amount.  Miss Newman's point, that until the warranty claims were sorted out it was not known what payments were made "pursuant to the LTIPs", does not work for her.  First, one knows what payments were made pursuant to the LTIPs.  What one does not know is whether and to what extent those claims fall to be repaid.  Second, as I have just indicated, the key is the amount of Relief, and one knows the amount of the Relief and one knows that it was obtained.
484.	Since there is no evidence of any Second Tranche LTIPs Payments, there is, on the facts, no amount which falls to be deducted.
485.	This is not an uncommercial result; nor is it a result which defies common sense.  It does not follow from my conclusion so far that the sellers will necessarily retain all the benefits of the additional consideration.  Clause 3.5 provides for ex post facto repayments:

"3.5 If any payment is made by the Buyer to the Sellers pursuant to clause 3.3 in respect of any LTIPs Saving… And [GAS]… is subsequently denied such LTIPs Saving or is obliged to repay such LTIPs Repayment the Sellers shall pay to the Buyer, within five Business Days of written demand therefor by the Buyer, an amount equal to any amount paid by the Buyer to the Sellers pursuant to clause 3.3 in respect of such LTIPs Saving or LTIPs Repayment by way of reduction in the consideration for the Shares."

486.	That provides a possible repayment route (I make no ruling to that effect), but it demonstrates that it is an adjustment which takes place after payment has been made.  The scheme of the clause is that payment should be made in accordance with strict criteria, and repayments argued about afterwards.  It may also be the case that the general law of mistake would permit recoupment.  But for my part I would have thought that none of this could arise until the amount of the Relief has been formally adjusted so that (and to the extent that) it is no longer available to GAS.  That has not yet happened.
487.	Accordingly, commercial and common sense do not militate against the conclusion at which I have arrived.  Nor does the law of set off assist Miss Newman.  Clause 8.6 of the SPA provides:
"8.6 The Buyer waives any right of set-off or counterclaim deduction or retention which the Buyer might otherwise have in respect of a claim hereunder against or out of any payments which the Buyer may be obliged to make to the Sellers pursuant to this Agreement."

488.	I can see no reason why that should not operate strictly in accordance with its terms.  The claim for the LTIPs Payment is made under the Agreement, and although the buyers have warranty claims, it prevents a set-off arising.  In truth, it was not clear to me that Miss Newman was advancing her set-off claim in respect of her warranty claims; her written submissions indicated that that clause should not apply to her misrepresentation claims, and I have held those claims not to exist.  But for the avoidance of doubt, I rule that any right of set-off of the warranty claims which would otherwise have existed has been removed by that clause.
489.	There will therefore be judgment for the claimants in the LTIPs claim in the amount claimed.  Miss Newman's written submissions raise the possibility of setting off judgments.  I do not rule on this at present.  I will hear further arguments about the actual form of judgment on or after the handing down.

Appendix

The SPA and Disclosure letter - terms relevant to the claim 

The SPA

Clause 1.2.9 elaborates on terms which require the knowledge or awareness or belief of the Sellers or Warrantors.  It reads:

"1.2.9 any statement which refers to the knowledge, awareness or belief of the Sellers or Warrantors, or is in similar terms, howsoever expressed, shall refer

(a)  to their own actual knowledge at the date of this agreement; and

(b)  the knowledge that the Warrantors would have had had they made due and careful enquiries of David Brooks, Jamie Barnes, Andrew Kilbey, Iain Laws, Archibald Jenkins and Tom Calvert-Lee, in each case immediately before execution of this agreement."

The consideration is set out in Clause 3:

“3 Consideration

3.1 The total consideration for the purchase of the Shares shall be the payment by the Buyer to the Sellers of:
3.1.1 the aggregate cash sum of £16,289, 435… to be paid at Completion; and
3.1.2 additional consideration in the form of a cash sum payable pursuant and subject to the terms of clause 3.3,
In each case in accordance with clause 4.3.”

The actual words of warranty (which are important) are set out in clause 5:

“5.  Seller Warranties

5.1  The Sellers severally warrant to the Buyer in the terms set out in Part B of Schedule 4, and the Warrantors severally warrant to the Buyer in the terms set out in Part C of Schedule 4, subject to the provisions of clause 8.  

5.2  Each Warranty is to be construed as a separate and independent warranty and, save as expressly provided otherwise in this agreement, will not be limited by reference to or inference from any other Warranty or by any other provision of this agreement and subject to clause 8, the Buyer will have a separate claim for every breach of Warranty …”.

The relevant warranties were contained in Schedule 4 Part C of the SPA:

"2.3 The Group has not committed any material breach of any express term of any agreement or arrangement to which it is a party and which is material in the context of the business of the Company and so far as the Warrantors are aware, no facts or circumstances exist which are likely to give rise to such a breach.

3.12 So far as the Warrantors are aware, there are no facts or circumstances which are likely to require any reversal or repayment of any material brokerage, commissions or fees already collected by a Group Company, or for which credit has been taken, other than in the normal course of business.

4.1: The Accounts:
4.1.1 show a true and fair view of:
(a) the state of affairs;
(b) the assets and liabilities; and
(c) the profit or losses
of each Group Company to which they relate and the Group (on a consolidated basis) as at the Accounts Date;
4.1.2 have been prepared in accordance with relevant generally accepted accounting practice...”

The expression "the Accounts" was defined as meaning the audited financial statements of the company and its subsidiary for the financial period ended on 30th September 2007.  

Recovery under the warranties was the subject of certain limits set out in clause 8.1:

"8.1  Neither the Sellers nor the Warrantors (as applicable) shall be liable under Warranties ... in respect of any claim under the Warranties:
8.1.1 if the fact, matter, circumstance or event giving rise to such claim under the Warranties ... is fairly disclosed by this agreement, the Disclosure Letter or any documents disclosed in the Data Room (and for this purpose, "fairly disclosed" means disclosed in such manner and detail as to enable the Buyer to make an informed assessment of the matter concerned and its significance);
8.1.2 [certain time limits -- it is common ground that these have been complied with.]
8.1.10 to the extent that the Buyer (having made due and reasonable enquiries of Giles Derry and Jonathan Ma, confirmation of which is evidenced by the Buyer’s execution of this agreement) is actually aware of any fact, circumstances or matter at the Completion Date, which it is aware actually constitutes a claim for breach of the Warranties.
8.2 The aggregate amount of the liability of the Warrantors for all claims under the Warranties ... is limited to £6,000,000, such liability to be apportioned as to £5,682,600 in respect of Mr Breslin and £317,400 in respect of Mr Dawson, the aggregate amount of the liability of the Indemnifying Parties under the Indemnity is set out in clause 15.4 and without prejudice to the foregoing but subject to clause 8.3, the aggregate amount of the liability of the Sellers for all claims under this Agreement ... and the other Transaction Documents is limited to the consideration referred to in clause 3.1 of this Agreement, such liability to be apportioned among the Sellers so as to reflect their proportionate entitlement to the purchase price as set out in Part I of Schedule 1.
8.6  The Buyer waives any right of set-off counterclaim, deduction or retention which the Buyer might otherwise have in respect of a claim hereunder against or out of any payments which the Buyer may be obliged to make to the Sellers pursuant to this Agreement.
14 Several Liability
Unless expressly provided otherwise in this agreement, the liability of the Sellers for their respective obligations and liabilities under this agreement shall be several.

16.3 Entire agreement
16.3.1 The written terms of the Transaction Documents constitute the entire understanding, and constitute the whole agreement in relation to their subject matter and supersede any previous agreement between the parties with respect thereto
16.3.2 Each party acknowledges that it has not relied on or been induced to enter into this agreement by a representation other than those expressly set out in the Transaction Documents.
16.3.3 A party is not liable to the other party (in equity, contract or tort, under the Misrepresentation Act 1967 or in any other way) for a representation that is not set out in the Transaction Documents.
16.3.4 Nothing in this clause 16.3 shall affect a party’s liability in respect of fraud or fraudulent misrepresentation."

The Disclosure Letter

This letter was signed on behalf of the vendors and dated 9th October 2007.  Its relevant provisions were as follows.

“This letter is the Disclosure Letter referred to in the Agreement and constitutes formal disclosure to the Buyer for the purposes of the Agreement of the facts and circumstances which are or may be inconsistent with the warranties referred to in clause 5 and contained in parts B and C of schedule 4 of the Agreement (the “Warranties”) or which otherwise give or may give rise to a claim under the Agreement by the Buyer in respect of the Warranties.  Such facts and circumstances will be deemed to qualify the Warranties accordingly.

… A disclosure or qualification made by reference to any particular Warranty shall be deemed to be made also in respect of any other paragraph to which the disclosure or qualification may be applicable.

The disclosure of any matter or document shall not imply any representation, warranty or undertaking not expressly given in the Agreement nor shall such disclosure be taken as extending the scope of any of the Warranties.

1.  General Disclosures

By way of general disclosure, the following matters are disclosed or deemed disclosed to the Buyer:

1.1 the contents of the Agreement and all transactions referred to therein;…

1.7 all matters contained in the Information Memorandum prepared by PricewaterhouseCoopers LLP dated June 2007;…

2 Specific Disclosures

Without limiting the preceding paragraphs of this letter, the following matters are also disclosed.…

Warranty 3.12

The Company receives commission payments for brokering insurance deals between an insurer and the end corporate customer.  The insurer calculates the commission owed to the Company based on the estimated policy premium payable by the end customer.  The insurance company will calculate the final premium payable on an annual basis and it is common for the final premium to differ in practice from the original estimate.   Where the final premium is less than the original estimate the insurance company repays any overpayment of premium to the end customer.  The Commission payment should also be adjusted to reflect the final premium.  However, there is not always full clarity on all payments at the time that they are made.  As a result, the company expends time and effort attempting to reconcile all sums.

Monthly meetings are therefore chaired by David Brooks, where the unreconciled commissions are investigated and then followed up with insurance companies.  The policy adopted is that the smaller of the net balances are not investigated further (although in some cases the Company may be able to identify which individual balances were paid by specific insurers).  These balances are kept on the balance sheet as a liability.  Each quarter David Brooks may authorise the release to income of balances which are at least 2 years old and in respect of which no insurer has requested repayment.  These balances may in practice comprise both credits and debits (as insurers sometimes underpay), the latter resulting in a write-off to income.  The Sellers believe this approach is consistent with and in some respects more conservative than general practice in the sector, though the transfer of such payments may constitute a technical breach of the terms of business with insurers.  In the past 2 years, no insurers have contacted the company to request repayment of any sums retained as a liability in this manner for the 2 year period and which had been taken to income.

The policy has been accepted by the Company’s auditors, Rees Pollock, and their predecessors, KPMG.  The Company estimates that a total of £85,000 of net commission payments were taken to income in the year ended 30 September 2007 (compared to total revenues of £6million).  The quantum of overpayments is reducing year-on-year as commission-based remuneration is declining as the Company shifts to predominately fee-based arrangements (where overpayments do not arise).  At present around 35% of the Company’s Healthcare and Risk income is fee-based, versus commission derived.

In circumstances where the Company receives a commission from an insurance company when working on a nil commission basis, or when commissions received are rebatable to clients (as distinct from commission-based payments relatable to insurers, as above) these are posted to a separate ‘commission rebate’ account and the amounts are rebated to the insurer or client (as appropriate) at a later date when agreed.   Such payments are recorded as a liability in the balance sheet of the Company.  This liability currently stands at approximately £500,000.  These sums are not taken to income.”