Invertec Ltd v De Mol Holding BV & Anor

Contractual warranties about a company’s financial position may also operate as representations of fact and support a claim for fraudulent misrepresentation where they induced the transaction. A solvency warranty referring to section 123 of the Insolvency Act 1986 concerns the company’s actual ability to pay debts as they fall due, not whether a court has already made that finding. The assessment includes debts falling due in the near future and reasonably expected resources. A claimant may recover consequential losses caused by the fraud, but losses arising from a later commercial decision to continue trading are not recoverable merely because the claimant chose to support the business.

Invertec acquired the entire issued share capital of Volante from DMH under a sale and purchase agreement dated 6 October 2005. Invertec alleged that DMH and Mr de Mol had dishonestly misrepresented Volante’s July and August 2005 management accounts, solvency and corporation tax position, and had misrepresented matters concerning an Alstom contract. It claimed damages for fraudulent misrepresentation, alternatively negligent misstatement and statutory misrepresentation, together with sums under a tax deed. DMH denied liability and brought counterclaims for sums allegedly due under management and consultancy arrangements. The central issues were whether the warranties were false and dishonestly made, whether Invertec relied upon them, and what losses were caused.

1. Claims succeeded in part. Invertec established fraudulent misrepresentation concerning the July and August 2005 management accounts, Volante’s solvency and its corporation tax liability. The Alstom claim failed because the relevant loss-making character of the contract had been disclosed and relied upon only through the contractual indemnity.
2. The management accounts warranty required the accounts to be prepared in good faith, with the intention of giving a reasonably accurate and not misleading view, and on bases and principles consistent with earlier management accounts. Reclassifying sales historically treated as factored sales as in-house sales altered the basis of preparation. The changes concealed the decline in underlying sales and breached the warranty. The related representations were dishonestly made.
3. The solvency warranty was construed as a warranty that Volante was not unable to pay its debts as they fell due within Insolvency Act 1986, section 123(1)(e). It was not limited to cases in which a court had already made such a finding. The inquiry was flexible and fact-sensitive, extending to debts falling due in the near future and resources reasonably expected to be available. A balance-sheet analysis was not essential to proving cash-flow insolvency.
4. Volante’s mounting unpaid liabilities, creditor pressure and immediate need for substantial post-completion cash injections established insolvency at completion. The warranty and corresponding representation were false. Mr de Mol knew this, or was at least reckless as to its truth.
5. The corporation tax warranties were breached by the non-disclosure of an unpaid instalment and the arrangement with HMRC, including the additional amount payable. The contractual limitation did not protect deliberate concealment, although the fraudulent misrepresentation meant that there was no separate recoverable claim under the Tax Deed.
6. Invertec relied upon the warranties. It recovered the initial consideration of £1,512,113, £532,000 of consequential loans made before it had sufficient knowledge to decide what to do, and €216,960 paid under the MSA. Later loans resulted from a commercial decision to keep Volante trading and were not caused by the misrepresentations.
7. Mr de Mol was personally liable for the fraudulent misrepresentations. The DMH counterclaims failed.