Macquarie Internationale Investments Ltd v Glencore UK Ltd

This appeal concerned the construction of warranties in a sale and purchase agreement relating to company accounts and management accounts, and the scope of the concept of a "true and fair view". The Court of Appeal held that compliance with relevant accounting standards is prima facie evidence that statutory accounts give a true and fair view and that, absent exceptional circumstances, properly prepared accounts which comply with those standards do not fail that test. The court further held that the management-accounts warranty in paragraph 4.2 of Schedule 3 must be read by reference to the accounting bases, practices and policies stated in the warranty, and that the requirement that the management accounts be "not misleading in any material respect" and "fairly reflect" the Group's position is to be assessed by reference to conventional accounting standards and materiality as understood in those standards rather than from the purchaser's commercial perspective. On the facts (an undisclosed Xoserve "missed meters" liability unknown and not reasonably discoverable at the relevant times), the accounts and management accounts were properly prepared and not misleading; the appeal was dismissed.

The appellant purchaser, Macquarie, bought the share capital of Corona Energy Holdings Ltd from sellers including Glencore under an SPA dated 31 July 2006. Macquarie later discovered an unreported balancing liability (the "missed meters charge") arising from an Xoserve error in October 2005, which had not been included in the draft audited accounts for year ended 31 December 2005 or the management accounts as at 30 June 2006. Macquarie sued Glencore for damages for breach of warranties in Schedule 3 to the SPA, principally paragraph 4.1 (accounts warranty) and paragraph 4.2 (management accounts warranty).

The claim was tried in the Commercial Court (Andrew Smith J), which found that neither the audited draft accounts nor the management accounts should have included the missed meters charge because the Group did not know of, and could not reasonably have discovered, the liability at the relevant times; the accounts complied with Relevant Accounting Standards and therefore gave a true and fair view. The judge dismissed Macquarie's claim ([2009] EWHC 2267 (Comm)).

On appeal Macquarie challenged (i) the judge's treatment of the "true and fair view" warranty and (ii) the construction of paragraph 4.2, arguing that the management accounts were nonetheless "misleading in any material respect" from the purchaser's commercial viewpoint and that the warranty should be construed to require inclusion of unknown liabilities relevant to the purchaser's assessment of net asset value.

The Court of Appeal (Jackson LJ, Master of the Rolls and Lloyd LJ) rejected both arguments. The court emphasised that compliance with published accounting standards is strong evidence that accounts present a true and fair view and that exceptions are confined to exceptional circumstances. The trial judge's factual findings that the missed meters liability was unknown and not reasonably discoverable were not challenged. Paragraph 4.2 was construed against its contractual context: its introductory words limit warranties (a)–(c) to matters governed by the accounting bases, practices and policies used. The materiality limb in paragraph 4.2(c) must be judged by reference to accounting standards and professional materiality tests, not by a purchaser's ex post commercial calculation. Because the management accounts were prepared in accordance with the stated accounting bases and were not materially misleading on that basis, there was no breach and the appeal was dismissed.

The court noted the rarity of circumstances in which accounts prepared in accordance with the standards still fail to give a true and fair view, and recognised the draftsman's evident caution in repeating overlapping account-related warranties.

The appeal was dismissed. The Court of Appeal agreed with the Commercial Court that the audited accounts and management accounts were prepared in accordance with Relevant Accounting Standards and, absent exceptional circumstances, such compliance is strong evidence that the accounts give a true and fair view. Paragraph 4.2 of Schedule 3 must be read in the context of the accounting bases, practices and policies stated; the warranties refer to what those bases permit or require to be included and materiality is to be assessed by reference to accounting standards, not by an ex post purchaser's commercial view. On the unchallenged findings that the missed meters liability was unknown and not reasonably discoverable, there was no breach of the warranties.

Appeal to the Court of Appeal from a Commercial Court trial judgment of Andrew Smith J, dismissed at first instance: [2009] EWHC 2267 (Comm). This Court's judgment: [2010] EWCA Civ 697.