Hemsley & Anor v Graham & Ors

Documents supplied during contractual negotiations may constitute representations of fact, and a recipient is generally entitled to rely on them without independently verifying their accuracy. Fraudulent misrepresentation requires a false representation, dishonestly made, intended to be relied upon and in fact relied upon. An unlawful-means conspiracy may be established without an express agreement where parties tacitly combine with a common intention to achieve a common end. Contractual warranties concerning a company’s accounts and liabilities may impose absolute liability according to their terms, without proof of negligence or fraud.

The claimants invested substantial sums in Wey Bridging Ltd by loans and share purchases. They alleged that the company’s officers and associated individuals operated a largely fraudulent lending business, fabricated loan records, used cross-firing transactions to disguise repayments, and supplied misleading financial information.

The claims were brought in three related actions. The Maven claim was settled during the trial. The court determined the claims arising from the Hemsley claimants’ investments and the sale of Christopher Arnold’s shares, including deceit, unlawful-means conspiracy, statutory misrepresentation and breach of warranty.

1. Fraudulent representations. The financial documents, loan schedules, management accounts and related materials supplied to the claimants contained representations of fact intended to induce lending and share purchases. The claimants were entitled to rely on those documents and were not required to investigate their truth merely because they carried out some due diligence. The representations were materially false and were made dishonestly by the relevant defendants.
2. Deceit. Applying the established elements identified in Kriti Palm, the claimants proved representations which were false, dishonestly made, intended to be relied upon and in fact relied upon. The active defendants knew of, or participated in, the fraudulent operation and could not avoid personal liability by attributing responsibility to Mr Malik.
3. Conspiracy. The claimants established an unlawful-means conspiracy. An express agreement was unnecessary: the defendants deliberately combined, tacitly or otherwise, with a common intention to achieve the fraudulent end. The unlawful means included fabricated loan documentation, false draw-down notices, cross-firing transactions and diversion of investment funds.
4. Statutory and contractual liability. Mr Arnold was liable under section 2(1) of the Misrepresentation Act 1967, and had not shown reasonable grounds for the representations. Mr Graham was liable under the warranties in the June 2009 investment agreement. Those warranties were absolute on their terms, so proof of negligence or fraud was unnecessary to establish breach.
5. The defendants were also under duties, as officers or fiduciaries of Wey Bridging Ltd, to disclose their own and others’ misconduct to the company. The directors’ disclosure obligations under sections 117 and 182 of the Companies Act 2006 were treated as restatements of the pre-existing law. The claimants’ substantive claims were established. Remedies were to be addressed at the handing down of judgment.