116 Cardamon Ltd v MacAlister & Anor

The claimant purchased 100% of the shares in Motorplus Limited under a share purchase agreement containing warranties about the audited accounts (Accounts) at 31 August 2013 and the Management Accounts to 30 April 2014. The claimant alleged breaches of warranties including that the Accounts were prepared in accordance with accounting standards (warranties at Schedule 3, paras 11.2, 11.3 and 11.4) and that accounting records were accurate (warranty 3.3) and that information given in negotiations was true (warranty 4.2).

The Court found that the Accounts materially understated the provision for FamilyPlus claims (the underprovision claim) and that the related-party debt owed by Boomerang-Tag should have been written down; those matters were not so fully disclosed as to defeat the buyer's claims. The claim based on brokers' remuneration was held to be time-barred under the SPA notice and limitation provisions (clauses 6.3–6.4). The seller's submission that any increased provision resulted from a post-acquisition change of accounting method (clause 6.6(e)(ii)) was rejected.

On valuation, the Court accepted standard damage principles that the claimant must be placed in the position it would have been had the warranties been true, using an enterprise value / equity value valuation methodology based on maintainable EBITDA and an agreed EBITDA multiple. The judge made findings about the appropriate historic years and weightings to use, treated certain items as exceptional and adjusted EBITDA accordingly, and concluded that the claimant's loss exceeded the purchase price but was contractually capped. Damages were awarded up to the contractual cap being the Purchase Price of £2,386,247.50.

Background and parties. Cardamon acquired Motorplus Limited from Mr and Mrs MacAlister under an SPA dated 23 May 2014. The purchase price comprised repayment/assumption of directors' loans and cash. Cardamon alleged breaches of warranties concerning the 2013 audited Accounts and the Management Accounts to April 2014, and sought damages capped by the SPA up to the Purchase Price.

Relief sought. Damages for breaches of warranty for understatement of the claims provision for FamilyPlus (underprovision), failure to write off the Boomerang-Tag related-party debt, an alleged undisclosed change in brokers' remuneration accounting, and an overstatement of turnover. The claimant sought to recover losses up to the contractual cap, and contended that the de minimis threshold did not reduce recovery where loss exceeded that threshold.

Procedure and evidence. First instance Commercial Court trial before Mrs Justice Cockerill over four days with accountancy expert evidence (claimant's expert Mr Graham Nunns and defendants' expert Mr Andrew Conti) and factual witnesses. The court heard detailed forensic accounting evidence about claims reserving, management accounts and disclosure documents.

Issues framed. (i) Whether the Accounts and Management Accounts were misleading or inaccurate in relation to FamilyPlus reserves, the Boomerang-Tag debt and brokers' remuneration; (ii) whether the brokers' remuneration claim was time-barred under the SPA notice provisions; (iii) whether any post-acquisition change in accounting method barred recovery under clause 6.6(e)(ii); (iv) valuation and quantum (methodology for calculating damages and whether losses exceeded the SPA cap and de minimis threshold); (v) whether disclosure in the Disclosure Letter and accompanying materials negated seller liability for the Boomerang-Tag debt.

Court's reasoning. The judge found that the audited Accounts materially under-provided for FamilyPlus liabilities and that the Boomerang-Tag debt should have been written down; the Boomerang-Tag position was sufficiently disclosed in correspondence and the Disclosure Letter to be understandable to the buyer, but the underlying accounting understatement remained a breach. On the brokers' remuneration point the court concluded the pleaded claim concerning disclosure and accounting treatment had been notified in limited terms before the SPA time bar and that the claimant later advanced a different formulation; accordingly the brokers' remuneration warranty claim was time-barred under clauses 6.3–6.4. The sellers' defense that post-acquisition changes in reserving methodology caused the difference (clause 6.6(e)(ii)) failed because no material change of policy was found; rather the post-acquisition work tightened pre-existing approaches.

On quantum the judge applied orthodox principles of putting the claimant in the position it would have been in had the warranties been true, using EBITDA-based enterprise valuation, an agreed multiple, and adjustments for exceptional items and net liabilities. The judge made a best-evidence assessment of the opening reserves position for 2012 (finding some underprovision in 2012 but less than in 2013), adjusted EBITDA for exceptional items, preferred the claimant's approach to several micro reserving issues, and rejected the defendants' contention that the actual sale price was the appropriate measure of "as warranted" value. The resultant compensatory figure exceeded the Purchase Price by more than the de minimis threshold; the SPA cap limited recovery to the Purchase Price. The claim therefore succeeded to the extent of the contractual cap and the Purchase Price was awarded.

Subsidiary findings. The judge determined specific reserving adjustments (including treatment of certain estimated non-panel firm costs and nil-settled files), concluded the Boomerang-Tag debt treatment should have been written off, and ruled that some rectification cost claims were not proved. The brokers' remuneration claim was held to be time-barred.

This was a first instance judgment. The Court held that there were breaches of the sellers' warranties in relation to the understatement of the FamilyPlus claims provision and the treatment of the Boomerang-Tag related-party debt. The Court held the brokers' remuneration complaint was time-barred under the SPA notice and limitation provisions and rejected the sellers' argument that post-acquisition changes in reserving methodology barred the claim. Applying standard loss of bargain valuation (enterprise/equity value from normalised EBITDA using an agreed multiple and adjustments) the Court concluded the claimant's loss exceeded the Purchase Price and the de minimis threshold; recovery was, however, limited by the SPA cap. The claim therefore succeeded and damages were awarded up to the contractual cap being the Purchase Price of £2,386,247.50 for the claimant.