Next Generation Holdings Limited & Anor v Alec Finch & Ors

In civil fraud claims, the standard of proof remains the balance of probabilities. Serious allegations require careful assessment of the evidence, but not a heightened legal standard.

Directors who knowingly use client money to fund company expenses breach their duties to the company. Fraudulent representations about a company’s financial position may induce a share purchase even where the purchaser also has wider strategic reasons for the transaction. Consequential losses are recoverable where they have a sufficient connection with the wrongdoing and are not merely a but for consequence. Under the contribution legislation, a contribution may be refused entirely where it would not be just and equitable, having regard to each person’s responsibility.

Next Generation Holdings Limited purchased 58 per cent of AFL Insurance Brokers Limited from Alec Finch under a share purchase agreement. Ambon Brokers Limited, formerly AFL, joined the claim. The claimants alleged that Alec Finch, Robert Andrew Finch and the company accountant, Keely Dalfen, had falsified income accruals, concealed a substantial client-money deficit and misrepresented the company’s debtors.

The claims included breach of warranty, fraudulent misrepresentation, breach of directors’ duties and unlawful means conspiracy. The Finches sought a contribution from Ms Dalfen. The principal issues were whether the client-money deficit and false accruals existed, whether the Finches knew of them, whether the debtor information induced the purchase, the recoverable losses, and whether any contribution should be ordered.

1. Liability. The claimants proved on the balance of probabilities that AFL had a substantial client-money deficit at the sale date, assessed at £3.51 million. The deficit resulted from false accruals and the withdrawal of client money to fund company expenses. Alec and Robert Finch knew of the deficit and participated in the relevant conduct.
2. The debtor spreadsheet and the explanations given at the July 2017 meeting represented that the stated sums were genuine, recent debts. They were not. The representations were fraudulent and induced NGHL to enter the SPA. A purchaser may be induced by a representation even where the transaction also has strategic or wider commercial purposes.
3. The fraud constituted breaches of the SPA warranties, including those concerning the accuracy of the accounts and management accounts and compliance with applicable regulatory requirements. It also constituted breaches of the directors’ duties owed to AFL. Knowingly using client money to fund company expenses could not honestly be regarded as promoting the company’s success.
4. The Finches and Ms Dalfen were jointly liable in unlawful means conspiracy. Their acts were carried out pursuant to a combination to give a false picture of AFL’s finances and enable the business to continue trading.
5. NGHL could recover its own contributions to capital raises used to fund AFL and repair the client-money deficit. AFL could recover trading losses, post-sale losses, run-off costs, preference-share interest, loan costs and investigation costs, subject to avoiding double recovery and giving credit for business disposals. The share-valuation issue was adjourned for further directions.
6. No contribution was ordered against Ms Dalfen under the Civil Liability (Contribution) Act 1978. Although she was liable to the claimants for the same damage, the Finches were principally responsible, were the FCA-approved persons, directed the conduct and materially benefited from it. It was therefore not just and equitable for her to contribute.