Next Generation Holdings Limited & Anor v Alec Finch & Ors

Key legal principles and grounds for decision.

The court found that false accruals were used to inflate AFL's income and balance sheet, falsified client money calculations under CASS 5 were used to justify transfers from client accounts to the office account, and those actions produced a significant client money deficit. The conduct of the first and second defendants (Alec Finch and Robert Andrew Finch) amounted to fraudulent misrepresentation, dishonest and fraudulent breach of SPA warranties (Schedule 5), breaches of directors' duties (including s.172 Companies Act 2006 duties), and unlawful means conspiracy. The purchaser (NGHL) was induced by a spreadsheet and meeting on 6 July 2017 which misrepresented aged debtors.

The judge relied on the civil standard of proof applied factually to serious allegations, the contractual carve-out in Schedule 6 (clause 5.5) preserving claims arising from fraud, and authority on damages for fraud and consequential loss. The accountant (Keely Dalfen) admitted liability to the claimants; however, on a contribution claim under the Civil Liability (Contribution) Act 1978 the court held it was not just and equitable to require her to contribute to the defendants (the Finches), given the Finches were the principal actors and beneficiaries of the wrongdoing.

Background and parties.

This is a first instance trial concerning the 14 September 2017 share sale by which Alec Finch sold 58% of AFL Insurance Brokers Limited to Next Generation Holdings Limited (NGHL) for £2,119,900. The purchasers (NGHL and AFL, the latter now Ambon Brokers Limited) alleged that Alec Finch and his son Bob Finch perpetrated a fraud (with the company accountant, Keely Dalfen) by making false income accruals, carrying those into the accounts so as to show positive net assets, and falsifying client money calculations under the Financial Conduct Authority's Client Assets Sourcebook (CASS 5) to enable transfers from client trust accounts to the office account, producing a multi-million pound shortfall in client money.

Nature of the claim and relief sought.

• The claimants pleaded dishonest and fraudulent breach of warranty in the Share Purchase Agreement (SPA), fraudulent misrepresentation, breaches of duties owed to AFL, and unlawful means conspiracy. They sought damages including recovery of sums used to remedy the client money deficit, trading losses and consequential losses caused by the transaction. The defendants brought an additional claim against the accountant for contribution; that claim was determined by reference to the Civil Liability (Contribution) Act 1978.

Procedural posture and evidence.

Trial was heard over several weeks. The court received witness evidence from the purchaser’s due diligence adviser and director, the accountant (KD), and the Finches; and expert accounting evidence from both sides. KD admitted liability to the claimants and her claim was compromised; she nevertheless gave evidence for the claimants. The court was asked to determine primary and consequential liability and to quantify damages; valuation of the shares was reserved for a later valuation exercise.

Issues framed by the court.

1. Whether a client money deficit existed at the sale date, and if so its size and the defendants' knowledge of it.
2. Whether false accruals and falsified CMCs caused the deficit and distorted AFL's financial statements.
3. Whether the spreadsheet and the 6 July 2017 meeting involved fraudulent misrepresentation inducing NGHL.
4. Liability in tort and contract (fraudulent breach of warranty, directors' duties, unlawful means conspiracy).
5. Quantification of loss and the Finches' contribution claim against KD.

Court’s reasoning and findings.

• The judge accepted KD's detailed evidence (given against her own interest) and corroborating contemporaneous documentary evidence. The court concluded there was a very significant client money deficit at the date of sale and that both Finches knew about it.
• Examples of manifestly unsupported accruals and contemporaneous transfers out of the client account shortly after June 2017 supported the finding that accruals were false and used to withdraw client money. The judge rejected alternative explanations (including post-sale mismanagement) as inherently unlikely on the evidence.
• The 5 July/6 July 2017 spreadsheet and BF's representations at the meeting were found to be fraudulent misrepresentations that induced NGHL to enter the SPA.
• On the law, the judge held the false accruals and conduct amounted to fraudulent breach of SPA warranties, breaches of directors' duties (including s.172 CA 2006), and unlawful means conspiracy (Kuwait Oil Tanker definition). Damages for consequential losses caused by the fraud were awarded subject to mitigation and the reserved share-valuation issue.
• KD admitted liability to the claimants. On contribution, the court held it would not be just and equitable to require KD to contribute to the Finches because the Finches were the principal actors and beneficiaries; the Finches' contribution claim against KD therefore failed.

The court found for the Claimants. The First and Second Defendants (Alec Finch and Robert Andrew Finch) were held liable for fraud (false accruals and fraudulent client money calculations), fraudulent misrepresentation inducing the SPA, breaches of SPA warranties (Schedule 5) and breaches of directors' duties (including s.172 Companies Act 2006), and unlawful means conspiracy. Damages were assessed in part at the trial for heads of loss within scope, while the precise valuation of the shares was reserved for a later valuation exercise. The Third Defendant (the accountant) admitted liability to the claimants and compromised that part of the claim; however, the Finches’ claim for a contribution from her under the Civil Liability (Contribution) Act 1978 was rejected as not just and equitable, the court treating the Finches as the principal wrongdoers and beneficiaries of the fraud.