Robert Lawrence & Anor v Jonathan Cowell & Ors

The court held that the share purchase agreement (SPA) was induced by fraudulent misrepresentations about Keyguard's financial position and that the purchaser (Armatus) validly rescinded the SPA. The representations were the figures and accounts supplied pre-contract and there was an implied representation that those accounts gave a true and fair view (see Companies Act 2006 s.393). Expert and witness evidence established that a practice known as "ghosting" had materially inflated turnover and profits and understated liabilities, and that Mr Lawrence knew of, or wilfully ignored, that practice. Clause 20 (an entire agreement / non-reliance clause) did not prevent rescission for fraud. As a result Claim 1 (enforcement of the guarantees under clause 10 of the SPA) was dismissed.

Claim 2, alleging breaches of directors' duties under the Companies Act 2006 (including ss.171, 172 and 177) and/or breaches of trust, failed in almost all respects for lack of proof or because the payments were commercially justified, save for two successful heads: repayment of sums relating to personal car leases and a modest expense in respect of Mr Warren. Most pleaded heads of alleged asset stripping were dismissed.

Background and parties. The first claimant (Mr Robert Lawrence) sold 60% of Keyguard U.K. Limited to Armatus Risks Holdings Ltd by SPA dated 14 June 2017. The purchasers (Armatus) and four individual defendants (the guarantors and Armatus owners) disputed liability after Armatus stopped paying instalments. The claim split into two parts: (Claim 1) enforcement of the purchase price guarantees; and (Claim 2) claims by Keyguard against Messrs Cowell and Warren for alleged breaches of directors' duties and/or breaches of trust in the period after the SPA.

Nature of relief sought. Claim 1 sought the unpaid deferred purchase price, interest and consequential enforcement costs under clause 10 (guarantee) and clause 16 (interest) of the SPA. Claim 2 sought damages under a number of discrete heads for alleged wrongful payments and asset-stripping while Messrs Cowell and Warren were directors.

Issues framed by the court. For Claim 1 the court considered: which representations were made (express and implied), whether they were false, whether Mr Lawrence knew of the falsity or was reckless (the Derry v Peek standard), whether Armatus relied on them and the effect of Clause 20 (entire agreement / non-reliance). For Claim 2 the court considered whether each pleaded payment or transaction amounted to a breach of statutory/directorial duties (notably ss.171, 172 and 177 CA 2006) or a breach of trust and whether Keyguard proved loss causation.

Factual and expert evidence and reasoning. The court accepted expert and factual evidence that the practice of "ghosting" (charging for hours or guards not actually provided) occurred and was significant in the period leading up to and shortly after the SPA. The accounting expert findings and contemporaneous witness accounts supported the conclusion that the financial information provided to purchasers did not present a true and fair view and materially overstated turnover and profits while understating liabilities. The court concluded Mr Lawrence was aware of, or turned a blind eye to, the ghosting and therefore knew the representations were false or lacked honest belief in their truth.

On inducement the court found Armatus relied on the financial information and that reliance was not displaced. On Clause 20 the court held that an entire agreement / non-reliance clause cannot protect a representor from liability for fraudulent misrepresentation; clear words would be required to exclude fraud and public policy prevents excluding liability for one's own fraud.

Disposition. The court held that the SPA was induced by fraudulent misrepresentations and that Armatus validly rescinded the SPA; Claim 1 was therefore dismissed. Claim 2 failed in nearly all pleaded heads for want of proof or because payments were legitimately incurred in the business, except that the court found the car lease payments (personal use) and a modest expense of Mr Warren were breaches and awarded the stated sums to Keyguard.

At first instance the court found that the SPA was induced by fraudulent misrepresentation by Mr Lawrence and that Armatus validly rescinded the SPA; accordingly the claim to enforce the guarantee (Claim 1) was dismissed. On Claim 2 (director/duty and breach of trust allegations) nearly all heads failed for lack of proof or because payments were commercially justified, but the court found breaches in relation to personal car leases (repayment £18,332.79) and one modest expense of Mr Warren (£890.18). The court therefore dismissed the bulk of Claim 2 but upheld those two heads.