Millbrook Healthcare Bidco Ltd v Paul Croll & Ors

In a share sale warranty claim, damages are assessed by comparing the value of the shares on a Warranty True basis with their value on a Warranty False basis at completion.

The assessment uses a hypothetical reasonable willing buyer and seller. Subsequent events must not influence the valuation unless they were reasonably foreseeable at the valuation date. The price actually paid may represent the Warranty True value where it resulted from an orthodox valuation process. In an EBITDA-based transaction, inaccurate financial information affecting maintainable EBITDA may reduce the enterprise value and therefore the price. Later recoveries may reduce the loss as mitigation.

The claimant acquired the entire issued share capital of MHCDC Ltd from the defendants under a share purchase agreement dated 22 July 2019. The claimant alleged breaches of warranties concerning the accounts, management accounts, locked-box statements, debtors and commercial contracts.

The claims concerned two NHS contracts. Under the East Sussex Contract, a pre-completion variation limited the recoverability of historic overspend and future sales, but was not reflected in the financial information. Under the Somerset Contract, an employee had agreed arrangements that effectively waived a reconciliation invoice, which was nevertheless recorded as recoverable.

The central issues were whether the warranties had been breached, whether the breaches caused loss, and how damages should be assessed by comparing the actual transaction with the counterfactual transaction on accurate information.

1. Warranty breaches. The Sellers breached the warranties concerning the truth and fairness of the statutory accounts and management accounts. The financial information failed to reflect the East Sussex variation, which limited MHL’s contractual entitlement and made the contract loss-making on the relevant accounting basis. The Somerset invoice should also have been treated as irrecoverable or doubtful. Related breaches of the locked-box, debtor and commercial-contract warranties were established.
2. Damages measure. The proper measure was the difference between the Warranty True value and the Warranty False value of the shares at the SPA date, applying the approach in Lion Nathan Ltd v C-C Bottlers Ltd [1996] 1 WLR 1438 and Ageas (UK) Ltd v Kwik-Fit (GB) Ltd [2014] EWHC 2178 (QB); [2014] Bus LR 1338. The valuation required hypothetical reasonable willing parties rather than reliance on the parties’ subjective views.
3. The court adopted the market-value formulation described in The Hut Group Ltd v Nobahar-Cookson [2014] EWHC 3842 (QB). Hindsight was excluded in accordance with MDW Holdings Ltd v Norvill [2022] EWCA Civ 883. The price actually paid was accepted as the Warranty True value because it resulted from an orthodox EBITDA multiplied by an appropriate multiple valuation. The general rule of thumb discussed in Ivy Technology Ltd v Martin [2022] EWHC 1218 (Comm) was treated as applicable, but not mechanically.
4. On the Warranty False basis, maintainable EBITDA was reduced by £302,000, producing an enterprise-value reduction of £2,000,000. The working-capital claim failed because both locked-box and target working capital required corresponding adjustment. A further £96,000 was allowed for the profit ticker, subject to a £100,000 adjustment for management bonuses. The net loss was reduced by £287,000 for mitigation arising from the East Sussex settlement.
5. The claim succeeded in the sum of £1,709,000. The Sellers’ counterclaims based on post-completion conduct and third-party claim notification failed.