Capital Green Recycling Limited & Anor v Steven Nicholas Bird & Anor

The court considered claims by the purchaser (Capital Green Recycling Ltd and its subsidiary) alleging breach of warranties in a share purchase agreement, fraudulent or negligent misrepresentation inducing the sale, and an equitable claim by the company (One Stop Recycling Ltd) against its former directors for payments to them while the company was allegedly insolvent. Key contractual provisions considered included the warranties in Schedule 3, the limitations on claims in Schedule 4 and the Completion Accounts / price adjustment mechanism in Schedule 7 (working capital, target working capital and deferred consideration).

The judge found that the purchaser had not proved the pleaded dishonest "Fresh Air" invoicing alleged to amount to an undisclosed abuse of the invoice-discounting facility; instead the evidence supported disclosure of Advance Invoicing to the purchaser’s agent (N. Chhabria) prior to completion. The purchaser’s attempts to prove widespread Fresh Air invoicing by ad hoc spreadsheet analysis at trial were held to be unsatisfactory and insufficiently particularised. The purchaser’s separate claim about a purchase-reserve ledger failed because the pleaded matter did not relate to the accounts and dates warranted by the SPA. Claims for misrepresentation failed for lack of particularisation and reliance: the purchaser relied on contractual protection in the Completion Accounts process rather than extraneous representations. The company’s claim for equitable compensation under the creditor duty (section 172 Companies Act 2006 and the approach in Sequana) failed because the creditor duty was not shown to have been triggered in a way that caused loss, and any contractual price adjustment mechanism already addressed the same matters. The counterclaim succeeded only to the limited extent that the buyer must seek to procure release of certain personal guarantees; all other counterclaims were dismissed.

Background and parties: The second claimant, One Stop Recycling Ltd (OSR), was a scrap metal merchant owned and run by the Birds (Steven and Amy). By a share purchase agreement dated 16 December 2019 the Birds sold a majority stake in OSR to Capital Green Recycling Ltd (CGR). Completion involved a deferred consideration and a post-completion Completion Accounts mechanism in Schedule 7 to adjust price for working capital shortfall and related items.

Nature of the claims:

• CGR alleged breaches of warranties in the SPA and fraudulent or negligent misrepresentation by the Birds, and sought damages.
• OSR claimed equitable compensation against the Birds for sums paid to them (in dividends/remuneration) while OSR was said to be insolvent, relying on the creditor duty in section 172 of the Companies Act 2006 and the Supreme Court's reasoning in Sequana.
• The Birds made limited counterclaims, including enforcement of contractual obligations to procure release from personal guarantees.

Issues framed:

• Whether OSR had used so-called "Fresh Air" invoices (fabricated invoices unconnected to any underlying order) to draw on an invoice-discounting facility, and whether that conduct was concealed from CGR.
• Whether the Birds had breached specific warranties in Schedule 3 (accounts, management accounts, records, plant and equipment, facilities and contracts) and whether CGR could recover losses beyond the contractual Completion Accounts adjustment.
• Whether representations relied upon were false and relied upon such as to ground a claim in misrepresentation (fraudulent or negligent).
• Whether the Birds, as directors, breached the creditor duty under section 172 by causing or permitting unlawful or injurious dividend/remuneration payments to themselves and whether equitable compensation should be ordered.
• Whether CGR was estopped from relying upon certain Completion Accounts provisions and whether the buyer must procure release of personal guarantees.

Court’s reasoning and findings (concise):

• The judge accepted that Amy had disclosed to Nirmal (the purchaser’s agent) the practice of "Advance Invoicing" (drawing on Bibby against goods not yet despatched) before completion, but found that CGR failed to prove the more serious allegation of deliberate Fresh Air invoicing. The court criticised the purchaser’s trial method of particularising instances by late spreadsheet analysis and found it unsatisfactory and insufficient to support findings of widespread fabrication.
• The contractual Completion Accounts mechanism (Schedule 7) governed price adjustment and the expert determination produced a large Working Capital Shortfall and a significant adjusted price; CGR's attempts to pursue parallel damages for the same matters were largely defeated by the pleaded case and by the contractual allocation of risk.
• An allegation about understatement of liabilities in a "Purchase Reserve Ledger at Completion" failed because the pleaded item was not a matter warranted as at the accounts dates in the SPA; the purchaser could not treat matters outside the warranties as breaches.
• Misrepresentation claims failed for lack of particularity, absence of pleaded reliance, and because the purchaser had relied upon the contractual price adjustment process rather than extra-contractual assurances.
• The company’s claim under the creditor duty was dismissed: the court was not persuaded that insolvency (or such imminence/probability as would trigger the creditor duty) had been established in a way that rendered the dividend decision causative of loss, and, in any event, the contractual Completion Accounts process already addressed the relevant economic effects.
• The Birds’ counterclaim succeeded only in respect of an order requiring the buyer to procure release (or attempt to procure release) of certain personal guarantees; other counterclaims failed.

Practical points noted by the court: the decision stresses the discipline of pleading, the proper use of the SPA Completion Accounts mechanism, caution when advancing allegations of dishonesty without prior particularisation, and the limited circumstances in which equitable compensation under the creditor duty will be ordered.

This was a first-instance judgment. The court dismissed CGR's claims for breach of warranty, misrepresentation and associated damages and dismissed OSR's claim for equitable compensation by reference to the creditor duty. The judge concluded that Fresh Air invoicing had not been proved and that the Completion Accounts mechanism and pleadings constrained CGR's recovery. The Birds' counterclaim succeeded only to the limited extent that the buyer must procure or attempt to procure release of specified personal guarantees; all other counterclaims were dismissed. The court ordered dismissal of the claims and limited relief on the guarantees point, with liberty to the parties to apply if necessary to settle terms of the guarantees order.