Case No: 2010 FOLIO 1193 and 1282
Neutral Citation Number: [2011] EWHC 3240 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 09/12/2011 

Before:

MR JUSTICE EDER
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Between:

	Welven Limited	Claimant	
	
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	Soar Group Limited
Barry James Aughey
	First Defendant
Second Defendant	

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Mr John Taylor (instructed by Spratt Endicott) for the Claimant
Mr Barry Aughey acting in person for the First Defendant and on his own behalf

Hearing dates: 15, 16, 17, 21, 22, 23, 24, 28 and 29 November 2011
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Judgment
Mr Justice Eder: 
Introduction
1.	In these proceedings the Claimant (“Welven”) claims against the First Defendant (“SGL”)  the balance of the consideration of £1.25 million allegedly due to it pursuant to a share sale and purchase agreement dated 26 March 2008 (“the SPA”) whereby SGL acquired the shares of Soar Engineering Group Ltd (“SEL”). SGL was a special purchase vehicle set up by the Second Defendant (“Mr Aughey”) for the purpose of the SPA; and Mr Aughey guaranteed the obligations of SGL under the SPA. Both Defendants deny any liability. In particular, they say that they were induced to enter the SPA by certain misrepresentations made by or on behalf of Welven which they say were made fraudulently. In broad summary, the Defendants say that the deal was intended to be “self-financing” i.e. in part (some £4.6m) funded by a loan from a bank (in the event Ulster Bank Ireland Limited) and in part (deferred consideration of some £1.25m payable over a period of 3 years from closing) funded by expected profits from SGL. The Defendants say that contrary to various representations, SEL had in fact been suffering substantial losses which had been fraudulently concealed; that as a result, SEL did not generate the profits which Mr Aughey expected; and that as a further result the Defendants have suffered loss at least equivalent to whatever outstanding balance might otherwise be due which they are, in effect, entitled to set off against such outstanding balance. Moreover, they say that the same result follows even if the misrepresentations were made negligently or even innocently.

2.	Prior to the SPA, Welven was, in effect, the parent company which held all the shares in SEL. SEL in turn held all the shares in three operating subsidiaries known as Potter & Soar Ltd (“P+S”), Bedford & Soar Ltd (“B+S”) and MultiMesh Ltd (“MultiMesh”) (together “the Subsidiaries”). Together SEL and the Subsidiaries are referred to as “the Group”. The Group operated from 4 locations: Banbury (P+S), St Helens and Wolverhampton (MultiMesh) and Leighton Buzzard (B+S). It was a privately owned business having been largely owned by members of the Soar family since it was started back in 1824. All of the Subsidiaries were in the business of manufacturing, buying and selling welded wire mesh, wire based shelving and other wire mesh products. Between them they employed around 145 employees. Each subsidiary had its own management team. P+S’s Managing Director was Mr Andrew Campbell. MultiMesh’s Managing Director was Mr Lyndon Rohrer.

3.	At the material time, the Group traded from 2 of the 3 sites owned by another company, Pentargon Ltd (“Pentargon”), and leased to one or other of the Subsidiaries. The shares in Pentargon were previously owned by Mr Soar and members of his family. They were sold to SGL at the same time as the SPA under a separate share purchase agreement (the “Pentargon SPA”) for £4m, subject to a price adjustment clause.  It is common ground that prior to execution of both the SPA and the Pentargon SPA all parties knew that an adjustment in relation to capital gains tax  would result in SGL receiving a refund of £220,000 of the price (subject to that being off-set against the price adjustment under the SPA). Thus, it was known that the real price for Pentargon was £3.78 million. The 3 sites owned by Pentargon were:  

(1)	A 2 acre industrial site in Banbury near to the M40. Potter & Soar leased the factory. There was an office block sub-leased to another company and a vacant unit which was also available for sub-letting. 

(2)	A 3.5 acre industrial site at St Helens on which there was a 38,000 sq foot factory occupied by MultiMesh, a quarter of which was sub-let. Planning permission had lapsed for the building of another 40,000 sq feet factory on the site, but renewing the permission was not an issue.

(3)	A property in Bristol at 93 Stokes Croft. This comprised a shop on the ground floor (leased to the Big Issue) and offices on the second floor. At the rear was a workshop, a yard and another 2 storey property fronting onto another road. Planning permission for 2 residential units on the rear part of the site had lapsed, but renewing this was not an issue.

The Terms of the SPA
4.	Under clause 3.1, SGL purchased all the shares in SEL for an initial consideration of £1.5 million. Under clause 3.2 the price was to be paid as follows:
a.	£1 on Completion on 26 March 2008 and
b.	£249,999 on 31 March 2008 (which has been paid) and 
c.	the balance of £1.25 million (defined as the “Deferred Consideration”) was payable in 6 half yearly equal instalments together with interest and was subject to adjustment (up or down) by the price-adjustment mechanism in part 2 of Schedule 7. 
5.	The price adjustment mechanism in part 2 of Schedule 7 provided for the drawing up of Completion Accounts for the year end 29 February 2008. Broadly, the price was to be adjusted by comparing how the 2008 NAV (i.e. net asset value) compared with the 2007 NAV. Disputes were to be referred to independent accountants. In the event, these were resolved subsequently by Mazars which resulted in an increase in the price as referred to below. The fact that the 2008 NAV had not been determined did not delay the payment of instalments of the Deferred Consideration (clause 3.6). When SGL failed to pay the first instalment of the Deferred Consideration in September 2008, the entirety of the £1.25 million became payable under clause 3.3. 
6.	By clause 22 Mr Aughey undertook the same obligations as SGL as primary obligor and also guaranteed SGL obligations under the SPA.  
7.	The Defendants seek to rely on the Warranties in the SPA as being representations made immediately before the SPA was signed. In that regard, Clause 7 provided that:

“7.1  	In consideration of SGL entering into this Agreement:”
[Welven] … hereby acknowledges that it has warranted in relation to the Company and as separate warranties in relation to each of the Subsidiaries as if their respective names (where the context so admits) were substituted for references to the Company.
That subject to clause 7.2 each of the Warranties is true, accurate and not misleading at the date of this Agreement.
That any statement in Schedule 4 whether or not it is qualified as being made “so far as the Vendor is aware” or “to the best of the Vendor’s knowledge” or “to the best of the knowledge, information and belief of the Vendor” or any similar expression has been made after due and reasonably careful enquiries by [Welven] of only Peter Mills, the Company’s and [Welven’s] solicitors, [Welven’s] accountants and the insurance brokers and pension advisors acting for [Welven] and the Company into the subject matter of that statement.
7.2  	The Warranties are qualified to the extent but only to the extent, of those matters fairly disclosed in the Disclosure Letter and for this purpose “fairly disclosed” means disclosed in such manner and such detail as to enable a reasonable purchaser to make an informed and accurate assessment of the matter concerned …
		………….
7.5	If at any time after the Completion Date it should transpire that any of the warranties is untrue or incorrect and has been breached then the measure of damages shall be determined by the Courts under normal contractual principles of loss of bargain arising from the breach.”
8.	Clause 13.2 of the SPA provided that:

“[SGL] acknowledges that it has not been induced to enter into this Agreement by any representation, warranty, promise or assurance by [Welven] or any other person, save for those contained in this Agreement.  SGL agrees that (except in respect of fraud) it shall have no right or remedy in respect of any other representations, warranties, promise or assurance save for those contained in this Agreement.  SGL acknowledges that its legal advisers have explained to it the effect of this sub-clause 13.2.”
9.	The Warranties were in Schedule 4 to the SPA. Paragraph 3 of Schedule 4 provided:

“3.1	The Accounts [to 28 February 2007]:”
Have been prepared in accordance with the C[ompanies] A[ct] 1985 and with accounting standards, policies, principles and practices generally accepted in the United Kingdom;
Give a true and fair view of the state of affairs of the Company as at the Accounts Date and its profit for the financial year ended on that date;
To the extent required by the CA 1985 and the relevant accounting standards make provision for all established liabilities or make proper provision for (or contain a note in accordance with good accounting practice respecting) all deferred or contingent liabilities (whether liquidated or unliquidated) at the date thereof.
…………..
Each of the Management Accounts was prepared on a consistent basis with previous management accounts of the Company and give a reasonable view of the Company’s and the Subsidiaries’ profits, assets and liabilities.”
“”
“Accounts” were defined as “the audited financial statements of the Company and the Subsidiaries as at and to [28th February 2007]  the Accounts Date, comprising the individual accounts of the Company and the Subsidiaries including in each case the balance sheet, profit and loss account together with the notes thereon and the auditors and directors [sic] reports;” 
 “Management Accounts” were defined as “the unaudited management accounts of the Company and the Subsidiaries for the period from 28th February 2007 to 31 January 2008;”
10.	The Warranties in the SPA were subject to the Disclosure Letter. This expressly provided that stock figures in the Management Accounts were only estimates with clause 3.6 stating “The Management Accounts have been produced for internal purposes only, and contain estimated figures only in respect of material used, and in all cases are subject to year end stock take and audit of the accounts”.

The Evidence

The Claimant’s Witnesses
11.	In support of its case, Welven called the following witnesses:
i.	Mr Richard Soar. He was Chairman and a Director of Welven. At the material time he lived in Guernsey. He was not a hands on manager and was not involved in the day to day management of the Group although he was directly involved in the negotiations with Mr Aughey culminating in the SPA. He held 67.9% of the shares of Welven. He had previously been elected as Chairman of the British Woven Wire Association for about 8 years and also President of the European Woven Wire Association called the Bureau International pour les Toiles Metalliques. 
ii.	Mr Peter Mills. He is a Chartered Accountant. He joined P+S as an accountant in 1980. By 1990 he had been appointed Finance Director and Company Secretary of each the Subsidiaries. Thereafter he became Finance Director and Company Secretary of SEL. He was a Director of Welven and had a minority shareholding in Welven of 5%. It is common ground that because of the loans that were outstanding from Welven to Mr Soar, no shareholder of Welven would benefit from the sale of its shares in SEL. Mr Mills is also a member of the Methodist Church of Great Britain Audit Committee (which has a turnover of £42 million and assets of £137 million), a Trustee for the Methodist Church and registered as such with the Charity Commission, a Director of Methodist Chapel Aid Ltd (directorship approved by the FSA), a company which receives deposits (circa £19 million) and makes loans to churches in England, Scotland and Wales. Mr Mills does voluntary audit work for charities (3 of which are large enough to be registered with the Charity Commission).
iii.	Mr Andrew Campbell. He is now a Sales and Marketing Director of Locker Group Limited which was and is a competitor of P+S, trading in this country and abroad in the fabrication and sale of wire mesh and wire mesh products. He had previously worked for P+S starting as a sales assistant in 1985 progressing through the organisation and eventually becoming Managing Director in 2006. He left to join Locker Group Limited in 2009. He is currently Chairman of the British Woven Wire Association.
iv.	Mr Howard Platt. He is Chairman and Finance Director of Locker Group Limited. 
v.	Mr Hine. He is a Chartered Accountant. He produced an expert report and was called as an expert witness to deal with a number of accounting issues as referred to below.
I regarded all the above as honest witnesses who gave their evidence in an open and helpful manner.
Mr Aughey 
12.	So far as the Defendants are concerned, the Second Defendant, Mr Aughey, gave evidence himself. He is the Company Secretary of SGL. He has a separate business, Aughey Screens Limited, which is based in Ireland and, like P+S, manufactures precrimped woven wire mesh. He was directly involved in the negotiations with Mr Soar to purchase the shares in SEL which culminated in the SPA. 
13.	I understand that Mr Aughey has been under considerable financial pressure since the onset of the credit crunch. It appears that Mr Aughey and his companies now owe their bankers over €24m. This exceeds the value of their assets by some €7m. Although SGL and Mr Aughey were previously represented by solicitors and counsel in these proceedings, he acted on his own and on behalf of SGL during the trial. I recognise that that was not an easy task given, in particular, the seriousness of the allegations, the volume of paper in the trial bundles and that Mr Aughey is not a lawyer. Moreover, as he explained to me, he continues to work under considerable financial pressure and is currently in the course of discussions with third parties to seek to resolve his financial difficulties. Notwithstanding all these matters, the fact is that in certain respects at least Mr Aughey’s evidence was extremely unsatisfactory. In particular, as submitted by Mr Taylor on behalf of Welven, Mr Aughey made various false statements in the Defences that he has filed at court, in correspondence he sent pre-trial, in his witness statement for trial and when giving oral evidence. Whatever difficulties and pressures Mr Aughey was or may be under provide no excuse for such falsities. 

14.	The following is a list of some of the more obvious falsities in the documents produced and evidence given by Mr Aughey in these proceedings:

a.	Paragraph 58 of Mr Aughey’s Amended Defence and Counterclaim stated that when the price of £1.5 million for SEL was first agreed in October 2007 it was based on the August 2007 Management Accounts. In fact, that was untrue because at that time Mr Aughey had only been provided with the final draft of the February 2007 Audited Accounts. Mr Aughey was forced to accept this falsity in cross examination. 

b.	Mr Aughey amended paragraph 55 of his Defence in November 2009 to introduce an allegation that Ulster Bank had increased the interest rate on its £4.6 million loan to SGL by 3.5% per annum. This alleged increase was part of the multi-million pound Counterclaim which was then being advanced. It was plainly an untrue allegation. The facility letters from Ulster Bank show that the interest rate was decreased only 2 months prior to this amendment from around 4% to around 1.7%. Mr Aughey eventually admitted that the interest rate had not in fact been increased as alleged in his Amended Defence.

c.	Paragraph 53 of Mr Aughey’s Defence advanced a case that the financial analysis he carried out on the January 2008 Management Accounts showed that the Group was making an “operating profit” sufficient to enable the transaction to be self-financing. This allegation is plainly false not least because it includes a contention that the cost of invoice discounting would not be incurred after the acquisition when in fact Mr Aughey accepted in cross examination that there was always going to be invoice discounting with Ulster Bank.

d.	During the course of this litigation Welven discovered that Mr Aughey had transferred one of his properties, Apartment 3, Waterside Close, Monaghan into the name of his wife. Welven was understandably concerned and asked if other properties had been transferred to Mr Aughey’s wife. On 15 December 2010 Mr Aughey instructed his solicitors to say that “no other properties have been transferred in this way”. That was untrue or at least misleading. Mr Aughey had, in 2009, also transferred a property in Florida called 146 Bermuda Drive into the name of his wife. Mr Aughey and his wife had paid US$197,500 for the property 2001, but he transferred his share of it to his wife for US$10.

e.	In the same letter of 15 December 2010 Mr Aughey instructed his solicitors to write to Spratt Endicott to state that he had sufficient unencumbered property and cash to pay the Claimant’s costs of these proceedings. In fact, at the time Mr Aughey was insolvent to the tune of about €7 million and this was admitted by Mr Aughey.

f.	At trial Mr Aughey advanced a completely new and unpleaded case that there were two sets of management accounts to support his fraud case against Welven. This allegation does not appear in Mr Aughey’s Defence, despite the fact that it has been amended twice. It was an allegation that Mr Aughey made up at trial without any proper foundation. I deal with this further below.

g.	In paragraph 33 of his witness statement Mr Aughey claimed that the financial projections for the Group produced by CK had been approved by the directors of SEL prior to Completion. This assertion was manifestly false. Mr Aughey accepted it was untrue but sought to explain away this important point as “a misunderstanding”.

h.	Mr Aughey advanced a case in relation to his meeting with Mr Mills on 23 October 2008. He alleged that Mr Mills made various admissions at that meeting which I reject for the reasons set out below.

i.	Mr Aughey denied in Court that his position in the negotiations was that he was prepared to buy Pentargon on its own but he was not prepared to buy the Group on its own. This evidence was shown to be false by the email dated 1 October 2007 sent by Mr Aughey during negotiations.

j.	Mr Aughey opportunistically sought to take advantage of the obvious typographical error in the attendance note of the telephone call on 14 January 2008 between (on one side) Mr Soar and Spratt Endicott and (on the other) Mr Aughey, Mr Rutherford and Mr Kelly. Mr Soar would never have said that 90-95% of the stock was on the computer (as alleged by Mr Aughey) because everyone knew that was simply not the case. It would have been a remarkable thing for Mr Soar to say to Mr Kelly who knew that there were large amounts of stock not on the computer. Mr Soar said no such thing and for Mr Aughey to suggest that he did was plainly false. Again, I deal with this further below. 

k.	At the opening of the trial, Mr Aughey alleged that proposals by Mr Platt to purchase P+S were “not at arm’s length” and “bogus”; and had been put together by Mr Soar. As explained below, these allegations were without foundation.  

15.	With regard to Mr Aughey’s credibility, Mr Taylor sought to rely upon the fact that in 2008 Aughey was found to be an unreliable witness in the Irish High Court by Mr Justice Sheehan who rejected Mr Aughey’s account of an alleged oral promise made at a meeting with a planning officer in Monaghan. (I should make plain that the facts of that case have nothing to do with the present case.) In response, Mr Aughey told me that the hearing in Dublin in that case took place the day after he buried his father-in-law with whom he had a very close relationship and who had assisted in this acquisition; that his death was very sudden and came as a great shock to everybody; that he was unable to postpone the judicial review; and that his mind was elsewhere when he was giving evidence that day. Given this explanation, it seems to me that it would not be right to place any reliance in the present case on the conclusions previously reached in some other case as to Mr Aughey’s reliability as a witness. Accordingly, I give them no weight. 

16.	On behalf of Welven, Mr Taylor submitted that the upshot of all of this is that no weight can be placed on anything that Mr Aughey said in evidence. I do not accept that submission. It goes too far. In my judgment, the correct approach is to bear all these matters in mind (apart from the Irish Court Judgment) when considering any particular dispute of fact in the light of all the evidence including the contemporary documents. However, I agree with Mr Taylor to this extent viz that to the extent that Mr Aughey disagreed with Mr Soar and Mills, the evidence of Mr Soar and Mr Mills is generally to be preferred. 

Mr Kelly
17.	 In addition, the Defendants called another witness, Mr Desmond Kelly. He is a Chartered Accountant and Senior Partner of Cavanagh Kelly Chartered Accountants (“CK”). He was engaged by Mr Aughey to assist him in relation to the SPA. In particular, as appears below, Mr Kelly assisted Mr Aughey in carrying out a financial due diligence process in late October/early November 2007 as well as in reviewing certain financial information provided to the Defendants in the course of that process and during the period prior to the SPA.
18.	As submitted by Mr Taylor, Mr Kelly and his firm are in my view, in a difficult position in this litigation. As referred to below, Mr Kelly admits that CK failed to read Mr Mills’ important email dated 31 October 2007 sending them August 2007 Stock Summary Sheets (“SSS”) apparently due to the deficiencies in their (i.e. CK’s) email system. It obviously should have been read at the time. This email and SSS had apparently still not been read when in November 2008 Mr Aughey’s solicitors sent a letter accusing Welven of fraud. Mr Kelly admitted that he fed erroneous information to Mr Aughey’s solicitors which led to their letter making the false assertion that CK had never been sent a SSS. In addition, CK produced the financial projections for the Defendants which were also used as part of the whitewash procedure required by Ulster Bank before they advanced £4.6 million to SGL. CK signed off on those projections stating that they were not aware of anything in the projections which would render them unreasonable. In fact, as is now known, those projections proceeded on the basis of entirely false sales figures for the year end February 2008. In particular, these projections ignored the January 2008 Management Accounts and Mr Mills’ Budget. Mr Kelly did not want Mr Mills to see his erroneous financial forecasts prior to completion, stating that Mr Mills would give a “shitty answer”. For reasons best known to Mr Kelly, he added in the same email that he thought Mr Mills was “a bit of a tit”. 

19.	Although CK accepted instructions from Ulster Bank to report to it on the financial projections used in the whitewash, CK are still acting for Mr Aughey and are now assisting him with a view to persuading Ulster Bank not to foreclose on the Defendants’ assets. In my view, that is somewhat remarkable. It would, of course, be in CK’s interests if they could explain to Ulster Bank that they were the subject of a fraud by Mr Soar and Mr Mills. Indeed, that may be what Ulster Bank has been told to date. I do not know. In any event, the reality, though, as Mr Kelly is well aware, is that Ulster Bank lent on the strength of CK’s financial projections which (as appears below) had nothing to do with the most recent financial information which had been provided by Welven to CK. Furthermore, (again as appears below and as Mr Kelly is well aware), he can provide no explanation as to why his firm sent Ulster Bank out of date October 2007 Management Accounts when CK themselves had the January 2008 Management Accounts which showed a deteriorating financial picture. 

20.	It is against this unhappy background that Mr Kelly came to give evidence. Parts of his evidence were demonstrably false e.g. his contention that his financial projections were approved by Welven at a meeting on 14 March 2008 is obviously false. The minutes show that the meeting had nothing to do with the projections. Mr Kelly described this as an error on his part. Be that as it may, this was an important point and it highlights the potential unreliability of Mr Kelly’s evidence. He also gave inconsistent accounts as to whether his principal focus in due diligence was on the February 2007 Audited Accounts or the August 2007 Management Accounts. Mr Kelly’s suggestion that he was told that the computer was unreliable was one which did not feature in the original Defence and is inconsistent with what Mr Soar said about the accuracy of the computer on the telephone call on 14 January 2008. 

21.	Labouring under the clear conflicts of interest in which he finds himself, Mr Kelly’s evidence was, in a number of respects, unreliable. Where he gave different accounts of conversations with Mr Soar and Mr Mills, Mr Soar’s and Mr Mills’ evidence was generally to be preferred. 
The Procedural History
22.	The procedural history is important because it helps to explain the shape of the case in particular the issues that now arise for determination. The starting point is the SPA which makes clear that payment of instalments of the price could not be delayed merely because the price adjustment mechanism had not run its course (clause 3.6). It also made clear that any claim for damages for breach of Warranty had to be supported by the opinion of a barrister of at least 10 years standing before such a claim would excuse payment of the price (clause 8.3). Even then the disputed amount had to be paid into a solicitor’s account.  The Defendants never provided any such opinion and never paid any monies into a solicitor’s account. 

23.	The Claim Form was issued on 16 December 2008. Following service of the Particulars of Claim, the Defendants served their Defence and Counterclaim. Central to that original Defence and Counterclaim was a claim in deceit. However, it is important to note that (a) tacked on to the claim in deceit was also a claim for breach of Warranty; and (b) the Defence and Counterclaim did not seek to advance claims in innocent or negligent misrepresentation.  

The first order of Gloster J

24.	Initially, the trial was fixed to be heard in November 2010. However, the Defendants failed to comply with their obligations to give disclosure with the consequence that the trial date set for November 2010 was lost. On 26 November 2010 Gloster J made a final order for disclosure against the Defendants along with an order that they serve a witness statement explaining deficiencies in their disclosure. At the same hearing Gloster J ordered the Defendants to particularise their claims for breach of Warranty and also particularise their Counterclaim for damages. (At that time the only indication of the size of that Counterclaim was in a pre-action letter where the claim was put at £5.1 million). Shortly thereafter, on 10 December 2010 Gloster J ordered that SGL should provide £250,000 by way of security for the costs of this alleged Counterclaim.

25.	In the event the Defendants did not provide particulars or security for costs. Gloster J therefore ordered that the Defendants attend a hearing to show cause why the Court should not strike out the Counterclaim. That hearing came before Field J on 4 March 2011 who struck out the unparticularised Counterclaim, including the claims for damages for breach of Warranty. 

The order of Field J 

26.	Field J ordered that the Defendants reserve a Re-Amended Defence deleting out the Counterclaim and which was to be confined to “the already pleaded misrepresentations (whether innocent, negligent or fraudulent)”.  This was intended to be simply an exercise in deletion. The Order makes clear that the only remedy now open to the Defendants is to seek a reduction in the price payable under the SPA. The alleged multi-pound counterclaim was struck out.

The further orders of Gloster J

27.	However, following the hearing the Defendants did not simply make deletions. They served a new Re-Amended Defence introducing new allegations of innocent and negligent misrepresentation, as well as making a host of other new amendments. Permission to amend was given by Gloster J on 1 April 2011 but this was expressly subject to Welven’s right to apply to strike out.  A strike out application was subsequently issued but there was insufficient court time to determine that application which was adjourned to this trial. At the commencement of the trial Mr Taylor, on behalf of Welven, invited me to determine that application at that stage. However, since that application involved a question of law as to the scope of the SPA, I indicated that the preferable course was, if necessary, to deal with the issue in the course of my Judgment at the end of the trial. In the event, after taking instructions, Mr Taylor was content to proceed on that basis. 

28.	At the hearing on 1 April 2011, Gloster J also made further unless orders in relation to the Defendants’ disclosure. These focussed in particular on the financial projections which the Defendants and their accountants, CK, produced at the time and are addressed below.  

29.	Although the Defendants make serious allegations of deceit concerning the financial information provided to them, they failed to serve any independent expert evidence in accordance with the Court timetable. On 10 June 2011 Gloster J debarred the Defendants from adducing any such evidence.

Mazars’ determinations

30.	At the same hearing Gloster J also made an unless order against the Defendants requiring them to instruct and to pay jointly for a firm of independent accountants (Mazars) to resolve the disputes that had arisen between the parties in relation to the Completion Accounts and the application of the price adjustment mechanism under Schedule 7 of the SPA. Following this Order, Mazars were eventually instructed and produced their determination on 24 August 2011. Mazars determined that the price payable under the SPA should be increased by £245,002. At the same time Mazars also made a determination under the related contract i.e. the Pentargon SPA concerning shares in Pentargon Ltd (the company which owned the properties). The consequence of Mazars’ determinations is that the price adjustments due to and from SGL under the SPA and the Pentargon SPA are almost identical. Under clause 3.13 of the SPA and clause 3.5 of the Pentargon SPA, any adjustments under these contracts are to be paid simultaneously and are subject to set-off. In the event, it is common ground that there has to be some set-off. On behalf of Welven, it is said that the amount of such net set-off is £2,582 in favour of SGL. However, as I understand, this figure is not agreed by the Defendants. They say that the figure should be higher – perhaps £30,000. Unless agreed, it may be necessary to consider this further in due course. 

The present position

31.	Thus, the result of the foregoing is in summary as follows:
(a) Welven’s claim under the SPA against SGL and Mr Aughey is £1.25m less the appropriate net set-off.
(b) The Defendants have no (live) claim for rescission or breach of Warranty of the SPA. The only claims which are advanced or which are “live” are by way of defence only to Welven's claim on the basis of fraudulent, negligent or innocent misrepresentation; and, in effect, a set-off of such claims against Welven’s claim. 
Events Culminating in the SPA

Mr Aughey’s assets

32.	 It is clear that prior to the SPA Mr Aughey had built up a substantial property empire with properties both in Ireland and around the world. His statement of assets produced in April 2011 showed that at that time he had 9 flats, houses and residential development sites in Ireland. Mr Aughey owned Monaghan Retail Park, was a shareholder in Monaghan Business Park, owned a petrol station in Monaghan, a factory in Clones, 3.5 acres of land at Coolshannagh, 1.1 acres at Canal Bank in Monaghan and Aughey Screens’ premises in Monaghan. Outside of Ireland Mr Aughey owned 2 flats in Manchester, a flat in Leeds, 20% interest in a 5 storey building in Berlin and 2 ski apartments in France. Mr Aughey had owned properties in Florida (including 146 Bermuda Drive), had invested in an off-plan development in Dubai and had invested in a flat in Warsaw. Mr Aughey agreed that his statement of assets showed that out of his borrowings of €24 million, only about €2 million related to his wire mesh business, with the remainder relating to his investment in real property. It is clear that Mr Aughey had a significant property portfolio and that with year on year rises in property prices, by 2007 he had become very wealthy through his property investments. 

Initial Discussions

33.	In about March/April 2007 Mr Aughey approached Mr Soar indicating his interest in buying Pentargon and the Group. At that time the Group and Mr Aughey’s company in Northern Ireland (Aughey Screens Ltd) had an ongoing trading relationship. Aughey Screens’ main line of business was the manufacture of screens for the mining and quarrying business. This overlapped with the Group’s business but the Group had a wider range of products, a significant presence in the UK and a wide customer base both in and outside of the UK. These were important motivating factors for Mr Aughey who was very keen to expand his business into the UK and expand his market share. One of Mr Aughey’s main competitors was a Northern Irish company called Harpscreen Ltd (“Harpscreen”) which was owned by a Mr Kevin McCabe (”Mr McCabe”). There was fierce competition and rivalry between Mr Aughey and Mr McCabe to the extent that Mr Aughey insisted that his approach to acquire the Group was kept entirely confidential (not least because Mr McCabe was a customer of the Group and if he found out that Mr Aughey had acquired it, there was a fear he would terminate the business relationship). Mr McCabe had recently expanded his business in England (purchasing a company called Brimonn, a wire screen manufacturer in the West Midlands). During the time when Mr Aughey was negotiating the acquisition, Mr Soar was receiving approaches from Mr McCabe who was also interested in acquiring the businesses. 

34.	Mr Soar was content to take matters forward with Mr Aughey, believing him to be a wealthy man with a family-owned business operating in the same sector as the Group and which would be a good fit were Mr Soar to sell the business that had been owned by his family for over 100 years. 

35.	Following telephone contact, an initial meeting took place between Mr Soar and Mr Aughey on 28 May 2007 in Southampton.  The next day, 29 May 2007, Mr Soar sent an email to Mr Aughey setting out their discussions concerning possible acquisition of Pentargon and the Group. At that time they were discussing a multiple of between 5 or 6 times EBITDA (“Earnings Before Interest, Taxes, Depreciation and Amortisation”) for the Group and a multiple of between 10-13 of the rental income for Pentargon. 

36.	It was around this time that the Defendants retained CK. Mr Kelly was the partner retained to act in relation to the due diligence exercise that was carried out. According to CK’s letter of retainer (which is dated 15 May 2007 but was, it appears, only countersigned by Mr Aughey on 7 March 2008), the exercise CK were instructed to carry out was a “limited due diligence review only”.

37.	On 30 June 2007, Mr Mills sent an email to Mr Soar stating (amongst other things): “I will be publishing the May accounts before I go away. I am beginning to think that I will need to prepare two sets, one for the banks including the loan note interest waiver and one for our internal management.” This email was relied upon by the Defendants in support of their assertion that Welven had two sets of management accounts. I deal with this further below. For present purposes, it is sufficient to note that, according to Mr Mills and Mr Soar, there was a simple (and innocent) explanation to this email and that there had never been two sets of accounts as alleged by the Defendants.   

The 2007 (draft) Audited Accounts

38.	On 25 July 2007 Mr Soar sent the final draft 2007 Audited Accounts for the Group to Mr Aughey. These draft accounts related to the year ending 28 February 2007. For P+S, these draft accounts showed turnover and profit in the sum of £4.748m and £80,000 respectively. Both of these figures included a figure of £65,000 in respect of an amount referred to as the “Mivan deposit” which I consider further below. For present purposes, it is sufficient to note that the Defendants’ case is that this amount of £65,000 should not have been included within the turnover or profit figures with the result that each of these figures was deliberately overstated by £65,000. In particular, the Defendants say that the profit figure was in fact not £80,000 but £15,000. Thus, the Defendants say that the profit figure was deliberately overstated by almost 550% and that this was done fraudulently in order to induce the Defendants to enter the SPA as the Defendants allege happened. In particular, the Defendants say that if they had been aware at the time that the profit figure was only £15,000, they would never have gone ahead with the project and would never have entered into the SPA. 
39.	On 17 August 2007 Mr Soar sent to Mr Aughey further information about the Group’s products, management, employees, geographical location of its markets, manufacturing capacity and the rationalisation of its operating sites. (B+S had closed down its sales offices in Slough the previous year and it was proposed to close MultiMesh’s warehouse in Wolverhampton by October 2008 when the lease expired.) 

Further Negotiations

40.	On or about 17 August 2007 Mr Aughey made notes on an email sent by Mr Soar. Mr Aughey admitted in evidence that these showed that he viewed Pentargon as worth £6.12m.

41.	On 4 September 2007 CK sent an email to Mr Aughey stating that they had reviewed the Group’s 2007 Audited Accounts and that the net assets of the Group were £468,000 but if the Group’s Loan Notes (owed to Mr Soar and related parties) were not repaid the position would be net assets of £3.6 million. CK stated that a purchase price of £2 million for the Group “seems like a good price”.

42.	On 5 September 2007 CK sent a draft “Heads of Terms” to Mr Soar. This contained an outline offer to purchase both Welven and Pentargon for a total consideration of £5.5 million. At that time, £3.75 million was attributed to Pentargon and £1.75 million for Welven and the Subsidiaries (£1.25 million of which was to redeem Loan Notes). The two purchases were “mutually dependent on each other” and Mr Aughey wanted to keep the acquisition confidential. 

43.	Following further negotiations on 13 September 2007, CK made a revised offer which adjusted the way in which the £5.5 million was split between acquiring the Group and Pentargon. The outline offer made was £4 million for shares in Pentargon (subject to confirmation of tax liability) and £1.5 million for shares in SEL.

44.	Negotiations continued with Mr Soar stating that he considered that the properties were worth £4.8 million. Mr Soar stated in an email dated 27 September 2007 that he had received an offer for a part of the land at St Helens for £300,000 and that: “I believe that the real commercial value of the properties in the current market to be in excess of £4.5m without [the plot at St Helens], £4.8 million with the land. This is based on discussions with several property agents in Banbury and St Helens areas in recent weeks.” On 1 October 2007, Mr Aughey made clear that his offer for Pentargon was £4 million and his best and final offer for the Group was £1.5 million. Mr Aughey was prepared to buy Pentargon on its own, but so far as Mr Soar was concerned the purchase of the Group was dependent on buying Pentargon. It is now clear from disclosure that Mr Aughey also valued the properties significantly above £4 million. By the time of the SPA he considered them to be worth at least £5.3 million. Mr Aughey admitted in cross-examination that because of the price adjustment in the Pentargon SPA and after taking account of capital gains tax, he knew that the price he would end up paying for Pentargon was in fact approximately £3.8m (not £4m).

45.	Following further negotiations, on 8 October 2007 Mr Soar set out the outline of the terms that had been agreed at that time. These included:

(i)	The basic deal was that £4 million would be paid for Pentargon and £1.5 million for the Group. 

(ii)	All Loan Note liability would remain within Welven.

(iii)	£1.25 million of the price for the Group would be paid over a period of 2 years, would carry interest at 1% over bank base rate and would be guaranteed by Mr Aughey.

46.	Save that the period over which the deferred consideration would be paid was subsequently extended at a relatively late stage of the negotiations from 2 to 3 years, this broad structure of the deal did not change materially after this time.

The AS400 and the Material Usage Policy

47.	It is convenient to explain at this stage the way in which the Group managed its stock and, in particular, the information available relating to its stock and work in progress. This is important because it provides the background to certain subsequent events as well as other important matters relied upon by the Defendants. In particular, the Defendants contended in paragraph 35 of their Defence that “all of the companies operated a computer generated stock system, which was materially more accurate than the estimates of usage applied to Potter & Soar and MultiMesh by Mr Mills”. For the reasons set out below, this proceeds on the false premise that all of the Group's stock was recorded on a computer. That is incorrect. As explained below, it was entirely normal for large amounts of stock not to be recorded on the AS400 computer. By way of example, as at year ends 2006 and 2007 stock not on the AS400 computer for MultiMesh amounted to 41% and 25% respectively and for P+S it amounted to 32% and 48% respectively. In summary, the position was as follows:
48.	The Group had a computer system referred to as “the AS400” although it was actually replaced by a couple of newer models subsequently. 
49.	At P+S, a manufacturing company, the stock records were not simple at all as there were thousands of product lines and material types and the stock, particularly wirecloth, was very slow moving. Two or sometimes three store men were in control of the stocks. When stock (generally referred to as “raw materials stock”) was purchased, this would be entered into the computer system. From time to time, raw materials stock would be removed from storage for the purpose of manufacture and/or consignment to purchasers (including some purchasers abroad). At this stage, the raw materials stock would be deleted from the AS400 system. Sometimes, unused raw materials stock would be returned to storage and, again, this would be entered back on the AS400. For the most part, the stock records on the AS400 for P+S were pretty accurate as was also the case for B+S (the latter being a simple stock of finished goods in and out distribution business). At Multimesh, another manufacturing company, the stock records were not quite so accurate for reasons explained by Mr Mills but which are not directly relevant for present purposes. Mr Mills explained that the stock figure was sometimes “subject to human error” and that as a result, there were (he would say) 2 or 3 occasions a year where there was something “fundamentally wrong” involving perhaps a million pounds and which would require investigation. 
50.	Given the above, at any point in time, there was a considerable amount of stock which was not on the AS400. For convenience this was referred to as “work in progress” or WIP although it is important to note that this phrase included (at least sometimes) not only manufacturing work in progress but also work which had been completed and which was in the course of consignment. As to the latter, for example, a company called Proos in the United States held stock on consignment as did a company called Klinger in South Africa. This consignment stock and stock under shipment to consignees was not on the AS400 computer. (For convenience, unless otherwise stated, I shall simply refer to WIP and such reference shall include consignment stock.) In addition, there were certain other quantities of stock (including what was referred to as “discs”) which were not on the AS400 although these quantities were relatively insignificant.
51.	The difficulty was that the value of WIP could be incredibly variable. In particular, at any one time, the factories of P+S and Multimesh were working on hundreds of jobs in Banbury, St Helens and Wolverhampton which used stock taken out of the stores. There were approximately 45 different manufacturing machines and also pre-assembly areas. At any one time, the amount of WIP on these machines and in these areas could vary from small amounts to six figure sums. By way of example, at P+S's factory, stock not on the AS400 computer included wire on the shop floor awaiting crimping, crimped wire awaiting feeding into looms, wire in looms being woven, woven panels awaiting despatch, high tensile quarry screen stock awaiting sale, wire on the shopfloor not returned to the stores, wire cloth being worked on in the factory and scrap awaiting sale. At MultiMesh’s factory this included wire which was straightened on the shop floor, straightened wire awaiting welding into panels, wire in the wirework department being processed, finished panels on the shop floor, welded panels and wirework products awaiting despatch, shelving components and shelving wire on the shop floor awaiting manufacture, finished shelving awaiting dispatch, shelving in transit to plastic coaters and scrap awaiting sale.  Mr Mills in effect agreed that ideally he would have liked a system where WIP could be measured accurately on a continuing basis. However, the Group was a relatively small company with complicated manufacturing and hundreds of different product lines. They only had a team of two or three in the accounts department and it was considered too costly. As Mr Mills said in evidence, unlike a company that makes baked beans and puts them in a tin “we had thousands of product lines made of many different materials. We had these different companies in different businesses so there was a vast range of products and a vast range of materials going through the factory. One minute, they could be weaving cheap, mild steel and the next minute, they could be weaving silver. We could have employed, my lord, you know a fleet of accountants to check everything every week, but we didn’t, we went on this MUP basis which we’d used for many years.” 
52.	Until the early 1990s, the Group did 6 monthly physical stock checks including WIP but thereafter this was only done annually. However, during the year and in particular for the purpose of management accounts, the stock position was assessed in part on the basis of the AS400 and in part on the basis of an estimate of WIP by reference to what was described as the “Materials Usage Policy” (“MUP”).
53.	In summary, the MUP worked as follows. At the end of each financial year (i.e. the end of each February), Mr Mills would work closely with his fellow Directors to produce budgets for the following year.  In effect, in order to estimate WIP on a continuing basis during the period between annual stocktakes, they would agree various percentage figures based on a comparison of actual sales and stock used for the previous year for each of the Subsidiaries and, in some respects at least, for different products. Thereafter, during each current year, those respective percentage figures were used against actual sales to estimate the amount of stock that represented WIP for the purpose of the internal management accounts. These would be discussed in the course of management meetings (generally held either monthly or fortnightly) and, if appropriate, the percentage figures used to estimate WIP might be adjusted. In fact, the MUP percentages were often changed as appeared from a very detailed analysis carried out by Mr Hine. For example, between August 2007 and January 2008, the percentage figures for P+S automotive products varied between 39%-45%; P+S’ architectural products varied between 44%-41%. These changes would have been made as a result of conversations at management meetings or just generally with managers depending on how each particular department was going, what jobs were going through or how wire prices were changing.
54.	For a variety of reasons, it was recognised internally within the Group (and, in particular, by Mr Mills) that this methodology of estimating WIP was not accurate. Indeed, it was Mr Mills’ evidence that he would have liked to have had a better system although he recognised that this would have been very costly. In Welven’s disclosure, there are numerous internal emails reflecting this as a concern. I consider these further below. However, for present purposes the important point is that the difficulties of estimating WIP were well recognised (both within the Group and externally) and were dealt with during the year by using the MUP (which had been used by Mr Mills over 25 years and was a methodology employed generally in the manufacturing industry) making any necessary adjustments as was considered appropriate from time to time as I have already described. 
The Due Diligence Exercise carried out by CK
55.	Between Wednesday 31 October 2007 and Friday 2 November 2007 the Defendants’ accountants, CK, attended a hotel in Banbury to carry out due diligence. In attendance were Mr Kelly, Ms Catherine Doris and Mrs Wendy Willis, all of CK. The reason for due diligence taking place off site was all parties’ desire to maintain confidentiality.

56.	In advance of that meeting, on 25 October 2007, CK sent an email to Mr Mills attaching a long list of information required by CK for the purpose of their due diligence exercise. Mr Mills responded promptly the following day (i.e. 26 October 2007) providing some early answers including that “Stock computer generated list can be reviewed, wip is estimated”. A few days later, on 29 October 2007, Mr Mills emailed CK the audit packs for 2007 which included: (a) The February 2007 Trial Balances and Mr Mills’ notes. (b) Stock Valuation Summaries. (These showed raw materials, WIP and finished goods. It was clear from these that a large proportion of stock was tied up as work in progress. For P+S, as at February 2007 WIP was £242,551 and almost as much as the value of the stock in the stores.) (c) A number of computer generated stock lists eg. P+S Banbury wirecloth stock held in the stores and recorded on the computer. 

57.	When asked whether CK wanted the information for 2006 as well, CK confirmed that 2007 was sufficient. No requests for information were refused and Mr Mills could not recall being asked for information which he could not provide. During that due diligence exercise, Mr Mills also provided CK with the August 2007 Trial Balance, the August 2007 Management Accounts and a final version of the 2007 Audited Accounts.  
58.	In paragraph 15 of his witness statement, Mr Kelly said that the work carried out during the due diligence was principally in relation to the 2007 audit pack. Despite this, he claimed CK had not seen Mr Mills’ notes on the February 2007 trial balance. At trial Mr Kelly then contradicted his statement by contending that the work during the due diligence was principally in relation to the August 2007 management accounts.
The Stock Summary Sheets

59.	In advance of the meeting, CK asked Mr Mills to bring hard and softcopy information to the hotel. This involved Mr Mills downloading information onto a memory stick and copying that information onto CK’s lap tops. Mr Mills also sent CK information by email including, on 31 October (ie during the due diligence exercise), what was described as “Attached stock summary used in management ac preparation.” As already noted above, in pre-action correspondence when the allegation of fraud was first made it was alleged by the Defendants that they had never been sent this document. However, it was common ground during the trial that this had indeed been sent to and received by CK on that date although, for some unexplained reason, it was apparently never actually seen or at least opened by CK (or the Defendants) until some time after the completion of the SPA.  The attachment to the email dated 31 October in fact contained (amongst other things) a number of spreadsheets referred to generally as Stock Summary Sheets prepared primarily by Mr Mills and containing detailed information with regard to raw materials as extracted from the AS400 and WIP for the Group and each of the Subsidiaries for each month from February to August 2007.  In particular, the spreadsheet for P+S showed in material part the following figures at the end of August 2007.

	£000	
CA       Wirecloth	101.9	
          Y2        Discs	25.0	
CA        Wire	191.2	
Y1         WIP ETC	250.0	
                        TOTAL	568.1	

The notes indicated that “CA = Actual per the AS400 computer system (at written down value)”, “Y2 = February Year End Estimate per statutory accounts, subsequent months not available, therefore PAM [Peter Mills] estimate”, “Y1 = February Year End Estimate per statutory accounts, subsequent months not available, therefore PAM [Peter Mills] estimate.” There were similar spreadsheets for B+S and MultiMesh and an overall summary spreadsheet for the Group entitled “Soar Group Stock Summary Written Down Values per Computer + WIP Estimates” including (for August 2007) the above total figure of £568,100 for P+S, £172,000 for B+S, £610,000 for MultiMesh and a Group total of £1,351,000. In considering these figures, it is important to bear in mind that, as the notes make plain, the figures for “Discs” and “WIP etc” were estimates only made by Mr Mills. Furthermore, Mr Mills (based in Banbury) was not expected by anyone to try to go round each of factories in Banbury, Wolverhampton and St Helens on the last day of each month trying to assess the value of stock which was work in progress; and he did not do so. Neither did anyone else.
60.	It was an important part of the Defendants' case that the information on these SSS contained “accurate” values for all the Group's stock; that such information was more accurate than that based on the MUP; and that, in effect, these constituted a concealed second set of figures. As pleaded in paragraph 41 of the Defence, the Defendants thus asserted that Mr Mills “could have seen/should have known” that the volume of WIP on the shopfloors was wrongly stated in the management accounts. I do not accept the thrust of these submissions. The format of these SSS was broadly similar to what Mr Mills had prepared on a monthly basis for many years. As he explained:

a.	They were used in management meetings to make comment about the value of stock on computer, and to comment on cash spend or release from the same.

b.	No reference would be made in the management meetings to his rough guides for work in progress etc as they were known to be extremely round estimates, e.g. in multiples of £50,000, and were never intended to be anything other than a guide. It would be wrong to describe them as “best estimates”. 

c.	The figures on these sheets were not used in the preparation of the monthly management accounts. The management accounts were prepared using the MUP alone. The stock summary sheets had been issued over many years and never looked upon as “fact” apart from the value of stock on the computer.

d.	The stock summary spreadsheet was a “live” document (an Excel spreadsheet) which Mr Mills amended each month to add the new month’s figures. Where errors in stock on computer were found he would go back and alter the figures accordingly, so it would be difficult at anytime to say what was a current figure. He recalled a number of times where the computer figure seemed incorrect and upon investigation it was found that an error had been made. 

61.	As Mr Mills further explained by way of example and by reference to the figures for P+S which I have quoted above, only the first and third lines (ie marked “CA”) contain figures taken from the AS400. The other figures (ie marked “Y1” and “Y2”) were his rough figures. Importantly, they were not based on the percentage figures used in the MUP. His practice was to put in round figures for values of categories of stock. They varied widely from time to time. The SSS were prepared within a couple of days of the end of each month and their main use was for directors and managers to see the computer actual (“CA”) figures. No one paid much attention to Mr Mills’ estimated figures. If anything, they were less likely to be accurate than the MUP. I accept Mr Mills’ evidence as summarised above.

62.	It is common ground that during the due diligence exercise, Mr Mills informed Mr Kelly that, between the physical stock takes at year end, the Group operated the MUP as described above. By an amendment to the Defence and Counterclaim the Defendants alleged that Mr Mills told Mr Kelly that there was a computerised stock system but this was “unreliable”. I do not accept that allegation. In my view, the allegation may be founded on a misunderstanding by the Defendants viz not that the AS400 was “unreliable” but, rather, that it could not be relied upon solely to identify all stock because, as I have said, the AS400 did not include, in particular, WIP. This is perhaps a subtle but important difference. The main difficulty of course was estimating WIP but I am satisfied that Mr Mills made clear that not all of the Group’s stock was recorded on the computer; and that the fact that WIP was estimated was fully explained to CK as is reflected in the email dated 26 October 2007 referred to above stating: “stock: computer generated list can be reviewed, wip (i.e. work in progress) is estimated” (there would have been no point in making that invitation if the computer was unreliable); and also by CK’s comment in the Due Diligence Report which CK subsequently produced as referred to below. Moreover, as appears below Mr Kelly was a party to the telephone call on 14 January 2008 when Mr Soar said that the information held on computer was “normally pretty accurate”. Mr Kelly did not react to that statement. Had he really been told by Mr Mills that the computer was “unreliable” he would have reacted and asked why he had been told it was “unreliable”. Thus, Mr Mills’ evidence on this conversation is to be preferred.

The August 2007 Trial Balance

63.	Included in the information provided by Mr Mills to CK during the due diligence exercise, was a document described as the P+S Trial Balance for August 2007 which showed (amongst other things) in spreadsheet form a closing balance for stock of £1,516,394. This was a gross figure extracted from the AS400 and based upon the opening balance of stock at the beginning of the financial year (i.e. 1 March 2007) after adding/deducting purchases and withdrawals as I have described above up to the end of August 2007. To be clear, that figure did not identify stock that had been used or any WIP. As Mr Mills explained in evidence, he was in the habit of making notes on the trial balance of each company for his own purposes. These notes would include reference to unusual large invoices where known, remedies to adjust an item next month, questions to be asked and notes of errors. The notes would always include calculation of the amount of stock that would be left after the previous year end stock take figure plus purchases and withdrawals as shown in the trial balances minus his figure for materials usage based on the MUP. He would compare that calculated balance with what he described in his notes as “act(ual) stock” taken from the stock summary sheet for the equivalent month (as described above). As Mr Mills explained, the description “act stock” was a very poor description of the figure appearing in the stock summary sheet since it was itself an estimated figure made up as to about 65% by the computer actual (CA) figure appearing in the stock summary sheet together with (as to the balance) Mr Mills’ very rough estimate of the value of the stock not recorded on the AS400 (again as I have described above). According to Mr Mills, the purpose of the exercise was “….to make sure that there wasn’t a £1 million error creeping in that we needed to go back and check on a find out about and correct on the AS400 system.” As he explained: “I could only be monitoring the AS400 stock because we did not know what the work in progress, the stock on the high seas, the stock in America and all the rest of it was.” According to Mr Mills, he put this procedure in place as cross-referral whereby he would be looking for any material and obvious discrepancies that he would then investigate. They were his own internal workings which he described in evidence as a “sense check” and which would never be given to Mr Soar or circulated to the other Directors. Again, I accept the evidence of Mr Mills.

64.	In accordance with Mr Mills’ practice as described above, he had carried out such an exercise in relation to the trial balance for August 2007 on his own computer as reflected in certain “notes” which he made on his copy of the trial balance spreadsheet on his computer. These notes showed in relevant part the following: 
		
Last month	
Change	
1,516,394
(938,200)
578,194	pchses
usage
= stock	1,397,789
(761,900)
635,889	118,605
(176,300)
(57,695)	
				
493,100
(85,094)	act stock
Diff + = 1	490,000
(145,889)	3,100
60,795	
				
1,516,394
(493,100)
1,023,294	pchses
act stock
usage	1,397,789
(490,000)
907,789	118,605
(3,100)
115,505	

65.	With regard to this table and by way of explanation, the figure of £1,516,394 is what I have described as the gross stock balance at the end of August 2007 as extracted from the AS400 but not including any usage or WIP. The figure of £938,200 is the cumulative estimated usage figure based on the MUP. Thus, the net figure of £578,194 is the calculated stock figure based on the AS400 data and the MUP. This is then compared with the figure of £493,100 which was based on the Stock Summary Sheet as it must have existed at the beginning of September. However, it is important to note that there is no extant Stock Summary Sheet or other document which shows this figure of £493,100. (By way of comparison, the summary stock sheet for the end of August 2007 subsequently produced in hard copy and provided to CK as referred to above shows a stock figure of £568,100). This is because, as Mr Mills explained, the Stock Summary Sheet is a “live” spreadsheet that will change in time. In this context, the main thrust of the Defendants’ case was that Mr Mills knew that the figure of £493,100 was, the “correct” figure rather than the figure of £578,194 based on the MUP; that the value of stock at the end of August 2007 was therefore in fact £85,094 less than the figure based on the MUP and, therefore, that the profit figure was overstated by an equivalent amount.

66.	The trial balance for August 2007 as provided by Mr Mills to CK did not include Mr Mills’ table and notes as referred to above. Contrary to the Defendants' submissions, I do not consider that this was in any way untoward. I accept Mr Mills’ evidence that he was asked by CK for a clean copy of the Trial Balance, which is what he provided, and as Mr Mills pointed out, had CK been carrying out the due diligence in the offices at Banbury with access to the AS400 computer, that would have been precisely what they would have seen. Notwithstanding, the Defendants contended that the information provided to CK in that form (i.e. without Mr Mills’ table and notes) was incorrect and amounted to a misrepresentation on the part of Welven. Indeed, the Defendants submitted that this misrepresentation was fraudulent involving a deliberate decision by Welven to conceal the true position with the deliberate intention of concealing the lower stock figure and thus overstating the profit and the aim of inducing the Defendants to enter the SPA which, according to the Defendants, is exactly what happened. Similar allegations of fraud are made by the Defendants with regard to subsequent trial balances provided to the Defendants for subsequent months up to January 2008 (again without the equivalent table and notes by Mr Mills). I do not believe it is necessary to set out the detailed information contained in each of these subsequent tables and notes. For present purposes, it is sufficient to note that these tables and notes followed a similar format to what I have set out above in respect of August 2007 and that, according to the Defendants, these showed increasing discrepancies between what they said were the “correct” figures for stock based on the SSS and the figures for stock based on the MUP. 

Mr Kelly's Table

67.	A summary of these alleged discrepancies (including also further information relating to other months) as extracted from an attachment to the statement of Mr Kelly is set out in the following table:

Stock Variances 

Potter & Soar

	Aug 07	Sep 07	Oct 07	Nov 07	Dec 07 	Jan 08	Feb 08	
Stock per PAM Man A/Cs 
	594.5	650.2	633.3	622.5	670	745.3	685.5	
Actual Stock Per System*
	493.1	496.1	481.8	446.2	497.2	575	520	
Diff  Man A/C and Actual	101.4	154.1	151.5	176.3	172.8	170.3	165.5	

 

MultiMesh

	Aug 07	Sep 07	Oct 07	Nov 07	Dec 07 	Jan 08	Feb 08	
Stock per PAM Man A/Cs 
	689	662.1	625	605	617	634	644	
Actual Stock Per System*
	570	524	502.8	495.9	476.4	517	491.7	
Diff Man A/C and Actual	119	138.1	122.2	109.1	140.6	117	152.3	

68.	The Defendants say that this table shows a pattern of increasingly overstated stock during this period which, in effect, inflated profit figures whereas, in truth, the losses being incurred by Welven towards the end of 2007 and early 2008 were much larger than the Defendants were led to believe and that these increased losses were deliberately and fraudulently concealed from them. The nub of the Defendants’ case can best be illustrated by going forward in the chronology to the management accounts for P+S to the end of January 2008 which were sent to CK on or about 11 March 2008. These covered the first 11 months of that financial year. In summary, they showed (in relevant part) total sales of £3,827,700, materials usage £1,630,100 and (after deducting other items including wages and overheads) a net loss of £151,800. As stated in the management accounts, the figure of £1,630,100 was based on the percentage figure of 43% which was an estimate calculated in accordance with the MUP. However, the Defendants say that this percentage figure was, and was known by Mr Mills to be, incorrect and that the “correct” figure for materials usage was in excess of 50% as (say the Defendants) is confirmed by, in particular, the subsequent audited accounts for the year ending February 2008. Thus, say the Defendants, the figure of £1,630,100 was significantly understated; that the correct materials usage figure was, in truth, approximately £1,900,000, a difference of approximately £270,000; and that, in the result, the actual loss was not £151,800 but a much bigger loss i.e. approximately £420,000. I revert to these allegations further below.

CK's Due Diligence Report

69.	Meanwhile, CK produced their Due Diligence Report for the Defendants on or about 6 November 2007. CK’s report referred to the stock figures in the 2007 Audited Accounts (which had been ascertained following a physical stock-take) and also referred to the estimated figures for stock in the August 2007 Management Accounts. CK reported that they were “unable to verify stock quantity”. That was because they were well aware that the value of stock between year ends was the subject of estimation involving the MUP. 

The end of 2007 

70.	CK followed up with further questions in November 2007. These were answered and included questions on stock. At trial Mr Kelly admitted that he knew that the computer did not record stock which was WIP, consignment stock, P+S’s disc stock, and some stock at MultiMesh which had never been on the computer. On 26 November, Mr Mills sent an email to Mr Rohrer as follows:

“Subject: More help St Helens October Materials
St Helens 
Opening Stock £336,100 (per AS400 + £10,923.68 WIP)
Purchases
Amodil            £13,462,
Croft                £2,806
StainlessRest   £5,545
Bunner             £862
Washboiurne    £1,818
C&CPowder    £1,892
Vecom             £446
Penistone         £3,865
Lamb                £2,817
Aalco                £10,469
StainlessWire   £17,042
Metalwire         £37,568
Lewis                £18,885
Barrot                £3,282
Bridge           £11,10(this is a 3 month forward invoice/No goods received in October)      
Hagener           £10,623                   
Other                £400
Closing Stock £(360, 800) (per AS400 + £24,648.58 WIP)
Usage = £134,460 (If you subtract Bridge £123,358)
Per Lyndon’s sheets £123,230   DIFFERENCE JUST ON THIS MONTH £25,000!!!!!
You may know something about WIP or cut off timing or something????? Still Looking
Peter”
71.	Mr Rohrer responded later that same day with the comment: “Maybe some answers?” (These two emails form part of a number of emails specifically pleaded and relied upon in the Defence in support of the Defendants’ case in fraud and which I consider further below.)
72.	From December 2007 Mr Aughey went about raising bank finance for the acquisitions. Mr Aughey’s response to questions raised by one bank show that by mid December 2007 Mr Aughey had formed the view that the properties owned by Pentargon were worth £6.3 million, as Mr Aughey admitted in cross-examination. 

73.	On 28 December 2007 Mr Mills sent an email to (amongst others) Mr Campbell which stated in material part as follows: 
“Subject: Potters Material Usage Stainless
First part of the major exercise looking at actual material usage against the accounts.
Stainless Steel Wire 8 months to 31st October 2007.
Opening AS400 stock    £192,831
Purchases see below       £381,171 but?? Could be higher? See note below re Hagener
Closing AS400 stock      £(133,800)
Therefore usage*            £440,202
Sales                               
Automotive?                   £75,000 (only £20,000 Proos actually made this year?)
Industrial SS?                  £85,000
Architectural                   £814,600
Total =                             £974,600
Therefore mat usage on above = 440/975 = 45%
I have used in management accounts 40% on Architecture 39% on automotive and 35% on industrial 
This would give a material usage of £385,000 a difference (loss) of £55,000???
Can you please consider the above and have a think about the material usage figure in Architecture, or the accuracy of stock, or anything else.
Thanks
Peter M”
74.	The following day, Mr Mills sent another email again to Mr Campbell (amongst others) which stated in material part as follows:
“Having done some further work I realise that the situation is worse than my previous email. 
At 28th February 2007 we had work in progress (therefore wire already used in previous year)
Glazzard            £30,916 invoiced on 3rd March 2007
InterStructure    £15,284 invoiced on 21st March 2007
Therefore on my previous email 
The total sales should only be £928,400 (974.6 – 30.9 – 15.3)
d the material usage would be £440k/£928.4k = 47.4%
The management accounts calculated material usage would now be £366,000
A revised difference to the actual £440,000 of £73,000.
When I return to the office I will run some selective job costing to see whether that throws any light on this problem.
Peter M”. 
Early 2008

75.	On 14 January 2008, a telephone conference took place between (amongst others) Mr Soar, Spratt Endicott in Banbury, Mr Aughey, Mr Kelly and Mr Aughey’s solicitor, Mr Rutherford, from C+H Jefferson,  with regard generally to a wide range of issues concerning the proposed SPA. According to an attendance note prepared at the time, the discussion included the following:

“2.3.7 RS saying that of the half million pound reduction in bank borrowing he was looking for payment of a figure around the £0.25m mark. DK saying that this then equated to recent losses of around a quarter of a million pounds. RS saying this was the case DK saying that the easiest way to approach these issues was to consistently act as though the accounts were prepared in a normal manner.
2.4 Stock Take
2.4.1 RS saying that a full stock check would be required in order to complete the Completion Accounts. RS saying this would be difficult bearing in mind the secrecy surrounding the deal. BA suggesting that the year end stock take be used and RS saying that the end of the financial year was 29 February. RS saying that 95-95% of the information was held on computer and is normally pretty accurate. RS saying there were balancing figures which took into account work in progress and consignment stock. (KR confirming that they were aware that some of the consignment stock was in the US).”
76.	As appears from paragraph 2.3.7, Mr Kelly was well aware of recent losses of around £250,000. Mr Soar had been candid about these recent losses as Mr Aughey accepted in evidence. With regard to paragraph 2.4.1, there was some dispute in the evidence at the trial as to the fourth sentence: “RS saying that 95-95% of the information was held on computer and is normally pretty accurate.” It was common ground that the reference to “95-95%” did not make sense and was, at least in part, a typographical error. In summary, it was Mr Aughey’s evidence that the reference should be “90-95%” and that based on what he was told his understanding was that stock in general was about 90% accurate. Mr Soar’s evidence was that the first figure of “95” in the note was incorrect; that what he had said was that between 55-95% of the stock was on the computer; that the information on the computer was normally pretty accurate although it did not include work in progress and consignment stock; and that, as referred to in the following (i.e. fifth) sentence there were “balancing figures” which took these matters into account. So far as may be relevant, I accept the evidence of Mr Soar on this point which (apart from the typographical error) is more consistent with the note and with the other evidence concerning the methodology and practice relating to the monitoring of the stock, WIP and consignment stock as I have already explained.    
77.	While the detailed terms of the SPAs were being negotiated, the market was deteriorating at the end of 2007 and beginning of 2008. In particular, stainless steel wire prices were declining. (I should mention that these fluctuations in market price created additional problems in estimating the value of stock at any point in time.) During this period, the Defendants were provided with updated financial information. Importantly, it is clear that Mr Mills and Mr Soar were candid about the deteriorating financial position of the Group in the period since August 2007. For example: 

a.	On 16 January 2008 Mr Soar told Mr Aughey on the telephone that the Group had had a “bad trading period” and that 5 people were being made redundant by P+S. In addition, Mr Soar told Mr Aughey that they were about to lose a senior sales person in the Architecture Department. Mr Aughey gave evidence that Mr Soar had said that the redundancies were “nothing serious or anything to worry about” and that (in his own view) taking action to make redundancies is a “good thing”.  I do not accept the first part of that evidence. There is nothing in the note to that effect. As to Mr Aughey’s suggestion that redundancies were a “good thing”, I accept that they will obviously reduce future wages but the fact remains that, as is common ground, Mr Soar was entirely candid about the Group having had a bad trading period and had already suffered recent losses of around £250,000, with some weeks still to go before the year end.

b.	On 10 March 2008 the Defendants were informed that the estimated loss for 2008 was £250,000 and that Mr Mills had indicated it could be higher.

c.	On 11 March 2008 the January 2008 Management Accounts were sent to CK. These showed that the Group had made a loss of £287,000 between September 2007 and January 2008. Annualised EBITDA based on that 5 month period was a loss of £247,120. 

78.	Meanwhile, as appears from a file note of a conversation on 22 January 2008, Mr Aughey had been told by surveyors CB Richard Ellis that the Pentargon properties were valued at £6.45 million.

79.	On 5 February 2008 CK sent to Ulster Bank a set of financial projections. These are the financial projections which are annexed to the Re-Amended Defence. It was accepted by Mr Kelly that these projections were not changed materially at any time prior to the acquisition on 26 March 2008 or prior to the financial whitewash which took place after the acquisition on 31 March 2008. Also attached to that email was a statement that Mr Aughey would be injecting £700,000 as part of the total acquisition consideration of £5.5 million. This is completely inconsistent with Mr Aughey’s case that the transaction was to be self financing. In Court Mr Aughey was constrained to say that the email to Ulster Bank had been wrong to say that he would be putting in £700,000 towards the acquisition cost. According to Mr Aughey, what he meant was that he was intending at some stage in the future after the acquisition to invest a further sum of £700,000 to install other better equipment. In any event, it is another document which is inconsistent with Mr Aughey’s case. 

80.	On 7 February, Mr Mills sent an email to Mr Campbell (amongst others) with regard to stainless wire usage. The email refers to certain changes which reduced the potential loss (to 31st October) “….but it is still £42,000. This has not been adjusted in any management accounts”. The email continued with some detailed calculations which identify the difference of some £42,000 and concluded as follows: 

“Difference £42,000 = about 10% gone missing, or? 7 tonnes?
Or it could be that my overall material usage of 29% for all Mesh Assembly (excl auto) is too low and should be nearer 35% for SS and HT, which would explain the difference.
So now I will turn my attention to HT and Harps”
81.	Thereafter, between 11-14 February 2008 there was a further exchange of emails between Mr Mills and Mr Campbell relating to various matters including stainless wire usage and also estimates of stock with regard to a client (Proos) in the USA. I do not propose to set these (lengthy) emails out in detail. It is, I believe, sufficient to note that they are concerned in large part with the difficulties of estimating WIP and consignment stock and adjustments to the percentage figures to be used as part of the MUP and that they were relied upon by the Defendants in support of their case in fraud. In particular, Mr Campbell raised questions as to material content suggesting that the existing MUP figures for auto (39%) and industrial (39%) should be higher whereas the figure for architectural (44%) should be lower. Mr Mils’ response was that the management accounts usage is probably understated by possibly as much as £40,000. So far as necessary I consider these emails further below.  

82.	On 19 February 2008 Mr Mills sent a further email to Mr Campbell saying (amongst other things) that he had been “very concerned for some time about Potters material usage figures in the management accounts. I have been keeping my fingers crossed that stocks were wrong, WIP was higher, a purchase invoice was wrong etc. I have been looking in detail for a couple of months now and between us we have a number of areas which combine to make the trading for the year even worse than currently being shown.” Mr Mills then listed a number of those specific areas viz (a) problems with receipts into stock on the AS400; (b) Proos; (c) industrial sales; and (d) Mivan.   

March 2008
83.	During this period, on the instructions of Mr Aughey, CK was working on financial projections which were necessary in order to obtain finance. On 19 February 2008, Ulster Bank sent to Mr Aughey a Facility Letter setting out the terms of a loan facility in the sum of £4,600,000 subject to certain “pre-drawdown conditions” including the following: 
“7. Written confirmation from accountant/auditor with the Bank to be satisfied with the Capex requirements over the next three years. A budget to be provided and agreed.
10. Submission of Assets and Liabilities statement, 2007 audited accounts and 2008 management accounts (minimum 6 months) for the target companies and the Bank to be satisfied with same.”
The Bank also required to be satisfied that the properties were valued at £6m OMV on a vacant possession basis. Although there were slight changes thereafter to this Facility Letter, the terms remained substantially similar including the conditions quoted above. 
84.	On 5 March 2008, Mr Aughey spoke to his solicitor, Mr Rutherford, with regard to updating him on discussions he (Mr Aughey) had had with Mr Soar. Mr Rutherford produced a note of that conversation which recorded (amongst other things) as follows: 
“Barry was at pains to point out the following to me:
1.	As far as Barry is concerned, the main reason why he is buying the Soar Group is to achieve market share.
2.	He is not particularly after the manufacturing capability because manufacturing in this sector in the UK is in decline generally. Most of the manufacturing is being done in the Far East and ultimately he will use the Soar premises as warehouses.
3.	The important thing is the customer list of the Soar Group and the properties which he will purchase through Pentargon.
4.	He believes that the rents charged to Soar by Pentargon are either less than market rent or represent a market rent but overall he feels that the rents are attractive.
5.	He also fees that the deal is a cheap deal overall because he is paying less than 4 times EBITDA. Richard Soar is selling the business cheaply because he wants to sell it quickly and quietly and Barry wants this too.
6.	Barry realises there may be redundancies after Completion and he may have to sell some equipment, but he is not concerned about this. The amounts involved will be relatively small compared to the overall plan.
7.	Barry is quite content that he will use the time after completing the Share Purchase Agreement to persuade the continuing directors of his intentions, to secure their secrecy regarding the deal and to obtain their assistance in relation to the financial assistance whitewash.   ”
85.	 On 6 March 2008, Mr Kelly’s assistant, Aeveen Daly, sent to Mr Kelly what appears to be a draft email to Mr Mills stating “Peter, in order for me to complete the report pursuant to s.156(4) of the Companies Act 1985 (the Act) and complete the whitewash procedure, I shall require the following information at this time.” The draft email then set out a list of information requested including (a) “financial projections for the next twelve months (including any assumptions made)”, (b) “Up to date Management accounts/Management information” and (c) “Details of any third party information which the company has relied on in preparing the financial projections.” Mr Kelly responded to Aeveen Daly by email stating: “Given what Avril [the Bank’s solicitor] has sent you through and what we can provide you its probably best you only [ask] Peter [Mills] or Barry [Aughey] for what you need and specifically who can provide you with what – Mills is a bit of a tit.” Mr Kelly also indicated in red on Aeveen Daly’s draft email what he described as a “sort of a pointer”. Thus in the list of information, Mr Kelly stated against (a) “Circulate to PM/RKS if necc” and against (c) “You’ll get a shitty answer from Mills on this”. In the event, the draft email which Aeveen Daly had prepared was sent in modified form to Mr Aughey for his action and for him to approve CK’s letter of appointment to carry out the whitewash.
CK’s Financial Projections
86.	 On 7 March 2008, CK produced a finalised version of the financial projections for the Group. As stated on the second page, these financial projections were based on certain assumptions including the following:

“SALES
Sales in 2007/08 based on actual to October 2007 per Management Accounts and estimated to year end based on 2007/08 budgets YTD performance.
Sales in 2008/09 are forecast based on previous year actual results and budgets for 2008/09. (12% growth) Wire Cloth, Mesh Assembly and Architecture sales in 2009/10 are based on a 10% increase in sales from 2008/09. Automotive sales in 2009/10 are based on a 1% increase in sales from 2008/09.”
87.	The projections for P+S showed, in particular, sales for the financial year 2007/2008 of £4,606,800 and, going forward, £5,180,000 (2008/2009) and £5,685,440 (2009/2010) assuming sales growth in those years of 12% and 10% respectively. It is important to note that neither Mr Mills nor Mr Soar nor anyone at Welven was ever asked to confirm or otherwise to comment upon these financial projections prior to the execution of the SPA notwithstanding the fact that (a) the provision of a “budget” to Ulster Bank was one of the stipulated pre-drawdown conditions and (b) they were used as part of the financial whitewash procedure which was required by Ulster Bank to provide funding to Mr Aughey. 
88.	Ms Daly appears to have continued to review these projections. On 8 March 2008 she noted that the sales for P+S went from £4.6 million to £5.2 million to £5.6 million and wrote “excessive increase” and appears to have been querying the “basis for sales increase over 3 yrs”. On 9 March 2008 Ms Daly sent out her email seeking financial information for CK’s financial projections. This was addressed to Mr Soar who was asked to contact Mr Mills to provide up to date management accounts and budgets. The email said that “Catherine/Des” were providing the other information Ms Daly required – that was a reference to the financial projections which CK had prepared. 

89.	On 8 March 2008, CK advised Mr Aughey that if there were any overstatements in the management accounts these would be found in the completion accounts process. That was a reference to the price adjustment mechanism in the SPA. CK rightly understood that if the estimated value of stock was more than the value ascertained after a physical inspection this would reduce the price under the SPA. 

90.	On 9 March 2008 Ms Daly drew up a list of matters to complete the whitewash. Point 1 was to compare CK’s projections to the January 2008 Management Accounts. Point 9 was also related to obtaining up to date Management Accounts and look at sales analysis to February 2008.

The January 2008 Management Accounts

91.	Meanwhile, in early March 2008, Mr Mills produced the Management Accounts for the 11 months to the end of January 2008 which I have already referred to above. As I have stated, these showed total sales for P+S during that period of £3,827,700 (equivalent perhaps to approximately £4,200,000 on an annualised basis) and a loss of £151,800. For the Group, these Management Accounts showed that the Group had made a loss of £287,000 between September 2007 and January 2008 (5 months). Annualised EBITDA based on this 5 month period showed a loss of £247,120. Mr Aughey accepted that these Management Accounts for that 5 month period showed an average loss of £56,000 pm over the previous 5 months. On the same day, Mr Mills, sent to CK the aged debtors, aged creditors and Trial Balances to November 2007 and January 2008. 

92.	These Management Accounts were provided to Mr Rutherford who forwarded them on to CK on or about 10 or 11 March 2008. For reasons which neither Mr Kelly nor Mr Aughey could satisfactorily explain, these updated Management Accounts were never provided to Ulster Bank prior to the execution of the SPA or drawdown. Nor was any attempt ever made by CK to update the financial projections which they had prepared in light of such more recent Management Accounts. Mr Kelly sought to distance himself from this aspect by suggesting that he had nothing to do with the whitewash and that this was the responsibility of Aeveen Daly. Be that as it may, the fact remains that important information was not passed on by CK to Ulster Bank prior to the execution of the SPA and drawdown and, in my judgment, this was inexcusable.

93.	Further, not only were these Management Accounts never sent to Ulster Bank but on the contrary what was sent to the Ulster Bank by CK were the earlier Management Accounts to the end of October 2007 (which were, of course, the basis of CK’s financial projections) under cover of an email dated 13 March 2008. This was, of course, a few days after CK had received the later and more up to date Management Accounts for the 11 month period to the end of January 2008. Why this was done (i.e. why out of date accounts to October 2007 were sent rather than the more recent accounts to January 2008) is totally inexplicable. One possibility is, I suppose, oversight. Another possibility is that the later January 2008 accounts were deliberately withheld by CK and/or the Defendants from Ulster Bank because they showed a substantial decline in overall sales, substantial losses and that the Group was in a materially worse financial position than appeared from the Management Accounts to the end of October 2007 thereby undermining the financial projections which had been provided to Ulster Bank. It is impossible for me to resolve that question and unnecessary for me to do so. For present purposes, it is sufficient to note that the relevant up to date information had been provided by Mr Mills at least to Mr Rutherford and CK. 

Property valuations 

94.	About this time, Ulster Bank’s valuers (Cluttons) produced valuations for Pentargon’s properties valuing them at £3.6 million with vacant possession. Mr Aughey’s view was that this was extremely cautious and based on historic valuations in the accounts. Mr Aughey had received a desk top valuation from BTW Shiells which came out at approximately £6 million and his “gut feeling” was that the properties were worth £5.3 to £5.7 million. Mr Aughey admitted in evidence that this was his view at the time the SPA was signed on 26 March 2008.

Soar Group Budgets to February 2009

95.	On 13 March 2008, Mr Mills sent Soar Group Budgets to Aeveen Daly for the year to February 2009 prepared on a current basis (i.e. taking no account of the SPA) and assuming that MultiMesh Wolverhampton would be closed in the third quarter. Importantly, these were substantially lower than the financial projections which had previously been produced by CK. In particular, they showed for P+S sales for 2007-2008 of £4,159,000 and projected sales for 2008-2009 of £4,481,000. (The comparable figures in CK’s projections were £4,606,800 and £5,180,000 respectively). It appears that these projections were never forwarded to Ulster Bank nor did CK update its own financial projections in light of this information provided by Mr Mills. Again, the failure to do this is totally inexplicable. Mr Aughey suggested in evidence that it was for CK to send information to Ulster Bank. Mr Kelly sought to explain why this had not been done by saying that this new information came very late. However, I found this explanation most unsatisfactory particularly in the light of the pre-drawdown condition in the Facility Letter. 

Further Discussions

96.	Meanwhile, Mr Mills spoke on the phone to Mr Aughey on 7 March 2008 and they had a meeting a few days later probably on or about 12 or 13 March 2008 at Aughey Screen’s premises in Tamworth. According to Mr Aughey it was Mr Mills who contacted him and who asked for the meeting; and the meeting did not amount to much other than an introduction. Be that as it may, it was common ground that such meeting did take place. In summary, it was Mr Mills’ evidence that he gave Mr Aughey his view as to the poor current trading position of the Group and his opinions as to “why we were where we were”. Mr Mills had no recall of the details of the conversation but his evidence was that he was certain that he told Mr Aughey of the most recent management account figures for the companies and that the statutory accounts for the full year might show a worse financial position when they had finished receiving subsequent invoices and valuing all the stock not held on the computer. This was consistent with a manuscript note made by Mr Aughey’s solicitor which states “Feb 07 – co broke even. Now loss estimated at £250k for 2008. P Mills has indicated to BA maybe higher. P Mills how much will it be? BA wants DK to find out”. In cross-examination Mr Aughey put to Mr Mills that there was no discussion of accounts or figures during that conversation or “anything like that”. However, I accept Mr Mills’ account which is consistent with other information provided at this time and the solicitor’s note referred to above.  

97.	On 14 March 2008 parts of the disclosure letter which were under  negotiation were sent by the Defendants’ solicitors to Mr Aughey. These included disclosures showing the deterioration in the finances of the Group:

a.	The Group had lost business from Brimonn UK as a result of its takeover by Harpscreen. It had also lost business from a company in the US (Proos) where turnover was down from £416,000 in 2007 to only £100,000 in 2008.

b.	Profitability was estimated to be down by £250,000.

c.	The general level of trading in the second half of the financial year ended 28 February 2008 was worse than the first half in the case of P+S and MultiMesh.

98.	A telephone attendance note at around this time records that Mr Aughey still valued the properties at around £6 million.

99.	On 18 March 2008 Ulster Bank issued its facility letter in finalised form under which SGL subsequently borrowed £4.6 million for the acquisitions. 

	      Execution of the SPA, Drawdown and Subsequent Events

100.	On 26 March 2008, prior to the financial whitewash procedure being carried out, Welven and the Defendants executed the SPA and the Pentargon SPA. The Defendants duly paid the nominal sum of £1 under the SPA.

101.	The financial whitewash took place on 31 March 2008 in Spratt Endicott’s offices. This was based on CK’s financial projections. Both Mr Aughey and Mr Kelly accepted that these had not been seen by Welven or any director of SEL or its subsidiaries before 31 March 2008. Mr Kelly accepted the fact that paragraph 39 of his witness statement was wrong to say that CK’s projections had previously been approved by Mr Soar on 14 March 2008. That was simply untrue as Mr Kelly accepted. Welven never approved these projections at any time. Mr Campbell confirmed that the first time he saw these projections was when they were shown to him on that day i.e. 31 March 2008.   On the same day, the Defendants drew down the funds under the Facility Letter from Ulster Bank and paid the balance of the first instalment (i.e. £249,999) under the SPA and the further sum of £4m under the Pentargon SPA.

102.	In due course, the statutory accounts for the Group were prepared and finalised for the year to end February 2008. These showed substantial losses for the Group, including a loss for P+S of £451,355 which was substantially greater than the equivalent figure in the Management Accounts for the 11 months to the end of January 2008 which I have referred to above. It was an important part of the Defendants’ case that this increase was due to the “correction” for stock which had previously been deliberately concealed in the previous Management Accounts including those to the end of January 2008. 

103.	After the acquisition, the relationship between Mr Mills (who continued in his role as Finance Director) and Mr Aughey deteriorated. On 17 October 2008, Mr Mills sent a long email to Mr Aughey explaining in considerable detail the way in which stock was recorded on the computer and the difficulties of estimating WIP. He commented in part as follows: 

“The businesses of Potter & Soar and MultiMesh are quite complicated, with a large number of different job centres. I would dearly love to have a better integrated system, and have talked about it endlessly, but we do not have the staff. Our computer manager will tell you he has a number of such tasks on his list, but they are all in abeyance with cost implications. As I have said to you it is my regret that in recent years we have not had proper monthly management meetings where we would review the accounts, but when we have been remotely managed by our owner manager, the local directors have just carried on, in the knowledge that he supported the business.”
Eventually, matters were brought to a head during a meeting on 23 October 2008 attended by Mr Mills, Mr Aughey and Mr Batchelor, the Production Director of P+S. A note of the meeting was prepared by Mr Batchelor. A separate note was prepared by Mr Aughey. According to both notes, there is no doubt that Mr Aughey took a very aggressive approach towards Mr Mills. In particular, according to Mr Batchelor’s note, Mr Aughey said (amongst other things) that his main concern was that the accounts presented by Mr Mills up to August 2007 showed P+S to be a far better company financially than it really was; that he had proof that the accounts were false; and he (Mr Aughey) pressed Mr Mills whether he knew this and whether he was instructed to do this (i.e. falsify the accounts) by Mr Soar. As recorded in Mr Batchelor’s note and confirmed by Mr Mills in evidence, he (Mr Mills) empathetically denied these allegations. At some point during the meeting, Mr Aughey demanded that Mr Mills hand over his laptop computer which he (Mr Mills) promptly did. Mr Aughey’s note of the meeting is much longer than Mr Batchelor’s note and it contains many assertions as to what allegedly happened during the meeting and shortly afterwards when Mr Batchelor and Mr Aughey followed Mr Mills to his (Mr Mills’) office. In particular, according to Mr Aughey’s note, Mr Mills referred to Mr Soar as “Tricky Dickey” and stated that the material usage “….method was changed at the request of Mr Richard Soar and that this change was specific to the management accounts”; and that Mr Mills ended the meeting by saying “do not be soft on Mr Soar”. Mr Mills denied these allegations although he accepted in evidence that he might have referred to Mr Soar as “Tricky Dickey” (but he had no recollection that he had done so). According to Mr Mills, Mr Soar was known as such in the trade. Mr Mills took it to be a term of endearment meaning that Mr Soar was jolly good at doing a deal. The important point is that I accept Mr Mills’ evidence that he did not think and did not intend to suggest that Mr Soar was in any way dishonest. I also accept generally Mr Mills’ account of this meeting and, as confirmed in Mr Batchelor’s note, that he (Mr Mills) was angered at the suggestion that he had been instructed to alter the figures in the Management Accounts and had pointed out to Mr Aughey that “I am not far off retirement, I would have been crazy to jeopardise myself by being involved in such a thing”. Again, this is another document which is inconsistent with the allegations made by Mr Aughey. Mr Aughey also alleged that Mr Mills shredded unspecified documents “relating to the share purchase agreement”. In fact, as Mr Mills said in para 137 of his witness statement and in cross examination, the documents did not relate to the SPA but instead related to an old company called Screen Systems. Mr Mills’ account is supported by the contemporaneous document he sent to his solicitor at the time. Again, I accept Mr Mills’ evidence in this regard. 
The Defendants' Pre-Action Letter

104.	It is important to note that on 14 November 2008, Mr Aughey’s solicitors, sent what was in effect a pre-action letter stating that Welven was in fundamental breach of the SPA and the Pentargon SPA “….because [Welven] wilfully concealed the New Data [as defined in the letter] and was guilty of fraudulent misrepresentation prior to completion;” and that SGL’s losses and damage to date were estimated to be £5.1m. The “New Data” (which, according to the letter, Mr Kelly was “shocked to discover”) was said to be the SSS for the period after 28th February 2007. In fact,  the SSS for the end of August 2007 had been provided to CK at the time of the due diligence exercise under cover of the email dated 31 October 2007 as I have already described above (and was now common ground), although the email and attachments had apparently not been seen or opened. The fact is that if Mr Kelly was shocked to discover what was described as “New Data”, it was no fault of Mr Mills or Mr Soar. Given that the SSS had been provided to CK, it follows that the allegations of fraud as set out in that letter were founded on a false premise and, in my judgment, were entirely baseless.

105.	On 1 December 2008 CK sent an email to Mrs Costello attaching an “updated” schedule of properties. That included the Pentargon properties which were valued at €6.45 million, which is a sterling equivalent of around £5.49 million. The Group was valued at €1.8 million, which is a sterling equivalent of around £1.53 million. Mr Aughey admitted these valuations in cross examination.

The Subsidiaries

106.	Meanwhile, on about 9 October 2008 SGL sold one of the subsidiaries, B+S, for £349,102. Towards the end of 2008 and thereafter, negotiations also took place between Mr Aughey and Mr Platt with regard to the possible sale of P+S to the Locker Group. In December 2008 Mr Howard Platt, the Managing Director of Locker Group met with Mr Aughey at Locker’s offices in Warrington. That meeting discussed Locker’s interest in purchasing the woven wire part of P+S. It was followed by an email from Mr Platt dated 15 December 2008 in which he said that he thought he could put together an asset deal for the wirecloth part of P+S’s business which would be worth around £1 million in positive cash impact to the Aughey Group. Locker Group made a similar offer in July 2010. Mr Soar subsequently learned of these discussions from Mr Platt. That led to Spratt Endicott asking Mr Platt for details of the proposal but Mr Platt instructed solicitors who declined to provide any documents, rightly suggesting that they ought to have been disclosed by Mr Aughey. Accordingly, Spratt Endicott asked Mr Aughey to give disclosure. This led to Mr Aughey’s email to Mr Platt in which he stated “I have received an email from my solicitors...in Belfast...Spratt Endicott are aware of and have requested a copy of the offer to me from Locker Group....Please can you advise me as to how Spratt Endicott are aware of your offer to me by email and what is the purpose in making them aware of such an offer”. The correspondence was not disclosed by Mr Aughey so Welven had to obtain an order for specific disclosure which was made on 18 July 2010. This order forced Mr Aughey to disclose his correspondence with Mr Platt which is annexed to Mr Platt’s witness statement and includes Mr Aughey’s email in which Mr Aughey complained to Mr Platt that his disclosure of the proposal had put Mr Aughey in an “awkward position” in this litigation (because Mr Aughey was and still is advancing a case that SEL was “worthless”) and asked him to keep that email “confidential”. In fact, as Mr Platt explained in Court, his proposal was worth around £1.2 million and was broken down as follows:

a.	Goodwill of £200,000

b.	Stock which was estimated to be worth £300,000

c.	Deferred consideration based on 17.5% of all sales for a 3 year period, which Mr Platt considered would generate around £220,000 a year for 3 years making a total of £660,000.

107.	Mr Aughey admitted that he did not want to give disclosure of this correspondence with Mr Platt. However, having been unable to keep this correspondence secret, Mr Aughey then changed tactic at trial and advanced the allegation in his opening that in fact the offers made by Mr Platt were “not an arm’s length offer” and were “bogus” and had been put together with Mr Soar. In my judgment, these allegations were entirely without any foundation. Moreover, in evidence Mr Platt confirmed that his proposals were “serious proposals” which were “valid”, “legitimate” and “sincere”. I accept that evidence. 

The Alleged Misrepresentations
108.	Having set out a summary of relevant events and, so far as may be relevant, my conclusions with regard to at least certain of those events, it is convenient to identify the two main misrepresentations relied upon by the Defendants as pleaded in paragraph 50 and 51 of the Re-Amended Defence and Counterclaim.

“50. The warranties contained in this Agreement presented to the Defendants immediately prior to its signature amounted to representations made by the Claimant to the Defendants, and were intended by the Claimant to induce the Defendants to enter into the Agreement .The defendants were induced to enter into the Agreement by these representations, and did so in reliance of these representations. The particular representations upon which the Defendants rely in these proceedings are the warranties in paragraphs 3.1(b), 3.2(a) (ii) and (b), 3.5, 3.6 and 18.5 of Schedule 4 to the Agreement as set out above.
51 The representations referred to in the preceding paragraph were materially incorrect in that:
“(a) the Accounts of Multi Mesh and Potter & Soar (Tab 6) did not give a true and fair view. Profit was grossly overstated by reason of a mis-posting in the Accounts of Potter & Soar of a £65,000 plus VAT deposit received from a customer, Mivan Limited. In relation to the Mivan mis-posting, a copy of the relevant internal sales invoice and the sales invoice histories of account 2M0988 and SD0802 (Deposit) in respect of Mivan Limited are attached at Tab 7. That mis-posting materially and inaccurately enhanced the profit recorded in the Accounts of Potter & Soar in the sum of £65,000 (from £15,000 to £80,000).”
(b) as stated above (at paragraphs 27-44), the accounting  records of Multi Mesh and Potter & Soar had not been properly written up. The Defendants refer to the hard and soft copy Trial Balances provided to the Defendants in October 2007 referred to above, and rely upon the omission from the Trial Balances of the more accurate information from the computer system that had been removed from the Trial Balances provided to the Defendants.”
109.	As pleaded in paragraph 52, these representations are alleged to have been made by Welven fraudulently alternatively negligently alternatively innocently. Given the absence of any claim for rescission, any claim to the reduction of the purchase price on the basis of innocent misrepresentation seems bound to fail in any event. More generally, as to the Defendants’ case based on negligent and/or innocent misrepresentation, it was Welven’s case that these could not be relied upon or were otherwise excluded in light of the terms of the SPA. This was (at least in part) the subject of Welven’s strike out application and it is convenient to deal with this aspect at this stage.
Clause 13.2 of the SPA
110.	In essence, Welven’s case in this context falls into two limbs. First, Welven relies upon Clause 13.2 of the SPA which provides as follows:
“[SGL] acknowledges that it has not been induced to enter into this Agreement by any representation, warranty, promise or assurance by [Welven] or any other person, save for those contained in this Agreement.  The [SGL] agrees that (except in respect of fraud) it shall have no right or remedy in respect of any other representations, warranties, promise or assurance save for those contained in this Agreement.  The [SGL] acknowledges that its legal advisers have explained to it the effect of this sub-clause 13.2.”
111.	The way in which the Defendants put their case in misrepresentation is to allege in paragraph 50 of the Re Amended Defence that the Warranties in the SPA “immediately prior to its signature amounted to representations made by the Claimant to the Defendants”. In my view, this is a false premise because of the express terms of Clause 13.2 which is a type of clause which was considered by Christopher Clarke J in Raiffeisen Zentral Österreich AG v Royal Bank of Scotland [2011] 1 Lloyd’s Rep 123 where the relevant previous authorities are reviewed and conveniently summarised. In particular, consistent with what is stated at para 287 of Raiffeisen, Clause 13.2 is a clause which makes clear that “no (or only a qualified) representation is being made”, rather than a clause which seeks to exclude liability for a representation that has been made. As Clarke J explained at para 310 “The essential question goes to whether the alleged representation was made (or, I would add, was intended to be understood and acted on as a representation), or whether it excludes or restricts liability in respect of the representations made, intended to be acted on and in fact acted on; and that question is one of substance not form”. 
112.	The Defendants rely on the position “immediately prior to signing” the SPA at which time they contend that misrepresentations were made to them by the terms of the unsigned SPA. However, at this time it was clear from the SPA that the only representations being made and warranties being given were those set out in the SPA. Clause 13.2 is a clause which makes clear whether any representations are being made at all, rather than a clause seeking to exclude liability for misrepresentations that have been made. 
113.	The Defendants rely on the terms set out in Schedule 4 to the SPA as pre-contractual representations concerning the 2007 Audited Accounts and the Management Accounts. However, Schedule 4 does not contain any representations.  Schedule 4 contains only contractual warranties. That was the basis on which the parties were contracting i.e. that these matters were contractually warranted and were not pre-contractual representations.  (For reasons which I have already explained, I am not concerned with any possible claim for breach of warranty. The Defendants’ case is limited to one based on alleged misrepresentations). For these reasons, I accept Welven’s primary submissions that the effect of Clause 13.2 is to preclude the Defendants from asserting the making of the alleged pre-contractual misrepresentations whether made negligently or innocently. On this basis I accept Mr Taylor’s submission on behalf of Welven that the Misrepresentation Act 1967 is not engaged and is not therefore applicable. It follows that the Defendants’ claims in negligent or innocent misrepresentation must fail although, as Mr Taylor rightly conceded, Welven could not rely on Clause 13.2 to avoid a claim by the Defendants based on fraud.  
Exclusion of liability for Negligent or Innocent Misrepresentation 
114.	However, if contrary to the foregoing, any representations were made, liability for innocent and negligent misrepresentation was in my judgment excluded by the clauses in the SPA. Further, such exclusion was reasonable within the meaning of the Misrepresentation Act 1967. The relevant clauses of the SPA provide that:
“If at any time after the Completion Date it should transpire that any of the Warranties is untrue or incorrect and has been breached then the measure of damages shall be determined by the Courts under normal contractual principles of loss of bargain arising from the breach” (clause 7.5) and 
“After Completion the sole remedy of the Purchaser against the Vendor under or in respect of the Warranties shall be in damages for breach of contract and the Purchaser shall have no right to rescind this agreement after the date hereof for breach of any of the Warranties or under the provisions of the Misrepresentation Act 1967 or for any reason whatsoever” (clause 20 of Schedule 5).
115.	In my judgment, (a) these clauses exclude any remedies for innocent or negligent misrepresentation (but not fraudulent misrepresentation), and (b) they are reasonable exclusions within the meaning of the Misrepresentation Act 1967. In Raiffeisen Clarke J at para 321 referred to the general approach that “The courts have on several occasions expressed the undesirability, generally speaking, of striking down terms freely agreed between large commercial parties who are usually to be regarded as the best judges of their own interests”. Clarke J went on to quote Chadwick LJ in E A Grimstead & Son Ltd v McGarrigan [1999] EWCA Civ 3029 at para 29: 
“There are, as it seems to me, at least two good reasons why the courts should not refuse to give effect to an acknowledgement of non reliance in a commercial contract between experienced parties of equal bargaining power— a fortiori, where those parties have the benefit of professional advice. First, it is reasonable to assume that the parties desire commercial certainty. They want to order their affairs on the basis that the bargain between them can be found within the document which they have signed. They want to avoid the uncertainty of litigation based on allegations as to the content of oral discussions at pre contractual meetings. Second, it is reasonable to assume that the price to be paid reflects the commercial risk which each party — or, more usually, the purchaser — is willing to accept. The risk is determined, in part at least, by the warranties which the vendor is prepared to give. The tighter the warranties, the less the risk and (in principle, at least) the greater the price which the vendor will require and which the purchaser will be prepared to pay. It is legitimate, and commercially desirable, that both parties should be able to measure the risk, and agree the price, on the basis of the warranties which have been given and accepted.”
116.	Turning to the SPA: 
i.	it was negotiated at arms-length over a number of months between experienced commercial parties with equal bargaining strength involving some 13 or 14 drafts; 
ii.	both knew of the terms in the SPA and were represented by solicitors (Spratt Endicott for the Claimant and C&H Jefferson for the Defendants);
iii.	the Defendants were also advised by accountants (Cavanagh Kelly);
iv.	the clauses in question do not seek to exclude all liability if a warranty is incorrect – they simply restrict the remedies available to the Defendants which are to claim damages for breach of contract (subject to the restrictions in Schedule 5 clauses 3, 4 and 5 which limit liability to the purchase price, provide for notice of claims to be given and provide minimum amounts for which claims may be brought).
117.	For these reasons, it is my conclusion that the only basis upon which the Defendants can succeed is to show some fraudulent misrepresentation on the part of Welven. 
The Law in relation to Fraudulent Misrepresentation 
118.	For present purposes, the relevant law in relation to fraudulent misrepresentation may be summarised as follows:
i.	A representation is a statement of fact made by the representor to the representee on which the representee is intended and entitled to rely as a positive assertion that the fact is true (Cassa di Risparmio della Repubblica di San Marino SpA v Barclays Bank Ltd. [2011] EWHC 484 (Comm), Hamblen J).
ii.	A representor may qualify what might otherwise have been an outright statement of fact by saying that it is only a statement of belief, that it may not be accurate, that he has not verified its accuracy or completeness, or that it is not to be relied on: Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland plc [2011] 1 Lloyd’s Rep 123 at para 86, cited by Hamblen J in Cassa di Risparmio della Repubblica di San Marino SpA v Barclays Bank Ltd. [2011] EWHC 484 (Comm).
iii.	Fraud is proved when it is shown that a false representation has been made (1) knowingly, (2) without belief in its truth or (3) recklessly, careless whether it be true or false (Derry v Peek (1889) 14 App Cas 337).
iv.	In that context, it is important to bear in mind certain passages from the judgment of Rix LJ in The Kriti Palm [2007] 2 CLC 296 citing earlier authority at paragraphs 257-259 viz 
“257. In effect, recklessness is a species of dishonest knowledge, for in both cases there is an absence of belief in truth. It is for that reason that there is "proof of fraud" in the cases of both knowledge and recklessness. This was stressed by Bowen LJ in Angus v. Clifford [1891] 2 Ch 449 where he said (at 471): 
"Not caring, in that context, did not mean not taking care, it meant indifference to the truth, the moral obliquity of which consists in a wilful disregard of the importance of truth, and unless you keep it clear that that is the true meaning of the term, you are constantly in danger of confusing the evidence from which the inference of dishonesty in the mind is to be drawn – evidence which consists in a great many cases of gross want of caution – with the inference of fraud, or of dishonesty itself, which has to be drawn after you have weighed all the evidence."
258. And in Armstong v. Strain [1951] 1 TLR 856 at 871 Devlin J, after a full citation of passages in earlier authorities which stress the need for dishonesty (also called actual fraud, mens rea, or moral delinquency), said this about the necessary knowledge: 
"A man may be said to know a fact when once he has been told it and pigeon-holed it somewhere in his brain where it is more or less accessible in case of need. In another sense of the word a man knows a fact only when he is fully conscious of it. For an action of deceit there must be knowledge in the narrower sense; and conscious knowledge of falsity must always amount to wickedness and dishonesty. When Judges say, therefore, that wickedness and dishonesty must be present, they are not requiring a new ingredient for the tort of deceit so much as describing the sort of knowledge which is necessary."
259. Moreover, whether it is in the matter of identifying the relevant misstatement or in the finding of a dishonest mind, it is necessary to bear in mind the heightened burden of proof which bears on the claimant, as discussed in cases from Hornal v. Neuberger Products Ltd [1957] 1 QB 247 to In re H (Minors) [1996] AC 563. In the latter case Lord Nicholls of Birkenhead said this (at 586): 
"Built into the preponderance of probability standard is a generous degree of flexibility in respect of the seriousness of the allegation. Although the result is much the same, this does not mean that where a serious allegation is in issue the standard of proof required is higher. It means only that the inherent probability or improbability of an event is itself a matter to be taken into account when weighing the probabilities and deciding whether, on balance, the event occurred. The more improbable the event, the stronger must be the evidence that it did occur before, on the balance of probability, its occurrence will be established. Ungoed-Thomas J. expressed this neatly in In re Dellow's Trusts [1964] 1 W.L.R. 451, 455: "The more serious the allegation the more cogent is the evidence required to overcome the unlikelihood of what is alleged and thus to prove it."
v.	It must have been made with the intention that it will deceive the recipient of the statement (Clerk & Lindsell on Tort para 18-30).
vi.	It must have been relied on and induced the transaction (Clerk & Lindsell on Tort para 18-34) 
The Mivan Deposit 
119.	It is convenient to consider first the Defendants’ case in relation to the Mivan deposit. I have already mentioned this above, but at the risk of some repetition, the position with regard to the Mivan deposit is as follows. 
120.	The allegations concerning the Mivan deposit arise out of a large contract under which P+S agreed to supply goods to a customer called Mivan which was carrying out work on the Willis Building, 51 Lime Street, London. The contract straddled the February 2007 year end. Mivan paid a deposit of £65,000 under the contract in payment of a deposit invoice dated 26 June 2006. P+S then delivered materials to site over a number of months as evidenced by invoices which were raised in February 2007, March 2007, June 2007, July 2007 and subsequently. The invoices, including the deposit invoice for £65,000, were raised by the P+S’s sales department, not the accounts department. As stated above, the £65,000 deposit was included in the 2007 accounts without taking account of the cost of the goods to be supplied and to that extent the turnover and profit in those accounts were overstated by an amount which for present purposes has been assumed to be equivalent to that sum i.e. £65,000. As Welven now accepts, it does seem that as a matter of strict accounting, the Mivan invoice was not correctly accounted for in the 2007 Audited Accounts, even though they were signed off by Grant Thornton. On this basis, it seems to me to follow that the Defendants are right to say that there was a misrepresentation made by Welven when the draft 2007 accounts were provided to the Defendants the effect of which was to overstate both turnover and profit for that year by some £65,000. 
121.	As stated above, while the contract was being performed in the financial year 2006/2007 and 2007/2008, P+S made deliveries in stages and invoices were raised to Mivan. These invoices failed to take account of the fact that Mivan had paid a deposit and therefore Mivan were over invoiced. Mr Mills’ recollection is that this over-invoicing was discovered in around February 2008 and it was at this time that the credit note was issued. 

122.	In support of their claim that fraudulent misrepresentations were made in relation to the 2007 Audited Accounts, by virtue of the inclusion of the £65,000 deposit, the Defendants refer to the email from Mr Mills dated 19 February 2008. This email however simply sets out the analysis of how this Mivan contract was accounted for between the 2007 and 2008 accounting years. As Mr Mills said in evidence, he did not believe that the 2007 Audited Accounts were false. Similarly, Mr Soar did not think that the 2007 audited accounts were false. Both believed prior to the SPA that there would be an adjustment down in profits in the 2008 Audited Accounts. Further, Mr Soar considered £65,000 to be immaterial in the context of the Group’s turnover of £10 million and that in any event the adjustment in the 2008 accounts would benefit the Defendants since it would reduce the 2008 NAV compared to the 2007 NAV. Mr Soar and Mr Mills only became aware that there was an issue with the 2007 Audited Accounts after the SPA had completed. I accept that evidence of Mr Soar and Mr Mills. 
123.	In that context, Welven’s accounting expert, Mr Hine, examined in detail P+S’s sales ledger and its purchase ledger. Within the sales ledger the sales invoice was recognised and offset against the corresponding cash receipt. In the purchase ledger the same process has taken place in that the purchase invoice has been matched up against the cash payment, but then an additional credit note has been recognised in respect of the deposit. This has the effect of deferring the cost on the deposit into the new financial year. However, as Mr Hine also noted, no prior period adjustment was made to the 2007 Audited Accounts when the 2008 audit was carried out and no adjustment is in any event required of the February 2008 balance sheet as this reflects the correct treatment of the Mivan invoice. Again, I accept that neither Mr Soar nor Mr Mills had any dishonest intention in relation to these accounts.
124.	For these reasons, I am satisfied that at the time the 2007 accounts were prepared, there was no fraud or intention to deceive on the part of Welven within the meaning laid down in Derry v Peek or the other cases referred to above . Nor do I consider that there is any basis for suggesting any fraud or intention to deceive by Welven in relation to the Mivan deposit at some later stage whether prior to the execution of the SPA or otherwise. 

125.	For reasons stated above, no question of negligent or innocent misrepresentation arises. But, if I am wrong and insofar as may be relevant, the question whether there was a negligent misrepresentation is more problematic. On behalf of Welven it was submitted that the view that the Mivan over-invoicing would be dealt with in the 2008 Audited Accounts was, a reasonable one; that the uncertainty as to how to account for deposit invoices is demonstrated by an email from Ms Costello of SGL to Mr Kelly after the acquisition on 9 June 2008; and that as Mr Hine notes no prior period adjustment was made to the 2007 Audited Accounts when the 2008 audit was carried out by Cavanagh Kelly. On this basis, and relying in particular on the evidence of Mr Hine, Mr Taylor submitted that any misrepresentation was not negligent. The difficulty is that the Defendants did not adduce any expert evidence themselves with regard to this issue. Indeed, they were debarred from so doing by Court Order as I have already described. There is thus no expert evidence to support the Defendants’ case of negligent misrepresentation in this context. Nevertheless, I do not read Mr Hines’ report to say that the misrepresentation originally made in the 2007 accounts was not negligent and, in any event, the court would not be bound to accept any such evidence in any event. In these circumstances, it seems to me that I must deal with the issue as best I can on the material before me. On this basis, I have little hesitation in concluding that the 2007 Accounts did contain a misrepresentation which was made negligently. Although, there is virtually no information as to the process by which the £65,000 Mivan deposit came to be included in the 2007 Accounts, it is clear (as Mr Hine and indeed Mr Taylor both accept) that this should not have occurred with the result that the P+S profits for 2007 were overstated by £65,000. As such and absent any satisfactory evidence or explanation to the contrary, the conclusion I reach is that this can only have been the result of some negligence by one or more individuals. To this extent, I reject Mr Taylor’s submission – although for the reasons which I have already stated, a misrepresentation which is merely negligent (still less innocent) is of no avail to the Defendants by virtue of the terms of the SPA. Further, for the reasons set out below, any claim for negligent (or even innocent) misrepresentation in relation to the Mivan deposit cannot succeed in any event.        
126.	Even on the assumption that Welven were guilty of some fraudulent (or negligent) misrepresentation in respect of the Mivan deposit, I am not satisfied that it was material. Further having regard to the timing and the subsequent events, I am not persuaded that it was (or would have been) reasonable to rely on such misrepresentation; nor that the Defendants were in fact induced to enter into the SPA in reliance on such misrepresentation (whether generally or on the terms that were agreed). My reasons are as follows. As I have indicated, the Defendants sought to argue that they had been so induced and that the misrepresentation was “material” in particular because the inclusion of the deposit (£65,000) in effect falsely increased the net profit for P+S by some 550% from £15,000 to £80,000. Although the arithmetic is correct I do not accept the Defendants’ submission. In my view, it is based on a false comparison and one which I reject on the evidence. On a turnover of approximately £4m, a figure of £65,000 is almost insignificant – it is less than 2%. Moreover, it is plain that as the negotiations continued through 2007 and early 2008, the profit figure for 2007 was to all intents and purposes irrelevant since the market had changed and, as the Defendants well knew, the Group (and in particular P+S) was making substantial losses. Although Mr Aughey recognised this, the main thrust of his evidence in this context (and of the Defendants' case) was that if only he had known the truth in 2007 that P+S had only made a profit of £15,000 in the financial year ending February 2007 rather than the £80,000 as stated in those accounts, he would never have even considered any deal to purchase the Group: it never would have happened. I do not accept that evidence. I am satisfied on the evidence that the deal would still have gone ahead on exactly the same terms regardless of the treatment of the Mivan deposit and even if the £65,000 had not been included in the 2007 accounts.  
Management Accounts

127.	It is common ground that prior to the sale, Welven provided to the Defendants the Management Accounts for August 2007, October 2007, November 2007 and January 2008. As stated above, the allegation made in the Defence is that these Management Accounts contained materially inaccurate figures for the value of stock and these were known to be false by Mr Mills and Mr Soar. This is denied by Welven. Before considering the factual aspects of this part of the case, I must deal with certain threshold points raised by Mr Taylor on behalf of Welven. In particular, Mr Taylor relied upon the fact that the Warranty given in relation to the Management Accounts was that they were: “prepared on a consistent basis with previous management accounts of the Company and give a reasonable view of the Company’s and the Subsidiaries profits assets and liabilities”. This Warranty was subject to the Disclosure Letter which stated that: “The Management Accounts have been produced for internal purposes only, and contain estimated figures only in respect of material used, and in all cases are subject to year end stock take and audit of the accounts”.

128.	On this basis, Mr Taylor submitted in summary as follows. First, Welven was not making any representation in relation to the amount of stock held by the Group; it was made clear that the stock figures in the Management Accounts were estimates and that is precisely what they contained. Second, Mr Taylor relied upon the fact that the SPA also contained the price adjustment mechanism in Schedule 7 which included, as part of process of producing the 2008 NAV, a physical stock take. Thus, the price was directly affected, up or down, by the actual amount of stock as determined by this physical stock take. Third, Mr Taylor further submitted that, in any event, the way in which the value of stock was estimated was not dishonestly false (it had been used in the Group for 25 years) and the method was a reasonable one.

129.	I do not accept the first and second of these submissions at least in relation to the case advanced by the Defendants on the basis of any alleged fraud. As to the first, if in truth there was some actionable fraud on the part of Welven whether by Mr Mills or Mr Soar, it does not seem to me that the terms of the Warranty or the Disclosure Letter would assist Welven. In my judgment, this would be so if, for example, Welven knew that the management accounts were false because they included figures which although stated to be estimates were known to be materially incorrect. As to the second, it is of course correct that the price adjustment mechanism in Schedule 7 would ensure that the purchase price would be adjusted to take account of the actual stock held at the relevant time. However, if previous losses in the period prior to the SPA had been concealed so as to amount to a fraudulent misrepresentation it does not seem to me that such fraud is necessarily eliminated, reduced or otherwise affected by the prospect of a physical stock take carried out pursuant to Schedule 7. The third submission (in essence was there any fraud by Welven?) is, of course, central to this case; and that is the issue to which I now turn.   

130.	In my view, that case is founded on a number of premises which are incorrect.

131.	First, the Defendants have alleged that the AS400 was “unreliable” and in effect known to be unreliable. I have already set out my comments and conclusions with regard to such allegation.  As stated above, the AS400 only recorded the raw materials stock. This was normally “pretty accurate” as the Defendants were aware. Any possible errors (in particular with regard to MultiMesh) were checked and if necessary corrected so far as possible. Nothing material is demonstrated by pointing out that figures for stock as recorded in the AS400 were less than the estimated figure for stock in the Management Accounts which were calculated (and if necessary adjusted) in accordance with the MUP as I have described above.

132.	Second, the Defendants have alleged that the percentage figures used to calculate stock  in accordance with the MUP and which formed an important part of the Management Accounts were, and were known to be inaccurate, by both Mr Soar and Mr Mills. This is the main foundation for the allegation that the losses actually being sustained by the Group were being fraudulently concealed. Again, I have already set out my comments and certain general conclusions with regard to this central allegation. In summary, as noted above, the value of stock had to be estimated during the year because the stock held by the Group was the subject of one physical stock count at year end when the audited accounts were being drawn up. As I have described, the MUP involved using the figures for the value of sales of the Group’s various products and applying a percentage to those sales in order to estimate the amount of stock that had been used to make those sales. These percentages, which varied across the different products manufactured by the Group, were set by reference to the results of the physical stock take at the start of the year and were monitored and if necessary adjusted by Mr Mills through the year with the management of each of the Subsidiary companies. At the risk of repetition, the MUP had been used for some 25 years within the Group with the advantage of allowing management to analyse the performance of departments or product groups within each of the Subsidiaries.  Moreover, Mr Hine stated that this methodology of estimating the value of stock is not unusual for a business that operates in a manufacturing environment and concluded that “…the management accounts gave a reasonable view of the profitability of the business, consistently applied from month to month and from one accounting year to the next utilising the MUP approach to calculate profitability within the accounts.”. Other companies in this line of business, such as Locker Group Ltd, use similar systems.  Indeed, Mr Kelly accepted that in principle the methodology is “not uncommon”. Thus, the general principle of estimating the value of stock based on the application of a percentage to the sales of products cannot be criticised. It follows that I do not accept the Defendants’ contention that there could possibly be “accurate” figures for stock during the intervening period. During the year, the value of stock was estimated and the Defendants were well aware of this. 

133.	However, it is important to recognise that the main thrust of the Defendants’ case was not against the general principle of using the MUP but rather that on the particular facts of the present case Mr Soar and Mr Mills knew that the percentage figures used as part of the MUP were wrong because of the existence of other and better figures and that therefore the Management Accounts which were based on the MUP figures were also false and indeed fraudulent.

134.	The central focus of this allegation is the “notes” which Mr Mills prepared when considering the trial balances at the end of each month – in particular the notes which I have already referred to in relation to the trial balances for August 2007, November 2007 and January 2008 based on a comparison between the Management Accounts and those notes and the alleged variances for these months which I have summarised in the table in paragraph 67 above. Mr Aughey described the exercise carried out by Mr Mills in his notes as a “reconciliation”. Mr Taylor submitted that such characterisation was a “fundamental misconception” in the Defendants’ allegations; and that to describe Mr Mills’ notes in this way was to attribute to them a purpose which they simply did not have. This was on the basis that, as Mr Mills said, if you are “reconciling” something, you are reconciling it to a fact eg. reconciling cheques written by a company to the figures on a bank statement. Mr Mills consistently corrected Mr Aughey’s mischaracterisation of his notes as a “reconciliation”. Mr Hine’s expert opinion was to the same effect. In my view, this dispute was somewhat arid. I accept that strictly speaking the exercise carried out by Mr Mills was not a reconciliation. But it does not seem to me that the proper label is necessarily crucial. Rather, in my judgment, the main fallacy in this part of the Defendants’ case is that it is founded on the false premise that the figures which Mr Mills described in his “notes” as “act stock” (see e.g. the figure of £493,100 for August 2007) were, and were regarded as being, more accurate than the figure which was calculated on the basis of the AS400 and MUP. Based on Mr Mills’ evidence (which I have already summarised above and which I accept) that is not so. At the risk of repetition, the purpose of the exercise which he carried out in his “notes” was simply to monitor the AS400 as I have already described above.  They did not represent his “best estimate” of stock as alleged by the Defendants. As Mr Mills said (and I accept), he did not consider that they were relevant and did not form part of any proper accounting exercise. The exercise was used as no more than a sense check by Mr Mills to determine whether there were any material and obvious discrepancies in the figures which ought to be investigated. As Mr Mills stated, as a result of this sense check, on 2 or 3 occasions each year he would spot that something had gone wrong such as a storeman entering stock on the computer with a significantly incorrect value.
135.	Equally, I reject the allegation that it was somehow dishonest for Mr Mills to remove his internal notes. In my view, such allegation does not get off the ground in the light of the evidence of Mr Mills which I accept. Further, it is also undermined by the fact that part of the documentation provided by Mr Mills to CK during their due diligence exercise was the 2007 “audit pack”. This was sent to CK under cover of Mr Mills’ email dated on 29 October 2007 and included the Trial Balance as at 28 February 2007 with Mr Mills’ notes.
136.	I have already dealt with the position with regard to the SSS. In summary, the fallacy in the Defendants’ allegations is the suggestion that these provided a better estimate of stock than the information available from the AS400 and the MUP. As already explained, I do not accept that suggestion.
137.	Nor is there anything in the point that differences can be seen between figures in the SSS, the figures in the notes on the Trial Balances and the figures in the Management Accounts. Mr Mills was not trying to reconcile those figures. Further, as Mr Mills explained, when dealing with live documents it is not surprising that different figures can be found when documents were updated or printed at different dates. 
138.	The Defendants’ allegations of dishonesty are further undermined by the fact that Mr Mills sent to CK the SSS sheet under cover of his email dated 31 October 2007. The fact that Mr Mills sent this SSS to CK is completely inconsistent with the allegations of dishonesty made against him. If he really was trying to hoodwink the Defendants into thinking that stock was worth more than it was, why on earth would he send a document which showed lower figures for stock than appeared in the Management Accounts? In my view, there is no answer to this point. Thus, for MultiMesh, (a) the relevant SSS shows stock of £610,100 compared to (b) the August 2007 Management Accounts which show stock of £689,500; so (c) the August 2007 Management Accounts based on the MUP were showing £79,400 more stock than the SSS. Similarly, for P+S, (a) the relevant SSS shows stock of £568,100 compared to (b) the August 2007 Management Accounts which show stock of £594,500; so (c) the August 2007 Management Accounts based on the MUP were showing £26,400 more stock than the SSS.

The allegation that there were two sets of management accounts
139.	As already noted, the Defendants seek to support their case in fraud by alleging that there were two sets of Management Accounts. I have already dealt with that allegation to the extent that it is based on Mr Mills’ “notes” on his copy of the Trial Balances or the SSS. In addition, the Defendants rely on the email dated 30 June 2007 from Mr Mills to Mr Soar which I have already quoted in material part above. As both Mr Soar and Mr Mills explained in cross examination, there never were two sets of Management Accounts. I accept that evidence. With regard to that email, what Mr Mills was aiming to do was to make it as clear as possible to management and the banks what the financial effect was of payment of loan note interest and rent being waived during 2008. As both Mr Soar and Mr Mills explained, they wanted Soar Group management to be able to see how the Group was currently performing in comparison to previous years’ trading, but equally they wanted the bank to know that the profitability of the Group was being improved by the fact that Mr Soar (through his company Havelet) was not actually receiving the loan note interest which was shown as being due in the Management Accounts. 
140.	The solution they came up with was for Mr Mills to produce the monthly Management Accounts in precisely the same way as he had always done, but when those accounts were sent to the bank, they were accompanied by a covering letter, an example of which is that dated 13 December 2007 to Barclays which states:  “Please note as in previous months these accounts do not reflect that fact that Loan Note Interest to Havelet Investments and Rent to Pentargon have not been paid. This improves the loss for the month by approximately £40,000 in the month and by £225,000 in the year to date”. There are many other examples of such letters in the trial bundles. It is plain from these documents that there were not two sets of Management Accounts. In this connection it is worth noting that Mr Aughey inherited all the Group’s computers when he bought SEL and he also confiscated Mr Mills’ laptop on 23 October 2008 without any prior notice and copied its hard drive. There is no second set of Management Accounts on those computers because there never has been a second set.
141.	It follows that I reject the Defendants’ allegation that there were two sets of management accounts. It is an allegation built on unjustified suspicion and without any proper foundation.
The emails relied on by the Defendants

142.	In paragraph 46 of the Defence, in support of the contention that Mr Mills knew or ought to have known of the alleged   inaccuracy of the Management Accounts, the Defendants make reference to 8 emails sent between 26 November 2007 and 14 February 2008 and 1 email sent after the SPA had been executed which I have already referred to above. These emails were addressed in paragraphs 82 and 83 of Mr Mills' statement. As Mr Mills stated, all these emails show is him discussing the level of material usage with the relevant managers, namely Mr Rohrer in respect of MultiMesh and Mr Campbell in respect of P+S. Far from showing any dishonesty on the part of Mr Mills the emails show him making honest enquiries of the relevant managers and seeking to understand the information on stock in an honest attempt to come to an estimation of value. Mr Mills confirmed in cross examination: “we were always trying to get them as accurate as we could because that helped us in running the business” The evidence of Mr Andrew Campbell was to the same effect. Again, I accept that evidence.
143.	In summary, the two emails dated 26 November 2007 from Mr Mills to Mr Rohrer concern the value of materials used by MultiMesh in October 2007 at its Wolverhampton factory and its St Helens factory. The emails in fact show Mr Mills taking a more conservative approach to the amount of materials used (which would reduce the profit in the Management Accounts).  They are inconsistent with the Defendants’ case that Mr Mills was dishonestly overstating the value of stock in the Management Accounts. The next 5 emails relied on by the Defendants all related to stock at P+S.  These simply show Mr Mills and the Managing Director of P+S, Andrew Campbell, grappling with a range of issues concerning valuation of stock held by  P+S as at the end of October 2007. Both are obviously engaged in an honest attempt to understand how these issues affect the value of stock and how this affects the percentage used for the MUP. For example, in his email dated 11 February 2008 Mr Campbell raised the effect of the AS400 computer updating the cost price of all stock based on the price of the most recent purchase. With wire prices falling, this reduced the value of stock on the AS400 computer. Another issue was that stock which was taken on consignment from a company called Hagener was given a value on the computer by reference to the price on the oldest open purchase order given to that company. Mr Campbell gave an example of how a delivery of wire in January 2008 at a cost of £5.95 per kg had been valued on the AS400 computer at only £3.80 per kg. At the end of the exchange of emails Mr Campbell and Mr Mills are talking about a figure of £42,000 which Mr Campbell believed could easily be accounted for by issues such as those outlined above.
144.	The email dated 14 February 2008 from Mr Mills concerned stock which was on consignment to a company in the United States called Proos which made grilles for Jaguar motor cars. As Mr Mills explained, the value of stock held by Proos was difficult to estimate. Further, the sum which Mr Mills was considering was only £15,000 – which was not a material amount. 
145.	The final email dated 17 October 2008, which was sent months after the sale, concerns Mr Mills’ explanation of the MUP to Mr Kelly in the context of MultiMesh. As Mr Mills explained, between August and December 2007 he in fact increased the MUP percentage for MultiMesh i.e. making the accounts more conservative.  Again, this is contrary to any intention to overstate the value of stock in the Management Accounts. 
The Defendants’ case as advanced in Closing Submissions
146.	After close of the evidence, the Defendants served written closing submissions together with copies of certain documents some of which were entirely new documents apparently prepared by Mr Kelly; and at least one of which had apparently been prepared by Mr Mills (in October 2008) but which I had not seen before because it had not been included in the Trial Bundles and not been referred to previously in the course of the trial. In particular, it had never been put to Mr Mills in cross-examination. Mr Taylor objected to any reference being made to these documents. As to the former category, it seemed to me that if these new documents were simply arithmetical calculations or summaries of figures in other documents which were already in evidence, there could (or at least might) be no objection. The second category was more problematic – at least without possibly recalling Mr Mills to enable him to deal with any point which the Defendants might wish to pursue. In the event, I was satisfied that I could deal with the various points sought to be made by the Defendants with reference to these documents without difficulty and without having to recall Mr Mills.
147.	In summary, the Defendants submitted as follows:
a.	There were certain “variances” derived from certain figures as set out in the following Table:

 Potter and Soar

Month	Management Accounts	Feb 08 Year End Stock Summary Sheet	Trial Balance workings - ‘act’ual stock	
August 2007	£594.5k 	£533.1k *	£493.1k* 	
Nov 2007	£622.5k 	£486k *	£446.2k *	
Jan 2008	£745.3k 	£575k 	£575k 	

Multi Mesh

Month	Management Accounts	Feb 08 Year End Stock Summary Sheet	Trial Balance workings - ‘act’ual stock	
August 2007	£689k 	£570.1k 	£570k 	
Nov 2007	£605k 	£495.9k 	£495.9k 	
Jan 2008	£634k 	£517k 	£517k 	

b.	These reconciliations suggested that if the ‘actual’ stocks per the Stock Summary sheet were correct then the management accounts were concealing losses of:

August 2007	Potter & Soar £101.4k (A-C)	
	Multi Mesh £119k (J-L)	
		
November 2007	Potter & Soar £176.3k (D-F)	
	Multi Mesh £109.1k (M-O)	
		
January 2008	Potter & Soar £170.3k (G-I)	
	Multi Mesh £117k (P-R)	

c.	Mr Mills increased his MUP percentage for Multi Mesh in November 2007 to 52% and further increased to 56% in version 2 of the Feb 08 management accounts. Potter & Soar remained at 43% for the year until version 2 of the Feb 08 accounts when it increased to 48%.
 
d.	Even at the stage of version 2 of the Feb 08 management accounts when Mr Mills had significantly increased the year to date MUP percentage and consequently reported or released hidden losses – he still had not realised all of the hidden losses as the losses concealed at this point were as follows:

February 08	Potter & Soar  £165.5k	
	Multi Mesh  £152.3k	

e.	These losses were before any additional adjustments were made during the audit process.

f.	Therefore, before any audit adjustments, the MUP percentage that should have been in use in the January management accounts would be:

Potter & Soar: 52%
Multi Mesh: 60%

This would have increased the losses shown in the January 2008 management accounts by:
Potter & Soar: £360.4k
Multi Mesh: £278.7k

g.	The schedules provided to Cavanagh Kelly for audit purposes were very close in value to the Stock Summary values as included in the Feb 08 Management Accounts.

h.	Cavanagh Kelly made further adjustments to the final stock of £60.7k in Potter & Soar and £74k in Multi Mesh. These adjustments amounted to £134.7k across both companies and were as a result of errors in pricing, aging policy, redundant stock and the adoption of LIFO rather than FIFO as a basis for valuation – these adjustments were agreed either by Mr Mills (£63,397) or Mazars under determinations (£71,270).  Cavanagh Kelly was proved to be correct in their adjustments with only £1,998 not agreed by Mazars in their determinations.

i.	What this proved was that the Stock Summary Sheets were more accurate – Mr Mills carried out reconciliations and knew that the MUP was materially inaccurate but choose to conceal this information in order to conceal losses and the true financial position of the company.
148.	This part of the Defendants’ case is not easy to understand and requires some further explanation. The “variances” referred to in sub-paragraph (a) above are the same as had previously been identified and, so far as relevant, I have already dealt with this part of the Defendants’ case.  I have also dealt with the point as to what the Defendants refer to as “reconciliations”: they were not “reconciliations” at all. That is a misnomer. In this context, the only additional point to mention is that in final oral submissions, Mr Aughey drew specific attention to the fact that there was in each case a difference of almost exactly £40,000 in relation to the figures for P+S as set out in the above table for August and November 2007 which I have marked with a * (ie £533.1k - £493.1k and £486k - £446.2k). This, said Mr Aughey, is the “missing” £40,000 which Mr Mills was well aware of as referred to in the email exchanges between Mr Mills and Mr Campbell on 11 February 2008 which I have already referred to above. That may be. But as appears from that email exchange, the position at that stage was that, so far as Mr Mills and Mr Campbell were concerned, the discrepancy was still uncertain and they were seeking to resolve it. Indeed, the hope at that stage was that there was no mistake or that any mistake would, in effect, balance out. 
149.	However, the main thrust of the further points now raised by the Defendants can be summarised as follows. By reference to what the Defendants describe as “version 2 of the February 08 Management Accounts” (see paragraph (c) above and what I shall refer to as the “version 2 MUP figures”), they seek to make the point that the percentage figure used for those accounts according to the MUP was (much) higher than had previously been used and if those later percentage figures are then transposed into the January accounts, the loss in January would be much higher ie see the figures referred to in sub-paragraph f.  
150.	This is perfectly true but in my view the suggested exercise proceeds on a false premise. In particular, it is plain that the version 2 MUP figures came from a document which was prepared after the physical stocktake and indeed some time after the year end in the course of preparation of the Audited Accounts to the end of February 2008. As I have already explained, the practice was to start the year with notional percentage figures for material usage based upon actual usage of the previous year. These would then be used (sometimes as varied in the manner I have described) to estimate the WIP and (together with the figures from the AS400) to arrive at the amount of overall stock for the purpose of the management accounts in the course of the year. The important point is that during the year the percentage figures were used to calculate the WIP. At or shortly after the year end, the position was different – indeed exactly the opposite. At that point, there was a physical stocktake and it was thus possible to calculate a true actual figure for stock at that point in time. That figure was then used to calculate the percentage figure that would be used in accordance with the MUP going forward. Thus, reverting to the main thrust of the Defendants’ case in this regard, the suggested exercise of transposing those version 2 MUP figures into the January 2008 accounts is an exercise which could not have been done when preparing the January 2008 accounts. 
151.	In my judgment, the allegations of dishonesty against Mr Mills and Mr Soar are also undermined by the following: 
a.	The monthly Management Accounts which were given to the Defendants were also circulated to Barclays Bank. The notion that Mr Mills would, each month, circulate to the Group’s bankers figures which he knew to be false is untenable. What possible purpose would this have served? 
b.	Mr Mills had absolutely no motive to produce false figures. He had been producing the Management Accounts in the same way for years before he became a shareholder in Welven. Further, he was never going to receive any benefit from the sale since all monies received by Welven would go to repay loans made by Mr Soar. There was never going to be any surplus for Welven’s shareholders. In fact, as Mr Mills noted on 2 November 2007 after the sale of Group “we are then shareholders of a company with a large debt which has no income to pay interest or the debt. Do we then wind that company up”? 
c.	Everyone knew that the Group’s stock would be the subject of a physical stock take as at the end of February 2008. It is inconceivable that anyone could have thought they would be able to hide a deliberate overstatement of stock. Indeed, when Mr Mills circulated the February 2008 Management Accounts, he flagged up to the Defendants that these were subject to the physical stock check. 
d.	There is not a single email between Mr Mills or Mr Soar which suggests any attempt to provide false figures to the Defendants. On the contrary, the emails show them endeavouring to be as helpful as possible in answering questions during the due diligence process. As Mr Soar said to Mr Mills on 8 November 2007, he assumed that “you are still doing what you can to answer the remaining queries?”. Consistent with this is the fact that Welven provided the January 2008 Management Accounts to the Defendants which showed how the Group’s financial position had deteriorated in the 5 months to January 2008. Similarly, the Defendants were expressly told that it was estimated that the Group would make a loss in 2008 of £250,000 and that this could be higher. 
e.	The deceit allegations were launched on the utterly false premise that SSS had not been sent to the Defendants. 
f.	Mr Mills has maintained his innocence at all times despite Mr Aughey seeking to apply appalling pressure when Mr Mills was seeking to negotiate the terms of his redundancy from the Group in late 2008. For example:
g.	At a meeting on 20 November 2008 Mr Aughey suggested to Mr Mills that his severance package could be enhanced if he came out with the “right story” about the management accounts. Mr Mills felt it necessary to make clear he could not be bribed.
h.	Further menacing statements were made to Mr Mills by an email dated 24 November 2008 from Mr Aughey which stated “Just to be clear, my decision on whether or not to follow you personally and on whether to take disciplinary action against you will depend on the content of your statement that my agents are furnished with and your cooperation with us”. 
i.	Mr Aughey then went about trying to gag Mr Mills so that he would not give evidence in this case. The situation was neatly summed up by Mr Mills’ solicitors (Brethertons) on 3 December 2008 in which they stated “Quite frankly this has become ridiculous – we are now on version 14 of the Agreement,….you seem not to have accepted the fundamental principle that there is no property in a witness….therefore your continued attempts to gag our Client are unachievable….Mr client is now off ill with a doctor’s note as a result of all the pressure and stress that you are putting on him”.
j.	On 22 December 2008 CK’s Mr Kelly made the frank assessment that “There’s no admission of fraud or awareness even that anything was wrong or even potentially wrong……It certainly looks like he [Mr Mills] is not in any way pointing any finger at Richard Soar from these replies….I think we have to evaluate in the new year how you want to progress this case”.
152.	For all these reasons, I reject the Defendants’ allegations that the Management      Accounts contained any fraudulent misrepresentations or were otherwise fraudulent or were presented with any intention to deceive. Moreover, I reject any allegation of dishonesty on the part of Mr Mills or Mr Soar. Insofar as may be necessary, I also reject the Defendants’ case that there was any negligent (or even innocent) misrepresentation in this regard.
Reliance and Inducement: The real reasons why the Defendants entered the SPA
153.	The case now presented by the Defendants is that the financial position of the Group was essential to the decision to enter the SPA. As Mr Taylor submitted, the reality would seem to be rather different as appears from contemporaneous documents (which were extracted from the Defendants under the threat of unless orders). 
154.	First, it is clear that Mr Aughey believed that he was buying Pentargon at a very good price, which was well below what he considered was market value. He made clear that he was prepared to buy Pentargon on its own, but he was not prepared to buy the Group without Pentargon. Mr Aughey’s view that he was obtaining the properties for less than they were worth is evident from the following:
a.	 As noted above from a very early stage in the negotiations (i.e. in both August and December 2007) Mr Aughey formed the view that the properties held by Pentargon were worth around £6 million. 
b.	A file note of a conversation on 22 January 2008 shows that Mr Aughey had been told by surveyors CB Richard Ellis that the Pentargon properties were valued at £6.45 million.
c.	On 10 March 2008 Cluttons provided valuations for Ulster Bank as part of its enquiries to determine the terms on which it would lend to the First Defendant. Mr Aughey was expecting a valuation of around £5-6 million. However, Cluttons’ valuation was a conservative bank valuation based on vacant possession and valued the properties at £3.6 million. (The Bristol property (93 Stokes Croft) was valued at £170,000. The St Helens property (Eurolink House) was valued at £1.25m. The Banbury Property (Beaumont Road Industrial Estate) was valued at £2.2 million). Notwithstanding, Mr Aughey’s view remained that Pentargon was worth considerably more than this. A file note dated 10 March 2008 records Mr Aughey as saying that: (a) He expected Cluttons’ property valuation would have been between £5-6 million: Cluttons had been “extremely cautious with their valuation” and had “simply relied on the valuations in the accounts” which was “historic and subject to depreciation”; and (b) he had received a desk top valuation from BTW Shiells which came out at approximately £6 million and his “gut feeling” was that the properties were worth £5.3 to £5.7 million. Thus, only a few weeks before the SPA was executed and taking the lower end of Mr Aughey’s view of the value of Pentargon, he was acquiring properties which he valued at £5.3 million for just £4 million less an adjustment of £220,000 against potential capital gain tax.
155.	In considering the values attributed by Mr Aughey to Pentargon’s portfolio of properties, it is important to note that, according to his evidence, he valued the properties based on rental income. As he stated (a) the principal tenants for the properties are the two trading companies, P+S and Multi Mesh; (b) the rents generated by them were £170,000 for P+S and £148,000 for Multi Mesh ie a total of £318,000; (c) his valuation was based on 10 times rent which is a yield of 10; (d) had the concealment not occurred and the full extent of the losses in the trading companies been disclosed he would not have bought Soar Engineering Ltd and the trading companies; (e) moreover, he would have realised that the trading companies were unable to pay these rents.  Although (a) and (b) are plainly correct, I am not persuaded as to (c), (d) or (e). However, even if the price of £4m originally offered for Pentargon was based on the rental income and the yield figure stated by Mr Aughey, it is plain that he was well aware by mid-March at the latest that the Group was not making profits sufficient to pay the rental income but was, on the contrary, making substantial losses. But he still went ahead with the deal at the price that had been provisionally agreed – the only variation being the extension of the time for payment of the deferred consideration from 2 to 3 years. Mr Aughey’s answer to this was, in essence, that he thought he could turn the Group round but that, in any event, it was too late to back out of the deal. The former may well be correct; but I do not accept the latter. I suspect that the truth is that by this stage Mr Aughey had his finance set up with Ulster Bank (albeit on the basis, as I have noted, of information which was out of date or false) and, given the generally favourable economic conditions which existed at that time, he remained of the view that the deal remained one which was potentially very lucrative. Be that as it may, it is noteworthy that even as late as 1 December 2008 (ie after the letter from the Defendants’ solicitors accusing Welven of fraud) CK placed a value of €1.8 million on the Group and €6.45m (ie £5.49m) on Pentargon.
156.	While Mr Aughey now alleges that he was induced to enter the SPA in reliance on alleged misrepresentations in relation to the accuracy of the Audited Accounts and the Management Accounts, the reality, in my judgment, is otherwise ie Mr Aughey was not induced by, and did not rely on, either the 2007 Audited Accounts or the Management Accounts when deciding to buy the Group. In particular, as I have already noted, Mr Aughey’s accountants, CK, produced a set of financial projections which patently did not rely on either the 2007 Audited Accounts or the Management Accounts. Moreover, Mr Aughey purchased the Group knowing it was making substantial losses but (amongst other things) he relied on and was induced by the fact that he was obtaining the value of the properties, the Group’s customer list, increased market share, a presence in the UK and strengthening his ability to compete with Mr McCabe. Mr Aughey was “convinced he can turn around the Soar business”.
157.	 Contrary to the Defendants’ pleaded case, it is clear from the sequence of events I have already described that Mr Aughey had decided to offer £1.5 million for the Group by 1 October 2007. At that time Mr Aughey thought the Group was trading at a profit.  As at 5 March 2008 Mr Aughey’s solicitor noted that:
a.	Mr Aughey’s main reason for acquiring the Group was to gain market share. (At the outset of negotiations Mr Aughey had described Mr McCabe as “his biggest competitor” who had recently purchased a company called Brimonn, which was a wire screen manufacturer in the West Midlands).
b.	Mr Aughey was not particularly after the manufacturing capability because manufacturing in this sector in the UK was in decline generally. Most manufacturing was being done in the Far East and “ultimately he will use the Soar premises as warehouses”.
c.	The important thing was the Group’s customer list “and the properties he will purchase though Pentargon”. 
d.	 “Barry realises there may be redundancies after Completion and he may have to sell some equipment, but he is not concerned about this. The amounts involved will be relatively small compared to the overall plan”
This note also recorded that Mr Aughey thought he was getting the Group cheaply for less than 4 times EBITDA. However, Mr Aughey was then provided with updated financial information. By March 2008 there had been a significant deterioration in trading and the Group was at that stage trading at a loss. This was clear from the January 2008 Management Accounts provided to the Defendants on 11 March 2008, as I have already described above. Furthermore, the Defendants’ attention was expressly brought to the fact that losses were being made. To repeat, Mr Aughey’s solicitor made a note on 10 March 2008 stating that the estimated loss for 2008 was £250,000 and that Mr Mills had indicated it could be higher and on 13 March 2008 Mr Mills sent CK budgets for the year to 28 February 2009 which included sales figures for 2008. These figures made clear that sales for the Group for the 12 months ending February 2008 were forecast to be £8.8 million, some £849,000 behind the budget set at the start of year. Despite having this information about the Group’s losses, the Defendants and CK drew up a set of financial projections which forecast that profits would be made. Appendix 8 to Mr Hine’s report contains a comparison between the figures which appeared in the January 2008 Management Accounts and the financial projections that CK produced for the Defendants on 7 March 2008. It is plain that CK’s financial projections were not based on the Management Accounts, or the Directors' Budgets even though it is clear they had them. For example:
a.	The Directors’ Budgets for the Group (based on figures as at 1 February 2008) forecast sales for the year ending 29 February 2008 at £8.84m.
b.	However, CK’s forecasts stated that sales would be £9.58 million. 
c.	CK’s projections were therefore £745,000 more than the figures in the Directors’ Budget.
158.	Thus, CK’s analysis of the current trading year to February 2008 bore no resemblance to the figures provided by Welven (even though manuscript notes on the Budgets show that CK did review them). It is plain they and the Defendants were not relying on or induced by anything provided by Welven. 
159.	This pattern continued in relation to CK’s financial forecasts going forward, which again bear no resemblance to the financial information provided by Welven. Again, Mr Hine analysed the assumptions behind CK’s financial forecasts for 2009 and 2010 in paragraphs 6.33 et seq.   As Mr Hine stated, these were “hugely optimistic and without foundation”. By way of example: 
a.	For Potter & Soar:
i.	Sales growth of 12% and 10% were made for 2009 and 2010 respectively, despite a fall in pro-rated sales in 2008, compared to 2007, of 12%.
ii.	On the evidence of an expected loss of £166,000 for the year end February 2008, the projections forecast profits of £222,000, £475,000 and £755,000 for 2008-2010. 
b.	For MultiMesh:
i.	Sales increases were forecast for 3.4% for 2009, and 6% for 2010 compared with a fall in sales from 2007, to the pre-rated value at January 2008, of 5.6%
ii.	On the evidence of an expected loss of around £175,000 for the year to February 2008, the projections forecast profits of £161,000 in 2009 and £282,000 in 2010. 
160.	In addition, whereas the Directors’ Budgets for 2008/2009 forecast sales of £9.68 million, CK’s financial projections used a figure of £10.33 million.
161.	Thus, the Defendants were not relying on the financial information provided by Welven. It is only after the Defendants failed to meet their own incredibly optimistic forecasts that they sought to contend that they were. 
162.	 On behalf of Welven, Mr Taylor submitted that it was no doubt in an attempt to get round this, that both Mr Aughey and Mr Kelly asserted in their witness statements that CK’s financial projections had been approved by the Claimant prior to entering the SPA on 26 March 2008. Whether or not that is so, the fact is that in cross examination these allegations were accepted as being false.
 
163.	In a further attempt to suggest that he relied on the January 2008 Management Accounts, Mr Aughey put forward another false case in paragraph 53 of his Defence. There it is alleged that on receipt of the January 2008 Management Accounts an exercise was allegedly carried out whereby 2 types of interest charge were stripped out of the accounts. It is alleged that after doing this exercise Mr Aughey thought that the Group was making an “operating profit”. This case is plainly false because one of the charges which it is alleged was stripped out was the interest which was paid to Barclays in respect of its working capital facilities (i.e. invoice discounting). But, Mr Aughey agreed in cross examination that these facilities were to continue after acquisition when they would be provided by Ulster Bank. So the interest charges would still be incurred. It would have been simply illogical for any such calculation to be carried out. Plainly no such calculation was carried out – and perhaps not surprisingly there is not a single contemporaneous document to support that contention. Mr Aughey could not explain why his Defence had taken out the cost of invoice financing when it was always known that invoice discounting would continue after the acquisition. He agreed it was incomprehensible.
  
164.	While this is sufficient to deal with the false case advanced in paragraph 53 of the Re-Amended Defence, it should be noted that, in my judgment, this paragraph also proceeds on a false premise that the sum of £344,000 in respect of unpaid rents would be refunded under the Pentargon SPA. Mr Aughey accepted that no such sum was ever payable and this was determined by Mazars. The reality is that Mr Aughey was buying Pentargon for £3.8 million when he believed it was worth £5.3 to £5.7 million. He wanted the Group’s customer list, increased market share and a presence in the UK. He intended to invest £700,000 into SEL and, in his own words, “turn around” parts of the Group and sell off others (as he did with Bedford & Soar). In the event, he did not invest this £700,000, did not turn around SEL and was hit by the recession. None of that can be laid at the door of the Claimant.  
  
165.	For all these reasons, I reject the Defendants’ case on this ground as well viz that they were not in fact induced to enter into the SPA in reliance on the alleged misrepresentations (whether, fraudulent, negligent or innocent). 

The claim to reduce the price
166.	For the reasons outlined above, the Defendants have no claim to reduce the price payable under the SPA. However, even if they did have any claim, this would not reduce the price to anything like zero as they now contend in particular, because any claim would necessarily have to bring into account the value of what was acquired. That is usually assessed as at the date of the transaction, although that is not an inflexible rule: Smith New Court Securities Ltd v Citibank N.A. [1997] A.C. 254 at 264H per Lord Brown Wilkinson; Downs v Chappell [1997] 1 WLR 426.
167.	 As to the allegations in relation to the Mivan deposit, if the 2007 Audited Accounts had shown EBITDA reduced by £65,000 to a figure of approximately £460,000, Mr Aughey would still have purchased the Group and Pentargon. He went ahead when he knew that the Group was suffering losses, so a slightly smaller profit back in 2007 would have made no difference at all. This had no bearing at all on the value that SGL received which included the value of the properties, the Group’s customer list, goodwill, stock, plant, machinery, increased market share, a presence in the UK and strengthening its ability to compete with Mr McCabe.
168.	 As to the other allegations of concealment and fraudulent misrepresentations, the high point of the Defendants’ case is the alleged overstatement of stock in the January 2008 Management Accounts. This was, on the Defendants’ case, £287,000. Even if that allegation were correct, this too would not have made any difference to Mr Aughey who went ahead with the purchase knowing that the Group was making losses. It would certainly not have resulted in the price being renegotiated to zero, particularly when Mr Aughey’s view was that he was making a significant profit on the properties and that any overstatement of stock would have been adjusted by the price adjustment mechanism (and clause 7 of Sch 5 to the SPA makes clear that there are to be no claims in respect of matters for which allowance has been made under the price adjustment mechanism). The Defendants’ pleaded contentions (Defence paras 53-61) that they carried out EBITDA calculations on the Management Accounts is unsustainable as appeared from section 5 of Mr Hine’s expert report (and the Defendants’ own disclosure which shows that no such calculations were carried out at the time). 
169.	The fact is that at the very least SGL received the value of the matters set out above (customer list, goodwill, increased market share etc) which were, in my view, the real commercial drivers of value in this transaction. On any view these were of significant value – Mr Aughey was prepared to pay for them when he knew that the Group was making substantial losses. As already noted, even some 9 months after the acquisition and after the Defendants’ solicitors’ letter accusing Welven of fraud, Mr Aughey still placed significant value on the Group as shown by a schedule of assets produced on 1 December 2008 in which CK placed a value of €1.8 million on the Group and €6.45m on Pentargon.

170.	The Defendants’ contentions that they received “no value” also have to be seen in light of the facts that on about 9 October 2008 SGL sold one of the subsidiaries, B+S for £349,102. Further, on 15 December 2008 the  Locker Group outlined an asset deal for the wirecloth division of Potter & Soar which Mr Platt (Locker Group MD) thought would be “an assets deal worth around £1M in positive cash impact to Aughey Group or alternatively to offer Aughey a 25% stake in an enlarged Locker Group”. The Locker Group made a similar offer in July 2010, which Mr Platt described in Court as being worth around £1.2 million. As already noted above, I reject the Defendants’ case that these offers were  bogus or not at arm’s length.
171.	As regards the value of stock which was acquired by SGL, this was of course the subject of the price adjustment mechanism carried out in Schedule 7 of the SPA. This took into account the actual figures for stock reached after a physical stock take. When this physical stock take was taken into account along with the other matters relevant to the Completion Accounts, the price was in fact increased by £245,002.

172.	On behalf of Welven, Mr Taylor submitted that in light of the price adjustment mechanism which took into account the actual value of stock and regardless of all other matters, the Defendants cannot in any event now claim a second reduction in the price by reference to the same matters; and that indeed clause 7 of Sch 5 to the SPA makes clear that there are to be no claims in respect of matters for which allowance has been made under the price adjustment mechanism. I am not persuaded by that submission at least to the extent that it is relied upon in response to the Defendants’ claims in fraud. However, given my other conclusions with regard to the Defendants’ allegations, this point would seem to be irrelevant and does not strictly arise for decision.

173.	If, contrary to the foregoing, any reduction in price was to be made for the value of stock, it could not possibly reduce the price to zero as alleged by the Defendants. The Defendants’ complaint is about the MUP percentages that were used in the Management Accounts. Following the physical stock take, these estimates were found to be accurate to within 3% to 4% of the value of sales:

a.	MultiMesh’s February 2008 Management Accounts showed stock at £644,000. After the physical stock count the stock was valued at £491,668 on the Stock Valuation Summary Sheet. That is a difference of £152,000 which as a percentage of sales of £3,834,000 was 3.9%.

b.	P+S’s Management Accounts for February 2008 showed stock at £688,500. After the physical stock count, the stock was valued on the Stock Valuation Summary Sheet showing stock at £520,842. That is a difference of £167,658 which on sales of £4,153,100 is 4%.

174.	As set out above, Mr Hine’s view is that the MUP was reasonable. In his evidence he explained that a difference of 3% or 4% would be material for the year end audit, but not monthly management accounts. As the estimates were reasonable, in my judgment, the Defendants have no claim in any event, particularly when the difference between estimated and actual figures was taken into account in the Completion Accounts. But on any view, the most that could be attributed to stock would be 3.9% of MultiMesh’s sales shown in the January 2008 Management Accounts (£138,013) and 4% of P+S’s sales shown in the January 2008 Management Accounts (£153,108), making a total of £291,121. Of course, this figure of £291,121 does not give any margin for the fact that the figures in the Management Accounts were estimates and the Defendants have adduced no evidence as to what would have been a reasonable margin for error for estimated stock values using the MUP. 

175.	 As part of his case that the acquisition was to be “self financing”, Mr Aughey complained in paragraph 55 of his Defence that after acquisition the sum of £410,000 was lent to P+S and MultiMesh by SGL. The alleged cash injections were set out in tab 11 of Mr Aughey’s Re-Amended Defence. On behalf of Welven, Mr Taylor submitted that there is a number of reasons why this allegation cannot possibly affect the price. One reason advanced by Mr Taylor was that Mr Aughey’s own evidence was that he was going to put in £700,000 to turn the business around but he admitted he did not invest that money; so he (Mr Aughey) can hardly complain now if SGL put in £410,000. I am not persuaded by that point – in particular because Mr Aughey’s evidence was that that proposed investment of £700,000 was essentially for the purpose of new upgraded equipment whereas the money that was expended was for different purposes. Notwithstanding the many difficulties I have had with Mr Aughey’s evidence, this part of his evidence rang true. However, I was persuaded by Mr Taylor’s other points in this context. In particular:

a.	There is no evidence about these alleged cash injections in Mr Aughey’s witness statement. He was unable to assist the court with them because he said the list was put together by his wife and his solicitor, but neither of them gave evidence.

b.	None of the costs relate to stock. 

c.	Some of the sums claimed are plainly in respect of expenditure that Mr Aughey anticipated before acquisition. For example, he always intended to make redundancies, so cannot complain about costs of £50,000 and £30,000 attributed to redundancy. He also knew that one of the leases was coming to an end and so the fact that dilapidations had to be paid for was known.

d.	Quite why damages should be claimed for the cost of buying software such as a Sage accounting package is unexplained.

e.	Further, it is clear that bad debts and capital expenditure incurred by P+S and MultiMesh account for cash injections of £375,000:

i.	In 2009 P+S had to write off bad debts of £195,000 and in 2010 it had to write off £40,000.

ii.	In 2009 and 2010 MultiMesh had to write off bad debts of around £15,000.

iii.	In 2009 P+S spent £110,000 on “capital expenditure”. In fact, £79,000 of this turned out to be Potter & Soar buying some equipment from Mr Aughey’s company which had been trading in Tamworth. A further £8,618 was spent in 2010.

iv.	In 2009 and 2010 MultiMesh spent around £7,000 on capital expenditure.

176.	The reality is that the Defendants purchased the Group on the basis of financial projections which were not based on the up to date information provided by Welven. The Defendants have had the benefit of a stock take which has ensured that SGL would pay only for the actual value of stock. They have had the benefit of that process, but have not met their financial projections. Thus, CK’s forecast was that P+S sales for year end February 2010 would be £5,685,440. In fact they were only £2,846,830. Similarly, for MultiMesh, CK’s forecast for year end February 2010 was that sales would be £4,308,900. In fact they were only £2,151,987. This provides no basis for reducing the price.

CONCLUSION
177.	For all these reasons, I reject the Defendants’ case that they are entitled to any reduction in the purchase price under the SPA on the basis of the alleged misrepresentations whether fraudulent, negligent or innocent or otherwise.  It follows that Welven are entitled to succeed in the sum of £1,250,000 less any net set-off as referred to in paragraph 30 above. In light of this conclusion, I would invite Mr Taylor to prepare a draft order which I hope can be agreed with the Defendants. Failing agreement, I will deal with any outstanding issues including costs.