Neutral Citation Number: [2018] EWHC 2011 (Comm)
Claim No: LM-2016-000075
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
MERCANTILE COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 27/07/2018

Before:

Lionel Persey QC sitting as a Judge of the High Court
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Between:

	DENNIS LLOYD	Claimant	
			
	-	and –
		
	HOWARD KRUGER	Defendant	

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Sarah Bayliss and Ben Waistell  (instructed by Keystone Law) for the Claimant
Bruce Drummond & Maria Mulla (instructed by Richard Slade & Co.) for the Defendant

Hearing dates: 16-19, 23-24 April, 3 May 2018
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Judgment Approved
Lionel Persey QC: 

A.	Introduction

	Introductory
1.	On 1 June 2009 a series of agreements (to which I will collectively refer as “the deal”) were concluded, the effect of which was to transfer the assets of a number of media organisations into a new company, Pegasus Entertainment Holdings Ltd (“PEHL”).  PEHL was later renamed Elm Street Media Group (“ESMG”). The Claimant, Dennis Lloyd (“Mr Lloyd”), was the managing director of Pegasus Entertainment (“Pegasus”), a division of Eagle Rock Entertainment plc (“Eagle Rock”).  Pegasus was sold by Eagle Rock to PEHL.  Mr Lloyd invested £250,000 in PEHL and continued in post.  The Defendant, Howard Kruger (“Mr Kruger”) was the principal of Elm Street Media Ltd (“Elm Street”) and represented both Elm Street and a number of companies in the TKO group that were under the ultimate control of his father, Jeffrey Kruger MBE (“Mr Kruger Sr”).   The assets of some, but not all, of these companies, were sold to PEHL.  I will refer to these collectively as “the Kruger Companies”.   ESMG was not a success and in May 2011 Mr Lloyd was made redundant.  In this action he claims that he was induced into working for, and investing in, PEHL by reason of fraudulent misrepresentations made by Mr Kruger, in particular as to the quantity and quality of the audio and audio-visual assets that were supplied under the deal.  For  reasons that I will give below, I find that this claim fails on the evidence and that it is also time barred.

The trial
2.	Ms Sarah Bayliss and Mr Ben Waistell appeared for Mr Lloyd.  Mr Bruce Drummond and Ms Maria Mulla appeared for Mr Kruger.  The trial lasted six days.   Following the conclusion of the hearing the Claimant applied to challenge the authenticity of two documents and the matter came back for a further hearing.   I rejected the application and said that I would give reasons for doing so in this judgment.  Those reasons appear in the Addendum to this judgment.

Approach to the evidence
3.	The claim against Mr Kruger is in deceit only.   The allegations are serious and relate to alleged representations that were made at least nine years, and in some cases nearly ten years, ago.  The relevant standard of proof is the civil standard.  It has been said that a claimant who alleges deceit bears a “heightened burden of proof” because of the need to prove dishonesty: see AIC Ltd. v ITS Testing Services (UK) Ltd. (The Kriti Palm) [2007] 1 Lloyd’s Rep. 555 per Rix LJ at [259]; Raiffeisen Zentralbank Österreich AG v Royal Bank of Scotland Plc [2011] 1 Lloyd’s Rep. 123, per Christopher Clarke J. at [341].  As Lewison J put it in FoodCo UK LLP & Ors v Henry Boot Developments Ltd [2010] EWHC 258 (Ch) at [3]
“... Although the standard of proof is the same in every civil case, where fraud is alleged cogent evidence is needed to prove it, because the evidence must overcome the inherent improbability that people act dishonestly rather than carelessly.  On the other hand inherent probabilities must be assessed in the light of the actual circumstances of the case: In re B [2009] AC 11 ...”

4.	As Leggatt J. observed in his valuable judgment in Gestmin SGPS S.A. v Credit Suisse (UK) Ltd & Anor [2013] EWHC 3560 at [19]-[20] the process of civil litigation itself subjects the memories of witnesses to powerful biases and considerable interference with memory is introduced in civil litigation by the procedure of preparing for trial.  In evaluating the evidence I have also kept well in mind the words of Lord Pearce in his dissenting speech in Onassis v Vergottis [1968] 2 Lloyd's Rep. 403, 431: 

“... Credibility involves wider problems than mere “demeanour” which is mostly concerned with whether the witness appears to be telling the truth as he now believes it to be. Credibility covers the following problems. First, is the witness a truthful or untruthful person? Secondly, is he, though a truthful person, telling something less than the truth on this issue, or, though an untruthful person, telling the truth on this issue? Thirdly, though he is a truthful person telling the truth as he sees it, did he register the intentions of the conversation correctly and, if so, has his memory correctly retained them? Also, has his recollection been subsequently altered by unconscious bias or wishful thinking or by overmuch discussion of it with others? Witnesses, especially those who are emotional, who think that they are morally in the right, tend very easily and unconsciously to conjure up a legal right that did not exist. It is a truism, often used in accident cases, that with every day that passes the memory becomes fainter and the imagination becomes more active. For that reason a witness, however honest, rarely persuades a Judge that his present recollection is preferable to that which was taken down in writing immediately after the accident occurred. Therefore, contemporary documents are always of the utmost importance. And lastly, although the honest witness believes he heard or saw this or that, is it so improbable that it is on balance more likely that he was mistaken? On this point it is essential that the balance of probability is put correctly into the scales in weighing the credibility of a witness, and motive is one aspect of probability. All these problems compendiously are entailed when a Judge assesses the credibility of a witness; they are all part of one judicial process and in the process contemporary documents and admitted or incontrovertible facts and probabilities must play their proper part ...” 

5.	Some of the alleged representations upon which Mr Lloyd relies were made in writing.  Others were made orally. There is no contemporaneous record of any of the oral conversations. Nor was any contemporaneous complaint raised by Mr Lloyd when he became aware of the matters upon which he now relies as evidence that he was defrauded.   In evaluating the evidence I have placed more weight upon such contemporaneous documents as there are, together with the inherent probabilities.  

The companies and their business
6.	The Kruger Companies comprised Elm Street, controlled by Mr Kruger, and the TKO Companies that were controlled by his father. 

7.	TKO had been founded some 50 years previously by Mr Kruger Sr.  It was a supplier of music rights and publishing and was said to have a well respected music, film and DVD catalogue.

8.	Elm Street described its core business as being rights ownership/access and exploitation in the related area of proprietary/non-proprietary music catalogue and music publishing.

9.	By 2008 the day-to-day business of both TKO and Elm Street was managed by Mr Kruger, although the evidence shows that he would revert to his father when any matters of importance arose.  Much of the non-publishing income of the Kruger Companies was generated by the licensing of titles in its catalogues to suppliers of finished audio and DVD product.

10.	Pegasus specialised in the supply of budget-priced CDs and DVDs that it supplied to outlets worldwide.  It also had a significant full and mid-priced business through major High Street retailers such as Woolworths and HMV.  Pegasus described itself as the largest supplier of special interest DVDs in the UK, as well as having one of the largest budget audio labels.  45 percent of its 1000 DVD titles were of military or other history related titles, 15 percent were steam and transport titles and the remainder covered a variety of other special interest subjects.  Pegasus owned very little content itself.  It instead licensed-in material from a variety of sources, including TKO and Elm Street.

11.	At the time that discussions started between the parties, Pegasus had an annual turnover of approximately £2,500,000 and generated annual profits of about £500,000.  It was entirely separate from the remainder of Eagle Rock’s business.  Eagle Rock had for some time been looking to sell Pegasus.  There is no doubt that Pegasus’ success was almost entirely down to the knowledge, industry and acumen of Mr Lloyd, who had been with Pegasus for some ten years.   Eagle Rock recognised that Mr Lloyd was crucial to Pegasus and that any sale of the company would have to have his blessing and that he would have to be a part of it.

The witnesses
12.	Mr Lloyd.   Mr Lloyd is now 63.   He is an intelligent man and diligent man.  He built up Pegasus by dint of painstaking work and preparation and a detailed knowledge of the markets in which Pegasus traded.  He was described in the papers as “the business” and was regarded by Coutts & Co (“Coutts”), the bank that partly financed the PEHL venture, as critical to its success.  Mr Kruger acknowledged this in cross-examination.

13.	Mr Lloyd’s first witness statement is nothing if not assertive and contains a considerable amount of argument. It was written with a close eye to the pleadings.  He was in full command of both parties’ disclosure and commented extensively on documents in Mr Kruger’s disclosure.  Mr Lloyd did not deviate from his story in his oral evidence and I am satisfied that he genuinely believed what he was telling me.   He plainly has no respect at all for Mr Kruger and found working with him a bruising experience.  Mr Lloyd was not afraid to stand up to Mr Kruger when he disagreed with him. He struck me as a proud man and must have been bitterly disappointed to see the business that he had so carefully built up begin to fail in so short a time.  I think it fair to say that he developed a profound dislike of Mr Kruger not long after they started to work together. Mr Lloyd was badly treated by Mr Kruger.   As became clear at the start of his oral evidence, Mr Lloyd now believes that Mr Kruger was out to defraud him from the very start.  Following his departure from ESMG Mr Lloyd actively criticised, and subsequently instigated complaints  against, those who were not prepared to take steps against Mr Kruger – the liquidators of ESMG and the police.  It will be necessary for me to determine whether Mr Lloyd’s beliefs are correct or whether he is someone who, convinced that he is morally in the right, has unconsciously conjured up a claim in fraud that has no substance in fact.

14.	Mr Kruger.  Mr Kruger is now 59. He had spent much of his adult life working for his father, Mr Kruger Sr.  Mr Kruger Snr was a highly successful businessman who had founded the Flamingo Club in London, established the independent record label Ember Records, and set up the music business conglomerate TKO (The Kruger Organisation).  Although Mr Kruger Snr had delegated some of the day to day management of TKO’s business to his son after he fell ill in 2000, he remained firmly in control of all strategic decision making.   Mr Kruger Snr died in 2014.

15.	Mr Kruger was described by his banker, Mr Skinner, in a risk analysis as “something of a wheeler-dealer and small time entrepreneur” and as having lived in the shadow of his father for some time.  This seemed to me to be an accurate assessment.  He was, as Mr Skinner observed, driven to prove that he could deliver without his father’s help.   Mr Kruger considered that the cross-collaterisation (as he described it) of TKO, Elm Street and Pegasus would create an attractive business that would enable TKO and Elm Street to sell and distribute their own product through Pegasus.    

16.	Mr Kruger and Mr Lloyd were, as soon became apparent, fundamentally incompatible.  They each had different visions for the business.   Mr Kruger was mercurial in temperament.  Mr Lloyd was hardworking and methodical. Mr Kruger said in evidence that both he and Mr Lloyd were a nightmare to work with.  He told me that he was demanding and aggressive and pushed through on deals to the best of his ability and that Mr Lloyd ran a “different type of shop” that took its time to work on titles that would be released many months hence. 

17.	I formed the view that Mr Kruger was trying to give his evidence to the best of his recollection of events that had happened over 9 years before.  His recollection, however, was not always that sound and he did not have anything like the same command of the documents as did Mr Lloyd.   Mr Kruger did not, however, seek to embroider his evidence when he could not remember something.  As I shall later describe, Mr Kruger had behaved dishonestly during the course of Mr Lloyd’s Employment Tribunal proceedings against ESMG.  In evaluating his evidence I have kept well in mind that Mr Kruger has shown that he is capable of dishonesty.

18.	The Claimant’s other witnesses   The other witnesses called on behalf of the Claimant gave their evidence well but that evidence did not greatly assist me in resolving the issues in this case.  They each thought that Mr Lloyd had been treated badly by Mr Kruger, as indeed he had.  Some of their written evidence relied upon what they had been told by Mr Lloyd after the commencement of these proceedings and may have been coloured by this.
(1)	Mr Paul Savident was a former right hand man of Mr Kruger, having worked with him as a consultant since about May 2000.  His principal skills were in the field of strategy, marketing and publicity.  He was the main author of the Business Plan which features large in the story and later became a director of PEHL, resigning in August 2010.   He was an honest witness, although his recollection was not particularly strong on some issues.  
(2)	Mr Peter Teale is a qualified chartered accountant and had acted as finance director for a number of companies before becoming associated with the PEHL project.  He was introduced to Mr Kruger by Mr Savident.  He worked on the acquisition of Pegasus and subsequently became finance director of PEHL/ESMG.  It was suggested to Mr Teale that he had come to give evidence for Mr Lloyd because he was indebted to him (as was in fact the case).   I am satisfied that this did not form any part of Mr Teale’s motivation.  Although much of his evidence was not particularly focussed I found him to be both honest and fair, even volunteering at one point that he believed that Mr Kruger had behaved honourably when providing ESMG with further finance.
(3)	Mr Felix Reisch was Pegasus’ production manager.  He worked closely with Mr Lloyd in the organisation of the monthly releases of CDs and DVDs, managing the in-house graphic designers, and overseeing and arranging the authoring and mastering of all releases.   He was not involved in the discussions and negotiations leading up to the deal.   He described in detail the poor quality, or non-existence, of many of the masters with which he wanted to work.  He also outlined the poisonous atmosphere in ESMG and the difficulties he and others experienced in working for Mr Kruger.  Mr Reisch was an excellent witness.

19.	The Defendants’ other witnesses  
(1)	Mr Richard Skinner was a director in the Media Banking Office of Coutts and had, by the time of trial, worked for Coutts for about 43 years.  He looked after clients in the independent music sector and had acted for both Mr Kruger and for Eagle Rock.  He described Coutts’ involvement in the deal and how it subsequently became apparent that Mr Lloyd and Mr Kruger could not work together.  He was a good witness.
(2)	Mr Michael Skeet is an accountant operating in the music industry and was the author of the Sound Advice Valuation which is the subject of one of the allegations of deceit.  He was a straightforward and honest witness.
(3)	Mr Trevor Binyon is a partner in the firm Opus Restructuring LLP and was one of the joint liquidators of ESMG.  In that capacity he had spent many hours investigating claims by Mr Lloyd regarding the alleged misfeasance of Mr Kruger in his capacity as a director of ESMG and was the subject of a number of complaints by Mr Lloyd when he was unable to find any evidence of wrongdoing.   Mr Binyon gave his evidence well.
(4)	Mr David Zackheim is a longstanding associate of Mr Kruger and was a non-executive finance director of PEHL/ESMG from the outset.   He is an insolvency practitioner.  He played a significant role in the redundancy/ dismissal of Mr Lloyd.  In his written and oral evidence he was dismissive of Mr Lloyd, Mr Savident and Mr Teale, describing them as financially illiterate and incapable of dealing with the issues that the group faced in 2010.  Mr Zackheim was only in the witness box for a few minutes and I was unable to form much of an impression of his evidence.   

The Expert witnesses
20.	The parties each called an expert witness to report on three agreed issues:-
(1)	Whether the formats upon which audio and audio-visual works were delivered by the Kruger Companies as part of the PEHL deal were suitable for use as master sources for the commercial reproduction of CDs and DVDs.
(2)	What, as a matter of industry practice, would be regarded as “largely unexploited”?
(3)	What was the true value to be attributed to the works to be included in the sale and the Kruger Companies’ licensing business at the date of sale?

21.	Mr Michael Mercer gave evidence on behalf of Mr Lloyd and Mr Mark Frey gave evidence on behalf of Mr Kruger.   There were significant differences between them.  As will later become apparent, I did not find their evidence to be particularly helpful in deciding the real issues in this case.

B.	Narrative
2008
22.	The first discussions regarding the possible sale of Pegasus to Mr Kruger took place at the MIDEM trade fair in Cannes in January 2008.   Mr Lloyd recalls discussing the proposal with Mr Kruger in person. Mr Kruger believes that his discussions were with Terry Shand and Geoff Kempkin of Eagle Rock. Nothing turns on this difference in recollection.

23.	In April 2008 Eagle Rock gave Mr Kruger permission to discuss a potential sale with Mr Lloyd.  They started to exchange information.

24.	On 6 May 2008 Eagle Rock confirmed to Mr Lloyd that it was the board’s intention to sell Pegasus by the end of 2008.  Eagle Rock confirmed that it would pay Mr Lloyd £150,000 in the event that a sale of up to £3 million was achieved, and that he would in addition receive 10 per cent of any excess over £3 million.

25.	On 29 May 2008 Mr Kruger visited Mr Lloyd at Pegasus’ Aldershot premises, together with Mr Zackheim and Mr Savident.  Mr Kruger gave Mr Lloyd a number of catalogues of titles that were owned by the Kruger companies.   Mr Lloyd’s understanding was that these would be available for Pegasus to exploit if the sale of Pegasus to Mr Kruger went ahead.  This was Mr Kruger’s understanding too.  He thought that the acquisition of Pegasus would provide a good fit with TKO and Elm Street and that it made sense for him to own his own sales and distribution business.  Up until then TKO and Elm Street had licensed their product to third parties, such as Pegasus.   

26.	It was not until the first day of the trial that this meeting of 29 May 2008 assumed a significance that had not previously been apparent.  Mr Lloyd’s pleadings, his witness statement and his skeleton argument each clearly asserted that the second direct representations upon which he relied were made at a meeting in Aldershot in August 2008.  In his evidence in chief, however, Mr Lloyd sought to correct this and said that these representations were in fact made on 29 May 2008 and were, therefore, the first of the direct representations upon which his claim is founded.  I will return to this when I consider the August meeting.

27.	On 12 June 2008 Mr Kruger advised Mr Lloyd that he had in principle agreed a purchase price of £3 million with Eagle Rock and that he would now “start actively trying to put this together”.  He asked Mr Lloyd to prepare a business plan and said that he would “then add together what TKO brings to the equation”.

28.	On 30 July 2008 Mr Kruger wrote to Mr Lloyd and said that he was currently awaiting valuations for the TKO catalogue and “the parts we are going to put in for the bank”. He pressed Mr Lloyd for his input to the business plan.  Mr Lloyd responded that he would prepare his input over the next week or so and said that the one thing that he would like to know is what catalogue TKO would have available for Pegasus to exploit as this would affect the acquisition budget. 

29.	Mr Kruger responded later that day (“the 30 July email”) as follows:-

“... As to catalogue, yes good idea for you to come up.

In essence all the audio titles in the TKO catalogue you have previously seen excluding the Ember ones about 15000 tracks.

Elm Street Media catalogue about 5000/7000 PD /Nostalgic titles
TKO Publishing business this is income producing and independently run.
TKO films
About 200 titles b/c movies all exclusively owned
Bunch of tv programmes
TKO DvD Titles
30/50 music titles
ELM Street Media
DVD/FILM/TV PD titles.  600 ish.

Some of the above can be found at www.tko.group and www.elmstreetmedia.com in the catalogue section.  Let me know when you are free and we will set a date to meet ...”
30.	The 30 July email is pleaded as the first direct representation made by Mr Kruger to Mr Lloyd.
31.	On 8 August 2008 Mr Lloyd emailed Mr Kruger as follows:-
“... I have gone through the DVD catalogues and there are lots of titles we would want to work with depending what else you have done with them, but enough to put on the release schedule to not need a major licensing spend in the first half of 2009, I have not been able to go through the audio catalogue as it is not available on line.

There are so many companies putting out the same PD stuff we have to be careful what we put out that is also out elsewhere ...”
32.	Mr Kruger responded on his BlackBerry later that day.  He advised Mr Lloyd that 
“... the audio is available on elm street media.com. I agree we should be careful but in our case it will cost us nothing as we have all the masters and they are all digitised ...”
33.	Mr Lloyd prepared a draft business narrative for Pegasus which he sent to Mr Kruger on 11 August 2008.  There was then a further meeting between Mr Kruger and Mr Lloyd at Mr Kruger’s father’s house in Brighton on 14 August 2008.  
34.	Mr Lloyd asserts in his pleadings, witness statement and opening skeleton argument that at some unspecified date in August there was a meeting with Mr Kruger and Mr Savident at Pegasus’ premises in Aldershot.  At this meeting Mr Kruger gave Mr Lloyd several catalogues which he represented as setting out in detail those audio and audio visual works owned by TKO Incorporated and Elm Street Media that were to be included in the sale.  These were:
o	TKO Danziger Film & TV Catalogue of Black & White Films (“the Danziger Catalogue”); 
o	TKO Wachesberger Catalogue of Colour & Black & White Films (“The Wachesberger Catalogue”); 
o	TKO Members Catalogue; 
o	TKO Ultimate Catalogue;
o	Elm Street Media Nostalgic War Documentaries Catalogue;
o	Elm Street Media Nostalgic Film A-Z Listing Catalogue; and
o	Elm Street Media Nostalgic Television Shows A-Z Listing Catalogue.

35.	In the course of the same meeting Mr Kruger also invited Mr Lloyd to download various other of the Elm Street Media catalogues and the TKO catalogues from the websites www.tkogroup.com and www.elmstreetmedia.com which, Mr Lloyd asserts, Mr Kruger represented as setting out further audio and audio visual works owned by TKO Incorporated and Elm Street Media that were to be included in the sale.  These were:
o	TKO Additional DVD Catalogues;
o	Elm Street Media Audio Catalogue;
o	Elm Street Sound-a-Like Catalogue; and
o	Elm Street Media Visual Catalogue.

36.	This August meeting was pleaded as the occasion of the second direct representations made by Mr Kruger.  Mr Kruger accepted that there had been a meeting at which he had given Mr Lloyd some catalogues and that he may have invited him to download others.  He thought that this meeting had taken place in Brighton.

37.	I find Mr Lloyd’s revised dating of this meeting to be unconvincing.  It seems to me that he has persuaded himself that it had taken place on 29 May because, first, there was in fact a meeting between the parties and Mr Savident in Aldershot on that date at which some catalogues were identified and, secondly, because he was then able to assert (as he did in evidence) that he knew precisely what Mr Kruger was referring to in the 30 July email, because he had already seen and considered all of the catalogues that Mr Kruger had told him would be included.   If that was the case, however, then there would have been no need for Mr Lloyd to ask Mr Kruger on 30 July which catalogues were going to be included or to say on 8 August that he had not yet seen the audio catalogues.  It is also inconsistent with Mr Kruger telling Mr Lloyd on 12 June that he had yet to decide what TKO was going to bring to the equation and again, on 30 July, with his saying that they had yet to decide which parts were going to be “put in” for the bank.  I am satisfied that this meeting happened in August 2008, most probably on 14 August.

38.	Mr Mike Skeet, an experienced valuer of copyright assets in the music industry, was instructed to value the TKO and Elm Street assets that were to be included within the proposed deal.   It would appear that he was initially approached in about August 2008.  He liaised closely with Ms Barbara Fry, TKO’s financial controller, and with Mr Savident and Mr Teale. Although he and Mr Kruger both initially stated that this valuation was prepared for the sole use of Coutts, from whom it was hoped a loan would be obtained, this was not in fact correct.  Mr Skeet prepared two valuations – a conservative valuation for the Bank and a more robust valuation for Elm Street Media.  The final versions of the valuations were signed off on 1 February 2009.  I will return to them below.

39.	In parallel the parties started to work on a Business Plan that was to be presented to Coutts in support of the application for a loan.  Mr Lloyd wrote that part of the Business Plan which related to Pegasus.  Mr Savident wrote the remainder of the plan. 

40.	There was a meeting between Mr Richard Skinner of Coutts and Mr Kruger, Mr Savident and Mr Teale on 6 October 2008 following which Mr Skinner advised Mr Teale that Coutts would be prepared to loan £3 million on the assumption that the combined Newco assets were worth £6 million (Pegasus - £3 million; audio/video - £1.5 million; publishing - £1.5 million) and that TKO Publishing would be sold within the first year. Coutts would require a commitment of £500,000 from Mr Kruger, although only 50% would have to be paid up. Mr Lloyd was not a party to any discussions with Coutts.  

41.	Mr Kruger then had further negotiations with Eagle Rock in an effort to reduce the purchase price for Pegasus. Once again Mr Lloyd was not involved.  By early December 2008 Coutts had informed Mr Kruger that it wanted Mr Lloyd to “have some skin in the game”.  Mr Lloyd was seen by Coutts as critical to the future success of Pegasus.  Mr Kruger asked Mr Lloyd whether he wished to invest in order to make the deal happen. Mr Lloyd was interested and subsequently agreed to invest £250,000, £150,000 of which would come from the bonus that would be due to him from Eagle Rock on the sale of Pegasus.

42.	By 23 December 2008 Mr Kruger had been told that Coutts was not prepared to lend more than £2.1 million for the proposed deal and that Eagle Rock would not accept less than £2 million for Pegasus, plus £500,000 for a licence to exploit their product in respect of which they required a down payment of £100,000.  Following this moving of the goalposts by Coutts Mr Kruger asked his father whether he would be prepared to accept £1 million for the assets and rights of TKO and TKO Publishing, with 50% paid upfront and the balance to be repaid over 50 months.  He made a number of further proposals and advised that he was not prepared to give a chunk of the company away to an outsider in order to obtain investment.  

2009
43.	The Business Plan was completed in February 2009. It was submitted to Coutts in support of the application for a loan. The Business Plan described the proposed formation of PEHL following the merger of Pegasus, TKO Inc (comprising TKO Licencing Ltd and TKO Publishing Ltd) and Elm Street Media.

44.	The Business Plan was, according to Mr Kruger, based on information provided by a number of people and sources, including his father, himself, Ms Fry, the TKO office in New York, Mr Lloyd, Mr Savident and Mr Teale.  The Business Plan made a number of statements about the audio and video content that would be available to PEHL following the merger.  Mr Lloyd says that it subsequently became clear that a number of the statements about TKO and Elm Street in the Business Plan were false (“the First Indirect Representations”). 

45.	Mr Skeet published two valuations on 1 February 2009.  They each valued “various catalogues of rights belonging to the Kruger Organisation Inc, TKO Licensing Ltd, TKO Publishing Ltd, Elm Street Media Ltd and Pegasus” (“the combined rights”).  The first valuation, prepared for Elm Street Media, valued the combined rights at £9,181,793.  TKO’s Audio/Film/DVD rights were valued at just under £1.9 million, Elm Street’s rights at just under £700,000, and Pegasus was valued at just under £5 million.  The much more conservative valuation prepared for Coutts valued the combined rights at £5,917,924.  TKO’s Audio/Film/DVD rights were there valued at just under £1.45 million, Elm Street’s rights at just over £500,000, and Pegasus was valued at a little over £4 million.

46.	Mr Lloyd told me that he was shown the Elm Street valuation but never saw, and was not at the time aware of, the lower Coutts valuation.  He did, however, know that Coutts required a valuation to be provided.  The Elm Street valuation is pleaded as the second of the indirect representations upon which Mr Lloyd relies (“the Second Indirect Representation”).  

47.	On 6 February 2009 Mr Skinner advised Mr Kruger and his father that he was willing to go the Bank’s Credit Committee on a deal which would involve Coutts lending £2.25 million, £0.25 million each from Mr Kruger and Mr Lloyd, together with an injection of £0.25 million from Mr Kruger to fund working capital and a personal guarantee of £0.25 million on top of this.

48.	This latest proposal from Coutts was regarded by Mr Kruger and his associates as a further moving of the goalposts by the bank.  Mr Kruger’s own investment in the project was now going to be larger than he had anticipated.  He seriously considered withdrawing from the proposed deal, and his business associates were urging caution.  Mr Zackheim observed that the economic climate had gone into freefall since the deal was first mooted back in June 2008, and expressed concern that the business would not be “immune from the maelstrom that will be 2009/2010”.   Mr Teale was more positive but observed that this coming year would no doubt “be full of tough unexpected events”.   

49.	Mr Kruger nevertheless determined to make a go of the merger. He held further negotiations with Eagle Rock and agreed in principle to buy Pegasus for £2.5 million, with £1.6 million to be paid on completion, a vendor loan note of £0.75 million to be paid in monthly instalments of £20,000, and the balance of £150,000 to be settled by way of the entitlements due to Mr Lloyd.   In addition he agreed to pay £500,000 for the product licence, with £100,000 payable on completion and £10,000 per month thereafter for 40 months.  Mr Kruger copied Mr Lloyd into the terms of this proposed agreement.

50.	On 7 April 2009 Coutts provided Mr Kruger with the headline terms for a revised (and reduced) proposed loan of £1.95 million. The bank now no longer required Mr Kruger to provide a personal guarantee.  It was a term of the proposed loan that PEHL was to acquire from TKO Inc. all of the IPR assets of TKO Inc and 100% of the shares of TKO Publishing.  Mr Savident and Mr Teale were copied into this email.

51.	Mr Kruger also had discussions with his father.  His unchallenged evidence was that he negotiated a lower price and a deferred consideration in order to acquire only some of the TKO assets from his father.  These did not include TKO Inc’s US assets or the Danziger and Wachesberger catalogues.  Mr Kruger said in evidence that his father made his decision as to what he (ie TKO) was selling and that he, Mr Kruger, decided which of the Elm Street assets were to be included in the deal.  His father also decided at a very late stage that he was not prepared to sell TKO Publishing, although he was prepared to permit PEHL to take the profits earned from that company as from the date of the merger. It would appear from what little contemporaneous documentation there is in the trial bundles that these decisions as to what was or was not to be included in deal were made very shortly before the sale was concluded.  Mr Lloyd was not party to these decisions and nor did he know about them. I am satisfied that Mr Savident and Mr Teale probably were aware of them.  Mr Kruger also advised Mr Skinner about the changes before closing.

52.	PEHL was incorporated on 13 January 2009. Mr Zackheim was appointed sole shareholder and director on that date.  Mr Kruger, Mr Lloyd, Mr Savident and Mr Teale became directors and shareholders on 15 May 2009.  PEHL was subsequently renamed Elm Street Media Group Limited (“ESMG”).

53.	The deal documentation was prepared by Farrers on behalf of Coutts, Davenport Lyons for PEHL and the Kruger companies, and Marriot Harrison for Eagle Rock.  Mr Lloyd retained Bird & Bird to advise him, although their advice was focussed upon the terms of Mr Lloyd’s service contract and the shareholders’ agreement.   Closing took place on 1 to 2 June 2009 following a series of lengthy meetings at the offices of Davenport Lyons.  In addition to the loan documentation and various other agreements the following transaction documents were agreed and signed off:-
•	PEHL Shareholders’ Agreement
•	Mr Lloyd’s Senior Executive Agreement
•	Mr Kruger’s Senior Executive Agreement
•	Pegasus Sale and Purchase Agreement
•	TKO Sale and Purchase Agreement (“TKO Agreement”)
•	Elm Street Media Sale and Purchase Agreement (“Elm Street Agreement”)

54.	Before the agreements were concluded PEHL Board Meetings were held at which the Board (Messrs Kruger, Lloyd, Savident and Teale) considered and approved the proposed Elm Street Agreement and the TKO Agreement.  The Board minutes for the TKO Agreement specifically noted that that terms of the proposed agreement had been carefully considered and that certain Music Recordings, Video Recordings, Master Recordings and other assets, as set out in clause 2.1 of the TKO Agreement, would be transferred to PEHL thereunder.

55.	The TKO and Elm Street Agreements each identified the assets that were to be sold in general terms in the body of the Agreements.  The Agreements contained a number of schedules.  One of these listed the Music and Video Recordings that were being sold in a “Disc to be attached”.   It is not clear whether the discs were available at the closing meetings although there is no suggestion that they could not have been obtained and considered had anyone asked for that to happen.   Mr Lloyd acknowledged that he could have asked to see the schedules and said that he did not think to do so because there was “no suspicion” on his part.

56.	Mr Lloyd was a party only to his own Senior Executive Agreement and to the PEHL Shareholders’ Agreement. He told me that he did not read these agreements or look at any of the other agreements at the closing meetings, that he saw no reason to read them thereafter, and that he relied on his co-directors, Mr Savident and Mr Teale, understanding that they had already gone through the documentation.   He did, when pressed in cross-examination, accept that he probably ought to have read the agreements in order to comply with his fiduciary obligations as a director of PEHL. 

57.	By at least early July 2009 Mr Lloyd became aware that the Danziger and Wachesberger Catalogues had not been included the sale.  He said that he was very surprised about this.  No contemporaneous complaint or surprise was documented at the time.  The Danziger Catalogue comprised a number of films and television series made by the Danziger brothers at their Elstree Studios in the late 1950s-early 1960s, containing titles such as “She always gets their Men”, “Devil Girl from Mars”, “The Depraved” and “So Evil so Young”.   Mr Lloyd said in his oral evidence that the Danziger Catalogue were the “crown jewels” of the assets that he thought were going to be transferred to PEHL.  His expert, Mr Mercer, had earlier described them in similar terms in his report.  Mr Lloyd told me that he had seen the Danziger Catalogue as the main source of growth for Pegasus and TKO Licensing and that the merger would not have been attractive to him without the Danziger Catalogue.

58.	On 10 July 2009 Mr Lloyd wrote to Mr Kruger Snr to propose a deal on what he described as “TKO product”: ie the Danziger and Wachesberger catalogues.  PEHL was prepared to pay royalties on all finished goods, streaming and downloading.  Mr Lloyd observed that it would be necessary to spend significant funds on the restoration of some of the masters to make them fit for purpose and advised Mr Kruger Snr that PEHL would be looking to recoup costs of up to £2,000 per master, although in some cases the costs could be higher than this.  It is apparent from this that Mr Lloyd was aware from an early stage after completion that these masters would require considerable work in order to produce saleable copies.   Once again there is no record of Mr Lloyd registering any complaint or surprise about this at the time.

59.	On 1 September 2009 PEHL entered into an Audiovisual Licensing Agreement with Movie Gems Ltd., a company controlled by Mr Kruger Sr.  The Agreement granted a licence to PEHL for the worldwide exploitation of 72 Danziger Catalogue films, 9 Danziger television series and 23 Wachesberger films in return for the payment of royalties. The licence required Movie Gems to deliver the films to PEHL in a Digibeta format master copy of first class industry standard and quality.  PEHL was entitled to reject any films that were not of suitable quality, in which case suitable replacements were to be provided.  The parties agreed that PEHL would be entitled to recoup up to £2000 per title from royalties for the renovation of masters for broadcast and digital exploitation.  Movie Gems warranted that it possessed full power and authority to grant the rights given, free of any adverse, competing or third party claims.

60.	Very shortly after the merger Mr Lloyd, Mr Reisch and others started to investigate and collate the music and video stocks held by TKO and Elm Street.   They visited Mr Kruger Snr’s house, where many were stored.  Ms Fry provided an inventory of masters.  As Mr Reisch explained, in or about November 2009 concerns began to arise with regard to the condition, format and lack of masters for the films, television series, documentaries and concerts that were supposed to have been brought into the merger by what he described as Mr Kruger’s companies.  Many were on VHS or umatic tape and some were in the low quality NTSC format.  There were DVDs that had been recorded directly off air, showing TV station logos.   Mr Reisch said that over the next few months it became apparent that what he described as the “supposed masters” that they were planning to use to fill the release schedule either did not exist, were of too poor a quality to use, or on formats such as 35mm that were not cost effective to use.   He cited by way of specific example a number of Danziger titles that were on 35mm reel and which would have cost around £1,000 to transfer to DVD to view even before manufacturing and were therefore deemed not to be cost effective to proceed with.  Mr Reisch does not appear to have been familiar with Mr Lloyd’s agreement with Movie Gems which made provision for a sum of £2,000 per film to be spent on restoration.  On 17 November 2009 Mr Lloyd advised Mr Kruger that he had gone through the masters that were in the United States but that there was still no sign of many of the Danziger films or TV series masters that they needed.

61.	PEHL was already experiencing financial difficulties by the end of 2009.   This was attributed by Mr Savident in an email report to Mr Kruger at the end of December 2009 to a number of causes, including: the general downturn in the marketplace; loss of revenue due to the collapse of Borders UK and Trilogy (PEHL’s main distributor into HMV); and limited licensing to third parties.  It was recognised that PEHL needed further funding.

2010
62.	In January 2010 Mr Kruger instructed an employee, Warren Heal, together, later, with a consultant named Mark Tinkler, to search for replacement masters.  On 15 January 2010 Mr Lloyd advised Mr Kruger that he was receiving a lot of interest in old TV series such as Richard the Lionheart but that there was no point in talking to anyone until the situation with the masters was resolved.

63.	By mid-March 2010 Mr Reisch had managed to locate only 17 “usable” masters from the Danziger catalogue.   These 17 masters did not include those films on 35mm.

64.	Relationships between Mr Lloyd and Mr Kruger deteriorated during the course of 2010.  Little income was coming in from the TKO and Elm Street companies.  Mr Lloyd says that this drop in income was in part due to a major customer being in serious trouble at the time of the deal and which failed very quickly thereafter and was in part unexplained.  Mr Kruger says that it was due to the fact that Mr Lloyd did not want TKO/Elm Street to continue to license its product to competitors because he wanted all licensing and marketing to be done through Pegasus.  There is some support for the latter view in Mr Savident’s December 2009 email report to which I have referred above.  This is, however, something that Mr Lloyd vehemently denies.

65.	The parties also had significant differences over the direction in which they each thought PEHL should be going.   Mr Kruger wanted to generate other deals that could provide business to PEHL.   For example, he wanted to sell CDs and DVDs in bulk to Poundland. Mr Lloyd was against this because he thought that there would be no money in it and that it would affect Pegasus’ business if its products were seen to be available for only a pound.   Mr Kruger therefore started two new labels in order to make product for Poundland. He also set up a company called Elm Street Media Productions Ltd which, Mr Lloyd complains, negatively affected PEHL because Mr Kruger used PEHL staff to work on its projects and PEHL cashflow to fund it.  Mr Kruger asserts that this new company was working for the benefit of Pegasus.

66.	ESMG group accounts for the year ending 31 May 2010 show a varied picture. Pegasus made a profit of £469,727, Elm Street made a loss of £161,458, TKO Licensing made a loss of £17,647 and TKO Publishing made a profit of £14,137. 

67.	Mr Kruger and Mr Zackheim held discussions with Coutts in June and July 2010 with a view to obtaining further working capital finance of £300,000. The terms of that facility, which was concluded on 29 July 2010, required Mr Kruger to provide a second charge on his home, which he did, as well as injecting £100,000 of his own money into the Group.   Mr Teale, who gave evidence for Mr Lloyd, volunteered that Mr Kruger had undertaken the “honourable obligation” of filling the hole in the Group’s finances.

68.	Mr Kruger’s intention to procure this loan had been signalled to the Board of ESMG at a Board Meeting on 8 July 2010.  Mr Lloyd told the Board that the consolidation of the Group had not been a success, that the various projects and acquisitions referred to at previous board meetings had not come to fruition, and that the cost of pursuing those objectives had been borne by Pegasus.  Mr Kruger did not agree with this analysis.  Mr Zackheim took over Mr Teale’s role as finance director and it was resolved that Mr Savident would in future not involve himself in financial matters. The Board discussed the possible sale of Pegasus’ business to Mr Lloyd.  It was agreed that all potential offers or interest would be channelled through Mr Zackheim and that any offer for the business would have to be made in writing and accompanied by proof of funding.  It was subsequently further agreed that Mr Savident could assist Mr Lloyd with his proposed Management Buyout (“MBO”).

69.	On 21 July 2010 MGM issued a cease and desist notice in respect of two of the Danziger films, “The Depraved” and “She always gets their Men”, asserting that MGM was the exclusive owner of all rights in all media to those films.

70.	Mr Lloyd made a provisional MBO offer on 11 August 2010.  This did not prove to be acceptable.   

71.	On 17 August 2010 Mr Savident resigned as managing director of ESMG and also relinquished his directorship.  

2011
72.	Discussions regarding the proposed MBO continued until the end of 2010 and into 2011.  They were tortuous. The difficult relationship between Mr Kruger and Mr Lloyd did not assist matters. Mr Savident became increasingly involved in conducting the negotiations on behalf of Mr Lloyd.  Coutts were approached to assist with the MBO.  Mr Skinner’s Joint Credit Assessment dated 19 March 2011 recommended support for the MBO and noted that the main reason for the MBO was that Mr Lloyd and Mr Kruger could not work together.  On 24 March 2011 Coutts advised the parties that it was prepared to support the MBO and set out the terms of its proposed loan facility.

73.	On 19 April 2011 Mr Lloyd advised Mr Kruger that he had decided not to proceed with the purchase of Pegasus.  He said that this was because the level of debt that he would incur would be too high to service in the current market, describing April 2011 as being the worst month’s trading he had ever known with all the signs being that 2011 was going to be a very difficult year indeed.  Although he expressed confidence in Pegasus’ future he advised that a cash injection would be required to ensure that it survived the current year and could go on from there.  Mr Lloyd said that he would be happy to continue to run Pegasus as long as the status quo was restored so that he would be able to trade unencumbered and that he was suitably motivated to do so.  He also said that he would fully understand if Mr Kruger and the Board wished to replace him as MD of Pegasus, and that he would assist with a smooth transition as long as his share situation was fully recognised, that all that was currently owed to him was fully paid up, and that any severance conditions were in line with his employment contract.  In evidence Mr Lloyd claimed that he had decided to pull out of the MBO because he had discovered from PEL’s bank account that Mr Kruger had transferred £20,000 to another one of his companies.   That payment was made to Stratx Consultancy Ltd. (“Stratx”).

74.	ESMG group accounts for the year ending 31 May 2011 showed a significant downturn over the previous year.  Pegasus made a profit of £50,553, Elm Street made a loss of £163,329, TKO Licensing made a loss of £2,340 and TKO Publishing made a profit of £10,872. 

75.	Mr Lloyd was made redundant in May 2011 and was put on gardening leave for the allotted 12 months’ notice period.  He sought legal advice in order to recover monies due to him and in respect of a potential claim for constructive dismissal.  There were two appeals against the redundancy decision, each heard by different external HR consultants engaged by ESMG.   Each of these found in favour of ESMG and in each case it was held that Mr Lloyd had grossly misconducted himself whilst a director.   The consultants’ reports were not included within the trial bundles.  Mr Lloyd considered that he had not been fairly dealt with by ESMG and brought a claim for unfair dismissal against ESMG and PEL.

76.	On 12 August 2011 Mr Lloyd’s then solicitors issued a statutory demand against ESMG in the sum of £58,685.55 in respect of unpaid bonuses and holiday pay due to him under the Senior Executive Agreement.

77.	In August and September 2011 Mr Lloyd’s solicitors pressed Davenport Lyons to release the Schedules to the 1 June 2009 Sale Agreements. These were provided towards the end of September 2011. Mr Lloyd asserts that it was not until he received these schedules, which showed what assets were actually included in the PEHL deal, that he “realised the extent to which [he] had been conned” by Mr Kruger.  I will return to this assertion below.

78.	Mr Lloyd’s claim for unfair dismissal was due to be heard by the Employment Tribunal at Southampton on 26 November 2011.   The claim was settled on the eve of the hearing for the sum of £30,000.  Mr Lloyd says that he begrudgingly accepted this figure because this was the most that he would have been awarded had he won the case (it was in fact £5000 more than he could have received).   Mr Kruger and Mr Zackheim assert that they were effectively forced by their insurers to settle the claim. Although only limited evidence relating to these proceedings was before me it is clear that Mr Kruger put Mr Reisch under pressure to make a statement that outlined Mr Lloyd’s purported failures as a manager and that Mr Kruger sought to influence the content of that statement. Mr Kruger then untruthfully asserted to his solicitors that Mr Reisch’s email statement was “unsolicited”, although he tried to deny this in evidence. He also complained that Mr Reisch, who was still in ESMG’s employment at the time, had been a mole in the camp because he had, quite properly in my view, advised Mr Lloyd of the predicament in which he had been placed by Mr Kruger.  Mr Kruger emerges with no credit from this episode.  His conduct was dishonest and vindictive.  It almost certainly fuelled Mr Lloyd’s burning sense of injustice.

79.	Mr Reisch resigned from Pegasus at the end of 2011. He said that the atmosphere at work had become toxic and that his responsibilities and involvement in production decisions had been slowly chipped away.   He described Pegasus as having slowly disintegrated in the hands of Mr Kruger and his team.

2012
80.	ESMG group accounts for the year ending 31 May 2012 showed that Pegasus made a loss of £6,128, Elm Street made a loss of £44,921, TKO Licensing made a loss of £140 and TKO Publishing made a profit of £8,631.  Although the Group’s overall losses were lower than in the previous year, Pegasus was now loss-making.

81.	In an attempt to keep the Group afloat the directors made proposals for a CVA for Pegasus in October 2012.   The CVA was approved in October 2012 and Pegasus vacated its leasehold premises in Aldershot and moved to cheaper offices in Farnborough.  A number of its remaining staff were made redundant.

2013
82.	ESMG was put into liquidation on 23 December 2013.   Mr Binyon and Mr Dolder of Opus Restructuring LLP were appointed as joint liquidators. The Directors’ Report on the History of the Group recorded that the 2009 merger had not led to the hoped-for synergies, and put the failure of the Group down to a clash of personalities, a refusal by certain directors to implement cost cutting measures, insufficient cash controls and the perceived failure of directors to manage.  These factors were said to have been hugely exacerbated by the failure of the Group’s distributor, Trilogy, in December 2009 and because many high street stores and customers had gone into administration/liquidation. Wyles Hardy & Co Ltd were appointed to realise the Group’s assets.

2014
83.	Mr Lloyd, Mr Teale and Mr Hoskens of Eagle Rock formed a creditors’ committee.  That committee had a meeting with Mr Binyon and Mr Hardy of Wyles Hardy on 13 February 2014.  Their discussion, which was recorded, ranged far and wide. Mr Lloyd said that he believed that there had been a major fraud on the original deal because a lot of the rights supplied by TKO and TKO Inc did not exist and the quality of the masters was so bad.   He also claimed that most of the rights that TKO held were in fact public domain and that the turnover of the Ember catalogue was used to value the catalogues brought into the group even though Ember had been sold to Acrobat prior to the merger.  The creditors’ committee expressed concern that the most likely potential purchaser of the Group’s assets was Stratx. Mr Kruger and Mr Zackheim were both directors of Stratx.

84.	Mr Binyon and Mr Hardy followed up a number of the points and complaints that had been raised by the creditors’ committee and concluded that there was little merit in pursuing them any further.  The joint liquidators considered that they had used all reasonable endeavours to investigate the matter and that there was no funding to enable them to do any more.  Mr Hardy contacted 17 parties who had expressed an interest in acquiring the assets but only Stratx made an offer, in the sum of £25,000.  This offer was accepted, but only after all of the other parties who had expressed an interest were contacted again. The creditors’ committee did not object to the recommendations of the liquidator and, once the consent of Coutts was received, the assets were sold to Stratx.

85.	Mr Binyon had been concerned about Mr Lloyd’s strident approach during the course of the liquidation and had taken advice from his Professional Regulator at the Association of Chartered Certified Accountants (“ACCA”). ACCA confirmed that Mr Binyon had complied with his professional duties as a liquidator. 

86.	Mr Lloyd then filed complaints against Mr Binyon with the Insolvency Service and with ACCA.  Those complaints were dismissed.  It was not suggested to Mr Binyon in cross-examination that he had acted in anything other than an entirely professional and proper manner during the liquidation of ESMG.   He had clearly done so.  

2016
87.	Mr Lloyd next asked the police to investigate certain allegations of fraud against Mr Kruger. I have only been shown documents relating to Mr Lloyd’s subsequent complaint made via the IPCC because he considered Sussex Police to have been insufficiently responsive.  It would appear from these that he also complained to the police about the conduct of Mr Binyon. According to the police report, his principal allegations were: first, that Mr Kruger and his associates had acted fraudulently by inflating the value of the Kruger companies in 2009 which enabled them to secure a loan to purchase Pegasus; and, secondly, that Mr Kruger used company accounts for personal spending which were not repaid.

88.	The Claim Form in this action was issued on 25 May 2016.

89.	Mr Lloyd had threatened to report Sussex Police and involve his MP if an investigation was not instigated.  Sussex Police nevertheless decided that it was not appropriate, proportionate or in the public interest for them to conduct a criminal investigation.   Mr Lloyd was advised of this decision on 27 July 2016.  Factors in their decision appear to have been the significant period of time (7 years) that had elapsed since the matters complained of, that the Insolvency Service and ACCA had concluded that Opus had carried out a full and proper investigation, that as a director of ESMG Mr Lloyd ought to have become aware of any discrepancy in the valuation of the company and should have reported it at the time or soon after, and that there was no set valuation procedure for valuing IP and that any valuation would therefore have been a matter of opinion.

C.	The claim in deceit

The tort of deceit
90.	The key ingredients in a claim for deceit are
(1)	First, there must be proof of fraud and nothing short of that will suffice;
(2)	Secondly, fraud is proved when it is shown that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false. To prevent a false statement being fraudulent, there must always be an honest belief in its truth, per Lord Herschell in Derry v Peek (1889) 14 App Cas 337 at 374.

91.	Lord Herschell further observed that if fraud be proved, the motive of the person guilty of it is irrelevant.  This does not, however, mean that motive, or the absence of motive, is irrelevant in deciding whether there has been dishonesty. As Christopher Clarke J. said in Raiffeisen (above) at [356], an absence of apparent motive points away from dishonesty.

92.	For an action in deceit to succeed the claimant must show:-
(1)	that the defendant has made a false representation to the claimant; and
(2)	that the defendant knows that the representation is false, alternatively he is reckless as to whether it is true or false; and 
(3)	that the defendant intends that the claimant should act in reliance on the false representation; and
(4)	that the claimant does act in reliance on the representation and in consequence suffers loss: see ECO3 Capital Ltd and others v Ludsin Overseas Ltd. [2013] EWCA Civ 413, per Jackson LJ at [77].

93.	Mr Lloyd’s claim is founded upon both direct and what have been described as indirect misrepresentations.  Direct representations are those made directly by the representor to the representee.  The indirect representations are in this case said to be generic representations made in documents that were intended to be read by potential investors.

The Alleged Direct Representations
94.	Mr Lloyd’s pleaded case as set out in paragraph 18 of the Particulars of Claim is that by his words and conduct Mr Kruger expressly represented to him that:-
(1)	The audio and audio visual works for sale as part of the PEHL deal included those described in the 8 June 2008 email and set out in the Catalogues;
(2)	The Catalogues were an accurate list of the audio and audio visual works owned by TKO Incorporated and Elm Street Media (available to them to exploit at no cost) which were to be included in the sale as part of the PEHL deal, save that in the case of TKO Members and Ultimate Catalogues, there were further audio titles to be included in the sale beyond those set out in those Catalogues;
(3)	The audio and audio visual works would be provided on sale on a suitable master format for broadcast and enabling CDs/DVDs for sale to be generated from them within the budget anticipated in the Business Plan; and
(4)	The audio and audio visual works and each of them were accordingly suitable for use by PEHL for broadcast and as content for CDs/DVDs as anticipated in the Business Plan.

95.	There are difficulties even on the face of some of these pleaded representations.   First, I was not referred to any email of 8 June 2008.  The only two emails identified in the relevant section of the pleadings are those of 30 July 2008 and 8 August 2008.  I have assumed that the reference in paragraph 18.1 is to the email of 30 July 2008, it being the only email which is said to have identified works that were to be included.   Secondly, the representations referred to in paragraphs 18.3 and 18.4 assert that the audio and audio-visual works would be in a suitable format for sale, and as content for CDs/DVDs within the budget, “as anticipated in the Business Plan”.   There was no budget or Business Plan at this stage.  The Business Plan was not produced until February 2009, some seven months later.   

The First Direct Representation
96.	The alleged First Direct Representation is that said to have been made in the 30 July email from Mr Kruger to Mr Lloyd. This email contained a very rough and ready general outline of the sort of material that would be available for exploitation by Pegasus.  The email does not identify any clearly identifiable titles that were going to be made available.  This is unsurprising.  The 30 July email was written in the context of a preliminary discussion that was intended to be a precursor to a meeting at which more detail would be given.  Taken on its own, and in the context in which I have found that it was sent, it is not possible to spell any sensible representation out of the 30 July email. 

97.	The Claimant’s closing submissions were predicated upon the assumption that all of the Catalogues had already been provided by Mr Kruger to Mr Lloyd at an earlier meeting in May 2008, and that the 30 July email was written against this background.  I have found that only some those catalogues were supplied at the earlier meeting. Ms Bayliss realistically recognised in her oral closing submissions that if she had come to court with a claim in deceit based only on the 30 July email it would not have got very far.

The Second Direct Representations
The Alleged Representations
98.	The Second Direct Representations upon which Mr Lloyd relies are the Catalogues with which he was provided at the August meeting and those which he was invited to download.   These are the eleven Catalogues that I have identified above.  Mr Lloyd also relies on the email exchanges on 8 August 2008 between himself and Mr Kruger.   

What, if any, representations were made?
99.	As I have already found, at the August 2008 meeting Mr Kruger provided Mr Lloyd with some Catalogues and directed him to downloads of others.  That was done in the context of a meeting in which they discussed the material that was going to be made available for exploitation after the merger.  I find that Mr Kruger was representing, or held himself out as representing, the Kruger Companies in these conversations.  It was argued on behalf of Mr Kruger that these discussions were at an early stage, that no deal had yet been done, and that nothing that was said in these conversations should be regarded as a representation.   Representations as to something that will be done in the future are, if anything, a contract or a promise, not a representation: Beattie v Lord Ebury (1871-1872) L.R. 7 Ch. App. 777 at 804, per Mellish LJ; FoodCo UK LLP & Ors v Henry Boot Developments Ltd [2010] EWHC 258 (Ch) at [193]-[194], per Lewison J. In the present case, however, I consider that in making statements about the future Mr Kruger was making an implied statement or statements of present fact about the Catalogues – that the Catalogues were within the control of the Kruger Companies and that it was Mr Kruger’s policy or position that they would be included within the deal.   The parties were by this stage engaged in serious discussions about the proposed merger.  Mr Kruger was advising Mr Lloyd what the Kruger Companies would bring to it. 

100.	Representations as to ownership of the IP.   Mr Lloyd asserted in his oral evidence that Mr Kruger had told him at this meeting that “we own it all” when referring to the Catalogues. In his witness statement he said that “Mr Kruger indicated that the catalogues he handed me and those on the websites set out the works owned by the Kruger Companies, both as to IP and masters, and that they would all be included in the sale”.  I did not find Mr Lloyd’s oral and written evidence to be convincing.  It is inherently improbable that Mr Kruger would have represented that the Kruger Companies owned the IP in all of the listed titles when both he, and Mr Lloyd, were well aware that this was not the case and that the titles included material that was in the public domain.  TKO/Elm Street did not own the IP in all of the titles listed in the Catalogues – hence Mr Lloyd’s observation in his 8 August 2008 email that “there are so many companies putting out the same PD stuff”.

101.	I find that no express or implied representation or statement was made at the August meeting as to the ownership of the content of the titles in the Catalogues. 

102.	Mr Lloyd further alleged that the Catalogues themselves constituted express and/or implied representations to the effect that the Kruger Companies owned their contents. Each Catalogue lists all of the titles that form part of that Catalogue.  The Catalogues contain no express statement as to the ownership of any individual title within them.   Nor, in my judgment, can such ownership be inferred from the mere fact that a title is listed.  Some of the Catalogues contain introductory sections to which reference was made at the hearing. 
(1)	The TKO Music Catalogue (audio) provided that “the artists or repertoire contained herein may be available exclusively or non-exclusively and may not be available in certain territories”.  An anti-piracy warning stated that “we, for our part, are satisfied as to the chain of title of everything contained in our vast catalogues, including many titles, which other people call public domain material but in fact is not”.  The Elm Street Audio Catalogue (audio) contained similar statements.
(2)	The TKO Members Catalogue (audio) stated in its anti-piracy warning “We, for our part, are satisfied as to our title to everything contained in our catalogues including many titles of material which other people call public domain”  in its anti-piracy section. 
(3)	The Elm Street Nostalgic War Documentaries, Nostalgic Color Film and Nostalgic Television Shows Catalogues (video) stated that “the repertoire contained herein may be available exclusively or non-exclusively and may not be available in certain territories or at all” and warned that potential licensees would need Elm Street to clear each item for usage.
The Danziger (video), TKO Ultimate (audio), TKO Additional DVD (video) and Elm Street Sound-a-Likes (audio) Catalogues were not prefaced by any introductory text.

103.	It was argued on behalf of Mr Kruger that Mr Lloyd was, or should  have been, aware from these introductory passages that the Kruger Companies were not asserting or representing that they owned the titles in question.  I find the so-called anti-piracy warnings to be somewhat ambiguous, particularly when taken together with other seemingly inconsistent statements in the introductory sections. I do not, however, consider that any clear representation as to ownership emerges from those anti-piracy warnings, which were only given in three of the Catalogues.   In any event, although Mr Lloyd was aware that some of the Catalogues contained these introductory sections, which he described as standard disclaimers, it does not appear that he either read or relied upon them.  

104.	It follows from the above that I reject the suggestion that Mr Kruger represented, whether by words or conduct, that the Kruger Companies owned the IP in the titles listed in the Catalogues.   I am, however, satisfied that Mr Kruger did represent to Mr Lloyd that the contents of the eleven Catalogues would be available for exploitation by the merged company.  

105.	Representations as to the quality of the Masters.  A central plank of Mr Lloyd’s case is that Mr Kruger represented that the audio and audio-visual works would be provided on a suitable master format for broadcast and sale as CDs and DVDs.   Mr Lloyd’s pleaded case relies upon the same facts and matters as the alleged representations as to ownership, together with the 8 August email.   The 8 August email from Mr Kruger referred to the audio on Elm.Street.Media.com being digitised.

106.	Mr Lloyd’s case here effectively assumes that which he needs to prove.  A master does not have to be in any particular format to be a master.  An original 35mm print of a 1960s film is just as much a master (if not more so) as a later digital copy of that film.  Ms Bayliss submitted that Mr Kruger’s representations were to the effect that the masters brought into the deal would be in an appropriate format to deliver the turnovers anticipated in the Business Plan. This is an impossible contention.   Work had not yet started on the Business Plan. It is not appropriate in my judgment to reverse engineer an allegation of fraudulent misrepresentation in this way.  Save in respect of the Elm Street audio catalogue, I have seen no evidence that Mr Kruger represented that any of the other audio and audio-visual works would be provided in a digital, or in any other immediately exploitable, format.  Nor is there any basis for implying a representation to the effect that they would be.   

107.	In conclusion on this issue, I find that (save in respect of the audio titles on Elm.Street.Media.com) Mr Kruger did not expressly or impliedly represent that the audio and audio-visual masters would be in any particular format.

The alleged indirect representations
108.	Mr Lloyd alleges that Mr Kruger provided information, or procured that information be provided, regarding the assets and finances of the Kruger Companies in circumstances where he intended and/or knew that Mr Lloyd would see the information and rely upon it.   That information was contained in the Business Plan and in the Sound Advice Valuation.

109.	The Business Plan and the Sound Advice Valuation were finalised after Mr Lloyd had agreed to continue as director of Pegasus following the merger and after he had been invited, and had agreed, to invest in the proposed deal.  The Business Plan expressly states that Mr Lloyd “has committed to an investment of £250,000”.  Mr Lloyd was one of the authors of the Business Plan, although his input was concentrated on Pegasus’ side of the business. Mr Kruger submits that no representation was made to Mr Lloyd in either document.   

The Business Plan
110.	The alleged representations.  The Business Plan was completed in February 2009. Mr Lloyd relies upon thirteen statements in the Business Plan which he contends were “derived from statements made by Mr Kruger to their various authors”:-
(1)	“... The visual catalogue [to be sold by TKO and Elm Street Media] contains over 1,000 hours of largely unexploited film, television and DVD content ...”
(2)	“... New Co, as owner, of all this content, will have unrestricted access to these catalogues and the ability to market new collections and products ...”
(3)	“... The TKO audio catalogues are either owned outright, or licensed-in non-exclusively, for the life of the copyright, or in perpetuity ...”
(4)	“... Elm Street Media Limited is a multi-faceted entertainment company, with its core business being rights ownership/access ...”
(5)	“... Elm Street Media also now owns large amounts of exclusive audio material ...” 
(6)	“... The schedule of the intangible assets of TKO Inc. comprises… An audio and visual catalogue comprising film, TV and in-concert footage totalling approximately 500 hours of programming suitable for DVD ...” 
(7)	“... TKO has a broad footprint, with product licensed worldwide to companies including EMI / Capitol, Warner Music, Sony Music, BMG, Universal, K-Tel International, JVC Victor and Pegasus Entertainment’s mother company Eagle Rock ...” 
(8)	“... There are six TV series [in the TKO film catalogue], each of 39 episodes ...” 
(9)	“... With the TKO catalogue of 11,000 tracks, many of which have not been utilised on this digital platform [the iTunes Store], the revenue would increase substantially ...” 
(10)	“... TKO Inc (www.tkogroup.com) through its UK subsidiaries – TKO Licensing Limited and TKO Publishing Limited - is a well established owner of intellectual property rights in audio, visual and music publishing. The company … is a leading supplier of worldwide B2B music rights, publishing and has a well respected music, film and DVD catalogue. The company has always been profitable and the revenue generation from its licensing catalogues for 2007 was £455,734, and its publishing catalogue was £151,414 ... It should be noted that neither TKO nor Elm Street Media release any finished products for sale and all income above is generated through existing licensing contracts with third party music companies ...” 
(11)	“... Elm Street Media Limited (www.elmstreetmedia.com) is a multi-faceted entertainment company, with its core business being rights ownership/access and exploitation in the related areas of proprietary/non-proprietary music catalogue and music publishing. The company has been profitable throughout its life and its revenue generation for 2007 was in excess of £263,000. … It should be noted that neither TKO nor Elm Street Media release any finished products for sale and all income above is generated through existing licensing contracts with third party music companies ...” 
(12)	“... Pegasus Entertainment Holdings Limited, as the enlarged group, will become a leading content owner, producer and distributor of audio and visual product, as well as combining the audio/visual catalogues of TKO and Elm Street Media. The company will additionally become a prominent third party rights licensor and owner of a substantial music publishing catalogue, which in itself is a valuable standalone business. Additionally this would allow for significant cost savings to be made due to the reduction in the amount of content being licensed in by Pegasus Entertainment for use in its products ...” 
(13)	In the case of each of the above representations, Mr Lloyd contends that it was expressly and/or impliedly represented that the audio and audio visual works referred to were to be included in the sale.

111.	Were these alleged representations made to Mr Lloyd? In her closing written submissions Ms Bayliss argued that the Indirect Representations in the Business Plan “were obviously intended to persuade Mr Lloyd to invest in the PEHL Deal and manage Pegasus”.  I do not find this assertion to be at all obvious.  I have considerable difficulty with the notion that statements in the Business Plan, of which Mr Lloyd was a co-author and before the publication of which he had already committed to invest, are to be regarded as representations that were made to him.  Mr Lloyd was not one of the potential investors (in particular Coutts) who was intended to act on any representations in the Business Plan; nor did he form part of a class of potential investors who might be persuaded to invest after reading the Plan.   

112.	In conclusion, I find that any indirect representations in the Business Plan were not intended to persuade Mr Lloyd to invest in the PEHL Deal and to manage Pegasus.  This is sufficient to dispose of this aspect of the claim, although I will consider the other arguments raised on his behalf.   

113.	Were the alleged representations false?  Mr Lloyd’s principal complaints about these statements are in several respects similar to those which he makes in respect of the direct representations, namely that:-
(1)	TKO and Elm Street did not, in the event, provide all of the audio and audio-visual works that the Business Plan stated would be provided;
(2)	Many of the works were not “largely unexploited” and those which did fall into this category were not capable of exploitation.
(3)	Many of the works that were in fact supplied were largely or entirely in the public domain or were licensed from third parties.
(4)	PEHL had no meaningful access to any of the audio and audio-visual content because no masters on a suitable format were supplied.

114.	As to the first complaint, the Business Plan did not specifically identify (whether by name or catalogue) the audio and audio-visual content that was going be transferred to PEHL, instead referring in general terms to, say, “1,000 hours of film, television and DVD content”, “500 hours of programming suitable for DVD” and 6 TV series each of 39 episodes. It did, however state that the plan was to “combine the audio/visual catalogues of TKO and Elm Street Media”.  I am satisfied that a potential investor would have understood that the TKO and Elm Street Catalogues were going to be included within the sale and would be available for exploitation by PEHL.  It is common ground that not all of those Catalogues were subsequently included in the sale.

115.	As to the second complaint, there was considerable debate about the meaning of “largely unexploited”.  The parties’ experts, Mr Mercer and Mr Frey, gave evidence about the meaning that would be attributed to this term in the market.  Mr Mercer said that a title would be largely unexploited if it has never been released at all, or only released in a small number of territories, or only on one or two low income generating formats.  Mr Frey considered that “largely unexploited” can refer to the particular product having not been previously offered at budget prices or in certain market channels.  Mr Mercer considers that material in the public domain cannot be described as largely unexploited.  Mr Frey disagrees. I did not find the evidence of either expert to be particularly illuminating.  To assess whether audio or video material has been largely unexploited it is surely first necessary to determine whether, and if so where, by whom and in what format, it has previously been released.   The fact that a title is in the public domain does not, as it seems to me, lead inexorably to the conclusion that it has previously been exploited.   In order to decide whether any given title was “largely unexploited” it would be necessary to investigate that position with regard to that particular title.   No exercise of this kind has been carried out by the experts.
  
116.	As to the third complaint, the various statements as to ownership and exclusivity in the Business Plan certainly give the impression that the Kruger Companies owned or controlled a considerable quantity of the audio and audio-visual titles that were intended to be sold to PEHL.  They do not, however, identify with any precision which of those titles were owned or exclusively controlled and which were not.  Thus, statements such as Elm Street’s “core business being rights ownership/access” tell one nothing about which rights were owned by Elm Street and to which rights they simply had access (whether because they were public domain material or because they had been licensed in from third parties).   Mr Lloyd was well aware from an early stage that there was a considerable quantity of public domain material in the Kruger Company Catalogues.

117.	As to the fourth complaint, in my judgment there is nothing in the Business Plan which represents (whether expressly or impliedly) that masters would be supplied in any particular format.  The fact that work needed to be done in order to commercialise a particular title does not mean that PEHL did not have unrestricted access to it.

118.	These four principal complaints cover the majority of the generic representations in the Business Plan upon which Mr Lloyd relies.   I am not satisfied that any of his other complaints are made out.   For example, in relation to representations (10), (11) and (12)  Mr Lloyd relies on the fact that the TKO and Elm Street  companies made losses, or only negligible profits, in the three years after the merger and that they cannot therefore have been viable businesses.   This does not begin to follow.  There is no challenge to the stated turnover of these businesses prior to the merger.  They did generate income through the licensing of titles.   

The Sound Advice Valuation
119.	The alleged representation.  As I have mentioned above, the Sound Advice Valuation prepared for Elm Street valued the Kruger Companies’ audio and audio-visual works at £4,268,184.  Mr Lloyd says that this was a representation upon which he relied, that it was based on information provided by Mr Kruger, and that the information was false.   Mr Lloyd relies heavily on the fact that all of ESMG’s intellectual property was sold for only £25,000 on liquidation more than five years later in 2014.   This is a bad point.   The market in 2014 was very different to that in 2009 and it is not at all surprising that ESMG’s assets did not fetch much on a liquidation fire sale.

120.	Was the alleged representation made to Mr Lloyd?  Mr Lloyd contends that he relied on the representations as to the value of the Kruger Companies’ IP in deciding to invest in and to work for PEHL.   The position here is similar to that with the Business Plan.   The Sound Advice Valuation was prepared after Mr Lloyd had decided to work for, and subsequently to invest in, PEHL.   It was not directed to him as one of a class of potential investors and I find that any indirect representation in the Business Plan was not intended to persuade Mr Lloyd to invest in the PEHL Deal and to manage Pegasus.   I will nevertheless consider the other limbs of Mr Lloyd’s case in case I am wrong about this.

121.	Was the alleged representation false?  Mr Skeet valued the IP of the Kruger Companies by using historical income figures to project a valuation.  This methodology was acceptable to Coutts.   For the purposes of both valuations Mr Skeet was provided with breakdowns of the Kruger Companies’ royalty income, payments to writers and retained share over the past three years which he reconciled back to audited and/or management accounts in order to determine the net income, or net publisher share (“NPS”), retained by the Kruger Companies.  For the purposes of the Elm Street valuation, upon which Mr Lloyd says he relied, Mr Skeet multiplied the NPS by fourteen years.  For the purposes of the more conservative Coutts’ valuation, Mr Skeet multiplied the NPS by ten years, commenting that if this valuation had been for a market sale (and not for funding purposes) he would have been inclined to apply a multiplier of fourteen.

122.	Mr Skeet’s valuations were considered by the parties’ experts.  Mr Mercer considered that using historical valuation figures to project a value for an IP business was a fundamentally flawed approach.  He also observed that Mr Skeet was valuing the complete IP of the Kruger Catalogues, whereas not all of the Catalogues were subsequently included within the deal.  Mr Frey considered Mr Skeet’s methodology to be appropriate and normal business practice in this sector.  He fairly accepted in cross-examination that Mr Skeet’s valuations would not be correct if not all of the IP that he had taken into account had in fact been sold as part of the deal.

123.	The accuracy or validity of Mr Skeet’s approach was not challenged when Mr Skeet was cross-examined.   Nor was it put to him that he hadn’t used the historical data that he had said he used to determine the NPS.  He told me that the method that he used was usual in these cases and was acceptable to Coutts for funding purposes.  I have no reason to doubt this.  The difficulty with his method, however, is that it does not ascribe any particular value to any individual, or groups of, audio and audio-visual products.   For example, Mr Mercer considers that it would have been possible to receive £10,000 per title for the exploitation of the films in the Danziger and Wachesberger Catalogues.   There is no evidence as to what other individual titles were worth, although Mr Mercer suggested that those in the public domain were worth little or nothing.  He did, however, acknowledge in evidence that public domain materials would have made up an appreciable proportion of TKO’s income and that the trick in marketing public domain material was in the repackaging of such materials for resale.

124.	I am satisfied that Mr Skeet was provided with the data that he says that he was provided with in order to reach his valuations.  I have seen no evidence to suggest that this data was in any way falsified, whether by Mr Kruger or those working for him, in order to cause Mr Skeet to present a misleading picture as to the turnover of the Kruger Companies.   I do, however, have grave doubts as to whether Mr Skeet’s methodology in fact provided an accurate valuation of the audio and audio-visual assets of the Kruger Companies (or indeed, of Pegasus, whose IP was valued on the same basis).   It is common ground that Mr Skeet was seeking to put a value on all of the assets controlled by the Kruger Companies and that these were not all included in the sale.

125.	Mr Lloyd’s principal complaint is that the Kruger Company audio and audio visual material that was sold was not in fact worth anything like the sums at which it had been valued.   There are a number of plausible reasons for this.  First, the valuation proceeded on the basis that all of the Catalogues would be included in the sale, which did not happen.  Secondly, the valuation was based on turnover for the various Catalogues that had been achieved when the Kruger Companies were licensing their material to third parties.  It is unclear from the evidence as to how much, if any, licensing of this product occurred after the sale.   Thirdly, the valuation did not, because of its methodology, provide a reliable guide as to the actual value of the audio and audio-visual assets.  Fourthly, market conditions rapidly deteriorated from the time of the sale.  The market for physical audio and audio-visual media was severely affected by the demise of many high-street outlets, by online competition and because of the increasing availability of significant amounts of material on free websites such as YouTube.  Fifthly, the management of ESMG was dysfunctional. 

Were the alleged representations fraudulent?
126.	For Mr Lloyd to succeed in an allegation of fraudulent misrepresentation he must prove that Mr Kruger made the alleged representation to him, and that at the time of making it, Mr Kruger did not believe in the truth of what he was saying or was otherwise reckless as to whether what he was saying was true or false.   

The direct representation
127.	Mr Lloyd’s claim effectively proceeds on the basis that the representation must have been untrue, and made fraudulently or recklessly, because a number of the Catalogues did not form part of the sale some ten months later.  At the outset of his cross-examination Mr Lloyd asserted that Mr Kruger had, from the very beginning, untruthfully represented the extent of the IP that was going to be made available by the Kruger companies, and that he knew what he was doing from the very start.  This is a very serious allegation.   I have no hesitation in rejecting it.

128.	I have not seen or heard any evidence to suggest that Mr Kruger was lying when he made those representations or that he did not care whether he was telling the truth or not. I consider that the inherent probabilities are that at the time of making those representations he did believe that the content of all of the Catalogues would be sold to Newco as part of the deal and that this was his honest intention.  Mr Lloyd has not in any event satisfied me even on a bare balance of probabilities that Mr Kruger did not hold this belief at the relevant time.  As the evidence shows, the decision by Mr Kruger and his father to remove some of the Catalogues and TKO Publishing from the deal was made at a very late stage and only after the Bank had significantly reduced the amount that it was prepared to lend.

The indirect representations
129.	The Business Plan.  Similar considerations apply to the indirect representation in the Business Plan that all of the Catalogues would be included within the sale.   I have not seen or heard any evidence to suggest that Mr Kruger, or those writing the Plan on his behalf, were lying when those representations were made or that they did not care about the truth of what they were saying.   The Plan was released some three months or more before the deal was concluded and well before the decision was taken to remove some of the Catalogues and TKO Publishing from it.

130.	The Sound Advice Valuation.   There were no fraudulent representations by Mr Kruger  in the Sound Advice Valuation. I have seen no reliable evidence to suggest that the data with which Mr Skeet was supplied was inaccurate, let alone deliberately falsified.  Although Mr Skeet’s methodology for valuing IP is open to question, it was nonetheless a recognised and accepted methodology, it was satisfactory to Coutts and he conducted his valuation in good faith.   

Facts later becoming incorrect
131.	Mr Lloyd’s case has throughout proceeded on the basis that Mr Kruger’s intentions were fraudulent from the start, in that he dishonestly misrepresented the quantity and quality of the IP that would be brought into the deal from August 2008 or earlier and then persisted with this deceit up and until the time when the deal was concluded.   I have rejected this analysis. 
  
132.	There is, however, another way of looking at the matter, although it has not been pleaded and was not properly investigated at trial.   The representations that were made were, as I have found, true and/or honestly made at the time that they were made.  The facts, however, changed very shortly before the deal was concluded, when Mr Kruger and his father decided not to include all of the Catalogues or TKO Publishing in the deal.  

133.	The elements of a claim in deceit are tested at the time at which the representation was acted upon by the representee.  Here the pleaded acts of reliance are said to have occurred when Mr Lloyd decided to work for, and subsequently to invest in, PEHL.  Mr Lloyd’s decisions were made well before the facts had changed.   Mr Lloyd’s pleaded case does not contend in the alternative that if the alleged representations were true at the time that they were made then they nevertheless became fraudulent at the time when the facts changed.  As Lord Millett explained in Three Rivers District Council v the Governor and Company of the Bank of England No 3 [2003] 2 AC 1, 
“... At trial the court will not normally allow proof of primary facts which have not been pleaded, and will not do so in a case of fraud. It is not open to the court to infer dishonesty from facts which have not been pleaded, or from facts which have been pleaded but are consistent with honesty. There must be some fact which tilts the balance and justifies an inference of dishonesty, and this fact must be both pleaded and proved ...”
134.	Although the point was not pleaded, it was nevertheless put to Mr Kruger that he should have told Mr Lloyd that the deal had changed and claimed that Mr Lloyd was “conveniently” not given the opportunity to consider the deal documents at the closing on 1 June 2009.   There is no pleaded case to the effect that Mr Kruger deliberately withheld information from Mr Lloyd at the time of the deal and this allegation was not directly put to him in cross-examination.  Mr Kruger told me that he did not know whether Mr Lloyd had been told that the deal had changed, and that his understanding (and I accept that this is what Mr Kruger believed) was that he could change a deal up right up until the point that it was signed.  

135.	I have found that none of the alleged representations were fraudulent at the time that they were made.  It is not open to Mr Lloyd to run an unpleaded case to the effect that, following his decision to withdraw some of the Catalogues from the sale, Mr Kruger thereby and/or subsequently at the time of the closing meeting became fraudulent.  I should, however, say that such a case would have failed in any event.  An intention to defraud would only exist if (1) Mr Kruger realised that the position had changed and that he ought to have disclosed this to Mr Lloyd, and (2) Mr Kruger took a conscious decision not to inform Mr Lloyd in order to defraud him: see Abu Dhabi Investment Co. v. H. Clarkson & Co. Ltd. [2007] EWHC 1267 (Comm) per Tomlinson J. (as he then was) at [232].   Neither of those limbs would have been satisfied.   Ms Bayliss submitted in her closing submissions that at the time of the deal Mr Kruger treated Mr Lloyd more as an employee of PEHL than as an investor.   That may be so.   It does not, however, begin to justify a claim in deceit.   Condescension does not equal fraud.

Reliance
136.	I can take these points shortly in light of my findings above.

137.	I consider that the Second Direct Representation did play some part, however small, in inducing Mr Lloyd to recommend the sale of Pegasus to Eagle Rock and agreeing to manage Pegasus’ business under its new ownership.   That is sufficient for the purposes of a claim in deceit.  A representation need not be shown to be the only cause, or even the main cause, of a representee’s decision, provided that it is a cause: Attwood v Small (1838) 6 Cl. & Fin. 232 at 502.

138.	I do not, however, accept that Mr Lloyd placed any relevant reliance on the alleged indirect representations.  He had recommended the sale of Pegasus and had agreed to invest in PEHL well before those representations were made.

D:	Time Bar
139.	Mr Kruger argues that the Mr Lloyd’s claims are time-barred by reason of section 32 of the Limitation Act 1980.  The relevant parts of section 32 provide as follows:

“... 32.— Postponement of limitation period in case of fraud, concealment or mistake.
(1) Subject to [subsections (3) and (4A)] below, where in the case of any action for which a period of limitation is prescribed by this Act, either—
(a) the action is based upon the fraud of the defendant; or
(b) any fact relevant to the plaintiff's right of action has been deliberately concealed from him by the defendant; or
(c) the action is for relief from the consequences of a mistake;
the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.
References in this subsection to the defendant include references to the defendant's agent and to any person through whom the defendant claims and his agent.
(2) For the purposes of subsection (1) above, deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time amounts to deliberate concealment of the facts involved in that breach of duty ...”

140.	The Claim Form in this action was issued on 25 May 2016.   That is almost seven years after the conclusion of the deal on 1 June 2009.   The limitation period begins to run from the time that Mr Lloyd discovered the deceit for which he contends or could with reasonable diligence have discovered it.

141.	The principal matters about which Mr Lloyd complains are (1) the fact that not all of the Catalogues were included within the sale, and (2) the fact that many of the masters were not in a digitized format suitable for immediate exploitation.  Mr Lloyd argues that the full extent to which he had been conned did not become apparent until late 2011, when he obtained the schedules to the Contracts.   I find this to be unconvincing.  

142.	Mr Lloyd became aware from just after the conclusion of the deal that the crown jewel Danziger and Wachesberger Catalogues did not form part of it.  It will be recalled that his evidence was to the effect that the merger would not have been attractive to him without the Danziger Catalogue.  If he considered that he had been misled or “conned” in this important respect the obvious course of action for him to have taken would have been to obtain and examine the Contract Schedules in order to find out which Catalogues had or had not been included.  He could with reasonable diligence have discovered the full extent of this alleged deceit fairly rapidly, and in any event well before May 2010.   I should say that I find it somewhat surprising that Mr Lloyd did not discover the absence of other Catalogues before late 2011 unless, that is, he had no interest in exploiting the material in them.

143.	Similar considerations arise in relation to the quality of the masters.  Mr Lloyd had become aware by at least November 2009 that many of the Kruger Company masters were not in what he asserts was the appropriate format.  As time went on more and more masters that did not meet Mr Lloyd’s alleged criteria were discovered.   By May 2010 Mr Lloyd would have been well aware that many of the masters would require considerable work and expense if they were to be brought to market.   This is all readily apparent from the evidence of Mr Reisch, with whom Mr Lloyd worked closely.

144.	It follows that the essential building blocks upon which the claim in deceit is founded were well known to Mr Lloyd before the end of 2009 and certainly before the middle of May 2010.   This is more than six years before the issue of the Claim Form.   Mr Lloyd could, with reasonable diligence, have determined the full extent to which he had allegedly been conned by May 2010.

145.	I find that Mr Lloyd’s claims are time-barred.

E:	Loss
146.	I will for completeness deal with the quantum of Mr Lloyd’s claim even though I have found that the claim fails.

147.	There are two components to Mr Lloyd’s claim:-
(1)	A claim for the recovery of the £250,000 that he invested in the deal;
(2)	A claim for loss of earnings after the termination of his employment.

The £250,000 investment
148.	I am satisfied on the evidence that Mr Lloyd did invest £250,000 in the deal and that this investment was lost.   The investment was initially intended to be funded from the £150,000 bonus that was due to Mr Lloyd on the sale of the Pegasus business and £100,000 in respect of payments made for his and his wife’s shares in Eagle Rock.  In the event the payment was structured by a reduction in the purchase price for Pegasus (£194,000) and with Mr Lloyd making a cash payment of £56,000.

149.	Mr Kruger argued that the only loss suffered by Mr Lloyd was £56,000, this being the only cash payment that was made by him.  I reject this submission.   Coutts required, and the Business Plan provided, that Mr Lloyd would invest £250,000 in PEHL and this is what he did.

150.	It was also suggested that Mr Lloyd did not in fact suffer any loss because Pegasus would have failed had the deal not gone through.   This point is bad in law.   Where a representee’s reliance consists of his entering into a contract or taking certain steps in reliance upon a fraudulent misrepresentation he is, subject to mitigation, entitled to recover those losses which flow from reliance on the representation: Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1977] AC 254.  It is neither necessary nor relevant to enquire as to what might have happened if the representee had not relied on the deceit.

Loss of earnings
151.	This head of claim was not pressed heavily and rightly so.  There was no evidence before me as to what earnings (if any) Mr Lloyd had lost as a result of the failure of ESMG.   He has been in work as an investor since he parted company with ESMG. 

F:	Conclusion
152.	For the reasons I have given above the claim in deceit fails.  Mr Lloyd’s claims are in any event time-barred.

ADDENDUM

Introduction
1.	  The trial of this action concluded on 24 April 2018.   I was advised on 27 April that the Claimant wished to assert that a document that had been briefly referred to in oral closings was a fabrication.  It then transpired that the Claimant intended to challenge the authenticity of two documents.  I heard the Claimant’s application on 3 May 2018 and dismissed it in a ruling dated 8 May 2018.  This provided as follows:-

The trial in this matter concluded on 24 April 2018. On 3 May 2018 I heard an application in which the Claimant sought to persuade me that I should reopen the case and give directions for the determination of an issue as to the authenticity of two documents 
Having carefully considered the parties’ arguments I have decided not to make the order which the Claimant seeks. My reasons for this decision will be set out fully in my judgment. 

Should either party wish to appeal this ruling then time to appeal will run from the date of the judgment. 

The Application
2.	The application arose in the following way.  During the course of his closing submissions Mr Drummond for Mr Kruger referred me to an email dated 11 May 2009 (timed at 1826) from Julian Ciecierski-Burns, a solicitor at Davenport Lyons, who were then acting for PEHL, to Mr Kruger (and copied to Nigel Davies and Alon Domb).   I will refer to this as “the disputed email”.  The subject heading of the email was “Company acquisition documents, schedules and bible”.   The text provided 

“As discussed with Nigel, I can confirm that electronic copies have been sent by email to Paul Savident. Peter Teale, Denis Lloyd all the directors and shareholders.

I have discussed this with Nigel, but he has not seen the final version.

Can you please confirm that this is acceptable? ...”

3.	I was advised that this email had been disclosed to the Claimant in December 2017 (ie at least 5 months before trial).  The email had not been put to Mr Lloyd in evidence or previously referred to in terms at the hearing.  It did, however, form part of the trial bundles.  Ms Bayliss objected to the fact that it had been referred to in closing and asked me to exclude it from the evidence.  I decided to direct the parties to investigate whether an email was in fact sent to Mr Lloyd and what attachments, if any, were sent with it.   I observed in discussion with Ms Bayliss that even if the documents and schedules had been sent to, but not read by, Mr Lloyd, she would still be able to make the point that because the claim was in deceit it would not be a defence for the Defendant to contend that he should have read them.

4.	On Day 4 of the trial disclosure of certain documents from the files of the by now defunct Davenport Lyons was given.  I was not referred to any of these during the hearing.  Following the conclusion of the trial the Claimant’s legal team discovered another email dated 11 May 2009 (also timed at 1826) from Mr Ciecierski-Burns to Mr Kruger (and copied to Nigel Davies and Alon Domb).  The text  provided that:-

“As discussed with Nigel, I now attach a revised personal guarantee in relation to our fees, which now includes the two fee-caps as agreed. 
	
I have discussed this with Nigel, but he has not seen the final version.

Can you please confirm that this is acceptable? ...”

5.	The Claimant contends that Mr Kruger deleted the words underlined in the second of the two emails to which I have referred and replaced them with the words underlined in the first.  

6.	The Claimant also challenged the authenticity of a second document (“the TKO letter”).   This was a TKO disclosure letter that purportedly formed part of the bible of documents at the closing of the deal.   It was asserted that there was cogent evidence that it was a later fabrication because the copy had  a heavy black line on the left hand side of the page, Mr Kruger Sr’s signature did not look like any other signature of his in the bundle, and the letterhead was anomalous.

7.	The Claimant invited me to give directions for the recalling of the parties and to list the matter for a further hearing, with cross-examination.   It was submitted that there were already serious question marks over Mr Kruger’s dishonesty and that it was important in the context of the case for me to make a determination in relation to the disputed email.

8.	The Defendant, who was very ably represented on this application by his solicitor, Mr Richard Slade, invited me to dismiss the application.  It took Mr Slade only minutes to demonstrate that the challenge to the authenticity of the TKO letter was entirely without foundation.   Miss Bayliss did not then pursue her application in respect of the TKO letter.   It should never have been made.  

Applicable principles
9.	CPR 32.19 provides 

“... (1) A party shall be deemed to admit the authenticity of a document disclosed to him under Part 31 (disclosure and inspection of documents) unless he serves notice that he wishes the document to be proved at trial 
(2)   A notice to prove a document must be served:-
		(a) 	by the latest date for serving witness statements; or
		(b) 	within 7 days of disclosure of the document, whichever is later ...”

10.	CPR 32.19(1) establishes an important principle, namely that parties are to put their cards on the table well before trial (and, in any event, within the time scale provided by CPR 32.19(2)) so that the parties and the court know, beyond question, whether the authenticity of any disclosed document is a matter in dispute: McGann v Bisping [2017] EWHC 2951 (Comm), per Richard Salter QC sitting as a judge of the High Court.   The purpose of this rule is to aid efficient case management and to ensure that there is no trial by ambush.  

Discussion
11.	CPR 31.19 was not complied with and the Claimant is therefore deemed to have admitted the authenticity of the disputed email.   It is not, however, disputed that I have a power to relieve the Claimant of the consequences of its failure to give a proper notice.

12.	The implications of the disputed email (that he received the deal documentation including schedules) were inconsistent with Mr Lloyd’s case and his evidence.  Ms Bayliss acknowledged this.  She said that no one had focussed upon the disputed email at the time that it had been disclosed because so much documentation had been produced.  I do not find this to be a satisfactory explanation.   Mr Lloyd and the Claimant’s legal team have shown an admirable command of the documentation and, I am sure, would have rapidly and carefully considered all disclosure as soon as it was produced.   They had certainly done so by the time that Mr Lloyd’s witness statement came to be prepared.  The Claimant could have required the Defendant to prove the disputed email but did not.

13.	In deciding whether I should accede to the application it is appropriate to keep in mind the principles laid down in Mitchell v News Group Newspapers Ltd [2014] 1 WLR 796 (CA) and Denton v TH White [2014] 1 WLR 3926 (CA).  A judge should address an application for relief from sanctions in three stages: (i) identify and assess the seriousness and significance of the failure to comply with any rule, practice direction or court order; (ii) consider why the default occurred; (iii) evaluate all the circumstances of the case, so as to enable the court to deal justly with the application.

14.	   As to the first stage, I consider that the failure to comply with CPR 32.19 in the context of a case in which the Claimant was already alleging a raft of deceitful misrepresentations against the Defendant is relatively serious.  In the context of a case like this it was incumbent upon the Claimant to raise any challenges to the Defendant’s disclosure at the appropriate time.

15.	   As to the second stage, no sensible explanation has been put before me as to why no challenge was made.   The Claimant makes the point that he was not aware that a solid challenge could be made until it had received and considered the second email of 11 May 2009.   There is some force in this, but the point on its own does not justify my giving leave to reopen the trial. 

16.	   I turn next to consider the circumstances of this case, giving particular weight to the need for litigation to be conducted efficiently and at proportionate cost, as well as to enforce compliance with the rules.   
(1)	The first, and important, point is that the trial had concluded by the time that the application was made.   
(2)	Secondly, I am not convinced that matters upon which the Claimant relies are strong evidence that an email was forged, or that it was forged by Mr Kruger.   It does not seem to me to be implausible that a solicitor could use one, very short, email as the inelegant boilerplate for another short email and fire them both off within the same minute.   The differences between the emails raise question marks, but no more.   
(3)	Thirdly, I was surprised and not a little concerned when Ms Bayliss sought to persuade me that the forgery issue could be resolved by cross-examination of the parties alone.  She was resistant to the suggestion that forensic expert evidence would be needed or even appropriate and reluctant to accept that it would be necessary to seek further disclosure from Davenport Lyons’ successors, Gordon Dadds (who were only prepared to submit to court orders requiring disclosure), or evidence from Mr Ciecierski-Burns.  In my judgment any proper investigation of the authenticity of the document would necessarily involve obtaining evidence from all of these sources.
(4)	Fourthly,  it would be inimical to the efficient conduct of this matter to permit the case to go off for potentially a substantial period for a further one to two day hearing.  I consider that to do so would be contrary to the overriding objective of dealing with cases justly and at proportionate cost.  I do not think that this would be either a good, or an appropriate, use of court time.
(5)	Finally, I was also satisfied that the determination of this issue would not assist me in determining whether the Claimant’s action in deceit should succeed.   Mr Slade correctly observed that only I would be in a position to know whether any issue to be determined would involve reliance on the Defendants’ uncorroborated evidence.   
153.	I decided to dismiss the application for the reasons given above.