Misrepresentation - Fraudulent misrepresentation - Sale of company

Barnett and another v Rose and others: Chancery Division (A.G. Bompas QC sitting as a deputy judge of the High Court): 21 September 2011

P, an individual, was made bankrupt in September 2008. In December 2008, the first defendant was appointed as his trustee in bankruptcy. P's only real asset was a shareholding in a company, in which he held 60 shares, which amounted to 40% of the issued share capital. For some years, the company's annual accounts had been compiled by a firm of chartered accountants acting by an accountant (the accountant).

In 2008, the accountant had resigned as a chartered accountant and was a director and shareholder of a company, M Ltd. M Ltd provided accounting services to the company. The second and third defendants (J and B) were the holders of the remaining 60% of the company, having 45 shares each. The claimants, who were a company and an individual interested in acquiring the company, discovered that J and B claimed to have purchased P's shares from the first defendant. Negotiations took place between the claimants and J and B to purchase the company as a whole.

Offers were made to the first defendant by J and B of £40,000 for P's shares. In the course of negotiations, the offer was raised to £65,000, and the first defendant agreed to report to the creditors in order to progress the matter. In March 2010, the first defendant sent a report to the creditors, in which he stated that he had reached agreement with J and B that payment for the shares should be raised to £65,000. The claimants subsequently obtained a freezing order with regard to the sale, claiming that the information provided to the first defendant had been incomplete. They launched an application, in which they applied for and obtained an injunction to restrain any disposition of P's shares.

The claimants sought orders pursuant to sections 303, 304, and 363 of the Insolvency Act 2006. They contended that fraudulent misrepresentations had been made, and that the first defendant was not bound to accept the offers from J and B, of either £40,000 or £65,000. The issue arose as to whether the pre-emption machinery in the company's articles had been invoked as to bind the first defendant to sell P's shares, and whether the shares had been validly transferred to J and B. The court had regard, inter alia, to the fact that the accountant had provided no evidence at trial, and to the certificate of fair value produced by the accountant.

The court ruled: (1) Regarding the alleged agreement to sell P's shares at £40,000, there had been no consensus that there was a contract binding on the first defendant for the sale of P's shares. On the facts, the person who had been engaged by the company's director to certify the fair value of P's shares had been the accountant, not M Ltd. Consequently, the certificate of fair value would be of no effect, since it had been given by the wrong person, as it was M Ltd's certificate. Further, neither the accountant nor M Ltd had been eligible for appointment to give a certificate of fair value. The accountant was not eligible for appointment as the company's auditor, nor did any of the company's shareholders think or want him to be acting in that role.

On the proper construction of the company's Articles of Association, only a statutory auditor could have carried out the role that the accountant had purported to carry out. If the court had not reached that conclusion, it would have concluded that the certificate had been vitiated on the ground that it had been produced in collusion with J and B and with partiality towards them (see [104]-[110], [118] of the judgment).

On the facts, there had been no agreement between the first defendant and J and B to sell P's shares for £40,000 (see [118] of the judgment). Duomatic Ltd, Re [1969] 1 All ER 161 considered.

(2) On the evidence, it was reasonable to draw an adverse inference with regard to the failure of the accountant to provide evidence. J and B had not called the accountant because they feared that his evidence would damage their case. The accountant's conduct had been intentionally misleading and had intended to deceive the first defendant. It was likely that the accountant had deliberately set a value on P's shares that was unduly low.

Further, on the facts, the accountant had effectively acted as a counsellor to J and B in relation to the acquisition of P's shares. He had provided them with advice about the shares, and had corresponded with the first defendant effectively as a representative of J and B. The accountant had acted in the production of the certificate in collusion with and with partiality towards J and B (see [129]-[138] of the judgment).

As a result of the accountant's activities, the first defendant would not be bound to sell and transfer P's shares to J and B pursuant to a contract resulting from the pre-emption machinery in the company's articles (see [139] of the judgment).

(3) Taken at its highest, there had only ever been an agreement in principle that the first defendant would sell P's shares for £65,000. On the evidence, the first defendant had required reassurance as to the justification for the valuation of the company before he was willing to sell at that price.

The first defendant had clearly not intended to sell without the approval of P's creditors. Further, the first defendant had sought approval to accept the offer in his report to the creditors, indicating that at that time he had not accepted an offer to sell at £65,000 (see [141] of the judgment).

On the facts, there had been no agreement between the first defendant and J and B to sell P's shares for £65,000. The first defendant would not be bound to sell P's shares at either £40,000 or £65,000. P's shares would be restored to the first defendant, to be dealt with by him with a view to restoring the return on P's bankruptcy (see [145] of the judgment).

Simon Mills (instructed by B.P. Collins) for the claimants. Philip Hinks (instructed by Fishburn LLP) for the first defendant. Jamie Riley (instructed by Gillan & Co) for the second and third defendants.