Assetco Plc v Grant Thornton UK LLP

Introduction

Overview of the Parties’ Cases

The Witnesses

GT’s Duties

Breaches of Duty by GT

The Material Facts: What Actually Happened

Defence Ground 1: Whether AssetCo can establish loss on the Counterfactuals

Defence Ground 2: Whether AssetCo has mitigated or otherwise avoided its loss

Defence Ground 3: Legal Causation / Scope of Duty

Defence Ground 4: Credit for benefits allegedly accruing

Defence Ground 5: Contributory Fault

Defence Ground 6: Circuity of Action

Quantum

Section 1157 of the Companies Act 2006

Interest

Conclusion

INTRODUCTION A.1 The parties and the claim

The Claimant (“AssetCo plc” or “AssetCo”) in these proceedings is a public company limited by shares listed on the Alternative Investment Market (“AIM”). Its current business consists only of the provision of fire and rescue services to the Special Operations Command (now known as the Presidential

The Group’s business varied over time but it is useful to provide a brief overview at this point given the significance of a number of subsidiary companies to the present case. The Group’s business can broadly be described as follows:

The significant subsidiary companies of AssetCo in the present case, some of which I have already referred to above, include the following:

The Defendant (“GT”) is a large and well-known professional services firm that provides, amongst other matters, audit services.

GT was engaged by AssetCo plc to audit AssetCo’s financial statements, those of its subsidiaries, and the consolidated statements of AssetCo plc and its subsidiaries (together, the “financial statements”) for the financial years ended 31 March 2009 (“FY09”) and 31 March 2010 (“FY10”). These audits are referred to individually as the “2009 Audit” and the “2010 Audit” and collectively as the “Audits”.

It is common ground that in those years the senior management team at AssetCo behaved in a way that was fundamentally dishonest. During the audit process management made dishonest statements to GT, provided GT with fabricated and massaged evidence and dishonestly misstated reported profits, and provided GT with flawed and dishonest forecasts and cash flow projections. Outside of the audit process, management were engaged in dishonestly ‘overfunding’ assets (i.e. misleading banks as to the costs of new purchases etc so as to borrow more than was permitted), misappropriating monies, dishonestly under-reporting tax liabilities to HMRC, concluding fraudulent related party transactions and forging and backdating documents.

It is also common ground that at the dates of the 2009 and 2010 Audits, AssetCo’s business was ostensibly sustainable only on the basis of the dishonest representations or unreasonable decisions made and taken by management.

GT accepts that it was negligent in a number of respects as the company’s auditor in failing to detect these matters and in giving the company clean bills of health; indeed GT accepts that if it had acted competently (as what has been termed in the proceedings “the Competent Auditor”), many if not all of the misrepresentations by AssetCo management would have been discovered. The precise scope of the duties owed by GT and its breaches was not agreed, but the parties agreed in a document produced at my direction, to which I shall

The points at issue in this case are instead about causation and loss. The bulk of the trial was devoted to the question of whether AssetCo could establish that, had GT acted as the Competent Auditor, events would have turned out as

AssetCo claims that if GT had acted competently, a series of events would have been triggered with the result that the business of the company would have been revealed as ostensibly sustainable only on the basis of dishonest representations made, and/or the unreasonable positions taken by, management, that new management would have been brought in, and a substantively similar scheme of arrangement would have been agreed as was reached with AssetCo plc’s creditors in 2011. Moreover, it is said AssetCo would have ceased incurring expenditure on its loss-making and unsustainable subsidiaries (which would have been revealed as such) and would have focused on the profitable elements of and opportunities for its business, as it has done since March 2011. Instead, however, the executive directors were permitted to continue to operate the business in a dishonest and unsustainable way, and to incur expenditure in the failing aspects of the AssetCo Group’s operations which would not otherwise have been made.

GT resists AssetCo’s claim and brings a counterclaim in respect of certain representations it says were made by AssetCo (primarily) in respect of the Audits. Although GT admits the majority of the alleged breaches of duty, it denies that any of the alleged breaches caused any loss or any recoverable loss to AssetCo plc.

AssetCo’s claim is in fact split insofar as it relates to each of the 2009 Audit and the 2010 Audit. It says that these claims are analytically distinct, in that GT committed separate breaches of duty in each year. However, AssetCo’s primary case is that the entirety of its (alleged) loss is attributable to GT’s breaches of duty in relation to the 2009 Audit. Mr Templeman QC for AssetCo explained that he advanced a separate claim in respect of the 2010 Audit only to guard against the possibility that it might be argued that GT’s breaches in respect of the 2010 Audit were an intervening act, breaking the chain of causation between the breaches in respect of the 2009 Audit and (some or all of) the loss suffered by AssetCo plc. Thus, if I were to dismiss the 2009 claims, AssetCo could still succeed on the 2010 claims. There is, though, an obvious overlap between the claims, not least because (i) the same acts of negligence in respect of the 2009 Audit were broadly repeated in respect of the 2010 Audit, and (ii) the events which AssetCo says would have occurred in either the 2009 or the 2010 counterfactuals following a non-negligent audit are largely the events that in fact occurred upon the initial discovery of the company’s financial problems and mismanagement in 2011.

GT made clear that it did not contend that its breaches in respect of the 2010 Audit were an intervening act breaking the chain of causation between the breaches in respect of the 2009 Audit and any loss suffered thereafter by AssetCo. However Mr Templeman QC made clear in opening that AssetCo was not to be thought to be dropping its separate 2010 claim. Therefore both parties proceeded on the basis that that claim was still being advanced separately, and I have proceeded accordingly.

In order to understand AssetCo’s claim and GT’s defence even at this introductory stage it is necessary to set out a very broad (and agreed) outline of the factual background, to which I will return in greater detail later in this judgment.

At the time of the Audits, the principal business of the AssetCo plc Group was the provision of fire and rescue equipment, fleet management and maintenance services to emergency services in the UK, primarily carried out under the London and Lincoln Contracts.

In January 2009, AssetCo plc had concluded an investment agreement (the “Preference Share Agreement” or “PSA”) with a number of investors advised or managed by North Atlantic Value LLP (“NAV”); a part of JO Hambro Capital Management Group)” under which, among other things: (i) the investors subscribed for preference shares in AssetCo (Abu Dhabi) Limited (“AADL”); (ii) AssetCo plc agreed that any contract for the provision of support services for the Fire and Rescue Service of the Abu Dhabi Police or similar projects in Abu Dhabi would be concluded by AADL and not itself; and (iii) the £15 million subscribed by the investors would be retained in

At the time of the Audits, the Executive Directors of AssetCo plc were Mr

During the course of the Audits, GT was provided with fabricated or false evidence by AssetCo plc’s management. This included evidence purporting to

On 15 June 2009 Mr Flynn signed a Letter of Representation addressed to GT stating among other things that there was no relevant audit information of which GT was unaware and that AssetCo plc had disclosed to GT its knowledge of fraud or suspected fraud affecting AssetCo plc involving management where the fraud could have a significant effect on the financial statements. On 12 July 2010 Mr Shannon signed a Letter of Representation addressed to GT in materially similar terms to those of 15 June 2009.

GT expressed an unqualified opinion on the consolidated financial statements on 15 June 2009 for FY09 and on 12 July 2010 for FY10.

By March 2011, it had become apparent to AssetCo plc's major shareholders that it was in severe financial difficulties. New management was appointed as a condition for further support from its major shareholders, with Mr Tudor Davies being appointed Interim Executive Chairman in late March.

By the late summer of 2011, it had become clear to the new management that AssetCo plc and its subsidiaries were insolvent and had no prospect of surviving without the support of their creditors. On 29 September 2011 AssetCo plc entered into a scheme of arrangement with its creditors pursuant to which liabilities of £121,071,000 were settled for £5,000,000 with the balance written off.

AssetCo plc’s new management prepared financial statements for the 18month period ended 30 September 2011. In doing so they identified what they considered to be prior period errors in the GT audited statements for FY09 and FY10. Consequently the financial statements of AssetCo plc for FY09 and FY10 were restated in the Annual Report and financial statements for the 18month period ended 30 September 2011.

GT resigned as AssetCo plc’s auditors in September 2011.

OVERVIEW OF THE PARTIES’ CASES

AssetCo claims damages for breach of contract and/or in tort arising out of the negligent performance by GT of its audit of AssetCo’s consolidated accounts for the financial years ending in March 2009 and 2010.

AssetCo’s case is that had GT complied with its duties it would not have signed unqualified audit opinions for FY09 and FY10 but instead would have issued a qualified opinion and/or would have resigned and caused a convening of a general meeting of the company, following the procedure in s.518 of the Companies Act 2006 for the purpose of receiving and considering GT’s reasons for resignation. AssetCo pleads an alternative case that if GT had complied with its duties, and management had accepted the adjustments that needed to be made, the financial statement would have reflected the true financial position (as set out in the 2011 restatements).

In either case, AssetCo’s position is that the true state of the company’s affairs would have been discovered in 2009 or 2010 and that events would then have taken essentially the same course as they took when the truth was in fact discovered in 2011 (save that, it says, events would have moved more quickly than in 2011). AssetCo would then have avoided expenditure which it made between 2009 and 2011, which expenditure has, it says, been wholly wasted.

In particular, AssetCo argues that on the counterfactual:

On that basis AssetCo seeks damages from GT for breach of its duties as AssetCo’s auditors owed in contract and tort during GT’s planning and conduct of the 2009 Audit and the 2010 Audit. It claims loss and damage in the sum of £31,461,807 (excluding interest) as follows:

AssetCo’s primary case is that it is entitled to recover those sums in full, having proved its case on the balance of probabilities. In the alternative AssetCo plc claims for the loss of a chance to restructure and refinance its business in 2009/10 and therefore avoid the losses that it says it has suffered. In this regard AssetCo accepts (contrary to what it originally submitted at paragraph 413 of its opening, but as confirmed on day 3 of the hearing by Mr Templeman QC) that if a loss of a chance analysis is appropriate, it must prove the actions that it says AssetCo (i.e., itself) would have taken on the balance of probabilities, but actions taken by third parties would have to be approached in line with the authorities on loss of a chance, which I address in detail below.

GT resists the claim, rejecting both the primary and alternative bases for it. Although GT admits the majority of the alleged breaches of duty (which I will set out below), and admits that had the matters pleaded by AssetCo plc been apparent to it, it would have uncovered many if not all of the instances of deceit of the GT audit team by the senior management of AssetCo, and it would have issued a qualified opinion or resigned, it denies that any of the alleged breaches caused any loss or any recoverable loss to AssetCo. In particular, it denies that events in the Counterfactual would have unfolded as pleaded by AssetCo and set out above.

In summary, GT’s defence is founded on what it asserts are six “insuperable obstacles” to AssetCo’s case:

Finally by way of introduction, GT further submits that if each of those six hurdles were cleared, further issues would arise as to:

As will already be apparent, there is a great deal on which the parties agree. However the precise extent of disagreement on largely-agreed matters was not always clear in the written opening submissions, a matter I explored with the

The first (the “Agreed Issues Document”) sets out what was agreed and what was in dispute between the parties – and the extent to which it was material to what was in dispute – as regards (i) the duties owed by GT to AssetCo plc, (ii) GT’s breaches of duty, and (iii) the evidence of the expert forensic accountants and the quantification of the loss said to have been suffered by

THE WITNESSES AND THEIR EVIDENCE

The detail of the witness evidence and the findings I make in relation thereto are addressed throughout this judgment. In this section I simply introduce each witness and give my overall impressions of their evidence.

I heard from two factual witnesses, Mr Tudor Davies (the Chairman of

In terms of general impression I am satisfied that each was an honest and straightforward witness who was doing his best to assist the Court, and who genuinely held the views that he expressed. Overall I found each to be an impressive witness. Both were clearly very successful businessmen, and like many businessmen who have succeeded in the financial world they have a strong belief in their own abilities and have strongly held views.

As to their belief in their abilities, I have no doubt that their belief was wellfounded. It is clear that Mr Davies is highly experienced, and successful, in corporate rescue, and is a man of great energy and drive who throws himself into such tasks, and devotes as much time as is needed, to transform a business, whilst Mr Mills is a highly experienced investment advisor and manager. Such impressions emerged clearly from their oral evidence.

As to the views they express I bear well in mind the point made by Mr Wolfson in closing that necessarily what happened in the counterfactual is a matter of opinion rather than fact. I am also alive to the fact that each witness had his own interests both reputational and financial in the outcome of the case, although I reject GT’s suggestion that this coloured the evidence that Mr Mills and Mr Davies gave. When considering whether the views they express represent what would have happened on the counterfactual I have given careful consideration to the evidence as a whole, including the contemporary documentation and contemporary events. I also bear in mind that GT has identified inconsistencies in their evidence including by reference to contemporary documents and that on occasions, their knowledge of the facts would appear to be less than their witness statements might have suggested.

I did not hear from Mr Chatila, the General Manager of Al Nowais Investment LLC and Arab Development Establishment in Abu Dhabi, but his statements were put in as hearsay evidence. GT accepts that there was a good reason why Mr Chatila did not attend for cross-examination. However inevitably, being untested in cross-examination, his evidence is to be given less weight than had

I also did not hear from Mr Robert Napper (GT’s audit partner on the 2009 and 2010 audits) although his statement was relied upon by GT without objection. So far as Mr Napper is concerned, GT does not gainsay what AssetCo noted in its written Opening Submissions that Mr Napper’s

The audit experts agree to a very large extent on the duties owed by GT to AssetCo plc and on the various breaches of that duty by AssetCo, which is reflected in the Agreed Issues Document.

What the parties and audit experts do not agree about is the timing as to when the Competent Auditor would have discovered the matters which it is agreed it ought to have discovered. Although the differences between the experts on various points of timing in that regard were not always great, they are of potential relevance in determining how events would have unfolded in the Counterfactual. These issues of timing accordingly formed the focus of the cross-examination.

In their respective closing submissions AssetCo and GT criticise the evidence of Mr Bligh and Mr Meredith respectively, and each invite the Court to prefer the evidence of the witness they called over the other. Overall, I found each of Mr Meredith and Mr Bligh to be independent experts doing their best to assist the Court, and it is commendable that they were able to reach such a large measure of agreement which undoubtably saved time and costs and greatly assisted the Court. I do not consider this to be a case where, as a matter of generality, one expert is to be preferred over the other. I address particular criticisms made of Mr Bligh and Mr Meredith, and my conclusions on such matters together with my associated findings, in the course of addressing their evidence in Section G.4.1.2 below.

The questions addressed by the forensic accounting experts, Ms Fowler for AssetCo and Mr Cuerden for GT, essentially went to quantum. Again there was a large amount of agreement between them, for example as to the fact and nature of money movements, that there is double-counting between certain of the heads of loss claimed, and in part the amounts involved. The experts also reached further agreement after the close of their oral evidence, in an Addendum to their Joint Statement filed on 22 June 2018.

However certain matters do remain in dispute between the forensic accounting experts. The main areas of dispute are identified at paragraph 11 of the Agreed Issues Document. These are best understood, and addressed so far as necessary, in the context of the detailed facts of the case and the quantum issues that arise. Accordingly, I will address the issues (and the common ground) between the forensic accounting experts as and when it arises in my analysis below. Overall I found Ms Fowler and Mr Cuerden to be independent

It is common ground that GT owed AssetCo the following duties:

AssetCo plc also alleges, but GT disputes, that GT owed AssetCo the following discrete duties:

The planning, intercompany balances and dividends duties are addressed in the Agreed Issues Document. It is, according to that document, common ground that whether or not the planning and intercompany balances duties were owed does not impact upon the merits of the claim or any of the defences to it. AssetCo nevertheless submitted in closing that I should have regard to the following matters agreed between the expert auditors:

As to the alleged duty relating to dividends, the parties agree that whether or not that duty was owed impacts only on the question(s) of scope of duty and legal causation. At a high level, if a specific duty was owed in respect of review of the dividends declared, this weakens GT’s argument (as to which see below) that the loss suffered by way of the payments of dividends fell outside the scope of GT’s duties or that the claim by AssetCo to recover dividends paid out by it is subject to a novus actus interveniens / intervening act breaking the chain of causation such that GT cannot be held liable for the payment of such dividends. AssetCo’s position is that it can recover the

GT accepts that an auditor might be liable for dividends unlawfully paid if such payment was made in reliance on negligently audited accounts. That is because overpayment of dividends may be the natural and probable consequence of an auditor’s breach: if misstated accounts are put before shareholders the natural and probable consequence may be that they vote in favour of a dividend. In those circumstances GT accepts the overpaid dividends would constitute recoverable loss, as in Re Thomas Gerrard & Sons Ltd [1968] Ch 455. However, GT submits that that cannot be equated with a separate duty to consider or review a company’s dividend policy or proposals. In this regard GT relies on the Court of Appeal’s decision in Re London and General Bank (No. 2) 1895] 2 Ch 673, where Lindley LJ cited the applicable

As I have mentioned, AssetCo’s position is that GT did owe a duty to review any dividend proposed by management and ensure it was properly authorised, approved and lawful, whether as a discrete duty or as part of GT’s general and agreed duties. In particular, AssetCo submits as follows:

The parties agree that GT’s general duty of skill and care was to be defined by reference to “all relevant audit standards” and its engagement letters refer to

Mr Meredith and Mr Bligh agreed that the Competent Auditor acting with reasonable skill and care would, in the circumstances of the AssetCo audit, be expected to have undertaken the procedures set out in [13.15]-[13.19] and

The experts also agree in their Joint Statement (at [2.20]) that the dividends paid in 2009 were paid in contravention of the Companies Act so that the directors could not lawfully recommend a final dividend.

I do not consider that the authorities establish that there is a discrete duty on auditors to obtain sufficient evidence to review any dividend proposed by management and ensure this was properly authorised, approved and lawful – and to advise whether this was so or not, albeit the evidence of the experts was that such matters would have been undertaken by a Competent Auditor.

However as part of the auditor’s general duty of skill and care it is the auditors’ function (and duty) to ensure, so far as possible, that the financial information as to the company’s affairs prepared by the directors accurately reflects the company’s position (see Caparo per Lord Oliver at 630). This involves, as the experts agreed, amongst other matters, “[comparing] the proposed dividend to the net assets / liabilities at the balance sheet date to assess whether there are sufficient distributive reserves to pay the dividend”. It is common ground that GT was in breach of duty in that it should have advised that there were no distributable reserves in 2009. Thus whether or not the legal duty extended to a specific duty to advise in relation to the dividend, GT should have identified that there were no distributable reserves, and so there was no possibility of a dividend (the decision as to whether to recommend a dividend, for consideration by the shareholders, being the directors’).

This is consistent with what Lord Oliver said in Caparo at p. 630:

“It is the auditors’ function to ensure, so far as possible, that the financial information as to the company’s affairs prepared by the directors accurately reflects the company’s position in order, first, to protect the company itself from the consequences of undetected errors or, possibly, wrongdoing (by, for instance, declaring dividends out of capital) and, secondly, to provide shareholders with reliable intelligence for the purpose of enabling them to scrutinise the conduct of the company’s affairs and to exercise their collective powers to reward or control or remove those to whom that conduct has been confided.”

In any event, and whether or not the general duty so extended, GT will be liable for losses that factually and legally flow from the breaches of duty

Mr Colton QC, representing GT, emphasised the need to have regard to the detail of what was entailed in the duties that GT admits it owed, and to compare those duties to those owed by those charged with the governance of a company (i.e. its directors). It is important to identify the content of GT’s duty because, as I set out above, AssetCo must show that each type of loss that it suffered fell within the scope of GT’s duty, i.e. was one that GT owed a duty to prevent. The exercise of considering GT’s duties and contrasting them to those of the directors is also, submits Mr Colton, relevant to four of GT’s six defences to the claim: (1) factual causation and the Counterfactual; (3) scope of duty/ legal causation; (5) contributory negligence and (6) circuity of action.

GT submits that the following eleven propositions apply in relation to the scope and standard of its duties to AssetCo. These were for the most part uncontroversial save to the extent that I have identified below.

First, in order to assess the scope of the duties owed by GT to AssetCo, and by AssetCo’s directors to AssetCo, it is necessary to have regard to the statutory provisions, the Articles of Association of the company, the auditor’s engagement letters, and the relevant auditing standards. In this regard GT refers to, and relies upon, Re London and General Bank (No.2) [1895] 2 Ch

Second, the relevant statutory provisions are now contained in parts 15 and 16 of the Companies Act 2006.

Mr Colton noted that those statutory provisions do not contain a general duty on auditors to detect or investigate fraud. However GT did not suggest that the identification of fraud was irrelevant to its duties. As I will come onto below, the auditor must apply professional scepticism to accounts in seeking to identify any misstatements, and to report suspected fraud – and this was something that it was accepted GT failed to do.

GT’s third proposition is that AssetCo’s Articles of Association as at the date of the 2009 and 2010 Audits provided at Article 81 that the business and affairs of the company were to be managed by the directors, and at Article 143 that accounting records sufficient to show and explain the company’s transactions were to be kept.

Fourth, GT points to its engagement letters which stated that “[o]ur audit work will be undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purposes”. Thus, GT submits, it was assuming no responsibility greater than that of a statutory auditor. I note too in that regard the statement that “[o]ur responsibilities as auditor is [sic.] imposed by United Kingdom law and professional standards”. GT also made the following submissions about the engagement letters:-

Mr Colton emphasised that those provisions highlighted that the audit was designed primarily for the purposes of GT expressing its opinion on financial statements, and that it was the directors (and not the auditors) who had sole responsibility for preventing fraud and other irregularities, and primary responsibility for their detection.

GT’s fifth proposition is that, consistently with the indication given in the engagement letters, the representations made by the directors of AssetCo to GT acknowledged and accepted their responsibilities, and gave GT comfort to enable GT to sign an unqualified audit opinion. In particular the directors represented as follows:

“We confirm to the best of our knowledge and belief that the following representations are made on the basis of appropriate enquiries of other directors, related parties, controlling bodies, management and staff, with relevant knowledge and experience (and, where appropriate, of inspection of supporting documentation) sufficient to satisfy ourselves that we can properly make each of the following representations to you in respect of your audit of the above financial statements, in accordance with the terms of your engagement letter dated [13 February 2009].

i

As set out in the directors’ report, we acknowledge our responsibilities for preparing financial statements which give a true and fair view and for making accurate representations to you.

ii

As far as we are aware:

there is no relevant information of which you are unaware, and

we have taken all steps that we ought to have taken to make ourselves aware of any relevant audit information and to establish that you are aware of that information

iii

All the accounting records of the company have been made available to you for the purpose of your audit and all the transactions undertaken by the company have been properly recorded in the accounting records and reflected in the financial statements.

iv

All other records and related information, including minutes of all management and shareholders’ meetings, have been made available to you.

v

The financial statements are free of material misstatements, including omissions.

vi

We acknowledge our responsibility for the design and implementation of internal control to prevent and detect error and fraud.

vii

We have disclosed to you the results of our assessment of the risk that the financial statements may be materially misstated as a result of fraud.

viii

We have disclosed to you our knowledge of fraud or suspected fraud affecting the entity involving:

management

employees who have significant roles in internal

control; or

others where the fraud could have a material effect on the financial statements;

ix

We have disclosed to you our knowledge of any allegations of fraud, or suspected fraud, affecting the entity’s financial statements communicated by employees, former employees, analysts, regulators or others.

x

Except as stated in the accounts:

there are no unrecorded liabilities, actual or contingent none of the assets of the company has been assigned, pledged or mortgaged

there are no material prior year charges or credits, nor exceptional or non-recurring items requiring separate disclosure

xi

There were no transactions, arrangements or agreements to provide credit facilities, (including loans, quasi-loans or credit transactions and guarantees to provide security for such matters), involving directors or officers that should be disclosed in the financial statements under section 232 of the Companies Act 1985.

xii

All related parties have been identified to you and there were no transactions with related parties nor details of controlling interests which should be disclosed in the financial statements.

xiii

There are no claims, legal proceedings or other matters which may lead to a loss falling on the company or which could result in the creation of an unrecorded asset, that should be disclosed in the financial statements.

xiv

The company has complied with all aspects of contractual agreements that could have a material effect on the financial statements in the event of non-compliance. There has been no non-compliance with requirements of regulatory authorities that could have a material effect on the financial statements in the event of non-compliance.

xv

We are not aware of any instances of actual or possible noncompliance with laws and regulations which might affect the view given by the financial statements.

xvi

We have no plans or intentions that may materially alter the carrying value or classification of assets and liabilities reflected in the financial statements.

We have no plans to abandon lines of product or other plans or intentions that will result in any excess or obsolete inventory, and no inventory is stated at an amount in excess of net realisable value.

xvii

No significant events having an effect on the financial position of the company have taken place since the balance sheet date which necessitate revisions of the figures included in the financial statements or inclusion of a note thereto. […]

The financial statements were prepared by Grant Thornton UK LLP on behalf of the directors. The financial statements have been fully explained to and discussed with us.”

Mr Colton highlighted in particular representations (i), (ii), (iii), (v), (vi), (viii) and (ix), and drew attention to the International Standard on Auditing (UK and

GT’s sixth point is that in each year’s annual accounts, the directors reported as follows as regards their responsibilities:

“Statement of directors’ responsibilities

The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law, the directors have elected to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the

European Union (‘EU’) and the parent company financial statements in accordance with United Kingdom Accounting Standards (‘United Kingdom Generally Accepted Accounting Practice’).

The financial statements are required by law to give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the Group for that period.

In preparing these financial statements, the directors are required to:

Select suitable accounting policies and then apply them consistently;

Make judgements and estimates that are reasonable and prudent;

State whether applicable accounting standards have been followed, subject to any material departures disclosed and

explained in the financial statements; and

Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business.

The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements comply with the Companies Acts [1985/2006]. They are also responsible for safeguarding the assets of the Company and Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

In so far as the directors are aware:

There is no relevant audit information of which the company auditor is unaware; and

The directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website.”

The “Corporate Governance Report” in the same document also stated as follows:

“Audit committee

The audit committee, which convenes every six months, has primary responsibility for monitoring the quality of internal controls and for ensuring that the financial performance of the Group is properly measured and reported on, as well as reviewing reports from the Group’s auditors relating to the Group’s accounting and internal controls, in all cases having due regard to protecting the interests of the shareholders.” And:

“Internal control

The Board is responsible for maintaining a sound system of internal controls to safeguard the investment of shareholders and the assets of the Group.

The directors monitor the operations of the internal controls. The objective of the system is to safeguard the assets of the Group, to ensure adequate accounting records are maintained and to ensure that the financial information used with the business, and for publication, is reliable. Any such system of internal control can only provide reasonable, but not absolute assurance, against material misstatement of loss.

Internal control procedures implemented by the Board include:

A clearly defined organisation structure with formal lines of authority, accountability and responsibility;

•

Review of monthly financial reports and monitoring of performance;

•

Prior approval of all significant expenditure including all major investment decisions; and

•

Regular assessment of major business, investment and financing risks.

The board has reviewed the operation and effectiveness of the Groups’ system of internal control for the financial year and the period up to the date of approval of the financial statements.

During the course of its review of the system of internal control, the Board has not identified nor been advised of any failings or weaknesses which it has determined to be significant. Therefore, a confirmation in respect of necessary actions has not been considered appropriate.

Internal audit function

The audit committee remains of the view that given the size and the nature of the operations of the Group that the establishment of an internal audit function is not warranted. The audit committee continues to review this decision.”

GT’s seventh proposition is that, having regard to all these matters, GT’s function as auditor was to enable shareholders to have the necessary information to exercise their collective powers. GT relies on the following dicta in Caparo v Dickman, supra:

“It is the auditors’ function to ensure, so far as possible, that the financial information as to the company’s affairs prepared by the directors accurately reflects the company’s position in order, first, to protect the company itself from the consequences of undetected errors or, possibly, wrongdoing (by, for instance, declaring dividends out of capital) and, secondly, to provide shareholders with reliable intelligence for the purpose of enabling them to scrutinise the conduct of the company’s affairs and to exercise their collective powers to reward or control or remove those to whom that conduct has been confided” (Lord Oliver at 630);

“I do not, for my part, discern in the legislation any departure from what appears to me to be the original, central and primary purpose of these provisions, that is to say, the informed exercise by those interested in the property of the company, whether as proprietors of shares in the company or as the holders of rights secured by a debenture trust deed, of such powers as are vested in them by virtue of their respective proprietary interests” (Lord Oliver at 631);

“Three matters emerge from the statutory provisions, namely: (1) that the responsibility for the preparation of accounts giving a true and fair view of the company’s financial state is placed fairly and squarely on the shoulders of the directors; (2) that the role of the auditors is to provide an independent report to the members on the proper preparation of the balance sheet and profit and loss account, and as to whether those documents give a true and fair view respectively of the state of the company’s affairs at the end of the financial year and of the company’s profit and loss for that year. Their role is thus purely investigative rather than creative; (3) that the company’s accounts, including the auditors’ report, will be furnished to all members of the company as well as to debenture holders and any other persons entitled to receive notice of general meeting. The accounts will, of course, also be available to any member of the public who chooses to examine the company file in the office of the Registrar of Companies” (Lord Jauncey at 660).

I note too in this regard the following passage from the judgment of Lord Bridge in Caparo at 626C-D, to which AssetCo drew my attention:

“The shareholders of a company have a collective interest in the company’s proper management and in so far as a negligent failure of the auditor to report accurately on the state of the company’s finances deprives the shareholders of the opportunity to exercise their powers in general meeting to call the directors to book and to ensure that errors in management are corrected, the shareholders ought to be entitled to a remedy”.

Mr Colton made two submissions in respect of the dicta in Caparo that he highlighted and that I have set out above.

GT’s eighth proposition is that the standard expected of an audit is set down in the auditing standards. It relies in particular on the following extracts from

GT highlights the following provisions of ISA 200:

“Reasonable Assurance

GT also highlights the following provisions of ISA 240:

“Responsibilities of Those Charged With Governance and of Management

13.

The primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and with management. The respective responsibilities of those charged with governance and of management may vary by entity and from country to country. In some entities, the governance structure may be more informal as those charged with governance may be the same individuals as management of the entity.

14.

It is important that management, with the oversight of those charged with governance, place a strong emphasis on fraud prevention, which may reduce opportunities for fraud to take place, and fraud deterrence, which could persuade individuals not to commit fraud because of the likelihood of detection and punishment. This involves a culture of honesty and ethical behaviour. Such a culture, based on a strong set of core values, is communicated and demonstrated by management and by those charged with governance and provides the foundation for employees as to how the entity conducts its business. Creating a culture of honesty and ethical behaviour includes setting the proper tone; creating a positive workplace environment; hiring, training and promoting appropriate employees; requiring periodic confirmation by employees of their responsibilities and taking appropriate action in response to actual, suspected or alleged fraud. It is the responsibility of those charged with governance of the

entity to ensure, through oversight of management, that the entity establishes and maintains internal control to provide reasonable assurance with regard to reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations. Active oversight by those charged with governance can help reinforce management's commitment to create a culture of honesty and ethical behaviour. In exercising oversight responsibility, those charged with governance consider the potential for management override of controls or other inappropriate influence over the financial reporting process, such as efforts by management to manage earnings in order to influence the perceptions of analysts as to the entity's performance and profitability.

[…]

Inherent Limitations of an Audit in the Context of Fraud 17. As described in ISA (UK and Ireland) 200, ‘Objective and General

Principles Governing an Audit of Financial Statements,’ the objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. Owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements will not be detected, even though the audit is properly planned and performed in accordance with ISAs (UK and Ireland).

18.

The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting a material misstatement resulting from error because fraud may involve sophisticated and carefully organized schemes designed to conceal it, such as forgery, deliberate failure to record transactions, or intentional misrepresentations being made to the auditor.

Such attempts at concealment may be even more difficult to detect when accompanied by collusion. Collusion may cause the auditor to believe that audit evidence is persuasive when it is, in fact, false. The auditor's ability to detect a fraud depends on factors such as the skilfulness of the perpetrator, the frequency and extent of manipulation, the degree of collusion involved, the relative size of individual amounts manipulated, and the seniority of those individuals involved. While the auditor may be able to identify potential opportunities for fraud to be perpetrated, it is difficult for

the auditor to determine whether misstatements in judgment areas such as accounting estimates are caused by fraud or error.

19.

Furthermore, the risk of the auditor not detecting a material misstatement resulting from management fraud is greater than for employee fraud, because management is frequently in a position to directly or indirectly manipulate accounting records and present fraudulent financial information. Certain levels of management may be in a position to override control procedures designed to prevent similar frauds by other employees, for example, by directing subordinates to record transactions incorrectly or to conceal them. Given its position of authority within an entity, management has the ability to either direct employees to do something or solicit their help to assist in carrying out a fraud, with or without the employees' knowledge.

20.

The subsequent discovery of a material misstatement of the financial statements resulting from fraud does not, in and of itself, indicate a failure to comply with ISAs (UK and Ireland). This is particularly the case for certain kinds of intentional misstatements, since audit procedures may be ineffective for detecting an intentional misstatement that is concealed through collusion between or among one or more individuals among management, those charged with governance, employees, or third parties, or that involves falsified documentation. Whether the auditor has performed an audit in accordance with ISAs (UK and Ireland) is determined by the audit procedures performed in the circumstances, the sufficiency and appropriateness of the audit evidence obtained as a result thereof and the suitability of the auditor's report based on an evaluation of that evidence.

Responsibilities of the Auditor for Detecting Material Misstatement Due to Fraud

21.

An auditor conducting an audit in accordance with ISAs (UK and Ireland) obtains reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error. An auditor cannot obtain absolute assurance that material misstatements in the financial statements will be detected because of such factors as the use of judgment, the use of testing, the inherent limitations of internal control and the fact that much of the audit evidence available to the auditor is persuasive rather than conclusive in nature.

22.

When obtaining reasonable assurance, an auditor maintains an attitude of professional scepticism throughout the audit, considers

the potential for management override of controls and recognizes the fact that audit procedures that are effective for detecting error may not be appropriate in the context of an identified risk of material misstatement due to fraud. […]”.

Mr Colton highlighted the duty to provide reasonable assurance that financial statements are free of material misstatements resulting from fraud. In contrast, he submitted, there is no general duty on an auditor to identify dishonesty or fraud within the company. Mr Colton gave an example said to illustrate that distinction: if the CEO of a supermarket was routinely taking a sandwich from the shelves without paying, which, it was said, would not in ordinary circumstances have a material impact on the supermarket’s accounts, Mr Colton submitted that an audit process would not need to be designed that would identify that dishonesty.

GT’s ninth proposition is that having regard to its statutory and contractual obligations as set out above, its function as auditor, and the distinct responsibilities of those charged with governance, the scope of GT’s duty was to protect the company from the consequences of decisions taken by it on the basis that the accounts were free from material misstatement – but no more.

Scope of duty is an area of substantial dispute between the parties to which I will return in dealing with the third ground of GT’s defence, on legal causation, which though conceptually separate from the question of scope of duty is closely related and was at times treated by the parties as part of the same issue.

GT’s tenth proposition is that it does not fall within the scope of the auditor’s duty to assume responsibility for general trading losses, or for general business decisions or the fraud or imprudence of management; and nor is it part of an auditor’s duty to review a company’s dividend policy or proposals. I have already made findings above in relation to dividends and the GT’s general duty of care, but I address the scope of duty further when considering scope of

GT’s eleventh and final proposition is that a company may only claim in respect of losses incurred in reliance on the correctness of the audit opinion. GT characterises this as being a point about factual causation rather than legal causation or breach of duty. In my view it is in reality a point about both factual and legal causation, to which I shall return in discussing Ground 3 of GT’s defence. As I will set out in more detail below, I agree that AssetCo must show that it relied on the audit in order for it to make out its loss. The disagreement between the parties related more to how AssetCo could prove that reliance was satisfied; I return also to that point below.

Although I have adverted in this section on GT’s duty to a number of disagreements between GT and AssetCo about the precise nature and scope of the duties owed by GT, it is worth re-emphasising that the parties agree in large part about what duties GT owed, and also that to the extent that they do not agree, that does not (save to the extent identified) impact on the matters for decision.

The parties are similarly agreed on much of the relevant ground as regards GT’s breach of duty.

In general terms, GT admits that it failed to gather sufficient appropriate audit evidence and to apply appropriate professional scepticism to that which it did gather. More specifically, the parties have agreed that where the expert auditors, Mr Meredith and Mr Bligh, agree that there has been a breach of auditing standards, the parties adopt that agreement. Where Mr Meredith and Mr Bligh do not agree whether there has been a breach of auditing standards, or the precise extent of an agreed breach, the parties have in the Agreed Issues Document helpfully indicated that they are content that I should proceed on

In those circumstances the position on breach can be summarised relatively briefly. It is common ground that GT committed the following breaches of duty:

There is some disagreement between the parties in relation to whether GT acted in breach of duty in particular respects, particularly as regards the duties that it is disputed whether GT did in fact owe, as set out above. In brief:

However the parties do not consider that any audit issues about which they disagree (in relation to breach of duty) have any material impact on the merits of the claim or the defences thereto (including scope of duty), save that the parties disagree as to the position in respect of dividends, as set out above. In such circumstances (and save in relation to dividends) I have not found it necessary to make findings in relation to such differences.

Unfortunately this high level of agreement on breach of duty does not extend to the timing as to when the Competent Auditor would have discovered the matters which it is agreed it would have discovered. This remains in dispute as between the parties and audit experts and was the focus of the crossexamination of the audit experts. I address this evidence, and make associated findings, in due course, when considering the Counterfactual(s) in section G below.

More generally, I note AssetCo’s submission that given the extent of the admitted breaches, I should look sceptically on GT’s suggestion that AssetCo has no remedy against it at all. I do not agree with that submission. In order to succeed in its claim AssetCo must make out every element of the cause of action on which it relies. It must prove causation and loss. The mere fact of breach does not carry it home, regardless of whether it is admitted and however pervasive or serious it was. Of course, AssetCo does not suggest otherwise, but I do not accept what seems to me to be necessarily implied in AssetCo’s submission, namely that I might be more inclined to find a way through the various obstacles raised by GT because of the nature of its admitted breach.

As I have set out above, the factual findings that it is necessary to make relate not to what happened in the relevant time-period, but rather what would have happened if GT had acted competently (i.e. had GT not been in breach of its duties to AssetCo plc).

In order to make that assessment, it is necessary to have regard to (and indeed to set out in detail), what actually happened. That is for two related reasons:

As already foreshadowed, AssetCo owned a number of direct and indirect subsidiaries. It also owned 100% of AADL, which was incorporated in January 2009. In broad summary, AssetCo’s subsidiaries, the most important of which I have already identified above, were grouped into the London Group, which serviced the London Contract, the Lincoln Group, which serviced the Lincoln Contract, and a collection of other subsidiaries that provided emergency vehicle and equipment assembly and maintenance services.

Mr Mills, through NAV, was involved in AssetCo’s business from an early stage. He was introduced to AssetCo Group Limited around November 2006, when he authorised a £5 million investment in the company from various NAV funds. As a result of this investment, NAV held a 6.4% shareholding in the company following the Asfare takeover.

AssetCo’s business model was premised upon capitalising on what it perceived to be its “first mover advantage” in the fire market. As the final admission document for its admission to AIM in 2007 (upon the reverse takeover of Asfare) put it, the idea was that AssetCo was “well positioned to build a significant and leading position in the provision of total managed services for vehicles and equipment, equipment supply and specialist vehicle design and build to the FRAs and other emergency services”, in circumstances where “change and modernisation were high on the agenda for all emergency services”. At the time of the admission to AIM, it does not seem to have formed any part of AssetCo’s plans to expand into overseas markets.

The final admission document identified particular risks relating to the business of the Group, including: (i) the loss of the London or Lincoln Contracts; (ii) the performance of the Group as a whole; (iii) competition; (iv) failure to win future contracts; (v) failing to achieve contractual performance targets; (vi) an inability to raise capital or future finance; and (vii) the fact that, following admission, Messrs Shannon and Flynn would own 50.7% in aggregate of the share capital in the company (as to their interests in 2009, see below).

As at 2009, the AssetCo Group’s main contract was the London Contract. Pursuant to that contract:

In 2009/10, the London Contract represented the Group’s largest source of revenue, bringing in annual revenues of around £16.8 million. It was recognised at board level within AssetCo that the London Contract was unsustainably financed, and that a refinancing therefore needed to take place.

The Lincoln Contract was similar, but comparatively small. This contract brought in annual revenues of around £3 million.

I have already mentioned Messrs Shannon and Flynn. Mr Shannon, who had led a management “buy-in/buy-out” of AssetCo’s emergency and fleet-related business on 5 October 2005, was a director of AssetCo plc from 30 March 2007 until he was forced to resign on 24 March 2011. Mr Flynn, who was also involved in the buy-in/buy-out, was also a director from 30 March 2007, until he stepped down on 4 October 2010, at which point his replacement, Mr Scott Brown, was appointed as a director.

Both Mr Shannon and Mr Flynn had substantial personal interests in AssetCo.

Mr Shannon’s personal interest in the success of the business was heightened by the fact that he had pledged 8.4 million of his 27 million shares in AssetCo to an Icelandic bank, Kaupthing, as security for a personal loan of £2.7 million. By January 2009, he was coming under what he described in an email of 14 January 2009 as “increased pressure from Kaupthing to improve their security position or refinance [his] facility”. He wrote on 23 January 2009 that he believed the bank would call on its security over the shares. Mr Shannon came under particularly heavy pressure from Kaupthing in April 2009. In particular, on 5 April 2009, a Kaupthing employee told Mr Shannon that the value of its security (i.e. AssetCo’s shares) had been falling, and, after an exchange of emails, that Mr Shannon would receive a formal demand for repayment of the loan and thereafter a statutory demand. This period of intense pressure from Kaupthing coincided with the start of GT’s fieldwork for the 2009 audit, during which (as is common ground) Mr Shannon made a series of unreasonable and dishonest statements to GT, the effect of which was to enable AssetCo to continue trading as though it were a going concern, and therefore to prop up the price of Mr Shannon’s shares in AssetCo, which were the subject of the charge held by Kaupthing. In August 2010, Mr Shannon informed Kaupthing that he had been servicing what he could of the loan through dividend payments from his shareholding in AssetCo. His personal situation was therefore closely connected to the fate of AssetCo.

Mr Shannon had a further personal stake in AssetCo through two related party companies, Jaras and Graphic Traffic. As I will explain, Mr Shannon used these companies to extract substantial fraudulent payments from AssetCo for personal gain.

The non-executive directors (“NEDs”) of AssetCo in FY09 were Mr Adrian Bradshaw, Mr Tim Wightman and Peter Manning. Mr Andrew Freemantle was appointed on 1 January 2010.

Mr Matthew Boyle was the Group Financial Controller, and like Messrs Shannon and Flynn was a member of the Institute of Chartered Accountants in Ireland. Mr Michael Lavender was company secretary.

In late 2008 NAV entered into discussions with AssetCo regarding a possible investment to fund an expansion into Abu Dhabi. Mr Shannon told NAV that AssetCo would need to demonstrate access to capital of around £15 million as

The structure of the investment was based on the essential premise that the £15 million (i) should be invested into a newly-formed wholly-owned subsidiary of AssetCo plc which had no liabilities and was separate from the UK businesses and companies, (ii) that the subsidiary company and the £15 million should be “ring-fenced” from the rest of the AssetCo Group, and (iii) that the subsidiary’s obligations would be guaranteed by AssetCo plc. The rationale for ringfencing cash in the subsidiary – i.e., what would become AADL – was twofold. First, both sides understood that any Abu Dhabi contracting party would require proof that AADL held substantial funds. Second, NAV regarded the ring-fencing of its money within AADL, rather than it being mixed in with AssetCo’s general working capital, as limiting its risk.

During the course of negotiations, Mr Shannon asked Mr Mills for a provision to be written into the investment agreement permitting £5 million of the £15 million investment to be used as a short-term loan to fund the working capital requirements of two UK-based AssetCo subsidiaries, UVM and Papworth. Mr Mills agreed to permit the loan on the condition that it be repaid as to £1.5 million by 30 June 2009 and the balance within one year (per clause 5 of the PSA below).

The PSA was entered into on 12 January 2009. The parties to the contract were the various NAV funds which made the investments (“the Investors”), NAV LLP, AssetCo plc and AADL (a Bermudian special purpose vehicle).

By clause 2.1 of the PSA, the Investors subscribed for 15 million preference shares in AADL in exchange for an investment of £15 million. The rights attaching to preference shares in AADL were laid down in AADL’s ‘Amended and Restated Bye-laws’ of 28 January 2009. In summary:

Clause 4 dealt with AssetCo’s obligations. AssetCo undertook to (i) transfer any existing interests in the “Abu Dhabi Project” (defined as set out below) to AADL; (ii) procure that any future contracts or agreements in Abu Dhabi would be entered into by AADL (and not by AssetCo); and (iii) ensure that any such contracts did not benefit AssetCo plc (save by virtue of the holding of its shares) (clauses 4.1-4.2). It also guaranteed to the Investors the due and punctual performance by AADL of its obligations to redeem the preference shares (as to which see clause 13 below) and undertook that if AADL failed to comply with its obligations in that regard, AssetCo would itself pay or otherwise procure that AADL paid the sums due to the Investors on redemption (clause 4.3).

The “Abu Dhabi Project” was defined in clause 1.1 as:

“any and all rights benefits and advantages and/or obligations whether current, future or contingent vested in AssetCo or any other Group Company arising from or in relation to: (i) its negotiations with the Abu Dhabi Police General Headquarters (or any other party) in relation to the Abu Dhabi Contracts; (ii) the subsequent award of the Abu Dhabi Contracts; and (iii) any contract or other agreement which arises from (or in connection with) such negotiations”.

“Abu Dhabi Contracts” were defined in the same clause as:

“the proposed contract (or contracts) to be entered into by AssetCo, or following assignment of the Abu Dhabi Project to [AADL], [AADL] to provide a range of integrated support services for the Fire and Rescue Service of Abu Dhabi Police”.

As for the £15 million invested by NAV, the PSA provided for the position that I have set out above as discussed in the negotiations between Mr Mills and Mr Shannon: namely that both the net proceeds (after expenses), and any and all profits made by AADL, be retained in AADL, save for £5 million which could be loaned by AADL to AssetCo on agreed terms. 116. Clause 5 provided:

“5 Application of Subscription Proceeds and Profits

5.1

Save as provided in clause 5.2, the Subscription Proceeds and any and all profits made by [AADL] in pursuance of the Business (or otherwise) whilst the Investors hold Preference Shares shall be retained in [AADL] and utilised to provide working capital for the development of the Business.

5.2

[AADL] shall be entitled to use £5,000,000 of the Subscription Proceeds to grant the Loan to AssetCo on the terms set out in the Loan Agreement.

5.3

AssetCo hereby undertakes to the Investors to repay to [AADL] £1,500,000 of the Loan on or before 30 June 2009 and to repay the balance of the Loan on or before the Loan Repayment Date.” 117. This clause used the following terms defined in clause 1:

“Subscription Proceeds means the net proceeds, after payment of expenses, of the subscriptions made by the Investors on Completion.”

“Business means any and all business carried on by [AADL] in furtherance of the Abu Dhabi Project or any other similar projects in Abu Dhabi.”

Clauses 13.1 and 13.2 provided that the preference shares could be redeemed (i.e. repaid) by agreement between NAV and AADL on the first or second anniversaries of the investment, in the event that no qualifying contract had been awarded to AADL by that date. In the event that no qualifying contract was awarded to AADL by the fifth anniversary of the investment, the preference shares were to be redeemed at par value (clause 13.4).

AssetCo was to issue a total of 24,509,802 warrants to the Investors (clause 3). Those warrants were to be cancelled in the event that the preference shares were redeemed.

NAV had the right to appoint a member of the board of AADL, which was deemed in the first instance to be Mr Mills (clause 9.3).

As one of the completion conditions of the PSA (in Schedule 3 of that agreement), the authorised share capital of AssetCo was increased by £3,750,000 from £23,750,000 to £27,500,000. This ensured that there were an additional 15 million 25p shares available, if NAV were to exercise all of its warrants.

AssetCo warranted that the company’s audited accounts gave a true and fair view of the state of affairs of AssetCo, and that the accounts properly disclosed all liabilities of the company (Schedule 4, paragraphs 4.1 and 4.2).

The PSA was complemented by a series of other agreements as identified below.

First, AssetCo plc, AADL and AC Management Services Limited (“ACMS”) entered into an “Agreement for the provision of management consultancy and advisory services” (the “Management Agreement”). ACMS was a company associated with NAV and incorporated in Bermuda on 7 January 2009, of which Mr Mills was director.

Under clause 2, ACMS agreed to provide the following services to AADL:

“management and strategic consultancy services and advice in connection with the funding and development of the Business and the securing of additional contracts, including advice and assistance in developing the Business Plan, researching opportunities for further development of the Business in Abu Dhabi.”

GT’s case is that neither ACMS nor NAV in fact provided or were intended to provide any services under the Management Agreement; but that is rejected by AssetCo, which submits that it was intended that Mr Mills would continue to provide strategic advice and assistance to AADL and would continue to be instrumental in the development of AADL’s business. It was not suggested that anything turns on this disagreement.

By clause 3.1 AADL agreed to pay management fees of £900,000 per year to ACMS (i.e. 6% per annum on an investment amount of £15 million). If any of NAV’s shares in AADL were redeemed or sold, then ACMS’s fee would reduce proportionately. There was no provision, however, for ACMS’s services to change in such circumstances. GT’s case is that this, and the Management Agreement more generally, was a “device intended by AssetCo to disguise payments of interest to NAV in respect of the outstanding preference shares”. AssetCo submits based on Mr Mills’ evidence that the 6% fee was a legitimate substitute for the 6% coupon that would otherwise have

Second, a Warrant Instrument was entered into on 28 January 2009 which created the 24,509,802 warrants that AssetCo had agreed to issue in clause 3 of the PSA. Under the Warrant Instrument:

The PSA was also complemented by a Loan Agreement concluded on 28 January 2009 between AssetCo plc and AADL in respect of the £5 million loan for working capital provided for in clause 5 of the PSA. In particular:

The £15 million PSA proceeds were paid into the bank account of AssetCo Group Ltd (subsequently renamed AssetCo Fire and Rescue Ltd) on 28-30 January 2009. The funds were deposited in the following bank accounts:

The remaining £3 million of the PSA funds had by 30 January 2009 already been spent on various subsidiaries and paying off overdrafts, according to a spreadsheet attached to an email sent by Mr Beard of AssetCo on that date, which was headed “The question that you will all be asking next week … Where has all the cash gone?”. This in itself was a breach of the PSA, since under clause 6.1 of that Agreement the £5 million Loan was supposed only to be used for the working capital purposes of UVM and Papworth.

By 31 March 2009, £285,000 had been drawn down from the segregated BOSI account and spent on expenses relating to the PSA and the Abu Dhabi business.

It is GT’s case, which AssetCo denies, that the £9.715m held at that point in the segregated AIB and BOSI accounts (i.e. the £7.5m plus the £2.5m deposited in those accounts, minus the £285,000 spent on expenses) was held on trust for AADL as the money that was to be retained in AADL under clause 5 of the PSA (i.e. the £15m investment minus the £5m loan to AssetCo).

NAV did attempt to prevent AADL’s money being dissipated. I was taken in particular to correspondence in February and March 2009 in which Mr Timothy Sturm of NAV sought banking documentation for the AssetCo funding, explaining that Mr Mills wanted to see the guarantee for AssetCo’s use of its loaned monies and wanted to know which banks “our £10m is held with” and to ensure that he was a signatory for the release of any monies from those accounts. It appears that although steps were taken to add Mr Mills as a signatory on the BOSI and AIB accounts, that was never in fact done.

Moreover, when AssetCo sought to use AADL’s money for general corporate purposes, its request was generally refused by NAV. However Mr Mills did agree in July 2009 (after the July 2009 placing, which I will come to below, had been announced) that AssetCo could draw down an additional £1m to assist with working capital; the money was to be placed on deposit again at the end of the month when the placing proceeds had been received.

By 8 June 2009, at least £7.5m remained in the two segregated AIB accounts and £2,003,816.17 remained in the BOSI account (sums having been withdrawn and interest having been added to that account). There therefore remained at least £9.5 million in those accounts that was on GT’s case held on trust for AADL by that date; again, AssetCo denies that those monies were held on trust.

However by the time of the 2010 Audit, all of the preference share money in the segregated accounts had been dissipated, by being mixed with the Group’s general funds.

NAV’s preference shares were ultimately acquired by AssetCo in September 2011, as part of the 2011 Scheme of Arrangement. In return, NAV received a total of 3.75 million new ordinary shares in AssetCo. Any other claims which NAV might have had against AssetCo arising from the Preference Share Agreement were compromised by the 2011 Scheme of Arrangement.

In the run-up to the 2009 Audit, AssetCo’s management sought to negotiate a proposed “public to private” (or “P2P”) takeover of AssetCo by Mr Shannon, Mr Flynn, NAV and a Japanese company called Marubeni Corporation, which would have involved removing AssetCo from the AIM market. In this regard, Mr Shannon requested that Kaupthing delay any decision to exercise its security until the takeover took place. However, in the event, the deal fizzled out in around May 2009. AssetCo’s management also sought to negotiate a refinancing of the London Contract with Lombard, which also never materialised.

The company’s cash position became increasingly strained over this period. In particular, certain Group entities had built up arrears of PAYE and corporation tax amounting to £1.76 million at the end of January 2009. HMRC threatened to take steps to recover this debt but did not in the event take any such steps (until January 2011). Mr Shannon approached Mr Agnew, of NAV, to ask him to free up more of the PSA funds for the benefit of the UK businesses, which he did not agree to. As I have described above, Mr Shannon was also facing increased pressure at this time from Kaupthing regarding his personal loan secured over AssetCo shares.

There were, however, potentially promising developments in Abu Dhabi (at least per AssetCo’s board minutes). In this regard, AssetCo’s board minutes of

GT began work on the AssetCo audit at least as early as December 2008, when it held a planning meeting and it organised an “on-site planning visit” in

GT carried out their audit fieldwork between 20 April and 22 May 2009 (although GT notes that with minor exceptions relating to UVM, audit fieldwork only began on 27 April 2009). I deal in more detail with the precise chronology of GT’s audit process, and the analysis relating thereto by the expert auditors, Mr Meredith and Mr Bligh, when considering the

In circumstances where GT admits breach of duty, it is not necessary to give an exhaustive account of either Audit at this point. Relevant events, and their timing, are addressed when considering the Counterfactual. Suffice it to note at this point, as already identified, that, in respect of both the 2009 and 2010 Audits, GT failed to spot multiple instances of management deceit which it would have uncovered had it performed a non-negligent audit. I have set out above a summary of GT’s agreed breaches.

A particularly notable example of management deceit in the 2009 Audit was the fabrication of fictitious income on AssetCo’s main source of revenue, the London Contract. The fabricated revenue related to modifications to fire engines carried out by AssetCo. AssetCo’s management asserted (falsely and dishonestly) that the modifications had resulted in an additional monthly unitary payment of £46,975.68, and persuaded GT on the basis of evidence that was less than compelling, including in particular an Excel spreadsheet containing a figure of £46,975.28 in the “UP for month” column (which was

Following the completion of GT’s fieldwork and its correspondence with management:

The overall result of GT’s negligence on AssetCo’s financial statements was significant and material. The Group’s assets were overstated by £120 million, profits and cash balances were also greatly overstated, and, crucially, AssetCo was said to be able to continue as a going concern, when in fact it was insolvent.

The Group’s cash position following the 2009 Audit was extremely tight. Mr Flynn was forced to make selective payments to HMRC to keep it at bay, and there was a growing list of trade creditors demanding to be paid. Mr Shannon began to discuss a potential fundraising with the other directors in early July 2009. The proposal was to raise £5-7.5 million by way of a share placing, ostensibly (at least so far as potential investors were concerned) to fund AssetCo’s new “EFCC” (Emergency Fire Crew Capability) contract, entered into by AssetCo London with the London Fire Brigade on 9 July 2009, for the training of reserve firefighters. AssetCo’s board meeting minutes of 8 July 2009 recorded as follows:

“The award of the Contract had provided an opportunity for the Company to raise further equity through a secondary placing. Not all of the funds raised would be used to fund the set-up costs of the Contract. Further funds were required to assist in the roll out of similar contracts across the country. There may be a need for further resources to do this.

It was proposed to raise between £5m and £7.5m. Shares would be offered at a discount, however this was not a rescue fund-raising but fund-raising on the back of the award of a significant contract and the level of discount would reflect this. There was a need not to exhaust interest so as to maintain an orderly market in the shares after the announcement.

The book-building had commenced, potential Investors were therefore insiders. There was some new Investors. There had been significant interest”.

This was reflected in AssetCo’s press announcement and presentation given to potential investors, as well as an email sent to NAV by Mr Shannon.

The capital raising launched on 14 July 2009. On that date, a “Notice of General Meeting” was published, which set out the proposal. In summary:

On 30 July 2009, AssetCo in general meeting agreed to increase the authorised share capital from £27,500,000 to £32,500,000 by the creation of 20,000,000 new ordinary shares of 25p each. That day, AssetCo informed Arden that all the conditions of the Placing Agreement had been fulfilled.

Meanwhile:

On 20 August 2009, Mr Flynn emailed Mr Shannon with an explanation of the use of the £7.5 million which had been raised – “2m was used to repay JO Hambro [i.e. NAV] +myself for funds put into the business to pay creditors in July. 600k was Q1 Vat, 650k was for arrears in arrangements with Paye, 400k for Month 3 Paye, 350k to yourself, 280k for UVM pref shares +balance month end bacs and supplier arrears…”.

AssetCo’s attempts to develop a business in Abu Dhabi appear to have dated back to 2007. On 7 January 2008, AssetCo presented various proposals relating to police and fire and rescue services to Brigadier Ahmed Al Raisi at Abu Dhabi Police GHQ.

There were repeated attempts to drum up business in Abu Dhabi over the course of 2008. By August 2008 AssetCo had established contact with various officials in the country. On AssetCo’s case, it was by this point well-placed to win business in Abu Dhabi and confident of doing so. It says that Mr Mills had strong links to the prominent Al Nowais family of Al Nowais Investments LLC (an investment company of which Mr Chatila was General Manager), and prevailed upon its members to assist AssetCo, which, it is said, was likely to impress potential business partners. AssetCo prays in aid paragraphs [18] to [19] of Mr Chatila’s statement, where he said as follows:

Mr White and Dr Ord, AssetCo’s primary employees on the ground in Abu Dhabi, had died prior to the time of the trial.

On 15 August 2008 AssetCo was told by Mr Chatila in an email that it was “likely to be awarded a small contract for airport firefighting equipment”. In an email of 23 September 2008 Mr Shannon asked Mr Mills to seek an update from his contacts in Abu Dhabi because he believed AssetCo was “very close” to winning two projects. Mr Mills’ evidence is that by December 2008 NAV – which was at this time considering its investment into the proposed Abu Dhabi business, i.e. investment through the PSA into AADL – anticipated that AssetCo would win four contracts in Abu Dhabi. The extent of Mr Mills’ confidence in the Abu Dhabi venture is relevant to the Counterfactual and is addressed in due course below.

GT’s take on the exploration of business opportunities in Abu Dhabi before 2009 is somewhat different. It refers to a memo written by Mr White (Managing Director of AssetCo UAE) to Mr Shannon in August 2008. As regards his dealings with the Abu Dhabi Police, Mr White reported that there was “[c]lear competition against AssetCo at every conceivable step in the process” but that there was “definitely business in Abu Dhabi of a long term nature”.

GT also notes that AssetCo took high-level advice in early December 2008 from Simmons & Simmons as to the possible structures for AssetCo to adopt in order to conduct business in Abu Dhabi. This advice was, again, sought in the context of NAV’s proposed investment in AADL. Two options were identified: a limited liability company, as a joint venture, with UAE nationals owning at least 51% of the business; or AssetCo establishing a branch office.

None of the opportunities pursued by AssetCo materialised before 2009.

A theme in the correspondence relating to Abu Dhabi – at least before a sponsor, Mr Adel Al Nowais, was found – is that opportunities were identified but AssetCo had strong competition and there were political difficulties in AssetCo exploiting them, and so a local sponsor/representative was needed – I was referred, for example, to emails from Mr White of 6 February 2009, 10 April 2009 and 25 May 2009.

On 25 May 2009, the AssetCo board minutes record a series of resolutions relating to the establishment of an Abu Dhabi branch, including the appointment of Mr Shannon as AssetCo’s representative and manager to exercise all powers, authorities and discretions of the company. The minutes record, among other matters:

“JS [Shannon] provided an update regarding the decision making process and timescales in Abu Dhabi. JS confirmed that a decision in principle has been made to outsource the handling of fires and emergencies in Abu Dhabi. If AssetCo London were successful in its bid for LondonGuard this would be of assistance. JS confirmed that he and Christopher Mills of JO Hambro would be visiting Abu Dhabi within the next fortnight.

[…]

JS confirmed that an office in Abu Dhabi was now open. JS confirmed the need for the Company to establish a branch in Abu Dhabi. Ideally this would have been a branch of AssetCo Abu Dhabi Limited, however it was a requirement that two years accounts be submitted to the relevant authority to open a branch and it was proposed that a branch of the Company be established. ML [Mr Lavender] confirmed the requirement that the branch be capitalized with 250,000 Dirhams (about £40,000).”

On 7 June 2009 there was a further update which reported, among other matters (regarding the Abu Dhabi police) that “[p]olitics are rife at the moment and the sidelining has been confirmed but our own man is in a good position.” It was agreed that AssetCo’s relationship with Sir Ronnie Flannagan (adviser to the Minister of the Interior, Abu Dhabi) remained one that it needed to continue to use, and that it would be good to have Hussain Al Nowais, founder of Al Nowais Investment LLC appointed as sponsor of AssetCo in Abu Dhabi. On 10 June 2009, Mr Mills emailed Hussain Al

On 15 June 2009, Mr Mills emailed Mr Shannon, following a discussion with Mr Chatila. He recorded: “Walid still believes this project will succeed but they have had a lot of local ‘political’ difficulties”. Mr Shannon replied that day:

“Thanks for update Christopher.

We continue to be told we need a Senior Emirati Sponsor to help address the political barriers and to position us correctly with Sheik Saif. I am unclear whether Hussein is openly our Sponsor, or would be interested in being our Sponsor. The Chairman of Abu Dhabi Airports Corporation (ADAC) has indicated his interest (he has just been appointed Chief Exec of the Municipality of Abu Dhabi).”

On 17 June, Mr Mills wrote to Mr Chatila seeking clarity on whether AssetCo had a sponsor, stating: “I thought Hussain, or at least Emirate Holding, was the company’s sponsor?” Mr Chatila replied:

“Actually, AssetCo does not have a branch in Abu Dhabi and therefore does not have a sponsor. AssetCo has a marketing services agreement with Teletech Solutions International LLC to help them secure work. Teletech is owned by Michael Sawaya and a UAE national other than Hussain but the company is backed by Hussain. I agree that AssetCo will need to establish a branch in Abu Dhabi and appoint the right sponsor. Let me get back to you on that after returning to the UAE and seeing Hussain.”

Also on 17 June Mr White wrote a detailed memo in which he reported that AssetCo had been advised on several occasions that two of its four proposals had been approved, and that it considered that the projects were “being blocked due to internal politics and insider relationships within the Police Department”.

On 22 June 2009, Mr Shannon asked Mr Mills whether Mr Chatila had managed to speak to “Hussain” (Al Nowais) on behalf of AssetCo, and whether Mr Al Nowais would want to be AssetCo’s official Emirati sponsor. At a board meeting of AADL on 14 July 2009, Mr Chatila said that either Abdulla or Salaah Nowais would become sponsor of AssetCo, but this would take 2-3 months to get the paperwork through.

There are also various emails, for example from Mr Lavender on 31 July 2009, dealing with the various matters that AssetCo was having to do, and documentation it was having to provide, in order to open a branch office in Abu Dhabi.

Notwithstanding the difficulties described above, by early 2010 AssetCo had secured two projects in Abu Dhabi: the SOC Contract and, of less significance but first in time, what has been referred to as the Rabdan Disaster City Contract. It also had a sponsor: Mr Adel Al Nowais, nephew of Hussain.

As regards the Rabdan Disaster City Contract, on 29 July 2009 AssetCo agreed in principle to enter into a joint venture with the Critical National

AssetCo (through Mr Shannon) signed a “Pre-Incorporation Contract in

GT submits that this was not a major contract, and that it was one that failed to provide AssetCo with any business. In that regard, GT drew my attention in particular to the following exchange that took place on 21 July 2011 between Investec and Mr White, when the former was conducting due diligence on AssetCo:

“[Q] The Rabdan Disaster City Pre-Incorporation Contract sets out the terms for the formation of the joint venture to be entered into between Assetco plc and the Rabdan Academy I Critical National Infrastructure Authority. The contract requires the incorporation of Rabdan Disaster City

LLC (‘Rabdan LLC’). The agreement is stated to terminate if the parties have not entered into a memorandum of association and shareholders’ agreement with respect to the Rabdan LLC within 3 months of the date of the agreement, or such date as may be agreed between the parties. We have seen no evidence to date to confirm that the Rabdan LLC has been incorporated and that the memorandum of association and shareholders’ agreement have been entered into. Therefore if the 3 month deadline was not extended, it would appear that this agreement may have automatically terminated. In addition, the agreement contains a non-compete whereby Assetco plc shall not directly or indirectly enter into or participate or be employed by any company or establishment in competition with or similar to the business of Rabdan LLC. This restriction would potentially conflict with the non-compete restrictions under the shareholders’ Agreement with Emirates Response Services if there is an overlap between the two businesses. Please confirm whether (i) Rabdan LLC has been incorporated or (ii) the joint venture agreement in respect of Rabdan LLC has been terminated.

[A] Rabdan LLC was not entered into but there is no non compete issues with ERS. Rabdan Disaster City is still at planning stages and has no further development at this stage. The process is being managed by a Government entity called Tawazun and we are in regular dialogue with them. The project is a government training centre where we would send firefighters to be trained or actually conduct the training ourselves.”

On 6 August 2009 (i.e. the same day as the CNIA letter relating to Rabdan Disaster City), Mr White was contacted by Major Bader Al Nuami of the Abu Dhabi Special Operations Command (SOC), in respect of a potential fire outsourcing project. Major Bader Al Nuami’s superior was a close friend of Mr Hussain Al Nowais. Mr White agreed to give a presentation to the SOC the following Sunday/Monday (9/10 August).

By 13 August AssetCo had signed a Non-Disclosure Agreement with SOC. Further documentation then passed between the parties, including an initial model with proposed pricings produced by Mr White on 20 August. On 3 September, Mr Shannon sent an email to Mr Agnew of NAV in which he reported on his meeting with Major Bader Al Nuami. Mr Shannon wrote also that AssetCo had contacted Mr Chatila to ensure that Mr (Hussain) Al Nowais, who AssetCo had been informed had access to the “ultimate decision maker”, was aware of the opportunity, and commented that “[a]ny push from Mills”, who was a friend and business associate of Mr Al Nowais, “would be appreciated”. On 8 September Mr Shannon emailed Mr Mills himself asking

On 3 September, Mr White reported to Mr Shannon that two items remained to establish a branch office – an internal auditor review of AssetCo’s annual reports, and a bank guarantee. Mr Sawaya was given the task of completing the documentation required to open the branch office, and preparing copies of the legal documents required for the SOC submission, after a meeting with Mr White and Dr Ord on 9 September 2009. Mr Sawaya told Mr White that the pre-approval licence would be issued by the Chamber of Commerce the next day. The next day, Mr White reported that all documents had been completed, with an initial approval document issued for AssetCo’s trade name and licence. As to the bank guarantee, a bank account was opened with HSBC by 5 November 2009 and by 22 November the guarantee application was being processed. On 26 November 2009, Mr White made a presentation to the AssetCo Board concerning developments in Abu Dhabi: initial approval had been received for the Abu Dhabi branch as a legal entity; and an office lease had been taken.

Meanwhile after further correspondence and discussion, on 19 November 2009 AssetCo sent its final proposals to SOC regarding the scope of the work, its proposed prices, and a draft contract. Thereafter:

Although outwith the chronological consideration of historic factual matters, it is worth noting the other (potential) further business relating to Abu Dhabi that AssetCo was involved in during the relevant period. As I have touched on above, in early 2011 AssetCo was in severe financial difficulty, which had become public from early to mid-February. Notwithstanding those difficulties,

The position is not clear on the material before me, and it is not necessary to reach any conclusion on this difference between the parties. However it appears that on 29 July 2010 AssetCo plc signed a shareholder agreement with a subsidiary of Emirates Advanced Investments for the formation of a joint venture company, AssetCo Emirates Response Services LLC (“ERS”). In the event however it would appear – and indeed this was the conclusion of PwC’s preliminary audit findings in March 2012 and legal advice provided in October 2011 – that AssetCo did not execute the agreement and ultimately had no formal investment or contractual interest in ERS. A contract was then awarded to ERS for the delivery of services to the UAE Air Force, and AssetCo announced to the market on 21 February 2011 that its joint venture company had been awarded the contract. However GT submits that that was not a contract to which AssetCo was a party.

In any event, by (at least) March 2011 news of AssetCo’s difficulties had reached Abu Dhabi. Accordingly on 28 March, Mr Mills and Mr Davies travelled to Abu Dhabi to ensure that AssetCo’s financial difficulties had not compromised its relationships there. Mr Mills’ evidence is that Adel Al

During 2010 the management of AssetCo continued to discuss a refinancing of the London Contract, now with Gatehouse Bank. However, as with the Lombard discussions in 2009, the proposed refinancing never materialised.

Mr Shannon entered into two substantial fraudulent transactions with AssetCo for his personal benefit. A suggestion was made by AssetCo that there may have been more, but no claim is made in that regard.

Mr Shannon was the sole shareholder and director of a UK company called Jaras Property Development Limited. Jaras rented a property in Mallusk, Northern Ireland, to AssetCo. On 9 December 2009 Mr Shannon sent an email to Mr Flynn stating (without explanation):

£1.5 million was duly transferred from AssetCo Fire & Rescue Limited to

In March 2010, Mr Shannon appears to have taken steps to cover his tracks in relation to the Jaras payment. In an email of 23 March he instructed Mr Boyle to account for the payment as a “sundry debtor”. On 30 March he asked Mr

Mr Boyle was also asked on 23 March to “tidy up” matters relating to two other related parties, Graphic Traffic and Star Rentals. The net effect of the Graphic Traffic transaction was to write off a £615,000 debt owed by Mr

Clause 7.1 of the SOC Contract required SOC to make an advance payment of just over AED 48.5 million (around £8 million) upon the production of certain documents by AssetCo. AssetCo received the advance payment into its BNP Paribas account on 12 April 2010. AED 22,000,075 was then remitted to the detail account of AssetCo Resource Limited with Northern Bank (received as AED 21,999,961), in breach of the PSA, and transferred into the Group cash pool facility account. Of this amount, AED 21,401,026 (£3,799,461) was transferred to AssetCo Fire and Rescue Limited, clearing an overdraft of £364,295 on the relevant account, and the balance of the payment was transferred to other subsidiaries or used to pay third parties so that the funds

GT began fieldwork on its 2010 Audit on 3 May 2010. Again, in

On 14 June 2010 GT’s audit review partner, David Miller, expressed concerns about the conduct of the audit. In an internal email sent to Ricky Lane on that date, Mr Miller said as follows, with emphasis added:

Mr Miller followed up with a further email on 16 June identifying potentially serious problems with AssetCo’s accounts:

Mr Miller was also critical of the audit team’s calculation of the Group’s cash balances, saying in an email of 18 June 2010 that “if the file was reviewed by someone independent I don’t see how we could defend a cash treatment sufficiently”.

Nonetheless, the audit team continued on their existing course. The remaining audit chronology was as follows:

As in 2009, the 2010 audited accounts contained serious misstatements. The Group’s net assets were overstated by £146 million, whilst profits were overstated by £25.5 million; the Group had in fact suffered a loss of £23 million over the year, despite the accounts showing that it had made a profit. Crucially, the accounts contained a statement that the Group was able to continue trading as a going concern. That statement was erroneous. It was not.

AssetCo’s board remained very conscious that the company had major cash flow issues: minutes of its board meetings throughout the second half of 2010 show a repeated identification of its cash flow problems. At the end of October 2010 the directors felt it necessary to take legal advice on their obligations in relation to the company’s status as a going concern. Ultimately however the board concluded on 4 November that the company was able to continue trading because of the proposed Gatehouse refinancing.

Alongside the proposed refinancing, the other potential sources of cash for the

The Group’s cash position came to a head in early November, when payment of the 2010 dividend became due. Mr Brown (who had replaced Mr Flynn as CFO on 4 October 2010) proposed delaying payment of the dividend to preserve capital for secured creditors, and in light of the Group’s liabilities to HMRC. However, Mr Shannon resisted, and the board decided on 4 November to pay dividends as soon as possible; dividends totalling £847,866 were paid on 5 November. This is something to which I will return in relation

On 27 October, the board received an indicative takeover offer from Arcapita, a Bahraini private equity house. Details of the proposed bid, which also involved Mr Shannon and NAV as buyers, were set out in a draft letter to the Takeover Panel. Separately, Mr Mills entered into discussions with Mr Shannon and AssetCo to acquire the company and take it private in conjunction with Carlo Bonomi of InvestIndustrial. AssetCo’s management continued to discuss these proposals, or iterations thereof, into early 2011.

Whilst the AssetCo Group as a whole was haemorrhaging cash, the Supply 999 and (to a lesser extent) Treka Bus businesses, were profitable and cash generative. This is confirmed in the forensic accountants’ Joint Statement at [2.50].

Management were in negotiations to sell these profitable subsidiaries from late 2009, and used their pending disposal as a reason for asking HMRC to delay any winding up action against the company. On 18 August 2010, the AssetCo board resolved to obtain the highest offers for Treka Bus and the Supply 999 Group of subsidiaries, and to complete the transactions as soon as possible. Subsequently:

The proceeds of these sales were dissipated rapidly. An email sent by Mr Brown on 21 December 2010 indicates that already at that time, even before the sale of the business had completed, £2 million of the Supply 999 proceeds had been earmarked to pay off creditors. By mid-January 2011, all of the proceeds had been spent, with £900,000 being described in a draft CFO report of 21 January 2011 as having been “absorbed into operations”.

Throughout the period 2009 to 2011 there were substantial arrears of both PAYE and VAT within the Group. However, whilst all companies within the VAT group (i.e. including AssetCo plc itself) were jointly and severally liable for all the VAT, each individual company was only liable for its own PAYE.

However I consider that the PAYE liabilities are of potential relevance. First, the companies that did have substantial PAYE or corporation tax arrears between 2009 and 2011 would have had to be supported in the Counterfactual.

What would have occurred with HMRC on the Counterfactual is addressed in due course below. However in terms of actual events, the overall picture is ultimately one of HMRC showing an interest in AssetCo but granting it more time to pay over an extended period of time. The parties’ take on contemporary events differs somewhat at least in terms of their ascribed explanation for HMRC’s attitude. For AssetCo, HMRC patience reflected a

Mr Flynn took the lead in fending off HMRC. He appears to have employed three particular techniques: (i) making promises as to future cash flows (based on new contracts, refinancing, and asset sales); (ii) deliberately underreporting PAYE and VAT obligations; and (iii) paying some – and occasionally paying all, or nearly all – HMRC liabilities (in particular using the proceeds of the July 2009 placing, and using the April 2010 transfer of funds from Abu Dhabi).

On 21 April 2009, Ms Wendy Grant, the AssetCo Group Tax Manager, sent Mr Boyle a draft VAT return for the quarter to 31 March 2009, and on 6 May she sent Mr Shannon an update on HMRC arrears. Her spreadsheet showed

Mr Shannon replied that he would “review and speak with [Ms Grant] tomorrow.” The next afternoon, Ms Grant circulated to Messrs Shannon, Flynn and Boyle a revised VAT return, “incorporating your amendments”, which Mr Shannon acknowledged. The revised spreadsheet now showed only £1,484,769 of VAT as due.

On 2 June 2009, Ms Grant emailed Mr Flynn, Mr Boyle and others, letting them know that HMRC had responded to a request for time to pay for the latest group VAT liability of £1,484,769. Ms Grant stated that HMRC was now connecting the companies’ PAYE arrears too, “as they can see the companies in the VAT group”, and advised that “[a]cross the group HMRC arrears are £3.6 million of which £750,000 is overdue”. HMRC was asking for information including details of PAYE arrears, cash flow forecasts, details of all overdrafts and facilities and audited accounts for FY08 and FY09. The following day, Ms Grant provided Flynn with an updated spreadsheet showing HMRC arrears. Mr Flynn responded by instructing payment of some of the outstanding arrears.

On 9 June 2009, Ms Grant notified Mr Flynn that HMRC were threatening to

“go legal” if payment was not made for Papworth, Auto Electrical Services (Manchester) Limited (“AES”) and AS Fire within the following week. This prompted discussions within AssetCo as to the risk of HMRC petitioning to wind up AssetCo, leading to Ms Grant emailing Mr Flynn on 16 June with a warning:

“You mentioned that you had not seen many HMRC winding-up petitions in the gazette. I have just reviewed the last 3 issues (Thursday, Friday and yesterday) and HMRC have issued 54 windingup petitions against companies in the London gazette alone.”

During June and early July 2009 Ms Grant sent Mr Flynn a number of emails setting out the updated position as regards arrears (being, in total, £3,555,885 according to a spreadsheet sent on 30 June), emphasising the importance of providing a cash flow analysis and supporting information to HMRC to support the “time to pay” application and chasing for a response as to how he wanted her to proceed. Eventually a letter and cash flow analysis were sent to HMRC on 7 July 2009.

On 13 July 2009 Ms Grant wrote to HMRC setting out present cash holdings totalling only £127,208. On 15 July 2009 Ms Grant provided HMRC with a

On 22 July 2009, HMRC wrote to Ms Grant, requiring a cash flow forecast, up to September 2010, for the VAT group alone. HMRC queried why a dividend was being paid if there was not the cash to pay HMRC arrears, and asked whether funds raised from the July 2009 capital raising could be used to pay arrears.

As at 31 July 2009, the Group had arrears (including PAYE, VAT and corporation tax) totalling £4,157,258. This included historic VAT liabilities of £1,378,147, and £606,312 for the current VAT period.

On 5 August 2009 Ms Grant emailed Mr Flynn, reporting HMRC’s response to the time to pay application. She had spoken to HMRC, and reported that “they are not happy that we have asked to pay the debt over 12 months in view of the placing monies and the dividend”. She also sent Mr Flynn a draft tax payment proposal on the same date, chasing for a response on 7 August because HMRC were threatening a winding up petition if the outstanding

On 7 August 2009 Ms Grant also wrote to HMRC replying to the 22 July letter. She explained that the monies raised through the recent placing had been partly dependent on the dividend being paid, which justified paying the dividend. She also explained that the placing was being used primarily to fund the upfront costs of the new contract concluded with LFEPA (the EFCC Contract).

On 17 August 2009 HMRC responded seeking further explanation for the dividend payment, use of the placing proceeds, and the use of the £15 million from the issue of preference shares. Ms Grant responded on 24 August, seeking an arrangement to repay within 6 months.

On 5 October 2009 Ms Grant told Mr Flynn that she had spoken to HMRC concerning the potential winding up of UVM, and the Revenue had confirmed that the only way to stop the petition would be to pay the amount due in full.

Still, however, no winding-up petition was brought.

On 2 March 2010, Ms Grant reported to Mr Flynn that HMRC were chasing overdue VAT arrears. However, HMRC were, in certain respects, under a misapprehension, unintentionally pushing back the time to pay arrangement by one month, and wrongly believing a payment of £248,000 had been made.

On 16 March 2010, Ms Grant emailed Flynn seeking urgent assistance on HMRC arrears. She noted that “HMRC have finally connected our VAT and

In June AssetCo made a time to pay proposal to HMRC arrears of 9 payments of £94,989 per month, from 31 July, to pay arrears of nearly £855,000.

The Revenue rejected the application on 30 June. In doing so HMRC emphasised that “[t]ime to pay is not offered as an ongoing facility to assist with company cash flow but as a one off concession to help through immediate short term difficulties.” In particular, HMRC noted “from the annual accounts and press release [of 25 June 2010] the intention to pay dividends to shareholders. Senior managers will not consider a payment arrangement to assist a company that is paying dividends but not paying tax liabilities.” HMRC demanded £854,904 by 9 July, failing which it said legal proceedings would be commenced.

Ms Grant subsequently spoke to HMRC, who said that insolvency procedures would be avoided only if all arrears were paid off over 3 months, with other payments made as they fell due. She considered this to be un-achievable, and proposed to tell HMRC that the arrears could not be cleared within 3 months, recognising that the case would then be passed to the insolvency section – at which point, further negotiation might be possible.

On 21 July 2010, Mr Shannon’s PA received 4 letters from HMRC, warning of winding-up petitions against Simentra, AssetCo Lincoln, AssetCo Managed Services Ltd, and AssetCo Group Ltd. Following investigation, Ms Grant reported that the letters only included part of the debt – “Including 3 month PAYE we currently owe £1,103,000”, and “VAT of approximately £450,000 is also due at the end of July”. Ms Grant also, rightly, clarified that even though Simentra had no arrears of its own, “they are part of the VAT group and thus jointly and severally liable for the VAT arrears”.

As at 31 July 2010, the Group owed £644,000 for VAT (and £1,003,000 for PAYE). On 4 August 2010, HMRC wrote to AssetCo Fire and Rescue Ltd (i.e., AssetCo Group Ltd) seeking payment of £691,703 (including the group VAT liability). On the same day HMRC demanded £644,000 from each of Simentra Ltd, AssetCo Lincoln Ltd, and AssetCo Managed Services Ltd.

On 25 August 2010, HMRC demanded payment of £14,800 from AssetCo Fire & Rescue Ltd (i.e., again, what was AssetCo Group Ltd) in respect of PAYE and national insurance, threatening proceedings if payment were not received by noon on 3 September. As at 31 August 2010, HMRC arrears were just under £2 million, including £743,000 of VAT.

On 7 September 2010, Ms Grant sent HMRC a time to pay proposal, seeking to justify the grant of time to pay on the basis of (i) new contracts recently won in the UK and the Middle East; (ii) anticipated sale of parts of the Group; and (iii) new contracts being negotiated in the Middle East, which would enable more funds to be raised in the equity markets.

HMRC asked for confirmation of AssetCo’s £2 million overdraft facility, which Ms Grant provided on 21 September 2010.

On 23 September 2010, Ms Grant provided Boyle with an update showing current arrears of £1,755,487, including £743,474 of VAT. She explained that their case had been passed to the Enforcement and Insolvency Office, after the Debt Management Office rejected the time to pay application because of

Nevertheless, the fact remains that by this stage HMRC had received a number of time to pay proposals from AssetCo without actually bringing a petition. Indeed on 8 October 2010 Ms Grant expressed her surprise that HMRC was “happy to consider a revised [time to pay] proposal”. Mr Brown also touched on HMRC’s apparent patience (though as I have said, GT disputes that this is the correct way to characterise the position), writing in an email of 12 October that HMRC “accept that they need to wait 4 to 5 weeks for the bulk of the arrears” but wanted to see “a show of good faith”.

On 13 October AssetCo sent HMRC a yet further revised payment proposal.

On 27 October 2010 HMRC accepted the proposal, stating that “as a final concession HM Revenue & Customs is prepared to hold its action against the companies until Monday 15 November 2010 to allow the re-financing package to be concluded and payment of all outstanding liabilities to be made.”

As at 9 November 2010, HMRC arrears were £3,455,422, including £1,973,506 in VAT. By 10 December 2010, the arrears exceeded £3.5 million and as at 31 December 2010, VAT and PAYE arrears totalled £3,540,420. Approximately £2.5 million of corporation tax was also due, in addition to late payment penalties. But in relation to corporation tax Ms Grant explained to

Notwithstanding those liabilities (or at least notwithstanding the liabilities that HMRC knew about), HMRC still did not present a winding-up petition. On 11 November 2010 James Egan of HMRC Northern Ireland agreed to hold off any action “to allow [AssetCo] to progress both the Gatehouse refinancing and the sale of Supply 999”, and on 10 December Mr Shannon reported that

On 6 January 2011, the Board was informed that although there remained problems with HMRC, no winding-up petition had been issued – the timetable was still thought to be that none would be issued until the end of February. At a further meeting the next day, the Board agreed that the company should continue to seek refinancing from Gatehouse. By 12 January, Mr Brown informed the Board that the key date for approval and commitments for this refinancing was Friday 14 January, with completion expected by 28 January. Mr Shannon informed the Board that the HMRC process remained on hold until 14 January. The Board again agreed to continue negotiations with Gatehouse.

However on 7 January 2011 HMRC had presented a winding-up petition against AssetCo plc; and from that date onward petitions were presented against various of its subsidiaries, in particular on 12 January when a series of petitions were filed and various of its subsidiaries. The petition against AssetCo plc (along with those filed against a number of its subsidiaries) appears to have been served on 12 January, and on the 14^th Mr Clissett sent scanned copies of those petitions to Mr Shannon.

Mr Shannon took various steps to conceal the existence of the petitions. On 20 January, Ms Grant emailed Mr Shannon, copying Messrs Clissett, Brown and Boyle and informing them that a winding-up petition had just been served on Supply999. Mr Shannon responded to say that he was “pretty sure”, based on

Ultimately, after unsuccessful attempts to get HMRC to withdraw the petitions, the Group’s tax liabilities of £4.2 million, which excluded its undeclared corporation tax liabilities, were paid from money raised in the March 2011 capital raising (as to which see below). These liabilities included liabilities of AssetCo’s subsidiaries, and former group companies which AssetCo had sold, but which were group members at the relevant time; in the relevant sale agreement, the vendor had warranted that these liabilities did not

HMRC’s winding-up petitions placed great strain on the Group. I set out below in some detail some (though by no means all) of what was taking place during that period, due to its potential relevance in the context of the Counterfactual.

One issue that had already been on the agenda before the petitions were served was the question of refinancing. At the board meeting of 26 January, referred to above, the board considered the question of going concern and decided that it continued to be in the best interests of creditors and shareholders for the company to continue trading and to seek to execute its refinancing plans. The two refinancing options discussed were a syndicate being coordinated by Gatehouse, and Lombard as a sole provider of funding, with both said to be in a position to complete in February. As already mentioned, that discussion and conclusion took place in the context of Mr Shannon having misled the board as to having had assurances from HMRC that all actions were on hold in circumstances where he had known of the existence of the petitions since 14 January.

Also in that context, in late January and early February AssetCo’s management sought a credit line to enable HMRC to be paid off, both from Gatehouse and Northern Bank.

On 31 January 2011 AssetCo made an RNS announcement in response to press speculation, saying that it was in discussions with a third party “that may or may not lead to an offer being made for the Company”, and that NAV was not that third party.

On 4 February 2011 the planned refinancing by Gatehouse fell apart when it discovered the position with HMRC. Mr Shannon, whose position as communicated to Gatehouse and Nabarro was that he had not known that the petition had been served, said in an email of that date that he was now “trying to put the pieces back together again” after a “fucking nightmare day”.

On 7 February 2011 AssetCo received an offer from Mr Pelham Olive of the Brook Henderson Group of an emergency bridge facility of £3.5m to enable HMRC to withdraw the petition. The offer was conditional on receipt of further information and a review of the security offered to Gatehouse on its (previously) proposed bridge. Further discussions followed, including as to a fee of £140,000 that was being sought for the financing.

On 8 February:

Mr Shannon and AssetCo were exploring a number of potential options at this time.

On 9 February, Ms Grant reported to Mr Shannon that Mr Jennings of GT had asked whether the current arrears were the only arrears that AssetCo had with HMRC. She had said that that was so, deciding not to tell Mr Jennings about the corporation tax liability, on the basis that HMRC did not know about it. She now sought confirmation from Mr Shannon as to whether GT should be informed of the corporation tax liability. Mr Shannon confirmed that she had given the “correct response”.

Also on 9 February, Northern Bank informed AssetCo that it had frozen the

It was also becoming more widely known, by this point, that AssetCo was facing financial difficulties. On 14 February 2011 The Guardian published an article reporting that AssetCo’s shares had slumped due to “admitted funding problems”. The London Evening Standard ran a similar story.

AssetCo was concerned that, even if HMRC was paid off, this publicity would cause other creditors to join, or threaten to join, the winding-up petition. In an email of 15 February Mr Brown wrote that “the press speculation is alerting creditors and I believe the smarter of them will investigate the court records, find the petition and start to add on to it”. This concern turned out to be wellfounded. On 8 February a creditor of AssetCo plc, Eric Sinclair, instructed his lawyers to join the petition. Several days later another creditor, Bradmount Capital Partners, announced that it would support HMRC’s petition.

On 14 February (i.e. the same day as the press articles), the board announced that it was encountering delays in its attempts to refinance the business, which had “led to a significant strain on the cash resources of the business”, and so it was discontinuing talks with the potential offeror for the company “in order to concentrate on the Company’s short term issues”. It was in those circumstances looking to other sources of funding, and was in that regard considering an equity fundraising. The announcement caused yet further publicity. The Financial Times reported that AssetCo was “look[ing] to investors as talks fail”.

Also on 14 February, HMRC told AssetCo’s solicitors, Nabarro, that the tax which had to be paid in order for the petitions to be withdrawn was £3,447,076 of arrears referenced in the petitions, plus £459,449 for VAT for the period ending 31 December 2010, which should have been paid by 31 January 2011. Mr Jennings wrote to HMRC that same day that he had been advised that the company would pay the £459,449 liability in full from the equity placing, confirmed the previous Friday, and expected to complete within a week to ten days.

Meanwhile AssetCo was in breach of its banking facilities. However it found the banks to be, broadly, supportive. The Company received waiver letters from Northern Bank, Barclays and the Co-op on 14 February, agreeing that they would not terminate the Group’s facilities. Lloyds Banking Group however indicated to Mr Wightman in a telephone call in the evening of 14 February that it needed further information to make a credit decision. Bank of

At this point Mr Shannon turned to Mr Mills. Mr Mills’ evidence is that Mr Shannon came to NAV’s offices for meetings on 14, 15 and 16 February and explained that AssetCo needed to raise several million pounds. On 15 February Mr Shannon forwarded to Mr Agnew of NAV an email from Mr Boyle containing a spreadsheet that purported to show how the PSA funds had been used. Mr Mills was “alarmed” that Mr Shannon could not satisfactorily account for roughly £4.3 million of funds which appeared to be missing, that

Mr Mills’ evidence is that NAV considered AssetCo’s problems to be manageable at this stage, that it was prepared to support AssetCo but that it was clear it would have to take control of the situation. He therefore made a proposal on 15 February 2011 of a funding package of approximately £8 million, a condition of which would be that NAV could appoint two directors

On 15 February Mr Shannon accordingly asked Tim Wightman to step down from the board to make room for a NAV-appointed director, and subsequently emailed Mr Mills’ PA to let him know that Mr Wightman was prepared to do so that evening for Mr Mills to be appointed Temporary or Interim Chairman the following morning. Mr Shannon also arranged for Mr Mills to receive updates from potential financiers and to attend a meeting with Lloyds.

Earlier that day, Mr Mills had emailed Mr Davies, a long-standing associate whom NAV had engaged to assist with under-performing businesses over many years, stating “Need you to go on another board for us – chairman

Mr Mills sent to AssetCo his draft Heads of Terms on 16 February 2011. AssetCo’s board approved the proposal in principle that day.

At 4.40pm that day, Mr Shannon informed Mr Jennings and Mr Agnew that, following a conversation with Mr Mills, HMRC had agreed to withdraw the petition on the basis of an immediate payment of £2 million, followed by monthly payments of £200,000 until the £3.8 million arrears were repaid. Mr

Also on the 16^th, Mr Shannon emailed LFEPA seeking to reassure them that provision of services under its contract was ring-fenced, and followed up with a letter the following day. Mr Dobson of LFEPA replied, thanking him for the information but making clear that they wished to speak to HBOS (the bank funding the London Contract) as soon as possible.

On 17 February 2011, Mr Agnew and Mr Mills met with Lloyds, together with

Mr Manning reported on the meeting to the AssetCo board that evening as follows:

“CM had put forward a proposal to finance the company. He proposed that NAVLLP put £2m on deposit with Lloyds as security for a shortterm facility to be provided by the bank. The bank listened to NAVLLP's proposals but did not respond.

In a separate break out session, CM made it clear to the company that his main concerns were:

Also on 17 February 2011, Mr Jennings advised AssetCo’s board as to HMRC’s position, following discussions he had had with various persons including HMRC. He noted that he had advised Mr Mills that HMRC would be unlikely to accept £2 million in settlement of outstanding liabilities and would be more likely to wind the company up. He advised that:

“The only way HMRC will withdraw the petitions is either payment in full of the £3.5m arrears or acceptance of an instalment plan once HMRC have seen a turn around plan and evidence of meeting current liabilities. HMRC’s biggest concern, apart from being paid, is that the debt could increase. HMRC consider that the inability to pay HMRC is indicative of trading insolvently.

We would advise that all directors take suitable professional advice from an insolvency specialist concerning their own personal risks.”

That evening, Lloyds emailed the Board with the terms on which it would support AssetCo. These included confirmation by HMRC that it would withdraw its winding-up petitions; NASCIT to back any sums advanced by Lloyds on a £-for-£ basis, secured by a second-ranking charge behind Lloyds; and NAV to provide approximately £4 million by 22 February. Mr Brown noted that this was “pretty much as we agreed. The issue however is where JOH [i.e. NAV] are” and that “JOH have stressed that they are very keen to do something here and they are currently thinking that an equity raise over

Having met with Mr Mills, Mr Brown then emailed the Board listing “items the Board would need to understand were achievable in a given time in order to continue under the current process with NAV”, and expressing concern “that we have gone from £8m package of which £4m would be available immediately, to £2m and NAV promising Lloyds they get fully repaid. At the end of the evening NAV was talking about a £10m equity raising and Lloyds not getting anything back but rebasing its debt over the remaining life of the contract.” Mr Brown explained that he had put off further meetings with NAV

At 9am on 18 February 2011 there was then a further AssetCo Board meeting of AssetCo. Mr Brown reported on his meeting with Mr Mills the previous evening. “The Board agreed that the company could not progress with NAV until it provided a firm written proposal. It was also necessary to make clear to Mr Mills that any proposal necessitated an injection of £4.lm. It was agreed that JS should revert to NAV today.”

A board meeting of AADL was convened for 18 February 2011. Mr Shannon and Mr Mills attended as directors, and Mr Davies and Mr Agnew were also present. Mr Davies and Mr Agnew were appointed as directors and Mr Davies was appointed as Chairman.

It was at this meeting where the use of the PSA funds was finally revealed. Mr Mills states in his first witness statement as follows at [75]:

Mr Davies’ evidence is that as tension quickly developed, he suggested to Mr Shannon that the two of them step out of the meeting for a private conversation. Mr Davies states as follows at [41] of his first witness statement:

Later that day Mr Mills also wrote to HMRC, asking it to clarify its position in relation to the winding-up petition, explaining that the existence of the petition was hindering the unlocking of AssetCo’s liquidity problems. HMRC responded as follows:

“HMRC will only consider dismissing the petitions on payment in full. If a payment of £2m is made prior to the hearings on Wednesday 23 February 2011 together with payment of all PAYE liabilities due for the period to 5 February 2011 payable by 22 February 2011 (if made by electronic payment), HMRC will then consider agreeing to an adjournment for a period of 12 weeks to allow the group time to make an agreed schedule of payments together with all current liabilities. If the group achieves this, the position will be reviewed and consideration given to dismissal at that point to allow the group to clear any balance over specified period.

As matters stand in the absence of payment of £2m or evidence that this will be made on a specified date along with the liabilities due for the period to 5 February 2011 as stated above, consideration is being given to the advertising of the petitions before the hearings on 23 February 2011”.

Also after the meeting, Mr Shannon put his lawyer, Ms Duane of Nabarro, in touch with NAV with regard to NAV “obtaining a charge over the Abu Dhabi branch”, and NAV’s lawyers Bircham Dyson Bell sent Nabarro a draft declaration of trust under which AssetCo would hold all Abu Dhabi contracts, rights and cash on trust for AADL. However Mr Shannon that afternoon expressed to Ms Duane his objections to an assignment, suggesting that a charge was “the correct way forward”.

At 6.15pm on 18 February 2011, there was a further Board meeting. It was reported:

“Christopher Mills had confirmed that he was in touch with InvestIndustrial (II) and that a revised proposal would be tabled on Monday 21st February. He is to have a meeting with II followed by one with JS at 11:30am. If the proposal was acceptable to the Board, NAV would make short term funds available. The Takeover Panel had been approached and had been advised that the company would be monitored under rule 2.4 of the code. No announcement was necessary because bid talks had not begun (or restarted with respect to II).

The Board agreed to wait until it received a formal offer.”

Further discussion followed about the proposed assignment. On 19 February

The Abu Dhabi contracts were never novated or assigned.

As I have referred to above, AssetCo announced the possibility of an equity fundraising on 14 February 2011. On 20 February, Mr Wightman told the board that Arden was confident it could raise £8-10 million by way of a share placing. The following day, AssetCo announced that it had “decided to approach investors and shareholders in order to raise up to £8 million as soon as possible”.

Also on 21 February Mr Mills wrote to Lloyds, stating that he believed there to be a £23 million liquidity shortfall within the next 6 months. He said that

“together with a potential financial partner or partners” NAV was willing to fund the shortfall, and in parallel to make an offer for the company, on condition that Lloyds and other banks agreed certain restructuring of

AssetCo’s debts. The AssetCo board sought a firm written proposal from Mr Mills, who wrote a letter in response explaining his view that the company would require a cash injection of c. £23 million, and said that NAV with its potential investing partner proposed (1) an injection of £4m supported by a fixed and floating charge over AssetCo plc and the Abu Dhabi assets, to pay off the petition and provide liquidity to the company, (2) “[a]n offer for the entire share capital of the company to be accompanied by the board’s recommendation”, (3) “[f]urther availability of funds on an as required basis to satisfy any pressing creditors in the intervening period before the offer becomes unconditional” and (4) an ‘expectation’ that following completion of the offer, up to £23m would have been injected. The letter was stated “not [to] constitute a firm intention to make an offer or impose any legally binding obligation on [NAV]”. Mr Mills also sent a letter in similar terms the following day. Correspondence between members of the Board indicates their dissatisfaction with the fact that no firm offer or concrete proposal was forthcoming.

Lloyds meanwhile told Mr Brown on the same day that they considered that both the BOSI and HBOS debt was in default, which they said gave them the right to withhold the full unitary payment when it arrived in their account. They also said they were asking for information including cash flows and book values of assets, thinking about enforcing an “Independent Business Review” [IBR] on the business immediately, and thinking about asking for management changes to be enforced immediately. That afternoon, Mr Agnew sent Lloyds a financial model of the London and consolidated business.

On 22 February, Arden was engaged by the Board of AssetCo to act as financial adviser and corporate broker to the company on the proposed placing. Its emails at the time show that investors were unwilling to rely on the company’s audited accounts. They asked instead for detailed analyses of the Group’s financial position. AssetCo drew my attention in particular to emails from Gartmore, Blackrock and Investec in this regard.

On 23 February 2011, Arcapita wrote to Mr Wightman, indicating a desire to make an offer to acquire the company, and requesting access to the data room to enable it to complete financial and legal due diligence. Arcapita stated that “[g]aining the support of John Shannon is fundamental to the offer”.

Also on the 23^rd, AADL, ACMS and NAV through their lawyers Bircham Dyson Bell wrote to the directors of AssetCo, formally demanding, among other matters, (i) the immediate repayment to AADL of the £5 million loaned to AssetCo; (ii) the assignment to AADL of all cash and assets, and the benefit of all contracts, rights and entitlements, of the Abu Dhabi branch; alternatively, (iii) payment to NAV of £15 million plus interest and costs, by way of damages for breach of AssetCo’s obligations under the Preference Share Agreement; and (iv) payment to ACMS of £450,000 of management fees.

Before that letter was sent on 23 February, Mr Agnew and Mr Mills had met with Mr Richard Day of Arden, and NAV proposed a £40.5m rights issue. The following day Mr Agnew sent Mr Day an outline of the proposal discussed. The idea was that NAV would contribute around £5m to the rights issue. Mr Agnew specified that Mr Davies would be made Executive Chairman, but “[w]e envisage a significant executive role for John Shannon with the business going forward”.

Meanwhile, on 26 February Mr Brown raised concerns about Jaras with Mr

On 1 March Mr Wightman wrote to Mr Shannon, copying in Mr Day of Arden as well as Messrs Manning, Brown and Freemantle. He explained that Arden was seeking irrevocable undertakings from the directors to support the placing, save, Mr Wightman suggested, in circumstances where an offer for the company was received that was recommended by the Board. Mr Shannon gave a formal undertaking to that effect the following day.

Early on 2 March 2011, Mr Wightman reported to the Board that Mr Shannon had entered into an exclusivity arrangement with Arcapita, whereby he agreed that in the event of a bid from Arcapita that was recommended by the Board he would commit his shares. Mr Shannon followed that with an email to Arcapita, informing them that “The Board and Arden and Nabarro have gotten themselves into a corner where they are going to spook the Banks and the clients on the basis that the Placing cannot proceed if Arcapita are still involved.” Mr Shannon said the Placing needed to close, but then a “2.5” offer should be made: “Your offer will carry my support and another 10% support from former Directors.” Mr Shannon then emailed Wightman, saying: “Clearly my ability to participate in the Placing is dependent on the repayment of my current account balance, including the outstanding dividend payment.” The reference to Mr Shannon’s loan account prompted Mr Brown to ask Mr Boyle for the amounts owed to all directors and NEDs.

At 1pm that day, at a Board meeting of AssetCo, Mr Brown advised the Board that Lloyds had asked for a formal IBR to be conducted and KPMG had submitted an Engagement Letter and fee estimate. Mr Wightman also advised the Board that KPMG “had questions around the pre-payment of rent to Jaras Properties, a related party transaction with JS. They also had questions in connection with directors' current accounts.” The Board agreed that it should ask the auditors for a report on their findings at the time of the audit and if necessary in addition arrange for a separate forensic investigation, with action postponed until the end of March.

On 3 March, AssetCo formally announced to the market that it was carrying out a £16 million placing, underwritten by Arden.

A ‘Notice of General Meeting’ was issued on the same day, explaining the circumstances of and reasons for the placing as follows:

“The short term funding requirement resulted from delays in securing the refinancing transaction detailed in the interim results of the Group announced on 13 December 2010 and as a consequence a winding-up petition being presented by a substantial creditor [HMRC] in relation to an outstanding payment obligation. This action has precluded the Company from obtaining short-term bridging finance and it is now, therefore, raising additional equity finance. The substantial creditor has agreed to withdraw the winding-up petition on receipt of the amounts due to it from the proceeds of the Placing. During this period, the Company has been in discussions with its banks and principal creditors. Each of the Group’s banks has given a waiver of the breaches of the Group’s facility agreements which is conditional amongst other things on the Placing taking place.

The Company has received approaches from various third parties in relation to short-term funding linked to possible offers to acquire the Company. The Directors have carefully considered each of these approaches and concluded that the Placing is the most appropriate route to follow in the interests of the shareholders and creditors of the Group. The Company is no longer in any discussions with any of these third parties relating to these various proposals.

The Company has received a threat of legal proceedings from an investor in the Group relating to certain historic transactions. The Directors believe that these claims are without merit.

Without the additional equity funding being forthcoming through the Placing, the Directors believe that it is likely that the Group’s banks would withdraw their support which would mean that the Company could not continue in its current form. The Directors have concluded in the current circumstances, that it would not be practicable to carry out a pre-emptive offer to all Shareholders.”

NAV did not participate in the fundraising. Mr Mills’ evidence is that NAV was “fairly certain” that the targeted amount would be insufficient to meet

On 4 March 2011, KPMG sent Mr Brown a draft discussion document on critical payments. Mr Brown forwarded this to Mr Shannon and Mr Wightman, observing that the analysis showed that after critical payments were made, only £2.8m of cash would remain – and that did not include “bringing the overdraft to nil which currently stands at £1.4m”, nor an anticipated corporation tax bill of £3.6 million in April.

Also on 4 March 2011, Mr Brown and Mr Wightman both met with Colin Rutherford, who was being considered for, and considering, appointment as new Chairman of AssetCo.

On 6 March 2011, Mr Day (of Arden) emailed the Board, in advance of the general meeting to approve the placing authorities. He gave feedback on investor presentations, stating among other things that investors generally accepted that AssetCo was looking for a new CEO but wanted to see Mr

During the evening of 7 March 2011, Mr Brown had a meeting with KPMG and Lloyds which “did not go well”. They were concerned at the extent to which the £16m being raised would be spent, and were concerned that a statement would need to be made correcting the warranty that sufficient funds were being raised.

Also on 7 March 2011, Arcapita had made a further attempt to engage the

Meanwhile, Mr Shannon was beginning to agitate matters. On 12 March 2011 he wrote to Mr Day seeking “formal written advice” as to whether there had been a deterioration in the company’s position which the Board was required to announce under AIM rules. This followed earlier discussion on 9 March, when Mr Shannon had raised the issue with Mr Day and, following discussion, the Board had decided no announcement needed to be made, Arden being comfortable that there had not been a material adverse change. A Board meeting was convened on 13 March. Mr Shannon expressed the opinion “very strongly” that in his view AssetCo had undergone a material adverse change in its working capital position which would mean that the placing should be withdrawn and AssetCo would need to be put into administration as it would no longer have the support of its primary banks. The remaining directors disagreed that there had been a material adverse change. Later that evening, Mr Shannon emailed Mr Wightman suggesting that there were only two alternatives available to address the position other than administration: (1) reengagement with Arcapita if a suitable offer was received; or (2) seeking to increase the amount of funding raised in the placing, but having made disclosure of the working capital position (i.e. the alleged material adverse change).

During this period AssetCo was also coming under pressure from its suppliers, and making repayment commitments. This was compounded by creditors’ knowledge of the imminent placing proceeds, from which they expected to be paid. On 10 March Mr Flynn told AssetCo that he expected to be paid his outstanding director’s loan of around £430,000 upon completion of the placing, and inferred he would apply to join the winding-up petition if his debt was not satisfied (as he in fact did on 25 March).

In those circumstances on 14 March AssetCo made a further RNS announcement, stating that the prospect of imminent funding had caused its creditors to take a harder line:

In the same announcement, AssetCo also said that it had secured a short-term loan of £1.45 million from Bank of Scotland.

On 15 March a meeting took place involving NAV, Gartmore and directors of AssetCo. The meeting was reported by Mr Davies (who was not there but had spoken to Mr Mills and Gartmore) as being “a shambles”. He reported that there had been “problems with [AssetCo’s] working capital statement” and that there was a suggestion that the “placing may well not be sufficient”. NAV and Gartmore had rejected Lloyds’ nominee as Chairman, Colin Rutherford, but Mr Wightman had agreed to step down. He reported further that the meeting had been inconclusive as regards matters such as Mr Davies going on the board.

On 16 March 2011, Mr Wightman reported a series of conversations to Mr Brown and the other NEDs. The first was with Lloyds, who expressed unhappiness at Mr Davies replacing Mr Rutherford as the proposed new

Also on the 16^th, following meetings with Jamie Brooke of Gartmore and Charles Jillings of Utilico Investments Ltd, Mr Mills offered to provide further funding for working capital after the placing, on condition that Mr Davies be appointed as Chairman of AssetCo plc as soon as the fundraising was completed. Lloyds eventually agreed to the appointment of Mr Davies. Mr Sturm reported in an email to Mr Agnew that for a time it had seemed that Lloyds might insist on Mr Rutherford being Chairman, which would have been a deal-breaker for Mr Mills, who would, it was suggested by Mr Sturm, in those circumstances have joined the winding-up petition against AssetCo.

On 18 March 2011, Mr Mills, on behalf of NAV, signed:

Accordingly additional support of up to £10 million was pledged jointly by NAV, Gartmore and Utilico Investments Ltd. The support of unnamed “major shareholders” up to a maximum of £10m was announced by AssetCo on 18 March. On 21 March a further announcement was made stating that AssetCo “expect[ed] to require a working capital facility of £3-4 million after the receipt of the £16 million gross proceeds from the equity placing which is the subject of today's general meeting and that the board's preference to meet this requirement is to arrange suitable new bank facilities, but that this has not been possible prior to the placing”, but that as a contingency it had received indications that NAV, Gartmore and Utilico were prepared to provide additional funding of up to £10 at AssetCo’s request.

Mr Shannon, meanwhile, had escalated his agitation, and on 16 March had written to Mr Wightman as Chairman, suggesting that the Board was in breach of its duties by failing to disclose the extent of the company’s funding shortfall. Mr Wightman formally responded to Mr Shannon’s protestations on 18 March, stating that the board was “concerned and astonished” by Mr Shannon’s conduct as CEO of the company, and that it was “keeping [his] position under review and will take appropriate measures in relation to your position and past conduct if required”.

On 18 March Mr Shannon filed a notice to appear on the HMRC petition. Then on 20 March he issued a claim in the High Court seeking a declaration that he was not bound by his undertaking to vote in favour of the resolutions to be proposed at the meeting to be held on the 21^st. AssetCo’s shares were suspended as a result of the ensuing uncertainty.

However the company successfully obtained an urgent injunction requiring Mr Shannon to vote in favour of the placing, and all went to plan on 22 March 2011, the necessary resolutions were passed in general meeting and the placing went ahead, raising £16 million.

The following morning, the board resolved to make immediate payments out of the proceeds to three creditors: HMRC, Nabarro and Eric Sinclair.

Mr Davies was appointed on 23 March. It will however be clear from the above that his involvement began before that date. Indeed he had already started to identify the key issues with AssetCo’s finances and he had been provided with detailed models produced by AssetCo in connection with the Investindustrial bid, detailed cash-flow information, and draft profit and loss accounts.

On 20 March, Mr Davies had sent an email to Scott Brown asking “to be involved in all future meetings/decisions”, and saying:

In a similar vein, on 22 March Mr Davies wrote stating that in order to ensure the company were to achieve “maximum value” from the placing:

Funds should not be dispersed into any bank accounts where the bank is an existing creditor. Nor should funds be dispersed to the operating businesses where presumably most of the liabilities reside.

Mr Davies engaged two accountants, Tim Barrett and Donald Morris (who had in fact been engaged from 14 March, prior to Mr Davies’ appointment), to assist him to assess the financial position of the Group. Mr Davies’ evidence is that between them, they established “within a couple of weeks” that the London Contract was flawed, since the unitary payment was insufficient to cover the expenses of operating the Contract as well as servicing the company’s debt repayments. He told the non-executive directors in an email of 11 May that:

Mr Davies says that it was clear to him from “very early on” that “either a scheme of arrangement or a company voluntary arrangement would almost certainly be part of any solvent solution” for the company.

One of the major issues faced by Mr Davies following his appointment was the existence of the HMRC winding-up petition, which had caused the Group’s banking facilities to be frozen. The petition also meant that any payments made by AssetCo plc needed to be authorised by a validation order

HMRC had agreed that its petition would be dismissed after it was paid out from the £16 million placing proceeds, but this did not in fact occur. Instead,

The Court formally substituted Nabarro to the petition against AssetCo plc after a hearing on 25 March. The petitions against the subsidiary companies were dismissed.

On 14 April, Nabarro formally withdrew from the petition and Mr Flynn abandoned his application to join it. However, Mr Shannon maintained his application to join until discontinuing it on 22 April.

The petition against AssetCo plc now had no supporters, and was formally dismissed on 27 April.

Mr Shannon, too, was soon to be dismissed. Rewinding a little, on 23 March 2011, the day Mr Davies was appointed, Mr Brown called a board meeting, upon advice that “it was appropriate to effectively serve John [Shannon his] notice and place him on gardening leave pending the outcome of … an investigation that may or may not result in him being dismissed for cause”.

The following day, the board sent a letter to Mr Shannon asking him to resign from his position as director of AssetCo plc and all other Group companies.

In order to resist Mr Shannon’s attempt to join the HMRC winding-up petition, Messrs Davies and Barrett carried out an investigation into Mr

Despite attempting to join the HMRC petition, Mr Shannon later told Mr

GT submits that notwithstanding statements to this effect, the reality is that Mr Shannon was doing all he could to undermine the company.

Nevertheless, as I have said above, Mr Shannon did then abandon his attempt to join the HMRC petition on 22 April, resulting in the petition being formally dismissed on 27 April.

Another matter of which Mr Davies became aware soon after his appointment was that AssetCo had ‘overfunded’: thus he told PwC that “Within a few weeks I established that the company was cash generative but Lloyds together with some smaller lenders had overlent...”.

The basic position – which was common ground (despite AssetCo’s suggestion in the List of Parties’ Factual Disagreements that the exact nature and extent of overfunding had not been established) as reflected in certain letters sent by Davis & Co acting for AssetCo on 18 October 2017, 16 November 2017 and 29 November 2017 – is as follows. In FY09 and FY10 AssetCo obtained funding of £13.3 million from finance lease lenders in excess of the value of the assets acquired or in respect of assets already funded by LFEPA (‘overfunding’). Management had borrowed more to acquire these assets than the cost of the assets, fraudulently generating cash for other purposes. Internal invoices, within the Group, were generated and used dishonestly in order to mislead lenders into providing greater sums than would otherwise have been available.

Lloyds Banking Group, through KPMG, discovered overfunding on the London Contract over the course of May-July 2011. The Co-op was not informed of the overfunding on the Lincoln Contract in 2011, and in 2012 an effort was made to keep the information from it. Mr Davies noted that they were “much more on top of this than Lloyds”.

In early March, the Group’s banks had provided a series of formal waivers, which lasted until 25 March. Thereafter, the banks informally extended the waivers, albeit also sending regular “reservation of rights” letters to protect their position. Mr Davies’ evidence is that the banks were “cooperative [and] wanted a solvent solution to AssetCo’s problems”.

Prior to Mr Davies’ appointment, the banks had made it a condition of their support that KPMG be appointed to carry out an Independent Business Review, and that Mr Rutherford was appointed as interim restructuring officer (the latter proposal being rejected by Mr Mills as a deal-breaker). A large amount of management time was spent answering questions KPMG had raised

On 12 April, Mr Davies gave a presentation to the banks. He explained that

“AssetCo’s profitability had been consistently overstated … the EBITDA was £9 million against debt servicing costs of £18.7 million, and that as a result AssetCo needed a further cash injection and/or bank write-offs, plus rescheduling of its debts”.

On 28 April, Mr Davies held a further meeting with the Group’s major banks along with Mr Jillings of Utilico. The meeting took place at the first opportunity after the winding-up petition against AssetCo plc was lifted, which had occurred just one day previously. Prior to that, the banks had been unwilling to discuss unlocking the Group’s accounts whilst the petition remained in place. Mr Davies and Mr Jillings told the banks that they needed to take a “big haircut” if they wanted access to further shareholder money; he reported in an email to Mr Mills of the following day that “they seemed to agree”. At the same meeting, Mr Davies successfully pressured Lloyds into

“unlocking” the unitary payment income from the London Contract, as he described in his email of the following day:

Shortly thereafter, on 4 May, Lloyds confirmed that the blocked unitary payment funds would be released “to support the company with the continued operation of the LFEPA contract”. Under this arrangement, AssetCo was required to provide the bank with weekly notices detailing the payments that needed to be made in connection with the Contract. Lloyds said it was taking this step “in light of … the public safety requirement to ensure the continuing operation of a contract material to one of London’s emergency services”. The Co-op bank agreed to a similar arrangement in relation to the Lincoln Contract on 9 May.

As a result of these arrangements, the London Contract became self-funding (albeit only in the sense that its revenue exceeded its expenses if it was repaying neither principal nor interest on its loans) and ringfenced from the activities of the rest of the Group. (The Lincoln Contract was already selffunding).

On 31 May the Group’s major banks agreed, in principle, to a standstill/ deferral of future debt repayments for an initial period until the end of June. Lloyds provisionally issued such an agreement on 6 June, as did Barclays on 7 June. Whilst the banks did not in the event enter into formal contracts regarding these arrangements, they did not demand repayment over the restructuring period.

Northern Bank was the only bank that did not agree to a deferral/standstill.

Mr Davies initially took the view that Northern Bank should be paid off. However he later decided that “to prefer one bank in front of the others would

The Northern Bank petition prompted a series of further creditors to jump on the bandwagon, including Supply 999, Mills Selig solicitors and EDF Energy.

In order to stall the petition, AssetCo made an “administration application” on 29 June, which bought the company a 14-day grace period under the relevant provisions of the Insolvency Act. The company announced on 29 June that:

The court granted a series of adjournments on 1 July 2011 to allow AssetCo to proceed with its rescue strategy. Once NAV, Utilico and Gartmore (the “Pledge Shareholders”) put forward their proposal for recapitalising the company (as to which see below), Northern Bank was content to allow its petition to be adjourned pending negotiations. The petition was finally dismissed on 28 September, the same day the scheme of arrangement was sanctioned by the Court.

Around mid-May 2011 AssetCo appointed financial advisors, Execution Noble, to assist with the proposed bank restructuring and the due diligence being carried out by two parties that had expressed an interest in acquiring AssetCo, Arcapita and Seacor. Managing these bids delayed the scheme of arrangement by several weeks: they caused the banks to prevaricate over how

During this period, Execution Noble was in regular contact with the Group’s banks. In a presentation delivered on 14 June 2011, Execution Noble informed the banks that AssetCo was considering a “Plan B” (i.e. as an alternative to the bids) which would involve an injection of working capital from the Pledge Shareholders, a debt for equity swap by the banks and a conversion of NAV’s preference shares. Eventually Lloyds “pulled [the] plug” on negotiations with Arcapita, and Mr Davies immediately turned his attention to the alternative solution: “an injection of 10m plus a compromise with creditors”.

In late June, the Pledge Shareholders put forward a proposal to inject funds into the business by way of a share issue. Their proposal involved:

The Pledge Shareholders’ proposal was announced by the board on 25 July as follows:

The banks supported the proposal. This meant that the company’s other creditors therefore did not strictly need to be persuaded to support it, since the banks would carry any vote on the scheme of arrangement. In the event, all creditors voted in favour of the proposal.

PwC were engaged on 12 August 2011 to advise and assist AssetCo on the formulation, promotion and management of a scheme of arrangement.

A Scheme Document was published on 30 August, containing the details of the proposed restructuring and refinancing. In summary, these were:

On 9 September AssetCo announced the Scheme Document to the market as follows:

The remaining steps to implement the recapitalisation and the scheme of arrangement went smoothly, and broadly in line with the anticipated timetable). In summary:

The length of time between the Pledge Shareholders’ formal proposal to the board (on 15 July) and the scheme of arrangement was therefore just over two months.

Following the scheme of arrangement, AssetCo engaged PwC to audit its accounts for the 18-month period to 30 September 2011. The 2011 accounts contain substantial restatements to the previous accounts audited by GT in 2009 and 2010, including:

In August 2012, the London Group of subsidiaries was sold to a company controlled by Sir Aubrey Brocklebank. The London Contract was subsequently terminated and transferred to a company named Babcock. The Lincoln Contract was unexpectedly terminated in April 2012.

AssetCo plc continues to trade profitably. It now carries on business exclusively in Abu Dhabi. The SOC Contract was subsequently renewed, and continues in force to this day.

So much is, for the most part, common ground. I have set it out in such detail because AssetCo’s case is based on detailed counterfactuals as to how, if the audit had been done competently, things would have been different in 2009 and 2010. There has been vigorous argument on precisely what would have happened in the Counterfactuals: down to a level of detail regarding, for example, the precise date that a particular step would have been taken, or

I now turn to my discussion and analysis of the Counterfactuals, which falls within the first ground of GT’s defence (that AssetCo cannot establish its case on the Counterfactuals and therefore cannot show factual causation of its alleged losses), after which I will address each of the other five grounds on which GT says the claim should be dismissed. I will then address the other issues that remain to be determined if each of those six hurdles are cleared by AssetCo.

AssetCo’s pleaded case on the counterfactual has developed over time through the Particulars of Claim, the Reply and Responses to Requests for Further Information, and can essentially be divided into three phases:-

AssetCo’s case at trial was set out in detail at paragraphs 225 to 269 of

AssetCo’s case on the Counterfactual, and GT’s response thereto, after the factual and expert evidence, and in closing, is addressed in due course below.

In relation to the position in 2010, AssetCo’s primary pleaded counterfactual can be summarised as follows:-

The 2010 Counterfactual accordingly raises many of the same issues, in terms of the steps that would have to be undertaken, as in relation to 2009.

GT identifies that in relation to the various steps that would have to be undertaken some of these steps would have to be undertaken by AssetCo itself (or those acting on behalf of Asset Co), whilst it submits that other steps were dependant, in whole or in part, on the conduct and actions of third parties. In this regard GT submits that at least the following are to be so characterised:-

The consequences of the characterisation, and division, of steps into those that would be taken by AssetCo alone and those which depend upon the conduct of one or more third parties, led to a major issue between AssetCo and GT as to how damages were to be assessed.

For its part GT argues that AssetCo’s case for damages is properly to be characterised as a loss of a chance whereby GT’s breaches of duty deprived AssetCo of a chance, in 2009 or 2010, to seek to conclude a scheme of arrangement and thereby extricate itself from the position in which it found itself. GT submits that whether any such chance is capable of giving rise to any recoverable loss by AssetCo depends not only on the actions that AssetCo

AssetCo’s primary case is that its claim is not to be assessed on the basis of a loss of a chance (whilst advancing a secondary case on a loss of a chance basis). As to the case advanced by GT, AssetCo makes three submissions:-

The approach to be adopted in the context of the pleaded Counterfactual in the present case is considered in section G.3 below, after considering the applicable legal principles in relation to loss of chance and causation in the next section (section G.2).

When assessing damages, there is an important distinction between past events and what will happen in the future, or would have happened in the future if something had or had not happened in the past, as recognised in the case law discussed by the editors of McGregor on Damages 20^th edn., at paragraph [10043] and following. Thus Lord Reid stated in Davies v Taylor [1974] A.C. 207 at 212E-213B:

“When the question is whether a certain thing is or is not true – whether a certain event did or did not happen – then the court must decide it one way or the other. There is no question of chance or probability. Either it did or it did not happen. But the standard of civil proof is a balance of probabilities. If the evidence shows a balance in favour of it having happened, then it is proved that it did in fact happen.

…

…You can prove that a past event happened, but you cannot prove that a future event will happen and I do not think that the law is so foolish as to suppose that you can. All that you can do is to evaluate the chance. Sometimes it is virtually 100 per cent: sometimes virtually nil. But often it is somewhere in between. and if it is somewhere in between I do not see much difference between a probability of 51 per cent. and a probability of 49 per cent.”

The latter passage was quoted by Stuart-Smith LJ in Allied Maples at 1613F1614A).

In Mallett v McMonagle [1970] A.C. 166 Lord Diplock stated at 176E-G as follows:

“The role of the court in making an assessment of damages which depends upon its view as to what will be and what would have been is to be contrasted with its ordinary function in civil actions of determining what was. In determining what did happen in the past a court decides on the balance of probabilities. Anything that is more probable than not it treats as certain. But in assessing damages which depend upon its view as to what will happen in the future or would have happened in the future if something had not happened in the past, the court must make an estimate as to what are the chances that a particular thing will or would have happened and reflect those chances, whether they are more or less than even, in the amount of damages which it awards.”

In broad terms there are two circumstances in which a claim may be

It is not suggested that AssetCo’s claim is of a type falling within the first category. However GT submits that AssetCo’s claim, to the extent that it is dependent on hypothetical actions of third parties, is of a type falling within the second category.

In assessing damages a claimant bears the burden of proving the loss caused by the breach of contract and the quantum of such damages. As already noted, in relation to past events the question of causation is to be determined on balance of probabilities as is the quantification of loss. Conceptually, where the causation of the loss suffered by the claimant as a result of the defendant’s wrongful act is dependent upon the hypothetical act of the third party then the law could require that a claimant prove causation on a balance of probabilities.

That might, however, place real difficulties in the way of a claimant because the scenario is hypothetical, there may be no certainty as to what would have happened, and evidence from the third party or parties may or may not be available. If causation were to be determined on balance of probabilities, then a claimant who could demonstrate that there was a 45% chance of a third party acting in a particular way, would recover nothing, whereas if it sufficed that he

GT submits that the approach in Allied Maples is to be applied in all such

“loss of chance” cases and it submits that the present case is just such a case. In contrast, AssetCo submits that the Allied Maples doctrine is a “permissive rather than mandatory principle” (per paragraph 310 of AssetCo’s Written Closing Submissions), alleging that a claimant is entitled to recover all of its losses if it is able to prove on the balance of probabilities that the defendant’s breach caused it to suffer loss even where its claim depends on the hypothetical act of a third party.

GT submits that AssetCo is wrong, that the Allied Maples principle applies in all cases where the claim depends on the hypothetical act of a third party, and that the claimant does not have the “option” to seek to prove its loss (at a causation and quantum stage) on balance of probabilities in relation to the actions of the hypothetical third party – for example through adducing evidence from the third party. This aspect of the parties’ respective cases is addressed below, after first identifying the applicable principles in relation to loss of a chance.

Allied Maples concerned negligent advice by a solicitor - the very type of case where a claim will be based on a lost chance dependent on third party action. The claimants were advised by the defendant solicitors in their purchase of certain business and shop properties. The solicitors had allowed the sale to the claimants to proceed with the deletion of a warranty by the sellers that no contingent liabilities existed whereas there was a liability on a lease which in due course materialised.

Two questions arose in relation to causation and damages. The first question was whether, if the defendants had properly advised the claimants of the effect of deleting the warranty, the claimants would have taken steps to obtain from the sellers some protection, by way of warranty or otherwise, against this liability. The second question was whether the sellers would have been prepared to accede to such a request by the claimants.

In his judgment Stuart-Smith LJ distinguished between three types of situation or categories. In his first category fall cases in which the defendant’s negligence consists in some positive act or misfeasance and the question of causation is one of historical fact. This is the situation to which Lord Reid in Davies v Taylor and Lord Diplock in Mallett v McMonagle were referring. Here proof on the balance of probabilities is required. As Stuart-Smith LJ stated at 1610A-B:

“What has to be proved to establish a causal link between the negligence of the defendants and the loss sustained by the plaintiffs depends in the first instance on whether the negligence consists of some positive act or misfeasance, or an omission or non-feasance. In the former case, the question of causation is one of historical fact. The court has to determine on the balance of probability whether the defendant's act, for example the careless driving, caused the plaintiff's loss consisting of his broken leg. Once established on balance of probability, that fact is taken as true and the plaintiff recovers his damage in full. There is no discount because the judge considers that the balance is only just tipped in favour of the plaintiff; and the plaintiff gets nothing if he fails to establish that it is more likely than not that the accident resulted in the injury.”

In the second category fall cases in which the defendant’s negligence consists of an omission where causation depends not upon a question of historical fact but upon the answer to the hypothetical question what would the claimant have done if there had been no negligence. How the claimant would have reacted is again subject to proof on the balance of probabilities. As StuartSmith LJ stated at 1610G:

“Although the question is a hypothetical one, it is well established that the plaintiff must prove on balance of probability that he would have taken action to obtain the benefit or avoid the risk. But…if he does establish that, there is no discount because the balance is only just tipped in his favour.”

In the third category fall cases in which the claimant’s loss depends upon the hypothetical action of a third party, whether in addition to action by the claimant or independently of it. Here whilst the claimant must prove on balance of probabilities what it would have done, the claimant need only show that he had a real or substantial chance of the third party acting in such a way as to benefit him to satisfy the requirement of causation, the evaluation of the chance being part of the assessment of the quantum of the damage. As StuartSmith LJ stated at 1614D:

“…in my judgment, the plaintiff must prove as a matter of causation that he has a real or substantial chance as opposed to a speculative one. If he succeeds in doing so, the evaluation of the chance is part of the assessment of the quantum of damage, the range lying somewhere between something that just qualifies as real or substantial on the one hand and near certainty on the other. I do not think that it is helpful to seek to lay down in percentage terms what the lower and upper ends of the bracket should be.

All that the plaintiffs had to show on causation on this aspect of the case is that there was a substantial chance that they would have been successful in negotiating total or partial (by means of a capped liability) protection.”

In the case before the court, therefore, the claimants had to show on the balance of probabilities, before any recovery was possible, that they would have sought a degree of protection against the contingent liability; it was held that in this they succeeded. However, they needed to show only that there was a significant chance, which could be less than likely, that the third party would have been prepared to afford them this protection. The majority held that the loss of such a chance had been made out and it was assessed at 50 per cent. Millett LJ agreed with the analysis of the law and reasoning of the majority, but dissented in relation to whether a real and substantial chance had been made out at the causation stage.

Thus Millett LJ stated at 1623A-F as follows:

“That left the second head of loss: the chance that, if properly advised, the plaintiffs might have succeeded in persuading the defendants to agree to reinstate warranty 29 or to provide some other total or partial protection against the risk of first tenant liability. This depended on (i) whether the plaintiffs would have sought to reopen the negotiations to obtain such protection and (ii) whether and if so how far they would have been successful. The first of these again depended on what the plaintiffs themselves would have done in a hypothetical situation and accordingly had to be established on a balance of probabilities. The judge thought that it had been so established, and I agree with Stuart-Smith L.J. that there was evidence to support his conclusion.

That, however, was all that the plaintiffs came to court prepared to prove. They evidently believed that the question whether and to what extent Gillow would have acceded to the plaintiffs' request could be left to the assessment of damages. In my view they were in error. It was incumbent on them to establish, at the very least, that there was a chance that Gillow would have been receptive to their request, and in my opinion this was not something which could simply be inferred.

The judge found (or rather inferred, since no evidence from Gillow or Theodore Goddard was called by either party) that, if asked, Gillow would probably have offered some form of protection against the risk of first tenant liability. In this the judge went further than was necessary. Since the question depended on what an independent third party would have done in a hypothetical situation, the plaintiffs did not need to establish it on a balance of probabilities. Provided that they could demonstrate, by evidence or inference, that there was a real and substantial chance that Gillow would have offered the reinstatement of warranty 29 or its replacement by some other total or partial protection, they were entitled to have that chance evaluated. I agree with Stuart-Smith L.J. that the judge's finding is not supported by the evidence and must be set aside; the defendants must at least be given an opportunity to call witnesses from Gillow to say that they would not have acceded to the plaintiffs' request. In my judgment, however, the evidence was not even sufficient to justify the inference that there was any real or substantial chance that Gillow would have acceded to the plaintiffs' request. Whether they would or would not have done is, on the evidence so far adduced, a matter of pure speculation.”

There have been numerous cases subsequent to the decision in Allied Maples where the issue that arose was the valuation of the future benefit which might

It will be necessary to return to some of these cases in more detail when considering the issue as to how one goes about calculating the recoverable loss when there are multiple contingencies including where an issue arises as to whether the contingencies are truly independent or are in fact inter-dependant (in particular the decision of Vos J in Joyce v Bowman and of the Court of Appeal in Hanif v Middleweeks).

In some of these cases reference was expressly made to the principles in Allied Maples and indeed the proper approach to causation, as well as the assessment of quantum (see, for example in Joyce v Bowman at [54]). The principles expressed in Allied Maples have also been considered, and endorsed at appellate level, for example in Wellesley Partners LLP v Withers LLP [2016]

In Wellesley it was contended that, but for the defendant’s negligence, the claimant (WP) would have opened an office in New York and tendered for the executive search business of Nomura. Floyd LJ stated at paragraph [100]:

“I would have thought that, applying those principles to the present case, it would be plain that, whilst WP would need to show on the balance of probabilities that, but for the negligence complained of, they would have opened a US office (a question of causation dependent on what the claimant would have done in the absence of a breach of duty), the actual loss which they claimed to have been caused by the defendant was dependent on the hypothetical actions of a third party, namely Nomura. Accordingly, in line with well-established principle, the chances of Nomura deciding to award the mandates to WP would have to be reflected in the award of damages.”

It was submitted to the Court of Appeal in Wellesley that cases subsequent to Allied Maples showed that such a result was incorrect, including Owners of the Front Ace v Owners of the Ship Vicky I [2008] 2 All ER (Comm) 42, Parabola Investments Ltd v Browalia Cal Ltd [2011] QB 477, Vasiliou v Hajigeorgiou [2010 EWCA Civ 1475, CA and AerCap Partners 1 Ltd v Avia Asset Management AB [2010] 2 CLC 578. Floyd LJ (with whom Longmore LJ and Roth J agreed) concluded that this was not so, expressing his conclusions at paragraphs [107] to [110] which I quote in due course below, having made reference to each of those authorities. As AssetCo places reliance on some of these authorities, I set out below Floyd LJ’s analysis of such authorities.

Floyd LJ first considered the Front Ace at paragraphs [100]-[101]:

“101 Ms Parkin submits, however, that subsequent cases show this result to be incorrect. The Owners of the Ship “Front Ace” v The Owners of the “Vicky 1” [2008] EWCA Civ 101, concerned a vessel which had been prevented by a collision from 57 days of profitable employment by its owners. The experts had proceeded to agree a figure for hire in that period without any suggestion of a reduction on the basis of a loss of a chance that the vessel would be profitably employed. Sir Anthony Clarke MR (with whom Dyson LJ and Jacob LJ agreed) said this:

“71.

… I am not persuaded that this is a case for the application of the loss of a chance approach discussed in Allied Maples among many other cases. This is not as I see it a case in which, as Stuart-

Smith LJ put it at 1611A-B,

“… the plaintiff's loss depends on the hypothetical action of a third party, either in addition to action by the plaintiff, as in this case, or independently of it.”

It is not a case where the claimants' loss depends upon a chance of making a particular contract. The exercise upon which the experts were engaged was to find the appropriate market rate for the use of the vessel in the relevant 57 days in circumstances in which it was established that she would have been profitably employed during that period. The experts agreed the appropriate figure. So indeed did the parties, at any rate assuming that it was appropriate to adopt the time equalisation approach, which in my opinion it was.

Floyd LJ next addressed the Parabola case at [102]-[103] stating:

“102 In Parabola (cited above) Tangent claimed damages in deceit for capital losses, and lost profits lost through being induced to engage in loss-making trades. The judge found on the balance of probabilities that, but for the deceit, Tangent would have traded profitably at a particular level. On appeal the defendants' attack was on the figure for profitability on which the judge alighted. It was submitted that there was no basis for the finding that the claimant would have traded at this specific level of profitability. Toulson LJ, as he then was (with whom Mummery and Rimer LJJ agreed) rejected this argument:

“22.

There is a central flaw in the appellants' submissions. Some claims for consequential loss are capable of being established with precision (for example, expenses incurred prior to the date of trial). Other forms of consequential loss are not capable of similarly precise calculation because they involve the attempted measurement of things which would or might have happened (or might not have happened) but for the defendant's wrongful conduct, as distinct from things which have happened. In such a situation the law does not require a claimant to perform the impossible, nor does it apply the balance of probability test to the measurement of the loss.

Floyd LJ then addressed the Aercap case. It will be necessary to return to what he says about Aercap in the context of what Gross LJ stated (in obiter comments) in Aercap about whether, where a claimant could prove causation on the balance of probabilities, a court was required to go on and evaluate the chances involved, even when it came to the assessment of damages. Floyd LJ stated at [106]:

“106 In Aercap the claimant seller alleged that the defendant buyer was in repudiatory breach of a contract for the sale of two Boeing 757-200 aircraft. The seller resold at a reduced price and claimed damages. The buyer claimed that the seller had not been in a position to supply the contractually agreed engines, given certain leasing commitments into which it had entered. It argued that even if it was liable to the seller, its damages should be reduced by a factor to reflect the chance that the lessee would not have returned the engines in time for them to be delivered to the buyer. Gross LJ considered, in obiter and very tentative observations at the end of his judgment, that where the claimant can prove causation on the balance of probabilities, the authorities did not require the court to go on and evaluate the chances involved, even when it came to the assessment of damages. He went on to hold in any event that there was no relevant uncertainty.”

At [107] and [108] Floyd LJ then went on to comment on the nature of the cases he had just addressed:

“107 The outcome in The Owners of the Ship “Front Ace” v The Owners of the “Vicky 1” depended on the fact that there was a finding that the vessel would have been profitably engaged and the existence of a relevant market. I do not think that it assists WP's case here, where there was obvious uncertainty as to whether WP would find a market for its services in the US.

108 Parabola and Vasiliou are illustrations of the principles established by Allied Maples. As I have indicated, I do not read either judgment as disagreeing with Stuart-Smith LJ's proposition in Allied Maples, that a judge's evaluation of the substantial chance of obtaining the benefit in question forms a legitimate part of the quantification of damages. I do not think that Gross LJ was doubting these principles in Aercap. If he was, I respectfully disagree.”

Floyd LJ then returned to consider the conclusion he had expressed at paragraph [100] that whilst WP would need to show on the balance of probabilities that, but for the negligence complained of, they would have opened a US office (a question of causation dependent on what the claimant would have done in the absence of a breach of duty), the actual loss which they claimed to have been caused by the defendant was dependent on the hypothetical actions of a third party, namely Nomura, so that the chances of Nomura deciding to award the mandates to WP would have to be reflected in the award of damages. He stated as follows at paragraphs [109] and [110]:

“109 On the judge's findings in the present case, the only viable claim to loss of profits in the United States was one to the loss of some of the Nomura mandates. WP's case on causation, that Withers' negligence caused WP to lose the Nomura mandates, was one which depended on the hypothetical actions of Nomura, a third party. WP had, first, to prove that its own actions would have been such as to place itself in a position to obtain that work, and it had to do so on the balance of probabilities. It did so. All that remained on the issue of causation was for WP to establish whether there was a real and substantial chance that Nomura would have awarded some part of the mandates to WP. It did so. That was the beginning and end of its case on causation.

110 It does not follow at all, however, that it is no longer relevant to consider the chances that WP would have obtained the mandates. The evaluation of that chance is part of the process of the quantification of damages. It would be wrong in principle to treat the conclusion on causation as if it meant that the chances of obtaining some part of the mandate were 100%. The judge was correct to reflect his view of the chances of WP obtaining the mandate in his quantification of damages.”

Wellesley is accordingly a recent Court of Appeal authority that applies the approach to causation and quantum adopted in Allied Maples, endorsing that where causation depended upon the actions of the claimant, the claimant must prove what it would have done on balance of probabilities, whilst if causation depended at least in part on the action of one or more third parties the claimant would have to demonstrate that there was a real or substantial chance that the third party would have acted in the respect relied upon, with the evaluation of that chance being part of the process of the quantification of damages.

Accordingly Allied Maples is authority for the proposition that in determining whether a breach of duty has caused loss in a situation where the question arises as to what would have occurred in relation to any particular step on the counterfactual, where the step would have been taken by the claimant the claimant must prove that step on the balance of probabilities, whilst for each step that depends on the conduct of a third party, the court must consider whether there is a real or substantial chance that the third party would have acted in the respect relied upon, the evaluation of that chance being part of the process of the quantification of damages. That approach to causation and quantification of damages has been followed in subsequent cases, including at appellate level, including Wellesley.

AssetCo submits, however, that a claimant is entitled to recover the entirety of its loss if it is able to prove on the balance of probabilities that the defendant’s breach caused it to suffer loss. It is said that loss of a chance does not apply in such circumstances, as it is a permissive rather than mandatory principle.

In contrast, relying in particular on cases such as Allied Maples and Wellesley, GT submits that loss of a chance applies whenever a claimant’s claim depends on the hypothetical act of a third party, even if a claimant is able to prove its case on balance of probabilities including as to what the third party would have done. GT submits that the Allied Maple principle is only permissive in the sense that the law permits or entitles the claimant to have his claim valued on the loss of a chance basis when there is an independent act of a third party involved, but it is not permissive in the sense of optional. If it were than there could be no scope for the doctrine where a claimant could demonstrate on a 51%+ basis what the third party would have done, so that one would only ever be assessing a loss of chance (at a quantum stage) based on a percentage lower than this – and that is not how the doctrine identified in Allied Maples is applied by the courts.

Developing its submissions, AssetCo asserts that the authorities establish two propositions:

In support of the first proposition (that a claimant is entitled to recover 100% of its damages where it is able to prove causation on the balance of probabilities) AssetCo rely on the Court of Appeal case of The Law Debenture Trust Corporation plc v Elektrim SA [2010] EWCA Civ 1142.

The claim concerned bonds issued by the defendant, Elektrim. The claimant was entitled to a payment if the issuer’s assets exceeded a certain level, with the valuation of those to be carried out by investment banks in accordance with an agreed procedure that is set out at paragraphs [3]-[4] of the judgment of the court (given by Arden LJ):

“3 Under the restructuring the Bondholders agreed to accept certain changes to the terms on which the Bonds were issued, including a reduction in the coupon. In return the conditions attached to the bonds were amended to include (by condition 6(k)) the right to a Contingent Payment, sometimes called an “equity kicker”, entitling Bondholders in certain events to an additional cash payment to be calculated using a formula of which the principal integer was “the Fair Market Value” of Elektrim's assets as determined by reference to its last annual audited consolidated financial statements (in the events which happened) for the period ended 31 December 2005.

4 The first part of the definition in condition 6(k) of Fair Market Value is of critical importance to these appeals so we will set out the whole of the definition at this point:

“Fair Market Value” means the fair market value of the assets of the Guarantor (including, without limitation, the Guarantor's interest in any affiliates, but excluding the receivables from any loans to the Guarantor's shareholders made by the Guarantor) after deduction of any debt (but excluding contingent liabilities or amounts due in respect of working capital) and assuming that the Guarantor has no obligations in respect of the Contingent Payment, as determined (by reference to the most recent annual audited consolidated financial statements of the Guarantor) on the Contingent Payment Determination Date by two leading investment banks of international repute, appointed by, and at the expense of, the Guarantor, one chosen by the Guarantor and one chosen by the Bond Trustee, on the basis that:

(i)

if the higher of the two valuations is less than 15 per cent greater than the lower valuation or the two valuations are the same, then the Fair Market Value shall be the arithmetical mean of the two valuations;

(ii)

if the higher of the two valuations is 15 per cent or more greater than the lower valuation, then the Guarantor shall, at the expense of the Guarantor, appoint a third investment bank chosen jointly by the Guarantor and the Bond Trustee to determine the Fair Market Value, which valuation must be no higher than the higher valuation and no lower than the lower valuation determined by the original two investment banks and which valuation shall be conclusive and binding on the Issuer, the Guarantor, the Bond Trustee and the Bondholders; and

(iii)

the investment banks shall act as experts and not as arbitrators, and their determination and findings shall be conclusive and binding on the Issuer, the Guarantor, the Bond Trustee and the Bondholders …”

It is apparent from the passage that I have highlighted that the Elektrim case was about the valuation of shares by two investment bankers (not named individuals), and what was in issue was the appropriate valuation – as such it was not obviously a loss of chance case at all.

The defendant, in breach of its obligations, failed to effect the appropriate procedure, and no payment was made. The claimant claimed that, by reason of the breach, it lost a real and substantial chance that the investment banks would have valued Elektrim’s assets at such a level that the right to a payment. would have been triggered.

There were a number of issues in the case. As identified at paragraph [25] of the judgment, issue 2 was, “should the judge have approached the valuation of the PTC shares by reference to loss of a chance?” The approach adopted by the trial judge (Sales J) can be seen from paragraph 40 of the judgment (as highlighted):

“40 The Trustee's primary case is that damages for breach of condition 6(k) should be assessed by reference to the loss of a chance of what the bondholders might have received by way of a Contingent Payment had the machinery in condition 6(k) been operated and investment banks been appointed to make the relevant assessment of Fair Market Value of Elektrim's assets at the proper time. At the trial it submitted in the alternative that Elektrim was in breach of an obligation to redeem the bonds prior to 15 December 2005 and that damages for this breach should similarly be assessed on the basis of a loss of a chance but we are not concerned with this alternative argument. The judge accepted that the correct principle was loss of a chance but (in relation to the PTC shares) that where the court was in a position to hold that it was probable that the valuers would have received certain legal advice there was no need to make any discount for the chance of other advice having been rendered. Likewise he held, in relation to the valuation of the PAK shares, that as Elektrim failed to lead evidence as to the financial information that would have been available at the time, he was entitled to draw inferences and make findings against Elektrim as to what such information would have shown and thus that he did not need to make a discount for the possibility that the financial information might have been otherwise.”

The Court of Appeal endorsed the trial judge’s approach, stating at paragraphs [44] and [45] as follows:

“44 … He accepted that he had to assess what conclusion a third party would be likely to reach in relation to the valuation of the PTC shares but said that it was very little different from deciding the consequences of a negligent solicitor failing to issue proceedings before a limitation period expired or allowing a client's action to be struck out. He said (para 173):—

“In this type of case, the court hearing the negligence claim usually makes a single broad assessment of the value of the opportunity which has been lost, assessing the legal merits for itself and allowing an appropriate discount to take account of contingencies which might have affected the claimants' prospects of winning at trial. The court does not usually try to assess a range of different possible judgments on the legal merits which might have been given by the notional trial court, and then produce a table of probabilities in respect of the possibilities in that range and aggregate the resulting values. Rather, the court draws on its own legal knowledge and expertise to produce the best assessment it can of the legal merits, with a discount primarily to take account of contingencies and uncertainties in relation to the evidence which might have been called in the case.”

He further decided, following the decision of Neuberger J (as he then was) in Harrison v Bloom Camillin [2001] PNLR 195 para 101 that where a point or points of law were in issue the court should be ready to determine whether a claimant would have succeeded or failed on it. Since the points in the present case were primarily points of law the judge proceeded to decide them and he decided that approach (iii) was correct and that no discount from that was necessary.

45 We endorse the judge's approach. It does not follow that merely because the court has to assess what a third party would be likely to have done that the case must be regarded as a “loss of a chance” case and a percentage of damages thus be awarded. It is different from being deprived of the chance to participate in a beauty contest (such as Chaplin v Hicks [1911] 2 KB 786) where the outcome is not dependent on a legal assessment. Nor is it like having to assess the outcome of negotiations which would have taken place if a solicitor had not (negligently) failed to give correct advice because that depends on many extra–legal factors, as was the case in Allied Maples Group v Simmons & Simmons [1995] 1 WLR 1602. In that case Stuart-Smith LJ was careful (page 1611A) to introduce his third category of case (namely where the claimant's loss depends on the hypothetical action of a third party and can therefore be evaluated on a loss of a chance basis) with the words “in many cases”. He is not saying that all such cases must be evaluated on that basis.”

However, the Court of Appeal made clear that it doubted whether the case before them should be characterised as a “loss of chance” case at all – being as it was, a valuation case where a banker would have concluded as to the valuation of shares. As Arden LJ stated at paragraph [46]:

“46 Indeed we rather doubt whether the present case should be categorised as a “loss of a chance” at all. Dr Harvey MacGregor QC has pointed out (Damages 16th ed para 8-032) that the “loss of a chance” concept has been extended well beyond the kind of case in which it was originally developed. In the present type of case the court has to assess what a banker would have concluded as to the valuation of certain shares. That may not be easy but if something of value has been lost, the court must do its best to estimate that value and should not too readily decide that it is a matter of chance what the true value of something as concrete as a share is likely to be.”

The value of the shares in that case did not depend on any particular valuer valuing the shares. As Mr Wolfson put it for GT, whoever the valuer was, whichever bank they came from, the question was the same: what were the

Elektrim is ultimately a valuation case – it is not authority for the proposition being advanced by AssetCo that where a claimant is able to prove on balance of probabilities that the defendant’s breach caused it to suffer loss it is entitled to recover 100% of its losses in circumstances where such loss depends in whole or in part on the hypothetical actions of a third party. Nor is it authority for the proposition that loss of a chance applies (only) to permit a claimant to recover a proportion of its damages where it is unable to prove causation on the balance of probabilities because its claim depends on the hypothetical act(s) of a third party, and there is no relevant evidence before the court as to how that third party would have acted.

AssetCo also places reliance on the obiter comments of Gross LJ (sitting as a judge of the High Court) in AerCap. As Floyd LJ identified in Wellesley, in Aercap the claimant seller alleged that the defendant buyer was in repudiatory breach of a contract for the sale of two Boeing 757-200 aircraft. The seller resold at a reduced price and claimed damages. The (counterclaiming) buyer claimed that the seller may not have been in a position to supply the contractually agreed engines in any event, given prior leasing commitments into which it had entered with third parties. The buyer argued that even if it was liable to the seller, its damages should be reduced by a factor to reflect the chance that the lessee would not have returned the engines in time for them to be delivered to the buyer. Gross LJ held that the counterclaim failed.

He found (at paragraph 74), (i) that the engines were not specific goods, (ii) on balance of probabilities, if it had been necessary for the seller (Aercap) to do so, it could and would have delivered the engines in accordance with the agreement, and (iii) if it mattered, the chance of Aercap doing so was a virtual certainty. His first conclusion that the engines were not specific goods rendered the debate on loss of a chance academic, and was indeed the end of the matter. Nevertheless, as he put it “for completeness” he said something about the second and third conclusions ([75]). It is clear, therefore, that what follows was obiter. He had already made clear at [74], that whilst the principles of loss of chance and its sphere of application is one of no little interest, given the conclusions he had come to, “this [was] not the case for any extended debate on this topic”.

He expressed himself in paragraphs [76] and [77] in these terms:

“76 As it seems to me, the second conclusion raises for consideration the question of whether the “loss of a chance” approach involves a restrictive as well as a permissive principle. In short, when a “hypothetical past event” (see, per Lord Nicholls, albeit a dissenting speech, in Gregg v Scott [2005] UKHL 2; [2005] 2 AC 176, at [15]) turns on the act of a third party but the Claimant is in a position to prove causation to the standard of a balance of probabilities, is the Claimant without more entitled to recover its damages in full (subject only to contingencies affecting quantum) or must the loss of a chance analysis be applied? In the light of the first conclusion (and, for that matter the third conclusion), the present is not the right case to delve into a point of this nature, so I confine myself to the following:

(i)

The origins of the loss of a chance principle are clearly permissive. The doctrine applies to the causation of damage and, in the circumstances where it is applicable, facilitates recovery where the uncertainty is such that a claimant would fail if required to prove its loss to a balance of probabilities: see the leading case of Allied Maples Group v Simmons & Simmons [1995] 1 WLR 1602, in the judgment of Stuart-Smith LJ, esp. at pp. 1611 et seq . See too, Gregg v Scott ( supra ), per Lord Nicholls, at [15] et seq and per Lord Hoffmann, at [82] – [83].

(ii)

The loss of a chance analysis applies to causation not to quantification of damage: Allied Maples ( supra ), at p. 1609; Gregg v Scott ( supra ), at

It is clear from the words used by Gross LJ in (v) above including “my inclination”, having also noted at [74] that “this is not the case for any extended debate on this topic” in relation to loss of a chance, that his observations were not only obiter, but were also, as Floyd LJ described them in Wellesley, “very tentative”, when he observed that where the claimant can prove causation on the balance of probabilities, the authorities did not require the court to go on and evaluate the chances involved. The context was also one where it mattered not on the facts as he concluded that it was “a virtual certainty” that AerCap could and would have delivered the engines – so any loss of chance would in any event have been taken to be 100%.

For my own part, I would respectfully differ from the very tentative observations of Gross LJ in Aercap to the extent that he is either disagreeing with Stuart-Smith LJ's proposition in Allied Maples that a judge's evaluation of the substantial chance of obtaining the benefit in question forms a legitimate part of the quantification of damages or is suggesting that where a claimant is in a position to prove causation on balance of probabilities in relation to the hypothetical actions of a third party the court is not obliged to evaluate the chance of obtaining the benefit when quantifying damages, but rather the claimant is entitled to 100% of its damages even where the claim depends on the hypothetical acts of third parties.

I consider that the principles set out in Allied Maples apply with equal force whatever the probabilities that the third party would have acted in a particular way (and whether or not the claimant can show that the third party would have acted in a particular way on balance of probabilities) so that at the causation stage, where causation depends upon the actions of the claimant, the claimant must prove what it would have done on balance of probabilities, whilst if causation depends at least in part on the action of one or more third parties the claimant would have to demonstrate that there was a real or substantial chance that the third party would have acted in the respect relied upon, with the evaluation of that chance being part of the process of the quantification of damages – as reflected in Allied Maples, that approach also being endorsed by Floyd LJ (with whom Longmore LJ and Roch J agreed) in Wellesley.

AssetCo characterises the question in Allied Maples as being whether loss of a chance applies “permissively”, such that the claimant has a cause of action on a loss of chance basis where it is unable to prove on the balance of probabilities that a third party would have acted in a particular way, and it is said by AssetCo (at paragraph 31 of AssetCo’s Written Closing Submissions) that Stuart-Smith LJ answered that question in the affirmative at p. 1614D in the passage that has already been quoted, and which I will repeat for ease of reference:-

“[I]n my judgment, the plaintiff must prove as a matter of causation that he has a real or substantial chance as opposed to a speculative one. If he succeeds in doing so, the evaluation of the chance is part of the assessment of the quantum of damage, the range lying somewhere between something that just qualifies as real or substantial on the one hand and near certainty on the other. I do not think that it is helpful to seek to lay down in percentage terms what the lower and upper ends of the bracket should be”

However the principle is only “permissive” in the sense that it allows a claimant to succeed on causation in a loss of a chance case where he would have failed on causation had he been required (which he is not in such cases) to establish causation on balance of probabilities – that is what was decided, or affirmed, in Allied Maples. Allied Maples is not authority for AssetCo’s proposition that in a loss of a chance a claimant can choose, or elect, or has the option (however its point might be characterised) to seek to prove the action of third parties on a balance of probability. In such cases all that needs to be establishes on causation is a real or substantial chance. The evaluation of that chance being part of the process of the quantification of damages.

AssetCo also places reliance on what was said by Millett LJ in Allied Maples at p. 1623D-E:-

“Since the question depended on what an independent third party would have done in a hypothetical situation, the plaintiffs did not need to establish it on a balance of probabilities. Provided that they could demonstrate, by evidence or inference, that that there was a real and substantial chance that Gillow would have offered [the warranty], they were entitled to have that chance evaluated”

However, in this passage the words “did not need” are not being used as the corollary of “may” – these words are not being used to denote that a claimant could choose to establish matters on balance of probabilities – rather what is being acknowledged is that in a loss of chance situation a claimant does not have to prove that which it would otherwise have to prove on a balance of probabilities.

Thus the loss of chance principle is not “permissive” in the sense relied upon by AssetCo. Whilst it allows a claim to pass the causation stage in circumstances where it would potentially have failed had the conduct of the third party been required to be proved on balance of probabilities (and to that extent is “permissive” and provides an “alternative” outcome, based on policy considerations) to what would otherwise be the outcome, it applies whatever the probability at the causation stage (be that above or below 51%) with the evaluation of the chance being part of the process of the quantification of the damages. The loss of a chance principle is accordingly mandatory in the sense that where the claimant’s loss depends on the hypothetical action of a third party then the claimant must prove as a matter of causation that he has a real or substantial chance of the third party taking that action, and if that is shown then the evaluation of the chance is part of the assessment of the quantum of damage.

I note that my view also accords with that of the first instance judge (Nugee J) in Wellesley. In that case he faced arguments not dissimilar to those advanced by AssetCo in the present case. After addressing Parabola and Vasiliou to which he had been referred (at [186] to [187]), he summarised his views at [188], addressing the very point presently under consideration at [188(3)]:-

“188 As these citations show, despite Allied Maples having been the leading authority for nearly 20 years, this area is one that continues to cause real difficulties of classification and application. What I understand from these authorities can be summarised, with I hope suitable diffidence, as follows:

(1)

There is a difference between the question whether a loss has been caused by the wrong complained of, and if it has, the quantification of that loss. The fact that there is a distinction is in principle clear; what is not always clear is where the line is to be drawn.

(2)

Sometimes what the claimant has lost was only ever an opportunity to obtain something else, for example the chance to take part in a competition or the opportunity to bring litigation. Such an opportunity is a valuable right in itself, and what the claimant proves (on the balance of probabilities) is that he has lost that right; the assessment of the value of the right then depends on the chances of success. As Patten LJ says in Vasiliou at [21] this is because what has been lost is by definition the loss of a chance. It would obviously be wrong to value the right to take part in a competition at the value of the prize that might be won as the claimant never had a right to the prize, only the right to enter the competition. It would also be wrong to value the right to bring litigation as if it were bound to succeed, if, as is almost inevitably the case, the outcome of the litigation is uncertain. A claim with a prospect of success has a value, but until judgment has been obtained (and indeed it is clear that it can be successfully enforced) that value is not the same as the amount which would be awarded were it to succeed.

(3)

What Patten LJ makes clear, which had not I think been so clear before, is that this is not quite the same type of case as Allied Maples. In an Allied Maples case the claimant has not lost a valuable right, but he has lost the opportunity of gaining a benefit, albeit one which depends on a third party acting in a particular way. In such a case the claimant is not required to prove that the third party would have acted in that way, only that there was a real and substantial chance that he would. This is still a question of causation, not of quantification (see Vasiliou at [22], and also First Interstate Bank of California v Cohen Arnold & Co [1996] CLC 174 at 182 per Ward LJ, cited in Vasiliou at [43]); but if the claimant does establish that there was such a real and substantial chance, then when it comes to quantification, his damages will be assessed not at 100% of the value of the benefit he would have obtained, but at the appropriate percentage having regard to the chances of his obtaining it. I only add the obvious point that in some cases, where the chance is found to be say 30%, the requirement that the claimant only need show that he has lost a real and substantial chance is beneficial to him (as if he had to prove how the third party would have acted on the balance of probabilities, he would recover nothing); but in other cases, where the chance is assessed at say 70%, it has the effect of only enabling him to recover 70% of the damages he otherwise would. But as I read the authorities, the claimant does not have a choice whether to adopt the Allied Maples approach; if the case is an Allied Maples type of case, this is the appropriate way to approach the issues of causation and quantification.

(4)

However, as Parabola and Vasiliou illustrate, there are other cases where the claimant does not seek to establish as a matter of causation that he has lost the opportunity of acquiring a specific benefit which is dependent on the actions of a third party; rather, he claims he has lost the opportunity to trade generally, and claims the loss of profits that he would have made.

(5)

It seems that in such a case the Court must first decide whether the claimant would have traded successfully. It is not entirely clear if this is part of the question of causation and a separate exercise from quantification; or whether it is to be regarded as part of the quantification exercise. Toulson LJ in Parabola at [23] fairly clearly treats the finding of Flaux J that “on a balance of probability Tangent would have traded profitably…” as part of the question of causation as he deals with it in the context of the claimant having first to establish an actionable head of loss, and coming before the “next task” which is “to quantify the loss”. On the other hand Patten LJ in Vasiliou at [23] seems to have regarded the question as part of the exercise of quantification: see his reference to there being “no doubt at all that the breach had caused the loss subject only to the quantification of that loss”, and to Mr Vasiliou's competence and the restaurant's prospects of success not being matters that went to causation at all but being relevant at most to the assessment of how profitable the restaurant would have been.

(6)

On either view this is clearly a different type of exercise from that undertaken in an Allied Maples case. It does not require the Court to find that there was a real and substantial chance of a third party acting in a particular way; but to reach a conclusion whether trading would have been profitable or not. However the exercise is characterised, I think it must follow that this is a simple yes/no question (would the trading have been profitable ?), and hence falls to be decided on the balance of probabilities. I accept that this is so, even though as a matter of strict logic it is not entirely obvious why there should be such a sharp difference of approach from the Allied Maples type of case. The profitability of the restaurant in Vasiliou presumably depended on whether it would have attracted sufficient custom, or in other words whether a number of third parties would have chosen to come to Mr Vasiliou's restaurant; and this does not seem very different in kind, only in degree, from the question in Allied Maples which was whether the third party in question would have chosen to accede to Allied Maples' request for a particular contractual term. It may be that the difference is between one particular third party and a pool of potential customers; in the case of an individual third party, the Court must assess the chance of his acting in a particular way, but in the case of a pool of potential customers, the Court is not concerned with how any individual would have behaved but with whether there would have been sufficient custom generally to make the business a success.

(7)

Be that as it may, it is clear from Parabola and Vasiliou that if the Court finds that trading would have been profitable, it then makes the best attempt it can to quantify the loss of profits taking into account all the various contingencies which affect this: see Parabola at [23]. This neither requires any particular matter to be proved on the balance of probabilities (see Parabola at [24]) nor has anything to do with the loss of a chance as such (see Vasiliou at [25]). The assessment of the loss will itself include an evaluation of all the chances, great or small, involved in the trading (see Parabola at [23]). Once the judge has assessed the profits in this way, any further discount is therefore inappropriate (see Vasiliou at [28]).” (emphasis added)

In relation to AssetCo’s reliance on AerCap, it should also be noted that the post Allied Maples case of Maden v Clifford Copock & Carter [2004] EWCA Civ 1037 was not cited to Gross LJ. In Maden the Court of Appeal reversed the decision of the trial judge at first instance in failing to apply a discount at the quantum stage in relation to the actions of the third party where the trial judge had found “on balance of probabilities” that a settlement would have occurred, the prospects being “high” with the Court of Appeal discounting the amount recoverable by 20% on the basis of an assessment of the likelihood of settlement at 80%. On AssetCo’s analysis, and the judge’s finding, the claimant would have been entitled to 100% of the damages claimed – but as the court found that was not the correct approach. The reasoning of the court can be seen at paragraphs [48]-[54] of the judgment of Neuberger LJ (with whom Sir Martin Nourse and Sedley LJ agreed):

“48.

I turn, to the second ground of appeal. The effect of the judge's findings in paragraphs 65 and 66 of his judgment was that “on a balance of probabilities”, Mr Maden and Mrs Chadburn would have settled the Wardle action by Mr Maden paying Mrs Chadburn £20,000 and costs; indeed, the judge considered that the prospects of such a settlement were “high”. The effect of paragraph 67 is that he considered that such a settlement would have been reached on 30th September 1996.

49.

When damages are being assessed by reference to what would have happened (and this is most common in the context of solicitor's negligence case, such as the present), the applicable principles are as laid down in Allied Maples Group Limited -v- Simmons & Simmons , referred to by the judge in paragraph 66 of his judgment (cited above) and to which his attention has been very properly drawn by counsel for Mr Maden. The application of the principles in that case to the facts of the present case appears to me to involve the following propositions.

50.

First, the court must inquire what would have happened if Cliffords had given the right advice at the beginning of September 1996. Secondly, that involves considering whether, as Mr Maden contended and the judge accepted, the Wardle action would have settled. That in turn involves considering how two parties, namely Mr Maden and Mrs Chadburn, would have acted in hypothetical circumstances, and in particular whether they would have been prepared to settle the action at £20,000. So far as Mr Maden is concerned, he had to satisfy the judge, albeit only on the balance of probabilities, that he would have settled on those terms: that is because he was the claimant in these proceedings, and therefore the court had to arrive at a conclusion, one way or another, whether he would have settled. However, the other party to the hypothetical settlement, Mrs Chadburn, is not a party to (and was not even a witness in) these proceedings. Therefore the judge should have considered what prospects there were of her settling the action on the terms on which Mr Maden would, on the balance of probabilities, have been prepared to settle. Further, unless the judge was certain, or very close to certain, that Mrs

Chadburn would have settled the Wardle action in September 1996 for £20,000 and costs, he should have discounted the award of damages to take into account the uncertainty.

51.

There was some, albeit brief, argument as to whether, on the evidence before him, the Deputy Judge would have been entitled to conclude that Mrs Chadburn would have been effectively certain to settle the Wardle action on those terms, but I do not think we need to go into that. On no fair reading of paragraphs 65 and 66 of his judgment did the Deputy Judge come to such a clear view. In my opinion, although it is true that in paragraph 66 he referred to being “satisfied on a balance of probabilities” that such a settlement would have happened, I do not consider that that means, as counsel for Cliffords suggests, that it was no more than a 60% chance. The judge was merely emphasising that his decision was, as it were, on the right side of the line from the point of view of Mr Maden, and on the wrong side of the line from the point of view of Cliffords. In connection with the loss of chance, his statement in the preceding paragraph that “the prospects” of a settlement “would have been high” is of importance.

52.

Quite apart from that, it seems to me that Mrs Chadburn would have been very likely to settle for £20,000 and costs, given that she had put forward an offer of £25,000 plus costs, and that her solicitor had indicated that he would probably recommend a settlement of £20,000 plus costs. Of course, parties in litigation do turn down offers which they and their solicitors have indicated they would accept, but in light of the uncertainties involved in the Wardle action, the relatively high potential liability for costs, and the fairly consistent approach to settlement by Mrs Chadburn, I consider that, while a discount was appropriate, it should not be a very large discount.

53.

Accordingly, I am of the view that the Deputy Judge was wrong not to make a discount in the damages he would have awarded, in light of the principle laid down by this court in Allied Maples, but that, in light of the findings he made as to the likelihood of settlement, and probabilities as revealed by the evidence, the discount in the damages should not be great.

I would assess the likelihood of a settlement at £20,000 occurring on or about 30th September 1996 at 80%.

For the reasons identified above, I reject AssetCo’s submission that where a claimant is able to prove on the balance of probabilities that the defendant’s breach has caused it to suffer loss it is entitled to 100% of its damages in a case where the claim depends on the hypothetical acts of third parties. Equally the loss of chance principle does not only apply where the claimant is unable to prove the hypothetical act(s) of a third party on the balance of probabilities because of a lack of evidence before the Court or where it is necessary to value a hypothetical uncertain benefit claimed as a loss.

As the authorities I have identified show, in cases in which the claimant’s loss depends upon the hypothetical action of a third party, whether in addition to action by the claimant or independently of it, the claimant must prove on balance of probabilities what it would have done (see, in particular, Allied Maples at 1610D-G) but need only show that it had a real or substantial chance of the third party acting in such a way as to benefit it to satisfy the requirement of causation, the evaluation of the chance being part of the assessment of the quantum of the damage (see, in particular, Allied Maples at p. 1614D).

Of course in a particular case, and as addressed below, the court may have before it evidence which allows it to conclude that the hypothetical conduct of a third party is (in Mr Wolfson’s words) “a racing certainty … so close to 100[%] that the judge awards 100[%]. And…the converse is true at the other end of the scale.” At the former end of the scale the requirement of causation will be easily and quickly satisfied, and at the quantification stage there will be no reduction. At the latter end of the scale, the requirement of causation will not itself be met. Between those two positions provided that there is a real or substantial chance (as opposed to a speculative one) of the third party taking the action under consideration then the requirement of causation will be met, and the evaluation of the chance will be part of the assessment of the quantum of damage.

Two further questions were debated before me in relation to the application of loss of chance principles. The first was how the court deals with multiple contingencies for example where the claimant’s loss depends on the hypothetical action of a number of third parties. The second (that I raised with the parties) is whether the position is different, in relation to the application of loss of chance principles if the court hears from the witness or witnesses concerned from a third party – is the chance still to be evaluated a percentage ascribed to that chance, or in such a scenario can the matter be decided on balance of probabilities. These questions are addressed in the sections that follow.

At paragraph 391 of GT’s Written Opening Submissions, GT submitted (relying upon Hughes-Holland v BPE Solicitors [2017] 2 WLR 1029 at [53]) that:

“Where it is the claimant’s case that, but for the defendant’s negligence, the claimant would have taken (or refrained from taking) some steps – alone and/or in conjunction with third parties – to bring about a beneficial result, then at every step the burden is on the claimant to show that there is a real or substantial chance that the third party would have taken (or refrained from taking) the required hypothetical action, and what that chance would have been.”

From this starting point, GT then submitted at paragraph 391 of its Written Opening Submissions that:

“Where there are a number of independent steps which would have needed to be taken by specific third parties before the claimant could have obtained a benefit, the probability of each step must be multiplied together.”

In this regard GT relied on a number of authorities as illustrations of the application of this (mathematical) approach including Phillips & Co v Whatley

By the time of closings, it was common ground that such a mathematical approach is only appropriate where the steps are truly independent or discrete in nature. This is recognised in a number of the authorities including Tom Hoskins PLC v EMW (A Firm), supra, Joyce v Bowman, supra and Hanif v Middleweeks (A Firm) [2000] Lloyd’s Rep. P.N. 920.

Thus in Tom Hoskins PLC v EMW (A Firm) Floyd J (as he then was) stated as follows at [133]-[135]:-

“133 Although there are multiple contingencies (agreement to the terms, attempts to re-negotiate or extend completion and so on) I think it would be wrong to apply percentage upon percentage. For example if I thought there was a 20% chance of ISL agreeing to provide the director's guarantee as a requirement of the contract and an 80% chance of completion occurring at the end of October, a simple multiple of these two percentages (to yield 16%) would not reflect the true chances of the deal being done. That is because the contingencies are not independent. ISL might well have resisted the guarantee so as to prevent exchange of contracts until much later, and then agreed to it when their funding was in place. Or they might have agreed to it at once but with a longer completion date.

134

I think it right to ask what were the overall chances that TH and ISL would, absent negligence, have negotiated and agreed a contract for the sale for all five pubs, on terms requiring a guarantee, with completion occurring at the end of October 2000?...

…

135

I would evaluate the overall chances of a completion at the end of October as 50%. As the damages have been calculated on the basis of the original completion date I will have to make a further reduction to the overall figure in due course.”

As Floyd J recognised in that case, where there are a number of contingencies and they are not independent it would be inappropriate and wrong to apply percentage on percentage, multiplying the percentages together, as that would not evaluate properly the true chance of the outcome under consideration.

Equally in Joyce v Bowman Vos J stated at [55]:-

“55 Ms Ferguson also relies on a dictum of Mance LJ at paragraphs 33 and 34 in Hanif v. Middleweeks unreported 19th July 2000 as showing that the percentage prospects of any future event that depends on the hypothetical actions of third parties are cumulative and should be multiplied together, at least insofar as they relate to separate considerations that do not overlap. That case, when both the judgments of Mance and Roch LJJ are considered, makes clear that a mathematical approach is not always appropriate. There were, in that case, three putative defences to an action that the claimant had lost the chance of bringing. The Court of Appeal held that the Judge ought not to have disregarded the first two defences (which had high probabilities of failing) and taken only the percentage he assessed for the defence that was most likely to succeed. In essence, however, Hanif shows that it is permissible, indeed appropriate, to take a less than entirely mathematical approach where the factors affecting the cumulative future events overlap or are affected by the same considerations.” (emphasis added)

On the actual facts of the case before him he concluded that there were 4 discrete contingencies (albeit that one was to be assessed at 100%, and he had also fed in the overlaps between the chances as he progressed through them), and in consequence concluded that it was appropriate, on the facts of that case to undertake the mathematical exercise that was not precisely appropriate in Hanif, as can be seen from his judgment at [108]-[115] which also illustrates the practical application of the principles in Allied Maples:-

“107…Had Mr Joyce been properly advised, was there a real and substantial chance that (i) Mr Joyce would have been granted the buyer's option? (ii) Mr Joyce would, in the event, have been able to exercise that option, had it been granted? (iii) Mr Joyce would have been able to obtain permission for the March 2009 Plans, had the buyer's option been granted and exercised? (iv) Mr Joyce would have been able to obtain the funding for the development of the March 2009 Plans?

108 I have already dealt above with these 4 questions. I am entirely satisfied for the reasons I have given that there was a real and substantial, rather than a speculative, chance of:-

i)

Mr Joyce being granted a buyer's option that he could have exercised after one year if planning permission had not, by then, been obtained.

ii)

Mr Joyce actually exercising that option in September 2006, since planning permission would not have been obtained by the Vendor.

iii)

Mr Joyce being able to obtain permission for the March 2009 Plans; and

iv)

Mr Joyce obtaining the funding for the development of the March 2009 Plans.

Issue 4: What were the percentage chances that Mr Joyce would have succeeded in surmounting the four hurdles?

109

This issue is, perhaps, the most difficult as it requires an evaluation of all the evidence in the case. It is, therefore, very much a balancing exercise, and it is hard to set out in full detail everything that one has taken into consideration.

110

I will deal first with my percentage evaluations of the chances of each of these 4 events occurring and then with the question of how I have obtained a single figure from those percentages.

111

The chances of Mr Joyce obtaining a suitably watertight buyer's option was, in my judgment, 85%. The correspondence, some of which I have described above, is informative. I think Mr Chesters wanted to sell, thought he was getting a good price, and that, had his scheme to replace the promised buyer's option with a seller's option been rumbled, he would have done what had been promised in the Sales Particulars and the Sales memorandum. The fact that he had tried it on, in the way that he had, would have put him in a weak negotiating position, and would have made Mr Joyce (who was very keen to have the promised option) all the more astute to make sure that the option was watertight and that Mr Chesters could not wriggle out of it by, for example, appealing the planning decision, within the year. I think it is fairly certain that Mr Joyce would have got the buyer's option he wanted.

112

The chances of Mr Joyce actually exercising that option in September 2006 were also very high. We know that the Vendor could not get planning permission, and that Mr Joyce found the £20,000. I think the chance of his exercising the option, had he got it, was 100%.

113

The third chance concerning planning permission is the most difficult. I have sought to explain my approach to the expert evidence above. I am by no means sure that Mr Joyce would have got the precise permission he wanted, but on the assumption that something close to what is shown in the March 2009 Plans would have satisfied him and enabled him to go ahead, I judge the prospects of getting such a permission, at least on appeal, as being 40%.

114

As for the chance of Mr Joyce obtaining the funding for the development of the March 2009 Plans, I accept that Mr Joyce was by no means cash rich, but he did seem able to borrow when he wanted to, and I think it likely that Mr Thompson would have helped him out. The chances of funding such a development, had he got planning permission, would have been 85% in my view.

115

I have fed in the overlaps between these chances as I have progressed through them. For example, the second chance is assessed at 100% because it assumes that the first chance has already been realised. Likewise, the fourth chance is assessed at 85% on the assumption that the March 2009 Plans were passed. Thus, I think it is appropriate here to undertake the mathematical exercise that was not precisely appropriate in Hanif. This gives 28.9%, which I propose to round up to 29%.”

In Hanif the appellant defendants acted formerly as the claimant respondent’s solicitors in relation to a counterclaim for fire damage against insurers. Due to the appellants’ negligence the counterclaim was struck out for want of prosecution although at one stage the appellants had been optimistic that insurers would offer something of substantial value in settlement. In the action it fell to the judge to assess the damages, if any recoverable, by the respondent from the appellants for the loss of the opportunity to pursue insurers under the counterclaim which was struck out, but which ought to have been tried in 1995.

There were three points raised by insurers in their defence to counterclaim.

The appellants appealed on the ground (amongst others) that the judge erred in not multiplying together the percentage prospects on each of the three issues (on a purely mathematical basis 80% x 60% x 25% = 12%). The Court of Appeal held that the judge ought not to have disregarded the first two defences (which had high probabilities of failing) and taken only the percentage he assessed for the defence which was most likely to succeed. However it was held that it was permissible, indeed appropriate, to take a less than entirely mathematical approach where the factors affecting the cumulative future events overlap or are affected by the same considerations, with, in the circumstances, the judge’s assessment of 25%, viewing the matter on an overall basis, being reduced to 20% (not 12% as per an entirely mathematical approach).

The Court’s reasoning can be seen at [33]-[44]:-

On behalf of GT, Mr Wolfson accepted, indeed endorsed, the approach in Hanif, accepting not only that a mathematical approach cannot be used where the factors are not independent (as illustrated by Tom Hoskins PLV v EMW (A firm) as addressed above) but also that where the factors affecting the cumulative future events overlap or are affected by the same considerations (as in Hanif) an entirely mathematical approach is also not appropriate:-

“…I will just take two second on Hanif. One side you have totally independent factors, you do the math, you do the multiplication, if any of the factors are not independent you can't adopt for those factors a pure multiplication approach. What Hanif is saying and we say respectfully rightly is there can be an intermediate category where you do have independent factors but there is a particular theme which runs through them.

MR JUSTICE BRYAN: Say they all involve an analysis of the credibility of a certain individual.

Mr Wolfson also accepted that such considerations might come into play in the present case. The matter is addressed in more detail below when considering the various aspects of the Counterfactual, but he accepted potential illustrations of the point (depending on the factual findings made) during his oral closing submissions. For example:-

GT does, however, question the apparent approach of Proudman J in Harding Holmes (East Street) Ltd v Bircham Dyson Bell [2015] EWHC 3329 (Ch). In that case (and after quoting from [133]-[135] of the judgment of Floyd J in Tom Hoskins PLC v EMW (A Firm) that has already been set out above), the judge continued at [41]-[42]:-

GT submits that such an approach is only appropriate where the contingencies are not independent or there is an overlap of the type identified in Hanif. In contrast AssetCo submits that Harding Holmes was rightly decided, and reflects the approach of Floyd J in Tom Hoskins (albeit that in the former case Floyd J made clear that he did not consider the contingencies to be independent).

AssetCo submits that if it is found that there are two or more contingencies on which AssetCo’s claim depends the Court should consider what is the “overall chance” that AssetCo would have avoid the losses claimed in the Particulars of Claim. It submits that otherwise there is a risk of the Court holding that the AssetCo may recover very little even if it proves a strong prospect that each of the contingencies would apply. It is said that this would be particularly unjust as what AssetCo has lost is a matter of historical fact (and so not “uncertain” at all), rather than a hypothetical future benefit. In this regard AssetCo also

Fiona Trust v Privalov (No.2) was a case in which the claimants had brought proceedings against a number of defendants including Mr Nikitin, against whom they obtained a worldwide freezing order initially to the value of US$225 million (that order being discharged on monies of Mr Nikitin being retained in a Lawrence Graham account where it remained until judgment), with a further order freezing assets up to $377m subsequently being made, in each case with the claimants giving the usual cross-undertaking in damages.

At the inquiry (undertaken by Males J) the court had to determine, amongst other matters, what loss the defendants had suffered as a consequence of the freezing orders. The defendants presented alternative scenarios as to how they might have dealt with the frozen funds in the otherwise ordinary course of their business to generate profit. Their primary case was that the funds used to provide security for the initial (2005) order would have been used to contract with shipyards for the purchase of newbuildings which would have been sold before the collapse in vessel values resulting from the 2008 financial crisis and that the proceeds would then have been invested in non-shipping investments earning further significant sums.

Males J found that the correct approach to be adopted was to ask whether the claimant had proved to a sufficient standard that its trading would have been profitable. If so the court would make the best assessment of the damages that

At [55] he stated as follows:-

“55 The true position is that in principle damages can be awarded for loss of profits even if a claimant might have made a loss. The approach which the court will adopt is to ask whether the claimant has proved to a sufficient standard (which may be the balance of probabilities, or sometimes merely that there was a real and substantial chance as in loss of a chance cases) that its trading would have been profitable. If so, the court will make the best assessment of the damages that it can, applying if necessary a discount to reflect whatever uncertainty exists, while recognising that a party seeking to show what might have happened is not required to perform an impossible task with unrealistic precision.”

After quoting from the judgment of Flaux J in Parabola, supra, he continued at [57]:

“57 Thus merely to label the prospect of profits as "speculative" takes matters nowhere unless that prospect is so speculative that it must be disregarded. In principle, however, trading which is speculative in the sense that it may turn out to be loss-making is capable of giving rise to an award of damages if on the evidence the court is able to find to a sufficient standard that it would in fact have been profitable. Applying this approach, Flaux J found as a fact on the balance of probabilities that the claimant would have made profits. He awarded damages accordingly, adopting what he regarded as a conservative figure pitched at a level which took account of the inherent trading risks and the probability that some individual trades would have been loss-making (see e.g. [188] and [192]). This decision was upheld in the Court of Appeal [2010] EWCA Civ 486, [2011] QB 477. Toulson LJ said:

"22.

There is a central flaw in the appellants' submissions. Some claims for consequential loss are capable of being established with precision (for example, expenses incurred prior to the date of trial). Other forms of consequential loss are not capable of similarly precise calculation because they involve the attempted measurement of things which would or might have happened (or might not have happened) but for the defendant's wrongful conduct, as distinct from things which have happened. In such a situation the law does not require a claimant to perform the impossible, nor does it apply the balance of probability test to the measurement of the loss.

He then continued at [58] (in a passage upon which reliance is placed by AssetCo):

“58 I adopt this approach. There is necessarily a degree of uncertainty in determining what Mr Nikitin would have done with his money if it had not been held in the Lawrence Graham account as security for the claimants' claims. Even if it can be said with reasonable confidence what he would have done or sought to do, for example that he would have sought to invest in a programme of newbuildings, there remains considerable uncertainty in assessing the financial outcome which would have resulted. However, these uncertainties are not fatal to the defendants' claims. What the defendants need to prove is that on the balance of probabilities they would have sought to invest in a way that had a real as distinct from fanciful chance of making a profit. If so, it will be necessary to make the best possible assessment of the profit which the defendants would have made, taking account of the uncertainties inherent in this exercise. In a case such as this where there are a number of such uncertainties, what needs to be assessed is the "overall chance" of the defendants making the profits in question (see Tom Hoskins Plc v EMW Law [2010] EWHC 479 (Ch) at [133] to [135]).”

Fiona Trust No.2 is a case like Parabola and Vasiliou where the claimant does not seek to establish as a matter of causation that he has lost the opportunity of acquiring a specific benefit which is dependent on the actions of a third party rather he claims he has lost the opportunity to trade generally, and claims the loss of profits that he would have made. In such a case the Court first decides if the claimant would have traded successfully – in Fiona Trust No.2 whether a profit would have been made by the defendants.

As Nugee J noted in Wellesley at [188] this is a different type of exercise from that undertaken in an Allied Maples case. It does not require the Court to find that there was a real and substantial chance of a third party acting in a particular way; but to reach a conclusion whether trading would have been profitable or not (as Males J did at [58]). As is clear from Parabola and Vasiliou, if the Court finds that trading would have been profitable, it then makes the best attempt it can to quantify the loss of profits taking into account all the various contingencies which affect this: see Parabola at [23]. This

It was in such a context that Males J sought, at [58] to “make the best possible assessment of the profit which the defendants would have made, taking account of the uncertainties inherent in this exercise” and said “In a case such as this where there are a number of such uncertainties, what needs to be assessed is the "overall chance" of the defendants making the profits in question”.

In referring to Tom Hoskins Plc v EMW Law [2010] EWHC 479 (Ch) at [133] to [135]) Males J clearly considered that there were multiple uncertainties which, like the contingencies in Tom Hoskins, either overlapped or were not independent. It was in that context that he assessed, as he put it, the “overall chance” when quantifying the defendants’ loss of profit. Fiona Trust v Privalov was a loss of profit case in the context of causation and it was only in the evaluation of the profit that it was necessary to consider the uncertainties that were in play.

Males J did not refer to (still less address) the authorities (such as Philips & Co v Whatley and Joyce v Bowman) which establish that in a loss of a chance case where there are a number of independent steps that would have needed to be taken by specific third parties before the claimant could have obtained a benefit the probability of each step must be multiplied together. Those cases have not been (as AssetCo puts it) “overtaken by more recent decisions in Tom Hoskins, Harding Homes and Fiona Trust” still less was Males J in Fiona Trust v Privalov rejecting the mathematical approach as applying in the context of loss of chance cases with independent contingencies that do not overlap.

Tom Hoskins was a case where “Although there are multiple contingencies… it would be wrong to apply percentage on percentage…because the contingencies are not independent” (see at [133]). Fiona Trust was not a case in which the judge was addressing independent and non-overlapping contingencies in a loss of chance scenario.

As for Harding Holmes to the extent that the contingencies in that case were truly independent then I do not consider that the approach of Proudman J to

“look at the chances of the various contingencies happening in the round” to have been appropriate on the authorities. However such an approach is entirely appropriate where contingencies are not independent. It is also an approach that may be appropriate where multiple contingencies are affected by the same considerations (a Hanif type situation).

I reject AssetCo’s submission (if it be AssetCo’s submission) that to the extent that loss of a chance applies, and the court finds that there are two or more independent contingencies, that the court should consider what is the “overall chance” that the party (in this case AssetCo) would have avoided the losses claimed without multiplying those contingencies together. I also disagree with the submission that, “Otherwise the Court risks holding that a claimant may recover very little even if he proves a strong prospect that each of the contingencies would have materialised” because if there are a number of independent steps which would need to be taken by specified parties before the claimant could have obtained the benefit then it is the product of those contingencies that reflects the recoverable loss.

However where two or more contingencies are not independent it is not appropriate simply to multiply those contingencies together (see Tom Hoskins at [133]), nor is it appropriate to adopt an entirely mathematical approach where the contingencies overlap or are affected by the same considerations (see Hanif and Joyce v Bowman). As I have identified above I understand that, ultimately, that was common ground between the parties, albeit that they differed as to the application of loss of chance principles and alleged associated contingencies to AssetCo’s case (as addressed in section G.4 below).

It is also necessary to consider whether an entity is truly a third party or is, together with the claimant, for practical purposes, a unity or is so closely connected or associated with the claimant as to justify the third party’s hypothetical conduct being judged on balance of probabilities, as the case law illustrates.

Thus in Veitch v Avery [2008] PNLR 7 Auld LJ held that a witness appearing before him was not to be treated as a third party for loss of a chance purposes. The case concerned a claim based on a lost opportunity to make profits from running a hotel. The claimant alleged that his father would have invested in the hotel but for his solicitor’s negligent advice. Auld LJ held at [26]:

“26.

In my view, the Judge was entitled to approach this aspect of the evidence on the basis of a balance of probabilities and not to consider it, in the alternative under the heading of loss of chance, since the son and father were for practical purposes a unity and closer to the second category of causation/quantification considered by Stuart-Smith in Allied Maples, at 1610D-H, namely where the question is "what would the plaintiff have done" about it. His reasoning, on that basis, appears to be well supported by the evidence indicating a reluctance on the part of Mr Veitch to put at risk any money that his father might have been prepared to put into the conservatory venture and a real doubt as to whether the father would or could have come to the rescue, if asked…that the father and son “were for practical purposes a unity and closer to the second category of causation/quantification considered by Stuart-Smith in Allied Maples, namely where the question is ‘what would the plaintiff have done’ about it”

In Connaught Income Fund, series 1 (in liquidation) v Hewetts Solicitors [2016] EWHC 2286 (Ch) an issue arose as to whether the connection between an entity (TIL) and the claimant justified TIL’s hypothetical conduct being judged on the balance of probabilities rather than on a loss of chance basis.

In that case TIL was the claimant’s agent and as such it is hardly surprising that the judge considered that it was appropriate to consider what TIL would have done on the balance of probabilities. The case is to be contrasted with that of Dayman v Graham [2008] EWHC 2036 at [83] where a witness was treated as a third party for loss of chance purposes where his interests were “divergent” from that of the claimant.

AssetCo also refers to the case of Hicks v Russell Jones & Walker [2007] EWHC 940 (Ch), in which Henderson J applied the balance of probabilities test to a solicitors’ negligence case concerning the advice that leading counsel (Michael Brindle QC) would have given if he had been instructed in good time (in the context of a want of prosecution case). Mr Brindle gave evidence at the trial. The question of whether he should be treated as a third party and matters assessed on a loss of a chance basis does not appear to have been debated. In such a case the court is itself valuing what the chose in action is worth and I do not consider this case sheds any further light on the applicable principles in what may properly be characterised as a loss of chance type of case.

Accordingly there will be cases where an entity is, together with the claimant, for practical purposes a unity or is so closely connected or associated with the claimant as to justify the third party’s hypothetical conduct being judged on balance of probabilities rather than on a loss of a chance basis. The reality is that it is likely to be relatively rare that there is such unity, or such a close connection or association, but whether that is so in any particular case will depend on the factual situation that exists, and is found by the court.

During the course of the hearing I raised with the parties whether the position is different, in relation to the application of loss of chance principles, if the court hears from the witness or witnesses concerned associated with a third party – is the chance still to be evaluated and a percentage ascribed to that chance, or in such a scenario can the matter be decided on balance of probabilities, given that the court is in a position to find what the third party would have done with the benefit of that third party having given evidence?

GT submitted that what is being evaluated is still loss of a chance, and as such a percentage should ascribed to that chance, whereas AssetCo submitted that the matter was to be, and could be, determined on balance of probabilities.

I postulated the example of the contingency being whether an individual third party would have pressed a button. If the court concludes that the witness would have pressed the button does this determine the point in the claimant’s favour (i.e. on balance of probabilities) or is it necessary to ascribe a percentage to the chance of that action occurring despite the finding that that is what the witness would have done?

Conceptually there should be, and I find that there is, no difference when a court has heard from the witness. If it is a question of a loss of chance the question is still how likely is it that the third party would have acted as required on the counterfactual. A finding that a witness would have pressed the button (without more) is no more than a finding on balance of probabilities, it is not an assessment of the chance.

Of course the reality is that having heard a witness the court is much better placed in its assessment of the chance, and indeed it may be so sure of what would have happened as a result of hearing from the witness that it can assess the chance at 100% (or so high as to be treated as 100%) - and make clear that it is doing so by saying (for example) that the court is “sure”, or “has no doubt whatsoever” or the like, as to what the third party would have done (see for example the approach of Vos J in Joyce v Bowman at [112] in relation to one of the events). Nevertheless what is being assessed, even when the witness is before the court, is the percentage chance in relation to the contingency in question.

AssetCo’s primary case is that its claim must be proved on balance of probabilities, and its claim for “loss of a chance” is no more than an alternative in case the Court should conclude that AssetCo is wrong in its primary characterisation of its claim. GT submits, in contrast, that AssetCo’s claim is rightly to be assessed on loss of chance principles because AssetCo’s case on the Counterfactual (and the causation of the loss suffered by AssetCo as a result of GT’s negligence) depends on the hypothetical acts of third parties. AssetCo’s riposte is to assert that, “The short (and complete) answer to this point is that it does not so depend.”

Mr Templeman characterised AssetCo’s case in these terms during the course of oral openings, as maintained in AssetCo’s closing:-

“… there is nothing speculative or uncertain or contingent about the claim that we make. We claim for wasted expenditure and that is money which we actually spent in the past. We say quite simply that if Grant Thornton had done its job properly, that money would not have been spent because Mr Davies would have come in, in June 2009, and put a stop to it. And, in that sense, my Lord, it doesn't really matter whether AssetCo would have achieved a scheme of arrangement, whether it would have gone into liquidation or whatever else would have happened to it. The fact is the money would not have been spent and that is our loss.”

AssetCo submits that this was not mere rhetoric. It asserts that its claim on the counterfactual involves two steps: (1) the appointment of Mr Davies as its chairman; and (2) AssetCo (acting through Mr Davies as its chairman) would have avoided the expenditure described at paragraph 63 of the Particulars of Claim. It is said that the first step would be an act of AssetCo through its board of directors, just as in fact occurred in March 2011. The second step would also be an act of AssetCo, through Mr Davies as its chairman; indeed, only AssetCo could take the second step, since only AssetCo could either make, or decline to make, the relevant payments. It is said that neither step involves the act of any third party.

However AssetCo recognises, as it must, that the acts of third parties are not

In relation to AssetCo’s case that it would not have incurred the wasted expenditure described at paragraph 63 of the Particulars of Claim and that it

Elaborating upon its assertion that AssetCo’s claim that GT’s negligence caused it to suffer loss depends on the actions of AssetCo alone it submits that:

“…there is no “reason of uncertainty” which prevents it from proving its case on the balance of probabilities, and therefore “no need to reduce the damages on the basis of a loss of chance” (AerCap, [76(v)]…). That is particularly so where AssetCo’s claim is based on facts which actually occurred in 2011, and which AssetCo contends would have occurred in the 2009/10 counterfactuals.”

Strong though the attraction would be for the finder of fact to accede to

It is not right to say that in relation to the acts of (1) the appointment of Mr

As is implicit in the matters quoted above that AssetCo recognises are either not “completely irrelevant” or are “relevant to whether AssetCo would have taken these steps” AssetCo’s actions cannot be viewed in a vacuum divorced from the actions of third parties around it. More than that, it is not possible to get to the stage (or step) of the appointment of Mr Davies by the board of AssetCo in order for Mr Davies to seek to prevent further wasted expenditure without:-

Without NAV supporting AssetCo one never gets to the appointment of Mr Davies. Without Mr Davies being in a position to, and agreeing to, accept an appointment one never gets to an appointment by AssetCo and the Counterfactual in the present case is (as pleaded at trial) solely dependent upon Mr Davies himself agreeing to act as chairman (rather than, for example, anyone else with the same attributes).

However AssetCo submits that even if the acts of NAV and/or Mills were relevant to establish that GT’s negligence caused AssetCo to suffer loss and might appear to be a third party, neither is a third party, nor is to be treated as such for the purpose of a loss of chance analysis. In this regard AssetCo submits (paragraph 302 of AssetCo’s Closing Submissions):-

“(1)

Mr Mills’ evidence “covered the [relevant] ground” (AerCap, [76(v)]…, such that there is no justification for applying a loss of a chance analysis;

(2)

Mr Mills has, been a director of AssetCo plc since 23 March 2011, and would have been in the 2009/10 counterfactuals. He has also been a director of AADL since 28 January 2009. AADL is a 100% owned subsidiary of AssetCo plc whose acts directly affected the interests of

AssetCo plc because of (i) AssetCo plc’s direct shareholding in AADL; and (ii) the fact that AssetCo plc had guaranteed AADL’s performance of obligations under the PSA. Funds managed by NAV were at all material times shareholders in AssetCo plc.

(3)

In any event, Mr Mills has a sufficiently close connection with

AssetCo plc that his evidence is not to be treated as that of a third party…

”.

Elaborating upon the above AssetCo submitted at paragraphs 307-309 of its

In relation to (1), and the assertion that Mr Mills’ evidence “covered the [relevant] ground” (referring to the tentative observations of Gross LJ in AerCap at [76(v)]) to submit that there is no justification for applying a loss of a chance analysis, I have already addressed Aercap, and for the reasons that I have identified I respectfully differ from the very tentative observations of Gross LJ in Aercap to the extent that he is either disagreeing with Stuart-Smith LJ's proposition in Allied Maples that a judge's evaluation of the substantial chance of obtaining the benefit in question forms a legitimate part of the quantification of damages or is suggesting that where a claimant is in a position to prove causation on balance of probabilities in relation to the hypothetical actions of a third party (on this hypothesis NAV or Mr Mills) the court is not obliged to evaluate the chance when quantifying damages.

I consider that the principles set out in Allied Maples apply with equal force whatever the probabilities that a third party would have acted in a particular way (and whether or not the claimant can show that the third party would have acted in a particular way on balance of probabilities) so that at the causation stage, where causation depends upon the actions of the claimant, the claimant must prove what it would have done on balance of probabilities, whilst if causation depends at least in part on the action of one or more third parties the claimant would have to demonstrate that there was a real or substantial chance that the third party would have acted in the respect relied upon, with the evaluation of that chance being part of the process of the quantification of damages – as reflected in Allied Maples, that approach also being endorsed by Floyd LJ (with whom Longmore LJ and Roch J agreed) in Wellesley.

For the reasons that I have identified, the loss of a chance principle does not apply “permissively” (in the sense of the claimant having a cause of action on a loss of chance basis where it is unable to prove on the balance of probabilities that a third party would have acted in a particular way). The principle is only “permissive” in the sense that it allows a claimant to succeed on causation in a loss of a chance case where he would have failed on causation had he been required (which he is not in such cases) to establish causation on balance of probabilities – that is what was decided, or affirmed, in Allied Maples. Allied Maples is not authority for AssetCo’s proposition that in a loss of a chance a claimant can choose, or elect, or has the option (however its point might be characterised) to seek to prove the action of third parties on a balance of probability. In such cases all that needs to be established on causation is a real or substantial chance. The evaluation of that chance being part of the process of the quantification of damages.

Again, and as had already been addressed, and for the reasons I have identified, the position is no different where a relevant (third party) witness has given evidence and “covered the relevant ground” – it is still a loss of chance case and the chance must still be evaluated, albeit that the court will

As for the matters identified in (2), the identified directorships of Mr Mills do not mean that Mr Mills or NAV are to be treated together with AssetCo for practical purposes as a unity, nor are they so closely connected to or associated with AssetCo as to justify NAV’s or Mr Mills’ hypothetical conduct being judged on balance of probabilities rather than on a loss of a chance basis. As further addressed below their interests also have the potential to be divergent. Nor does the relationship between AADL and AssetCo plc or the fact that funds managed by NAV were shareholders in AssetCo plc mean that NAV is so closely connected to or associated with AssetCo as to justify NAV’s hypothetical conduct being judged on balance of probabilities rather than on a loss of chance basis.

So far as having heard Mr Mills give evidence and the points made under (3) and paragraphs 307 to 309 of AssetCo’s Closing Submissions are concerned, Mr Mills does not have a sufficient closeness of association with AssetCo which would justify Mr Mills hypothetical conduct being determined on the balance of probability, nor does the fact that I have heard evidence from him mean that I should determine his actions on a balance of probability, on the principles that I have identified including Veitch v Avery and Connaught. The fact that I have heard him give evidence does, however, assist me greatly, in assessing whether there is a real and substantial chance that he would have acted in a particular manner and when assessing the chance as a matter of quantum.

I would add that the interests of NAV (and Mr Mills) had the potential to diverge from those of AssetCo, and whilst it now says that it would have acted

In the above circumstances I am satisfied that AssetCo’s claim is dependent upon the hypothetical acts of each of NAV (including Mr Mills acting on behalf of NAV) and Mr Davies, who are to be treated as third parties and, in the context of AssetCo’s claim, AssetCo must prove on the balance of probabilities what it would have done (which includes Mr Davies wearing his hat as chairman of AssetCo if one gets to the stage of his appointment), and in relation to the hypothetical actions of NAV and Mr Davies, AssetCo must prove as a matter of causation that there is a real or substantial chance as opposed to a speculative one of the third party taking the action in question, and if that is shown the evaluation of that chance is part of the assessment of the quantum of the damage.

AssetCo’s case, after any appointment of Mr Davies, is that AssetCo (acting through Mr Davies as its chairman) would have avoided the expenditure described in paragraph 63 of the Particulars of Claim and that this is to be assessed on balance of probabilities (which could, of course, work for or against AssetCo depending on the court’s findings as to the facts).

In contrast GT submits that once again, whether or not AssetCo would have been able to avoid making such payments, and indeed whether or not it would have been able to stave off insolvency and would have survived to enter into a scheme of arrangement, depends on the hypothetical acts of third parties, as identified at paragraph 71 of GT’s Closing Submissions, specifically Messrs Shannon and Flynn (other than when acting as directors or officers of AssetCo), AssetCo group companies, trade or banking creditors and customers when considering the pleaded steps forming part of the counterfactual, namely:

As already identified AssetCo asserts that AssetCo (acting through Mr Davies as its chairman) would have avoided the expenditure described at paragraph 63 of the Particulars of Claim, and that this action is the action of AssetCo and whilst “the attitudes of third parties may be relevant to whether AssetCo would have taken these steps, that does not mean that AssetCo’s claim depends on those third parties, or that the claim must be assessed on a ‘loss of a chance’ basis” (paragraph 300 of AssetCo’s Closing Submissions).

Once again AssetCo’s position does not bear examination. It presupposes that AssetCo is free to avoid such expenditure, but whether it would have been able to avoid such expenditure (in whole or in part) is dependant (at least in part) upon the hypothetical acts of third parties. To take one example, it is a necessary step in order for Mr Davies to have been able to “turn off the tap” and for subsidiaries (specifically the London and Lincoln Group) to become self-funding, that Mr Davies would have entered into arrangements with the banks in the 2009/10 counterfactuals as they did in 2011, and in this regard (see paragraph 144(3) of AssetCo’s Closing Submissions):-

“(a)

The banks agreeing to defer capital and interest repayments until the conclusion of a Scheme, as they did in 2011;

(b)

Lloyds agreeing to make available the unitary payment income from the LFEPA Contract to meet the operating expenses of those Contracts, including any such expenses located in AssetCo Fire and Rescue Limited;

(c)

As a result of (a) and (b) above, the London Group would have become self-funding (the Lincoln Group was already self-funding) and AssetCo plc would not have needed to meet any of their debts or expenses.”

Thus it is inherent within this counterfactual that Lloyds Bank makes available the unitary payment income from the LFEPA Contract to meet the operating expenses of those Contracts, including any such expenses located in AssetCo Fire and Rescue Limited. Whether it does so is a hypothetical act of a third party. Accordingly at the causation stage the question is whether there is a real or substantial chance that it would do so, and if that is shown then the valuation of that chance is part of the assessment of the quantum of the damages. Equally the approach of each of the other banks is also a hypothetical act of other third parties.

However, and as will be addressed in due course when addressing the counterfactual and making factual findings in relation thereto, not all the contingencies are necessarily truly independent (see Tom Hoskins), and factors affecting the cumulative future events overlap and/or are affected by the same consideration so that, as is common ground, an entirely mathematical approach is not appropriate (see Hanif).

Thus, staying on the example of the actions of the banks (i) Mr Davies is a common theme running through all such negotiations, (ii) in addition not dissimilar considerations are likely to apply to the various banks, and (iii) the reaction of Lloyds Bank is also likely to influence the action of the other banks. As already noted, particular examples were discussed, and recognised by Mr Wolfson on GT’s behalf during the course of oral closings, as already quoted above.

Accordingly, and although I reject AssetCo’s submission that AssetCo’s case on the Counterfactual in terms of AssetCo avoiding the expenditure described in paragraph 63 of the Particulars of Claim, does not turn (at least in part) on the actions of third parties, with the result that the actions of third parties are to be determined on loss of chance principles, it will be necessary to consider whether particular contingencies are independent (when considering (if applicable) whether percentage is to be applied on percentage), and also whether factors affecting the cumulative future events overlap and/or are affected by the same considerations (when considering whether an entirely mathematical approach is appropriate). Such matters are best addressed in the course of considering the Counterfactual and my findings in relation to it.

AssetCo’s factual evidence, quantum evidence and pleadings are based on the totality of the material audit matters having been uncovered by a competent auditor by 5 June 2009 (or 16 June 2010) at the latest. If I were to accept Mr Meredith’s evidence, this would be a conservative position, with serious problems with AssetCo’s accounts being brought to the management’s attention well before this date.

AssetCo’s case (in opening) was summarised in a table at paragraph 236 of its

In this regard, Mr Meredith set out his views at paragraph 2.49 of his supplemental report in which he states:

“I set out below a table showing the latest date I consider that the Competent Auditor would have notified AssetCo’s management and Audit Committee of each of the issues set out in paragraphs 2.32 to 2.48 above.”

His table provided as follows:-

AssetCo submit that each of these notifications would have triggered a requirement for management to make an RNS announcement and/or approach NAV, which would in turn have precipitated the appointment of Mr Davies.

In contrast, GT submits that the best evidence of the time that it would have taken for the Competent Auditor to communicate concerns as to significant audit issues to the Audit Committee is the evidence of Mr Bligh in his supplemental report, and what he states at paragraph 9.11.15 thereof:-

“I consider it probable that a Competent Auditor would have made contact with the Chairman of the Audit Committee most likely at the end of May 2009 to express the following concerns of the Competent Auditor:

(i)

Management was not co-operating with the enquiries the Competent Auditor was making into (a) revenue of £2.6m received from LFEPA which management wanted to recognise in FY09, and (b) an increase in the UP of £45,976 per month.

(ii)

The quality of information provided by management, as discussed in 9.11.2 above.

(iii)

Delays in receiving information from management, as discussed in 9.11.4 above.

(iv)

Inconsistencies in information provided by

management, as discussed in 9.11.6(i) and (ii) above

(v)

Questionable judgments by management, as discussed in 9.11.9 above.

(vi)

The potential for there to be material adjustments to the financial statements relating to the £2.6m revenue, the increase in UELs/RVs, the capitalisation of bid costs and the accounting for the Preference Share issue.

(vii)

Work was continuing on impairment of goodwill, but there were indications that a material impairment charge might be necessary, which would have implications for the parent company's balance sheet and the ability to declare a dividend. (This assumes that the 'second scenario' described in section 9.8 above had not occurred, for the reason explained at paragraph 9.8.18 above.)

(viii)

Work was continuing on going concern, but there were indications that there may be insufficient available cash resources to cover the forecast cash outflows, and covenant information had not yet been provided.”

Due to this divergence of view between Mr Meredith and Mr Bligh, they were each cross-examined in relation to the timings that they advanced as addressed below. In its Written Closing Submissions at paragraphs 44 and 45 AssetCo submitted that:

“44.

Ultimately the disputes between the experts may not require resolution, given Mr Bligh’s acceptance that the competent auditor would have discovered and raised with the Audit Committee by the end of May (in both years) that:

[(1) The PSA had been breached;]

(2)

There were serious doubts as to going concern, AssetCo was in breach of its banking covenants and was running out of cash;

(3)

AssetCo’s assets were massively impaired;

(4)

There was no prospect of a dividend being paid “for many years”; and

(5)

In consequence there would be a delay in AssetCo publishing its results.

45.

These are matters that it is common ground would need to be announced promptly to the market by way of an RNS announcement (or announcements). It is common ground that the delay in publication of the results would also require announcement, along with the reasons for the delay. This would have caused an approach to and/or the intervention of Mr Mills and NAV, and thus the appointment of Mr Davies… .”

In fact Mr Bligh did not accept that by the end of May (in both years) the Competent Auditor would have discovered and raised with the Audit Committee that the PSA had been breached. I address in due course the evidence in relation to breach of the PSA and my findings in that regard, as well as my more detailed findings in relation to each of these issues.

I am satisfied however, and find, based on the evidence of Mr Bligh himself, that the Competent Auditor would have discovered and raised with the Audit Committee by the end of May (in both years) (at the latest) the following in relation to the matters set out at paragraph 44(2)-(5) (I set out more detailed findings in relation to dates concerning such matters in due course below):

On the basis of the evidence before me, the likelihood is that a number of the above matters (if not all such matters) would have needed to be announced promptly to the market in the form of one or more RNS announcement(s). However whether or not that is so is academic as Mr Bligh himself accepted that delay in the announcement of the results would itself have necessitated an RNS announcement:-

“I think, as Mr Meredith said earlier, which I agree, then normally if a company is not going to meet its deadline it would have to put out an announcement saying that the results are being delayed and usually that would be accompanied by some explanation of the reasons for the delay. Depending on those explanations, that could have an adverse effect on the share price.” (my emphasis)

As Mr Bligh recognised any such announcement would need to be accompanied by an explanation of the reasons for the delay, which is consistent with AssetCo’s and their NOMAD’s obligations under the AIM Rules. The context (following a competent audit in 2009 or 2010) would be that the errors in the financial statements proposed by AssetCo’s management were very large and highly material to AssetCo’s financial position and would significantly impact upon AssetCo’s expectation of its performance, which

In this regard rule 11 of the AIM Rules, June 2009, provides:-

“General disclosure of price sensitive information

11.

An AIM company must issue notification without delay of any new developments which are not public knowledge concerning a change in:

♦ its financial condition;

♦ its sphere of activity;

♦ the performance of its business; or

♦ its expectation of its performance,

which, if made public, would be likely to lead to a substantial movement in the price of its AIM securities.”

In the above circumstances I consider that AssetCo is correct to submit that it is not necessary to determine precisely when each audit discovery would have been made and raised with AssetCo’s management and/or audit committee, nor exactly how management would have responded to requests for further information or evidence (or within what time period) – as by 30 May 2009 the matters identified above would have arisen, which would either have led to an approach to NAV, or to one of more RNS announcement(s), which would have come to the attention of NAV immediately (leading on to a consideration of the alleged subsequent steps in the Counterfactual, including the support of NAV and appointment of Mr Davies, as addressed in due course below).

However I address the expert evidence in relation to timing below given that (1) the matter was fully argued before me through the evidence of Mr Meredith and Mr Bligh and I received detailed submissions from the parties in relation to the same and (2) GT submits that timing remains relevant as the later the problems at AssetCo were discovered, the less the preparation time for Mr Davies between him discovering the problems at AssetCo and his putative appointment (with less information as to AssetCo’s financial circumstances and Mr Davies being less ready to make decisions as to what

In section C above I have already commented on the witnesses including Mr Meredith and Mr Bligh, and expressed my conclusion that they were each independent experts doing their best to assist the Court. It is convenient at this point to address specific criticisms made by the parties as to their evidence, and express my conclusions in relation to such matters.

For its part GT criticises Mr Meredith in that in his supplemental report, as summarised at paragraph 2.49 thereof, Mr Meredith does not distinguish between when the Competent Auditor would have notified AssetCo’s management and when it would have notified the Audit Committee.

In this regard Mr Meredith expressed himself in these terms at paragraph 2.49:-

Accordingly Mr Meredith does not differentiate between when the Competent

When this aspect of Mr Meredith’s evidence was explored with him in crossexamination by Mr Colton QC on behalf of GT, Mr Meredith readily acknowledged the distinction between notification to management and to the Audit Committee and the circumstances in which each would occur:

Thus (save to the extent that any matter is one in respect of which the Competent Auditor would have suspected dishonesty in which case management would have been “circumvented” (as Mr Colton put it)), Mr Meredith accepted that his dates were those when, in his opinion, the Competent Auditor would have first gone to management with concerns, the Competent Auditor then going to the Audit Committee dependent upon the reaction of management. I bear this point in mind when considering likely timings.

GT also submits that the earliest of the dates put forward by Mr Meredith could not be defended. I address the particular points made when considering each of the matters being addressed. However I do not consider that the points

So far as Mr Bligh is concerned, AssetCo notes (rightly) that Mr Bligh had an impressive recollection of the detail of the audits and the contents of his reports, but also submits that when it came to the timing of the audit discoveries by the Competent Auditor (the remaining material issue between the experts), he was less straightforward, his evidence was far more guarded and he was unwilling to make appropriate concessions.

I do not agree with the characterisation of Mr Bligh as being less straightforward when giving evidence in this area, but I did find him to be curiously reluctant to accept the likely impact on timings, of matters which were common ground and which he agreed with. I consider that this did influence, and impact upon, his evidence on timings, which I have born in mind when making findings on the likely timing of events, and when comparing the evidence of Mr Meredith and Mr Bligh in this regard.

By way of example, Mr Bligh accepted a number of matters that had the obvious potential to impact (in terms of bringing forward) various timings:-

Such matters would, one might have thought, have had some effect on the stage at which a Competent Auditor would have required information, and would have meant that a Competent Auditor would have required information, and would have got more information, earlier than GT did, yet Mr Bligh was unwilling to accept such a proposition stating, “I can see no basis on which to assume that.” (Day 8/33/11).

There then followed this question and reply:-

The difficulty I have with that answer is that it failed to take into account and give effect to Mr Bligh’s own evidence that a Competent Auditor would have chased management earlier and harder than the GT audit team, as the Court put to Mr Bligh, to which he replied:

“A. Subsequently for when information hadn't been received but all I'm saying is initially I do not think there was

any reason to assume that AssetCo would have provided information to a competent auditor any quicker than it provided it to Grant Thornton.”

The further difficulty I have with that answer is as to the consequences if a Competent Auditor did not get the information (given Mr Bligh accepted that the Competent Auditor would have chased AssetCo harder), which led to the following question from the Court and Mr Bligh’s answer thereto:

“…But what if the competent auditor doesn't get the information and you say that they would have pressed harder or whatever, isn't the consequence of that that either they would have got information quicker or that would give rise to a concern they would have because they were not getting the information –

However despite such evidence in which he appeared to accept that if information was not initially received a Competent Auditor would have chased for it quicker, he remained reluctant to accept that information would have been received more quickly, and indeed did not answer that precise question when asked by AssetCo’s counsel:

“MR TEMPLEMAN: It is at every stage, isn't it, Mr Bligh, because if as a competent auditor you ask for information and you want it and it doesn't come within seven days then you chase again don't you, the upshot of that is likely to be that you get it more quickly than if you wait for a month.

A. You certainly chase information. Whether you chase every piece of information within seven days will depend.

Q. Yes. It depends on the importance of the information and I suppose whatever else you are up to?

A. Yes because whilst an auditor clearly wants all of the information so he can carry out his work sufficiently he can't do the whole audit on day one.

Q. So would it not be a reasonable assumption that if a competent auditor had done what you say a competent auditor would have done, the result would have been that

they got more information more quickly than Grant Thornton?

A. I have said in my supplementary report that in certain instances a competent auditor would have chased management quicker. I can't tell whether management would have responded any quicker, though it is possible, but I can't guarantee that.” (emphasis added)

If, as Mr Bligh accepts, a Competent Auditor would have chased management earlier and harder, then AssetCo would either have provided information earlier (which I consider and find is the more likely) or if they did not do so that would have given rise to a concern for the Competent Auditor – either way this would be likely to have accelerated timings, in the former case because they would have received the information itself earlier, in the latter case because this would have led to concerns which they would have raised earlier (either with the management or with the Audit Committee depending on the nature of the matter raised and the level of evasiveness or refusal to provide information they encountered).

Answers of Mr Bligh in other areas (if accepted) would also impact upon timings pushing out the time period within which a Competent Audit would be conducted. For example he suggested that a Competent Auditor “will work at whatever speed he works at” (without regard to his evidence that a Competent Auditor would have chased management earlier and harder) and he suggested that an audit partner (on the Counterfactual a competent audit partner) was “[p]robably worried about finishing off his previous audits” - when a competent audit partner would need to do that which needed to be done within an appropriate time period – unfettered by past commitments.

In relation to the time taken by a competent auditor’s valuation team in relation to considering the impairment of goodwill and investment in subsidiaries he suggested that a competent audit team could take two weeks, but his evidence was not that such an exercise would take two weeks for a Competent Auditor (he confirmed if they had the available information and nothing else to do it would take only 3 days as an approximation) but rather that even if told to prioritise it:

“A. They are told to prioritise it by every audit team in the firm, so they will say: I will deal with it in order with all the other ones I have got, it is a small number of people looking at quite a lot of these at a busy time of year. And everyone wants them prioritised. Sorry, I'm just giving you my experience of 20 years of auditing.”

The difficulty I have with that answer, as I indicated at the time, is that it is not necessarily consistent with the obligations of a Competent Auditor to say, “well, there are such demands on the company that even if it needs to be done quicker it would only have been done in two weeks or so because we were swamped because we had all these different ones coming in at the same time”.

Mr Bligh’s views as to who would initially undertake a task, and when they would consult someone more senior also impacted upon his timings, and there was a tendency to be unwilling to commit to particular dates, even if they were not dissimilar to conclusions expressed in his report. For example when asked about concerns about management fraud in the form of the unitary payment and whether a Competent Auditor would have wanted answers by 22 May 2009 (the end of the fieldwork) he said, “I cannot answer that question definitively one way or the other” , whilst in his supplemental report he had said at paragraph 9.11.14:

“it is likely that a Competent Auditor would have made further enquiries about the increase in UP and the purpose of the £2.6m invoices starting from mid-May and, assuming management was unlikely to co-operate fully with such enquiries, I consider that a Competent Auditor would have likely raised concerns over the progress of such enquiries with the Chairman of the Audit Committee before the end of May, some two weeks ahead of the Audit Committee meeting, followed by the request for permission to write directly to LFEPA which would most likely have been refused by Mr Shannon.”

(He also referred at paragraph 9.1.5 to a Competent Auditor having made contact with the Chairman of the Audit Committee, “most likely by the end of May”)

I have borne such matters in mind when considering likely timings on the counterfactual, in particular where there is a difference of opinion between Mr Meredith and Mr Bligh.

The dates identified by Mr Meredith in his supplemental report are that a Competent Auditor would have discovered the breach of the PSA and raised it with the management and/or Audit Committee (as appropriate) by 30 April 2009 or 12 May 2010.

In cross-examination Mr Bligh accepted that at some stage Mr Lane “would have worked out that the terms of the preference share agreement weren’t being followed meticulously” (Mr Lane reviewing the document containing the evidence on 18 May 2009). He said:

“But I do not think that would have been before the

14 May. I think this was reviewed by Ricky Lane on 18 May. All I'm saying is I think that is the earliest if they had been fairly alert and it could have been later on before they actually joined the dots together.” 526. In relation to 2010, Mr Bligh said that, “yes, I’m very willing to agree that at some stage in May that a competent auditor would have firstly asked the question, what’s happened to the original preference share proceeds and secondly, realised that it had all gone.”

The starting point is that the Competent Auditor would be aware of the restrictions on the use of the PSA monies at the outset and of the fact that they had to be retained in AADL, as GT were advising on the structure of the PSA and noted the restrictions in December 2008 – see email Ricky Lane to Frank

By ‘retained in AADL’ it would be clear to any Competent Auditor that this meant that the £10m had to be held in an AADL account and ringfenced from the UK business, as Mr Meredith explained when cross-examined.

In consequence, the whereabouts of the proceeds would have been something to be checked by a Competent Auditor as part of the audit. As Mr Meredith said:

Mr Bligh agreed that (assuming that the Competent Auditor had been given the documents at the time or before the start of the audit (and GT had the PSA Agreement)) a Competent Auditor would have had the restriction of cash issue, “in mind even before the commencement of the fieldwork in 2009”. The bank confirmations were sought in April before the start of the fieldwork and the AIB confirmation letter was received on 8 April 2009. Mr Bligh accepted that the Competent Auditor should have asked how the money was being used under the loan agreement given that there were restrictions within the 5 million loan agreement as to what it could be used for.

As Mr Bligh expressly accepted:

“I think it perfectly reasonable to expect a member of a competent auditor’s team to have asked management about the preference share agreement and what has happened to the cash at an early stage of the audit.”

From the AIB confirmation letter that was received on 8 April 2009 it was clear that the £7.5 million to which it related was not held in an AADL account. GT point out that Mr Meredith’s 30 April 2009 date for notifying the breach of the PSA depended on knowing that the money in the AIB account and BoSI accounts was supposed to be the preference share money, and they submit that there is no evidence that there was any knowledge of this prior to

However, the 14 May 2009 date is based on the document “Summary of

Given the fact that a Competent Auditor would have known of the restriction on the use of PSA monies at the outset, would no doubt have briefed the team of the restriction on the use of the monies at an early stage, and would have had the restriction of cash issue in mind even before the commencement of the fieldwork I consider that a Competent Auditor would have become aware that PSA monies had not been retained in AADL at an earlier stage than GT did, would have followed up the source of the monies revealed in the AIB Letter of 8 April 2009 earlier and pressed harder for information and would have followed up quicker, with the result that a similar position as that reached as at 14 May 2009 would have been reached earlier, and to the level of the equivalent of Mr Lane earlier (potentially by 30 April 2009 as Mr Meredith suggests), but certainly by early to mid-May, and given the seriousness of the matter, and the potential impact on going concern, would have resulted in the issue being raised with AssetCo management very soon thereafter, and I so find. The point is academic, however, as even on Mr Bligh’s evidence the Competent Auditor would have realised the problem by 18 May 2009 (I reject that it would take a Competent Auditor further time to “join up the dots”), and again the issue would have been raised with AssetCo’s management very soon thereafter.

As Mr Bligh accepted when giving evidence, the breach of the PSA was not capable of rectification for the purpose of the accounts being audited, and a breach of the PSA would have had to have been raised with NAV in order to obtain a waiver (as Mr Meredith noted when giving evidence) and as I find would have to have occurred. It was the evidence of Mr Mills, which I found convincing and accept, that he would not have granted a waiver.

So far as the position in 2010 is concerned it was common ground that a Competent Auditor would have realised from the cash in transit position that

In terms of timing as to when a Competent Auditor would have discovered and notified the Management and Audit Committee, there was a difference of opinion between the experts and AssetCo’s (and Mr Meredith’s) date of 12 May 2010, and Mr Bligh’s date of the end of May 2010 (which applied to audit issues generally). In relation to this Mr Bligh accepted that the cash in transit issue had been identified by 12 May 2010. He also accepted that there was an issue around what was supposed to be the restricted payment under the SOC Contract, though he questioned whether it needed to be ring-fenced (I am satisfied it did), and suggested that the payment could have been made to AssetCo in the UK for a legitimate purpose (such as supplies for AADL from the UK), but he confirmed to the Court that he could not refer to anything specifically that suggested that anything was being paid for a legitimate purpose. I consider that Mr Bligh was speculating in this regard.

Equally, however, for his part, Mr Meredith accepted that his own conclusion on timing was predicated not only on knowing that cash in transit was £11.1 million but that Asset Co’s cash balance was £13.7 million (which would lead a Competent Auditor to realise that as there was only £2.6 million left over and so there must have been a breach of the PSA), and he accepted that there was no evidence as to when Grant Thornton knew the cash balance. Once it was known that there was a breach of the PSA the next step would have been to contact management for an explanation, but given the importance of whether AssetCo was a going concern I consider that the reality is that the Audit Committee would have been notified soon thereafter in any event.

I consider that a Competent Auditor would have considered the cash in transit by 12 May 2010 and ascertained the cash balance soon thereafter, would have put two and two together and not only asked what had happened to original preference share proceeds but realised they had all gone, soon thereafter, and well before the end of May 2010, and raised the matter with management soon thereafter, though it is not possible to pin point a precise date on what is a hypothetical.

The question of going concern is linked to that of breach of the PSA, which I have already addressed above, and also to impairment of assets (as addressed below). Once again 30 May is the very latest date on which serious doubts as to going concern would have been identified by a Competent Auditor (not least based on Mr Bligh’s evidence that in both 2009 and 2010 the issues relating to the going concern assumption would have “[f]ollowed suit” from the adjustment required for the impairment of assets which would, on Mr

However I consider that (as per my findings above in relation to breach of the PSA and a date of 30 April or, at the latest, early to mid-May in relation to that in 2009) concerns about going concern would have been identified, and raised with management by at the latest early to mid-May 2009 (see also the discussion in relation to impairment of assets below). Going concern was an important issue for any auditor, which would have been considered at the planning stage of the audit and was a “hot topic” in 2009. As Mr Bligh put it, “In 2009 and 2010, certainly in 2009 going concern was an issue for many businesses. So it was a hot topic on most audits at that time.” In addition to this evidence, Mr Bligh also accepted that the Competent Auditor would have

Mr Meredith’s evidence (by the conclusion of his evidence) was that whilst a formal conclusion might not have been reached on going concern by a Competent Auditor by 30 April, there was an “early warning of a material going concern issue” at this date which would have been raised with the management (which is consistent with my findings above going breach of the PSA). Whilst he also agreed that a final conclusion on going concern could not be reached until a going concern paper incorporating cashflow forecasts had been received from management, and that such papers are normally received at the end of the audit – I have no doubt that once there was an early warning of a material going concern issue (as there would be following an identification of an apparent breach of the PSA) a Competent Auditor would have raised the concerns with management, and given the importance of the issue I consider and find that it would soon have been escalated to the Audit Committee.

It will be recalled that Mr Bligh accepted that (in 2010) the breach of the PSA would in and of itself “have had a potentially massive impact on going concern”, though he was more circumspect in his evidence on this topic in 2009. Whatever AssetCo might have done (for example transferring the £10m AIB and BOSI funds into accounts in the name of AADL – which seems improbable given its cashflow difficulties), this would not have prevented a need to obtain a waiver from NAV (which it would not have given).

In the above circumstances I find that concerns about going concern would have been identified, and raised with management by at the latest early to mid-

It is common ground that a Competent Auditor would not have suggested finance lease accounting in 2009 or 2010 (in contrast to GT’s (negligent) approval of the same). I am satisfied, and find, that if GT had applied appropriate professional scepticism (as a Competent Auditor would have done) the dishonest fabrication of evidence by management would have been discovered which would have had to be raised to the Audit Committee (bypassing management).

In terms of timing, Mr Boyle had asserted that foam pump modifications to fire engines under the LFEPA Contract had produced an increase to the Unitary Payment of £46,975 from April 2009, with GT themselves recognising that there was an issue on or about 22 April 2009 (any Competent Auditor would have been asking management in relation to this issue by the start of fieldwork). Mr Bligh’s evidence was that a Competent Auditor would have wanted to understand what this figure represented, and that by 20 May 2009 a Competent Auditor would simply have ruled out any question of finance lease accounting (although he considered, rightly, that no Competent Auditor would have been anywhere near a finance lease in the first place). I consider that a Competent Auditor would have reached this conclusion earlier, given the importance of the matter, and after raising it with Mr Shannon in the first instance (without any agreement in terms of accounting treatment) would have escalated the matter to the Chairman of the Audit Committee by around 20 May 2009.

So far as 2010 is concerned, a Competent Auditor would not have raised the issue at all – but would have looked back at the previous year’s accounts and accounting treatment so as to establish that what was done was reasonable (and would have realised that the prior year’s treatment was unsustainable). If the possibility of finance lease accounting been raised as a possibility in 2010 it would have been followed up quickly – not least as it would have raised or reduced profits by £13.m depending on the accounting treatment, and as such would have been a significant issue. Mr Bligh (rightly in my view) considered that Mr Shannon would have refused to action the matter appropriately, which would have resulted in a Competent Auditor going to the Audit Committee (on the basis that Mr Shannon was seeking to place a limitation on the audit). Mr Bligh’s evidence was that this would be by late May, “probably a few days later than 24 May” (the date put to him), and, on the basis of such evidence I find that this would have occurred by around 27 May 2010.

GT failed to consider the appropriateness of capitalisation of bid costs (so that they were not treated as incurred costs and appearing on the profit and loss account but as an intangible asset, on the basis that a contract was virtually certain to be awarded and was expected to result in future net cash inflows), including the re-allocation of certain items from prior years. In this regard, as Mr Bligh (rightly) identified, the material presented to GT by the management was inconsistent, the audit team obtained no evidence that AssetCo became a preferred bidder on any project in 2009, and (as I accept) no Competent Auditor would have capitalised any of those costs in 2009.

In terms of timing, the evidence (of both Mr Meredith and Mr Bligh) was that by 21 May 2009 a Competent Auditor would have known that AssetCo had not achieved preferred bidder status on the EFCC contract (and accordingly that costs should not have been capitalised). In this regard Mr Flynn had emailed GT on 21 May 2009 stating (in relation to the tender for the EFCC contract) that “this tender was submitted on 14 April and the preferred bidder will be announced at the end of June with the contract to commence in

On the evidence before me I am satisfied that a Competent Auditor would have raised the matter with management upon realising this, and would also have needed to raise the matter with the Audit Committee. In this regard it was

Whilst is was suggested to Mr Meredith in cross-examination that the issue of capitalisation of bid costs did not raise the issue of management dishonesty (which would have necessitated the matter being raised with the Audit Committee regardless of the attitude of management), I consider that the matter would inevitably be raised as it was obvious that there was no possible justification for the capitalisation of bid costs which called into question the reasonableness if not the honesty of management in furthering such an approach. This is consistent with the parties’ agreement, as recorded in the List of Issues in relation to the treatment of intangible assets:-

“As regards both the 2009 and 2010 Audits, although GT disputes aspects of AssetCo plc’s case in respect of the treatment of intangible assets, it is common ground that GT breached its duties to AssetCo pic in respect of intangible assets and that had it not done so it would have concluded that AssetCo plc’s management was falsely and dishonestly and/or unreasonably seeking to recognise costs as intangible assets, contrary to the true position, so as to inflate the company’s asset position and profits.”

Turning to the impairment of assets there was much common ground between the experts in this regard as reflected in the Auditors’ Joint Statement in section 2 at 2.12:

It was also common ground that a Competent Auditor would not (as GT did), simply rely on revised cashflow forecasts from management. GT, in its Defence, admits that it should have inferred in all the circumstances (not simply from the revised cashflow forecast alone) that the revised forecast were fabricated dishonestly and/or prepared solely to address the impairment issue. The consequence of this is that the Competent Auditor would have raised this matter directly with the Audit Committee.

There remained a difference between the experts as to when a Competent Auditor would have known the precise size of the impairment (which itself is a matter of opinion), though ultimately I do not consider it matters as to what the precise size of the impairment would have been. Mr Bligh’s own evidence

As to timing Mr Bligh recognised that, by 29 May 2009, “there was a high likelihood that there was going to be a significant impairment charge” – which was something that would have been discussed with the chairman of the Audit Committee (even before any final answer on the extent of the impairment was known). Mr Bligh accepted a Competent Auditor would have chased the valuation team earlier in May 2010, and I consider and find that a valuation team acting appropriately would have responded more quickly.

In the above circumstances I am satisfied, and find, that the Competent Auditor would have gone to the Audit Committee with the information that a significant impairment was required by (at the latest) the end of May in each year.

As already identified above, I am satisfied and find (based on Mr Bligh’s evidence) that by the end of May 2009 a Competent Auditor would have “been advising [that]..it was probable that there was going to be a significant write-down in the investment and subsidiaries and therefore no dividend would be payable as a result”. Indeed the evidence of Mr Bligh, which I accept, is that the Competent Auditor would have identified that there was likely to a significant impairment of goodwill and “as a result of that it follows on that there is likely to be a significant write-down in the value of the investment in subsidiaries meaning that AssetCo Plc is not going to be able to pay a dividend for many years”. Whilst this was said in the context of the position in 2009, I am satisfied that the same would be true, by 1 June, in 2010. Such impairment of goodwill and its consequences were serious matters that I am satisfied would have been raised with management and with the Audit Committee in both years at this time.

It is common ground that GT did not obtain sufficient evidence that intercompany balances had been eliminated in 2009 and 2010. AssetCo submits that a Competent Auditor would have realised, upon receipt of the intercompany consolidation schedule, that balances had not been eliminated.

I am satisfied, on the evidence, that a Competent Auditor would have identified that intercompany balances had not been eliminated and raised the same with management by 26 May 2009 per Mr Meredith’s evidence, though I also accept that this would have led to discussion with management, with the result that the matter might not have been raised with the Audit Committee until the end of May, or possibly a little later. However precisely when this would have been likely to occur is academic, given the other matters that I have identified which would have had to be raised with the Audit Committee (given their serious nature), by the end of May 2009.

The related party transaction issues only arise in 2010. So far as Jaras is concerned GT were, themselves, aware of the transaction on 21 May 2010 which would have led to a request for further information – on receipt of further information (or in the event of delay in provision of the same), and in accordance with Mr Bligh’s evidence, the audit partner would have approached the chairman of the Audit Committee and whether the transaction had been approved by the Board – and would have discovered it had not.

In relation to Graphic Traffic GT were, themselves, aware of the transaction by 23 May 2010 (email of Mr Lane to Mr Napper), and Mr Bligh’s evidence (which I accept) is that he/a Competent Auditor “would have asked the manager to pursue quickly some of the documentation to support it to see what that said before I then would have asked Mr Flynn why the company had bought it and then I would have called the Chairman of the Audit Committee.”

In the context of such chronology of events I am satisfied that the issues around related party transactions would have been discovered by a Competent Auditor, and following further enquiries, raised with the Audit Committee if not by the date identified by Mr Meredith in his supplemental report (23 May 2010) soon thereafter (within a matter of days) - not least in the context of the seriousness of such matters.

I summarise below my findings made as to the timing of audit discoveries on the Counterfactuals, interposing such dates upon the tables, quoted above, that originate from section D1 of AssetCo’s Written Opening.

In 2009:

In 2010:

The parties disagreed as to how quickly matters would have been announced to the market, and matters would have come to the attention of NAV (via RNS announcements and/or communication with NAV).

I have already set out above my findings as to the timing of particular audit discoveries and the time at which they would have been notified to management and to the Audit Committee.

As I have found, by mid-May the Competent Auditor would have discovered and notified AssetCo’s management and the Audit Committee that the terms of the Preference Share Agreement had been breached and made it clear that AssetCo needed to seek a waiver from NAV. This is linked with the fact that by early to mid-May at the latest the Competent Auditor would have discovered that there were material uncertainties as to whether AssetCo could continue as a going concern and the Competent Auditor would promptly have notified AssetCo’s management by this time, and would have escalated the matter to the Audit Committee soon thereafter. These matters alone were serious, and would have necessitated a meeting of the Audit Committee from mid-May onwards, certainly before the end of May, and well before the date of the Audit Committee meeting that actually took place on 8 June 2009.

However the picture was a developing (and increasingly serious) one, and numerous other accounting concerns would also flow through to the Audit Committee in short order during the course of May - matters such as finance lease treatment, and capitalisation of bid costs would also have been coming before the Audit Committee soon after 20/21 May, and by the end of May the Audit Committee would have been aware of a significant impairment of assets and that there was likely to be a significant impairment of goodwill and that as a result there was likely to be a significant write-down in the value of investment in subsidiaries, meaning that AssetCo was not going to be able to pay a dividend for many years.

I consider and find that the Audit Committee would have met soon after midMay and in all likelihood it would have met again before the end of May as a picture of accounting problems emerged with increasing and vivid clarity through the latter part of May 2009.

GT submits that even once matters had been escalated to the Audit Committee there would have been delays before any conclusions were reached that Messrs Shannon and Flynn could not be left to manage AssetCo or that any proposals that they might make as to the way forward should not be adopted relying on aspects of the conduct of the Board in 2010 and 2011. In this regard they pointed to the fact that after the Graphic Traffic and Jaras transactions were brought to the attention of the non-executive directors by GT on 17 June 2010, and Mr Wightman received an explanation from Shannon which he was to state made no sense, he and the Board acted without urgency and accepted

However serious though the Graphic Traffic and Jaras matters were, and whilst I accept that the Board was slow to react to such matters in 2010 and 2011, they were discrete issues, and were nothing compared to the overall accounting revelations that would have emerged in mid to late May 2009 – and the implications for AssetCo, its accounts, and its liquidity position as revealed by the various matters a Competent Auditor would have identified, and the Audit Committee would have been notified of, and aware of, from mid-May 2009 through to the end of May 2009, as I have found.

When the Audit Committee would have met soon after mid-May and in all likelihood again before the end of May (as I have found would have occurred), as a clear picture of accounting problems emerged through the latter part of May 2009, the inevitable conclusion would have been that prompt action was needed in terms of one or more RNS announcements to the market, a course that the Board of AssetCo as a whole would have had to agree to within short order, and I am satisfied would have agreed to within short order. In this regard there was no room for any delay in announcement to the market given broker reports/expectations and the expected issuance of AssetCo’s FY09 results in the week commencing 16 June 2009.

In terms of what such RNS announcement(s) would contain I have no doubt that, in consultation with the NOMAD, the announcement(s) would be in measured terms and not state more than had to be stated – but the announcement(s) would have needed to identify the key points that had emerged from the Competent Auditor’s findings, and at the very least would have needed to identify that the publication of the results would be delayed – and that no dividend would have been payable (as the experts’ agreed would have been the position). Unlike in 2011 (where there was something of a dripfeeding of information to the market that led to uncertainty) such key points would have been provided to the market, albeit in measured terms, at one time, or in short-order, given that a Competent Auditor would have presented a clear picture of the accounting problems, and consequences, to the Audit Committee, and AssetCo would have had to make one of more RNS announcements to the market in respect of the same without delay.

I also consider, and find, that such announcements would have focussed on the accounting issues and the future rather than management fraud (as Mr Davies explained in his evidence in the context of what he said would have been announced after his appointment (on the Counterfactual)) (a matter to which I will return later in my consideration of the Counterfactual). In the immediate aftermath of Competent Auditors reporting to the Audit Committee, it was notification to the market of financial/accounting matters that would have been of most immediate priority to AssetCo.

Such announcement(s) would have alerted NAV to AssetCo’s liquidity problems, and the evidence before me from Mr Mills (which I accept) is that NAV would then have made its own investigations. Equally in relation to the breach of the PSA the Audit Committee and the Board would have recognised, and the Board would have agreed, to approach NAV about the breach of the terms of the PSA and a waiver sought. By either, and indeed both, of these routes, I consider that NAV would have been in contact with, and liaising with AssetCo by the end of May 2009 or (at the very latest) very soon thereafter in the first day or two of June 2009.

In terms of contact between AssetCo and NAV there is an issue between the parties as to whether AssetCo would (through Mr Shannon) have approached Mr Mills and NAV for financial assistance in advance of, or at the same time as, an RNS announcement to the market.

In Section F I summarised the actual events that took place in January and February 2011 and in particular the events of 14-16 February 2011 and Mr

It is true, as GT point out, that when AssetCo was facing particular difficulties in January and early February 2011 AssetCo and Mr Shannon did not immediately come to NAV with its issues and Mr Shannon was keeping particular matters to himself. Hence, whilst Mr Shannon was informed of winding-up petitions having been served on a number of AssetCo companies, including plc on 14 January 2011 he did not inform Mr Mills of this until 8 February 2011 (and in the meantime concealed the existence of the petition from the Board, Arden and AssetCo’s solicitors), and negotiations took place with Gatehouse which broke down in early February 2011 (because Gatehouse had discovered there were winding up petitions against AssetCo companies – a matter Mr Mills was not aware of even at trial), and Mr Shannon was also speaking to Henderson Group about an emergency bridging facility of £3.5 million (a matter that Mr Mills was unaware of at the time, and until trial), as well as AssetCo having a “Plan B” to place itself into administration (a matter that Mr Mills was also aware of at the time, and until trial). It is also true that even once contact was made Mr Shannon was not wholly frank and honest with NAV (for example, in terms of the spreadsheet purporting to set out how the preference share monies had been used on the Abu Dhabi business).

However, what I consider to be characteristic is that in 2011 when matters came to a head when the Henderson negotiations broke down on Friday 4 February (with Mr Shannon replying to Mr Duffy who had asked him how thing were, “Don’t ask…[expletive] nightmare. Gatehouse unravelled in front of me over HMRC position, so trying to put the pieces together again”), it was to NAV that Mr Shannon turned, contacting NAV on Tuesday 8 February which led on to the further contact with NAV and the events of 14-16 February 2011 as identified above.

There are also distinguishing features between 2011 and 2009. In the former case financial statements were not due, there was no immediate need at the time (before audit) for an RNS announcement whereas in 2009 there had been a concatenation of accounting problems that would have been brought to the attention of the Audit Committee, and to a head, in the second half of May, there was an urgent need for a RNS announcement, and AssetCo was running out of money (as was common ground before me). There was every reason,

In the above circumstances I am satisfied, and find, that AssetCo (through Mr Shannon wearing his AssetCo hat) would, on very much more than balance of probabilities, have approached Mr Mills of NAV by the end of May 2009 or (at the very latest) very soon thereafter in the first day or two of June 2009, seeking financial support. In reality it matters not whether AssetCo would have made the first move by doing so, as I am also satisfied, for the reasons that I have given above, that NAV would in any event have been aware of AssetCo’s financial difficulties by the same time, as a result of RNS announcements around this time revealing AssetCo’s liquidity problems and/or as a result of NAV making its own investigations in consequence of the same, or indeed as a result of AssetCo having to approach NAV to seek a waiver of the breach of the PSA, and NAV would then have approached AssetCo.

By whichever of the above routes AssetCo and NAV would have come, by this time, to be liaising together, I am satisfied, and find that AssetCo would have acceded to any intervention of NAV and, if Mr Davies was willing to accept appointment, Mr Davies’ appointment, followed by any pledge of NAV’s to support AssetCo on the basis of any such appointment. However these are key aspects of the Counterfactual depending on the hypothetical actions of third parties (Mr Davies and NAV), which were hotly contested, and to which I will now turn.

Any appointment of Mr Davies to carry out further investigations, and whether he would have been appointed as Executive Chairman of AssetCo, is linked with whether NAV was or was not willing to support AssetCo which raises a question as to whether the position of NAV, or any appointment of Mr Davies, should be considered before the other.

Ultimately, I do not consider it matters as GT does not dispute that Mr Mills would, in principle, have wanted to appoint Mr Davies to carry out further investigations as to what had gone wrong at AssetCo whether or not NAV ultimately offered financial support. I will accordingly first consider the Counterfactual in relation to the position surrounding the appointment of Mr Davies, before considering NAV’s position in relation to support.

On the evidence that I have heard, and for the reasons I have identified, I consider that NAV would have been in contact with, and liaising with AssetCo, by the end of May 2009 or (at the very latest) very soon thereafter in the first day or two of June 2009 (in 2010 by 1 June 2010) consistent with, though slightly earlier than, AssetCo’s pleaded dates of 5 June 2009 and 16 June 2010 respectively. If, however, AssetCo had the requisite knowledge of financial problems from the Competent Auditor and/or would have been in contact with NAV any later than this (the dates being ultimately incapable of identification with absolute precision given their hypothetical nature and the interaction of relevant factors) I am satisfied that, on any view, on the basis of the evidence that I have identified, such contact and liaison would have been by the aforesaid pleaded dates of AssetCo (as a long-stop).

As I have already identified above, GT does not dispute that Mr Mills (on behalf of NAV) would, in principle, have wanted to appoint Mr Davies to carry out investigations as to what had gone wrong at AssetCo. This is entirely consistent with Mr Mills’ written and oral evidence and what actually occurred in 2011. Given GT’s stance it is probably unnecessary for any finding to be made as to whether Mr Mills would have approached Mr Davies, however, for the avoidance of doubt I am satisfied that not only is there a real and substantial chance, but it is an absolute certainty that once NAV (through Mr Mills) became aware of AssetCo’s financial problems Mr Mills, on NAV’s behalf, would have approached Mr Davies immediately by email and asked him to go on AssetCo’s board and carry out further investigations.

As identified in Section F above, that is precisely what Mr Mills did on 15

Even though he was on holiday in Venezuela at the time, Mr Davies immediately replied, asking, “What’s the deal? Thought they were running out of cash/being taken over?? Need to understand more”, and he agreed to meet Mr Mills at his offices the following day. From hearing from Mr Davies, and assessing his personality, he came across as very much a 24/7 person whether on holiday or dealing with business matters, and I consider his immediate response (which itself shows that he had his ears to the ground about contemporary business matters and the position of AssetCo) was typical of Mr Davies and the sort of person he was.

It is however, very much in issue, independent of the exact timing of such approach, as to whether (in GT’s words) Mr Davies, “could and would” have accepted the appointment. As GT point out, Mr Davies’ situation was not the same in 2009 as it was in 2011.

GT identifies what it says are three related issues in this regard, namely:-

GT point out that Mr Davies was executive chairman of Castle until June 2010, and the position in 2009 was that NASCIT and Oryx had significant investments in Castle.

It is important to have regard to the chronology of Mr Davies’ involvement with Castle, and what that actually entailed in 2009, compared to the earlier period, from the time of Mr Davies’ appointment as a director in 2002 onwards, when considering the evidence of Mr Davies and Mr Mills in relation to this aspect of the Counterfactual.

It is clear that in 2002, when Mr Davies was appointed a director, Castle was

His CV sets out that he oversaw at Castle:

“bank re-financing, business turnaround focusing on rationalizing operations, increasing margins and resolving defined benefit pension scheme issues” and that he “repositioned company for growth, focus on power, oil, gas, resources, shipping, rail sectors in international markets, and expansion into Middle East.”

I also have no doubt, based on the evidence of Mr Davies and Mr Mills, that in the early years Castle required, and Mr Davies devoted, a substantial amount of his time to Castle. This was consistent with the impression I formed of him that he was highly experienced in corporate rescue, and that upon appointment

As Mr Mills (who was well placed to comment on Mr Davies’ approach to life from his long-standing experience of him) said, “Mr Davies, when he goes into a situation, like when he went into [Castle], works seven days a week”. I did not understand this observation to mean that Mr Mills meant that when Mr Davies went in to rescue Castle in 2002, or when he would have gone into any other business to do so (such as AssetCo in 2009) Mr Davies would literally be working every minute of every day seven days a week on it, rather that Mr Mills was speaking figuratively about Mr Davies. Certainly that is the impression that I formed of Mr Davies having heard from both Mr Davies and

In terms of the position in 2009, it is clear that Castle was a mature, transformed business, and would have required a very different level of involvement from its executive chairman than it would have back in 2002. In his witness statement Mr Mills stated that in 2009 Castle occupied him for 1 to 2 days a week. Minutes of a NASCIT board minute of 30 June 2009 recorded that Castle “management is concentrating on resolving the pension fund deficit with a view to selling the business once the problem had been rectified, although this may take some time”. Mr Mills’ evidence was that the lawyers would be doing the work, but “Mr Davies would obviously oversee that”.

In his oral evidence Mr Davies explained his involvement with Castle in the period 2002-2009 in these terms:-

“Let me explain. I went into what was originally Dowding & Mills Plc in 2002. It was an underperforming business with lots of issues. I turned it round and by 2008 or 2009 we were making an EBITDA I guess 18/20 million, something like that. This was a business that had lots of branches. I had changed the business model so that all the responsibility was in all those businesses. From about -- this is only a rough idea -- probably 2007 onwards I was very much part time, very much part time. But of course I had a responsibility. The head office was in Central Birmingham. I might go there irregularly, probably once every five or six weeks. The rest of the time I would do what was necessary from my office in Monmouth which is just down the road from my farm.”

This was entirely consistent with the evidence of Mr Mills:

So far as the sale of the business was concerned, Mr Davies’ evidence was that the result of the financial crisis meant that the idea of selling Castle was off from probably the summer of 2008, so that in the period June 2009 to around April 2010 it was a hiatus period in relation to any sale, with the running of the business simply being carried on in this period. In relation to the sale of the business that did occur to Swiss purchasers in 2010, Mr Davies explained that this did not involve much work on his part in circumstances where the Swiss company had been involved in due diligence before, prior to the financial crisis.

GT submits that Mr Davies’ evidence as to the level of his involvement in 2009 and 2010 in relation to Castle was unrealistic and that I should not accept it. However the evidence establishes that in 2009 Castle was a mature business

I bear well in mind that Mr Davies was being well paid for his work for Castle (both in terms of remuneration and bonuses) as chairman, but I have no doubt that such remuneration was set against the backdrop of the transformation of the company he had been instrumental in and reflected his executive skills and expertise which would be deployed, as and when needed, as executive chairman. Mr Davies was not in the position of a 9 to 5 employee.

I have no doubt that Castle and its shareholders would have formed the view that Mr Davies was the sort of person who would have devoted what time was needed, when it was needed – and would have continued to do so should he take on other responsibilities. If at any time the “candle had to be burned at both ends” then my impression was that Mr Davies was the man for the job, had the skill set to do so with success for all involved, and would have been so regarded by Castle, NAV and AssetCo (and their respective shareholders and investors) alike. In this regard the evidence before me was that Castle was owned almost entirely by NAV and what Mr Davies’ described as NAV’s “friends”. Mr Davies’ evidence was that Castle was not, in reality, a public company having been demerged out of Lonhro, with outside shareholders being probably 4 or 5% at most.

I, of course, also bear well in mind that both Mr Davies and Mr Mills could be said to have reason to downplay the extent of Mr Davies’ involvement with Castle in 2009 and 2010, but set against the backdrop of a mature business that had been rescued, and Mr Davies’ personality and approach to business, and my overall impression of him as a witness, I accept his evidence that he would have had the time to go on the board of AssetCo and become its chairman, that he would have done so, and that he could have undertaken what was required of him at AssetCo whilst still (properly) performing his role at Castle.

Equally I do not consider that to do so would be contrary to his duties as a director of Castle, or that Mr Mills consistent with the duties he owed Castle could not (or would not) have asked Mr Davies to take on the additional substantial undertaking of joining AssetCo. On the contrary I accept his evidence that that is precisely what he would have done.

GT places reliance on Mr Mills’ evidence that, “If I thought it in any way endangered Castle I would not have asked him to do it, so therefore I would not have thought it endangered Castle in any way” as being backward logic or reasoning. However I understood that the overall sentiment being expressed by Mr Mills, which I considered reflected his honestly held belief, was that he would not have asked Mr Davies to go on the board of AssetCo had he considered it would have endangered Castle in any way – and it was equally clear from his evidence that he did not consider it would have done so.

The starting point in 2009 (as GT realistically recognise) is that Mr Mills would have wanted Mr Davies to carry out investigations in relation to what had gone wrong at AssetCo – just as he did in 2011. On the basis of Mr Mills’ evidence (which I accept) that is precisely what he would have done – he would have asked Mr Davies to go on the board (with a view to him taking on the role of chairman of AssetCo), and Mr Davies would have agreed to go on the board. The position is a fortiori in 2010 in circumstances where GT recognises that Mr Davies would have ceased his role at Castle by around June

In the above circumstances not only was there a real and substantial chance of Mr Mills and Mr Davies so acting, there is no doubt in my mind that that is what they would each have done, and as such the probability of the pleaded step (premised as it is on the actions of third parties specifically Mr Mills on behalf of NAV and Mr Davies himself) does not stand to be discounted in relation to this step (in 2009 or 2010).

So far I have only considered the position up to the time of Mr Davies being asked to, and going onto, the board of NAV. What would have happened thereafter (in terms of NAV pledging support for AssetCo and Mr Davies being appointed as executive chairman), is also heavily disputed on the Counterfactual, and involves a consideration of the attitude (and actions) of NAV, Mr Davies and AssetCo’s board.

AssetCo’s case is that Mr Davies would been appointed as chairman of AssetCo with Mr Mills being appointed as a director, and NAV would have (financially) supported NAV through to the underwriting of a scheme of arrangement. The strategy that AssetCo says NAV would have adopted is encapsulated in the following passage in the evidence of Mr Mills during the course of his cross-examination:

“I think the better way to describe this is, we would have done whatever is necessary by (a) getting ourselves on the board (b) making sure the company [AssetCo plc] survived, (c) continuing with the Abu Dhabi business and the fact of the matter is we would have realised that any attempt by NAV to take money out of the Plc would basically hit all the claims that would turn up from everywhere and we would get nothing.

So in essence the best solution for all of us was to work at the Plc to secure its survival and that would have been absolutely obvious to anybody that survival of the Plc was in the best interests of everybody.”

In contrast GT’s case is that in 2009 or 2010 NAV would not have supported AssetCo as it did in 2011, GT pleading that, “AssetCo would not have obtained sufficient support from NAV in the form of underwriting the scheme of arrangement”. In opening AssetCo asserted that it was not clear on what

In the event GT expanded on its case in its Written Closing, submitting that whether NAV would have pledged support, and whether Mr Davies would have been appointed as executive chairman, depends on a number of matters it identifies/alleges, which it recognises are inter-related (and as such not independent of each other). It is convenient to set out such matters (which are contained in paragraph 96 of GT’s Closing Submissions) at this point whilst recognising that such matters (and their characterisation) are not accepted by AssetCo:-

“ (1) Whether NAV would have had any interest in saving AssetCo plc at all, or rather:

(a)Whether NAV would have preferred to flood the Board of AADL, and use that position to freeze the remaining Preference Share funds;

(b)Whether NAV would have taken the view that the AssetCo plc corporate vehicle did not need to be saved in order for NAV to find a way to profit from any future Abu Dhabi business;

(3)

Whether NAV would have been willing to pledge support in the absence of any understanding, or any reliable understanding, of the liabilities to which it was thereby exposing itself;

(4)

Whether NAV would have been willing to pledge support in circumstances where more than 25% of the shares were controlled by Shannon;

(5)

Whether (quite apart from any time commitment to Castle Support Services plc) Mr Davies could and would have taken on the role of executive chairman of AssetCo, having taken on the role of director and chairman of AADL;

(6)

Whether the AssetCo Board would have agreed to NAV’s terms for its support, being money in return for a rights issue or a placing…”

In relation to such matters GT approached the evidence under the headings set out below (some of which are contentious in terms of what is stated). These headings (which I have re-ordered) are as follows:-

It is convenient to consider the evidence under each of these headings whilst bearing in mind that the key question is what NAV (through Mr Mills) would have done on the Counterfactual – in relation to which the evidence of Mr

GT first look to what happened in 2011, and on this occasion say that something similar would have happened in 2009. However the parties immediately part company as to what the first significant step was in 2011 and whether the same would have occurred in 2009.

GT submits that in 2011, the first significant step taken by NAV in an attempt to secure its position was to hold (on 18 February 2011) a short notice board meeting of AADL in which Shannon and Mr Mills attended as directors, and Mr Davies and Mr Agnew were also present. The board decided to appoint Mr Davies and Mr Agnew as directors, and for Mr Davies to become Chairman. It was also agreed to novate or assign all contracts and assets held by AssetCo, via it Abu Dhabi branch, to AADL, in accordance with the terms of the Preference Share Agreement. Shannon agreed to instruct AssetCo’s lawyers to action that.

GT refers to Mr Mills’ evidence in that regard, “TD’s initial advice was for us to flood the board of AADL so that we at least could gain control over that company, any remaining cash and the business in Abu Dhabi”. GT submits that there is no good reason why the advice of Mr Davies would have been any different in 2009 or 2010 – it is said that in each year, NAV would have discovered that there were serious concerns as to AssetCo’s financial position, and it is said that NAV would have wanted to take advantage of the ringfenced structure that Mr Mills had deliberately put in place to protect NAV’s investment.

In fact there were significant steps in 2011 that preceded such events, and also reasons why I consider the position in 2009 would not have been directly comparable with that in 2011 so far as the position of AADL was concerned.

First it is important to have regard to the precise chronology of events in 2011. On 15 February 2011 (i.e. three days earlier) Mr Shannon emailed Mr Manning (a non-executive director of AssetCo) informing him that he had asked Tim Wightman to step down as chairman to allow Mr Mills to be appointed as interim chairman to “save the day” – so Mr Shannon had apparently already secured that resignation to support the possibility of Mr

The board minutes themselves refer to:

“JS [Shannon] reported that JOH [NAV] are considering supporting the company with a package of circa of £8m consisting of a cash backed guarantee to Lloyds to cover the HMRC liability and then a further £4m in funding shortly after to support the working capital requirements. As part of the pre-conditions of this funding JOH were seeking…To replace the current Chairman with the appointee of JOH’s choice…The Board agreed to proceed on this option once written Heads of Terms were received from JOH and JS was tasked to obtain this tomorrow. It was agreed as the most likely alternative and the one the company should invest the most effort in.”

In relation to Mr Davies’ advice in 2011 (to flood the board of AADL etc) it does not follow that his advice would have been the same in 2009. Importantly he would have known from the Competent Auditor that the preference share money was not in AADL but rather in AssetCo (and in 2010 would have

However the parties were not ad idem as to what that legal advice would have been, nor as to Mr Mills’, likely response. By way of overview (at a high level) GT submitted that in essence the advice would have been that the money was on trust, that a freezing injunction could be obtained, that NAV would have gone down that legal route and following that NAV would have cut its losses and walked away from AssetCo. In contrast AssetCo submits that the legal position was less straight forward but in any event Mr Mills’ evidence was that he would not have acted as GT suggests, and would have supported AssetCo, and that I should accept his evidence in that regard.

In terms of the factual position in 2009, by virtue of clause 5 of the Preference

In fact (as AssetCo pointed out in Closing Submissions), the money was never with AADL, having been paid by NAV into a current account in the name of AssetCo Group Limited (and therefore co-mingled before being transferred out). The position as at 31 March 2009 was that £2 million was held in an AIB account, ending 9282, in the name of AssetCo plc, on a 12 month fixed term deposit, £5.5 million was held in an AIB account, ending 9285, in the name of AssetCo plc, on a 12 month fixed term deposit and £2.215m was held in a Bank of Scotland (Ireland) (‘BoSI’) account, number 757476/120, in the name of AssetCo Group Ltd. It does not appear that these were (as suggested by GT) “segregated” accounts (i.e. accounts designed to keep these monies separate and distinct on behalf of a particular entity other than the named holder of account). Such monies had also already been co-mingled with other monies in

Management accounts produced by Management for the AADL board meeting in April 2009 referred to a figure of £12 million as “Cash at bank and in hand”. In May 2009, Mr Mills refused a request from Mr Shannon to use further amounts of the Preference Share monies in the UK business.

Mr Mills’ evidence was that he believed (as he did until 2011) that the Preference Share monies had been retained in AADL as the Preference Share Agreement required, and he believed that (in his capacity as director of AADL) he was a signatory on the relevant accounts.

On the basis of those facts available to NAV in 2009, GT submits that when NAV sought legal advice it would have been advised that there was a very strong argument that the Preference Share monies were held on trust by AssetCo and AssetCo Group either on an express trust for AADL (on the basis

GT submits that the effect of the Preference Share Agreement, in light of Twinsectra v Yardley, is that AADL held the Preference Share monies on trust for NAV, subject to a power for AADL to apply the money in the development of the Business, and that the Preference Share monies being held in AssetCo plc and AssetCo Group Ltd bank accounts was a breach of that trust, in circumstances where AssetCo plc and AssetCo Group Ltd, through Messrs. Shannon and Flynn, were both well aware of the circumstances of those monies. Therefore, those companies in 2009 held the Preference Share monies subject to the trust in NAV’s favour, and NAV could have called for the return of those funds.

GT submits that in any event, and whatever the basis of the trust, AADL and NAV would have been advised that they should seek an immediate order freezing the identified funds as their own property or (in the case of AADL) property held on trust for another. In this regard (for the purpose of obtaining a freezing injunction) all that would be required would be a good arguable case on the merits (as Mr Templeman accepted).

For the purpose of the Counterfactual the question arises as to what legal advice NAV and AADL would have received and how NAV and AADL would gave reacted in the light of such advice and in all the circumstances. It would add unduly to the length of this judgment to opine in detail on the applicable legal principles or to express a view as to what the actual position as a matter of law would have been expressed to be by a competent lawyer with suitable experience of the applicable legal principles. Suffice it to say that I am satisfied that the legal advice that NAV and AADL would have received was that they would be able to demonstrate a good arguable case that there was an express trust in favour of AADL or a Quistclose type trust in favour of NAV, and that they could consider seeking a freezing injunction in that regard, with the issues being determined by the court in due course if legal action was taken. I do not consider, however, that the “blindingly obvious” thing to do would have been to freeze the remaining PSA monies (as was put to Mr Mills and which he denied) – the legal advice would have identified such a course as a possibility, and this option would have been part of the overall picture, but it would not have been the whole picture.

The key question is what NAV would have done in all the circumstances. The legal advice received being but one part of the overall picture and the circumstances being considered by NAV/Mr Mills. Mr Mills addressed this at paragraph 113 of his statement recognising that legal proceedings was one option but stating that:

“…we would also have realised that if we sought to freeze the £7.5 million which remained and/or pursue a claim for the balance of the £7.5 million which AssetCo had spent (1) this would have been likely to drive

AssetCo into insolvency, (2) AssetCo’s insolvency would almost certainly mean we would lose any prospect of winning the business in Abu Dhabi, which in the summer of 2009 we believed was about to be awarded fairy imminently, and (3) we might have ended up an unsecured creditor for some or all of our investment with little or no prospect of any recovery”.

As to this evidence, (1) GT submits that if Mr Mills would not yet have been a director of the plc it is difficult to see why saving the plc from insolvency

However, firstly there was, in fact, a very good reason why NAV would not have wanted AssetCo plc to become insolvent which was that the upside for

Secondly, it is clear that NAV did regard AssetCo’s existing experience of the type of operations under consideration (specifically the LFEPA Contract and the Lincoln Contract) as important in the context of its investment, and in the context of obtaining any business in Abu Dhabi – Mr Mills was placed in a good position to put AssetCo or AADL in touch which people who would influence matters in Abu Dhabi and the use of AssetCo/AADL would have been an advantage over a new company with no track record. Equally even if

The backdrop to the Counterfactual is that Mr Mills saw the Abu Dhabi business as being one that stood to be very profitable. As he said in the course of his cross-examination (in the context of what was said in the 9 December 2008 investment memorandum):-

“The view that I was taking at the time and I'm the one who ultimately is responsible with the other investment committee members was that the opportunities in Abu Dhabi were very substantial. The money that was put into the manufacturing subsidiaries was a very short-term loan and would be returned for the Abu Dhabi opportunity. I think if you put it in context we are expecting to make 28/29 million a year from Abu Dhabi.

The whole of England, including the main business, is only making 10 to 12.”

As Mr Mills said in his evidence, he also considered that it would be “totally dishonourable” or “immoral” to pursue the Abu Dhabi business from a nonAssetCo entity. I am in no doubt that this was his sincerely held view. GT are, of course, right that Mr Mills owed duties to his investors, to ensure that their money was safeguarded, and he could hardly have been criticised had he taken legal action to protect such interests, but it is clear that he had a strong belief in the prospects in Abu Dhabi, and that he considered that this could best be advanced through a solvent AssetCo plc, with its existing experience, rather

Thirdly, any trust claims would not extend to the £5 million that had been lent in relation to which NAV would not have ranked ahead of other unsecured creditors. I also note that in 2011 whilst NAV’s solicitors wrote to AssetCo’s directors setting out various claims which AADL asserted against AssetCo (no doubt as a negotiation tactic whilst also offering investment) no legal proceedings were brought. Of course the factual scenario was not the same in 2011 (the money having been spent), but in 2011 (as AssetCo say would have happened in 2009) AssetCo’s immediate reaction was to offer financial support, and to pursue the business opportunities in Abu Dhabi utilising AssetCo’s experience notwithstanding the financial difficulties that AssetCo was in (which did not, in the event, prevent the subsequent renewal of the SOC Contract).

Nor do I consider that the fact that more than 25% of the shares were controlled by Mr Shannon would have impacted upon NAV’s willingness to pledge support in return for the appointment of Mr Davies. On my aforesaid findings on the Counterfactual, AssetCo (through Mr Shannon wearing his AssetCo hat) would have approached Mr Mills of NAV seeking financial support, and Mr Shannon, both as a director, and as a shareholder, would have supported the appointment of Mr Davies as chairman in return for financial support from NAV. At this stage no particular re-financing scheme had been agreed and the fact that 25% of the shares were controlled by Mr Shannon would not have impacted upon what NAV would have done at this stage of the Counterfactual (i.e. get Mr Davies appointed as chairman to consider potential restructuring and refinancing). The subsequent position of NAV and Mr Shannon re: any actual scheme that might have been proposed is addressed in due course below at a later stage of the Counterfactual. I reject the suggestion that Mr Shannon’s shareholding would have impacted upon what NAV would have done at this stage of the Counterfactual.

I do not consider that any of the reasons advanced by GT would justify a rejection of Mr Mills’ written and oral evidence, in which he was consistent throughout, that AssetCo would have agreed to provide support to AssetCo to keep it afloat in the short-term whilst Mr Davies worked out the details of a potential restructuring and refinancing. Whilst recognising that Mr Mills’ expressed views are effectively opinion on a hypothetical counterfactual, I found his evidence convincing in that regard which was entirely consistent with the financial support offered in 2011 with the appointment of Mr Davies, and I accept his evidence in this regard.

It is next said by GT that the reasons why NAV invested in AssetCo no longer existed in June 2009, GT pointing out that in December 2006 NAV’s decision to invest in AssetCo (at the time Asfare) was based on AssetCo’s “strong position” to obtain new business in the UK market as a result of “first mover advantage” and the “inherent conservatism of the customer base”, whereas by June 2009 AssetCo was showing itself to be a company going through financial difficulties, and with a financial structure that was (as Mr Mills recognised) “a mess”. In this regard Mr Mills accepted that many of the “strengths” of AssetCo identified in a December 2008 investment memorandum produced by Mr Agnew no longer applied. For example, whilst it was described as a “profitable and cash generative, asset backed business able to support gearing levels” in the 2009 Counterfactual Mr Mils would have known that the UK business was not cash generative, and that, “Proven management team, well known to NAV, with high level ownership” (i.e.

However another of the “strengths” was identified as, “Abu Dhabi business will be backed by the Abu Dhabi government and should be highly profitable” and “Downside risk is mitigated by the proceeds of the preference shares being ring-fenced and redeemable should the key Abu Dhabi contracts not be won.” The former point is of interest as it reiterates (contemporaneously)

GT submits that “NAV and Mr Mills would not have been sufficiently confident in a profitable Abu Dhabi contract being awarded, and being awarded imminently, to pledge support to AssetCo in June 2009”. However it is clear that NAV was confident in a profitable Abu Dhabi contract being awarded, this had been part of its investment thesis at the time of investment, this remained Mr Mills’ views at the time of the investment memorandum and accompanying SWOT analysis in December 2008, and events up to June 2009 did not lead Mr Mills to change his views.

As to the former Mr Mills’ evidence was that “we were absolutely confident we would win contracts in Abu Dhabi. We would never have entered into this agreement period if we weren’t very confident”. As reflected in the investment memorandum, NAV’s fall-back position was to redeem the preference shares which would enable the recovery of the £15million investment. As to this Mr Mills’ evidence was that, “in the very unlikely event” that such contracts were not won “this was a fallback. But to put that in its perspective, our private equity fund would have an expected rate of return of somewhere between 30 and 35% IRR. If we didn't believe we were going to win these contracts, we would never have made this investment. I mean, 6% would be a disaster.”

Mr Mills’ expressed view (at paragraph 14 of his witness statement) was that it was a “one way bet” with the potential upside of making “an absolute fortune” . As to the former he explained his thinking as follows:

“Q: Why was it a one-way bet?

GT points out that throughout 2008 it was being suggested to AssetCo that a contract in Abu Dhabi was imminent, but none was forthcoming at that time. In this regard reference is made to the fact that in June 2008 Mr Sawaya

However Mr Mills’ evidence (as reflected in paragraph 137 of his statement) was that:

“The fact that in June 2009 AssetCo had not yet been awarded any contracts in Abu Dhabi would not have affected my willingness to invest. As I have explained, we had assisted AssetCo in pursuing business opportunities in Abu Dhabi since late 2007, and had every confidence that with the strength of our local connections, AssetCo would be awarded contracts in the region. As of June 2009 AssetCo had established a permanent presence in Abu Dhabi and we were being reassured by [Walid Chatila / Hussain Al Nowais] that contracts would be awarded, although this would take time”

This evidence is consistent with the evidence he gave when cross-examined, which I am satisfied represented Mr Mills’ belief, and would have been his belief on the Counterfactual, namely “in my belief [there was] an extremely good chance of winning very substantial business in Abu Dhabi”. He gave similar evidence when considering what the position would be after Mr Davies had been appointed:-

“.. the story that I think we would have told the institutions is Mr Davies has successfully ringfenced the London assets like he did in 2011, we believe we have very good prospects of winning the business in the Middle East, which we believed we did and there are some small operating subsidiaries which may have some value, they may not, but as a practical matter Mr Davies is rather good at turning companies around, as you all know, and I believe that would have been an interesting story for other institutions” (emphasis added)

When considering NAV’s approach in 2009 it is also apposite to have regard to subsequent events and AssetCo’s subsequent approach to those events. In 2010 AssetCo was awarded the SOC Contract – it was then renewed in 2013 despite the events of 2011. It is also to be borne in mind that NAV’s investment in 2011 was made in circumstances where the profit from the existing SOC Contract had been received by way of the advance payment, which was then squandered, such that the profitability of the then existing Abu

As Mr Mills stated at paragraph 140 of his witness statement:

“Whilst it is correct that we could not be certain which contracts would be awarded to AssetCo by which UAE authority, as I have explained there was never any doubt in my mind that AssetCo would be awarded profitable business in Abu Dhabi. I would reiterate that when we agreed to invest as part of the restructuring in 2011, we were aware that there was no further cash return to be earned from the existing SOC Contract, since previous management had diverted the profit element of that contract (in the form of the advance payment) and expended it on the UK subsidiaries. There was thus no absolute certainty in 2011 that AssetCo would be able successfully to win the tender for an extension/renewal.”

This is consistent with his oral evidence on day 6 when he was being crossexamined about whether or not it would have been a prudent investment to invest at all in 2010 and Mr Mills referred to the possibility of a rollover of the SOC Contract at the time of NAV’s support in 2011.

It is said that in 2011 NAV was not prepared to pledge support to AssetCo immediately upon learning of AssetCo’s financial issues, and that part of the reason for such reluctance was an unwillingness to commit until the scope of any liabilities was clear, something which it is said would have been an even greater problem in 2009 than 2011.

If all that GT means by “reluctance” is that in 2011 NAV was not immediately prepared to make a binding commitment then that would appear to be uncontroversial and entirely understandable – NAV would wish to negotiate before proceeding to a binding commitment. But NAV were not unwilling to negotiate in 2011, as a consideration of events in 2011 shows. In this regard Mr Mills’ evidence, which I accept, was that he and NAV “believed that we could resolve the problems of the company and we had the money to do it.” In this regard Mr Mills and NAV soon reached a decision that they would intervene to assist AssetCo, following Mr Shannon’s approach in midFebruary. At this stage it was not known that all the PSA money had gone, but within two days NAV proposed Heads of Terms, following a “very quick due diligence”, although it took “a few more days” to “really [get] to the bottom of it” (per Mr Mills’ oral evidence).

In this regard as early as 15 February 2011 NAV was already proposing an £8 million investment package albeit in non-binding terms. What was needed in 2011 was not only to negotiate with HMRC but to come up with a comprehensive solution involving the injection of sufficient money - hence

The fact is that NAV was offering to inject funds in to the company as early as 21 February 2011 – only a week after the first approach from Mr Shannon, albeit form in non-binding and subject to contract. It was sufficiently serious for NAV’s proposal also to be sent to Lloyds. Mr Mills’ evidence was that this was an offer on the table that the company should take very seriously and proceed to negotiate. Mr Mills’ evidence was that if he had just wanted to take the company for the cheapest price, he “could have just as easily gone and bought the debt and taken the whole company”. Instead, Mr Mills was “trying to be responsible to all parties and make an offer and secure the business for everybody.”

It is true that NAV would not have known the true scope of AssetCo’s liabilities in 2009 (or in 2010), and there was additional information available to NAV in 2011 that was not available to it in 2009, however in 2009 a Competent Auditor would have identified the problems facing AssetCo, albeit

In 2011 AssetCo’s Board agreed to the appointment of Mr Davies as chairman on 23 March 2011, whilst other shareholders made this a condition of their support after it became apparent that the £16m fundraising would be insufficient. It is in issue as to whether AssetCo’s Board would equally have accepted the appointment of Mr Davies in 2009 and 2010 to which I will now turn. However, as addressed below, I consider that AssetCo’s Board would have done so, not least given that it is common ground that without NAV’s support AssetCo would have gone into insolvency.

It is said that there is a lack of clarity in AssetCo’s pleaded case that, “In both 2009 and 2010 NAV would have pledged support for the company on condition that Mr Davies be appointed as interim executive chairman” and the terms which NAV would have demanded in return for this pledge, which is said to be significant given the fact that the less generous or more onerous the terms, the more reluctant the board would have been to accept them. In closing

However I consider Mr Mills’ evidence (which I accept) to have been clear enough that NAV “would have agreed to provide support to AssetCo to keep it afloat in the short term whilst [Mr Davies} worked out the details pf a potential restructuring and refinancing” (paragraph 114 of his statement). That is consistent with the discussion of at least £8 million of financing on 15 February 2011 based on actual events in 2011. Mr Templeman confirmed in closing that it was not AssetCo’s case that NAV would have offered to underwrite all of AssetCo’s debts, but nor do I consider that it would have had to do so in order for AssetCo’s Board to accede to the appointment of Mr Davies as chairman.

GT also submitted in closing that it was unclear whether it was AssetCo’s case that NAV would have been entitled to some shares in the company in return for such pledge, and if so what vote of shareholders was envisaged to approve such an agreement. Mr Templeman confirmed in closing that this would not have been required in relation to the initial provision of capital to meet the immediate requirements of AssetCo but that it would in due course have formed part of the arrangements that would have become the scheme of arrangement. As such it is not immediately relevant to the AssetCo Board’s approach to the immediate proposal.

GT accepts that Mr Mills’ oral evidence was that he would have allowed AssetCo plc to use the Preference Share monies (at least to stay afloat pending the restructuring being implemented), and it is suggested that this is inconsistent with his evidence (both in his second witness statement and in his oral evidence) that he would not have waived the breach of the Preference Share Agreement. I am satisfied that Mr Mills did indeed indicate that he would have allowed AssetCo to use Preference Share monies to assist it to stay afloat pending the restructuring being implemented following Mr Davies’ appointment – hence he referred to AssetCo having “got my 7.5 million” (which would mean that there could be no question of AssetCo being in breach of trust in using such monies). However he was clear that, pending the appointment of Mr Davies, he would not have waived the breach of the PSA. I do not consider there was any inconsistency in Mr Mills’ evidence in terms of his own mind-set – he was prepared to allow use of some of the PSA monies following Mr Davies’ appointment, but he would not waive any breach

As was pointed out by Mr Templeman, really short-term funding was not going to be a problem for AssetCo given that it was not a trading company – and whilst it had some Group VAT liability, and some contingent liability to banks of its subsidiaries in relation to lending, as well as its running cost -

GT also suggests that AssetCo’s Board was very reluctant to engage with NAV in 2011 and that the position would have been the same in 2009.In this regard reference is made to communications involving both Mr Mills and AssetCo in February and March 2011 which show that AssetCo were suspicious about NAV’s motives, at least as first, and wanted NAV to make a formal offer. In this regard NAV rely, amongst other matters (to which I have had regard), on the following. On 18 February 2011 Mr Jennings of GT reported internally on AssetCo’s view that NAV “may have an ulterior motive of actually wanting to stab [AssetCo] in the back so they can gallop off with a cheaper carcass”, whilst on 21 February 2011, Mr Freemantle stated in an email to Mr Brown that “threats and intimidation” were a feature of dealing with NAV. Mr Manning, also on 21 February 2011, described a proposal for investment by NAV as “yet another ploy to scare us into surrender”, and a “bottom fishing try-on”. Mr Shannon, on 22 February 2011, stated that AssetCo should not meet with NAV until NAV made a formal offer, and “anything else will just be a Mills bullying session.”

Mr Mills’ oral evidence was that in 2011 AssetCo “didn’t consult us” when

Events in 2011 were not, however, the same as the position in 2009 or 2010 on the Counterfactual. As GT acknowledges in its Defence at paragraph 48(3A)(1), “it is admitted that in both 2009 and 2010 the only prospect for