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You are here: BAILII >> Databases >> England and Wales High Court (Queen's Bench Division) Decisions >> Ageas (UK) Ltd v Kwik-Fit (GB) Ltd & Anor [2014] EWHC 2178 (QB) (04 July 2014) URL: https://www.bailii.org/ew/cases/EWHC/QB/2014/2178.html Cite as: [2014] BUS LR 1338, [2014] WLR(D) 407, [2014] Bus LR 1338, [2014] EWHC 2178 (QB) |
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QUEEN'S BENCH DIVISION
7 Rolls Building, Fetter Lane London, EC4A 1NL |
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B e f o r e :
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Ageas (UK) Limited |
Claimant |
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| - and - |
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| Kwik-Fit (GB) Limited AIG Europe Limited |
Defendants |
____________________
Patricia Robertson QC and Tamara Oppenheimer (instructed by CMS Cameron McKenna LLP) for the Second Defendant
Hearing dates: 9-13 & 17 June 2014
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Crown Copyright ©
The Hon. Mr Justice Popplewell :
Introduction
Ageas")
acquired from the First Defendant, Kwik-Fit (GB) Limited ("KFGB"), the entire issued share capital in Kwik-Fit Insurance Services Limited ("KFIS") for a consideration of £214.75m. Under the SPA, KFGB warranted the truth, fairness, accuracy and compliance with relevant accounting standards of the KFIS accounts which were relied upon by
Ageas
for the purpose of valuing KFIS and its subsidiaries, subject to a £5m cap on liability. As is now common ground, KFGB breached those warranties. At the same time as entering into the SPA,
Ageas
took out a Warranty and Indemnity insurance policy with the Second Defendant ("AIG"), then called Chartis Insurance UK Limited, to protect it against losses resulting from breaches of warranty in excess of the £5m cap under the SPA. The measure of loss recoverable under the policy is that which would be recoverable from KFGB under the SPA, subject to the £5m excess.
Ageas
claims that the proper quantum of its warranty claim is £17,635,000, giving rise to a claim under the policy of £12.635m; AIG contends that the proper quantum of the warranty claim is £8,792,000 giving rise to a claim under the policy of £3.792m. The quantum issues narrowed considerably in the course of the hearing, enabling me to set out relatively briefly the background necessary to address the issues which remain.
The background
Ageas
(formerly named Fortis (UK) Limited) is the holding company for the group's insurance operations in the United Kingdom. At all material times
Ageas
has predominately been engaged in providing personal lines insurance through a network of intermediary brokers, focusing mainly on the underwriting of motor insurance, but also providing household insurance, travel insurance and a small amount of commercial insurance.
Ageas,
KFIS was a wholly owned subsidiary of KFGB and EIS and TGIC were wholly owned subsidiaries of KFIS. I shall refer to the three insurance companies collectively as KFFS, as the parties did at the time and during the hearing.
Ageas
was alerted to the proposed sale of KFFS when it received an Information Memorandum from the seller's investment banking advisors, Credit Suisse, on or around 12 March 2010.
Ageas
regarded it as a potentially attractive investment opportunity, and put together a team of senior personnel from its own staff. Within this team there was considerable past experience of acquisitions and a wealth of knowledge of the operation of the UK insurance market, including both underwriting and intermediary activities.
Ageas
also retained Deutsche Bank and Deloittes to advise them in relation to the purchase, completing an impressive M&A team.
Ageas
M&A team submitted a paper on the proposed acquisition of KFFS to the Management Committee for approval. On 14 June 2010, the
Ageas
M&A team submitted an updated paper to the Holdings Board. On 15 June 2010, the Holdings Board approved an offer for KFFS in the range of £210m to £220m. On or around 22 June 2010,
Ageas
made its "final" offer of £215m, which was revised down to £214.75m in order to take into account an additional liability incurred by KFIS. This was accepted and on 1 July 2010 the parties entered into the SPA, whereby KFGB agreed to sell to
Ageas
the entire issued share capital in KFIS for £214.75m. Completion took place on 2 August 2010 and the purchase price was paid in full by
Ageas
to KFGB.
Ageas
team adopted and relied on a discounted cash flow ("DCF") analysis, as is common in valuing companies. As is well known, DCF modelling involves using projections of the future free cash flow of a company (the amount of cash not required for operations or reinvestment) discounted to arrive at a present day value of a future income stream. The DCF model created by Deutsche Bank and used by
Ageas
was relatively sophisticated, and involved starting with the projections put forward by KFFS, identifying their key performance indicators and the assumptions which drove them, adjusting those KPIs and assumptions for
Ageas'
own views of the future for the business and the market, and applying the revised assumptions to the model taking the historical figures from the warranted accounts. Cross checks were also made by reference to other common methods of company valuation, in particular by considering price/earnings ratios and other market transactions. The final version of the DCF model used the figures in the 2010 management accounts and produced an ultimate valuation of £214.5m.
The issues
Ageas
paid, namely £214.75m, which was very close to the figure produced by the DCF model using
Ageas'
assumptions and key performance indicators. The dispute was what value was to be attributed to the error in relation to TOCBD.
Ageas'
case, based on the evidence of its expert accountant Mr Mesher, was that adjustment for the understatement of TOCBD reduced the value of the company by £21.9m, which involved a reduction in value, net of the Bad Debt Percentage adjustment, of £17.635m. The figure was calculated as follows. Mr Mesher identified the actual TOCBD incurred for the five months covered by the 2010 management accounts, which were the latest trading figures available for the period prior to the sale. He grossed it up to give an annual figure for 2010 of £2.866m. He then applied that figure to all the years in the DCF model, by adjusting the commission write off cell, which flowed through the model to give the adjusted value. He was therefore valuing the company by using the DCF model used by
Ageas
but projecting that TOCBD would remain constant to 2014 at the absolute level at which it had been for the first 5 months of 2010. The model projected that after 2014 all revenue assumptions would remain constant, so that this involved assuming TOCBD at 2010 levels until 2020.
Ageas,
because the actual TOCBD figures between June 2010 and April 2014 can be seen to be much lower than those assumed by Mr Mesher. It can now be seen that the rates of TOCBD in mid 2010 were at a level which represented an historical peak and fell back thereafter. AIG's expert, Mr Mainz, produced a calculation in the course of Mr Mesher's cross examination which identified the relevant adjustment based on actual TOCBD figures to be £8.792m (after adjustment for Bad Debt Percentage). He too made his recalculation up to 2014 and assumed, as had the model, constant levels thereafter. For the period 2010 to 2014 he did not simply apply the actual TOCBD figures, because he recognised that the actual level of TOCBD had been influenced by the fact that there had been a reduction in the number of policies written compared with the number predicted at the time of acquisition and used in the model. He therefore sought to remove this variation as a factor, by calculating from the actual TOCBD post acquisition data a rate of TOCBD per policy, and then applying that rate to the forecast volume of policies used in the model at the date of the acquisition. Although these figures were put to Mr Mesher in cross examination before he had had a chance to consider or check them, he was able to follow the exercise which they purported to carry out, and he and
Ageas'
advisers have had ample subsequent opportunity to check their accuracy, which has not been challenged. The issue is whether they reflect the correct methodology for making the relevant adjustment.
Ageas,
not KFFS, in the light of the wealth of experience of
Ageas'
M & A team and the fact that
Ageas'
assumptions were what drove the DCF model which in fact produced a figure almost identical to the agreed price. The assumption that the
Ageas
M & A team put into the model was that rates of cancellation would remain constant at 2010 levels. Secondly using KFFS's assumptions rather than
Ageas'
assumptions did not assist this aspect of AIG's case. Both Mr Mesher and Mr Mainz used absolute figures in their adjustment, whereas the KFFS assumptions about falling cancellations were of rates of cancellations as a percentage of the volume of policies written, not numbers of policies cancelled. Since the model projected increased numbers of policies written, a projected fall in the cancellation rate did not imply a reduction in the number of policies cancelled. A calculation in the course of the hearing applying the KFFS projected fall in cancellation rates to the projected increased volumes revealed that even on KFFS's assumptions the number of cancelled policies was projected to rise.
Ageas
receiving a windfall and would offend the compensatory principle.
Ageas,
Mr Matovu QC and Mr Scannell argued that there is no good reason to depart from the breach date rule, assessing damages by reference to the value of the company at that date without reference to subsequent events; and that following this conventional approach does not involve any injustice to AIG or windfall to
Ageas.
Discussion
"Although the 1990 management accounts did not show a true and fair view because rebate reserves were overstated by £1.7m., in order to see if the plaintiff has suffered any loss and, if so, how it should be quantified, it is necessary to establish the actual profit for that year. Thus, if some credit or profit has been omitted which can properly be taken into account in the 1990 profit, the apparent loss is pro tanto extinguished or diminished. For this purpose, in our judgment, it is permissible to take into account hindsight to arrive at the actual figures."
"[132] Before I move on from this part of my judgment, there is a more general point which I wish to make. So far I have looked at the question of the quantum of any loss in the way in which the experts looked at it, making hypothetical estimates both of the but for valuation and of the actual valuation. Both experts were at pains to leave hindsight out of account in both of their valuations. That is plainly correct as regards the but for valuation, which is a hypothetical exercise, but I question whether it is also correct as regards the actual valuation. The actual valuation is not a hypothetical valuation like, for example, a valuation made for capital gains tax or inheritance tax purposes. It is designed to establish what the true loss to Infiniteland has been. Why should hindsight be excluded in that context?
[133] In Mr Downes' written closing submissions he wrote:
"Mr Palmer's evidence is that the actual value was nil. Given the absence of a track record and recent historic losses, it is submitted that Mr Palmer's opinion has an inherent probability about it."
I agree with that, but I am in any event inclined to go further. Infiniteland bought the companies in July 2001, and within a matter of months Bickerton's trade collapsed. Although I do not believe that Artisan realised how bad things were at the time, and although I accept that Artisan would have preferred Infiniteland to make a success of Bickerton, I think that it is obvious now - admittedly with hindsight - that Bickerton was doomed from the time that Infiniteland acquired it. I would in any event agree with Infiniteland (and its expert witness, Mr Palmer) that Bickerton was worthless at the time of acquisition, but even if I was uncertain about that I do not see why I should close my eyes to the undoubted facts that the companies for which Infiniteland agreed to pay over £1.4m turned out in the event to be completely worthless. There were a few hearsay suggestions in the evidence that Mr Aviss milked Bickerton during his brief period in control, so that the failure of Bickerton may have been Mr Aviss's fault, but the point was not pressed, and I repeat my view that Bickerton was doomed from the start.
[134] I do not need hindsight to come to my conclusion, but as a generalisation and subject to principles of remoteness of damage in contract or in tort (which do not in my view arise in this case), losses recoverable in damages are quantified at what they turn out in the event to have been, not at what they might have been forecast to be at the time of the transaction which subsequently goes wrong. Given my earlier conclusions on liability this does not help Infiniteland, but if I had taken a different view on liability, then either without or with hindsight I would agree with Mr Downes and Mr Palmer that the actual valuation of the companies which Infiniteland acquired — the valuation which falls to be compared with the but for valuation of some £1.4m — was nil."
(1) Damages for breach of contract are intended to put the innocent party in the same financial position as if the contract had been performed. This is the compensatory principle which "has been enunciated and applied times without number and is not in doubt" per Lord Bingham in Golden Strait Corpn v Nippon Kubisha Kaisha (The Golden Victory) [2007] 2 AC 353 at [9] (see also per Lord Scott at [29]). It may also be expressed as the claimant being entitled to the value in money of the contractual rights he has lost (per Lord Scott at [30]). The lodestar is that the damages should represent the value of the contractual benefits of which the claimant is deprived by the breach of contract, no less but also not more (per Lord Scott at [36]).
(2) Damages for breach of contract will normally be assessed by reference to the position at the date of breach. But a later date may be used for the assessment if in all the circumstances of the case to do so would more accurately reflect the overriding compensatory principle: County Personnel (Employment Agency) Ltd v Alan R Pulver & Co [1987] 1 WLR 916, at 925-6; The Golden Victory at [11] and the authorities there cited.
"[36] The same would, in my opinion, be true of any anticipatory breach the acceptance of which had terminated an executory contract. The contractual benefit for the loss of which the victim of the breach can seek compensation cannot escape the uncertainties of the future. If, at the time the assessment of damages takes place, there were nothing to suggest that the expected benefit of the executory contract would not, if the contract had remained on foot, have duly accrued, then the quantum of damages would be unaffected by uncertainties that would be no more than conceptual. If there were a real possibility that an event would happen terminating the contract, or in some way reducing the contractual benefit to which the damages claimant would, if the contract had remained on foot, have become entitled, then the quantum of damages might need, in order to reflect the extent of the chance that that possibility might materialise, to be reduced proportionately. The lodestar is that the damages should represent the value of the contractual benefits of which the claimant had been deprived by the breach of contract, no less but also no more. But if a terminating event had happened, speculation would not be needed, an estimate of the extent of the chance of such a happening would no longer be necessary and, in relation to the period during which the contract would have remained executory had it not been for the terminating event, it would be apparent that the earlier anticipatory breach of contract had deprived the victim of the breach of nothing.
………
[38] The arguments of the owners offend the compensatory principle. They are seeking compensation exceeding the value of the contractual benefits of which they were deprived. Their case requires the assessor to speculate about what might happen over the period 17 December 2001 to 6 December 2005 regarding the occurrence of a clause 33 event and to shut his eyes to the actual happening of a clause 33 event in March 2003. The argued justification for thus offending the compensatory principle is that priority should be given to the so-called principle of certainty. My Lords, there is, in my opinion, no such principle. Certainty is a desideratum and a very important one, particularly in commercial contracts. But it is not a principle and must give way to principle. Otherwise incoherence of principle is the likely result. The achievement of certainty in relation to commercial contracts depends, I would suggest, on firm and settled principles of the law of contract rather than on the tailoring of principle in order to frustrate tactics of delay to which many litigants in many areas of litigation are wont to resort. Be that as it may, the compensatory principle that must underlie awards of contractual damages is, in my opinion, clear and requires the appeal in the case to be dismissed."
Lord Brown said:
"[78] …My more fundamental conclusion, as I shall shortly explain, is that the breach date rule does not require contingencies - such as the likely effect of a suspensive condition – to be judged prior to the date when damages finally come to be assessed. ……..Could it really be thought to be in the interests of certainty to address these questions prior to that on which damages are in fact being assessed? To my mind not. Must the judge really shut his eyes to the known facts and speculate how matters might have looked at some earlier date? Again, not without compelling reason and none appears to me. Lord Bingham, at para 12, and Lord Carswell, at para 65, have already explained the "Bwllfa principle": Bwllfa and Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Co [1903] AC 426. There is no need to repeat it. Suffice it to say that I see no good reason to depart from it here."
"If the question goes to arbitration, the arbitrator's duty is to determine the amount of compensation payable. In order to enable him to come to a just and true conclusion it is his duty, I think, to avail himself of all the information at hand at the time of making his award which may be laid before him. Why should he listen to conjecture on a matter which has become an accomplished fact? Why should he guess when he can calculate? With the light before him, why should he shut his eyes and grope in the dark? The mine owner prevented from working his minerals is to be fully compensated – the Act says so. That means that so far as money can compensate him he is to be placed in the position he would have been if he had been free to go on working."
Lord Robertson said at p. 432 that "estimate and conjecture are superseded by facts as the proper media concludendi" and at p. 433 that "as in this instance facts are available, they are not to be shut out."
"My Lords, I think in this case that Phillimore J. stated the question for debate with perfect accuracy when he said that "the true inquiry here is not what is the value of the coalfield or of the coal, but what would the colliery company, if they had not been prohibited, have made out of the coal during the time it would have taken them to get it."
In carefully distinguishing the sale analogy as a false one, the House of Lords might be thought to have endorsed the conclusion of the Court of Appeal on the question had the analogy been a good one, which was that subsequent fluctuations in coal prices would have been irrelevant to a valuation if there had been a sale. But Romer LJ, at least, thought that there was no objection in principle or conceptual difficulty in using subsequent events as an aid to valuation at the earlier date, although in common with the other members of the Court he did not regard subsequent fluctuations in coal prices as assisting in that exercise. He said at p. 141:
"….it is common ground that the compensation to be awarded by the umpire was the true value of the coal on October 15, the day on which notice to treat was given. I agree that in ascertaining that value the umpire may look at facts occurring subsequent to the notice to treat so far as they are material as shewing what was the value of the coal on that date, but not for any other purpose."
"[Ageas]
shall, and to the extent reasonably possible shall cause [KFFS] to, act at all times as if uninsured and take all action reasonably necessary or advisable to mitigate any [insured loss] or potential [insured loss]."
Application
Ageas
a windfall. The second is that any benefit
Ageas
receives by the reduced post acquisition incidence of TOCBD is not one which the parties have conferred on
Ageas
by the allocation of risk in their contractual bargain. In my judgment AIG has failed to surmount either of these hurdles.
Windfall
Ageas.
Allocation of risk
Ageas
was prepared to pay, and KFGB to accept, for a business which was thereafter
Ageas'
to do what it wanted with. There was no provision, as there sometimes is in such agreements, for any post acquisition adjustment of the price based on subsequent trading performance. Each party would have to determine an acceptable price based on forecasts reached prior to completion in what was a fast moving and competitive market facing new challenges in the grip of a major recession whose effect on customers remained uncertain. Upon completion, the contract was fully executed. The outcome of all the contingencies inherent in the forecasts were risks conferred on
Ageas.
If the business did better than the parties projected when calculating a price, that was for
Ageas'
benefit. If it did worse, that was its loss. The bargain embodied in the SPA was the allocation of risk to
Ageas
of any benefit or loss arising either as a result of the way
Ageas
chose to run the business or as a result of external influences on the success of the business.
(1) The total volume of business whichAgeas
aims to write will depend upon its pricing strategy, upon its target customer base, and upon its administrative and cost structures. There is, for example, a spectrum between high volume low premium/margin business and lower volume business with higher premiums and margins. It is for the business under
Ageas'
ownership to decide where to seek to position itself. The volume of business written following acquisition will in part be the result of
Ageas'
own strategy in running the business. Further, whatever
Ageas'
strategy in these respects, the insurance market and wider macro economic circumstances are likely also to have an effect on the number of policies written. These may influence
Ageas'
market share, the level of premiums and margins, and possibly the size of the market as a whole in a recession.
(2) The mix of business, and in particular the number of instalment policies written, again may be the result of the wayAgeas
chooses to run the business in a number of respects. A higher number of instalment contracts might increase the incidence of TOCBD; but it brings with it an increase in the opportunity for finance income, and for add on products. Conversely, as already observed, a reduction in the number of instalment contracts might bring a welcome reduction in TOCBD but an unwelcome reduction in finance income. Whatever
Ageas'
strategy in these respects, again the insurance market and wider macro economic circumstances may have an effect on the number of instalment policies written.
(3)Ageas
may take steps to reduce the incidence of cancellation of policies, which again may have ramifications for other parts of the business model. The evidence suggested that cancellation rates tend to be lower for lower premium business and the evidence of Mr Gilmurray, KFIS' Finance Director since May 2011, was that one of the reasons TOCBD amounts fell after acquisition was a fall in premium rates. Lower premium business could be part of a business strategy or the effect of market influences or both. Lower premiums might lead to a reduction in TOCBD through a lower cancellation rate, but any such benefit would be offset or outweighed by the consequences in lower revenues or profit margins.
(4) The number of cancelling policyholders who default on the debt may be capable of being influenced by the company's administrative arrangements and credit risk inquiries, but may also be a product of macro economic conditions. One might expect more defaulters in a recession.
(5) The efficient management of TOCBD may be down to the wayAgeas
runs the business; it may also be a function of the regulatory environment and terms and conditions available from insurers.
Ageas
chose to run the business following acquisition and the interaction between those business decisions and the effect of the market and macro economic conditions on the business. Those contingencies are all matters which the parties agreed are for
Ageas'
risk. The incidence of TOCBD was just one element inextricably bound up with the way the business was run and the external influences on its success, and was subject to the same allocation of risk.
Ageas
to enjoy, just as
Ageas
would have to shoulder any resultant burden. As it happens, I did not have the evidence to enable me to determine with any degree of confidence what were the reasons for the extent of the fall. The only evidence was to be found in paragraph 29 of a statement of Mr Gilmurray which said: "TOCBD has been on a downward trend since August 2011. This is wholly due to external factors, including fewer sales and a fall in motor premiums, resulting in fewer cancellations and less bad debt." AIG did not require Mr Gilmurray to be called for cross examination. The statement does not purport to be exhaustive as to the reasons for the decline. It was a statement prepared in response to a disclosure application, not specifically for use at trial, and at a time when AIG's expert Mr Mainz had not yet identified that he was going to rely on the actual incidence of TOCBD post acquisition. It did not therefore purport to be a considered or careful analysis of the reasons for the fall. The passage is fairly to be characterised as a throw away line expressing an unconsidered opinion of some of the reasons for a fall in TOCBD since the acquisition. But even taken at face value, it does not assist AIG. If a reduction in sales and a reduction in premiums as a result of external market factors is a reason for the reduction in TOCBD from 2010, those are benefits accorded to
Ageas
by the contractual allocation of risk, just as would have been a loss resulting from an increased TOCBD caused by an increase in sales or premiums or any other internal or external factors.
Conclusion
Ageas' claim against AIG is entitled to succeed in the principal sum of £12,635,000. The amount of the judgment to be entered is affected by issues of the tax treatment of the principal sum, and interest, which were left over for further argument.