01 April 2020 - Podcast
Facts of the Case
In 2002, the appellant company, Capcon, had entered into negotiations for the purchase of shares in Argen in which the respondents were shareholders. Argen had a 50% stake in a subsidiary company, GMBH. During the negotiations Capcon enquired as to the owner of the remaining 50% stake in GMBH and Edwards represented that the shares were held by a Panamanian company, but were beneficially owned by a third party called Mr Cowling. The purchase agreement provided for an initial payment and two deferred payments, which depended on the profit of Argen over the following two years.
In June 2004 Mr Cowling, sent a letter to Capcon's accountants that he was not the beneficial owner of those shares. After enquiries as to the identity of the true beneficial owner, it was common ground at trial that by September 2004 Capcon knew that the representations made about the shares in GMBH were false.
In the meantime Capcon paid a further sum towards the first deferred payment under the purchase agreement and in mid August 2004 a board meeting was held to discuss what to do about Mr Cowling's letter. Following that meeting, in December 2004 Mr Cowling agreed to buy Argen's 50% stake in GMBH.
In April and May 2005 correspondence indicated that from Capcon's point of view the sale to Mr Cowling was regarded as closing the matter. In June 2005 Capcon delivered Argen's accounts for the second financial year.
In February 2007 the claimants issued proceedings and claimed summary judgment for payment by Capcon of the balance of £100,000 outstanding in respect of the first deferred payment and specific performance of the agreement so that their entitlement to the second deferred payment might be ascertained and enforced.
In March 2007 solicitors for Capcon contended that Capcon had rescinded the agreement and that the representations as to the share ownership of GMBH that Capcon had relied upon were false and had been made fraudulently (alternatively negligently).
The matter came on before Deputy Master Beruns in April 2007 who, in granting summary judgment and specific performance of the agreement found that although fraud had not been admitted, there was evidence to support the allegation, which had properly been made. Capcon was estopped from rescinding the agreement by its conduct, barred by lapse of time and further restitutio in integrum was not then possible given the nature of the property the subject matter of the agreement. Capcon appealed.
Capcon's appeal was heard by The Chancellor who in giving his Judgment on 12 October 2007 found:
- Capcon had no real prospect of establishing at trial that the necessary ingredients of the estoppel relied on by the claimants would not be made out. Further it would be unconscionable for Capcon to gainsay the unequivocal assurance it had given that it would not rescind the agreement.
- The Deputy Master was right to conclude that restitution was impossible if only because Capcon had sold its Argen shareholding in GMBH. It was Capcon's actions and not those of the alleged fraudster which precluded restitution.
- However, the issue was whether Capcon had a real prospect of resisting a remedy of specific performance at trial on the ground that it had entered into the agreement in reliance on a fraudulent representation. Whilst fraud was denied, all other constituents of the claim were admitted for the purposes of the summary judgment application. The Deputy Master had found that Capcon had a real prospect of establishing fraud at trial. In that situation it was too early to predict that in the event the fraud was made out at trial, whether the court would refuse to exercise its discretion in granting specific performance notwithstanding the loss of any right to rescind.
Points of Interest
In the context of an alleged fraud, it was clear from The Chancellor's review of the case law in the area of restitution that the fraudulent activity of a party is not sufficient to found a claim for rescission where the facts establish that restitutio in integrum is impossible.