European law firm Fieldfisher's leading commercial disputes team has secured a significant High Court victory for their clients – the defendants in a multi-million pound dispute concerning alleged breach of warranty and fraudulent accounting at a UK engineering firm.
Sitting at the High Court in Manchester on Monday 24 August, His Honour Judge Pearce struck out claims against the defendants (founders of AIM Engineering Ltd, a manufacturer of products for the automotive and aerospace sectors) alleging they had fraudulently inflated work in progress figures at the business.
The intention of the alleged fraud, according to the claimants, was to overstate AIM's accounts by around £1.5 million prior to its sale in 2013 to Arlington Industries Ltd, a portfolio company of global private equity fund, Cartesian Capital.
Having declined to pay loan notes due to the defendants in December 2017, Arlington commenced proceedings against them in early 2018 for alleged breach of warranty and fraud. The claimants sought damages of £6.9 million, claiming Arlington had been forced to pump millions into AIM as a result of overstated figures in the company accounts.
The defendants denied the breaches of warranty and the fraud, while also pursuing a counterclaim seeking payment of several million pounds-worth of loan notes owed to them, plus interest.
Fieldfisher acted for the third and fourth defendants, AIM Engineering's co-founders Mr Ian Draper and Mr Matthew McGowan. An application was issued by Fieldfisher on their behalf in June 2020, seeking an order that the claims against them be struck out and sought judgment in respect of their counterclaim.
Mr Stephen Connolly (Counsel for the third and fourth defendants) stated during the hearing: "These proceedings have been issued in bad faith. They have been issued in a cynical and abusive manner with the sole purpose of attempting to withhold payment of loan notes that are properly due and owing".
Mr Draper and McGowan were emphatically cleared of all allegations, together with the first and second defendants (Alan Foster and Simon John Brazier), who were also co-founders of the business. Mr Draper and Mr McGowan were also awarded judgment of circa £2.4 million in respect of their counterclaim, plus costs.
In a judgment that was supportive of the position taken by Fieldfisher's clients and highly critical of the Arlington Claimants, Judge Pearce said the breach of warranty claim against the defendants was "wholly without merit" and noted that the alleged overstatement was "wholly inconsistent" with the actual figures stated in the company's management accounts.
Judge Pearce noted: "There is no clear allegation of how it is the allegedly inaccurate figures in the management accounts in fact flowed from the acts or omissions of the defendants, still less that they flow from any dishonest, fraudulent or otherwise seriously wrongful conduct on the part of any of the four defendants."
Regarding the alleged fraud, he stated that Arlington had failed to properly particularise the allegations of fraud in the pleadings and added that: "In my judgment, this is a case, in which the claimants do not plead something which tips the balance towards fraud because they cannot do so because there is no such material".
As a mark of his views on the claimants' conduct in bringing and maintaining such claims, which he found to be both without merit and abusive, Judge Pearce awarded Fieldfisher's clients their costs of the entire proceedings, as well as the application, on an indemnity basis.
Arlington (now known as Investment Holdco 123) was placed into administration the same day that the summary Judgment application was issued, and that its expert evidence in support of its claim was due to be filed.
Fieldfisher will now be seeking recovery of the £2.4 million judgment and their substantial costs. The Judgment awarded on 24 August was made against Investment Holdco 123 (in Administration); however, Mr Draper and Mr McGowan indicated they would likely also be taking action against those other parties who controlled, funded and facilitated these proceedings.
Commenting on the decision and the next steps in this case, James Lappin, dispute resolution partner who led the Fieldfisher team representing Mr Draper and Mr McGowan, said:
"We are delighted to have secured this significant result for our clients and to have proved, as the Judge noted plainly, that the claims against them were abusive and entirely without merit.
"Mr Draper and Mr McGowan, together with the other defendants, spent many years growing their business and sold it to the Arlington group in 2013 in good faith. The decision to withhold payment of the loan notes which were due to them as payment for that company was awful. However, the cynical decision to pursue totally baseless allegations of fraud against them in order to do so was inexcusable and calls into question the conduct of those behind the Arlington Group and their advisers.
"We will be pursuing all possible legal options and we are confident of securing justice for our clients by making a full recovery of all sums and costs due to them."
The Fieldfisher Manchester team was led by James Lappin and Daniel Sheehan, together with Moishe Noe, Matthew Kurzeja and members of the costs team.
Counsel for the third and fourth defendants were Stephen Connolly and Anja Lansbergen-Mills of Exchange Chambers.
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