Many business owners look forward to the day when they will be able to sell up for a fortune – but such hopes can come horribly unstuck without the right professional advice. The point was made by a case in which a couple were ordered to repay every penny of the seven-figure sum they received for their company.
When the couple sold all the shares in the company to an investor for almost £2.4 million, they formally warranted that, amongst other things, its accounts were true and accurate, fairly representing its assets, liabilities, profits and losses. They also confirmed that the accounts were not affected by any unusual or non-recurring items or any other factor that would affect their accuracy.
After the investor took over, it walked straight into a cashflow crisis. It argued that it had to advance over £1 million to keep the company afloat. It was alleged that the company’s liabilities had been understated, and the value of its assets overstated, thus giving its accounts an unduly rosy look. It was submitted that the company was in fact worthless and insolvent at the date of the sale.
In upholding the investor’s claim, the High Court found that the couple had breached the warranties. The damages due to the investor in respect of the breach would be likely to exceed the purchase price by more than £500,000. A contractual cap contained within the sale agreement, however, restricted the investor’s recovery to the purchase price. Judgment was entered against the couple for £2,386,247, to which interest and legal costs would be added.