The High Court rejected a purchaser’s bid to unwind a share purchase agreement after an employee’s embezzlement came to light, but awarded damages and ordered the sale to proceed with an adjustment to the price.
In a judgment delivered on 10 June 2005, Mr Justice O’Sullivan found that financial warranties in the agreement had been breached. The contract barred rescission after completion for breaches of warranties, and the court also rejected the purchaser’s claims for rescission based on misrepresentation and mistake.
Intrum Justitia BV had agreed in October 2004 to buy the entire issued share capital of Legal and Trade Collections (Ireland) Limited, an Irish subsidiary of Legal and Trade Financial Services Limited, for €2.15 million. Ninety per cent of the price was paid on completion. During work on the completion accounts, the defendant’s chief accountant identified a discrepancy of about €457,000. The defendant’s financial director then confessed to embezzling money over almost three years to fund a gambling habit.
The judgment said a report prepared during the investigation put the embezzlement at €453,415.55. The judge assessed the likely total at about €457,000, while noting that no forensic audit had been carried out and definitive information was unavailable. He found that the purchaser’s decision to conduct due diligence had continued unchanged despite assurances from the defendant’s chairman, so the purchaser had not relied on those statements. He also concluded that the embezzlement did not make the shares fundamentally different from what had been contracted for.
The parties disputed whether the defendant had been denied access to company records needed to prepare completion accounts. The judge found access had been refused for only a few hours on 5 November 2004 and was available afterwards. Completion accounts were not provided by the contractual deadline or later, so the judge held that the defendant was liable for the cost of an appropriate forensic audit.
The court awarded €457,000 to be put back into the company and €25,000 towards the audit. It also awarded general damages equal to 5% of the company’s net annual post-tax profits for its last audited 12-month period, adjusted for the embezzlement. Any further direct losses disclosed by the audit above €457,000 would also be payable once ascertained.
The defendant was granted an order for specific performance of the agreement, with an appropriate adjustment to the purchase price. The judgment does not specify that adjustment’s amount.