Accounts Warranties and Unknown Liabilities

Originally published September 2010

An issue that frequently exercises the minds of buyers and sellers of companies and businesses is the possibility of a previously unknown pre-completion liability that comes to light after completion of the transaction, particularly where provision for the liability, if known, would have been made in the audited or management accounts of the target. This issue was the subject of a recent English Court of Appeal decision (Macquarie Internationale Investments Limited v Glencore UK Limited [2010] EWCA Civ 697).

The Macquarie case examined the wording and liability resulting from accounts and management accounts warranties included in a share purchase agreement. The share purchase agreement entered into between the parties defined "Accounts" as the draft audited consolidated balance sheet and profit and loss account in respect of the financial year ended on 31 December 2005 and "Management Accounts" as the unaudited consolidated management accounts for the period from January to June 2006. The share purchase agreement contained a warranty that the Accounts gave a "true and fair view" and made appropriate provision for all material actual and contingent liabilities "of which the Group and/or Company or Subsidiary to which they relate was aware". The Management Accounts were warranted as fairly reflecting the Group's financial position and not being misleading in any material respect.

The target group's business involved the supply of gas to commercial customers in the UK. The gas was transported by distribution companies one of whom undercharged one of the target's subsidiaries in respect of certain charges over a period. It then issued an invoice to the relevant subsidiary for the amount of the shortfall, which was Stg£2.4 million. The liability was not included in the Accounts or Management Accounts but if it had been the price paid would have been Stg£2.4 million less. The claimants argued that that there had been a breach of both the Accounts and the Management Accounts warranty, in particular that the Accounts did not give a true and fair view of the assets and liabilities of the group or the relevant subsidiary and the Management Accounts did not fairly reflect the financial position of the group and were misleading in a material respect. It was admitted by the defendants that had the liability been known it would have been included in both the Accounts (at the then accrued figure of £566,000) and the...