[2025] EWHC 1889 (Comm)

Like Issues 5 and 7, my determination of these two issues is fact-specific though Issue 6 does contain the point of contractual interpretation mentioned next. As explained above, logically they would fall to be determined before Issue 7 had those other two issues, relating to disclosure, not been so heavily intertwined.

The terms of Warranty B5.2.2 are set out in paragraph 103 above. The question of interpretation is whether it contains one single warranty or two separate ones.

I address Issue 6 before Issue 4 below because LCG is right to say that if Warranty B5.2.2 contains two separate warranties (which the defendants obviously challenge) then the result of the 2022 Audit clearly establishes a breach of the Key Warranty, which is:

“during the last four years [the Company] has complied, and continues to comply, in all material respects with the Funding Rules.”

If, however, the Key Warranty is only a part of a single, composite Warranty B5.2.2 then it is necessary to address the Vendors’ Knowledge Issue by reference to the provisions of clause 6.8 of the SPA. This involves considering the defendants’ awareness of the Company’s entitlement to receive all funding under the contract in place between the Company and ESFA for AY20/21.

LCG contends that Warranty B5.2.2(a) is an absolute warranty – a representation of fact that the Company had during the last 4 years complied and continued to comply with the Funding Regulations – which is not qualified by reference to the defendants’ knowledge or awareness. As the 2022 Audit established a breach of the Funding Regulations, that representation was untrue and the defendants are liable for its falsity.

LCG points to the admission in the defence that the Company “had previously misinterpreted and misapplied the Funding Rules, as alleged” and that “under the contracts which the Company signed with the ESFA it was required to comply with the Funding Rules and submit accurate data in respect of learners.”

Mr Booth KC said that the inclusion of Warranty B5.2.2 (as a whole) as a knowledge-based warranty in the parties’ Agreed List of Common Ground and Issues was simply for convenience. That document is a case management tool (see D.5.2(a) of the Commercial Court Guide – “a neutral document”) and does not take precedence over the parties’ statement of case. That is obviously right. As I observed during closing submissions, it is the language of the SPA (as construed by the court by reference to any competing statements of case) which matters.

So far as that contractual language is concerned, LCG says there is a clear distinction between the absolute nature of Warranty B5.2.2(a) and the knowledge/awareness-based nature of Warranty 5.2.2(b). The qualification “so far as the Vendors are aware” applies only to the second.

Even if the Key Warranty is an awareness/knowledge based one, LCG says that I should reject Mr Lewis’s evidence that he was unaware of the breaches of the Funding Regulations. LCG does not doubt Mr Lewis’s commitment to serving the best interests of the students on the Company’s courses but I am invited to reject his evidence that he knew nothing about the financial consequences of the Company’s decisions in relation to planned hours and Condition of Funding. Those decisions were hugely significant for the financial position and success of the business and for Mr Lewis, as the Company’s CEO, to say he was oblivious to them is a starling assertion which beggared belief.

LCG says that the assertion is also undermined by the evidence of Mr Williams who rejected the suggestion that the decisions were his alone and said Mr Lewis was involved in them. Counsel for LCG pointed to the contrast between the defendants’ opening submissions, which said Mr Williams’s evidence on this aspect was materially helpful to them, and the conflicting evidence given by Mr Lewis. They referred to Mr Lewis’s preparedness to make statements of truth that (for the purposes of Issue 7) LCG had knowledge of matters indicating a breach of the Funding Regulations; and they questioned where this led when testing Mr Lewis’s awareness of such matters for the purpose of Issue 4.

LCG invited me to conclude that Mr Lewis’s evidence on Issue 4 was deliberately false.

The defendants say the Key Warranty (like the remainder of Warranty B5.2.2) is awareness/knowledge based. In addition to pointing to the treatment of Warranty B5.2.2 in the List of Issues, they say LCG’s argument is contrary to the way its case was pleaded and that splitting the warranty in two makes a mockery of the conjunctive word “and” between its two limbs. Mr Sims KC highlighted what he said was LCG’s inconsistent approach to the use of the word “and” in paragraph 12 of Schedule 5 (on Issue 7) and its suggested insignificance on the present issue. The defendants argue that its use means that, in order to establish a breach of Warranty B5.2.2, including the Key Warranty, LCG must prove both (1) non-compliance with the Funding Regulations and (2) they (as Vendors) were aware the Company was not entitled to receive all funding under its contracts with ESFA.

The defendants say they were not aware at the date of the SPA that the Company had breached the Funding Regulations. So far as the “due and careful inquiry” obligation under clause 6.8 of the SPA is concerned, Mr Lewis says he relied upon the experience of Mr Williams (part of the Senior Leadership Team as defined in the SPA) and the clean audit in 2018 in believing that the Company had complied with them.

The defendants’ counsel said the attack on Mr Lewis’s credibility as a witness was completely unjustified and at odds with the general thrust of his and Mr Williams’s evidence and the documentary record which showed, for example, that, Mr Williams signed the 2020 ESFA contract and completed the Company’s internal control questionnaires (required of it by ESFA as a provider of training). Mr Lewis had relied upon Mr Williams’s twenty-three years of experience in such matters and Mr Williams’s own evidence was that he had made innocent errors in fully comprehending the impact of the ESFA funding guidance. It is therefore entirely reasonable that Mr Lewis was unaware of the mistakes leading to the breaches of the Funding Rules. When Mr Lewis in testimony described Mr Williams’s evidence as “untruthful on a number of occasions” it was in relation to the suggestion that he (Mr Lewis) was fully aware of what was going on in Mr Williams’s department.

I should note first that LCG’s pleaded case is consistent with the argument that the Key Warranty is distinct from the remainder of Warranty B5.2.2. Addressing the warranty as a whole, paragraph 39 of the particulars of claim reads:

“This warranty was false in that the Company had not complied with the Funding Rules in all material respects during the previous four years, in that it had claimed the Over-Claimed Sum in breach of the requirements of the Funding Rules. The warranty was also false in that (for equivalent reasons) the Company was not entitled to receive all funding under contracts in place between the Company and the ESFA.”

The “also false” language is consistent with LCG’s case that two separate representations in the warranty (linked by the conjunctive “and”) were false.

In my judgment, the natural and ordinary meaning of the Warranty B5.2.2 is clear and supports the conclusion that the Key Warranty stands within it as a separate warranty.

The subject matter and scope of the two limbs of Warranty B5.2.2 is plainly different albeit heavily inter-connected, not least because of the way in which, as highlighted by the facts of this case, non-compliance with the Funding Regulations impacts upon funding for a later year. The fact that the Clawback related to the closed year AY20/21, though it was agreed to be repaid by way of an offset against the funding under the contract referred to in the second limb (i.e the contract for AY21/22) illustrates the different focus of the two limbs.

The first limb (the Key Warranty) addresses compliance with the Funding Rules over the last 4 years and currently (“continues to comply”). The “last 4 years” could be read either as a reference to academic years or to calendar years. If the former, then (on the basis that AY20/21 was the last of the four before the SPA) that would go back to AY16/17 (i.e. all of it). If the latter, then the Key Warranty covers the period back to 29 October 2017 which would not include almost all of the first 3 months of AY16/17. As compliance with Funding Rules is material to the Company’s funding for any given academic year, I would think the Key Warranty should be read as referring to past (and complete) academic years.

Nothing turns on that particular point, about precisely how far back the Key Warranty goes, and no doubt for that reason the parties did not trouble me with it (compare the Funding Indemnity going back to the specific date of 1 March 2018). However, it does highlight that the second limb of Warranty B5.2.2 is instead addressing the Company’s entitlement to funding under the contract with ESFA (and other funding contracts) in place as at the date of the SPA. That means the contract for AY21/22. Even recognising the two year time lag in the impact which any past non-compliance with the Funding Regulations might have upon the Retention Factor used to determine the Company’s funding in a later academic year, this limb of Warranty B5.2.2 is not expressly directed or necessarily confined to compliance with the Funding Regulations. However, I say that recognising that it is not obvious to me how an entitlement to funding for AY21/22 might rest upon matters going beyond compliance with the Funding Regulations; though it should also be noted that the limb also refers to “any other provider of funding for training delivered to schools” (I was told there was in fact no other such provider) whose funding would not be under the ‘Funding Rules’ as defined in the SPA.

To the extent the second limb can be said to indirectly address past compliance with the Funding Regulations, it is not obvious that it covers the period back to 2017. In addressing funding entitlement in AY21/22, neither does it extend to the Company’s funding entitlement in future academic years. By contrast, the “continues to comply” language of the Key Warranty is (because of the time lag and, again, as highlighted by the facts of this case) potentially relevant to funding in later academic years.

In my judgment the use of the conjunctive “and” between the two limbs of the warranty does not carry great significance in the interpretation of Warranty B5.2.2. Given the different subject matter and scope of the two limbs, the use of “and” (rather than “or” which could perhaps encourage a thought that one might somehow be a substitute for the other) is not inappropriate in linking two cumulative and separate representations about the Company. Taking Mr Booth KC’s salt and pepper analogy, the language signifies that the dish will be defective if either seasoning is missing (just as both were required for the purpose of testing the meaning of paragraph 12 of Schedule 5).

On the basis that Warranty B5.2.2 contains two distinct representations about the Company’s state of affairs, in my judgment it is impossible to read the first as qualified by the knowledge/awareness requirement of the second. The parties expressly agreed to confine that requirement to the second limb rather than include it within the introductory words to both. The defendants did not advance a Chartbrook argument (see the two conditions for such an argument identified in paragraph 345 above) in relation to Warranty B5.2.2 and to read the provision as if both limbs were prefaced by “so far as the Vendors are aware” would be at odds with the principles laid down in Arnold v Britton, at [16] to [20].

This is not the only warranty where they agreed upon an unqualified representation as to a factual state of affairs followed by a further representation about the defendants’ knowledge pertinent to the first: see Warranties B1.4, B2.5.2 and (more questionably when the wording of the knowledge element appears to cast doubt upon the apparently unqualified effect of the initial representation) B3.6. As it is, the parties have categorised those other three warranties (in their entirety) as knowledge-based warranties.

Accordingly, the Key Warranty is a separate warranty, the breach of which does not require LCG to establish that either defendant was aware that the Company had breached the Funding Regulations in the respects established by the 2022 Audit. The defendants warranted the truth of the statement about past and ongoing compliance with the Funding Rules, in all material respects, and assumed responsibility for that statement irrespective of their own awareness, knowledge or belief.

This interpretation of Warranty B5.2.2 avoids the potential (though see below for the parties’ implicit position on this) for Ms Probert to be liable under it, through being held accountable by reference to the statement in clause 6.8 of the SPA, when Mr Lewis might escape such liability by showing he did make the due and careful inquiry required by that clause. That is the essence of his position on Issue 4 so far as his reliance upon Mr Williams is concerned. There is no indication that Ms Probert made any such inquiries of the SLT or discussed such matters with Mr Lewis. On the face of it, it would be an odd result for Ms Probert potentially to have greater exposure to liability when she had no involvement in the funding matters that fell within Mr Lewis’s remit as the Company’s CEO. As it is, for the purposes of the argument on Issue 4, no distinction has been drawn between the knowledge of Ms Probert and the knowledge of Mr Lewis.

The 2022 Audit established that the Company did breach the ‘Funding Rules’ in AY20/21. The defendants are in breach of the Key Warranty.

LCG’s case is not confined to a breach of the Key Warranty. However, as Mr Booth KC correctly noted, LCG only needs to establish one breach of warranty, referable to the breach of the Funding Regulations, when (under the provision for ‘Double Claims’) it cannot recover greater damages by pointing to a breach of others.

So far as some of the other warranties relied upon by LCG are concerned, in my judgment the findings of the 2022 Audit mean that other warranties were also breached. In the light of Issue 4, I need only focus at this stage upon the absolute (i.e. non-awareness-based) warranties pleaded by LCG. All of the pleaded warranties are relied upon as a consequence of the Company being exposed to repayment of the Over-Claimed Sum because of the matters underpinning the breach of the Key Warranty. If I am wrong in my interpretation of the SPA in finding that the Key Warranty is an absolute warranty, it is my decision on Issue 4 that will determine whether the defendants were in breach of the pleaded warranties which are awareness-based.

The other absolute warranties shown to be false are:

The other absolute warranty relied upon by LCG is Warranty B5.2.1. The defendants warranted that “The Company does and has at all times complied with and conducted the Business in accordance with all applicable laws and regulations, which are binding on the Company”. LCG says this was false in that the Company had claimed the Over-Claimed Sum in breach of the requirements of the Funding Regulations. It points to the fact that ESFA allocated funding on behalf of the Secretary of State for Education (acting through ESFA) as was pointed out in a covering letter for the 2020-21 funding contract. The defendants say that the applicable laws and regulations related to statute law and regulation. Although my conclusion is of no significance to the outcome of the case, I am not persuaded that this warranty (when interpreted against the provisions of Warranty B7.2.7 which applies to contracts including the one which held the Company to compliance with the Funding Regulations) has also been shown to be false.

LCG has established a breach of the Key Warranty. LCG has also established a breach of Warranties B2.1.2, B2.1.3(a), B2.2.2 and B7.2.7.

If I am wrong in my conclusion that the Key Warranty is a standalone warranty then it is necessary to consider whether treating it as a single, composite warranty would have led to a different conclusion about it having been breached. Approaching the warranty on that basis, LCG would need to establish that the defendants were aware of matters which rendered it untrue.

On this aspect, the focus of the evidence and argument at trial was upon the knowledge or awareness of Mr Lewis (as, on the defendants’ case, he had no awareness that the warranty was untrue). Ms Probert confirmed in evidence that, although a director of the Company, she had no involvement in funding matters.

The language within Warranty B5.2.2 is “so far as the Vendors are aware”. Clause 1.2.4 of the SPA confirms that the reference to “the Vendors” (plural) includes each of them. Under clause 6.1 of the SPA, Mr Lewis and Ms Probert each gave the warranty “in respect of themselves only”, though clause 11.7 states the warranties “are given on a joint and several basis with all Vendors, subject to the terms of this Agreement”. It is not entirely clear to me how the joint promise under clause 11.7 - which I interpret as meaning that, up to the limit of her own liability under paragraph 2.1 of Schedule 5, Ms Probert takes responsibility for Mr Lewis’s promise that he was not aware of matters rendering the warranty untrue and vice versa – is to be reconciled with that language in clause 6.1.

Although Ms Probert was (by her own separate promise under each of those clauses) herself caught by the “due and careful inquiry” obligation under clause 6.8, which extended to inquiring of Mr Lewis and the SLT, and there is no evidence that she did consult them in relation to compliance with the Funding Regulations and funding entitlement, I understand it to be implicitly recognised by LCG that, if that cannot be established against Mr Lewis then (despite the absence of such evidence in relation to her own inquiries) it will not be made good against Ms Probert. Conversely, if he is liable under this warranty (or any other warranty) then, subject to the cap equal to the amount of consideration under the SPA actually received by her, so is she.

For present purposes, and against my conclusion that the true construction of the SPA leads to the conclusion that the Key Warranty stands independently of any question over lack of awareness, I should approach this issue on the basis that the whole of Warranty B5.2.2 is to be read as prefaced by the words “so far as the Vendors are aware”. In short, for the defendants to be liable under the warranty, LCG needs to establish that Mr Lewis was aware (when Ms Probert was not) both (a) that there had been a past non-compliance with the Funding Regulations and (b) that the Company was not entitled to all the funding under the ESFA contract for AY21/22. As I see it, no other approach can be justified in approaching a determination of this knowledge issue which proceeds on the hypothesis that my interpretation of the Key Warranty (as not also being knowledge-based) is wrong.

It is important to note that the knowledge I now presume to be required to establish a breach of the Key Warranty is not that the Company was engaged in a deliberately fraudulent manipulation of the Funding Regulations, for the purpose of unjustified financial gain. I have referred in the Introduction above to the Company’s “over-performance” in AY20/21, with a value of £1.42m, which came to be reflected in the settlement of the Clawback once the 2022 Audit had established that there had been non-compliance with the Funding Regulations. That is an indication that the Company may not have been driven by the motive of improper financial gain. LCG does not make any allegation of a fraudulent breach of warranty.

Instead, the question (on this alternative interpretation of Warranty B5.2.2) is whether or not Mr Lewis was aware that, during the last four years, the Company had not complied and, as at the date of the SPA, continued not to comply with the Funding Regulations in all material respects, so that the Key Warranty was untrue.

The (presumed) language of awareness of compliance with them “in all material respects”, when read against the knowledge of LCG of “facts, matters or circumstances giving rise to a Warranty Claim”, which would provide a defence under paragraph 12 of Schedule 5 if the defendants were otherwise liable on the warranty, indicates that the focus should be upon his awareness of the substantive requirement of the Funding Regulations. This approach to the Key Warranty, on the predicated assumption, is consistent with it being read together (for the purposes of Issue 4) with the terms of the second limb of Warranty B5.2.2. A failure to comply with the Funding Regulations in any material respect, in AY20/21 or any one or more of the four previous years, would impact upon the Company’s entitlement under the ESFA contract in place at the date of the SPA.

As the Clawback showed them to be material provisions, in my judgment it is not necessary for LCG to establish that Mr Lewis knew that (as revealed by the 2022 Audit) it was paragraph 119 of the Funding Regulations, specifically, which governed the Planned Hours Over-Claim. Instead, it would be enough to show that Mr Lewis was aware that a student studying for an Award (with no other learning aim identified at enrolment) should only have had planned hours appropriate to that aim. Likewise, it would be sufficient to know that full-time students subject to the Condition of Funding Rules were being reported to ESFA as part-time students even if he did not know the precise number of hours shown in the PDSAT to support their purported part-time status.

As I have already noted above in addressing Issue 7 (the Purchaser’s Knowledge Issue), there was evidently a degree of tension between the lack of such awareness asserted by the defendants and their position on Issue 7. Their position on Issue 7 also fed into Issue 3 (the Indemnity versus Warranties Construction Issue), so far as that rests upon the Funding Indemnity being included in the SPA to address a “known risk” of a funding clawback and, by reference to much the same point, Issue 8 (the No Loss/Amount of Loss Issue). However, such tensions can arise where alternative lines of defence are relied upon and, provided each is not harmed by a factually inconsistent case being advanced on the other, it is appropriate to address each defence in turn. My findings above on Issues 3 and 7 (broadly to the effect that LCG was not on notice of the risk that the Clawback would be made) ease some of the tension in reconciling a conclusion that LCG, as purchaser of the Company, had notice of the breach of the Funding Regulations when the defendants, as directors of the Company, say they themselves did not.

Although Mr Lewis in his evidence also referred to his reliance upon Emma Lambert (the Company’s Director of Finance) for the provision of accurate information in relation to financial matters, the member of the SLT whose knowledge at the time is central to determining whether or not either Mr Lewis or Ms Probert had knowledge that the Key Warranty was untrue is Mr Williams.

LCG’s closing submissions said that Mr Williams was a plainly honest witness though his evidence showed that, as the Company’s Director of Contracts, he had been completely misguided about the Company’s compliance with the Funding Regulations and what practices were justified under them. Mr Booth KC and Mr Adamyk said Mr Williams’s comments about Mr Lewis’s knowledge of those practices were critically important and should be accepted.

In his testimony Mr Lewis repeatedly said that he relied upon Mr Williams, and his expertise as Director of Contracts, and they both believed the Company was operating within the Funding Rules. Mr Lewis said that Mr Williams had been a loyal servant of the business since 1999 and he had no reason to doubt his advice that the Company was complying with the Funding Regulations.

Mr Lewis’s evidence was that, before signing the SPA, he asked Mr Williams to reflect upon the Company’s compliance with the Funding Regulations. The following day Mr Williams confirmed that nothing had changed since the 2018 audit which the Company had passed. Although the Company was delivering GCSEs at that time, it had not claimed funding for that because it was not happy with the results and, from a funding perspective, nothing had therefore changed. He said Mr Williams had no concerns over the funding warranties which Mr Lewis was being asked to give.

So far as the Planned Hours issue was concerned, Mr Lewis said he was not aware of paragraph 119 of the Funding Rules until the 2022 Audit. He said he relied upon Mr Williams to interpret the detail. He said he would not have looked at the ILRs.

Mr Lewis also gave the following answers which indicated a more general comment that paragraph 119 and RSM’s reliance upon it (see paragraph 63 above) did not suit the Company’s approach to study programmes:

“No, it doesn't work like that. The -- you are talking about the learning aims. It is a holistic programme. It is not just about the core aim, that's just one small element about it, it is about building young people's self esteem, their ability to communicate, their ability to thrive in the communities, it's making better citizens. Every day two and a half hours is physical training. Whether you have five 1 students or 25 students, it doesn't matter, you still have a member of staff there. One part of the programme is adventure training, so you don't -- you cannot just magic capacity out of thin air. The fixed costs I agree, but fundamentally it is about delivering on that promise to those young people. ……..So you are not -- when they are not doing the core aim as you describe it, they are still with the students, they are still delivering PT or engagement activities or adventure training activities or supporting on the maths and English qualifications. So they are never away from those learners, it doesn't matter.”

“This is where the misunderstanding happened. If you look at Mr Williams's statement and his descriptive [sic] there for RSM's audit. We didn't see the award as a short course, we saw it as a stepping stone qualification, as part of the nested process, so there was a massive disconnect between our understanding and RSM's understanding and what it was. We never saw any of the qualifications as a short course.”

“The point -- the aim was always to have those students on full-time funding, for those learners, and the data bore out the fact that the majority of them there would be up to the 48 hours, 48 weeks. And, as we heard today, the full-time funding only goes up to 18 weeks, so therefore the remainder is unfunded learning, so it doesn't matter.”

“I think this is one of the problems we had with the ESFA. People don't understand the programme. So a member of staff is brought on as a role model for that cohort, so they take them through physical training, they take them through the core aims, whether the award, certificate or diploma and those programmes roll on to each other, because it is a modular programme, it is a roll-on-roll-off programme, unique and different to everybody else, because it is centred around the learner. So you are not -- when they are not doing the core aim as you describe it, they are still with the students, they are still delivering PT or engagement activities or adventure training activities or supporting on the maths and English qualifications. So they are never away from those learners, it doesn't matter.”

Mr Lewis also challenged the suggestion that the Company’s approach in including an Award (with no higher qualification) as the learning aim was done to improve the Retention Rate. He accepted that an Award might be achieved within 10 weeks but said:

“We never had a 100 per cent retention rate. The average length of stay, and I am reading the self-assessment post, was 48 weeks and then it dropped to 31 weeks at one point, but averaged out -- so the vast majority of the learners would still be way in advance of the full-time funding. So it wouldn't be a challenge.”

“I have carried out an exercise retrospectively and by carrying out that exercise, it still comes, as in my statement, it still comes out that the retention factor is still extremely high, 96 per cent. I believe you have seen that.”

In relation to Condition of Funding, Mr Lewis accepted that he was aware before the 2022 Audit that some students had been put on the part-time funding band (though he did not know of the specific figure of 538 hours) but he understood that to be in accordance with the Condition of Funding rules. He said he never accessed the ILRs or the PDSAT records and again said he relied upon Mr Williams to ensure that each learner was allocated to the correct funding band.

It is clear from some of Mr Lewis’s answers in cross-examination that he knew that certain students shown as part-time should have been in funding band 5. His answers included the following:

“My Lord, I was aware that we actually changed the funding band to part time, believing that we were working within the guidelines and I think it has been discussed for the reasons why we changed it for that. The fact that it was 538, I wasn't aware of that specific number. I wouldn't be aware of that specific number.”

…

“…. I didn't know the detail. I relied on Mr Williams to understand the interpretation of the detail, but my understanding at the time was six weeks was an important date in the calendar for the student to be recognised as full-time funding. 540 was an important period, and we always went over 540 as and when we had to.”

…

“In fact, we believed that we were achieving underfunding by going down the funding, what are they, band.”

…

“Q. Yes, yes. So the point is that again that was, and similar to other matters, discussed at those meetings”- [i.e. SLT meetings] - so you were kept fully informed so that you were in a position to make the relevant decisions.

A.

Exactly. As it says, to forego the funding in order to meet the condition of funding rules.”

In his first witness statement, Mr Lewis had said that the allocation of 538 hours was a new approach from AY 20/21 but his second statement (responding to Mr Williams’s evidence) said that it was adopted from AY17/18 and that this was done to comply with the Funding Regulations. I note that this evidence at trial (including Mr Williams’s evidence) is at odds with what LCG said in a Part 18 response dated 27 September 2023 which said AY19/20 was the first year when learners were allocated 538 planned hours of tuition.

Mr Lewis’s key point, therefore, was that the Company’s approach was not adopted for financial gain. He referred to the Company’s over-performance in AY20/21 (the £1.42m over-performance and the deduction of the £0.42m Unfunded Learner Value from the Over-Claimed Sum) which he was aware of at the time. In addition to some of the statements quoted above, he said:

“I just believed that we were running the programme as efficiently as possible for -- with the right purpose. We were never running it as efficiently as possible, otherwise, as you say, to create capacity, we would finish out young people at the 540 hours. That then would create capacity and we wouldn't be funded anymore, but we never did that. If you look at the RSM report, I think it cited over 1,000 hours for the average learner, so it wasn't driven by a monetary desire as you are suggesting.”

“As CEO, my primary purpose was to drive the business forward in terms of quality of teaching and learning. It was the quality of teaching first and everything else came after it, so we were not driven by growth, we were not driven by profit, we were not driven by anything other than providing the very, very, very best quality of training for young people and I think that has been recognised with all the accolades and awards. That was my priority, for 23 years that was my priority.”

“In the real world, we funded the students after 540 hours, so it was one and the same thing. I don't see any differentiation with that. The fact that we weren't being funded for it wasn't unusual for us as an organisation whatsoever. Back to 2011, you see the Ofsted report there, we weren't funded for of two days week [sic] but we still delivered it. So there is no differentiation. In my mind, the mind of Tim Williams, in mind of the SLT is the way we'd always been worked and always been audited and always been inspected upon, so there's no change.”

“We always overdelivered, as I referenced before. The 2011, which is evidence and is in the bundle, we have always overdelivered. I did calculations for the ESFA meeting, the final meeting I had with the ESFA, where we detailed forensically examined how many extra hours did we do a year, free funding, for ESFA and it is £2 million.”

In support of his position that, until the 2022 Audit, he believed the Company was complying with the Funding Regulations, Mr Lewis made reference to the 2017/2018 version of the SPD. I have referred to the 2020 version of the SPD in addressing Issues 5 and 7 above. He said the earlier version of the SPD was shared with ESFA. It set out the Company’s approach to working within the Funding Regulations and the Company received a clean audit in 2018.

Mr Lewis also said this in cross-examination:

“…. we believed we were presenting correct information …. we never ever thought we were presenting incorrect information.”

“I believed Mr Williams had been putting the correct data within the funding guidelines. 100 per cent. No more, no less.”

Before turning to the evidence of Mr Williams, it is necessary to test those last answers against some of his others quoted above, particularly in relation to Condition of Funding. Those other answers indicate that Mr Lewis was aware at the time that some students who were funded as part-time were in fact full-time students. Whilst making the point that part-time students with a grade 3 GCSE could undertake a Functional Skills Programme as a stepping-stone towards achieving a GCSE grade 4 to 9, Mr Lewis said this in cross-examination:

“Q. Just to therefore look at it, do you agree that if a student is a full-time student with a grade 3, that is what paragraph 5 says, then they must study an eligible GCSE qualification. Pausing there, just to be clear, that means if it is grade 3 in maths, maths GCSE, and if it is grade 3 in English, English GCSE, you realise that, yes?

A.

Yes.”

…

“Q. You have made clear on a number of occasions, Mr Lewis, that you didn't think you were doing anything wrong. You don't need to say that every time you answer a question. What I would like you to do is just focus on what the question was. I will come to that subparagraph, but do you agree that you always knew that for a student who was on grade 3 in maths or English, if they were a full-time student, then they had to study for the GCSE to meet the condition of funding. You knew that, didn't you?

A. Yes, that is why we treated them as part-time students.”

Both answers show that Mr Lewis was aware that, once the Company ceased to provide GSCEs in around March 2019, students who would otherwise have been caught by it were instead treated as part-time students (who instead could undertake a stepping-stone qualification towards GCSE) in order to avoid the requirement to study for the relevant GCSE(s) under the Condition of Funding rules.

I note, however, that Mr Lewis said he was unaware before the 2022 Audit that (subject to ESFA’s 5% margin of tolerance) non-compliance with that requirement carried a penalty of 50% of the national funding rate for each non-compliant learner. He said:

“Q. But you knew that in fact you were enrolling them and they were going to stay with you as full-time students.

A. Yes.

Q. Yes? And so, therefore, you knew that once that had happened if you -- if they were recorded for the purposes of the ILRs as full-time students, you'd be in breach of condition of funding and there would be consequences in relation to 50% of that funding at some point?

A. No, I didn't know that. I didn't know the consequences of condition of funding. Like I said, the advice I was given was to put them on to part-time funding. That meant that we were working within the guidelines of -- of ESFA guidelines.”

Q. Right.

A. That's what we did previously with the ESFA report audit, and it wasn't picked up at all.”

…

“Q. You see I'll suggest to you, Mr Lewis, you couldn't possibly have been running that business and having discussions about all of this over all those years without knowing that in fact if they were put as full-time students there would be a condition of funding problem in terms of monies being eventually clawed back?

A. I believed that we were being underfunded. I believe that we were -- I didn't understand that there was a 50% clawback as a result of putting them on full-time. I just believed that we were doing the right thing and actually claiming less money than we were entitled to, so no.”

Mr Williams had primary responsibility within the Company for managing the 16-19 Study Programme and working out the level of funding it was likely to receive in the next academic year so that it could plan its training accordingly. His evidence, which was not challenged on this point, was that when Mr Lewis was running the Company there were monthly SLT meetings. Their subject matter extended to the ongoing management of the Company’s funding contracts and whether there had been any changes in the published funding guidance and whether changes had to be made for the Company to hit its goals and comply with funding requirements. He said Mr Lewis had the final say over any such changes.

In relation to the planned hours and nesting of qualifications, Mr Williams explained by reference to the SPD (the 2020 version of it which he provided to Mr Dowson for the purposes of the 2022 Audit) how the Company’s “roll on/roll off” approach to students’ learning aims was based upon a 39-week academic timetable. He explained that the Company’s plan was for every learner to achieve a Diploma (so that band 5 full-time funding was received) but the ILR at enrolment would show the Core Aim as an Award. He said the reason for this was that the Company wanted the most advantageous qualification for the particular student and to provide “bite-size” qualifications (i.e. nested qualifications). Once the Award had been achieved the ILR would be updated to show the next Core Aim of a Certificate, and so on upwards to the Diploma stage assumed at the outset.

Mr Williams made the point that (having received band 5 funding) the Company obviously did not receive any further funding if a student progressed beyond the Award and that there might even be Unfunded Learner Value if a significant number of students stayed with the Company for longer than the 39 weeks. In relation to such irrecoverable value, he talked about the Company “delivering the extra stages of the programme for free.” He explained that students leaving within the Qualifying Period would lead to an in-year funding adjustment. He recognised that, otherwise, there was no need to reconcile the planned hours with the hours of actual attendance and that, if the student had achieved the Core Aim of an Award but left part way through “the qualification ladder” there would be no impact upon the Retention Rate. Although those were matters picked up by RSM in the adverse finding in relation to their paragraph 119 of the Funding Regulations, Mr Williams’s evidence was that he did not consider the Company’s approach to be a breach of the Funding Regulations.

In relation to Condition of Funding, Mr Williams said that in AY17/18 the Company continued to claim full-time funding for some students subject to the Condition of Funding requirement to study for GCSE maths or English but in respect of whom the Company was not meeting that requirement. The non-compliance at that time fell within the 5% tolerance level. It was when the number of learners affected by that requirement started to increase that the Company decided to claim only part-time funding for them. Mr Williams said only a limited number of learners were reduced to 538 hours in AY17/18 but that, once the Company stopped delivering GCSE maths and English in AY19/20 the number of learners whose planned hours were reduced to 538 went up dramatically. The Part 18 response mentioned above says that this involved 278 students in AY19/20 and 348 in AY20/21 (also suggesting, at odds with this evidence, that there were no such students in AY16/17, AY17/18 and AY18/19).

So far as the position before the Company stopped delivering GCSEs is concerned, Mr Williams said:

“2016, 2017, 2018, when the audit took place, we made the decision then to sort of do functional skills alongside those GCSEs were going on, but GCSEs were never put on the ILR return.”

…

“They are not on the ILR, so they are not recorded to the ESFA, but there was still GCSE work being conducted, yes.”

After the Company stopped delivering GCSEs the decision was made to “forego a banding of funding” (as it was expressed in the SPD prepared by him) for those learners. Mr Williams was clear in his evidence that he considered this to be in accordance with the Condition of Funding rules.

Mr Sims KC suggested to Mr Williams in cross-examination that he was directly in control of how the Company was operating under the Funding Rules and that was not a matter Mr Lewis was required to oversee. Mr Williams responded:

“All the decisions made were decisions made together. It wasn't -- the assumption in his statement was that it was me who made the decisions on my own, and that was not the case.”

Mr Williams was not challenged further on that general point. Instead, the defendants’ overall position is that Mr Lewis shared Mr Williams’s belief that the Company was complying with the Funding Rules.

The 2017/2018 version of the SPD (relied upon by Mr Lewis) was in materially the same terms as the later version about which Mr Dowson was asked questions on Issues 5 and 7. In my judgment, that document does not justify the conclusion, considered against the clean 2018 audit (in the sense of confirming that zero public funds were at risk), that ESFA could be taken to have approved of the Company’s practices in relation to planned hours and Condition of Funding.

In relation to planned hours (though not using that label) the earlier version, like the later one, did contain the following statement (under the heading ‘How does MPCT promote individualised learning and capture this on the Individual Learning Plan?’):

“MPCT's study programme is a planned & timetabled programme, spanning over a 39-week academic timetable. MPCT has made the conscious decision to maintain its roll off/ roll on provision over this time period, although participation for longer than 539 hours does not attract further funding. MPCT maintains its moral compass in ensuring the learner is centric to its aims and does not curtail a learner's training at 539 hours, unless it is in the learner's interests to do so, and historical data for positive destinations of the learners supports this decision. This has been embraced by MPCT directly from the guide, "Implementing Study Programmes" 2013, produced by AELP with support from Department for Education.”

However, the earlier SPD also stated (the later one referred to two types of Award and did not refer to the NCFE Diploma):

“The Core Aim of each of the Qualification Plans will be the most substantial qualification being followed at the time.

Each learner must complete the following qualifications in the exact order of unit completions:

• Introductory Award

• Award

• Certificate

• Extended Certificate

• Diploma

• NCFE Diploma (retained for those learners who require additional time to achieve their progression route).”

On the face of it (whether ESFA would have read it as such in 2018 is another question) that statement, following a series of tables identifying the relevant qualification plan selected for the learner at interview and approved on enrolment, could be read as consistent with the rule-compliant approach to nested qualifications identified by RSM on the 2022 Audit.

In relation to Condition of Funding, the 2017/2018 version of the SPD (like the 2020 version which referred to “grade 4/C or above”), under the heading ‘How is Condition of Funding for Maths and English Checked?’, said:

“On analysis of starting points of the assessments, MPCT has made a decision not to set the learners an unachievable task of attaining a qualification grade of C or above (based on assessment levels mainly at Entry level). Therefore, we recalculate the planned hours, and forgo a banding of funding, to ensure the learner meets the condition of funding, with the appropriate qualifications achievable being followed.”

That does not state in terms that a student who is actually a full-time student and required to study for the relevant GCSE under the Condition of Funding rules will instead be recorded for funding purposes as a part-time student in order to avoid that requirement. The statement “we recalculate the planned hours” might indicate that the student actually becomes a part-time one. As Mr Dowson said, when asked about the equivalent language in the later version, it prompts a question about the Company’s approach to the Condition of Funding rules.

Neither version of the document spelled out that the Company would claim band 5 funding for a learner who was enrolled with the learning aim of an Award (only) or that some full-time learners, who should have been in band 5, would be included within funding band 4b in order to avoid the GCSE requirement.

ESFA said the 2018 audit was carried out through detailed testing using a random sample of funded students on the Company’s roll at the R06 data return and that, due to limited number of students on roll, “we carried out detailed testing of all funded students.” In relation to ILRs, the report noted 9 instances where the data captured on the ILR was not accurate when tested against “student files, PDSAT testing and the English and Maths reports.” This was a medium risk matter requiring improvement to the Company’s internal control mechanisms within 3 months. The report noted two instances where planned hours were not proportioned appropriately where the study programme crossed two funding years and, in relation to Condition of Funding, it noted that students who are capable of undertaking stepping-stone qualifications should be enrolled on an appropriate qualification in order to meet Condition of Funding rules.

I have referred above to Mr Lewis’s and Mr Williams’s evidence that the Company’s approach to the Condition of Funding rules in AY17/18 involved a limited number of learners (and, as I understood Mr Williams’s evidence it did not necessarily involve a reduction of learning hours to part-time for those shown on the PDSAT return as undertaking a Functional Skills Programme) and only came to involve a significant number of learners, above the 5% tolerance threshold, from AY19/20. That evidence does not suggest that a PDSAT return in respect of a limited number of students in the first week of February 2018 (R06) would necessarily have revealed the issue over Condition of Funding as later identified by the 2022 Audit. Having in mind Mr Dowson’s evidence (in relation to Issue 7) that the later PDSAT returns gave no indication as to whether a student had already attained GCSE grade 3, so as to indicate whether he or she should be studying for a GCSE, the suggestion that ESFA would in 2018 have noticed that there were students who should have been on a GCSE course rather than a Functional Skills Programme is based on assumption rather than fact. Indeed, Mr Williams’s evidence that some students were then undertaking GCSEs (even though that was not recorded in the PDSAT) goes against the assumption.

The earlier SPD was not referenced in the March 2018 Audit Report and there is nothing within the findings in the 2018 audit which indicates that the testing of student data on which it was based revealed the issues identified by RSM in 2022. In my judgment, Mr Lewis’s reliance upon the audit outcome and the apparent absence of questions by ESFA about the SPD in 2018 does not provide evidential support for his belief that the Company’s practices, leading to those issues, were in accordance with the Funding Regulations.

On my assessment of the evidence, Mr Lewis was aware at the date of the SPA that the Company was not complying with the Condition of Funding rules and that some students had wrongly been recorded as part-time in the PDSAT to give the appearance of compliance. Although Mr Williams considered this approach complied with the rules, he was also aware that hours were being inaccurately recorded. That is implicit in his reference to the Company foregoing a band of funding for those students: they should have been on band 5 and would have been but for the requirement to study for GCSE. I accept Mr Williams’s evidence that Mr Lewis was involved in the decision to adopt this approach and Mr Lewis’s evidence, overall, supports that.

Both of them were aware that those who should have been studying for maths or English GCSE, but who could not do so once the Company discontinued GCSE provision, were in fact full-time students and that, for them, studying for a stepping-stone qualification (under a Functional Skills Programme) was not in compliance with the rules. Mr Lewis may not have known that a particular learner’s hours had been recorded in the PDSAT as being 538 but the Condition of Funding requirement was, as he put it, “why we treated them as part-time students.”

Even if my decision on Issue 6 had been otherwise, this conclusion is sufficient to establish LCG’s case on Issue 4. In that respect, Mr Lewis was aware of matters which showed the Key Warranty to be untrue. It is irrelevant that, because the Company received reduced band 4b funding for the student concerned, Mr Lewis did not consider this was to the Company’s overall financial advantage. That is a different question (and a complex one given that savings in cost through the Company not delivering GCSEs would have to be factored into the analysis) which goes in part to the awareness involved in establishing a breach of the second limb of Warranty B5.2.2.

Mrs McLeish could not give direct evidence on this issue. However, the following observations during her testimony support the conclusion I have reached about Mr Lewis’s awareness that the Key Warranty was untrue. Addressing the suggestion that Mr Williams did not believe the Company was breaching the Funding Regulations, she said:

“Mr Williams knew that learners on full-time programmes should be studying a GCSE. Mr Williams knew that just reducing their hours on the ILR and still studying a full-time programme would not circumvent the rule around GCSE.”

“He might think that, but he and Mr Lewis knew that full-time students, as a matter of rule in the funding rules, had to do GCSE. Indeed they had been delivering GCSE previously, they then reduced those learners to part time but continued to deliver a full-time programme. So therefore, they must have known the funding rule was being breached.”

“… I can only deal with the facts. The facts are, everybody, everybody, knows that if a student is on a full-time programme, they have to do a GCSE. MPCT previously was delivering GCSEs to full-time learners. They then changed their policy and moved learners to a part-time study programme to circumvent the GCSE rule, but still continued to deliver full-time programmes. Therefore, they must have been aware of the funding rule.”

However, although it does not undermine my conclusion on Issue 4 by reference to the Condition of Funding rules, I am not persuaded that the evidence shows that (in relatiob to Planned Hours) Mr Lewis was aware of the matters which gave rise to a breach of paragraph 119 of the Funding Regulations. Mr Williams did not think the Company was in breach of them. I accept Mr Lewis’s evidence that he was not aware of the implications of that rule at the date of the SPA.

Whereas a decision was taken to claim part-time funding for full-time students, because the Company was no longer providing GCSEs, the Company’s mistaken approach to nested qualifications was not motivated by concerns about the Retention Rate. Mr Lewis did not consider learner retention to be an issue and his evidence in this respect is supported by the Unfunded Learner Value for AY20/21.

Although he recognised its impact in cross-examination, in terms of the student’s achievement of an Award (only) securing a better Retention Rate, the evidence supports the conclusion that neither he nor Mr Williams appreciated at the time that the Company’s approach to nested qualifications was wrong and involved a breach of the Funding Regulations.

Mr Lewis was aware of the Company’s non-compliance with the Key Warranty so far as its breach of the Condition of Funding rules (by treating full-time students as part-time) was concerned.