[2025] EWHC 1889 (Comm)

These three issues all go to the level of damages recoverable by LCG in respect of the established breaches of warranty. I think it is sensible to address Issue 12 first given the defendants’ case that LCG sought to “build a warranty claim” once the Company was subject to the 2022 Audit.

I say that because that case is to the effect that LCG has advanced inflated figures (and, therefore, using the language of mitigation, not ones which reflect losses which either have or could reasonably have been avoided) in its approach to the calculation of loss which is central to Issue 8. I do so recognising that, as explained below in addressing Issue 8, damages for breach of warranty are assessed as at the date of the SPA and the defendants’ case that there has been a failure to mitigate the financial consequences of the 2022 Audit necessarily relates to matters occurring after that date.

As I indicated at the beginning of this judgment, Issue 8 concerning the value of the warranty claim is the one issue which the parties have not comprehensively addressed by the terms of SPA. They have only done so in agreeing limits upon the amount of damages recoverable through paragraph 2.1 (the cap upon the liability of each defendant by reference to the consideration actually received by him/her) and paragraph 4 (the Double Claims provision) of Schedule 5.

Issue 9 falls to be addressed alongside Issue 8 as it is the defendants’ case that the value of the warranty claim is no greater than LCG’s claim under the Funding Indemnity.

Paragraph 11 of Schedule 5 to the SPA addresses LCG’s duty to mitigate in the following terms:

“Duty to Mitigate

The Purchaser shall (and shall procure that the Company and each of the Subsidiaries shall) take all reasonable steps to avoid or mitigate any loss or liability that may give rise to a Warranty Claim.”

In Equitix EEEF Biomass 2 Ltd v Fox [2021] EWHC 2531 (TCC), 198 Con LR 224, at [396]-[441], Kerr J was required to consider an equivalent provision in a share sale agreement. The language of the clause in that case was that the buyer should take or procure the taking by the company of “all reasonable action to mitigate any loss suffered by it or the Company…”. He considered that the clause might in that case be of significance to the amount of damages recoverable by the buyer when the common law “duty” to mitigate (i.e. the rule that avoidable losses are irrecoverable if a claimant acts unreasonably by not avoiding them) could have no application because the loss arising out of breaches of warranty (as to the quality of the company’s plant and equipment) had crystallised at the point of purchase.

Kerr J concluded that the language of the clause mirrored the common law standard, rather than setting a higher standard of conduct than the threshold at common law, and that (as at common law) the onus was on the defendant to show an unreasonable failure to mitigate. He said, at [441], “I think the words ‘all reasonable action’ mean action it would be unreasonable not to take.” I respectfully adopt the same approach to paragraph 11 of Schedule 5.

In the present case, there is clearly scope for the duty under paragraph 11 of Schedule 5 to apply when the untruth of the statements made in the warranties identified in my findings on Issues 4 and 6 crystallised a claim under which the alleged loss only came to be quantified by negotiation after the date of the SPA. Whether or not the duty to “avoid or mitigate any loss” could apply to other particular types of warranty contained in Schedule 4 to the SPA, the chronology of events in 2022 outlined in Section 2 of this judgment shows that the duty is in principle capable of applying to LCG’s and the Company’s conduct in those later negotiations.

The issue is whether LCG did mitigate its loss in respect of the warranty claims and the focus is upon the negotiation by the Company (under the direction of LCG) of the Clawback by ESFA. The amount of the Clawback informs the parties’ approach to the assessment of damages (as at the date of the SPA) on Issue 8.

However, it is important in my judgment to segregate from Issue 12 other matters, such as the cost to the Company of reinstating GCSE provision after the 2022 Audit in order to comply with the Condition of Funding rules applicable to certain full-time learners, which properly belong to that other issue. Although I did not understand the defendants to suggest the concept of mitigation went so far, it would not be logical to suggest that LCG failed to mitigate its loss by not introducing GCSE provision sooner and/or at less cost than it did when the Company was not providing GCSEs at the time LCG acquired it. It was not the absence of GCSE provision which “gave rise to a Warranty Claim” but, instead, the Company’s treatment of some full-time learners as part-time because it was not providing GCSEs. Accordingly, the argument between the parties about the speed and cost at which GCSEs might be reinstated after the SPA (which was the means by which LCG and the Company chose to avoid further non-compliance with the Condition of Funding rules) belongs to Issue 8. The rival expert evidence addresses that aspect of the dispute accordingly.

Similarly, the defendants’ heavy reliance upon the ARG/Capita issue and staff redundancies as the greater cause of post-SPA funding issues cannot be and was not, I think, suggested to be of any relevance to the mitigation issue. Those also had nothing to do with “any loss or liability that may give rise to a Warranty Claim”. Whether it properly features as a factor in deciding Issue 8 is a separate question which I address below.

I have already noted that Mr Lewis did not regard the negotiation of the Clawback as “the deal of the century”. However, without more, that observation does not mean the negotiation of the sum of £783,325 (net of the Unfunded Learner Value for AY20/21 and repayable by offsets against funding in AY22/23) reflected a failure by LCG to mitigate its loss. Indeed, the fact that Mr Lewis’s comment was based upon his view that the Clawback was simply the product of a fairly straightforward mathematical calculation could equally point to the negotiated figure being a perfectly reasonable one.

Although paragraph 11 of Schedule 5 contemplates scope for an argument that LCG has not mitigated its loss, the defendants’ suggestion that LCG’s response to the 2022 Audit was one focussed upon making a warranty claim against them rather than minimising the loss under it (their counsel described it as an exercise in “building a warranty claim”) raises an immediate question as to whether those are true alternatives. Mrs McLeish said LCG had not previously made a warranty claim in respect of any of its other acquisitions. However, even assuming LCG was not fully alive in 2022 to the uncertainties and hazards of litigation (as now illustrated by all of the other defences advanced and the dozen issues in this case) it would be odd and counterintuitive to business common-sense for the new owner of the Company to be indifferent about establishing the true extent of the Company’s liability to ESFA. It involves attributing to LCG not just disregard of the duty to mitigate under the SPA but, I think, also a business decision based on a belief that an asserted but perhaps questionable liability might be passed on to the defendants without quibble from them.

In support of the suggestion that LCG in early 2022 was focussing upon a warranty claim against Mr Lewis the defendants’ counsel referred to emails passing between Mr Higgins and Mrs McLeish. In an email to Mrs McLeish dated 14 February 2022, Mr Higgins said “As it stands we’ve bought a dead duck. Annualised EBITDA currently at £1.6m”. That was said in response to Ms Lambert (the Finance Director) noting that the Company’s management accounts for January 2022 showed EBITDA and profit to be down and “The reasons for not achieving budget are the same as last month…Recruitment continues to be a challenge and the impact of the marketing campaign and other changes made is slower progress than we had hoped”. Then, after RSM had provided their initial feedback and findings on 4 March, there was a further exchange of emails between them on 19 March 2022. Mr Higgins said “Not good, its been a horrible start under our ownership” to which Mrs McLeish responded “Absolutely terrible!!!! Numbers are nowhere near and now this ! ! !”. If the profit has been overstated because of this can we bring claim on Huw?”. Mr Higgins replied: “We would definitely be moving into the realms of building a case for a claim. However the onus is on us to prove it. There must be a lot of squeaky bums in that MPCT senior team right now.”

The defendants’ closing submission did not develop further the suggestion that the focus upon bringing a warranty claim had come at the expense of such matters of proof in the sense of LCG disregarding its duty to mitigate its loss. I regard that as a reflection of the difficulty in maintaining that argument in the light of the evidence given at trial.

In my judgment there is no evidence to support the conclusion that LCG failed to mitigate its loss. Indeed, so far as the effect of the 2022 Audit on the business going forward was concerned, the defendants’ closing submissions said that the in-year adjustments which needed to be made in AY21/22 as a result of the audit findings revealed an overall picture of successful mitigation by LCG.

The evidence given by Mrs McLeish, Mr Dowson and Mr Williams was clear in showing that (as was to be expected given that Mr Higgins had observed that the onus was on LCG to prove any consequential warranty claim against Mr Lewis) LCG did its best to reduce the Company’s exposure arising out of the 2022 Audit. I accept their evidence on this point.

Mrs McLeish credited Mr Dowson with reducing the Company’s exposure to clawback from a potential £2.9m down to £1.2m (before the deduction of the Unfunded Learner Value). Her figure of £2.9m was based on funding of £2.178m in respect of learners affected by the planned hours issue and £932,000 in respect of those affected by the Condition of Funding requirement.

Mrs McLeish explained her concern that, if the £1.2m figure was not agreed, it had been indicated (at a meeting in July 2022 at which Mr Lewis was present) that ESFA would be likely to audit the Company’s funding in years prior to AY20/21. In cross-examination, she said:

“Q. You advised Mr Lewis not to seek to challenge the ESFA's decision, didn't you?

A. We had a meeting with the ESFA, Mr Lewis was present at that meeting, Mr -- we had managed at this point to get the clawback amount down to 1.2 million, and they had stated on several occasions that if we could close this down, they wouldn't go back into previous years. I advised Mr Lewis that if we pushed it any further, they had told us, and the notes from the meeting that we had jointly with the ESFA would tell us this, that they could open up previous years. That was my concern for the business, that the amount that we had got it down to was 1.2 million and if we kept pushing and pushing them, that they would open it up to the previous years, as they stated in the meeting.

Q. Mrs McLeish, I think you are talking about a meeting in July now, are you not? Is that right, July 2022?

A. On several occasions they stated that.”

Mrs McLeish’s view was that ESFA showed a degree of goodwill towards LCG because LCG had a good record of compliance and the Company’s breach of the Funding Rules had not happened “on our watch”.

The absence of any serious issue over LCG’s mitigation of loss is revealed by the following passage in Mr Dowson’s cross-examination by Mr Sims KC:

“Q. As a headline point, Mr Dowson, what I am going to suggest to you is that there are potentially three different things going on in relation to the RSM audit process -- I will use the word "audit" because you use it in your evidence. In relation to that, the first question was dealing with the clawback issues in relation to the year 2021. That is point number 1, correct? Point number 2 is dealing with the position in relation to your in-year adjustments for 2021/2022. Then point number 3 is looking ahead, how you are going to deal with matters going forward in relation to the future. Correct?

A. They were the processes we went through. I am not sure the second and third were directly sort of part of the audit, but they were a consequence of the audit.

…

Q. In relation to the sort of headline proposition I am going to put to you, Mr Dowson, is that I have read all of the documents very carefully emanating to and from you. The impression I get from all of the documents I read is that your assessment in relation to the position in relation to a clawback was:

Well, do what you can to try and reduce the figures on the clawback to a figure which can be reasonably forward on behalf of LCG, point number 1.

Point number 2, doing the best you can for LCG in relation to adjusting the position as at the period for the second limb of the exercise in relation to the in-year period 2021/2022.

I am going to put to you actually you on the face of it appear to have been very successful in terms of what you did during that period in order to mitigate the impact of the adverse impacts that may have arisen in relation to the revenue figures. Was that your feeling at the time, that you actually did do a successful mitigation in relation to the in-year periods I am talking about, so the 2021/2022 period?

A.

Yes, I did my absolute best in all three periods.”

For the reason explained above, I consider Mr Sims KC’s point 3 belongs to Issue 8 rather than the present issue concerning mitigation. His question anticipated what would later be said in his closing submission about the success of in-year adjustments in AY21/22 (his point 2). Mr Dowson’s answer (also covering Mr Sims KC’s point 1) is a convincing one when considered in the light of the contemporaneous documents, including his exchanges with Mr Williams about their response to the audit, and the evidence of other witnesses.

In relation to Mr Sim KC’s point 2, Mr Williams’s third witness statement (made during the course of the trial) explained the steps the Company took in AY21/22 to address the planned hours and Condition of Funding issues. They were as summarised in its responses set out in the 2022 Audit Report. Mr Williams explained that the remedial steps were decided upon by Brian Edwards (the Company’s Director of Military Academies), Gary West (LCG’s Head of Quality), Mr Dowson and himself. In my judgment, the required remedial steps described in Mr Williams’s third witness statement undermine the defendants’ case (which it is for them to make good) that LCG failed to mitigate its loss. As Mrs McLeish said, they were “in-year adjustments we had to make whilst the audit was ongoing.” It is difficult to understand what the Company could or should otherwise have done.

In that statement, Mr Williams explained that nothing could be done about those learners who had by then left the Company in AY21/22 and whose funding band needed to be changed from band 5 to band 1, 2 or 3. If they had left before achieving their revised Core Aim then there was an adverse impact on the Retention Rate. In cross-examination, Mr Williams said that the number of leavers was consistent with other years. He described the downward adjustment for funding for those learners as “a bit of a half-way house” given the need to make in-year adjustments. In his evidence, Mr Dowson said that the adjustment meant that approximately £1m of the funding for AY21/22 was unspent and, as the adjustments were made late in AY21/22, there was no opportunity for LCG to attract new learners to utilise the underspend.

Although Mr Williams, in cross-examination, recognised that staff redundancies in June or July 2022 could have been a factor in students leaving, I am not persuaded of that. Mrs McLeish said in cross-examination that the reduction in staff costs noted in the Post Acquisition Review related to 14 redundancies and the remainder of staff departures were “natural attrition”. In any event, to the extent that the redundancies are linked to the ARG/Capita issue, I regard them as irrelevant to the present issue for the reason explained above. That issue relates to how many students might have enrolled with the Company in AY21/22, not with how many left it during that year. So far as replacing those who had left is concerned, I accept Mr Dowson’s evidence to the effect that the problem was one of timing not teaching capacity.

LCG’s success in deducting the Unfunded Learner Value for AY20/21 from the Over-Claimed Sum is, in my judgment, a further illustration of the efforts to minimise the impact of the 2022 Audit. Mr Williams suggested to Mr Dowson that it might be offset in an email of 21 March 2022. Mr Dowson responded “Yes I would hope it would offset against it, I've never been in a position in which that has been the case for audit, so unsure. It's certainly something we should push for once we get closer to resolution.” Once the £1.2m odd figure was agreed, LCG and the Company did succeed in obtaining ESFA’s agreement to its deduction even though AY20/21 was a closed year.

LCG complied with its duty under paragraph 11 of Schedule 5 to the SPA in mitigating the loss it seeks to recover on the warranty claim. The defendants have not established that LCG (or the Company) failed to take a step that might reasonably have been taken in avoiding or mitigating loss.

Issue 8 is the least straightforward of all the issues to determine. That is because it is the one issue to which the parties have not provided a complete answer in the comprehensive language of the SPA. They only agreed upon the cap upon the respective liability of the defendants when they could not then know what the precise details and circumstances of the warranty claim might be.

The outcome under Issue 9 will necessarily be determined by my finding on Issue 8, assuming it involves a decision that LCG has suffered some loss as a result of the breaches of warranty identified in my decisions on Issues 4 and 6.

The defendants argue that, if LCG has established any recoverable loss, the damages should be no greater than the value of the claim under the Funding Indemnity in the sum of £783,325.

There is no reason why that should be so as a matter of principle when, as highlighted by the reasons in support of my decision on Issue 3, the warranty claims and the indemnity claim are quite distinct. They each have different caps upon liability: see paragraphs 2.1 and 2.2 of Schedule 5 to the SPA. For those reasons, although the outcome is not inconceivable, one would not expect the findings of fact on Issue 8 to produce a result where the defendants’ liability under the warranties exactly matched the value of the claim under the Funding Indemnity: compare the “Warranty True versus Warranty False” approach to damages addressed below.

The parties and the experts largely agree upon the principles to be applied in addressing LCG’s pleaded case:

As highlighted by some of the arguments addressed below, there is potential tension between the exclusion of consideration of actual events which become known to the parties only after the date of the share sale (subject to the qualifications identified in Ageas and Arani) and the court’s preference to act upon known facts when assessing damages for breach of contract in the interests of serving the overriding compensatory principle of damages. In each of Ageas, The Hut Group and MDW the court addressed the decisions of the House of Lords in Bwllfa and Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Co. [1903] AC 426) and The Golden Victory [2007] UKHL 12; [2007] 2 AC 353, which confirm the general position on the quantification of damages for breach of contract. In his judgment in MDW, Newey LJ also considered the decision of the Supreme Court in Bunge SA v Nidera BV [2015] UKSC 43; [2015] Bus LR 987 (post-dating the judgments in Ageas and The Hut Group) where the principle in The Golden Victory was applied.

Newey LJ commented that The Golden Victory and Bunge were concerned with the assessment of damages for an anticipatory breach by renunciation (and the value of the goods or services that would otherwise have thereafter been delivered by the contract-breaker) whereas, and quoting from the judgment of Lord Sumption in Bunge, “… a share sale relates to an existing asset which is recognised as “an article of commerce in itself””. Newey LJ said, at [49], that there was a strong case for saying, in general at least, that the position in relation to warranties given on a share sale should be the same as in a claim for deceit: that a defendant cannot reduce his liability by showing that a contingency which served to reduce the value of the asset at the date of assessment did not eventuate. He said cases where account can be taken of what happened subsequently, as regards such a contingency, in the assessment of damages for breach of warranty “must be rare”.

For the reasons developed below, the court should not include within that rare category a case where the hindsight sought to be applied involves the defendants attempting to revisit the contractual allocation between of risk and reward between the parties or suggesting that the claimant will otherwise benefit from a damages “windfall” when the proper analysis is that the later recovery in the value of the shares is (to use Newey LJ’s phrase) “attributable to steps the purchaser had itself taken since the transaction.”

In the next part of the judgment, I summarise the parties’ main points about the quantum of the claim but not their respective cases based upon the expert evidence. I summarise those in the section below addressing the expert evidence.

The first element of LCG’s pleaded case is:

“If the Over-Claimed Sum had been known about prior to entering into the SPA this would have led to a reduction in the Company’s forecast FY2021 revenue of £1,247,680, and consequently a reduction in the maintainable EBITDA of the same amount” (per paragraph 52(d) of the particulars of claim).

The other key part of that case (see paragraph 52(e)) involves adopting a “Warranty False” MEBITDA multiplier of 3 instead of the multiplier of 5.5 which was used to determine the price paid under the SPA. This is said to be justified because:

“…. if the Over-Claimed Sum had been known about before entering into the transaction, the multiplier used to calculate the enterprise value would have been reduced for the following reasons: (i) the profitability of the Company would have been lower, (ii) there would have been known issues with the Company’s funding from the ESFA, (iii) there would have been perceived to be an increased possibility of further issues with the Company’s funding coming to light, and (iv) the overall view of the ‘quality’ of the Company’s business would have been negatively impacted as a result of these uncertainties, leading to a more cautious view being taken of the ability of the Company to continue to generate a given level of revenue in the future.”

The particulars of claim calculate the damages of £10,180,040 by reference to a Warranty False Value of £3,969,960 which is based on a reduced MEBITDA of £1,323,320 (i.e. £2,571,000 reduced by £1,247,680) and multiplier of 3. When served the particulars of claim referred to LCG’s intention to adduce factual and expert evidence to support those matters and reserved the right to amend the calculation of loss. No such later amendment was made though, recognising the claim was limited by the pleaded figure, LCG’s counsel said in closing submissions that higher damages might have been sought by reference to an even lower Warranty False Value.

Mr Booth KC and Mr Adamyk recognised that the pleaded claim of £10,180,040 necessarily rests upon an imprecise exercise which is permeated with supposition, in that the court is being asked to make findings about a hypothetical transaction which did not take place. Where the court is satisfied on the balance of probabilities that substantial loss has been caused by the breach of warranty but the evidence available does not allow the loss to be precisely quantified, then it assesses the damages as best it can on that evidence: see Parabola Investments Ltd v Browallia Cal Ltd [2010] EWCA Civ 486;[2011] QB 477, at [22]–[23], per Toulson LJ (cited with approval by Lord Reed in One Step (Support) Ltd v Morris-Garner [2018] UKSC 20, [2019] AC 649, at [37]–[38]) and 116 Cardamon Ltd v MacAlister [2019] EWHC 1200 (Comm), at [78], per Cockerill J. As noted in connection with Issue 2 above, 116 Cardamon Ltd concerned a claim for damages for breach of warranty under a share purchase agreement.

Counsel focussed upon what they said would have been the widespread and substantial uncertainty faced by the parties in the hypothetical situation where they are to be taken to have known the Company was in breach of the Funding Rules. They pointed to the following:

In summary, therefore, LCG says the breaches of warranty would have been perceived as having a substantial and ongoing adverse impact on the Company’s finances. As things turned out, the financial impact was not confined to the Clawback. The Company received lower funding for AY21/22 (as a result of the consequential in-year adjustments) and suffered the negative Condition of Funding adjustment of £392,962 for AY23/24. The reduction in MEBITDA in the hypothetical negotiation would not have been limited to the Clawback amount.

Mr Booth KC and Mr Adamyk submitted that it defied common sense and logic for the defendants to say that a significant reduction in the Company’s EBITDA and a consequent need to make substantial changes to the business would have made no difference to the hypothetical reasonable purchaser. By their nature the breaches impacted adversely upon the perceived quality of the Company’s business. That includes not only questions about the Company’s “true” levels of past and future profitability but also ones about the likely impact on the Company’s Retention Factor in future years (the actual details of which are summarised in paragraph 80 above). This would have led to the hypothetical negotiating parties adopting a significantly reduced multiplier.

In her evidence Mrs McLeish referred to two other business acquisitions made by LCG either side of its acquisition of the Company. The first was of Acorn Training Consultants Limited (“Acorn”) in August 2020 and the second was of White Rose School of Beauty and Complementary Therapies (“White Rose”) in August 2022. Both businesses offered a 16 to 19 study programme in their respective sectors (though White Rose did not have its own funding contract and LCG sub-contracted part of its own contract value to the company) and Mrs McLeish said their businesses were therefore broadly comparable to the Company’s business.

Mrs McLeish said that, on a Warranty False Value, LCG would have looked to adopt a similar multiplier under the SPA as that used in relation to Acorn and White Rose. She said the multipliers adopted for those other transactions were 3 for Acorn (on an EBITDA of £0.5m) and 3.9 for White Rose (on an EBITDA of £1.6m). Mrs McLeish said the reduction in the Company’s EBITDA, by reference to the Over-Claimed Sum, together with the reduced contract value and the knock-on effect on future funding brought the position closer to those other transactions. She said that, once adjusted, the Company’s EBITDA was similar to White Rose which was also the largest business of its type (the provision of hair and beauty training) and also had an OFSTED rating of ‘outstanding”.

Addressing LCG’s appetite for acquiring the Company, Mrs McLeish recognised the “cultural bond” between the two organisations, where LCG was already operating its four military academies in Yorkshire, also staffed by military veterans, and accepted the Company was a “real attraction” for LCG. She said LCG was motivated by the prospect of growing the business (including by adding the funding under the Adult Education Budget which was later noted in the Post Acquisition Review) rather than cost-saving synergies. In cross-examination, she said there were very few cost-saving implications because of the fixed overheads within each of the academies.

Mrs McLeish accepted in cross-examination that the clean 2018 audit and the belief that there were no funding issues with ESFA was not material to LCG’s decision to agree upon multiplier of 5.5. However, she said that, once discovered, the funding issues affected both the MEBITDA and the multiplier. Her position is summed up by the following answers:

“A. I think the two things are the same. We bought a business based on a 2.5 million maintainable EBITDA that, because of funding irregularities, was not 2.5 million EBITDA.

Q. Ms McLeish, you know that the EBITDA is separate from the question of the multiplier, don't you?

A. Okay, well then the funding value for the contract that we were buying, which was at the time of purchase £6 million, and subsequently reduced as a result of the audit, would have an impact on the multiplier and the reputation of the business because of the audit. So yes, it would impact the EBITDA and the multiple.”

…

[Addressing the potential clawback of £2.9m mentioned in connection with Issue 12 above] “The ESFA would have the right to reclaim all funds if they thought that necessary -- that is what they hold the right for and to go back five years, as we have discussed previously.”

…..

“So what I am referring to there is that there is a historical EBITDA overstating and that there is an ongoing impact of the funding per learner that we would be able to draw down because of this impact moving forward.”

….

“I am saying that we have got an EBITDA that is overstated and therefore we have overpaid for a business because the EBITDA was affected by about 1.2 million.”

…

“…the quality of earnings was naturally affected because the contract value was going to be reduced.”

….

“A. I believe that we bought a quality education business for an overstated EBITDA.”

Mr Higgins accepted in evidence that LCG was enthusiastic about the acquisition of the Company. He said (as the contemporaneous documents show) that, having offered a multiplier of 5, LCG’s decision to accept the counter-proposal of 5.5 was quickly made. He said that, in the warranty false scenario, LCG would have “dealt with the issues” in the negotiation rather than simply rely upon the Funding Indemnity. He said:

“I mean if we had found an issue in due diligence, we would have dealt with that issue and, depending what the issue was, would depend on how that would be dealt with through the SPA or whatever, or whether we would continue with the acquisition and we had -- we did due diligence on a couple of businesses where we found things we didn't like and we didn't go ahead with the acquisition. So hypothetically, it depends what you find, doesn't it.”

Mr Higgins said that, when he left LCG in May 2024, his perception of the Company was that it was still a good business.

The defendants (in addition to raising Issue 9 to the effect that any loss cannot exceed the value of the Funding Indemnity) maintain that the breaches of warranty did not result in any impairment or reduction of the Company’s MEBITDA. Their position is that there is no proper justification for using either a reduced MEBITDA figure or a lower multiplier.

They say those breaches would not have caused the hypothetical reasonable and prudent purchaser to have reduced its assessment of MEBITDA because (to quote from the defence) the purchaser “would have recognised that they could adjust delivery and funding claims so as to avoid any allegations of over-funding, and indeed to secure additional funding per learner, as it is believed the Company has been able to achieve following completion of the SPA” (per paragraph 54(b)). In circumstances, therefore, where they were not likely to cause a recurring reduction in MEBITDA the purchaser would have recognised that its position would be adequately protected by the Funding Indemnity.

The defendants point to the Over-Claimed Sum relating to only one funding year - AY20/21 and LCG not relying upon any breaches of the Funding Rules in prior years to support the case of loss. They said the Over-Claimed Sum should be taken to relate to an isolated event and a one-off payment in the lesser amount of the Clawback (£783,325); and, if LCG had wanted to rely upon breaches of the Funding Rules in earlier years, then those should have been pleaded and relevant evidence adduced.

The defendants also say that LCG’s pleaded case adopted the erroneous approach of calculating loss by reference to what was only later established by RSM in their report of 20 June 2022. The RSM report was also some 8 months after the relevant date for determining the Warranty False Value. However, they said the analysis of the adjustments undertaken by the Company in AY21/22, including in April 2022 in anticipation of the report, showed the overall picture to be one of successful mitigation of loss, as Mr Dowson said in evidence relating to Issue 12 and as I have found (at least in concluding the Clawback did not reflect any failure to mitigate).

They contend that the greater part of the £1.034m identified by Mr Dowson as under-delivery by the Company on its funding of £6.3m under the contract for AY21/22 was in fact attributable to a fall in the number of learners (by 149) caused by the ARG/Capita issue. By reference to an average figure of £4,175 per learner they attributed approximately £622,000 of the under-delivery to the ARG/Capita issue. The defendants’ closing submissions set out a series of calculations in support of their case that the balance of approximately £400,000 reflected financially positive aspects of the changes to planned hours and Condition of Funding explained by Mr Williams.

As I have summarised in connection with Issue 12, Mr Williams explained that, for learners who had not already left the Company by the time those in-year changes were made, some who had completed their learning aim were enrolled on the next one (to reflect the proper approach to nested qualifications) and others who had been on part-time funding, to by-pass the Condition of Funding rules, were moved to higher full-time funding (and thereby became subject to the Condition of Funding penalty suffered in the next-but-one academic year). So far as AY21/22 was concerned, while the effect of that penalty would not be felt until later, the defendants said the figure of £400,000 (derived from their analysis of the separate impact of the ARG/Capita issue) reflected “net positives” of approximately £300,000 in relation to planned hours and approximately £300,000 in relation to the changes made as a result of the Condition of Funding breach. In other words, the under-delivery on funding in AY21/22 was mitigated down to £400,000.

As the changes in AY21/22 described by Mr Williams had been made some 6 or 7 months into AY21/22 (by which time some students had left and the Company had changed their funding from band 5 to the reduced funding under band 1, 2 or 3 without the ability to adopt a proper approach to nesting for them) the defendants said the Company’s position would have been viewed even more favourably by the hypothetical seller and purchaser in October 2021. In their closing submissions, counsel said:

“… if the process was carried out prospectively, which is in effect what the position would have been as at October 2021, the net positive of £300k would be much higher and £1m would be much lower (because the problem of learners having left before completion of the aim would not arise). Based on this information the prospective assessment of the PLH and CoF issues is that they are likely to be significant net contributors to positive maintainable earnings. This is because they saved LCG from a drop they would otherwise have suffered due to the drop in learner numbers and the further adverse effects caused by the changes made by LCG in year (which resulted in retention factor being adversely affected).”

The changes which the defendants say adversely affected the Retention Factor were staff redundancies in June and July 2022 (because of the decline in numbers due to the ARG/Capita issue) and identifying the learning aim of those students moved to funding band 5 as a Diploma when that was often not achieved before the student left. They said the redundancy programme was carried out in an ill-thought-out way, without proper consideration of the resources required for delivering GCSEs. Mr Lewis’s evidence was that the redundancies caused a significant loss of motivation amongst students which led many to drop out of courses without achieving their Core Aim; and that had an adverse impact on the Retention Factor. His counsel said LCG should have adduced evidence from “an independent expert in ESFA Funding” (conducting an audit of the ILRs of learners enrolled in October 2021) to support the Company’s revised approach to learning aims rather than leaving this to the factual evidence of Mr Dowson and the accountancy evidence of Mr Osborne.

Mr Lewis’s evidence was that the reintroduction of GCSEs, in order to comply with the Condition of Funding rules, could have been achieved at an increased cost of £50,000. Mr Pearson had regard to this evidence when providing his own estimate of the GCSE costs. Mr Lewis’s position was that this expenditure would have produced an extra £293,000 in annual revenue (as noted below, the experts agreed upon a slightly higher figure). He said the Company should have put GCSEs back in place soon after the Condition of Funding breach came to light. He said he had not suggested this at the time because he had been ousted from management decisions and told that communications should be between solicitors.

In support of their case that GCSEs could have been reinstated at relatively modest cost, the defendants called Ms Lisa Gill as a witness. Ms Gill was the Company’s Head of Skills (maths and English) between 2016 and the date of the SPA (though she had been absent on sick leave between December 2020 and October 2021). After the SPA she became Head of Growth for the Company’s Welsh business and left that employment in May 2024.

Ms Gill has worked in adult education for over 20 years, though after October 2021 she was not concerned with any GCSE provision. Ms Gill did not accept that the Company’s teaching of GCSEs up until 2019 had been unsuccessful. Like Mr Lewis in his evidence, she said the Company had been measuring success incorrectly. A grade 1 GCSE was technically a pass – and a huge incremental step for many of the Company’s students – but the Company had been measuring success by reference to grade 4. Even by that standard, she did not accept that the Company’s view was that, until it ended, the GCSE provision was failing and, in hindsight and treating a grade 1 as a pass, she said the results up to 2019 were in fact “fantastic”. She was not part of the SLT who decided to curtail GCSE provision. The thrust of Ms Gill’s evidence was that, up to the point she went on sick leave, the Company had resources readily available for deployment in reinstating GCSEs if required. She did not envisage it would involve any additional costs. She accepted there was no question of reinstating GCSEs between 2019 and the date of the SPA.

Therefore, looking at the overall position of the Company as at the date of the SPA, the defendants presented the consequences of the 2022 Audit as positive contributors to an MEBITDA that would otherwise have suffered a significant reduction in revenue because of the ARG/Capital issue. Mr Lewis pointed to the funding that the Company had since been able to achieve through a proper approach to nested qualifications (the Additional Learner Value for AY20/21 being an indication of its capacity to do this without increased risk to the Retention Factor) and through the provision of GCSEs, at modest cost, to secure band 5 funding.

The defendants submitted that, if justified at all, any reduction in the Company’s MEBITDA figure should be no greater than the amount of the Clawback, rather than the Over-Claimed Sum, especially having regard to the Company’s history of providing Additional Learner Value through over-delivery.

They also said an adjustment of the 5.5x multiplier for determining a Warranty False Value was unjustified, and effectively amounts to double-counting of damages. The point was made that a downward adjustment of the multiplier by 0.1 (applied to the EBITDA of £2.571m) equated to £257,000 and counsel said that “soft hands” on the part of the court were required even if there was a case for making one. They repeated the point, made in connection with Issue 2, that Notices 1 and 2 did not suggest an adjustment to the multiplier. A reduction in the multiplier to 3 was only suggested for the first time in the particulars of claim.

The defendants suggested there is recognised judicial and accounting hostility to a reduction in both the multiplicand and the multiplier because of the risk of double-counting. They referred to the decision of Blair J in Hut Group Lid v Nobahar-Cookson [2014] EWHC 3842 (QB), at [159]-[173], where the judge was not persuaded to revisit the multiple in addition to a reduction in the EBITDA.

Mr Sims KC and Mr Jagasia (who also acted for the defendants in that case) accepted that in MDW Holdings Ltd v Norvill [2021] EWHC 1135 (Ch), at [288]-[290], HHJ Judge Keyser QC discounted the multiplier from 4.2 to 4. His decision was upheld on appeal: see [2022] EWCA Civ 883; [2023] 4 WLR 33 Counsel referred to the judge’s observation that “[t]here is obvious reason to be cautious before discounting the multiplier at all” because an adjustment to the multiplier would “present a risk of double-counting.” They submitted that this was not an MDW type of case where the matters giving rise to the breaches of warranty had resulted in reputational damage to the company.

More generally and engaging with LCG’s reliance upon the decision in Parabola, counsel referred to the decision of Leggatt J, as he then was, in Marathon Asset Management LLP v Seddon [2017] EWHC 300 (Comm). That case concerned a claim against former employees for breaches of contract through them copying confidential documents which they had either not subsequently made use of or where the claimant did not allege that their use had caused it any financial loss. Leggatt J was not persuaded to award so-called Wrotham Park damages, when the defendants’ activity could not reasonably be expected to be treated as the subject matter of a hypothetical negotiation between the parties, and he awarded nominal damages. He recognised that there are principles which may assist a claimant who has difficulty in proving loss, including the court’s preparedness to do its best to quantify loss where precise calculation is impossible, but went on to say, at [165]:

“These principles can help a claimant to overcome evidential difficulties in proving damages. There is a limit, however, to how far they can be taken. They may assist in resolving uncertainties where evidence is not reasonably available but they do not enable the court to conjure facts out of the air and they have little role to play where evidence could reasonably have been obtained, or has in fact been adduced. They may give the claimant a fair wind, but not a free ride.”

Counsel said LCG was in the same position as the plaintiff in Senate Electrical (also relied upon by them on Issue 2 above) where, addressing the issue of notification of the claim, the Court of Appeal said: “The plaintiff cannot complain if, through opening his mouth too wide, he fails to prosecute a more modest claim and the judge does not deal with the matter as sympathetically as he might otherwise have done.”

In Senate Electrical the trial judge rejected the evidence relied upon by the plaintiff to support a damages award in excess of £25m, which was based upon them saying they had applied a price/earnings ratio in their valuation of the business bought from the defendants, but he awarded damages of £5m on the basis that the price would have been negotiated at a lower level if the breaches of warranty had been known to both parties. The Court of Appeal noted that the judge’s approach was not covered by the pleading, and that it was not put forward by the plaintiff or considered by the defendants and said that the judge should not have attempted to rescue the plaintiff’s case as he did without giving the defendant an opportunity to object.

Counsel’s reliance on this aspect of the decision in Senate Electrical went in particular to what they said was the unfairness of LCG seeking to present the case on damages by reference to the prospect that an audit of the Company in respect of years prior to AY20/21 would have revealed further breaches of the Funding Regulations beyond those which produced the Clawback. They said the true extent of the risk of adverse findings on any such audits had not been explored at trial and it was contrary to LCG’s case to rely upon one when it had been contained by agreement with ESFA over the Clawback.

They also relied upon the recent decision of Fancourt J on the appeal in Jacobs v Chalcot Crescent Management Company Ltd [2024] EWHC 259 (Ch). In that case the trial judge had found for the defendant on a basis which had not been pleaded nor fairly raised at trial. Fancourt J allowed the appeal by reference to the decision of the Court of Appeal in Al-Medenni v Mars UK Ltd [2005] EWCA 1041 which emphasised the importance of the court confining its decisions to the issues identified and addressed by the parties.

Mr Sims KC and Mr Jagasia relied upon both Senate Electrical and Jacobs v Chalcot to say that LCG’s position in relation to the Warranty False Value MEBITDA had changed from the straightforward pleading of a deduction of the Over-Claimed Sum from the Warranty True Value MEBITDA to the one advanced by Mr Osborne. Mr Osborne adopted a quite different approach based on a reduction in the Retention Factor by reference to the Planned Hours Over-Claim and Condition of Funding Over-Claim. The defendants said this exercise involved the impermissible use of hindsight through the use of a Retention Factor relevant to funding for AY23/24 and by reference to the costs later incurred by the Company in providing GCSEs.

Both experts made it clear that their expertise did not extend to the Funding Regulations and that their respective views (in relation to the Warranty False Value MEBITDA) were subject to any particulars findings the court may make about the impact of the breach of warranty upon matters such as the Company’s Retention Factor or other financial consequences. This was illustrated by the tables within Appendix 5a to their joint statement and the alternative figures reflecting the variables behind them.

Mr Pearson did not consider it appropriate to undertake the type of calculations that Mr Osborne had when such variables - such as the length of the delay in implementing a GCSE curriculum, the relevant Retention Factor (if calculable as at the date of the SPA) and the level of costs expected to be incurred in delivering GCSEs – remained to be determined by the court. He indicated his willingness to provide further assistance to the court in working with Mr Osborne to quantify the damages (if any) following such determination. Mr Osborne said the same.

The expert evidence is detailed and voluminous. With the appendices to the reports and the experts’ joint statement it runs to over 1600 pages. What follows is therefore a summary of the key aspects of it.

Mr Christopher Osborne FCA is a partner and head of the forensic services practice of FRP Advisory Trading Limited. He has over 25 years of experience as a forensic accountant in a number of areas which include analysis of warranty claims.

I have already mentioned that Mr Osborne’s report addressed the meaning and effect of some of the warranties relevant to Issue 6. He was taken to task for this by Mr Sims KC in cross-examination on the basis that he had it compromised his independence as an expert by considering matters which went beyond issues of loss and included his views on breach. In my judgment this criticism was misplaced. Mr Osborne was expressly instructed to give his professional views on breach of the accounts-related warranties In doing so he gave his views by reference to the requirements of FRS 102, as explained by him when the language of the warranties called for such an explanation, but expressly stated that it was for the court to decide whether a breach of warranty had occurred. As he said in cross-examination, “I’ve tried to assist the court in regard to any relevant or [sic] accounting or financial matters.”

On Issue 8, Mr Osborne’s evidence on behalf of LCG adopted the ‘Equitable Value’ basis in the hypothetical negotiation that informs the Warranty False Value. The estimated price of the Company is therefore one agreed between identified knowledgeable and willing parties that reflects the respective interests of those parties.

LCG said that in the circumstances of this case, where any available synergies resulting from the acquisition of the Company’s business would have been potentially attractive to any ‘trade’ purchaser (as opposed to private equity investor), there was unlikely to be any material difference between Equitable Value and Market Value. By closing submissions, the defendants were in broad agreement. They said there does not appear to be much between the experts as to the factors which are relevant to take into account whichever basis is adopted. Indeed, the defendants inclined towards Equitable Value being the appropriate basis by reference to the reliance by them and Mr Pearson upon factors particular to LCG (such as the ability to pull on spare capacity from other contracts) that were pertinent to the measures taken in response to the 2022 Audit.

In his approach to both the Warranty True Value and the Warranty False Value Mr Osborne did not consider the use of hindsight to be appropriate (i.e. to resort to information that post-dated the SPA and therefore would not have been available to the parties). On that basis, the actual financial impact on the Company of the breaches established by the 2022 Audit was not relevant to his analysis. However, he did use hindsight as a proxy for what the parties may have contemporaneously estimated in two instances.

The first concerned the need for a party who knew the breaches had taken place to estimate a revised Retention Factor. He considered it reasonable to adopt the actual Retention Factor for AY21/22, as a proxy, rather than estimating one by reference to the parties’ expectation as at the SPA. He adopted the actual Retention Factor calculated by ESFA of 0.81451 from AY21/22, used in the Company’s funding allocation for AY23/24, as it reflected the impact of the issues underlying the Planned Hours Over-Claim.

The second involved the use, as a proxy, of the actual costs incurred by the Company to deliver GCSEs, for the purposes of analysing the costs which would need to be incurred to comply with the Condition of Funding rules, rather than estimating those costs. The defendants said this involved the impermissible use of hindsight; and that the 2024 costings relied upon by Mr Pearson appeared to be a forecast rather than costs perhaps actually incurred; though in re-examination Mr Osborne said that the costs for the relevant months in 2024 (as opposed to later months) were actual costs.

Because of his approach that the use of hindsight was generally inappropriate Mr Osborne did not support LCG’s pleaded approach of arriving at a Warranty False MEBITDA by deducting the Over-Claimed Sum from the Warranty True Value MEBTIDA. Neither did he support the defendants’ (last resort) alternative suggestion of deducting the Clawback.

As already explained, the Over-Claimed Sum was made up of the Planned Hours Over-Claim of £758,367 and the Condition of Funding Over-Claim of £489,097. Mr Osborne’s equivalent figures were £709,660 and (a net) £292,921.

His report explained how the first figure in relation to the planned hours breach was based upon his adoption of a Retention Factor of 0.81451 (taking the one used in AY21/22 as a proxy) instead of the actual Retention Factor of 0.95300 used in the funding allocation statement for AY20/21. He recognised the first figure would not have been known until March 2022. The difference of 0.13849 applied to funding of £5,124,268 (the funding shown in the allocation statement for AY20/21 which would therefore be known to the parties when negotiating the SPA) produces £758,367. He did not add to that sum (and thereby lower the Warranty False Value further) any estimate of the cost of providing Core Aims that would enable the Company to remedy the planned hours issue. He did not have the underlying evidence to support the inclusion of such additional costs or have sufficient detail to say whether they would instead be attributable to LCG’s plans for the expansion of the Company’s business.

The calculation of Mr Osborne’s second figure for the breach of the Condition of Funding rules is more complicated. It was based upon 263 students affected by the Condition of Funding breach in AY20/21 receiving higher band 5 funding of £223,968 but with recognition that having a GCSE course in the curriculum may impact on the Company’s Retention Factor as a result of some students withdrawing from their Core Aim. Using the Retention Factor for those who were on the Company’s GCSE’s course in 2017 as a proxy, Mr Osborne in his report had applied a Retention Factor of 0.79361 (a difference of 0.0209 from the actual one used in the funding allocation for AY20/21) to produce an offset of £107,073 against that additional funding. The third component of his calculation, which, in his report accounted for net additional funding of £116,895 becoming an overall reduction in MEBITDA, involves the inclusion of annualised GCSE-related costs. His figure of £409,816 for those costs was based upon a breakdown of actual monthly costs of delivering GCSEs between February and September 2024 with some downward adjustment to reflect the fact that those actual costs included provision of functional skills in another business. Mr Osborne said that the existence in October 2024 of 30 vacancies for GCSE teaching staff might mean he had underestimated the level of GCSE-related costs.

In contrast to LCG’s pleaded claim of a Warranty False Value MEBITDA of £1,323,320, the figure in Mr Osborne’s report was £1,568,419. However, this figure was revised in the experts’ joint statement. In the joint statement, Mr Osborne identified an alternative figure of £1,726,820. This was based upon his adoption of different Retention Factors for the planned hours and Condition of Funding breaches (leading to a lower funding impact for the former and a greater impact for the latter) and recognition that there would be an increase in funding (of £297,608) from delivering GCSEs. He made it clear that his use of specific Retention Factors – combined to produce a weighted average for a “counterfactual retention factor” - was dependent upon the court accepting the factual evidence on such points as the knock-on effect upon the Retention Factor of putting learners on the Core Aim of a Diploma. He accepted in cross-examination (by reference to Mr Williams’s third witness statement) that if the court were to find, in relation to the in-year adjustments made in AY21/22, that the main reason for a reduction in the Retention Factor was students leaving early without completing their Core Aim then that would affect his analysis.

Mr Osborne’s estimation of the cost of delivering GCSEs remained the same in the joint statement.

Mr Osborne’s conclusions on the Warranty False Value MEBITDA were shown in the following table in the joint statement.

In his approach to the MEBITDA multiplier Mr Osborne said in his report that LCG’s pleaded case was consistent with the multiples adopted in relation to the acquisitions of White Rose and Acorn “and that these appear, on their face, to be comparable companies.”

He acknowledged that there would have been an element of negotiation over a reduced multiplier (I refer below to what was described in one case as “the haggle factor”) but observed that he had seen no evidence of the defendants’ likely attitude to this.

The impact of Mr Osborne’s Warranty False Value MEBITDA upon the Company’s enterprise value (to which an appropriate figure for net cash would be added to reach the Warranty False Value), according to the multiplier applied to it, was illustrated by the following table in the joint statement.

Another aspect of Mr Osborne’s general rejection of the use of hindsight (and, with it, him not adopting the approach in the particulars of claim of deducting the Over-Claimed Sum from the EBITDA) was reflected in his inclusion of a third component in his Warranty False Value. This was by reference to the one-off adjustments that the Company would have needed to have made in AY20/21 if the planned hours and Condition of Funding issues had been known about at the date of the SPA. As these were one-off, he did not include them in a revised MEBITDA but instead said their non-recurring nature would mean that they would have impacted the net cash element of the Warranty True Value.

In fact, because he did not know how a purchaser would have contemporaneously sought to estimate the financial impact of the adjustments, he adopted the amounts later fixed for the Planned Hours Over-Claim and the Condition of Funding Over-Claim. What he did not include, however, was the Unfunded Learner Value, the setting-off of which accounts for the difference between the Over-Claimed Sum and the amount of the Clawback. He said it could not be foreseen that a “non-standard agreement” would have been reached with ESFA, which permitted its deduction, when the Funding Rules did not provide for that. In his report, his one-off adjustment to the net cash element of the Warranty True Value was of the same amount as the Over-Claimed Sum. This produced an adjusted net cash sum of £1,415,544 (i.e. the sum of £2,663,008 less £1,247,464).

With the adjustment to the net cash sum, the revised figures in the joint statement showed Mr Osborne’s view upon the difference between the Warranty True Value and the Warranty False Value to be in the range £6,596,003 and £10,913,053, depending upon the relevant enterprise value indicated by the table at paragraph 581 above. This resulted in a damages claim of between £5,899,955 and £10,217,005 when compared with the Warranty True Value. The higher figure was just in excess of LCG’s pleaded figure.

Mr Gavin Pearson FCA is Head of the Disputes, Investigations and Valuations Team at Quantum Advisory Limited.

On behalf of the defendants Mr Pearson gave evidence to the effect that LCG’s approach to the quantification of damages was flawed. He said, even if a reduction to the Warranty False Value MEBITDA was justified, there was no basis for a further adjustment to the multiplier. Any such adjustment amounted to double-counting of a reduction in profitability when there was no basis for concluding the issues resulting from the 2022 Audit would persist in future years. LCG’s pleaded deduction of the Over-Claimed Sum from the Warranty True Value MEBITDA already accounted for the worst-case scenario recurring on a perpetual basis. If any deduction was appropriate, it should be the amount of the Clawback. As regards the multiplier, to apply a discount to the multiple of nearly 50%, as LCG suggested, involved the suggestion that either the ESFA income stream had little if any value (he said that a multiple of 3 applied only to the ESFA funding equated in reality to a multiple of 0.25) or that the whole of the business (including its Welsh funding to which the breaches of warranty were irrelevant) was significantly impaired. He had not seen any evidence to support either proposition.

Mr Pearson identified four “somewhat comparable” transactions where EBITDA multipliers ranging from 4.5 to 7.6 had been adopted. He considered them to be somewhat comparable because they received funding from ESFA, had military links and, like the Company’s, their primary educational programmes would not necessarily be considered to be traditional academia.

Mr Pearson’s view was that there would be no perception between the parties to the hypothetical negotiation of a heightened risk in relation to future earnings after FY21.

Indeed, not only was there no reason to assume a fundamental worsening in the Company’s prospects but the Company’s practices which led to the Planned Hours Over-Claim and the Condition of Funding Over-Claim were such that a reasonable seller and a reasonable purchaser might have considered the 9+3 EBITDA to have been greater than £2.571m. He based this view on the funding that the Company might have received under a proper approach to nested qualifications (as illustrated by the recognition of Unfunded Learner Value in the calculation of the Clawback) and by students affected by Condition of Funding being put on band 5 funding. So far as those students were concerned, this was based upon a calculation of the provision of GCSEs of £629 per student (by reference to the costs implied by the Company’s management accounts for FY18) and an estimated additional profit of £103,000 p.a.. LCG, adopting Mr Osborne’s view, said that the FY18 cost of providing GCSEs did not accurately reflect the likely cost of reinstating GCSE provision after the SPA.

This approach led Mr Pearson to calculate a Warranty False Value MEBITDA of £2,663,437 in his report. That figure was revised by Mr Pearson in the experts’ joint statement to £2,664,608 to reflect his agreement with Mr Osborne upon increased funding of £297,608 through delivering GCSEs.

Mr Pearson therefore said that it would instead be reasonable for the court to conclude that the breaches of warranty had resulted in no loss because the fundamental strengths of the Company’s business did not require the MEBITDA to be re-visited. The value of the Warranty False Value MEBITDA was equal to or even greater than the Warranty True Value MEBITDA. He relied upon the fact that its acquisition gave LCG access to a new source of revenues through Welsh funding and to new recruitment streams, led to revenue and cost synergies and, with the addition of the Company’s numerous military academies to LCG’s existing four, put LCG in the position of being the largest military training provider in England and Wales. He relied upon the factual evidence which indicated that LCG had recognised that the price under the SPA was lower than what would have to have been paid in an auction.

It was by reference to such matters, specific to LCG, that I infer the defendants inclined towards Mr Osborne’s Equitable Value approach to the hypothetical negotiation between the parties.

Part of Mr Pearson’s reasoning was that, with knowledge of the breaches of warranty, the parties could have broadened the scope of the Funding Indemnity to cover a 6-year period rather than the 3 years to which it in fact applied.

In support of his view that LCG had suffered no loss Mr Pearson also relied upon the accounts of Boyd Topco (LCG’s parent company) for the years ended 31 January 2022, 31 January 2023 and 31 January 2024. He did so to highlight that Boyd Topco recognised goodwill of £15.153m (and net assets of £3.597) on LCG’s acquisition of the Company. He referred to the accounts for the later years to show that no material impairment charge had been made against the investment in the Company over and above the ordinary and expected amortisation of goodwill. FRS 102 requires goodwill to be recognised at cost less accumulated amortisation and accumulated impairment losses. As impairment losses are defined as including those where “the carrying amount of an asset exceeds …. its recoverable amount”, Mr Pearson said the accounting treatment appeared to show that LCG’s parent company considers that the Company will generate future economic benefits at least equal to the Warranty True Value.

Mr Pearson recognised that Boyd Topco’s accounts for the year ended 31 January 2023 state, at disclosure note 27, as follows:

“Contingent asset

There is an outstanding warranty claim in relation to a previous acquisition. This creates a contingent assets [sic] but it is not currently possible to accurately estimate the outcome or quantum of the claim.”

The definition of a ‘contingent asset’ in FRS 102 (“A possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity”) led Mr Pearson to conclude, on the assumption that note 27 relates to the present claim, that Boyd Topco (and therefore LCG) apparently consider this claim to be a contingent asset that represents an addition to the (unimpaired) value of the investment in the Company. He said: “This would mean that they consider the warranty claim not to be an amount to recover a loss on their investment, but rather, an additional asset/source of income entirely.”

Mr Pearson recognised that, as an alternative to the no loss scenario, the court might conclude that there had been a small increase in the risk factors affecting the Company. A table in his report illustrated the impact of applying a Warranty False Value multiplier of 5 (as well as the same 5.5 multiplier used for the Warranty True Value) to his own MEBITDA of £2.663m. This produced an enterprise value of £13,317,184. When applied to the lower Warranty True Value MEBITDA, a multiplier of 5 produced an enterprise value of £12.855m. In the joint statement addressed next, Mr Pearson said “the minimum acceptable EV/EBITDA multiple in a Warranty False Scenario would have been 5.0x”.

His summary of the alternative position was:

“Applying this methodology, I calculate that the Warranty False Value should be in the range of £12.855m to £14.150m, rather than the £3.971m set out in the Particulars of Claim. This would reduce the Claim value from £10.180m as per the Particulars of Claim, to between £nil and £1.295m.”

The experts agreed that, when considering the MEBITDA as at the date of the SPA, it is necessary to consider the future impact that LCG (or the hypothetical reasonable purchaser) and the defendants (or the hypothetical reasonable seller) would have anticipated at the point of purchase, that ensuring future compliance with the Funding Rules would have been likely to have on the Company’s income, costs and profit in future years.

They agreed the additional funding the Company could have claimed in relation to GCSE provision (and 348 students affected by the Condition of Funding Over-Claim) was £297,608. As noted above, they did not agree upon the cost that would be involved in securing it. Mr Pearson said Mr Osborne’s reliance upon the actual Retention Factor and GCSE costs in academic years after AY20/21 fell foul of the general prohibition upon the use of hindsight. Mr Osborne said Mr Pearson’s reliance upon historic GCSE costs was not appropriate when those costs would not necessarily be representative of the costs of contemporaneously reinstating a GCSE provision at a later date.

The experts also agreed that, so far as any adjustment to the EBITDA multiplier was concerned, the general approach to quantifying the Warranty False Value involved consideration of any foreseeable changes referable to the perceived future prospects and risks of the Company that LCG (or a hypothetical reasonable purchaser) and the defendants (or a hypothetical reasonable seller) would have considered beyond any increased revenue and/or costs relevant to any adjustment of the EBITDA figure. They agreed that it may be appropriate to decrease the multiplier to reflect some degree of uncertainty over future ESFA funding and general uncertainty in regard to the business.

Mr Osborne and Mr Pearson agreed that neither had identified any directly comparable company for the purpose of identifying the appropriate Warranty False Value multiple. This agreement extends to White Rose and Acorn, though Mr Osborne said they were comparable to the extent their businesses provide vocational training and are fully funded by the Government. It also includes the four companies identified by Mr Pearson.

The experts agreed that the factual evidence of the “synergistic values” of the transaction and the Company’s prominent position within the market might mean that (on the Equitable Value approach) it could command more than the 3 to 4 multiple suggested by Mrs McLeish’s comparison with White Rose and Acorn.

They pointed to the Company being the seventh largest ESFA-funded independent training provider, being the UK’s largest military preparation college, having memoranda of understanding with the three branches of the UK’s armed forces and the costs savings achieved through serving soldiers being seconded to it as relevant synergies as strengths. Their joint statement said:

“The Experts agree that the above factors would reasonably have been viewed positively by a hypothetical reasonable purchaser (and specifically [LCG]) as at the Transaction Date with [the Company] being well established and a leader in the military preparation college sector, with the close links to the military likely being viewed as a significant intangible asset of [the Company], which could aid in setting [the Company] apart from its competitors.”

They also agreed that the proportion of the Company's revenue derived from ESFA funding, compared with other sources, could be relevant to an adjustment of the multiplier.

I address first the points made on behalf of the defendants in relation to LCG’s pleaded case and the defendants’ approach to the exercise summarised in Equitix.

Firstly, I should note my conclusion that the present case is not close to the situation in Senate Electrical upon which they rely. In that case the plaintiff failed in its claim to recover damages calculated by reference to a price/earnings ratio when the purchase price (from which the plaintiff’s suggested starting ratio was derived) was in fact made up of a valuation of the company’s net assets and goodwill. The net assets element made up over 75% of the purchase price of £90m and the plaintiff’s claim, made by reference to an overstatement of profit by £1.7m (or 17%) in breach of warranty, would have resulted in what Stuart-Smith LJ described as an “absurd conclusion” where the suggested damages would equate to 80% of the goodwill figure of £20m. In the present case, by contrast, LCG’s calculation of damages by reference to the company’s enterprise value is entirely consistent with how the Company was valued under the SPA.

Neither is the present case close to Anglo-Cyprian Trade Agencies Ltd v Paphos Wine Industries Ltd [1951] 1 All ER 873 to which Mr Booth KC referred to illustrate the kind of situation where the court may properly conclude that the damages for which the claimant seeks judgment has not been adequately formulated in its pleaded case. The reason why the buyer of goods failed in its claim for the purchase price in that case was because it had alleged that the goods were valueless when it only succeeded at trial in showing that they were slightly defective. Devlin J held that that was an alternative claim, which should have been pleaded in the alternative, because the basis of that claim was different.

In my judgment the defendants’ interpretation of LCG’s pleaded case (summarised in their written closing as “Headline 8 – the ambit of C’s pleaded case – 20/21 errors only”) is a strained and unjustified one. I have quoted the relevant parts of the pleading in paragraphs 527 and 528 above. In suggesting that LCG’s case on damages is confined to the Over-Claimed Sum and the funding breaches in AY20/21, with them correctly observing there are no pleaded allegations of breach in earlier academic years, the defendants overlook two material points.

The first is that the case for an adjustment of the multiplicand (i.e. a downward adjustment of the EBITDA figure) is necessarily based upon a forward-looking assessment of the Company’s maintainable earnings: the ‘M’ in ‘MEBITDA’. The defendants are correct to say that LCG does not alleged breaches of the Funding Rules prior to AY20/21. However, in my judgment LCG’s case is not deficient in impugning the “maintainability” of the Warranty True Value EBITDA only by reference to the Over-Claimed Sum arising out of breaches in AY20/21. Whether that precise sum is the correct deduction is obviously a separate question.

To quote from the Company’s counter-offer to LCG of 8 June 2021, which was the basis of the price agreed under the SPA, “….. as regards the initial consideration payable at completion, the minimum value acceptable is 5.5x the FY21 MEBITDA of £2.571m i.e. £14.15 million.” The FY21 ended on 31 July 2021, hence the use of the 9+3 EBITDA down to that date. That counter-offer also said “[t]he forecast FY22 maintainable EBITDA of LCG [sic] is £2.804 million.” LCG’s pleaded case does involve an element of hindsight in relying upon the Over-Claimed Sum which only came to be quantified after the date of the SPA. However, the subject matter of the quantification is breaches of the Funding Regulations which occurred in the one academic year (AY20/21) that corresponded to the only financial year (FY21) to which the 9+3 EBITDA related. There is a direct correlation between the Over-Claimed Sum and the Warranty True Value MEBITDA which, LCG says, has become heavily qualified by it.

Although the Over-Claimed Sum only came to be quantified in FY22, the forecasted EBITDA for that next financial year was not used as the basis for the Warranty True Value. Neither does LCG need to impugn the 9+3 EBITDA by reference to alleged or suspected breaches of the Funding Regulations which took place prior to AY20/21 (and FY21). Indeed, because of the direct correlation, I think there would be conceptual difficulties in seeking to impugn the Warranty True Value by reference to breaches which occurred earlier than FY21. In my judgment, it is therefore logical to approach the question of whether the adopted 9+3 EBITDA was a maintainable one by focussing upon the impact of the subsequently quantified Over-Claimed Sum.

The second point to be made about the defendants’ response to LCG’s pleaded case is that (save perhaps on one unduly literal reading of paragraph 52(e) of the particulars of claim) it is incorrect to say that the suggested change to the multiplier is based solely upon the breaches in AY20/21 and the Over-Claimed Sum. In addition to the impact of the Over-Claimed Sum on the Company’s present profitability, the sub-paragraph identifies the known issues with the ESFA funding, the increased possibility of further funding issues coming to light and the overall view of the ‘quality’ of the Company, in the eyes of the hypothetical purchaser, as all “leading to a more cautious view being taken of the ability of the Company to continue to generate a given level of revenue in the future.”

LCG’s pleaded reliance upon the parties’ perception of “the increased possibility of further funding issues coming to light” must relate to potential issues which pre-date the SPA and (given the knowledge of the breaches in AY20/21 which is separately attributed to the defendants) which pre-date AY20/21. It is a matter which was addressed in the evidence of Mrs McLeish when, addressing the later discussions with RSM and ESFA, she explained her concern that the Company’s exposure should be confined to the financial implications of the 2022 Audit and not go back further in time.

The decisions in Senate Electrical and Jacobs v Chalcot confirm that it would be wrong and unfair for me to decide that the MEBITDA figure for the purposes of the Warranty False Value should be qualified by a specific amount which reflects presumed breach of the Funding Rules prior to AY20/21. LCG has not pleaded any prior breaches and not sought to put a value on them. However, the hypothetical perception of wider funding issues is invoked in relation to the qualitative element of that value (paragraph 52(e) of the particulars of claim) and not the quantitative one (paragraph 52(d)). Those decisions do not preclude consideration of LCG’s case in relation to a revised multiplier.

LCG’s pleaded case in support of the suggested adjustments to the multiplicand and the multiplier, respectively, is reflected in Mr Osborne’s and Mr Pearson’s agreement upon the general approach to quantifying the Warranty False Value. In their joint statement dated 7 February 2025 they said:

“The experts agree that the general approach to quantifying the Warranty False Value in this matter, is to adjust the Warranty True Value for:

(i)

any incremental revenue and/or costs that the Claimant (or a hypothetical reasonable purchaser) and the Defendants (or a hypothetical reasonable seller) would have considered that the Company would have generated (or lost) and/or incurred (or saved) in ensuring future compliance with ESFA rules (had they known of the ESFA Breaches at the Valuation Date), which would alter Maintainable EBITDA; and

(ii)

any other foreseeable changes with regards to the perceived future prospects and risks of the Company, that the Claimant (or a hypothetical reasonable purchaser) and the Defendants (or a hypothetical reasonable seller) would have considered, had the Parties been aware of the ESFA Breaches at the Valuation Date, which may affect the EV/EBITDA multiple.”

In his testimony Mr Osborne said that, whereas an alteration to the EBITDA was “a more mechanical calculation”, any potential adjustment to the multiplier would reflect “non-financial aspects” which might feature as negotiating tools between the parties. Mr Pearson said “….the multiplier effectively sums up the expected rewards and risks from owning the company. So obviously a higher multiple represents often high growth prospects. A lower one might be lower growth or higher risks.” Again, this evidence shows that (whether or not made out on the evidence) LCG’s pleaded case of a purchaser taking a more cautious view of the Company’s ability to maintain revenue at a certain level is clear, comprehensible and not as rigidly confined as the defendants suggest.

As already noted, the particulars of claim held out the prospect that they might be amended in the light of the factual and expert evidence later relied upon by LCG (“to support these matters”) and no such amendment has been made. It is the case that the “matters” pleaded include the quantification of a Warranty False Value MEBITDA by reference to the deduction of the Over-Claimed Sum and that Mr Osborne has adopted a different approach to the figures. Nevertheless, when LCG’s approach to damages has throughout remained the pleaded one directed to the maintainable EBITDA and a revised multiplier, it is in my judgment unrealistic for the defendants to suggest that the pleaded figure must at all times track the expert evidence (specifically the expert evidence of Mr Osborne) if the court is to be able to act on it.

That suggestion, which involves the unconventional approach of a pleading being necessary to support the expert evidence, rather than vice versa, might well require amendment in the light of various stages of the expert evidence (or the pleading party’s side of it): service of the report, the experts’ joint statement and then the expert giving evidence at trial. As Mr Booth KC observed, it cannot be right in principle that if an expert were to accept in cross-examination that a modest element of the claimant’s substantial claim was not properly claimable then, absent a (presumably contentious) application to amend in the light of that evidence, none of the claim would be recoverable. That would be to impose an expectation of “minute accuracy” in the pleaded case which Devlin J said in Anglo Cyprian, at 875f-h, was not a requirement over and above the need to plead “what measure of damage is being relied upon”.

The present case is much closer to Mr Booth’s extreme example than the situation addressed in Senate Electrical and Anglo Cyprian. This is obvious from the defendants’ own pleaded case that, if the Warranty False Value MEBITDA is to be adjusted, then it should be reference to the Clawback rather than the Over-Claimed Sum. The defendants have engaged through their own expert evidence, cross-examination of the expert and their closing submissions with Mr Osborne’s alternative approach to the revised MEBITDA.

In those circumstances the more realistic argument for the defendants is to say that LCG’s case has not been made good rather than it has not been made at all. It is one thing to submit that the court should not act on his evidence (which is their submission in relation to the revised multiplier where there is no scope for such a pleading point) but I reject a submission which amounts to saying his evidence on that point cannot properly be considered at all. The fact that Mr Osborne applies different figures to the same methodology as that adopted in the pleaded case (and has been challenged on his figures) shows that the present case does not come close to the situation in Senate Electrical or Jacobs v Chalcot.

In the light of the position adopted by both parties at the conclusion of the trial I have decided it is appropriate to adopt the Equitable Value basis in the determination of the Warranty False Value. The evidence of Mr Osborne and Mr Pearson in fact revealed there to be not much between them concerning the factors to be taken into account as to whether that or the Market Value basis was to be adopted.

Nevertheless, it is clear from Mrs McLeish’s and Mr Higgins’s evidence that LCG recognised the growth synergies in the transaction (if not any significant cost synergies) and the experts were agreed that LCG, in particular, would have had regard to the “synergistic values” that the particular strengths of the Company’s business brought to the transaction. LCG’s indicative offer to buy dated 2 June 2021 (contained in Mr Higgins’s email) said “we are confident that [the] joining of the two business will create great opportunities [for] the strong MPCT management team.” In my judgment, adopting the Equitable Value approach pays proper regard to the overriding compensatory principle recognised in The Golden Victory.

The exercise of assessing the outcome of a hypothetical negotiation obviously does not involve any second-guessing of the Warranty True Value which the experts agreed reflected both an Equitable Value and Market Value based assessment of the Company’s presumed enterprise value. The parties and the experts agree that the £16,813,008 paid under the SPA is the Warranty True Value.

I say that because many of the points made by the defendants, though presented with a much greater degree of sophistication, might be said to smack of an argument that LCG had acquired the Company at a good price and that the strengths of its business outweighed the weaknesses later revealed by the 2022 Audit. This was the broad thrust of Mr Pearson’s evidence, as is highlighted by his suggestion that Boyd Topco’s accounts indicated the present claim (made under warranties “purchased” by LCG at that price) constituted an asset additional to one whose value was not impaired.

The defendants’ counsel in their submissions said that, irrespective of any alleged breach of warranty, LCG got a very good deal and made a substantial profit from the acquisition. Picking up on a turn of phrase used by me during the trial, they said the Company was a honey pot not a hornets’ nest. Some of the questions put by Mr Sims KC to Mrs McLeish, Mr Higgins and Mr Osborne focused upon the possibility that (if the Company had been offered for sale in a private equity auction in late 2021) another purchaser might have agreed to pay a price fixed by a higher MEBITDA multiple than 5.5. Mrs McLeish responded by saying that (as a trade purchaser) LCG would not have competed in a private equity auction. Mr Higgins acknowledged there was a risk the Company might be sold to a third party, so that it was important LCG benefited from a period of exclusivity once terms had been agreed in principle. Mr Osborne said: “I don’t know contemporaneously what a potential purchaser would or would not have paid for the business, especially in the light of the ESFA breaches.”

Irrespective of the price which another purchaser might have paid by reference to a Warranty False Value, the perceived strengths of the Company’s business, which underpinned those submissions, were obviously reflected in the parties’ agreement upon the price paid by LCG. In particular, the greater part of that price (£14,150,000) reflected the Company’s enterprise value based on a Warranty True Value. Obviously, it is the price actually paid by LCG, rather than some higher price that might have been paid by another purchaser, against which the claim for loss and damage is to be tested by comparison with the Warranty False Value.

Points about the attractiveness of the Company to a buyer such as LCG highlight the importance of the court’s focus being upon the difference, if any, between the given Warranty True Value and the to-be-determined Warranty False Value.

This an important point to bear in mind when considering Mr Pearson’s approach which involves his calculation of a Warranty False Value MEBITDA that is higher than the Warranty True Value MEBITDA. In his report, he also addressed Mr Lewis’s suggested MEBITDA which was higher again. This approach must also be tested by considering what LCG acquired in return for the price paid under the SPA, which I address under the topic of hindsight below. At first sight, it seems counterintuitive to think that a company is more valuable despite the fact that certain warranties, given in support of its suggested value, are unjustified. That is because the suggestion implicitly questions the reliability of the Warranty True Value. There appears to me to be little if any difference between saying, on the one hand, that the Warranty False Value is higher than the Warranty True Value and, on the other, that the price paid by LCG under the SPA was too low.

I make this point about the Warranty True Value being immutable when, in my judgment, most of the strengths of the Company’s business highlighted by the defendants cannot be said to have emerged solely as a consequence of the audit-revealed weaknesses triggering the inquiry into the Warranty False Value. With one exception, they are not the flip-side of a coin that would have remained unturned but for the breaches of warranty. Instead, they were upsides of the transaction which LCG acquired at the price of the Warranty True Value and upon which the falsity of the warranties have no bearing. This basic point is also relevant to the question over the use of hindsight which I address below. The three authorities mentioned below on the hindsight question also make it clear that informed allocations of risk and reward already agreed under the terms of the SPA, and not covered by the warranties, cannot be disregarded when it comes to assessing damages. The observations of Newey LJ in MDW below, about the numerous contingencies that affect the value of a shareholding over time, are particularly pertinent.

Subject to any later deployment of it in effectively mitigating the actual loss caused by the downside created by the breach of warranty, the value of an “asset” (using the term loosely and in a non-accounting sense) or a particular strength of the Company’s business, for which LCG has already paid the Warranty True Value price, should not therefore feature in the calculation of damages. They are qualities reflected in the price paid under the SPA and, on that basis, their value belongs to LCG. They are to be credited not debited to LCG in the assessment of any remaining loss as the defendants have already received payment for them. The proviso is that the business’s resilience to the financial consequences of the warranty being untrue could be relevant to the Warranty False Value MEBITDA where actual mitigation of lost earnings is relevant.

If, however, their value is otherwise introduced into a comparison between the Warranty False Value and the Warranty True Value equation then the result, in my judgment, is an indirect and impermissible second-guessing of the qualitative-based multiplier of 5.5 agreed by the parties to support that price. The general thrust of the defendants’ points and perhaps their logical end was that a 5.5 multiplier was favourable to LCG in the calculation of the price under the SPA. But damages cannot be reduced by reference to “credits” that already belong to LCG under the agreed price. The defendants have already received full value for the revenue-generating potential of these other qualities and should not receive it again in the shape of a reduction in damages otherwise payable.

As I see it, the exception to the Company’s known qualities acquired by LCG is the Unfunded Learner Value in respect of AY20/21 to which I return below in addressing the Warranty False Value (specifically the quantitative adjustment of the Warranty True Value MEBITDA which was based upon the corresponding financial year).

In the cases cited to me, only the decision of the Court of Appeal in Senate Electrical appears to have involved a situation where the court recognised the case for an appropriate credit against the damages claim. As noted below in relation to hindsight, the court in Ageas and MDW noted that the outcome in Senate Electrical on that point did not involve a projection forward from the transaction date and, therefore, did not involve any application of hindsight. Instead, it was a case of recognising that the company’s overstatement of a rebate reserve in 1989, leading to an understatement of profits, should be set against the overstatement of profits in the later 1990 management accounts which formed the basis of the warranty claim.

To the extent that the defendants’ wider “honey pot” submissions are said to support the conclusion that there was a Warranty False Value below which the defendants would not have gone in agreeing a price then that too would be at odds with the valuation premise. Whether the basis is Equitable Value (involving two specific and identified parties) or Market Value (involving generic, unidentified market participants) the parties to the hypothetical negotiation are each taken to be “willing”: see the IVS, paragraphs 50.1 and 50.2, and The Hut Group, at [180], per Blair J.

In Sycamore Bidco Ltd v Breslin [2012] EWHC 3443 (Ch), at [464], Mann J referred to the “haggle factor” to which the court must have regard when assessing what would have happened in a hypothetical negotiation. In a passage which emphasised that the assessment does not therefore simply rest upon the technical approach of experts, he said “[w]hat one has to imagine is a price that a willing buyer would pay to a willing seller.” Mann J had regard to likely haggling during the negotiation of price. In an earlier passage, at [405], he said “the purpose of the valuation is to find what a willing purchaser would pay to a willing seller” but observed that “the views of the actual purchaser and of another potential purchaser are not irrelevant” when considering the haggle factor.

Nevertheless, I accept LCG’s submission that this notional haggling over price cannot be taken to the point where it undermines the concept of treating the hypothetical seller as a willing party to the negotiations. As Mr Booth KC submitted, the focus is upon willing parties, not reluctant or petulant ones.

Mr Booth KC and Mr Adamyk drew my attention to the decision of the Privy Council in Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd [2009] UKPC 45, [2011] 1 WLR 2370. The case concerned damages assessed by reference to a hypothetical negotiation for the release of a contractual obligation. Lord Walker summed up the position when he said, at [49]:

“… It is a negotiation between a willing buyer (the contract-breaker) and a willing seller (the party claiming damages) in which the subject-matter of the negotiation is the release of the relevant contractual obligation. Both parties are to be assumed to act reasonably. The fact that one or both parties would in practice have refused to make a deal is therefore to be ignored …”

There was a large element of hindsight in most if not all of the points made by the defendants about the Company’s strengths and weaknesses in the approach to the Warranty False Value. LCG’s witnesses were questioned and submissions were made about how the Company’s business had fared after the SPA to say the breaches of warranty did not lead to any substantial loss. The ARG/Capita issue and related staff redundancies, unrelated to any breach of warranty, were analysed in some depth and suggested to present greater problems for the Company in the period after the SPA than any breach of the Key Warranty.

Mr Pearson’s instructions included a request that he “consider the events that occurred after the SPA including LCG’s financial performance in the 2-3 years following acquisition, the impact (if any) of the overclaimed funding on LCG’s maintainable EBITDA in the period post-acquisition and any actions taken by LCG to mitigate their losses.”

As noted above, the defendants also said LCG and Mr Osborne had invoked impermissible hindsight when applying the cost of GCSE provision to a revised MEBITDA figure.

When considered in the light of the general restriction upon applying hindsight to matters not known about at the transaction date, the decisions in Ageas, The Hut Group and MDW present a significant hurdle to the defendants’ general approach. The decisions confirm that, in its assessment of damages, the court should not give credit to the defendants for matters which LCG can be seen to have already paid under the SPA and the financial benefits of which, as explained above, should therefore accrue to LCG in any event.

The decision of the Court of Appeal in MDW is also clear in stating that, of the many contingencies that operate upon a proper determination of the value of the Company’s shares from time-to-time, a post-SPA rise in value which is referable to steps taken by LCG certainly cannot be regarded as a windfall to be offset against the damages assessed as at the date of the SPA.

In my judgment, that is consistent with an approach to damages which requires the court to focus instead upon any less positive post-transaction conduct by a buyer (perhaps most obviously a failure to act) that can be said to fall foul of its duty to mitigate. It would be a windfall for the buyer to recover damages for a loss referable to the breach of warranty that could reasonably have been avoided. By the limitation in paragraph 11 of Schedule 5 (‘Duty to Mitigate’) the parties in this case have provided that any such loss should be for LCG’s account. On Issue 12, I have found there was no failure by LCG or the Company to mitigate loss. It is otherwise implicit in their overall bargain, and the court can presume it was LCG’s motivation for entering into the SPA, that the value of the Company might grow after the date of the SPA through LCG deploying what it has already paid for (see above) to good effect.

In Ageas, at [38], Popplewell J rejected the seller’s argument that, in assessing damages for a breach of a warranty about the fairness and accuracy of the company’s accounts, the court should take account of the fact that the incidence of bad debts was better than had been anticipated at the date of acquisition (and better still than what would have been shown in properly prepared accounts). The judge said it was inherent in the bargain between the parties, and the allocation of risk between them, that the buyer should receive the benefit of the actual position as it turned out to be.

In The Hut Group, Blair J followed Ageas in addressing the point that the later recovery of the value of the shares sold in breach of warranty should not have any effect on quantum assessed as at the date of breach. He said, at [185], “the buyer is entitled to the benefit of the upside, having taken the benefit of the downside.”

In MDW, at [36]-[43], Newey LJ referred on this point to Ageas, The Hut Group and two decisions of the Court of Appeal which did not concern share sales but instead claims in deceit. The damages for deceit were to be determined as at the date the claimant acquired the property which was the subject matter of the misrepresentation and for which, as a result of the fraudulent misrepresentation as to its quality, it had overpaid. The fact that the risks attached to the property in its true state (as at acquisition) did not later materialise was not a reason to discount or deny the damages claim by reference to the overriding compensatory principle of damages recognised in The Golden Victory. It was by reference to those Court of Appeal decisions that Newey LJ said there was a strong case for saying that similar arguments in the share sale context ought to be not just “rare” but perhaps impermissible.

The decisions in Ageas, The Hut Group and MDW therefore reinforce the clear limitations upon bringing hindsight to the comparison of the Warranty True Value and the Warranty False Value as at the transaction date.

The experts agree that the Warranty True Value is the £16,831,008 paid by LCG. Mr Osborne’s answer quoted in paragraph 625 above illustrates why consideration of the attractions which the Company offered to the wider market can only be relevant to the Warranty False Value. That value must be viewed through the lens of the hypothetical willing seller and buyer who, as at that date, are reasonably informed about the nature and characteristics of the Company.

I have mentioned above in general terms some of the Company’s attributes and strengths (highlighted by the defendants) that should not influence the Warranty True Value and which, applying those three decisions, also should not influence the Warranty False Value. Reliance upon them involves using “hindsight” to re-adjust the bargain made by the parties in terms of their allocation of risks and benefits of aspects of the Company’s business lying outside the scope of the warranties.

In my judgment, the Company’s ability to reintroduce maths and English GCSE provision (albeit at the financial cost of reinstating them) was an attribute of its business which falls on the Ageas/MDW side of the line rather than the Senate Electrical one. Whether or not the Company would have done so but for the finding behind the Condition of Funding Over-Claim, it could have re-introduced GCSEs after the SPA irrespective of the Condition of Funding breach identified by the 2022 Audit. Similarly, with each academic year involving a separate funding contract and a new cohort of learners (and assuming no material regulatory changes in relation to planned hours or Condition of Funding) the Company’s ability to benefit from future ESFA funding, through proper compliance with the Funding Rules in relation to each learner on its books, was one which arose year-on-year. Its ongoing (and Funding Rules-compliant) revenue-generating capacity is no different than what the defendants, by Warranty B5.2.2, verified the Company had deployed in the past; though, because that was untrue, its existing revenue was misstated.

Alongside business strengths, the same applies in my judgment to any known weaknesses in the Company’s business as at the date of the SPA. Any that were known about are to be taken to have been priced into the Warranty True Value and, as they were known about and therefore are not the subject of a warranty claim, neither should they impact upon the Warranty False Value.

If the defendants are right to say that LCG has suffered no loss, or no loss beyond the value of the Funding Indemnity, then that must be on the basis that there is no difference between the Warranty False Value and the Warranty True Value despite the emergence of the warranty-related weaknesses. Submissions which imply either that the price paid by LCG might have been less than the Warranty True Value (c.f. reliance upon the profitable “honey pot” acquired by LCG) or, alternatively, that the Warranty True Value should somehow be taken to be lower and closer to the Warranty False Value (c.f. the heavy reliance on the ARG/Capita issue and learner numbers after AY20/21) do not in my judgment assist in making a proper comparison between the two values.

The ARG/Capita issue went to the number of learners likely to be on the Company’s books in the next and subsequent academic years after AY20/21. The issue was known to LCG the time of the SPA, even though it was then understood to be a “pause” rather than a “stop” upon learner recruitment through Capita. It was not an issue that fell to be dealt with, to use Mr Higgins’s phrase, through a re-negotiation of the price (i.e. the Warranty True Value). Mrs McLeish denied that the ARG/Capita issue had a significant effect on learner recruitment because of the new sales and marketing strategy for which plans had been put in place before the date of the SPA.

Although it is obviously important to ensure that no part of the cost of implementing this strategy is sought to be included in any recovery under a false warranty (compare the £0.4m noted in the budget prepared later in January 2023) I regard the ARG/Capita Issue to be as irrelevant to the Warranty False Value as it is to the Warranty True Value. The present Issue 8 is instead directed to quantifying the risk under the relevant warranties. That risk concerns the inherent weaknesses in the Company’s business which LCG did not know about and which, under those warranties, are for the defendants’ account.

Under the SPA, and its allocation of risk and reward, LCG therefore acquired a Company whose business had attributes and weaknesses to which the warranties identified in Issue 6 above are irrelevant. On the basis of Mr Higgins’s answer mentioned above, it could be said that the defendants have already received proper value for the known “weakness” which was the ARG/Capita issue. LCG took on the risk of it and did not seek to re-negotiate a lower price by reference to it. It would therefore be illogical and wrong for the defendant to benefit from that issue again though an adjustment of the “price”, in the form of damages. for weaknesses (underwritten by the defendants under Warranty B5.2.2) which LCG was unable to negotiate because it did not know about them at the time. That would be the consequence of accepting the defendants’ argument which, if it does not imply a retrospective lowering of the Warranty True Value, must in essence be that the Warranty False Value should somehow be taken to be higher because of the presence the ARG/Capita issue. Yet the ARG/Capita issue falls completely outside the scope of the Warranty False Value. It is extraneous to any false warranty.

I have summarised only in broad terms above the defendants’ complex argument that some £622,000 of the £1.034m by which the Company under-delivered on its funding of £6.3m for AY21/22 was in fact attributable to the ARG/Capital issue and related redundancies. Their approach involves heavy qualification of the impact of the breach of warranty upon the Warranty False Value by reference to other factors that are said to be underlying causes of the Company’s later funding issues. Their in-depth analysis of the suggested financial impact of decisions and measures later adopted by the Company in AY21/22 runs up against the general rule that hindsight is not a legitimate tool in the assessment of damages as at the date of the SPA. Their argument could be said to chime with application of the first limb of the rule in Hadley v Baxendale when the proper approach to the assessment of damages is instead as set out in paragraph 522 above.

It is one thing for the court to proceed on the basis that the hypothetical seller and purchaser are reasonably informed about that issue and that they also know about the breach of Warranty B5.2.2. However, to approach the assessment of the Warranty False Value by reference to the kind of detailed ex post facto calculation suggested by the defendants is in my judgment misconceived. It is one which has been clearly rejected by the courts.

I have already noted what was said in The Hut Group about reliance upon a later recovery of the share value through the business prospering being “insupportable” (per Blair J). In MDW, at [289], HHJ Keyser QC at first instance said: “The argument of Mr Sims and Mr Jagasia (written submissions, paragraph 148) that no discount is appropriate because it is known that no risks to the business have been realised since the SPA is to be rejected, as it relies impermissibly on hindsight.” On appeal, the Court of Appeal rejected the renewed argument - based essentially upon the principles of Bwllfa and The Golden Victory – and said, at [53], “… the fact that, as matters turned out, GDE did not experience reputational damage does not mean that the value of the company was not reduced in the way the Judge found as at the date of the SPA.”

The argument of Mr Sims KC and Mr Jagasia in the present case is to the effect that the falsity of Warranty B5.2.2 (and the related warranties identified in my finding on Issue 6) presented no risk to the Company’s business beyond that identified by the Funding Indemnity and, materially for present purposes, less of a risk than that created by the ARG/Capita issue. Their argument to the effect that the risk under the warranty has been shown to have been marginalised (albeit, perhaps, not completely confounded) by later events is in my judgment no different, at the level of principle, than their argument which was firmly rejected in MDW. Indeed, because it introduces into the post-transaction quantification of lost earnings matters which are unrelated to the breach of warranty I regard their argument in this case as even more problematic.

In my judgment, the decisions in Ageas, The Hut Group and MDW establish as a matter of principle (and informed contractual allocation of risk and benefit) that the ARG/Capita issue should not be debited to LCG in the calculation of damages. In contrast to the approach under Hadley v Baxendale, hindsight is generally too “remote” for a damages award of the present type.

I have decided that the Warranty False Value MEBITDA is to be calculated by deducting the amount of the Clawback from the Warranty True Value MEBITDA. This decision rests essentially upon me bringing to the hypothetical negotiation the parties’ recognition of the direct correlation between the Clawback and the 9+3 EBITDA, which I have noted above in the section addressing the defendants’ pleading points, and their acceptance of its impact upon the Warranty True Value MEBITDA.

In my judgment, both steps are justified on the Equitable Value approach, the evidence showing how the Warranty True Value MEBITDA was calculated and the qualification to the hindsight principle explained below.

In terms of the evidence, the defendants’ counter-offer dated 9 June 2021, to which I have referred in that section, began by noting that LCG’s offer of 2 June “values the Company at an EBITDA multiple of 5.0 times the FY21 maintainable EBITDA of £2.571m as per the financial analysis provided to LCG on 27 May 2021.” That financial analysis explained how, alongside its Welsh funding and the revenue of its subsidiaries, the Company’s ESFA funding of £5,937,242 was part of the top-line figure (revenue of £12,227,284 for FY21) from which the MEBITDA of £2.571m was calculated. It also said “the current average funding per learner for ESFA contract is £4,300.” If the amount of the Clawback had been known to the parties at the date of the SPA then it would have fed directly into the MEBITDA calculation.

I consider the deduction of the Clawback (reflecting a known outcome of the warranty breaches) should be preferred over Mr Osborne’s approach. Most of his analysis reflects an inability to invoke any hindsight in assessing the financial impact of issues known to the hypothetical negotiating parties but where their precise financial impact was unclear as at the date of the SPA. His approach to the revised MEBITDA figure and his separate treatment of the one-off adjustments (to the Net Cash element of the Warranty True Value) perhaps reflect an understanding that the court’s approach to such matters is more rigid than the case law supports. It is illustrated by his reliance upon the Risk Spreadsheet for the purposes of his own recalculation of MEBITDA but not the Clawback which, in broad terms, can be said to be the product of that spreadsheet. I refer below to MDW again on this particular point about permissible hindsight.

However, in my judgment, the Company’s ability to deduct the Unfunded Learner Value for AY20/21 against the Over-Claimed Sum should be recognised when fixing the relevant EBITDA figure for the Warranty False Value.

Mr Osborne’s position is that, because of the cap on in-year recovery for unfunded learning, the parties to the hypothetical negotiation in October 2021 would have put no value by the Unfunded Learner Value. In my judgment, Mr Osborne’s approach is too rigid an application of a “no-hindsight” rule. As explained below, it is permissible to consider the actual outcome of events which had occurred prior to the date of the SPA. As explained above, the Unfunded Learner Value arose out of matters in AY20/21, not subsequently, and can be said to reflect a flip-side of the breach of Warranty B5.2.2.

I have also reflected upon Mr Osborne’s position that the Unfunded Learner Value is part of a one-off calculation which, he says, does not go to the Company’s enterprise value (through an adjustment to its maintainable earnings) but, instead, impacts upon the Net Cash element of the Warranty True Value. This is linked to his point about the uncertainty over ESFA recognising it in the calculation of the Clawback.

I am mindful that recognising the positive value of £0.42m in the calculation of the Warranty False MEBITDA could be said to involve giving the defendants undue credit for something that only related to AY20/21 and was not “maintainable”. Against that, Mr Pearson’s point was that both the Over-Claimed Amount and the lesser amount of the Clawback were, by their nature, non-recurring amounts and it would be wrong to award LCG damages by reference to a reduction in earnings relating to AY20/21 which cannot necessarily be assumed to be representative of the Company’s future earnings (i.e. the true level of its maintainable earnings). He said that any uncertainty over the MEBITDA as a result of such matters would be relevant to the Warranty False Value multiplier.

A proper balance between these competing considerations is reached by recognising the direct impact of the known Clawback upon the 9+3 EBITDA that was used as a proxy for Company’s maintainable earnings and separately considering future uncertainties when addressing the Warranty False Value multiplier. Uncertainties that were not resolved by agreement upon the Clawback - such as the knock-on effect upon the Retention Factor, the cost of reinstating GCSEs in years after AY20/21 and whether the Unfunded Learner Value for AY20/21 reflected a longer term ‘positive’ - go to the Warranty False Value multiplier rather than a revised MEBITDA.

In my judgment, deducting the Clawback to reach the Warranty False Value MEBITDA does not fall foul of the hindsight principle addressed above. It is known that the Unfunded Learner Value for AY20/21 operated to reduce the Clawback to £783,325. It was only quantified after the date of the SPA and paid by way of funding offsets in AY22/23 but the basis of it was over-delivery in an academic year which matched the period of the 9+3 EBITDA. It was directly related to the Planned Hours Over-Claim (as ESFA recognised by agreeing to its deduction) and was the basis on which Mr Lewis said he believed the Company was being underfunded for the student hours provided. The position is therefore similar to that in Senate Electrical so far as proper recognition of what might be described as an accrued credit against the warranty claim is concerned.

The quantitative adjustment to the Warranty False Value MEBITDA by reference to the amount of the Clawback, rather than the Over-Claimed Sum, is in my judgment consistent with the decisions in Ageas, The Hut Group, Arani and MDW.

I say that even though Mr Osborne is strictly correct in observing that the Company’s ability to negotiate the lower Clawback by reference to the Unfunded Learner Value cannot be described as a known contingency as at the date of the SPA. Applying Arani, the hypothetical buyer would be taken to have been aware of the relevant cap under the Funding Regulations, by reference to which the recovery of Unfunded Learner Value above that cap is generally precluded. On that basis, it could be said the hypothetical negotiating parties would not have approached matters with anything less than a deduction of the higher Over-Claimed Sum in mind.

Nevertheless, a cross-check for consistency with the claim later made by LCG points to an adjustment of the MEBITDA by reference to the lower Clawback as being the correct one. On this aspect of the Warranty False Value that result is consistent with the principle in The Golden Victory. Importantly, it is also consistent with my decision on Issue 12. It is in large part because the Company’s post-SPA efforts reduced the Over-Claimed Sum by what was otherwise £0.42m of Unfunded Learner Value that LCG has succeeded on Issue 12. To put it another way, it would be odd and, I think, unprincipled for the court to conclude that loss has been successfully mitigated, by reference to matters which occurred within the relevant financial year adopted for fixing the Warranty True Value, but to then ignore that mitigation when calculating damages because it is hidebound by the need to assess them as at the date of SPA.

In MDW, at [49(vi)], Newey LJ said there is no bar on using events subsequent to the date of assessment to cast light on events which had happened by that date. He went on to say:

“… there was, as I see it, no inconsistency between the Judge’s use of post-SPA evidence when determining the multiplicand and his refusal to take into account post-SPA events when considering whether the multiplier should be discounted. The former involved using matters subsequent to the date of assessment to cast light on events which had happened earlier, which is legitimate.”

The events which gave rise to the Company’s over-delivery (and the Unfunded Learner Value which was part of it) had happened earlier than the SPA. They gave rise to an accrued credit, though the extent to which it could be deployed in negotiations with ESFA, in mitigating the funding clawback, remained to be determined. The authorities show it is appropriate to act upon their actual impact, as later agreed with ESFA, when considering LCG’s suggested revision of the MEBITDA multiple.

That is the approach adopted in Senate Electrical in relation to the accrued credit arising out of the previous understatement of profits. I have briefly explained above the wider aspects of the claim in that case which led the Court of Appeal to observe that “the assessment of damages is subjective in the sense that the loss is loss sustained by the actual plaintiff not some hypothetical plaintiff.” As noted in Ageas and MDW, the decision in that case did not involve the need to “take into account hindsight to arrive at the actual figures.” However, the application of hindsight in the quantification of the Clawback, levied by reference to the breaches of warranty assumed to have been known about, is shown by MDW to be legitimate.

For those reasons, I find that the Warranty False Value MEBITDA is £1,787,675 (i.e. £2,571,000 reduced by £783,325)

LCG’s pleaded case contends for a reduction in the multiplier from 5.5 to 3 in determining the Warranty False Value.

When considering this element of the valuation it is important to note that the court is focussing only upon the different price that the hypothetical parties might have agreed under the SPA. In my judgment it is not legitimate to address the financial risk to the Company’s business created by the breaches of warranty through a notional change to other terms of the SPA. I mention that because I do not accept Mr Pearson’s point that the (presumed to be known) risk could have been accommodated through a Funding Indemnity of increased temporal scope which would undermine the case for concluding the Company’s earning potential had been damaged. On that approach, the court would probably have to treat the only non-variable aspects of the transaction as being its date, subject matter, the price paid (unless influenced by the giving of a more extensive indemnity) and the warranties which are relevant to Issue 6. That is not the correct approach when Issue 8 is directed to establishing the difference in price, if any, that would have been paid if those warranties were known to be false but the terms of the SPA otherwise stayed the same.

I am mindful of the leverage which any adjustment to the multiplier brings to the quantification of a damages claim. As Blair J said in The Hut Group, at [167], the multiple is important on quantum because “it invests relatively small adjustments with value.” However, because the defendants’ reference to the risk of “double-counting” begs the question to which it is held out as a preclusive response, I think it is probably better to say that the lever should not be used or used beyond the point where the result would offend the overriding compensatory principle of damages and monetise for LCG a suggested loss in the value of an asset (the Company) which has not been suffered.

In The Hut Group the court preferred the evidence of the defendant’s expert and found that the evidence of the claimant’s expert (who had initially suggested a reduction of the multiplier of 19.7 down to 8, later revised to 9.89) was premised upon an assumption of a stable gross margin with a sustained high growth in revenues when “this was little more than assertion, and the reference to “stable gross margin” was unexplained.” Blair J had noted (at [57]) that the admitted breaches of warranty arose out of what the defendants said were “relatively small adjustments” to the company’s management accounts when compared with the breaches of warranty alleged on the counterclaim (in respect of the consideration shares in the purchaser company where damages were calculated on a discounted cash flow method) which arose out of an accounting fraud.

In MDW the purchase price of the company of £3.8m odd comprised a valuation of its goodwill (calculated by applying a multiplier to post-tax profits) and its net assets, apportioned 65% and 35% respectively: see [128] and [283]. The value of the company’s assets was unaffected by the breaches of warranty which went to the proper cost (and therefore profitability) of its operations. This appears to have been a significant factor in the court’s decision to reduce the multiplier by less than 5% (which resulted in damages equivalent to 11.5% of the purchase price paid) when the “grossly overstated” 25% reduction in the multiplier that the claimant proposed would have impacted upon the 35% of value attributed to the company’s assets.

The adjustment of the multiplier in MDW was said by the judge, at [288], to be “appropriate to reflect the reputational damage (or, as it has been put, “the fragility of the goodwill”) that the breaches were liable to cause to the company and the jeopardy they occasioned to the future of the business”. That was a reference to the fact that part of the company’s waste disposal business had been conducted in breach of consents or permits granted by the environmental regulators. The wrongful practices did not extend to the whole of the company’s business but instead related to the leachate element of its “wet waste” business, as opposed to any of part its “dry waste” business.

On appeal, the Court of Appeal, at [53]-[54], said the judge was fully justified in lowering the multiplier as well as the multiplicand, for the purpose of determining the warranty false value, even though the company did not suffer the damage that a well-informed purchaser might have feared at the date of the SPA. Purchasers would not only have factored in the impact of the company’s practices on its true profit figure but would have brought down what they were prepared to pay to take account of the misconduct. Newey LJ said:

“That the Judge considered a downward adjustment to the multiplier as well as the multiplicand appropriate is entirely unsurprising. In fact, as Mr Ayres observed, it would have been remarkable if GDE’s misbehaviour had not had such a consequence. As a matter of common sense, a willing purchaser would not have been likely to pay as much for the company. On top of that, there is good reason to think that the fact that GDE did not in the event suffer the reputational damage to which its misconduct might have been expected to give rise is attributable to efforts which MDW made to put matters right after it had acquired GDE. In all the circumstances, the approach which the Judge adopted cannot fairly be said to give MDW a “windfall”.

Those observations have real resonance on the facts of the present case. The Company’s earnings based on ESFA funding (which was a significant part of its past and continuing business) reflected the breaches giving rise to the Planned Hours Over-Claim and the Condition of Funding Over-Claim. Those breaches had reputational as well as financially calculable implications. The Company, under the ownership of LCG, responded to the findings of the 2022 Audit by making the changes to ILRs summarised in connection with Issue 12 above and in later reintroducing GCSEs. As I have noted in connection with Issue 12, LCG was anxious in its negotiation of the Clawback to avoid the potential reputational damage to the Company by being exposed to an audit of years prior to AY20/21.

Whether or not a downward adjustment to the multiplier is appropriate and, if so, the amount of it, obviously rests upon an assessment of the evidence in this case – factual and expert – rather than the decision on the evidence in some other case. The essential question is whether the evidence in this case establishes a claim for a qualitative adjustment through the multiplier which, on proper analysis, is truly distinct from the quantitative adjustment through the EBITDA.

I say that recognising that an adjustment to the multiplier by reference to “reputational damage” might have been considered to be particularly appropriate in MDW where goodwill formed a significant element of the purchase price and that price had not been fixed on the enterprise value/EBITDA basis. Goodwill is all about reputation and, before it is ascribed a value in any financial accounts or transaction, probably better described as qualitative than quantitative in nature. I also recognise that there was a parallel claim in deceit in that case. However, the damages for breach of warranty were addressed separately in MDW and, to do so, it was obviously necessary for the court to adopt by reference to the expert evidence a comparator for the purposes of analysing the warranty true value. The court therefore approached the issue of damages on the same enterprise value basis that applies to this case, though it tested its conclusion on those damages by reference to the price paid and its basis.

In my judgment, the present case is not dissimilar to MDW so far as the perception of reputational damage to the business is concerned. The Company’s earnings were inflated through non-compliance with relevant regulations governing the conduct of its business which related directly (rather than indirectly as in MDW) to its turnover.

The financial analysis of the Company provided by the defendants to LCG on 27 May 2021 showed that, in FY21, ESFA funding accounted for £5,937,242 out of a total revenue of £12,227,284. Their counter-offer of 9 June 2021 said the deliverability of the forecast EBITDA of £2.804m was “extremely high” because the contract with ESFA was already in place. The evidence of Mrs McLeish confirmed that LCG’s acquisition of the ESFA-funded business (and the addition of the Company’s academies in England to LCG’s own) was just as important as gaining access to Welsh funding, if not more so. Mr Williams’s evidence was that because the Company did not have direct dealings with the Welsh funding agency, and received Welsh funding under a sub-contract, alongside other sub-contractors, it was less easy to grow that side of the business (and there appears to have been no equivalent in the Welsh funding rules for recognising Additional Learner Value).

As at the date of the SPA, the Company’s ESFA funding was therefore a critical part of its business and a core element of its enterprise value. Yet the parties to the hypothetical negotiation would have faced considerable uncertainty over the extent of the damage to the Company’s ESFA funding source and whether it was largely confined to AY20/21 or extended further. The nature of the non-compliance meant that it would have been known to the negotiating parties that there was likely to be an adverse impact on the Retention Factor that could affect the funding in the next-but-one academic year. The risk presented by the breaches revealed on the 2022 Audit could have involved an audit of years prior to AY21, with any further failure by the Company being a contractual ground (i.e. two successive failed audits) under which ESFA might have curtailed all further funding.

The consequential impact (if any) upon the Warranty False Value multiplier of their assessment of the risks falls to be addressed not by any attempt to justify a precise figure (to be applied to the Warranty False Value MEBITDA) as if it was a head of special damage but, instead, by adopting the approach in Parabola Investments, One Step and 116 Cardamon Ltd. The uncertainties inherent in a perception that a significant element of the Company’s business was adversely affected by flawed implementation of the Funding Regulations mean that the court must do the best it can to reach an accurate determination of the Warranty False Value multiplier on all the evidence available. For risks not quantified in the form of the Clawback, it is the qualitative rather than quantitative factor in the calculation of loss. Essentially, the issue over the appropriate multiplier is to be decided by reference to the parties’ perception of the quality of the Company’s business (as a whole) knowing that the warranties in relation to the ESFA funding were untrue.

Mr Osborne observed that his wide range of potential Warranty False Value multipliers was a reflection of it being “a highly subjective element of valuations”. He readily recognised that lots of factors would have gone into the negotiation of the Warranty False Value and “I don’t know contemporaneously what a potential purchaser would or would not have paid for the business, especially in light of the ESFA breaches.” In cross-examination he said that even a 5% reduction in MEBITDA in the warranty false scenario might be a reason to adopt a lower multiplier and that would depend upon how the potential buyer would perceive that change and its relevance to its view of the business.

Mr Pearson also said that the multiplier sums up the expected rewards and risks from owing the Company: “So obviously a higher multiple represents often high growth prospects. A lower one might be lower growth or higher risks.” In response to a question from me that it was therefore a reflection of the likelihood that the EBITDA would be “maintained” and grown, he said the multiplier can in simple terms be equated with the goodwill element of the valuation. I have already referred to his evidence that uncertainty over the cost of providing GCSEs or an adverse impact upon the Retention Factor might feed into the Warranty False Value multiplier and, in addressing the Warranty False Value MEBITDA above, I have explained why I prefer that approach to Mr Osborne’s reflection of them in the MEBITDA figure. The “haggle factor” would have been over their potential impact upon the multiplier rather than the 9+3 EBITDA.

So far as lower growth is concerned, Mr Pearson highlighted that an adjustment to the multiplier (alongside an adjustment to the MEBITDA) could involve the risk of double-counting. He adopted a significantly more cautious approach than Mr Osborne towards the trigger for any such adjustment. Separately from his position that the MEBITDA could be regarded as higher under the Warranty False Value, he gave the example of a breach of warranty which impacted upon 80% of a company’s turnover. He said that would be so significant that the multiplier could be impacted.

So far as concerns higher risks within the business, including any arising out of reputational harm or (per MDW) the “fragility of the goodwill”, Mr Pearson’s approach was again more conservative than Mr Osborne’s. He said: “if there had been reputational issues, there could be a slight reduction in the multiple to account for that.” In cross-examination, he accepted that the Warranty True Value reflected the parties’ perception that the Company was well run and had an ‘outstanding’ OFSTED rating but he was reluctant to accept that anything which detracted from its reputation would necessarily have been regarded as material for the purposes of justifying a reduction.

Some of Mr Pearson’s answers assumed that, in the hypothetical negotiation, the parties would have taken appropriate professional advice from an expert in operation of the Funding Regulations. They would therefore have been able to assess the impact of the breaches upon both the MEBITDA and the multiplier with precision. In an answer which was linked to his assumption that the due diligence process (unearthing the matters relevant to breach) would have involved quantification of the immediate financial and potential ongoing consequences, Mr Pearson said:

“ … I would expect the parties, as I say, to take professional advice from people with an understanding of how ESFA might react and whether there would be a quantitative impact as well as a potential qualitative impact.”

The willingness expressed by the experts in their joint statement to assist the court further in the light of any decisions by me upon such matters as the appropriate post-AY20/21 Retention Factor and the timing and cost of reintroducing GCSE provision could be said to come to much the same thing. I have already noted the defendants’ argument that LCG’s case on loss is deficient in not being supported by an expert in ESFA funding.

In my judgment, that line of evidence and argument departs from the correct approach to be adopted in determining the Warranty False Value and, in particular, the Warranty False Value multiplier. Even if ESFA funding is a recognised area of expertise, Mr Pearson’s use of the words “might” and “potential” in his answer highlight that it instead involves an evaluation of imponderables. He said the hypothetical negotiating parties would seek to minimise the uncertainty over past academic years but himself recognised that there would be more uncertainty over the future. Both experts agree that the multiplier reflects the Company’s prospects.

The correct approach to the Warranty False Value multiplier therefore involves the court making that evaluation by looking at imponderables (such as a potentially worsening Retention Factor, as yet unquantifiable GCSE costs, and ESFA’s appetite for further auditing) through the eyes of negotiating parties. It does not involve an exercise which perhaps comes close to saying that, instead of haggling over their likely effect, the hypothetical parties are to be treated as having bound themselves to an expert determination upon the “value” of such imponderables.

As noted above, the position adopted by the parties indicates that my decision to adopt the Equitable Value approach to the hypothetical negotiation may not be of great significance in determining the Warranty False Value multiplier. On that approach, the negotiating parties are to be taken (per the IVS, paragraphs 30.1 and 30.2(h)) to be acting “knowledgeably” and to be “reasonably informed” about the consequences of their breach upon the nature and characteristics of the Company’s business and its business potential but the court should not attribute to them “the benefit of hindsight at some later date.” This language of the IVS also lends itself to the approach in Parabola Investments and the other cases mentioned above.

A judicial determination of the likely outcome of a hypothetical negotiation by reference to a perception of risks and prospects, with the general fetter upon the use of hindsight, involves something quite different from one which attributes to the parties agreement upon precise figures as if they were supported by a mathematical calculation and/or set out in a profit and loss account. The difference is illustrated by the competing factual evidence, expert evidence and submissions about the costs that would have been incurred by the Company in providing GCSEs in order to secure the additional £297,608 of funding which the experts agree would have resulted from putting the 348 learners affected by the Condition of Funding Over-Claim on band 5 funding.

In my judgment, the hypothetical reasonable seller and purchaser would have recognised that the FY18 costs were historic and probably not an accurate indication of the costs likely to be incurred in reinstating GCSE provision after AY20/21. They would have sought to put some kind of estimate on the costs involved. But their estimation of those costs necessarily could not have been informed by knowledge of actual costs that were only incurred two years or so later. It is obvious that the defendants would have argued the costs would be lower and LCG would have predicted them to be higher. The experts, with commendable diligence, have identified their respective GCSE cost figures but it does not follow that damages should be assessed on the basis that the parties are to be taken to have decided upon one over the other. Damages assessed on that basis would involve treating them as omniscient (and armed with a crystal ball for the purposes of Mr Osborne’s figures) rather than reasonably informed about the nature and characteristics of the breaches of the Funding Regulations. It also leaves no room for the court’s assessment of that haggle factor.

It is therefore important in this counterfactual exercise to recognise the substantial uncertainty they would have faced by reference to the factors highlighted in LCG’s submissions. They would have understood their potential impact beyond AY20/21 but at the stage of the hypothetical negotiation their impact could not be quantified in the way that the Clawback can now properly be taken to have qualified the Warranty True Value MEBITDA.

The uncertainty the parties would have faced, in October 2021, is illustrated at a more general level by the later negotiation between LCG/the Company and RSM/ESFA over the Clawback and their agreement upon an outcome that did not involve audits of other years. It is evidenced by Mrs McLeish’s references to the Funding Indemnity having been negotiated by reference to an ESFA risk which was “a £30 million risk”, on the one hand, and her acceptance and her belief, expressed in hindsight, that “we bought a quality education business for an overstated EBITDA”, on the other. As at the date of the SPA, the parties would not have known how bad the financial implications of the breaches of warranty might be.

Mr Booth KC was correct to highlight the Company’s contractual obligation to bring any breach of the Funding Regulations to the prompt attention of ESFA and the particular risk of further ESFA auditing which this carried with it. Mr Pearson said the hypothetical purchaser would have been able to quantify the financial implications of any breaches in years prior to AY20/21 (in the way the Clawback was quantified) but he accepted there would be uncertainty until ESFA conducted its own review. He also recognised that the extent of the issue (if any) over historic funding would reveal whether there was a need to adjust the multiplier.

To adopt Newey LJ’s language in MDW, it is in my judgment a matter of common sense that the hypothetical reasonable purchaser (or LCG) would not have been likely to pay as much for the Company in the light of the risks thrown up by its breaches of the Funding Regulations. The expert evidence in this case confirms that an adjustment to the multiplier reflects what Mr Osborne described as “the potential impact of the breaches upon the business and the potential risks associated with the business”.

However, I have not been persuaded that the reduction in the multiplier should be as great as LCG has pleaded. Acorn and White Rose are not reliable comparable transactions for this purpose. In cross-examination, Mr Osborne referred to them as “indicators” in a highly subjective area. I should add that neither do I find Mr Pearson’s four suggested comparable transactions to be of any assistance in arriving at the correct multiple because of their distinguishing features identified by Mr Osborne in the joint statement. Mr Osborne recognised that the lower multiples used in the acquisitions of Acorn and White Rose reflected the lack of infrastructure and back-office provision (e.g. White Rose’s 16-19 study provision was sub-contracted) and the limited ability to sell to any other buyer apart from LCG. He acknowledged that these factors would need to be considered when deciding upon the Warranty False Value multiplier. There appears to be force in Mr Pearson’s point that LCG had a greater level of bargaining power in those other transactions.

Instead, I conclude that LCG would have recognised the strengths of the Company’s business identified by the defendants and the experts (see paragraphs 603 and 604 above) and as Mrs McLeish recognised by the second of her responses quoted in paragraph 704. However, both sides would have recognised not only that the 9+3 EBITDA had been overstated, as she said, but that the quality of the business was also impaired by a significant risk of a more extensive ESFA auditing (with potentially very serious financial consequences), the negative consequences of the breaches upon the Retention Factor, and uncertainty over the overall financial implications of providing GCSEs for those moved to band 5 in order to comply with Condition of Funding.

The uncertainty over the impact upon the Retention Factor is illustrated by the concluding answer by Mr Osborne to a long question he was asked about Mr Williams’s third witness statement and Mr Williams’s testimony about the in-year adjustments made following the 2022 Audit. He said:

“So, yeah, as I previously set out, if the assumptions I've ultimately used based on witness statements available to me at that particular point in time the court finds that those assumptions are not correct not partly correct, then obviously that will have an impact on the numbers. I suppose the one thing to kind of contextualise is I don't know exactly what the seller would have done at the point of the transaction point having known about these issues what they would have done to then assess that and the potential quantum impact of that had been.”

In my judgment, Mr Osborne’s caveat is an appropriate reminder of the proper approach to the assessment of damages outlined above (specifically at paragraph 522(7)).

So far as GCSE costs are concerned, I do not accept the evidence of Mr Lewis and Ms Gill which was aimed at marginalising the financial downsides of the Condition of Funding breach (both in terms of cost of providing GCSEs and the impact upon the Retention Factor of students dropping out of the GCSE course) and, therefore, how in the hypothetical negotiation it would have been given no real weight. As Mr Booth KC submitted, the Company did not have a GCSE department ready to spring into action (and in fact the Company is still short on GCSE teaching staff) and this would not have been regarded as an easy fix, particularly when ESFA would have been likely to have been scrutinising the adequacy of the reinstated GCSE provision.

I did not find Mr Lewis’s and Ms Gill’s evidence on this point to be at all convincing. It included their revised view, adopted in these proceedings, that students had in fact been succeeding in GCSEs by achieving a grade 1 (which was technically a pass) when in 2018 the Company had wrongly (they now said) been treating a grade 4 as the benchmark of success. As I have explained above, the assumption that it is grade 4 which represents a pass is the basis on which the Condition of Funding requirement applies to those students who previously “nearly passed” by achieving a grade 3. To the extent their evidence may have assumed the Company’s post-2021 provision of GCSEs would have been aimed at the revised, lower benchmark of success, that is perhaps a further indication that they have underestimated both its financial cost and the scrutiny that ESFA was likely to give to it.

It follows, in my judgment, that LCG or the reasonable hypothetical purchaser would not have been persuaded by their position. It is even possible that the haggling between the negotiating parties over the likely cost of providing GCSEs would have led to the conclusion that no net funding gain could be predicted to result from future compliance with the Condition of Funding rules. That said, my assessment of the evidence, including the experts’ figure of £297,608 for increased funding through providing GCSEs, leads me to conclude that the parties would have considered the future provision of GCSEs to be financially worthwhile overall.

In reaching that conclusion, I do not consider it correct to bring to the hypothetical negotiation knowledge and reliance upon Mr Osborne’s costing of GCSE provision. His reliance upon 2024 costs falls foul of the general prohibition upon the use of hindsight and, as Mr Pearson observed, involves reliance upon figures affected by significant inflation between 2021 and 2024. Mr Pearson indicated an inflation figure of about 15% in the service industry over that period. Likewise, I am not persuaded that Mr Pearson’s costings from 2018 can be taken as a reliable guide to what the parties in October 2021 would have been perceived to be the likely price of securing band 5 funding for students affected by the Condition of Funding requirement. Even if the inflation rate over the earlier period was lower, the Company would have had to reinstate a teaching provision which (at the time it was discontinued) had been considered to have become academically unsuccessful.

As with the future Retention Factor, the hypothetical negotiation would have taken place against a background of real uncertainty about the overall financial impact of the breaches in academic years after AY21/22.

My assessment of all the evidence in this case leads me to conclude that, instead of a multiplier of 5.5, their negotiations would have led the parties to agree upon a multiplier of 5.0.

In my judgment, a multiplier of 5.0 properly reflects what, in the hypothetical scenario, would have been real concern about the impact of the warranty breaches upon the overall “quality” of the Company, the level of future ESFA funding and the risk of funding in years prior to AY20/21 being revisited. To be set against those risks are the wider strengths of the Company recognised by the experts.

I do not consider a lower multiplier than 5.0 to be appropriate when those strengths are borne in mind and when the breaches of warranty did not impact upon the Company’s Welsh funding. I note that when that second point was put to Mr Osborne in cross-examination he responded by saying “I give a range of potential loss numbers and that range is quite wide, depending on exactly what criteria one applies.” Further, the parties’ reflection upon the nature of the breaches of the Funding Regulations would have led them to conclude that, allowing for the potential impact on the Retention Factor, there were aspects of the Company’s past funding practices that could be turned to its advantage. What would otherwise be Unfunded Learner Value could in future years be absorbed within ILRs that recorded a proper approach to nested qualifications and (at the cost of providing them with GCSE provision) a significant number of students would in the future benefit from full-time rather than part-time funding. All of these matters would have fed into the parties’ respective bargaining power on the Equitable Value basis.

Mr Pearson’s position was that the parties would not have gone lower than a multiple of 5 in the hypothetical negotiation. The hefty leverage which a reduction of 0.5 in the multiplier brings to the Warranty False Value MEBITDA of £1,787,675 (when Mr Pearson obviously was not contemplating any reduction from the Warranty True Value MEBITDA) means that an enterprise value of £14,150,000 is reduced to £8,938,375.

The court should conduct a sense-check to see whether its reasoning in support of a price reduction of some £5.2m (out of total £16.8m) produces a sound result. In my judgment, a revised multiplier of 5.0 properly reflects a situation which was summed up by Mrs McLeish’s observation about buying a quality education business for an overstated EBITDA. I note that, by its offer dated 2 June 2021, LCG was prepared to agree a multiplier of 5.0 to the Warranty True Value MEBITDA as it was then understood to be. The strength of the Company’s ESFA funding position was one of the key points made in the defendants’ counter-offer of 9 June which persuaded LCG to agree the extra 0.5.

The Warranty False Value multiplier is therefore 5.0.

Even if his analysis had not been afflicted by invoking impermissible hindsight, I would not have been persuaded by Mr Pearson’s reliance upon the treatment of LCG’s acquisition of the Company in Boyd Topco’s financial accounts. In my judgment, the flaw in the analysis is revealed by his treatment of the contingent asset (which is this claim and the value put upon it by my judgment) as being, in effect, a further acquisition of value when it is of course one that only arises out of a defect in the initial asset. The only basis for an award of damages which crystallises the previously uncertain outcome and value of the contingent asset is a compensatory one which necessarily recognises that LCG suffered loss in paying the price it did for the Company.

As Mr Osborne said in response to a question from me (in the context of one put to him about the protection given to LCG by the Funding Indemnity), a valuer of a company is not greatly influenced by legal provisions in the transaction when assessing what its subject matter is worth. In my judgment, Mr Pearson’s approach (in identifying a separate value for the warranty by reference to Boyd Topco’s accounts) muddles the two.

Even without the existence of this claim being expressly noted, in general terms, in the parent company’s accounts, there is clearly a danger in the court placing much reliance upon the accounting methodology (the silence in the accounts in relation to the concept of impaired goodwill and provision for its “recoverable amount” from time to time) to reach a judicial decision upon the level of damages fixed by reference to a comparison of the Company’s enterprise value (according to whether a particular warranty was true or false). The same danger would exist if the value of the warranty claim had instead been “talked up” in the relevant accounts with a reference to an impairment of goodwill (or indeed for the contingent asset) in an ambitious sum.

I note (as LCG’s counsel highlighted) that in Equitix, at [372], Kerr J found the accounts relied upon by the defendants (as showing no loss) to be of no assistance in deciding the value of a shareholding. From what he said, it appears that the accounts made no reference to the claim he had to decide. He said:

“I do not find the entries in Equitix's and Gaia's accounts of assistance. The experts, including Mr MacGregor, attached little importance to them. They may have been wrong; they may have been based on an incomplete understanding of the true state of Gaia, its assets and trading position; they may have allowed for recovery of loss through this case, as Mr Cashin thought. I do not know. They are not a reliable guide to the true value of Gaia's shares.”

I take the same approach.

The defendants are liable to LCG for breach of warranty in the sum of £5,211,625. This reflects the difference between the Warranty True Value of £16,813,008 (comprising an enterprise value of £14,150,000 and net cash value of £2,663,008) and a Warranty False Value of £11,601,383 (comprising a reduced enterprise value of £8,938,375 and the same net cash value of £2,663,008). The reduced enterprise value of £8,938,375 is the product of a Warranty False Value EBITDA of £1,787,675 and a Warranty False Value multiplier of 5.0.

On Issue 9, the damages for breach of warranty are therefore greater than the sum of £783,325 due under the Funding Indemnity.