[2025] EWHC 1889 (Comm)

This is the judgment, following trial, in support of my decision that the defendants are liable to the claimant for damages for breach of warranty under the terms of a Share Purchase Agreement dated 29 October 2021 (“the SPA”). I have determined their liability for breach of warranty to be £5,211,625.

That figure is just over half of the claimant’s pleaded claim for damages of £10,180,040 but significantly more than the “no recovery” scenario presented by the defendants. The defendants’ position in that respect involved them counterclaiming for the return of £783,325 which they had paid under an indemnity provision in the SPA but from which they contended in these proceedings they were in fact released from liability on the true construction and proper application of the SPA. For the reasons explained below, I have not accepted their arguments in relation to the indemnity. It follows that they are also liable in that sum but the claimant (heeding the impact of a provision in the SPA which prevents “double claims” in respect of both a warranty claim and an indemnity claim that arise out of the same matter) recognises the need to elect between a judgment under the indemnity and one for the greater amount of damages.

My decision upon the level of damages payable by the defendants for breach of warranty is made under the one issue (being ‘Issue 8’ among the twelve others identified below) where the answer was not pre-determined by the terms of the SPA. The comprehensive terms of the SPA otherwise provide the answer to the many issues raised by their defence and counterclaim. Nevertheless, there has been extensive argument about what the key provisions of the agreement actually mean in the light of points taken in the defence. Its terms have been closely analysed (by reference to authorities on contractual interpretation, including some other share warranty cases, and sometimes with an eye to the impact of the factual evidence given at trial) with a view to raising doubts about its otherwise apparent meaning.

By the SPA, the parties only provided for a cap upon any liability in damages for breach of warranty which is fixed by reference to the amount of consideration under the SPA actually received by him or her. This means there is a limit upon the recovery against the second defendant in the amount of £840,650 but the entirety of the damages award falls under the sum of £15,972,257 received by the first defendant. The second defendant’s liability under the indemnity is also capped, at one-half of the £840,650 received by her, but the total amount of the indemnity claim falls well below one-half of the £15,972,257 received by the first defendant.

At this introductory point, I express my gratitude to the solicitors and counsel for both parties for arranging a mass of evidence (documentation, witness statements and expert reports) into very well-ordered trial bundles, clearly explaining the complex funding rules which underpin the warranty/indemnity claims, and for presenting their rival arguments in a clear and constructive way. In hindsight, it was only the authorities bundle that was a bit excessive. In this judgment I have referred to thirty-five or so cases which is about one-third of those in that bundle. In advance of closing submissions, I invited counsel to identify their “humdinger” authorities. I have addressed those cases cited by them which appear to bear most closely upon the issues under consideration.

The complexity of the funding rules relevant to the claims sometimes meant that the questions and answers about their effect in any given actual or hypothetical situation were not easy to express but Mr Booth KC, Mr Sims KC and the relevant witnesses rose to the challenge. I have also been assisted by the very comprehensive expert evidence of the experts (Mr Osborne for the claimant and Mr Pearson for the defendants) and I address their evidence below in my determination of Issue 8.

Issue 8 (and its corollary in Issue 9) logically falls to be addressed last. Addressing matters in the appropriate order has led to the structure of this judgment being as follows, with the identified paragraph numbers marking the start of the relevant section:

Under the terms of the SPA the claimant (“LCG”) purchased from the defendants (respectively “Mr Lewis” and “Ms Probert”) the entire issued share capital in a company called APCymru Limited (“APC” or “the Company”). LCG paid £16,813,008 for the shares. That was the ‘Initial Consideration’ under the SPA with no further ‘Earn-Out Consideration’ becoming payable because of the funding clawback mentioned below. The Initial Consideration was made up of £14.15m enterprise value (fixed by reference to an EBITDA of £2.571m and a multiplier of 5.5) and a net cash payment of £2.663m.

The EBITDA figure (i.e. the Company’s earnings before interest, taxes, depreciation and amortisation) was a figure based upon the Company’s performance over the previous 12 months. EBITDA is similar to, but slightly different from, MEBITDA (i.e. a company’s maintainable EBITDA). It was derived from the Company’s actual performance to 30 April 2021 and a three-month forecast to 31 July 2021. For that reason, it has been referred to the “9+3 EBITDA”. The date of 31 July 2021 was also the year end of the Company’s 2020/21 accounting year ((“FY21”) and coincided with the end of the academic year 2020/21 (“AY20/21”). The 9+3 EBITDA was set out in an appendix to Heads of Agreement dated 22 June 2021 and the £2.571m reflected a higher figure of £2.646m adjusted down to reflect a maintainable EBITDA.

The Company provided and continues to provide education and training for young people, in particular through military training and preparation through courses in England and Wales and running schools and apprenticeship courses. The present claim concerns a significant aspect of its English business.

The Company’s business was formed in 1999 to support young men and women in their aspiration to join the British Armed Forces. The Company trades as ‘MPCT’. Before the SPA, this stood for Motivational Preparation College for Training and, after it, for Military Preparation College for Training.

LCG was incorporated in 2013. It also provides education and training and has acquired eight other business, aside from MPCT, since it was formed. By the time LCG acquired the Company in October 2021, LCG had four military academies of its own, each based in Yorkshire.

Mr Lewis was the founder of the Company in 1999 and its CEO at the time of the SPA. He goes by the name Huw and Ms Probert is his romantic partner. They live together. Although Ms Probert was a director of the Company prior to the SPA, she was not actively involved in its business. Mr Lewis was the sole director of the Company’s two wholly owned subsidiaries: Military Preparation College Limited and MPCT Limited.

The Company’s activities in England were substantially funded by the Education and Skills Funding Agency (“ESFA”). ESFA is an executive agency which is sponsored by the Department for Education and provides funding to providers for the supply of education and the teaching of skills to children, young people and adults. Although there is a substantial issue between the parties about how significant the funding issue mentioned next was to the value of the Company at the date of the SPA, ESFA funding was and remains at the heart of the Company’s business.

Unlike the Welsh funding, which the Company receives through a sub-contract with a college in South Wales, the ESFA funding is direct funding. The Company’s management accounts for FY21 indicate that the ESFA funding comprised about 50% of the Company’s income. Mr Pearson, the defendants’ expert, calculated that 38% of its profits derived from the academies in England funded by ESFA.

This litigation has arisen because, within a year after the SPA, ESFA found that, in AY20/21 which came to an end before the SPA, the Company had over-claimed funding from ESFA in the amount of £1,247,680 (the “Over-Claimed Sum”) as a result of breaches of the applicable ESFA Funding Rules (“the Funding Regulations”). (Alongside equivalent regulations governing the Company’s Welsh funding, the Funding Regulations fall within the definition of ‘Funding Rules’ in the SPA for the purposes of the principal warranty relied upon by LCG.) The Over-Claimed Sum was identified by ESFA during a post-year audit of AY20/21 which was carried out in February 2022 (“the 2022 Audit”) by ESFA’s auditor RSM UK Risk Assurances UK LLP (“RSM”). I mention below Mr Lewis’s contention that the 2022 Audit was not a full audit but was a funding review.

In the event, the Company was not required to pay the full amount of the Over-Claimed Sum but instead the sum of £783,325. This was because it “over-performed” in terms of student hours provided (when compared with the hours for which it had received funding) in AY20/21 and it was able to claim a deduction in respect of that. The fact that the Company over-performed in that way is potentially of wider significance to some of the issues in this case, in particular the issues of knowledge (on the part of Mr Lewis as warrantor under the SPA) and quantum (in terms of the value of the Company at the date of the SPA).

The over-performance in AY20/21 had a value of £1.42m but the Funding Regulations permitted a maximum claim of £1m. However, LCG negotiated with ESFA the deduction of the circa £0.42m unclaimable over-performance from the Over-Claimed Sum, reducing the amount which the Company was required to repay to £783,325 (“the Clawback”).

LCG says the breach of the Funding Regulations identified by the 2022 Audit has had a substantial adverse financial effect on the Company’s business and been the cause of ongoing financial difficulties, with its effects extending far beyond the Clawback and the immediate financial impact for the following academic year of AY21/22. It has required substantial (and expensive) changes in the way the Company delivers its education provision, and (due to the way in which the Funding Regulations work) caused a substantial reduction in the funding provided to the Company by ESFA in subsequent funding years. The £16.8m it paid for the Company under the SPA (there was no further Earn-Out consideration payable to the defendants) was significantly more than the Company’s true worth.

The defendants say this is all overblown. They say the outcome of the 2022 Audit does not show the Company was in October 2021 worth less than LCG paid for it. They point to a specific indemnity (“the Funding Indemnity”) in the SPA covering the Clawback to reinforce their point. In fact, on 14 October 2022 they paid LCG the amount of the Clawback under the terms of the Funding Indemnity though, as explained below, their position now in this litigation is that they should not have done so because LCG’s claim under the indemnity was time-barred (under the terms of the SPA) and deemed to have been withdrawn. It is the defendants’ general position that LCG’s redress in respect of the established breach of the Funding Regulations was to have its entitlement under the Funding Indemnity satisfied and no more. If LCG had not sued under certain warranties in the SPA, separate from that indemnity, it would have kept the sum paid by them under the indemnity (that sum currently being held in escrow) and they would not have counterclaimed for its return.

A claim which involves LCG saying the alleged breach(es) of warranty, revealed by the Company’s receipt of the Over-Claimed Sum, and their impact on the value of the Company are both obvious (though one which recognises the quantification of its diminution in value is a matter for judicial determination) has been met with a defence and counterclaim which challenges it at every stage. The defence is not just that the Company’s breach of the Funding Regulations was an innocent and technical one, having no financial consequence beyond what was anticipated by the indemnity in the SPA in respect of the Clawback, if indeed that. The defendants raise many other issues for determination. They start with the point that, like the indemnity claim, LCG’s warranty is time barred (again under the terms of the SPA on the defendants’ interpretation of it) and run through to the reliance upon the expert evidence in support of the contention that LCG did not in fact overpay for the Company.

The parties’ entry into the SPA was preceded by a due diligence exercise undertaken by LCG. This involved LCG having access to documents in the ‘Data Room’ (as it is defined in the SPA) from 12 July 2021. One of the issues to be determined in these proceedings relates directly to what LCG might have or did discover in relation to the risk of the Clawback; and the defendants also say that LCG’s attitude to certain matters noted during the due diligence exercise is also material to their position that it has not suffered the kind of loss alleged in the claim.

Before setting out the issues identified for determination it is necessary to set out the background to LCG’s claim, which has prompted the counterclaim, in greater detail.

As noted above, the litigation has arisen because of the Over-Claimed Sum which led to the Clawback soon after LCG had acquired ownership of the Company. Mrs Brenda McLeish, the CEO of LCG, was notified the 2022 Audit would be taking place by a letter dated 31 January 2022.

The Company was audited by reference to the Funding Regulations. They are complex in their content and application. This section of the judgment draws heavily from LCG’s extremely informative and helpful note prepared in accordance with Section J8.6 of the Commercial Court Guide: ‘Claimant’s Overview of How 16-19 Funding Works’. The note was prepared by reference to documents and (uncontroversial) evidence in the case.

ESFA funds a number of different education and training programmes. Its funding is subject to detailed sets of rules with which providers must comply. Those rules regulate the amount of the funding, the conditions to be complied with in delivering their courses, the monitoring of the delivery of courses, and the circumstances in which the funding can be adjusted in-year or post-year (i.e. the relevant academic year). Different programmes are subject to different sets of rules.

The Funding Regulations relevant to this case are those for courses delivered in accordance with ESFA’s ‘16-19 Study Programme’. They relate to funding of courses in England (as the Welsh funding provisions are different). The Funding Regulations include the following:

The relevant breaches of the Funding Regulations, which led to the Over-Claimed Sum, relate to AY20/21. The academic year runs from 1 August to 31 July. The Company’s total ESFA funding for AY20/21 was £5,124,268. The greater part of this (save for the sum of £420,352 for Student Financial Support Funding which is not relevant to the issues in this case) was calculated by reference to Funding Rates and Formula (“the Funding Formula”).

The Funding Formula is:

The last 5 components of this formula are not germane to this dispute. It is the second and third which are most material.

The first, student numbers, is a number based on two components:

The second component, funding rates per student, are determined by ESFA nationally each year. A particular provider’s funding rates may be fixed at a different rate to the national one and, in AY20/21, the Company’s rates were higher than the national ones.

The planned hours for each student (“Planned Hours”) are at the core of this second component of the Funding Formula. This can be seen from the following table which shows the Company’s funding rates for AY20/21.

Learners in the Company on a 16-19 Study Programme have an option to study towards one of the following:

Those externally certified qualifications, alongside vocational programmes offered by the Company, are “Core Aims” under the 16-19 Study Programme. They are not necessarily to be regarded as wholly separate qualifications: a Diploma consists of a number of different units, and the same units can be taught as part of the two smaller qualifications too. This approach involves what are known as “nested” qualifications.

Planned Hours are not limited to those required to achieve a Core Aim. In addition to those qualification and vocational activities, the 16-19 Study Programme also requires students to complete a “non-qualification activity that supports the students’ goals and is integrated into the study programme”. This can include planned employability, enrichment and pastoral (“EEP”) hours.

Each learner will therefore have a total number of Planned Hours comprising (a) the total number of hours of qualification activities dependent upon the qualification in question (“Planned Learning Hours”) and (b) the total number of hours of non-qualification activities (including those counting as EEP hours). The Planned Hours in Study Programmes describe the first as “hours of teaching and learning that count towards externally certified qualifications” and the second as “hours of fundable activity that are not used to take externally certified qualifications”.

Because Planned Hours (both categories) are added up to form the learner’s total hours for a study programme ESFA imposes obligations of in-year monitoring. ESFA requires the provider to monitor the completion of qualification(s) by each learner during the academic year in order to ensure that this is in line with what was originally planned for that learner.

Each learner has their own detailed personal record (the “ILR”) which is an ongoing collection of data supported by auditable evidence about that learner, the planned learning for that learner, and the learning which he/she has actually undertaken during the academic year. Any changes in planned hours are then submitted to ESFA via a series of returns made over the course of the year setting out up-to-date details of the ILRs of each of its learners. The ILR Funding Returns section of the Funding Regulations contains the rules for this. It identifies the relevant weeks for making fourteen returns (R01 to R14) over a period which begins with the first (in the first week in the September one month into the academic year) and ends with the fourteenth (in the first week of October after the end of that year). Five of these returns are mandatory and the remainder are elective.

The returns are checked by the provider before being submitted using a Provider Data Self-Assessment Toolkit (“PDSAT”). This is software developed by KPMG and made available by ESFA which analyses learner data and learning delivery data, interrogates ILR data and produces reports so that providers can identify and investigate potential anomalies.

Where the number of hours or qualifications which a learner completes deviates from the original estimate in any academic year as recorded on that learner’s ILR, this is reflected in the ILR returns submitted by a provider. It may result in either:

Either of those can be accommodated by ESFA making in-year changes to funding.

For under-delivery, the reduction in funding to which this gives rise is achieved by either (a) an in-year downward adjustment to the initial allocation (pursuant to (i) a reconciliation which takes place mid-year based on the R06 data resulting in clawback if the sum is below 75% of the forecast amount by that stage of the year, and (ii) a further reconciliation which takes place at the end of the year), or (b) a post-year “clawback” whereby the ESFA claims repayment of the relevant part of the funding.

For over-delivery, the increase in funding is paid by ESFA pursuant to reconciliations at various points in the year but is subject to an in-year growth cap, which is the smaller of (i) 30% of the contract value, or (ii) £1m (changed to £½m from AY23/24), and a minimum value of £100,000. Any Additional Learner Value above this cap is not recoverable and is known as “Unfunded Learner Value”. In AY20/21 the Unfunded Learner Value was the £0.42m mentioned above.

I have mentioned in paragraph 18 above how the amount of the Clawback reflected negotiation between the Company and ESFA by reference to these provisions even though AY20/21 was then closed.

If a student leaves the course without competing the Core Aim then the impact on funding, and whether there is an in-year funding adjustment or instead the impact is felt in the funding in a future academic year, turns upon when he or she leaves. It depends on whether that learner leaves their study programme without competing their Core Aim (a) within the first six weeks of a study programme (or two weeks in the case of a study programme lasting 2–24 weeks and having fewer than 450 hours) (the “Qualifying Period”), or (b) after that time. If they complete the Qualifying Period, they count as a “start” for funding purposes and they thereby become a qualifying “Fundable Learner” from ESFA’s perspective.

This means that:

The third component of the Funding Formula is “the Retention Factor”. The Retention Factor is based on (but not identical to) the proportion of Fundable Learners who have achieved their Core Aim in an academic year. It is used by ESFA for calculating the funding for certain subsequent academic years. As explained in the table above, it is used as a multiplier in the Funding Formula.

The Retention Factor is calculated as:

This calculation will produce a decimal number between 0.5 and 1. The ‘Retention Rate’ is the percentage of Fundable Learners who complete their Core Aim. The Retention Factor (alongside the other factors in the Funding Formula) is applied to the number of students (component no. 1 of the formula) and their funding rates (component no. 2) for the purpose of determining funding for the upcoming academic year.

Under the Funding Regulations, the funding for any given academic year will be calculated using a Retention Factor fixed by reference to the academic year two years before. The Retention Factor for a particular academic year will therefore impact upon the funding received two academic years later; so that the Retention Factor for AY20/21 would be used to calculate the Company’s ESFA funding for AY22/23.

A Retention Factor of 1 (which would reflect all learners having completed their Core Aim in the earlier year – i.e. a 100% Retention Rate) would mean that the provider would receive 100% of its funding in the later year. A Retention Factor of 0.8 (reflecting a 60% Retention Rate) would r mean that the provider would eceive 80% of the funding allocated in that later year.

The Company’s funding for AY20/21 reflected a process by which, in around March each year, the Company receives an indicative offer from ESFA setting out ESFA’s proposed level of funding for the following academic year starting on 1 August. The Company then has one month to submit a business case in support of a different contract value, if necessary. ESFA responds to that business case in May. The value of the funding contract is finalised in June or July and is set out in a Funding Allocation Statement for the upcoming academic year. Once the funding for the upcoming academic year is finalised, the Company and ESFA sign a funding contract for that academic year.

The Company signed its contract with ESFA for AY20/21 on 23 July 2021 (“the AY20/21 Contract”). The total funding was £5,124,268.

Excluding Student Financial Support Funding of £420,352, the application of the Funding Formula produced funding of £4,703,917 as follows:

In essence, the Over-Claimed Sum was attributable to the Company’s practice, in years prior to AY20/21 and affecting a significant number of students, in relation to (1) the Planned Hours in Study Programmes and (2) the maths and English Condition of Funding rules in the Funding Regulations. These are referred to respectively the “Planned Hours Over-Claim” and the “Condition of Funding Over-Claim”.

The Company’s practices impacted upon the calculation under the Funding Formula. Under the Funding Formula, the Planned Hours Over-Claim reflected the fact that the Company had received funding for more Planned Hours than were eligible for funding. This resulted in over-claimed funding of £758,367.

The Condition of Funding Over-Claim reflected the Company inaccurately recording some full-time students as part-time. This improved the Company’s retention factor and resulted in over-claimed funding of £489,097.

The final report by RSM on the 2022 Audit is titled ‘Funding assurance review’ and dated 20 June 2022 (“the 2022 Audit Report”). It identified the resulting breaches of the Funding Regulations. It explained how testing of a relatively small sample of students had revealed an error rate of 18.15% and how the Company’s consequential review of all learners affected by the Planned Hours Over-Claim and the Condition of Funding Over-Claim had led to their impact upon funding being quantified.

Mr Lewis said in evidence that the 2022 Audit Report did not reflect a full audit within the meaning of the Funding Rules, but was a review. Against that, on behalf of LCG Mrs McLeish and Daniel Dowson (LCG’s Director of Management Information Services and Funding since November 2017 who said the two terms are synonymous) said that such reviews are widely understood within businesses reliant upon ESFA funding to be audits.

I note that in their letter dated 31 January 2022, informing Mrs McLeish that the Company had been selected for “an assurance review of ESFA funded provision for the 2020 to 2021 funding year”, ESFA went on to say they had appointed RSM who would be in contact “to agree the audit arrangements”. The letter used the terms “review” and “audit” interchangeably. By its end, the process justified the latter description. The 2022 Audit Report contained the Company’s responses that it noted the need to have Core Aims recorded accurately in the PDSATs (and that the Company’s audit team would be conducting regular audits to support future funding claims) and that it would not reduce funding claims for certain students so as to avoid any penalty under the Condition of Funding rules explained below.

RSM identified that the Company had claimed funding on the basis of a plan for students to undertake the full Diploma course (the longest of the three qualifications, requiring approximately 300 Planned Learning Hours) with the correspondingly greater number of hours, irrespective of whether or not the learner progressed beyond the Award or Certificate stage. Where a learner did not progress beyond the Award or Certificate stage, the Company retained the greater funding for the Diploma, placed the learner on EEP hours (i.e. non-qualification hours) and thereby avoided any negative impact on the Retention Rate. This was a breach of the Funding Regulations which require that, when a learning provider plans to deliver a shorter qualification at the start of a study programme, the Planned Hours must only be recorded for that shorter qualification. The Planned Hours can then be updated and increased if and when the learning provider is sure that the learner will progress onto the further qualification requiring more Planned Learning Hours.

The 2022 Audit Report summarised RSM’s findings as follows:

“Planned hours

Our main sample and PDSAT testing identified a number of learners who were only enrolled onto one learning aim plus work experience which typically was planned for two months which they completed. However, their planned hours recorded in the ILR were full time. When discussed with the Provider we were informed that as the intention was that learners progress from one aim to the next all the planned hours for the year were included on the ILR when the learner first enrolled, although only the learning aim(s) they actually started learning on were added to the ILR. We confirmed with the ESFA that this approach is incorrect, and that in line with paragraph 119 of the Funding Rules which states that ‘Institutions may plan programmes for students with the intention of starting the student on a small or nested qualification and progressing them onto a larger qualification when they are successful in the smaller one. In such cases, the planned hours for the programme must only include the hours for the smaller or nested qualification. When the institution is sure that the student will progress onto the larger qualification, they can update the planned hours to include the additional delivery’. The Provider has reviewed all learners who completed in less than 27 weeks (considered to be the point at which learners are at risk of dropping from full time based on average hours delivered per week) and recalculated the planned hours based on what the learner would actually have been able to attend. This resulted in a total funding error of £758,367.”

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Under the Funding Regulations, learners who (a) have a grade 3 GCSE in maths, or English or both, and (b) are enrolled on a full-time course, must study for the relevant GCSE(s) in order to receive funding (known as the “Condition of Funding rules”). For these purposes, a grade 3 GCSE means that; neither higher nor lower. Grade 3 is the equivalent to the old grade D. The Condition of Funding is therefore a requirement aimed at students who nearly but not quite passed their maths or English GCSE. [In my decision on Issue 8 below, I refer to the evidence of Mr Lewis and Ms Lisa Gill whose position at trial was that even the lowest grade 1 was technically a pass.] Students who fall outside the Condition of Funding rules (either because their grade in maths or (as appropriate) English is greater than or less than 3, or because they are not enrolled on a full-time course) are permitted to undertake a Functional Skills Programme instead of a GCSE. A Functional Skills Programme (sometimes known as a “stepping stone qualification”) is a lower qualification than a GCSE and takes approximately 40 to 50 hours to complete. A GCSE takes approximately 100 hours to complete.

For the purpose of the Condition of Funding rules a full-time course means either:

The financial impact of non-compliance with the Condition of Funding rules depends upon the extent of it. A failure to provide the relevant GCSE course to a full-time student who is required to study that course under the Condition of Funding rules carries a penalty of 50% of the national funding rate for the relevant band for each non-compliant learner. This is subject to a 5% margin of tolerance. If that tolerance is exceeded, then the penalty is applied to the funding allocation two academic years later as explained below.

The Condition of Funding rules were introduced with effect from AY16/17. The Company had provided GCSE courses in maths and English, in order to comply with them, but in about March 2019 it decided to stop delivering GCSE courses from AY19/20. This was in part due to low exam pass rates (I mention below Mr Lewis’s evidence that the Company’s perception that its GCSE courses were not successful was, in hindsight, a mistaken one). Therefore, the Company did not provide any GCSE courses in AY20/21.

What it did instead was that it recorded students who were subject to the Condition of Funding rules (i.e. they were in full-time education and had a grade 3 in maths and/or English) as part-time students. In many cases, this meant the relevant students were recorded as having 538 Planned Hours (just under the 540 hours threshold for full-time learners identified in the table at paragraph 33 above). The Company enrolled those students onto a Functional Skills Programme instead of a GCSE. This meant it claimed a lower level of funding for the academic year (the learners in question fell in Band 4b rather than 5 for the purposes of the funding rates set out in that table) but it nevertheless avoided later having to pay the 50% penalty for breaching the Condition of Funding rules.

The 2022 Audit Report summarised RSM’s findings as follows:

“Condition of Funding

Our main sample testing identified a number of learners for whom the timetable and programme plan suggested they were full time, but where the ILR recorded them as in a lower band. From discussions with the Provider, we identified that these learners had previously achieved a grade 3 in English and/or maths, but as the provider did not offer GCSEs had been enrolled to Functional Skills. In order to reflect that this did not therefore comply with the Condition of Funding rules for full time learners the Provider had reduced the planned hours within the ILR, whilst still delivering the expected full time hours to these learners. We queried this approach with the ESFA, who ruled that this was not compliant with the Funding Rules and that in order to fully reflect the impact on funding of not complying with the Condition of Funding the hours would need to be reduced to 50% of full time hours, being 270 hours for 16 and 17 year olds and 240 hours for 18 year olds. The Provider has reviewed all learners recorded as on 538 or 448 hours with a grade 3 and enrolled to Functional Skills and recalculated the funding for these learners. This resulted in a total funding error of £489,097.”

If the value of the funding referable to those students who do not comply with the Condition of Funding is less than 5% of the overall ESFA contract value then that falls within ESFA’s margin of tolerance. There will be no impact on the value of the provider’s funding contract.

If, however, the value affected by the non-compliance is 5% or more of the contract value then the funding for each learner where the Condition of Funding rules are not met is reduced by 50%. The resulting overpayment of funding which the provider will have received for that learner is recoverable as a clawback. That is generally done as an adjustment to the value of the contract for a future academic year because the level of non-compliance cannot be accurately determined until after the end of the academic year in which the non-compliance has occurred. The learner may have been studying for a maths or English GCSE at any point during the academic year so the non-compliance will only be known at the end of it. By that time, however, the provider will have been awarded its contract for the following academic year and so the impact would be upon the value of the contract for the academic year after that one. A breach of the Condition of Funding rules in a particular year (above the 5% margin of tolerance) will therefore impact upon the funding for the academic year two years later.

Matters become more controversial between the parties when it comes to considering the true impact of the findings of the 2022 Audit and RSM’s findings that the Company had over-claimed £1,247,680 of funding in AY20/21.

It is clear that, on behalf of the Company, Mr Lewis signed a letter of representation to ESFA dated 13 June 2022 acknowledging and accepting the errors with that value. It is also accepted that negotiations between LCG and ESFA, by reference to the Unfunded Learner Value in respect of the closed year AY20/21, reduced the Clawback to £783,325, though in evidence Mr Lewis said this was more of a calculation than a negotiation and “it’s not the deal of the century”. The Clawback was repaid by an offset against funding in the following months in 2022: August (£234,000), September (£195,000), October (£195,000), November (£78,000) and December (£78,000).

Although the defendants have in these proceedings since sought repayment of this amount, on 14 October 2022 they paid LCG £783,325 (the amount of the Clawback) under the Funding Indemnity. This was on the basis that they accepted that the indemnity claim had been properly notified by LCG. The correspondence relating to this is best summarised in my determination of what is Issue 13 identified in the next section of this judgment.

The more controversial matters between the parties (such as the funding implications of the Company changing its practices so as to be compliant with the Funding Regulations and the cost of introducing GCSE provision to meet the Condition of Funding rules) are best addressed in the context of Issues 8, 9 and 12 identified below. Those issues relate to the quantum of LCG’s breach of warranty claim.

LCG says that, as a result of the 2022 Audit, the ILRs and plans for students in AY21/22 had to be updated to record hours in compliance with the Planned Hours in Study Programmes section of the Funding Regulations.

The Company’s practice in relation to Condition of Funding in AY20/21 had continued into AY21/22. This meant accurately recording those students whose planned hours had inaccurately been reduced to the level of part-time to avoid the Condition of Funding rules applicable to certain full-time learners. That correction identified an overpayment by ESFA which crystallised under return R14 for AY21/22. This resulted in the Company receiving lower funding than anticipated for AY21/22 as a result of the consequential in-year adjustments.

Those adjustments also meant that the Condition of Funding rules impacted upon the Company through reduced funding for AY23/24. There was no Condition of Funding base adjustment to AY22/23 because the overpayment for AY19/20 had been repaid through the offsets against funding (to make good the Clawback) between the months of August and December 2022 mentioned above. However, the overpayment in AY21/22 meant that there was a negative Condition of Funding adjustment of £392,962 for AY23/24.

LCG says that (as the 2022 Audit took place in-year during AY21/22) the Company had to reduce the claim for funding for learners who had already left during that year. For learners who were still part of the 16-19 Study Programme (and similar to learners in subsequent academic years) the Company enrolled them on to Diplomas from the beginning rather than adopting the nested approach. This enabled it to claim for the higher full-time funding though it carried with it an adverse effect on the Retention Factor because there is a lower rate of completion of that higher Core Aim.

LCG says the Company’s Retention Factor fell as follows:

At the time of the SPA neither the Company nor LCG was teaching GCSEs. A system for offering full-time learner GCSE course was put in place for AY23/24. LCG put the cost of this at £390,000 as at September 2023. A budget prepared by LCG in January 2023 for the financial year 2024 included “an investment (£0.3m) in English/Maths tutors in order to deliver the required GCSE qualifications to learners”.

The budget also included a “£0.4m investment in sales team to drive future increases in revenue”. It is LCG’s position that it made this investment in an academy-based sales team to counter the effect of the Company’s loss of a data sharing arrangement with the outsourcer Capita (the “ARG/Capita issue” mentioned below) to which the defendants point in connection with a drop in learner numbers after the SPA. The sales team was set up with effect from January 2023 alongside a team within LCG’s Durham call centre focussed upon academy recruitment.

LCG says this investment has enabled the Company to maintain a fairly steady level of learner numbers since the SPA and relies upon the following numbers (Footnote: ¹):

The January 2023 budget also referred to a change in the Company’s revenue recognition policy, as a result of the changes implemented following the 2022 Audit, which took effect from the start of the second half of FY23. The new policy resulted in revenue being significantly weighted towards the second half of the financial year. In a section headed ‘Acquisition Performance’, the budget provided for an increase in the Company’s revenue from £12.1m at the time of the SPA to £13.2m in FY24 but a fall in EBITDA from £2.6m to £2.3m.

The budget identified the Clawback and the under-performance under the 16-19 Study Programme in AY20/21 as the basis for anticipating that the Company’s overall “contract value for AY23/24 is expected to reduce by £2m to £10m.” LCG contrasts the value of the Company’s contract for the 16-19 Study Programme for AY20/21 (£5,124,268) with that for AY23/24 (£4,333,519).

Against this, the defendants say that the principal reason behind the reduction in funding was because the number of learners starting with the Company (in both England and Wales) had fallen by 22% in the 12-month period after the SPA. This had resulted in revenue falling by 9%. So far as the fall in learner “starts” in England was concerned, the “main driver” was the ARG/Capita issue (“ARG” denoting Army Recruitment Group).

The ARG/Capita issue arose out of the fact that the Company had an arrangement with the outsourcer Capita which itself had a data sharing arrangement with the armed forces. This enabled Capita to provide the Company with a list of names of individuals who had applied to join the armed forces but whose application had been unsuccessful. The study programmes offered by the Company might improve their prospects on any future application to join the forces. Before the SPA about one-third of the Company’s learners came from lists provided by Capita. However, as a result of a data breach (not involving the Company) the data sharing arrangement between the military and Capita was switched off at around the date of the SPA. LCG was made aware shortly before the SPA of the risk that it would be switched off though it understood at that time that this would be a “pause” rather than a “stop”. The defendants’ Disclosure Letter (addressed in the context of Issues 5 and 7 below) had given specific disclosure in relation to the ARG issue, in qualifying a warranty addressing changes since the date of the Company’s accounts, saying “[t]he Company has since had confirmation from ARG that the learner numbers are expected to realign to those targeted by the end of December 2021”. In the event, the arrangement between the military and Capita was terminated.

The defendants point to the terms of LCG’s letter dated 17 October 2022 to Mr Lewis informing him that no Earn-Out Consideration would be payable to him under the SPA because the target EBITDA (of £2,571,000) had not been met. LCG gave the following explanation in that letter for a lower EBITDA of £1,238,373 in the financial year ended 31 July 2022:

“1.

Learner volumes were significantly behind budget. This was partially due to the negative impact caused by the cessation of the data sharing agreement between the Company and the Army Recruiting Group.

2.

The Company's business has a predominantly fixed cost base. As a result, the negative impact of lower revenues as a result of point 1 above had an immediate impact on the Company's EBITDA, and therefore on Maintainable EBITDA.

3.

Huw Lewis was kept fully informed of these issues during the period from the Completion Date up to and including 31 July 2022, and was provided with monthly management accounts in each month during that period.”

The defendants emphasise the first point in that letter. They recognise (and indeed rely upon) the fact that the Company’s in-year (AY21/22) adjustments to ILRs, for those learners who were still part of the study programme and moved on to Diplomas, resulted in higher funding/revenue per learner. In this regard they point to a note in the Company’s management accounts for October 2022

“ESFA Contract —£4k less than forecast for the month and £26k behind for the YTD. The combined starts target for the last three months was 992, actual number achieved was 851. Part of the income missed by not achieving the target has been made back with a larger than forecast number of learners moving over to the diploma, therefore higher aver/£ per learner than forecast has been achieved.”

So far as concerns the second point in the letter dated 17 October 2022 (about the Company’s costs being predominantly fixed in their amount) the defendants refer to a staff reorganisation in the year after the SPA which impacted upon both teachers and support staff. In relation to this (and the above points about learner numbers and funding per learner) they rely upon the terms of a post-acquisition review prepared by LCG in February 2023: ‘MPCT (Project Beacon) 12M Post Acquisition Review’ (the “Post Acquisition Review”).

The defendants say the ‘Executive Summary’ in the Post Acquisition Review painted an overwhelmingly positive outlook for the Company. Amongst other points, it noted:

“Historic trading

•

Learner starts peaked at a round the time of the acquisition (Oct21), then fell (in part due to the loss of an external learner find source). FY22/23 starts of 1,753 were 22% lower than at acquisition but have remained stable around this level since Aug22.

•

A staff reorganisation was undertaken as part of the integration process (LCG group alignment) and to address lower learner starts. The reorganisation took place in Jul/Aug22, impacting delivery and support staff. Average headcount dropped by 20% and monthly staff costs by c.£72k per month for the last five months of FY22/23.

•

The FY22/23 adjusted EBITDA was £2.1m compared to £2.9m LTM (Footnote: ²) at acquisition.

Integration

•

An external PFA audit post acquisition identified a significant historic funding overclaim. A claim has been made against the vendors which is ongoing. Corrective action was taken (KPMG did a funding audit on revised practice which concluded there were no observations deemed to have a funding implication).

•

The LCG military academies in Yorkshire were integrated into MPCT in Jan22.

•

Other integration successes and challenges are noted on subsequent slides

Next twelve months

•

The FY23/24 Budget assumes a strong recovery in learner starts driven by multiple factors: a new internal sales structure, accessing wider funding (such as AEB (Footnote: ³)), and expanding the curriculum offer (new 13 qualification approved which will give 12 learners progression opportunities). Welsh apprenticeships has been moved into LCG Apprenticeships from 1Feb23.

Summary

•

The rationale for acquiring MPCT was to acquire the market leader in the pre-uniform military training sector. This rationale remains intact and the FY23/24 Budget assumes four new academies opening to strengthen market presence further.

•

Disappointing starts and correcting the PFA clawback matter has driven lower profitability, partly offset by addressing the cost base.

•

Starts, revenue and profit growth is anticipated in FY23/24 as a result of action taken to focus on driving new sales through access to broader funding and curriculum.”

The parties’ ‘Agreed List of Common Ground and Issues’ identifies 13 issues for determination (“the Issues” and each of them an “Issue”). Many of them turn on the true construction of the SPA where the parties do not agree upon its true meaning. Those whose determination rests upon evidential findings (including in relation to quantum, by reference to the expert valuation evidence adduced at trial) still fall to be tested against its terms; and on one of those (Issue 7 below) there remains disagreement about what the SPA provides.

The Issues identified by the parties are as follows (all but the last two definitional terms, which I have deployed, appear in the Defence):

In the remainder of this judgment I will refer to each of the Issues by the above numbering and/or by the relevant definitional term.

The Issues all fall to be determined by reference to the terms of the SPA (including for the purposes of Issue 8, which falls to be determined by reference to expert evidence, the price of £16,813,008 paid by LCG under it).

The principal parties to the SPA were the defendants as “the Vendors” and LCG as “the Purchaser”. LCG’s parent company, Boyd Topco Limited (“Boyd Topco”) was also a party, as “the Guarantor” of LCG, as was the Company.

The “Initial Consideration” payable under the SPA for the 100 ordinary shares in the Company was £16,813,008, payable as to £15,927,357.60 to Mr Lewis for his 95 shares and £840,650.40 to Ms Probert for her 5 shares. The calculation of that was set out in Part C of Schedule 7. Allowing for the inclusion and estimation of the Company’s net cash at completion, and for the fact that the schedule does not in terms identify the Company’s enterprise value (or its EBITDA or a multiplier thereof) it is common ground between the parties that the sum of £14,150,000 within that total initial consideration was based upon a MEBITDA figure of £2.571m multiplied by 5.5.

The SPA also provided for the defendants to be paid “Earn-Out Consideration”, in accordance with a formula set out in Schedule 8. However, the threshold condition for applying that formula was the expectation that the Company should in FY22 have a MEBITDA in excess of £2,571,000. This further consideration was not earned.

I identify below the particular provisions of the SPA which have given rise to differing interpretations by the parties (to which some other provisions in its Section 1 – headed ‘Interpretation’ – are relevant) but at this stage I note that:

I now turn to the warranties that are relevant to this case (including provisions of the SPA which elaborate upon them or qualify them) before setting out the Funding Indemnity.

The quotation of other provisions of the SPA is better left to be read in the context of the Issue to which they relate.

The warranties relied upon by LCG (‘General Warranties’, defined to exclude warranties as to title) were given by Mr Lewis and Ms Probert under clause 6.2 of the SPA:

“The Vendors warrant to the Purchaser for itself and the Purchaser’s successors in title and assigns) that as at the Completion Date each of the General Warranties is true.”

Schedule 4 to the SPA contains 45 pages of warranties. The Funding Regulations fall within the definition of ‘Funding Rules’ for those warranties which use that term. The warranties in Part B of the schedule which are relied upon in the particulars of claim are set out below:

LCG’s position is that the particulars of claim identify 12 separate warranties. This is on the basis that the warranty in B5.2.2 contains two separate warranties. However, the defendants say their true number is the eleven indicated above. The significance of this disagreement is that, as can be seen, some warranties are in absolute terms and some are knowledge-based. I address ‘Vendors’ Knowledge’ next. LCG says B5.2.2(a) is an absolute warranty and B5.2.2(b) is knowledge-based. The defendants dispute this separation of the two limbs and contend that B5.22 as a whole is a knowledge-based warranty. The point is of central importance when LCG’s position is that the detection of the Over-Claimed Sum points to an obvious breach of B5.2.2(a) (“the Key Warranty”) and it only needs to establish breach of one warranty to recover the full amount claimed as damages for breach of warranty.

Clause 6.8 of the SPA specifies that:

“Where any statement in the General Warranties is qualified by the expression ‘so far as the Vendors are aware’ or any similar expression, it shall be deemed to include an additional statement that it has been made after due and careful enquiry of:

6.8.1

each member of the Group, the Vendors and their respective Connected Persons; and

6.8.2

each member of the Senior Leadership Team”

Clause 1.1 of the SPA defined the Senior Leadership Team (“SLT”) to mean each of Emma Lambert, Tim Williams, Steve Williams, Donna Briggs, Huw Moore, Dan Shooter and Brian Edwards.

These provisions give rise to Issue 4 above.

By clause 6.3 of the SPA, each of the warranties identified in paragraph 103 above was given:

“subject to matters Disclosed and to the limitations set out in Schedule 5, provided that none of the provisions of Schedule 5 shall apply in the case of any fraud, dishonesty or wilful concealment by any Vendor.”

The proviso to clause 6.3 is not relevant to this case as no such allegation is made by LCG.

Schedule 5 is headed ‘Limitation of Claims’. That heading is not relevant to the interpretation of the schedule but the provisions within the schedule do provide for exclusions or limitations of liability: they give rise to the four issues (Issues 1, 2, 10 and 13 above) which logically fall to be determined first. The provision mentioned next gives rise to Issues 5 and 7 above.

Paragraph 12.1 of Schedule 5 (headed ‘Purchaser’s Knowledge’) provides:

“12.1

The Vendors shall not be liable in respect of any Warranty Claim to the extent that the facts, matters or circumstances giving rise to a Warranty Claim:

12.1.1

are Disclosed in the Disclosure Letter or Disclosure Documents; and

12.1.2

were within the actual (and not, for the avoidance of doubt, imputed, constructive, implied or deemed) knowledge of the Purchaser at the date of this Agreement.”

Clause 1.1 of the SPA defines ‘Disclosed’ to mean:

“fairly disclosed with sufficient detail to identify the nature and scope of the fact, matter or information concerned in the Disclosure Letter, the Disclosure Documents or the Additional Disclosure Documents.”

For the purpose of that definition, ‘Disclosure Letter’ means the letter from the defendants to LCG executed and delivered on the signing of the SPA, together with the ‘Disclosure Documents’ and the ‘Additional Disclosure Documents’. ‘Disclosure Documents’ means the documents which were made available to LCG and its advisers in the ‘Data Room’, an index of which is annexed to the Disclosure Letter (its Annex 1); ‘Additional Disclosure Documents’ means the documents which had been made available to LCG and its advisers in the additional disclosure documents bundle, an index of which is annexed to the Disclosure Letter (its Annex 2); and ‘Data Room’ means the data room relating to the transaction as at 25 October 2021.

The true meaning of paragraph 12.1 above is contentious and that has given rise to much of Issue 7.

The Funding Indemnity was one of number of indemnities given by Mr Lewis and Ms Probert under clause 7 of the SPA. It is found in clause 7 of the SPA which provides:

“7.1

Without prejudice to any other rights or remedies available to the Purchaser, the Vendors undertake to indemnify, and to keep indemnified, the Purchaser and the Group against, and shall, subject to and in accordance with Schedule 5, pay to the Purchaser a sum equal to, all Losses suffered or incurred by the Purchaser and/or the Group which arise in connection with:

…….

7.1.2

the clawback, recovery or repayment to ESFA, ACT or the Welsh Government of any sums paid to any Group company in the period from 1 March 2018 up to and including the Completion Date whether pursuant to an audit, investigation, inspection or otherwise…”

The “Group” for the purposes of the Indemnity is defined as the Company and its subsidiaries.

It is common ground between the parties that the Clawback led to the defendants being liable (on a timely claim) under the Funding Indemnity. Their liability under the Funding Indemnity has given rise to Issues 3 and 9. It also impacts upon Issue 8.

By the claim form and particulars of claim, LCG has expressly reserved the right to elect (as it sees fit) between its remedies for breach of warranty and its claim under the Indemnity. Entry of judgment on the one cause of action will constitute a final election between the two.

This position reflects the fact that paragraph 4 of Schedule 5 provides as follows:

“DOUBLE CLAIMS

“If the same fact, matter, event or circumstance gives rise to more than one claim for breach of any of the Warranties, or to a claim both under the Warranties, an Indemnity Claim and/or the Tax Covenant the Purchaser shall not be entitled to recover more than once in respect of such fact, matter, event or circumstance”.

In this section of the judgment I address the Issues in what appears to me to be the most sensible order to take them.

I set out my decision in bold at the end of each section addressing the relevant Issue or Issues.