Fraud And The Limitation Period

Assessing when a claimant could have discovered fraud…

In the recent case of European Real Estate Debt Fun (Cayman) Ltd v Treon and others [2021] EWHC 2866, the High Court took a broad view of the facts to be taken into consideration when assessing when a claimant could have discovered fraud for the purposes of the Limitation Act 1980 (the “Act”).

Summary

  • Section 32 of the Act states that where an action is based upon the fraud of the defendant, the limitation period does not begin to run until the claimant has “discovered the fraud…or could with reasonable diligence have discovered it.”
  • The state of knowledge which a claimant must have is knowledge sufficient to enable it to plead a claim.
  • The burden of proof is on the claimant to establish that they could not have discovered the fraud without exceptional measures which they could not reasonably have been expected to take.
  • The Court in this case held that the investigation as to whether a claimant could have discovered the fraud may turn on events before as well as after the loss was suffered.

The Facts

The claim was brought by European Real Estate Debt Fun (Cayman) Ltd (the “Claimant”) against Mr Anoup Treon, Arundel Group Limited and Dr Doraiswamy Srinivas (the “Defendants”) for fraudulent misrepresentation. The Claimant alleges that, in 2011, it was induced by the Defendants to subscribe for £11m of loan notes in a company known as European Care Group (the “Company”) (which was the fifth largest care home business in the UK but which, by 2009, was experiencing a liquidity crunch and needed to raise new capital).

Following the introduction of new management at the Company, the Claimant made a follow-on investment of £4.25m in 2012 to seek to mitigate its losses. However, by 2014, the Company had gone into administration and the Claimant lost the entire value of its investment.

The Representations

The Claimant’s investment adviser, Duet Private Equity Limited (“Duet”), was provided with financial information about the Company’s business and prospects by Mr Treon and Dr Srinivas prior to the Claimant’s investment. The Claimant alleges that the Defendants deliberately misled Duet about the Company’s recent financial performance and future prospects.  The specific allegations were as follows:

  • Duet was presented with tailor-made trading numbers for 2010 which deliberately excluded a material amount of trading costs (mainly wages) without the Defendants flagging this;
  • The trading numbers for 2010 were already out of date when they were repeated in February 2011; and
  • The projections for 2011- 2013 had already been superseded when given by more pessimistic ones.

Time-barred

The Defendants contested all elements of the claim, but also sought to have the action time-barred, having been commenced more than 6 years after the investment. The Claimant relied on s.32 of the Act which states that where an action is based upon the fraud of the defendant, the limitation period does not begin to run until the claimant has “discovered the fraud…or could with reasonable diligence have discovered it.”

The Decision

The Court was required to assess when the Claimant could have discovered the fraud. Case law has established that the state of knowledge which a claimant must have is knowledge sufficient to enable it to plead a claim. However, in many cases it is difficult to pinpoint a precise moment in time when a claimant has discovered enough to plead a claim given that often the discovery of relevant facts involves a piecemeal process over a period of time.

The burden of proof is on the claimant to establish that they could not have discovered the fraud without exceptional measures which they could not reasonably have been expected to take. [1] The test is how a person carrying on a business of the relevant kind would act if he had adequate but not unlimited staff and resources and was motivated by a reasonable but not excessive sense of urgency.

The Claimant argued that the court must restrict its examination under the section to facts arising on or after the date when the cause of action accrued. The Court rejected this submission stating that although s.32(1) of the Act is only relevant once there is a complete cause of action, it does not follow that the court must ignore events, communications or things known to the claimant before then. The Court highlighted that the “…ultimate question under the section is whether the claimant has or could have “discovered” the fraud and that may turn on events before as well as after loss was suffered.”

Mr Justice Miles found that there were a number of anomalies within the accounts and financial information provided to Duet prior to the Claimant’s investment that would have put a reasonably attentive adviser on inquiry. He also considered that a reasonably diligent adviser could and would (without taking exceptional measures) have asked for further, updated, P&L and balance sheet figures for 2010 before the Claimant invested in June 2011 and would have sought fuller figures so that a proper comparison with the forecasts could be carried out.  Miles J considered these requests to be a routine part of due diligence and not an exceptional measure. Similarly, Miles J was critical of Duet when, following the Claimant’s investment, it failed to request information to which the Claimant was contractually entitled.

The conclusion of Mr Justice Miles was that had Duet asked the further questions and information requests it would have discovered sufficient facts to enable the Claimant to plead a statement of claim i.e. it would have been apparent that the figures provided to Duet had given a false impression of the Company’s profitability for 2010. It was held the claim was time-barred and must therefore be dismissed.

[1] Paragon Finance Plc v DB Thakerar [1999] 1 All ER 400

Take-aways

Although this case is about the application of the Limitation Act 1980, the case highlights the importance of due diligence when seeking to make an investment in a private company. Often, the financial information which is presented by the company will be its best side, and it requires questions and further information to uncover the true picture, which is sometimes not pretty! That said, a claimant is not expected to take exceptional measures to discover whether they are being defrauded.

In any event, if you suspect that to be the case, we would always advise potential victims to act promptly to investigate the matter further. We are able to assist with these initial investigations and can ensure that the right steps are taken to protect your position and preserve your right to bring a claim. For example, in cases where limitation is tight, it may be possible to agree a stand still with your opponent.

Should you suspect that you are a victim of fraud or other wrongdoing, please do not hesitate to get in touch at hello@tenetlaw.co.uk

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