Non-Disclosure in Business Sale Leads to High Court
In a case which underlines the need for both full and accurate disclosure of potential liabilities when selling a business, a lawyer who failed to reveal the existence of a potentially substantial negligence claim against his firm before disposing of it will receive a lesser sum for its sale, following a High Court ruling.
The lawyer had disposed of his firm to one of its employees for £100,000. The sale agreement, which was in a 'somewhat confused' form, made provision for the lawyer also to receive payments in respect of debts owed to the firm and for any work which was in progress when the transaction was completed.
The buyer issued proceedings against the lawyer, accusing him of overestimating the firm's turnover and profit and failing to disclose a number of relevant matters which affected the value of the business, as well as aspects of its trading position and the cost of its professional indemnity insurance.
The Court found that the lawyer had, in certain respects, negligently misstated the firm's likely future profitability and past turnover. However, the buyer had failed to establish that the firm was in fact worth less than the agreed price and the lawyer's misrepresentations had therefore caused no recoverable loss.
The lawyer had also failed to disclose a potential claim against the firm of which he had notice before the sale went through. Whatever his views of the merits of that claim may have been, the Court found that his failure to disclose its existence to the buyer amounted to a breach of warranty. In those circumstances, the buyer was entitled to recover £58,000 in respect of increased professional indemnity insurance premiums that he had been required to pay as a result of the breach.
The lawyer, who had thus far only been paid £50,000 by the buyer, was entitled to the balance of the purchase price and other sums, totalling £105,375. The buyer was entitled to set-offs against that sum, coming to £60,365, which meant that the purchaser was liable to pay the seller almost exactly £45,000.
It is important to make a full disclosure of liabilities and contingent liabilities when selling a business. If you are involved in a business purchase or sale, contact Wolferstans for expert legal advice on 01752 663295.