Neutral Citation Number: [2005] EWHC 30 (QB)
Case No: HQ03X02823
IN THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 21/01/2005

Before :

THE HONOURABLE MR JUSTICE STANLEY BURNTON
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Between :

	HALSTON HOLDINGS SA	Claimant	
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	EDWARD DOUGLAS SIMONS	Defendant	

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Richard Millett QC (instructed by Berwin Leighton Paisner) for the Claimant
Sebastian Prentis (instructed by Atlantic Law) for the Defendant

Hearing dates: 13, 14, 15 & 16 December 2004
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Judgment
Mr Justice Stanley Burnton: 
Introduction
1.	In these proceedings, the Claimant seeks damages against the Defendant for his alleged deceit in relation to a certificate of the inter-company indebtedness included in the assets of Harvey Goldsmith Entertainments Ltd (“HGE”, or “the company”) for the purposes of a Share Purchase, Subscription and Shareholders’ Agreement (“the Agreement”) entered into by the Claimant on 18 September 1998. The parties to the Agreement apart from the Claimant were HGE itself, Harvey Goldsmith, Allied Entertainment Holdings PLC (“Allied Holdings”), Allied Entertainment Group PLC (“AEG”) and the Defendant. I shall refer to the Claimant as “Halston” and to the Defendant as “Mr Simons”.
2.	By the Agreement, Halston agreed:
(1) 	to subscribe for 1640 new A ordinary shares in HGE for a total aggregate subscription price of £750,000;

(2) 	to acquire 588 A ordinary shares in HGE from AEG for £250,000, which together with the new shares would give Halston 20 per cent of the shares of HGE; and

(3) 	to lend £500,000 to HGE on the terms of a loan agreement, to be executed in an agreed form secured by a debenture granted to Halston by HGE over its fixed and floating assets.
3.	Clause 1 of the Agreement set out a number of conditions precedent to the agreement and the obligations of the parties under it. Clause 1.1 (f) was as follows:
The Company (i.e., HGE) producing written evidence in a form satisfactory to (Halston) of confirmation from Allied and any other relevant member of the Allied Group certifying that the total intra-group indebtedness between the Company and the members of the Allied Group does not exceed the sum of £2.8 million payable by Allied to the Company; 
4.	For the purpose of satisfying the requirements of that provision, Mr Simons signed a letter certifying that the intra-group indebtedness was not in excess of £2.8 million.  The Agreement was duly completed on the date it was made.
5.	Halston alleges that the true level of intra-group indebtedness was approximately £3.8 million; that Mr Simons knew that; that but for that false certificate it would not have entered into the Agreement; and that as a result of his fraudulent misrepresentation, it lost all of its investment, apart from a recovery of £200,000 received from Mr Goldsmith and a further £200,000 from Mr Simons under his guarantee.
6.	Specifically, Halston alleges that Mr Simons had deliberately caused to be altered a balance sheet of HGE produced by the accounting staff of the Group for the purposes of the Agreement, showing intra-group indebtedness of some £3.8 million, so as to show not more than £2.8 million, in order to satisfy the requirements of clause 1.1(f) of the Agreement, knowing that that figure was very substantially less than the true amount.
7.	Mr Simons does not accept that the true level of inter-company indebtedness exceeded £2.8 million. He denies that he altered the balance sheet of HGE. He does not dispute that if the true level of inter-company indebtedness was substantially in excess of £2.8 million, Halston would not have completed the Agreement. It is obvious that, if Mr Simons did deliberately alter the balance sheet of HGE in the manner and in the circumstances alleged by Halston, the certificate was false and he knew that the certificate was false. 
8.	It follows that the principal issue of fact for determination is whether he did so alter the balance sheet. The second principal issue, which arises only if Halston succeed in establishing that, is damages.
9.	The allegation made against Mr Simons is a serious charge of dishonesty. Halston is required to prove its case on the balance of probabilities. However, the seriousness of the allegation is reflected in the burden it must satisfy, which is not significantly different from the criminal burden of proof.
The parties and their witnesses
10.	Halston is a company registered in the British Virgin Islands. It is ultimately owned by a family trust (the Palan Settlement) of Paul Levinson (“Mr Levinson”), a businessman who in practice makes its investment decisions. He was advised by Philip Keane, a chartered accountant. Mr Levinson and Mr Keane both gave evidence. Mr Levinson’s son, Mark Levinson, was also involved in the affairs of Halston, but has since died. The witnesses who say that Mr Simons altered the balance sheet of HGE are David Verrells, a management accountant who was employed by HGE, and Rebecca Drummond, an accountant employed by AEG. Mrs Drummond was in Australia, and her witness statement was adduced in evidence under the provisions of the Civil Evidence Act 1995. 
11.	Until 18 September 1997, HGE was a wholly-owned subsidiary of Allied Holdings, the holding company of the Allied Entertainments Group. Prior to the completion of the Agreement, the directors of HGE were Harvey Goldsmith and Mr Simons. Wilder Coe were the auditors of the Group and of HGE. HGE was a promoter of pop concerts and other entertainments. Mr Goldsmith ran its business. Mr Simons, a chartered accountant, was the financial director of the Group, and he ran the businesses of the companies in the Group other than HGE. Mr Verrells and Mrs Drummond reported to him. In cross-examination by Mr Prentis, Mr Goldsmith put the division of responsibilities between them as follows:
A.  The kind of overall financial operations of the business was really overseen by Ed. I had my responsibilities, in essence, were kind of day-to-day on the shows and productions that we were doing and had a kind of overall steer on that. But, in truth, the accounts department really reported to Ed and the auditors in terms of making overall decisions of movements and stuff like that; sometimes I would be party to it, and often I was not because I just was not around.
12.	But Mr Simons did not act only as an accountant: 
Q.  Mr Simons’ role though was wider than that of being merely an accountant, was it not? 
A.  Yes.
Q.  Because he ran the film part of the business and the television part of the business?
A.  Absolutely. He was not there as an accountant. He was there as a fully-fledged -- and, indeed, was a Chairman of the group and had his own part of the business to run.
13.	The other shareholders of Holdings were Seymour Gorman, a partner in Lipkin Gorman, who were the solicitors to the Group, and a Mr Schuldenfrei. The other companies in the Allied Entertainments Group (“the Group”) were engaged in other parts of the entertainment business: music publishing, classical music, films, television and sports.
14.	Mr Levinson and Mr Keane both gave evidence. Halston also called, in addition to Mr Verrells, Mr Goldsmith. Mr Simons gave evidence, and called Mr Gorman. Mr Gorman, on the advice of his insurers’ solicitors, had not provided a witness statement.
Background and Chronology to the date of the Agreement 
15.	During the period relevant to these proceedings, of the companies in the Group, only HGE made substantial profits. As a result, it acted as banker to the Group. It lent moneys to other Group companies so that they could meet their liabilities. In addition, AEG would procure payment to it of receipts for tickets for HGE promotions. These moneys were owed by venues of the promotions, and presumably ticket agents also, who sold the tickets, to HGE, and the moneys paid to AEG were treated as loans by HGE to AEG. The result was a considerable inter-company indebtedness, due to HGE. Its balance sheet at 30 September 1995 included over £3.5 million of such debt. By 30 September 1996, that had increased to over £4.9 million. The audited balance sheet at that date shows net assets of less than £1 million. Clearly, on an assets/liabilities basis, the solvency of HGE depended on the ability of the other Group companies to repay their debts to it. The inter-company indebtedness overshadowed the net profits of HGE, which in the year to 30 September 1996 were only about £218,000. Not surprisingly, the accounts of HGE to that date, approved by the directors on 11 July 1997, included a note on the going concern basis on which its financial statements had been prepared. It stated:
The parent company’s consolidated balance sheet reports a substantial excess of liabilities over assets, principally as a consequence of losses arising on the production and release of a major motion picture reported in the previous period. In response to these circumstances, the group’s directors have continued to take steps to secure the necessary finance required to enable the group to meet its liabilities as they fall due by securing additional financial support by way of loans from certain of the group’s directors, renegotiating the level of support and the repayment schedule of certain sources of bank finance, … Additionally, since the year end, the group’s excess liabilities have been reduced by £1.5 million as a result of the disposal of the rights to certain future television productions to a joint venture in which the group holds a 50% interest; the transaction additionally generating a substantial cash inflow. Furthermore the group’s underlying trading performance has been strong, …
The directors consider the actions being taken to be sufficient to enable the group and its subsidiaries to continue to trade and to meet their liabilities as they fall due for the foreseeable future.
16.	The auditors’ report, also dated 11 July 1997, was not qualified, but included the following paragraph:
In forming our opinion, we have considered the adequacy of the disclosures made in note 1 of the financial statements concerning the appropriateness of adopting the going concern basis in their preparation. The validity of this policy depends upon the successful completion of the steps being taken by the directors of the parent company to strengthen the group’s capital base and secure the necessary finance required to enable the parent company in each of its subsidiaries to meet their liabilities as they fall due. In view of the significance of this uncertainty, we consider that it should be drawn to your attention. Our opinion is not qualified in this respect.
17.	The notes to the financial statements of the Group included a paragraph on the appropriateness of the going concern basis for the preparation of the financial statements. It referred to the fact that the parent company’s consolidated balance sheet reported a substantial excess of liabilities over assets, principally as a consequence of losses arising on the production and release of a major motion picture reported in the previous period. It was otherwise a similar to the note in the accounts of HGE. The auditors’ note was in the same terms as that relating to HGE.
18.	Since HGE was the only really profitable company in the Group (described by Mr Simons as “the engine of the Group”), and given the lack of funds in the other Group companies, there were realistically only two ways that the inter-company indebtedness could be repaid. The first was for the other companies to sell sufficient of their assets to meet their liabilities to HGE. The second was for HGE to make sufficient profits to enable substantial sums to be distributed to the Group as dividends. Those sums could then be repaid to HGE in satisfaction of their debts. Mr Goldsmith considered that the second was the more likely possibility, and felt that the high level of inter-company indebtedness put pressure on him to increase the profits of HGE, and indeed he described that as his main concern, as it was unlikely that the Allied Group would otherwise be able to repay it.
19.	The shareholders of Allied Holdings realised that the Group required an injection of capital. As Mr Goldsmith put it, 
… when it became apparent of (sic) the losses in the Group and potentially the inability for the Group to immediately repay the money that it had taken from HGE, we had had discussions.
20.	An approach was made to or by Mr Levinson. Negotiations between Mr Levinson’s family trust, the Palan Settlement, and the shareholders of Allied Holdings began early in 1997. From an early stage, Mr Levinson was interested in acquiring an interest in HGE only. The acquisition of a substantial minority interest in HGE required the separation of its affairs from those of the remainder of the group. Mr Levinson and Mr Keane had substantial doubts as to the recoverability of the inter-company indebtedness, which were referred to in a fax or letter dated 15 May 1997. Mr Goldsmith and Mr Simons disagreed. The parties negotiated towards the inter-company debt being reduced. Mr Levinson set out the basic principles of the proposed agreement in a fax dated 21 June 1997. Points 1 and 2 were as follows:
1. At March 31, 1997 there were net assets of £1.46 million and intercompany receivables of £3.92 million.
2. Prior to completion, HGE will pay a dividend of £1.4 million to Allied which will reduce the intercompany receivable to £2.5 million.
The figures in point 1 would have been taken from management accounts of the company. The nominal ledger of HGE was kept on computer. The system would print documents, apparently in considerable volume, from which the management accounts were prepared. 
21.	Draft Heads of Agreement were prepared dated at 30 June 1997. The first 5 paragraphs were as follows:
1. At 31 March 1997 there were net assets of £1.46 million and intercompany receivables of £3.92 million.
2. Prior to completion HGE will pay a dividend of £1.4 million to Allied which will be used to reduce the intercompany receivable to £2.52 million. The net assets at that stage will be £60,000 plus the after-tax profits earned since 1 April 1997.
3. There will be no increase in the intercompany receivable nor will there be any upstream or cross-guarantees. All existing guarantees or similar arrangements must be untangled.
4. Palan Trust will subscribe £1 million the new class of shares representing 20% of the enlarged capital of HGE …
5. Palan Trust will make a (secured) loan to HGE of £500,000 … to be repaid not later than 30 September 2000.
22.	Mr Levinson had instructed Baker Tilly to carry out due diligence. They produced a draft report dated July 1997. It seems that the draft report was never finalised, apparently because Mr Levinson and Mr Keane considered it sufficient for their purpose. According to the draft report, net intercompany indebtedness owing to HGE was £3.9 million at 31 March 1997. Its net assets were £1.457 million, so that if the inter-company indebtedness was not recoverable, it had a substantial excess of liabilities over assets. The report showed profits before tax of about £200,000 for the year to 30 September 1996 (taken from the audited accounts), of about £500,000 for the 6 months ended 31 March 1997 and a forecast of £884,000 for the year to 30 September 1997.
23.	Mr Goldsmith described his concern as follows:
My concern was to make sure that the company going forward -- which was agreed by all would be ring-fenced so that if it made a profit it kept the profit – that it had sufficient cash flow to run its business, because that was causing a major strain on the company and in its ability to go forward, and that it had the support of the new investors, and that they would help make the company grow, and through the activities of Mark (Levinson) we could actually develop a much, much bigger business, which was what everybody’s anticipation was.
24.	Negotiations continued and moved towards the drafting of the formal agreement. Lipkin Gorman acted for the Group and Messrs Goldsmith and Simons; Halliwell Landau for Halston. As mentioned above, the Agreement was executed and completed on 18 September 1997. It included extensive warranties, including warranties of the books of account and other records of the company and of the accuracy of the management accounts for the period from 30 September 1996 to 30 June 1997, subject to the contents of a disclosure letter. Mr Goldsmith and Mr Simons were the personal warrantors, their liability being limited to £250,000 plus defined costs. There was a disclosure letter and, in addition, an agreed bundle of documents which formed part of the disclosure against the warranties. Unfortunately, the bundle of documents has been lost. It can however be seen from the Agreement that the bundle included the management accounts of the company for the period from 30 September 1996 to 30 June 1997, which were warranted to “fairly and accurately reflect in all material respects the assets and liabilities of that company and the state of affairs of that company at such date and its results for (that period)”.
25.	The conditions precedent in clause 1 included, in addition to paragraph (f), paragraph (e):
the Company having declared and paid a dividend of £1 million (under a group election) to Allied thereby reducing the inter-group indebtedness of Allied to the Company by the sum of £1 million; …
26.	All of the conditions precedent were satisfied. In addition, as had been agreed between the Group and Halston, AEG assumed liability to HGE for all of the debts payable to it by other companies in the Group.
27.	Schedule 3 of the Agreement listed acts of the Company that required the approval of Halston, including a number of provisions intended to preclude it from making any further loans to other Group companies: see paragraphs (j), (k), (l) and (u).
28.	Clause 12 contained the so-called ratchet provisions. Halston was granted options to require that the Group transfer shares to it for a nominal consideration in the event that there was any inter group indebtedness to HGE outstanding on 30 September 2000. The percentage of the shares in HGE to which Halston would be entitled depended on the amount of indebtedness at that date. If it was less than £250,000, Halston would be entitled to an additional 10 per cent of the issued equity share capital; if it was £250,000 or more, Halston would be entitled to require such shares as would result in its holding 51 per cent of the issued share capital of the company.
Events following completion of the Agreement 
29.	Upon completion, Mr Levinson and Mr Keane were appointed directors of the company. Its board then comprised them together with Messrs Goldsmith and Simons.
30.	Board meetings were held on 16 October and 21 November 1997. The agenda for the latter included the company’s accounts. The management accounts to 30 September 1997 were available, having been produced on 20 November 1997. They included a schedule of inter-company debtors as at that date, totalling £3.8 million. AEG was shown as the largest, but not the only, such debtor. Although the total inter-company indebtedness was £1 million more than the sum represented in the certificate for completion, the board minutes indicate that no one raised any concerns.
31.	The position changed in the spring of 1998. In a fax to Mr Simons dated 9 April 1998, Mr Levinson complained that his son and Mr Keane had been asking for the monthly management accounts on numerous occasions but they had not been forthcoming. A few days later, in a fax to Mr Simons dated 14 April 1998, Mr Keane repeated the request for regular monthly management information. He stated that Paul and Mark Levinson wanted him to go through the inter-company accounts and asked whether it was possible to finish off the September 1997 financial statements. 
32.	Rebecca Drummond sent the management accounts for the 5 months to 28 February 1998 to Mr Keane on 17 April 1998. The schedule of inter-company indebtedness showed a total of £3,872,986 due from Group companies.
33.	Mr Keane went to HGE’s offices on Tuesday 21 April 1998, and went through the management accounts with Mrs Drummond and David Verrells. In a fax to Mr Verrells dated 26 April 1998, which he requested be copied to Mr Goldsmith and Mr Simons, Mr Keane set out 12 points that arose from their meeting. Point 4 referred to the draft financial statements for the year to 30 September 1997, which he must have seen, and stated that they needed to be finalised with the auditors. Those accounts showed inter-company indebtedness of £3.8 million. Points 6, 7 and 8 were as follows: 
6.	All of the intercompany balances should have been put into one receivable account so that there were no inter-company payables at all. ..
7.	Why is the intercompany balance £3.8m. I expected, and the Agreement confirmed, this would not be over £2.8m.
8.	Please give me a print out of all the intercompany accounts showing the movements from 18 September 1997 to 28 February 1998.
34.	The print out requested in point 8 was never provided. The inter-company indebtedness was discussed between Mr Levinson and Mr Verrells on 12 May 1998. Later that day, Mr Verrells sent a curious fax to Mr Levinson, copied to Messrs Goldsmith, Simons and Keane:
Further to our conversation this afternoon my understanding is that the September 1997 year end accounts reflected AEG inter-company loan account as being 3.8 million both Paul and Philip Keane expected this to show 2.8 million.
A meeting should be set up as soon as possible to clarify this point.
35.	Mr Levinson responded in a fax of 13 May 1998:
Thank you for your fax dated 12th May 1998. it is  not that Philip and I expected this to show £2.8 million it was contracted to be £2.8 million.
36.	On about 12 May 1998, a meeting took place between Messrs Goldsmith, Simons, Gorman and Schuldenfrei: i.e., the shareholders of the Group. The level of the inter-company indebtedness of HGE at the date of the Agreement was discussed. What was said at the meeting was not recorded in writing; at least, if it was, no record is available. Halston alleged in its Particulars of Claim that Mr Simons admitted having falsified the certificate of inter-company indebtedness. As Mr Millett accepted, that allegation is not supported by the evidence. According to Mr Gorman, whose evidence Mr Prentis invited me to accept, as I do:
I think the meeting focussed around the fact that the certificate which Ed had signed was looking increasingly as though it was inaccurate and that the figure for the inter-company indebtedness was probably understated by about £1 million, that the agreements, the sale and purchase agreements or the subscription agreement contained provisions for compensation to Halston in the event that it proved that the inter-company indebtedness exceeded £2.8 million or thereabouts and as shareholders Edward and Harvey wanted to alert Mr Schuldenfrei and myself to the possibility of a diminution in our shareholding should Halston exercise the ratchet as compensation for the additional inter-company indebtedness.
37.	The result of that meeting was that Mr Schuldenfrei and Mr Gorman:
left it to Ed and Harvey to negotiate as best they could the terms with Halston to compensate them for the understatement of the inter-company indebtedness, …
38.	Mr Keane not received a response to the points he had raised by 23 June 1998. On that date, he sent a fax to Mr Simons with a further copy of his fax of 26 April. He suggested that a board meeting should be arranged, and stated:
The management accounts for May should now be available. Can you please arrange for these to be circulated and I must insist that the balance sheet is included which shows the correct level of the intercompany debt.
39.	During 1998, the company required further loans. In March an increased secured bank facility was arranged with Bank Leumi, with an overdraft limit of £750,000. Cash shortages continued. The bank overdraft limit was increased to £1 million. This was insufficient. On 24 September 1998, Mr Verrells sent a fax to Mr Goldsmith, copied to everyone else interested in the company (Messrs Simons, Levinson, Mark Levinson, Keane, Gorman and Schuldenfrei), stating that apart from tax there would be a shortfall of £250,000 at the end of the month, which “needs to be addressed with the utmost urgency”. As a result, Mr Goldsmith’s pension fund lent the company £250,000, Mr Levinson personally lent it £210,000 and Halston £150,000 (in addition to the loan made pursuant to the Agreement). Mr Goldsmith and Mr Simons guaranteed Halston’s original loan of £500,000, which was subordinated to the bank facility. These loans were repayable in December 1998, but the company was unable to, and did not, repay them.
40.	During 1998 a number of approaches were made with a view to the sale of all or part of HGE or its business. Between May and November 1998 negotiations took place between Allied and Halston on one side and Tring International plc on the other, with a view to Allied and Halston selling their shareholdings in HGE to Tring. HGE was, according to Mr Goldsmith, whose evidence I accept (indeed, it was not disputed), suffering from “severe cash flow problems”. He said, in re-examination:
It, well it just was, it was just, it was a constant nightmare from that period onwards how to deal with the cash flow and we were, you know at one point I even had to put in some money myself to pay a deposit for a big tour on the knowledge that that tour was going to be very successful, which it was, just to keep it going and there were even further loans that Halston had put in because they were aware of the cash flow position as well.

41.	The transaction fell through in November 1998, and Tring itself collapsed. For the purposes of the proposed transaction, HGE produced audited accounts for the period of nine months ended 30 June 1998. They were approved by the board and signed off by the auditors on the 11 November 1998. They showed intercompany indebtedness of £4.1 million at 30 June 1998, and of £3.78 million at 30 September 1997. It followed that the figure for intercompany indebtedness shown in the management accounts as at 30 September 1997, produced for the board meeting on 21 November 1997, was materially accurate. Shareholders’ funds at 30 June 1998 were £1.172 million. The company’s profit on ordinary activities after taxation was £555,000. 
42.	The notes to the financial statements to 30 June 1998 included one on going concern. It referred to in the “substantial excess of liabilities over assets” shown in the Group’s consolidated balance sheet, and to the proposed sale by the Group to Tring of its shareholding in HGE, and stated that the gain on the sale would allow Group to settle all amounts owed to the company on completion. The note ended:
The directors consider the actions being taken to be sufficient to enable the company to continue to trade and to meet its liabilities as they fall due from the foreseeable future. The directors accordingly consider it appropriate to adopt the going concern basis in the preparation of the financial statements of the company.
43.	On 9 December 1998, Mr Keane sent a fax to Mr Goldsmith and Mr Simons in which he raised the subject of the increase in Halston’s shareholding as a result of (i.e., as compensation for) the increased inter-company loan. 
44.	An agenda prepared by Mr Keane for discussion at a meeting on 18 December 1998 referred to the proposed increase in Halston’s shareholding and to then current amount of the inter-company indebtedness, namely £4,114,000, and asked:
iii) How and when did balance exceed allowed amount?
(iv) Interest arrangements on excess over £2.9 million?
(v) …
(vi) HGE to make immediate demand for excess over £2.8 million?
The figure of £4,114,000 came from the management accounts to 30 September 1998. 
45.	At the board meeting of 18 December 1998, the accounts of the company for the year to 30 September 1997 were approved. The auditors signed off the accounts on the same day. They showed a loss for the year of £102,000, and shareholders’ funds reduced to £617,000. A dividend of £1 million had been paid on 14 July 1997 (i.e., in fact well before the date of the Agreement) and applied to reduce the inter-company indebtedness. The amount of that indebtedness at 30 September 1997 was shown as £3,784,099. Note 1.9 to the accounts was as follows:
The financial statements have been prepared on the going concern basis. The Allied group’s consolidated balance sheet reports a substantial excess of liabilities over the assets, and substantial net current liabilities, as has been previously reported. The group’s directors have continued to take steps to improve the financial position, which have included the renegotiation of banking facilities, the introduction of new investors and the commitment of significant levels of finance from certain of the directors’ own resources. These actions are continuing, with the group directors in negotiations on several matters which they believe will enable the group to capitalise on the underlying value of its core activities and assets. The group has, furthermore, performed well in its core activities in the period since the year end.
The company is dependent on the successful completion of these steps in order to ensure the recoverability of amounts owed to the company by the rest of the Allied group (as disclosed in Note 12). The disposal of this company by the group is one of the matters under consideration to accomplish this.
Assuming the successful completion of these steps, the directors consider the actions being taken to be sufficient to enable the company to continue to trade and to meet its liabilities as they fall due for the foreseeable future. The directors accordingly consider it appropriate to adopt the going concern basis in the preparation of the financial statements of the company.
46.	The auditors’ report referred to this note:
In forming our opinion, we have considered the accuracy of the disclosures made in Note 1 to the financial statements concerning the appropriateness of the adoption of the going concern basis in preparation of these financial statements. The validity of this policy depends upon the successful completion of the steps being taken by the directors of the ultimate parent company to improve the group’s financial position and secure the necessary finance required to enable the ultimate parent company and each of its subsidiaries to meet their liabilities as they fall due, which, in the case of this parent company would entail enabling the recovery of the intra-group debt owed to it. In view of the significance of this uncertainty, we consider that it should be drawn to your attention. Our opinion is not qualified in this respect.
47.	On receipt of those accounts, Mr Keane sent a fax dated 21 December 1998 to Mrs Drummond, copied to Mr Verrells, asking them to provide him with a reconciliation and moving and schedule to the intercompany debt as follows:
“1. starting with the balance at 18 September 1997 (which I understand was less than £2.8 million);
2.  the 30 September 1997 figure of £3.784 million; and
3.  the 30 September 1998 figure of £4.114 million.”
The figures for 30 September 1997 and a 30 September 1998 were from the audited accounts and could not be, and have not been, disputed.
48.	On 22 December 1998, Mr Levinson sent a formal and a serious letter to Mr Goldsmith, Mr Gorman, Mr Schuldenfrei and Mr Simons, i.e. to the personal shareholders of the Group. He referred to the provisions of the Agreement requiring inter-company indebtedness not to exceed £2.8 million and prohibiting without the approval of Halston any intercompany loans, and said:
The amount of the intercompany debt (as you know) is currently substantially more than the maximum agreed figure of £2.8 million and has been since the signing of the agreements in 1997. This is in contravention of the agreement we reached and has had a detrimental effect upon the trading performance of HGE which it is extremely short of the working capital its needs. The directors of Allied should have been aware that some was incorrect when the documents were signed.
He sought proposals for the reduction of the indebtedness and for compensating Halston:
 “for the position they find themselves in, namely, that HGE’s Balance Sheet is considerably different than that which was shown at the time of the investment as result of having paid monies to Allied without authority.
My own view ... is that the level of Halston’s equity interest in HGE mass to be increased from 20% to 30%.”
49.	In a fax dated 15 January 1999, Mr Keane asked Mrs Drummond:
Could you please let me know the balance (of the inter-company indebtedness) outstanding on the 18th of September 1997 (the date Halston made their investment) and the movement between 18 and 30 September 1997?
He had not received that information by 4 February 1999. He repeated the request in a fax to her and Mr Verrells of that date, saying that he would be in HGE’s office later that day. When he visited HGE, he agreed to wait 3 weeks for the information, because a sale of HGE to MMC was under negotiation, and if completed it would be academic.
50.	On the following day, 5 February 1999, Mr Simons wrote to Mr Keane:
I understand from Rebecca that you have asked the information regarding the loan account, details of authorisation for payments, etc.
The fact that the loan account is significantly in excess of the agreed amount is conceded and, as such, Allied/Harvey and I have agreed that Halston received an increase in equity which, at current valuation, would amount to a bonus of £725,000.
If that is not to be the case, then I would rather revert to the existing shareholdings and deal with the issues of payments and receipts on the loan account.
I have instructed Rebecca not to reply until you and I have agreed the way forward.
The “current valuation” referred to was derived from the proposed agreement with MMC.
51.	On the 19th of February 1999, Mr Keane sent an e-mail for Mr Levinson:
A status report: -
Intercompany accounts
I was continuing to ask questions (but not receiving replies) about the intercompany accounts and the withdrawing of cash; for example, when did it happen, who authorised or instructed it to happen. Eventually Ed (Simons) said he was not happy with the “witch hunt” under reason to the increased shareholding was to avoid this investigation. I could have either the 30% holding all the answers us not both. He wrote to me on fifth February and I said I would leave it in abeyance the three weeks as it would all be academic if a deal goes through.
52.	A board meeting of HGE was held on 25 February 1999. Management accounts were produced for the meeting, and showed profit before tax of £181,000 for the period of four months ended the 31 January 1999. Mr Keane, who was at the meeting, reported to Mr Levinson, who was not, in a fax dated 26 February 1999. In relation to cash flow, he stated:
5.	So far as finance is concerned, he asked Mark and I to get Halston off his back. I said that was the same as asking us to get Leumi off his back. They act independently and he has to deal with them properly. He will reply to their latest letters, give them the financial information they asked for and seek an extension of the loans to 31st March. I asked if the money would be there to repay them on 31st March and he said “only if we have done a deal by then – it is a target date”. I told him that wasn’t good enough and he was storing up trouble with Halston (Mark agreed especially as there was to be a changeover in Trustees around then and they wanted a clean position). There is only a remote possibility a deal will be done in the next 5 weeks.
6.	Harvey says a deal must be done as the business will need more cash. He could not say when nor how much. More problems!
53.	Meanwhile, other efforts were being made to sell HGE. In December 1998 an approach was made to or by Multimedia Corporation Plc (“MMC”) under which Halston and Allied Holdings would sell 50 per cent of their shareholdings for £4 million cash, of which £3.2 million would be used to repay inter-company indebtedness, thereby enabling HGE to repay the outstanding and overdue loans that had been made to it by Halston (£650,000), Mr Goldsmith’s pension fund (£250,000) and Mr Levinson (£210,000). The Executive Summary for that transaction stated:
This will leave £2.09m for cash flow purposes, which is considered sufficient for HGE’s current trading needs. The company currently enjoys bank facilities of £1m with Bank Leumi, of which it is expecting to repay £250,00.
£2.09 million was, of course, far more than the cash available to the company at the time. The MMC deal went as far as the preparation of a draft formal agreement, but no agreement was concluded.
54.	On 19 July 1999, Mr Goldsmith sent a fax to Mr Simons, copied to Mr Levinson, his son and Mr Keane, with a calculation of the current cash position of the Company, showing a cash shortage of almost £500,000.
55.	In the summer of 1999, HGE organised a concert in Cornwall for visitors who came to see the total eclipse of the sun. It was a financial disaster, incurring a loss of (according to a memorandum dated 3 September 1999) about £770,000 net of VAT. The company could not withstand that loss, and on 29 September 1999 Administrative Receivers were appointed by the company’s bankers at the instigation of the directors. Subsequently, on 24 November 1999, a winding-up order was made on the petition of a creditor, a company representing unpaid artists. The Official Receiver’s report to creditors, dated 22 December 1999, stated that Mr Goldsmith attributed the company’s failure to “the promotion of the Eclipse concert and the inability of the Holding Company to repay its indebtedness” . Mr Goldsmith also stated that the Holding Company had been unable to repay its indebtedness after the losses incurred by the Group in connection with the motion picture referred to in the notes to the 1996 accounts referred to above.
56.	Halston received nothing by way of dividend in the liquidation of HGE, and nothing in respect of the loans it had made, save that Mr Goldsmith paid a total of £280,000 under the terms of his guarantee of the loans. Halston also intimated a claim against Mr Simons; if that was in writing, a copy has not been put in evidence. In a letter dated 13 June 2002, Mr Simons set out his position and said:
Whilst it was accepted that the Allied figures were incorrect in respect of the loan account, this never was a wilful deceit and it certainly was not known, prior to the signing. It was disclosed to Phillip Keane (sic) immediately we became aware. It most definitely was not the reason for HE (sic) going into receivership …
How did the certificate come to be given?
57.	There are only the following practical possibilities:
(1)	The certificate of not more than £2.8 million was correct.
(2)	The figure of £2.8 million was an understatement, due to an error in the accounting records of HGE.
(3)	The figure of £2.8 million was an understatement, as a result of the deliberate insertion in the certificate required by the Agreement of a figure less than that showed by the accounting records of HGE.
58.	In considering the probabilities, it is necessary to take account of the fact that the inter-company indebtedness at 30 September 1997 was some £3.8 million, an undisputed figure shown by the audited accounts, and that the management accounts produced for the board meeting of 21 November 1997 showed a figure that was not materially different from the audited accounts. If the certificate of £2.8 million was correct (i.e. inter-company indebtedness did not exceed that figure on 18 September 1997), there must have been a very substantial increase in that indebtedness in a short space of time: about £1 million in 12 days. The transactions or money transfers giving rise to that increase must have been known at the time, and certainly could have been ascertained. Furthermore, those transactions or transfers should not have taken place: they were prohibited by the Agreement unless Halston approved them, which it did not. That was the information that Mr Keane sought. It was never provided. There is nothing to suggest that Mr Simons asked for it. There is no reason to believe it could not have been obtained from the accounting records of the company. Given the apparently very substantial increase in inter-company indebtedness between completion of the Agreement and the month end, and the provisions of the Agreement prohibiting such an increase, one would have expected Mr Simons himself to obtain an explanation from Mr Verrells or Mrs Drummond. He did not do so. The information sought by Mr Keane was information to which he was entitled as a director of the company, quite apart from the interest of Halston. The reason given by Mr Simons for ordering Mr Verrells and Mrs Drummond not to provide that information, as he accepted he did, is unsatisfactory. A reconciliation of the certified indebtedness and the audited figure was never provided before the company collapsed.
59.	Moreover, Mr Simons has not pleaded that there were any transactions between completion and month end to account for an increase in the inter-company indebtedness; none were suggested by him in correspondence before the proceedings; none is referred to in his witness statement or identified in his evidence; and it was not put to Mr Verrells in cross-examination that there were such transactions.
60.	There is clear evidence that Mr Simons accepted that the figure of £2.8 million was an understatement of the inter-company indebtedness at the date of the Agreement. I refer to Mr Gorman’s evidence set out above concerning the meeting in April 1998 between Messrs Goldsmith, Simons, Gorman and Schuldenfrei. Mr Goldsmith’s recollection of the meeting was similar to Mr Gorman’s. In cross-examination, he said:
I was really angry and my presumption and assumption was at that time that whatever Ed had, whatever the figure that Ed had signed was incorrect.
Subsequently, in an answer to me, he said:
What was in my mind (at the meeting) was that a document had been signed and agreed which was wrong.  How it came about I had no idea, I just presumed it was just figures were just not done properly and I would say that our accounts department were pretty good, but I would not class them in you know in the top five in the country and there were so many small and different transactions going on and so on and so forth that you know in my mind mistakes could have been made and I just felt that Ed had signed off on a piece of paper that was, whether he knew it was wrong or it was wrong and it was clearly that important which what transpired afterwards it was wrong and it was his responsibility because why did he sign it?
Mr Simons’s evidence about this meeting was vague and defensive. I reject it in so far as it is inconsistent with that of Mr Gorman and Mr Goldsmith.
61.	In addition, I refer to Mr Simons’ own letter to Mr Levinson dated 13 June 2002 referred to above. Mr Simons was in a position to know whether the figure was accurate or not, and he would not have accepted its inaccuracy if he had thought it to have been correct. In cross-examination, he disputed that the letter was an admission of the inaccuracy of the certificate. The letter is clear, and his attempt to dispute the clear admission is one of the reasons why ultimately I have been compelled to reject his evidence relating to the certificate. Indeed, Mr Prentis, in cross-examining Mr Levinson, seemed to accept that the figure had been inaccurate. He said:
Can we turn to what happened once it was discovered that it was pretty likely that the 2.8 million figure was wrong, … April ‘98 onwards?
62.	If the certificate was incorrect because of defects in the accounting records of the company, some explanation is required for the fact that those records produced materially accurate management accounts, at least so far as the inter-company indebtedness at 30 September 1997 was concerned, in November 1997. No such explanation was given at the time or during this trial. Mr Simons accepted that the true inter-company indebtedness could be obtained from the nominal ledger, provided it was up to date: 14 December at page 91.
63.	That leaves the third explanation. It is what Mrs Drummond and Mr Verrells say occurred.
The evidence of the witnesses
64.	I found Mr Keane, who was the first witness, to be patently honest and candid. In fact, there was little dispute concerning his evidence. Mr Levinson’s evidence was similarly not substantially challenged. I considered Mr Goldsmith to be a careful and reliable witness: see, for example, his query as to the meaning of the question whether he was “involved in the negotiations” with Halston. He gave no sign of exaggeration or seeking to mislead. He readily admitted that he had received a quid pro quo for his testimony. His responses to questions concerning the Allied shareholders’ meeting of April 1998 were convincing. The major factual issue is between the evidence of Mr Verrells and of Mrs Drummond on the one hand and that of Mr Simons on the other. Mr Gorman, another impressive witness, was not challenged.
65.	As I mentioned above, Mrs Drummond’s witness statement was put in evidence under the Civil Evidence Act 1995. She said: 
26. In the lead up to the completion of the deal (which I was recall was delayed on several occasions) the accounts staff were instructed to keep the books as up to date as possible so that it would be a simple exercise to produce a summary of the financial position of HGE for the completion. Therefore at around this time, all book entries were being inputted onto the computer system on a daily basis.
27. In or around the middle of September 1997, I finished preparing the summary spreadsheet (which I usually produced on a quarterly basis) which summarised the draft accounts for HGE to the period to mid September 1997. I produced the spreadsheet (from a template which I used regularly) from the accounts system but it was completely independent of the accounts system i.e. an entry in the spreadsheet (which was manually inserted) would and could not automatically update the accounts system in respect of that entry and vice versa. I gave copies of the spreadsheet to David Verrells and Mr Simons only. As far as I was concerned, from my detailed knowledge of the financial position of the Group, these figures were correct. I cannot now recall exactly what the figure for inter-company debt was but I believe that HGE was owed in the region of £3.6 to £3.7 million. I understood that this summary was to be provided to Halston as part of the completion papers for the deal.
28. Shortly thereafter, Mr Simons asked me on a couple of occasions, to change the formatting of the spreadsheet. These changes were not changes of substance but rather ones of presentation. For example, I was asked to consolidate all the small debtors so they showed on the spreadsheet as one line rather than being listed separately and I was asked to consolidate the inter-company debt figure, again so it showed as one figure as opposed to being attributed to each individual company.
29. On about 16 September 1997 I was called into a meeting being held between Mr Simons and David Verrells, in David Verrells’ office as Mr Simons wished to make some further changes to the spreadsheet. At this time the computers were not networked and I therefore went back to my computer, copied the spreadsheet onto a computer disc and returned, with the disc, to David Verrells’ office and loaded it onto his computer.
30. Mr Simons then sat at the computer and attempted to alter some of the figures on the spreadsheet. I recall that he found this difficult because his sight was so bad and he therefore asked David Verrells to make some changes for him. I also remember that Mr Simons wrote the figures which he wanted to change on a piece of paper.
31. First, Mr Simons asked David Verrells to alter the spreadsheet summary of HGE’s accounts, debiting ticket sales in advance and debiting VAT. At this time the balance on the advance ticket sales was substantial because there were a number of events in the pipeline. I believe that it was in the region of £3.1 million. Advance ticket sales were treated in the accounts as a current liability (because theoretically if the event to which they related did not go ahead for some reason, HGE would have been obliged to refund the monies to the purchasers of the tickets). The effect of the adjustment was therefore to reduce the current liabilities giving the impression that further monies would be received in due course and making the cash balance look healthier. I do not now remember the exact amount of the adjustment but I believe that it was in the region of £700,000.
32. Second, Mr Simons asked David Verrells to alter the figure for inter-company debt on the spreadsheet summary. Again, I cannot now remember the exact amount of the adjustment but I believe the figure was reduced by about £900,000. No corresponding adjustments were made (or proposed to be made) by Mr Simons in the AEG accounts and/or spreadsheet summaries for the Allied companies.
33. When the changes had been made, I printed a copy of the spreadsheet off for Mr Simons. Prior to completion of the Halston deal, no further changes were made to the spreadsheet. I know this because I was the only person who had access to it.
34. No explanation was given by Mr Simons to justify these amendments to the spreadsheet and I was not instructed to make identical adjustments in the HGE accounts system. As far as I was aware at the time (and subsequently),there was no factual basis for making these adjustments. In hindsight, once I became aware that it was a pre-condition of the investment by Halston that the level of inter-company debt be certified as being less than £2.8 million, it became apparent to me that Mr Simons’ strategy was to seek to present an unjustified reduction of the inter-company indebtedness in order to ensure the Halston deal went ahead. To the best of my knowledge and belief this was wholly outside Mr Goldsmith’s knowledge.
Post Investment
35 Due to the fact that the year end was 30 September and we knew that the auditors were coming in very soon after the year end, we continued to update the ledgers on an almost daily basis after completion of the deal on 18 September 1997. 
36. At around the end of October/beginning of November 1997, I recall that I handed to Philip Keane (who was one of the directors appointed to the board of HGE as a Halston representative) the October management accounts and also the draft accounts for the year ended 30 September 1997. Both sets of accounts showed the inter-company indebtedness as £3.8 million. In preparing these accounts, I did not revert to Mr Simons to ask if the adjustments, which he had made prior to completion of the deal, should be incorporated. I prepared them from the information on the accounts system.
…
38. The actual indebtedness was in excess of £2.8 million, both at the time of the completion of the (Halston) deal and as at 30 September 1997.
66.	In summary, according to Mrs Drummond, the spreadsheet produced for the purposes of the Agreement showed lower liabilities and lower assets than the figures produced by the computer accounts system. The balance sheet would therefore balance. 
67.	Of course, I have to bear in mind that I did not have the benefit of hearing Mrs Drummond cross-examined. However, no reason has been put forward for her signing a false statement making such a serious allegation against Mr Simons. No notice was served by Mr Simons under CPR Part 33.4(1), seeking to cross-examine her. But perhaps the most important test of her statement is the possibility it provides for testing the testimony of Mr Verrells.
68.	In his first witness statement, Mr Verrells referred to the cash flow difficulties of the Group in the period before completion of the Agreement. He said:
13. In light of the financial difficulties of the Group as a whole, cash flow strain became enormous.  The cash flow problem became so severe that there came a point when we could not meet our commitments to pay deposits to artists and foreign entertainment taxes due on amounts earned by foreign artists. Also PAYE and VAT returns were affected.
14. … any profit in the Group was generated by HGE almost entirely. There was very little profit from any other source within the Group as the other companies within the Group continued to make heavy losses.
15. As the other companies within the Group were not profitable, often payments to creditors of those companies would be made from HGE. A nominal ledger account was set up to record payments made from HGE on behalf of the other companies within the Group and this is how the inter company debt position in the accounts was created.  In effect the cash flow in HGE was used to “fund” expenses and activities of the rest of the Group resulting in monies owed to HGE by other Group companies. These details were recorded in hand written journal entries on a weekly basis and inputted onto nominal ledgers, held on a bespoke computer system maintained by the Accounts department.   One of the juniors in the Accounts team would generally input these details.  If HGE paid an invoice on behalf of another company within the Group it would be detailed on the ledger and charged to the relevant company within the Group.  Summaries were produced quarterly which were then reconciled by the auditors, Wilder Coe when undertaking their annual audit.
69.	What he said about the treatment of advance payments in the accounts was broadly the same as Mrs Drummond’s statement:
18. HGE promoted concerts and the public would pay the theatre box offices in advance for those tickets.  HGE would ask the theatre box offices to remit those monies to them on a regular basis.  As an example, if £1 million was sent in this way, the correct accounting treatment for that would be to increase the cash in HGE’s books but to show a liability for the monies received (i.e. £1m) not yet earned.  There would be no change to the net worth of the company.
19. What actually happened was that Allied (who in effect acted as the Group banker) would request the money from the box offices and bank the £1m cash.  The money did not always find its way into HGE but was sometimes used by the group for other purposes.  Nevertheless, HGE should have recorded this by increasing their liabilities by £1m and increasing the inter-company debt by £1m.  According to the balance sheet, it should have made no change in the net worth position of the company but instead of HGE having £1m in cash they would have an increased inter-company debt receivable of £1m.
Mr Verrells did not substantially depart from this evidence in cross-examination.
70.	At my instigation, in view of the serious allegation made by Mr Verrells against Mr Simons and the anticipated conflict between their evidence, Mr Verrells gave his evidence relating to the production of the certificate in chief, in response to Mr Millett’s questions, rather than simply by confirmation of his witness statement. His evidence was as follows:
Q.  Mr Verrells, I am going to ask you some questions about what happened at a meeting in mid-September 1997 at which you, Miss Drummond and Mr Simons were present. First of all, do you recall the meeting?
A.  I recall the meeting in question.
Q.  Who called it; who summoned the meeting?
A.  I would think that Edward Simons would have requested this meeting.
Q.  Do you remember why he requested it?
A.  The reason for the meeting would have been to discuss the manuscript and the management account summary spreadsheet.
Q.  Tell me about the spreadsheet, what was it?
A.  The spreadsheet would have represented a profit and loss and a balance-sheet for Harvey Goldsmith Entertainments to be presented to Halston.
Q.  From what information was it created?
A.  The information that would have been put on to a spreadsheet would have come from the computer nominal ledger, i.e., the accounting system that that was held by Harvey Goldsmith. The two did not talk to each other, as it were, though. One was prepared manually from the other.
Q.  What was the purpose of the spreadsheet as you understood it at the time?
A.  The spreadsheet would have been used to condense and represent the profit and loss and balance-sheet for Harvey Goldsmith.
Q.  In connection with what, do you remember?
A.  I am not sure I understand the question.
Q.  In connection with what?
A.  In connection with doing a deal with Halston.
Q.  Thank you. What did you know about the level of inter-company indebtedness and its importance as between Halston, on the one hand, and HGE, on the other?
A.  At that point within that meeting I am not sure that I became aware of the importance of the exact amount of that inter-company indebtedness at that point because I had not been privy and did not know all the details of the arrangements that were being made between Harvey Goldsmith Entertainment and between Halston.
Q.  Do you recall now what the true level of inter-company indebtedness was so far as HGE was concerned in mid-September 1997?
A.  I believe it to be circa 3.6 million, my Lord.
Q.  The meeting you told us was summoned by Mr Simons. Just going back to it, did he tell you why he wanted it, what the meeting was going to be about?
A.  We would have gone through -- as far as I can recall, we would have gone through minor presentation changes which would not necessarily have materially affected any of the figures. There was a change that we did make though that would materially affect the inter-company account between HGE and AEG.
Q.  What did Mr Simons tell you that he wanted in respect of that inter-company debt?
A.  He wanted it to reflect about a million pounds less than it currently did.
Q.  Did he tell you why?
A.  I do not recall that we had an exact conversation reflecting the reasons why. As I recall it, at that particular meeting it is just that is the way he wanted it presented. I do not recall going into any further detail about exactly why that was at that point.
Q.  Who else was present with you at that meeting?
A.  Rebecca Drummonds who unfortunately is away in Australia.
Q.  Yes. At the meeting what documents did you have in front of you?
A.  We would have had the management accounts that we already had printed off, so we had a whole copy of that. We would have had possibly the working --
Q.  Pause there. Printed off from where?
A.  Printed off from a normal every day laser printer on A4.
MR JUSTICE STANLEY BURNTON:  From the computing system that was used to keep the accounts or --
A.  No, this would just purely be from a stand-alone laptop or computer which would have a printer, not connected to the nominal ledger system at all. Then the working papers that would have related to this spreadsheet would have been taken off from the nominal ledger print-outs from the accounting system itself which would have been reams and reams of computer paper and the one would have been used to condense it down into the other.
MR MILLETT:  You mentioned a spreadsheet a moment ago. Was that one of the documents that you had at the meeting?
A.  Yes, there would have been -- we would have had a spreadsheet, yes, reflecting the management accounts of Harvey Goldsmith Entertainments.
Q.  What did that spreadsheet -- let me ask you it this way. Did that spreadsheet show what the true level of inter-company indebtedness was?
A.  Yes, it would have done so far as I am concerned, yes.
Q.  Do you recall what that spreadsheet as a piece of paper had on it by way of a number for the inter-company indebtedness?
A.  Yes, there would have been two pieces of paper. The first would have shown the profit and the loss and the second sheet would have shown the balance-sheet. The balance-sheet is the one that we are concerned with here and, as I recall, that would have shown an inter-company loan of 3.6 million.
MR JUSTICE STANLEY BURNTON:  Who had prepared that. Had you prepared that or someone else?
A.  Rebecca Drummond would have done and I would have reviewed it.
MR JUSTICE STANLEY BURNTON:  When you say you would have, do you mean you did?
A.  I would -- I looked through the documents prior to the meeting, yes, my Lord.
MR MILLETT:  Was that your practice?
A.  Yes.
Q.  So the spreadsheet is in front of you showing, as you told us, 3.6 million of inter-company debt. What did Mr Simons do when he saw that piece of paper?
A.  As I recall, he made some changes to three of the ledger accounts that would have shown on there.
Q.  How did he do that?
A.  As I recall, he did it in pencil at that time.
Q.  Can you remember what those changes were?
A.  One was to the advance ticket sales which, shall I explain what I mean by advance ticket sales?
Q.  Yes, please.
A.  That is where the general public buy tickets and we take the income for that for shows that have yet to occur or mature. So that is why they are called “advanced” because they are monies that are taken for shows that have yet to take place.
Q.  Can you remember the figure for the advance ticket sales that Mr Simons wanted you to change?
A.  As the figure was, before we changed it?
Q.  What was the figure before you changed it?
A.  I cannot remember.
Q.  What was the figure you changed it to?
A.  I think it was changed by £700,000.
MR JUSTICE STANLEY BURNTON:  In which direction?
A.  To decrease it.
MR MILLETT:  So that is the first change. What was the second change?
A.  There was also a change to the VAT account, as I recall.
Q.  Can you explain that please?
A.  How the VAT account worked or the change to it?
Q.  No, what the change to that was?
A.  The change again I think would have decreased the VAT by that amount, 400,000, as I recall.
Q.  So just so that I am clear, you were lowering, to put it in a non-technical sense --
A.  That is perfectly okay with me.
Q.  -- the figure due to HM Customs and Excise in respect of VAT?
A.  I think that is correct, yes.
Q.  Can you remember for what period?
A.  No, I do not precisely. It would have been an ongoing figure. The net effect of these changes would have then I believe decreased the liability that AEG had towards HGE by about £1 million.
Q.  You mentioned a moment ago a third change. Can you please tell us --
A.  That is the one I am now referring to, the inter-company accounts.
MR MILLETT:  Thank you. You say --
MR JUSTICE STANLEY BURNTON:  That was a third one. When you say the net effect.
A.  By changing the other two you would then change the inter-company account as well by the corresponding amount of the other two.
MR JUSTICE STANLEY BURNTON:  Just explain to me how the VAT account affects the inter-company amounts?
A.  Because if you change the VAT account then you would have to change something correspondingly and I think that we changed the inter-company account by the same amount that we changed the VAT account by. So by changing the VAT and the advance cash in the same direction, the opposing entry to that would be to increase the figure of the inter-company account, sorry, decrease the figure of the inter-company account. I am not sure -- I cannot recall exactly how we did that. The material changes to the spreadsheet though were to reduce the amount of the inter-company account by about £1 million so that it looked like AEG only owed Harvey Goldsmith Entertainments 2.6 rather than 3.6 million. That is as far as I can recall of this meeting.
MR MILLETT:  Thank you. So he made those changes. Well, can I just ask you. Who had the pencil in the hand to make the changes on the spreadsheet?
A.  Ed would have done that.
Q.  Then what did he do with the piece of paper, the spreadsheet?
A.  That is one of the things that I was looking for before we actually left that building. I could never find it again. Because Mr Simons would not have known how to use the laptop computer to change the figures again so that when we reprinted them, the inter-company account then looked as he wanted it to. Either Rebecca Drummond or myself would have had to have done that.
Q.  You say either Rebecca or you would have had to have one that. Do you recall what you or Rebecca did with the piece of paper with the pencil changes on it after you made them?
A.  I do not recall, no what occurred to that working paper.
Q.  No. Please listen to my question?
A.  I am sorry.
Q.  Do you remember what either you or Miss Drummond did with the changes on the piece of paper immediately after Mr Simons had made the changes on the spreadsheet. What happened next?
A.  We used the manual changes that had been made on that piece of paper to then effect them and put them back into the laptop computer and then reprint them, so they were printed out properly, not with written changes upon them.
Q.  Did you reprint it?
A.  Yes, we did.
Q.  And what did you do with the piece of paper that was printed off?
A.  I imagine that either myself or Rebecca would then have given it back to Mr Simons.
Q.  You say you imagine. Can you recall?
A.  I cannot recall physically doing it myself. I cannot recall whether I went and gave it back to Mr Simons or whether I instructed Rebecca Drummond to do so but one or the other of us would certainly have done so.
Q.  Can you remember who made the physical changes on the computer to the document so that it would print off in the way you have described?
A.  I think as far as I can recall it was Rebecca Drummond but if Rebecca Drummond were here and said “No, Mr Verrells, in fact you did it” I would not dispute that. It was one or the other of us.
Q.  Thank you. Now what was your understanding about the reason at the time, your understanding about the reason for the adjustments that Mr Simons had asked you to make?
A.  Because although, as I have said, at that point in time I was not privy to all of the deals that were going to be either warranted or agreed between Halston and Harvey Goldsmith Entertainments, I understood that the reason why we were making the change to the inter-company accounts was so the deal become acceptability – would have become acceptable to Halston so that it might proceed.
MR JUSTICE STANLEY BURNTON:  I am sorry to interrupt you. What was said at the time that the changes were made? What was the reason given then?
A.  That we needed to reflect an inter-company balance of 2.6, not 3.6, as it currently was. I do not recall any conversation that would have gone on between Mr Simons, Rebecca Drummond and myself where Mr Simons may have at that point said “This is why we need to do it”.
MR MILLETT:  Did Mr Simons ask you to make any corresponding entries in the database for the AEG accounts or spreadsheet summaries?
A.  No, he did not.
Q.  What was your view at the time of the propriety of what you were being asked to do by Mr Simons?
A.  I was uncomfortable with it.
Q.  Were there any other changes made to the spreadsheet?
A.  There were no material changes to the spreadsheet that I can recall, no.
71.	No motive has been suggested for Mr Verrells to have produced a false allegation against Mr Simons. His account differs in minor detail from Mrs Drummond’s statement (as in relation to whether Mr Simons tried to enter altered figures on a computer), but no more than one would expect when a statement is given so long after the event. 
72.	Mr Verrells was a credible witness. He readily conceded that he could not remember certain matters. He showed some strain and embarrassment, but that is consistent with his admission that he participated, albeit on Mr Simons’ instructions, in the production of a fraudulent certificate, and with the fact that he was giving evidence against a man with whom he had worked for some time. What he said about his reluctance to become involved in this litigation rang true:
I had been unwilling to do so was because I just hoped that the whole issue was going to go away; I wanted nothing more to do with it; I had no good recollections of that period in time; I remember being under a great deal of trouble and stress and I really did not want to go back and revisit these events all over again six and a half years later  
73.	He readily corrected the exaggerations and inaccuracy in paragraph 4 of his second witness statement, which were, I suspect, due to tendentious drafting by a solicitor unfortunately typical of many witness statements. His evidence was not shaken in cross-examination. He summarised the entries that Mr Simons had caused to be changed:
Yes, the three entries I remember Mr Simons changing on the A4 management account spreadsheet were advance cash, were VAT and were the inter-company account between AEG and HGE.  The most material of these is the AEG/HGE inter-company account which it was reduced from 3.6 to 2.6 which I understand is the amount that Halston wished the inter-company not to be exceeded by in order that the deal could go ahead.
…
I am not certain how we came about to reducing it from 3.6 to 2.6 but I very clearly remember Mr Simons taking pencil to paper to change those accounts by those figures, that is correct
74.	His readiness to concede what he did not recall or know is illustrated by this exchange:
MR JUSTICE STANLEY BURNTON :  Just help me with this. I understand how changing the advance ticket sales figure affects inter-company accounts, because if the money was due to HGE but was going to Allied, it would increase Allied’s indebtedness to HGE.
A.  That is correct.
MR JUSTICE STANLEY BURNTON:  What I have not understood is how the VAT figure affects the inter-company account.
A.  I have to say I am not completely clear myself. I cannot exactly recall why changing the VAT should affect that either. I am not sure. I am sorry, I cannot recollect. I mean, if I could, I would say so. I cannot recollect.
75.	He was asked why he had not told anyone, and in particular Mr Goldsmith, what had happened:
That is a very good question. On the one hand, I thought that without doing this deal with Halston and showing that the liabilities, the inter-company balance, was not 3.6 but was rather nearer 2.6, without showing that, the deal would have fallen through; and I thought the company would have folded extremely quickly thereafter without this deal being done. Obviously I was concerned that that did not happen and I did not want it to. I also thought that Mr Simons would have some way in the next few months of working out a way for us to get out of the problem that we were incurring for ourselves by misrepresenting that inter-company balance. I did not want the company to go down. I did not want to lose my job. What I was doing at that point I knew was wrong, but those are the reasons why I carried on and did them and did not have any further conversation with anybody else in the short-term with regard to those figures that were changed.

76.	What he said about Mr Goldsmith was also convincing, as I noted at the time:
He could have understood me going up to him and saying, “Look, Harvey, I have just done something I really should not have done.  I have just falsified some figures that I have been asked to. What do you think?” I think if I had told him he would have had a complete and utter fit and blown the whole deal out of the water anyway, and I did not want him to do that.
Mr Justice Stanley Burnton:  Did you think of going to him?
A: Yes.  I slept not very much over the next few weeks.  I did not know what to do.
77.	Mr Verrells’ and Mrs Drummond’s evidence explains why the management accounts to 30 September 1997, which were prepared by them from the nominal ledger, showed a correct figure for the inter-company indebtedness: when the certificate was produced, no entries were made in the nominal ledger kept on a separate computer to reduce that amount.
78.	In his Defence, Mr Simons accepted that he played a part in the production of accounting information for the Agreement and its completion:
It is admitted that on Mr Simons’ instruction some changes were made to the presentation of certain accounting information produced to Halston as part of the disclosure exercise carried out by HGE and AEG in anticipation of the agreement being entered into. Such alterations were by one or more members of the accounts team headed by David Verrells, were for the purposes of consolidating the inter-company indebtedness figure across the group into one accurate net figure (as requested by the Claimant) and it did not in any way alter the substance of the information produced.
79.	His evidence was that the documents produced by Mr Verrells and Mrs Drummond and shown to him on 17 or 18 September 1997 showed inter-company indebtedness of less than £2.8 million, which enabled him to sign the certificate required by the Agreement. 
80.	I am unable to accept Mr Simons’ evidence in so far as it conflicts with that of Mr Verrells and Mrs Drummond. I have already given my reasons for accepting that Mr Verrells was a truthful witness. That view was provisional: it depended on the credibility of Mr Simons. In my judgment, Mr Simons’ conduct after the figure of £3.8 million for inter-company indebtedness at 30 September 1997 emerged is inconsistent with his case, and his evidence in support of his case lacks credibility.
(1)	Mr Simons’ evidence was that his initial reaction to the figure of £3.8 million in the management accounts was that it was an incorrect overstatement of the inter-company indebtedness. He went so far as to say that at the time of Mr Keane’s fax of 14 April 1998 he was “absolutely convinced” that the figure of 3.8 million was incorrect. If so, I find it incredible that, once the figure for 30 September 1997 had appeared, having regard to its implications for the correctness of the certificate that he had signed and the reliability of the company’s nominal ledger and accounting system (as to which a warranty of reliability had been given in the Agreement), he would not have instructed Mr Verrells and Mrs Drummond to check the figure in the management accounts to 30 September 1997. The need for such inquiry was increased by the facts that he had considered the information produced by Mr Verrells and Mrs Drummond to be reliable, and that he had himself checked the schedules they had produced, and by the fact that Halston were bound to question the figure.  Mr Simons’ evidence was that he had no recollection of asking Mr Verrells or Mrs Drummond about the correctness of the figure in the management accounts, but would have done so. If he had asked them, having regard to the importance of the matter (“very serious”: see 14 December at page 158), I am confident that he would have remembered doing so. Equally, he would have remembered their response, but he did not do so, except in the vaguest terms (see 14 December page 156). 
(2)	As Mr Millett pointed out, the suggestion that Mr Simons had initially thought that the figure of £3.8 million was incorrect, and that he had spoken to Mr Verrells about the supposed mistake, was not in Mr Simons’s witness statement, and was not put to Mr Verrells. It is not reflected in any contemporaneous document or anyone else’s evidence. 
(3)	If, as Mr Simons suggested at one point (14 December at page 156), Mr Verrells agreed that the figure of £3.8 million was wrong, Mr Simons would have instructed him to produce the correct figure. It is not suggested that he did so. Indeed, we know that the figure was correct, and that Mr Verrells would have been unable to show that it was incorrect. On 14 December at page 162-3, Mr Simons said that Mr Verrells told him that the spreadsheet they had given him in September 1997 had been incorrect; but he immediately resiled from that (because, in my judgment, he realised that he had admitted that the figure of £2.8 million had been incorrect), and stated that Mr Verrells had told him that there had been unauthorised transactions between 18 and 30 September 1997 that had increased the inter-company indebtedness.
(4)	If Mr Simons was convinced (or doubtful) of the incorrectness of the figure of £3.8 million, he would have communicated that to Mr Keane or to Mr Levinson or to Mr Goldsmith. He did not do so in writing, although he was receiving faxes from them. Mr Goldsmith did not suggest that Mr Simons had told him that the figure was a mistake. Nor did Mr Gorman. Mr Simons’ evidence that he was sure he had spoken to Mr Keane about this was not reflected in his witness statement; it was vague and unsatisfactory and I reject it.
(5)	If Mr Simons believed that the figure of £2.8 million for 18 September 1997 was correct, and believed or came to believe that the figure of £3.8 million for 30 September was correct, he would have enquired why an increase had been permitted, since it meant that there had been a failure to observe the restrictions in the Agreement. The need for enquiry as to the correctness of the figure for 30 September was enhanced by the concern of the Allied Group shareholders that the ratchet provisions of the Agreement might lead to their loss of control of the company. (See, e.g., Mr Simons 14 December page 125.) He would have instructed Mr Verrells to produce a reconciliation of the inter-company indebtedness figures for 18 and 30 September (i.e., the information sought by Mr Keane). No such reconciliation was carried out. Mr Simons could not recall whether he pressed Mr Verrells to produce such a reconciliation. Again, if he had done so, Mr Verrells would have produced it and it would have been available for Mr Keane, or else Mr Simons would have chased it up. It is significant that in evidence Mr Simons could do no more than speculate as to the transactions, if such there were, that increased the level of indebtedness from £2.8 to £3.8 million. Furthermore, I find that Mr Simons did not communicate to anyone else his belief that the cause of the discrepancy was that unauthorised inter-company loans had been made between 18 and 30 September 1997. He suggested in cross-examination that he may have given that explanation to Halston, but in the vaguest of terms. (14 December page 179-180: “I cannot tell you whether I did or whether I did not do that.”) It was not put to either Mr Keane or to Mr Levinson that he had done so, and there is no suggestion that he did so in Mr Simons’ witness statement. Lastly, Mr Simons’ belief that this was the cause of the discrepancy is inconsistent with his acceptance that the figure of £2.8 million was wrong as at the date of the certificate: I refer to paragraph 60 above. Again, this explanation of the discrepancy was not put forward until Mr Simons gave evidence.
(6)	All this is consistent with his knowing that the figure in the management accounts for 30 September 1997 was materially the same as the true figure for 18 September 1997.
(7)	His evidence that he did not ensure that monthly management accounts were produced after completion because he was not responsible for their production is difficult to reconcile with his instruction to Mr Verrells and Mrs Drummond not to provide the information sought by Mr Keane. He was clearly considered by Halston to be responsible: hence Mr Levinson’s fax to him of 9 April 1998, referring to previous requests made to him for the management accounts, and Mr Keane’s fax to him of 14 April 1998. Mr Simons did not take issue with these faxes at the time. Management accounts were in fact provided within a few days of the fax of 14 April. Mr Simons had good reason to defer the further provision of management accounts, which would confirm the excessive amount of inter-company indebtedness. I reject Mr Simons’ evidence on this.
(8)	Mr Simons had no good reason to order Mrs Drummond not to provide to Mr Keane the information he was seeking. He admitted that he had done this in his letter of 5 February 1999. It is likely that he had done so earlier, which is why the information had not already been provided. His explanation was that the information was irrelevant if the deal with Tring or MMC went through, and that he did not want Halston to require HGE to claim payment from the Allied Group of the excess £1 million of inter-company indebtedness. But Halston already knew that there was £1 million of inter-company indebtedness more than had been represented, and that either the certificate had understated it or, if the discrepancy was due to loans made after 18 September 1997, those loans had been made in breach of the Agreement. Withholding the information from Mr Keane was not going to reduce the risk of a demand by Halston for reduction of the inter-company indebtedness. In any event, Halston had already taken a position, in point 3.vi in the enclosure to Mr Keane’s fax of 9 December 1998, set out above, and in Mr Levinson’s letter of 22 December 1998. In my judgment, the true reason for withholding the information was that it would show that the certificate had understated the level of inter-company indebtedness, and might lead to the truth as to its creation coming out.
81.	There are two matters pointing to a different finding. First, if Mr Simons did cause a false certificate to be produced, he must have expected the truth to out sooner or later. Secondly, in his letter of 5 February 1999 he offered to deal with the issues of payments and receipts on the loan account if the offer in the letter was not accepted by Halston. These are cogent points. They are, however, outweighed by the matters pointing the other way. In my judgment, the pressures to complete the deal with Halston led Mr Simons to take the chance that he could deal with Halston’s complaints in due course, by achieving some sort of compromise. So far as the letter of 5 February 1999 is concerned, I think that the offer it contained was thought to be sufficiently attractive to be accepted and thereby avoid further investigation. I am unable to see why Mr Simons should have instructed Mrs Drummond not to provide the information sought by Mr Keane if there was nothing to hide.
82.	My conclusion is supported by Mr Simons’ demeanour in the witness box. He became increasingly hesitant and defensive as his cross-examination focused on what he had done and thought after Halston questioned the figure for inter-company indebtedness of £3.8 million at 30 September 1998; because, in my judgment, he had no convincing explanation for what had occurred.
83.	It follows that I find that Mr Simons knew that the true level of inter-company indebtedness at 18 September 1997 was in the region of £3.8 million; and that he deliberately caused a spreadsheet and certificate to be produced showing it to be less than £2.8 million in order for the Agreement to be concluded and completed., knowing that to be an understatement. If the certificate had not been signed and produced, Halston would not have entered into the Agreement or completed it. It follows that Mr Simons is liable to Halston for damages for deceit.
Damages
84.	Mr Millett and Mr Prentis agreed that the law on damages in cases of deceit is authoritatively stated in the decision of the House of Lords in Smith New Court Securities Ltd v Citibank [1997] AC 254. The House approved the decision of the Court of Appeal in Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158. At [1997] AC 266-7 Lord Browne-Wilkinson summarised the applicable principles as follows:
In sum, in my judgment the following principles apply in assessing the damages payable where the plaintiff has been induced by a fraudulent misrepresentation to buy property: (1) the defendant is bound to make reparation for all the damage directly flowing from the transaction; (2) although such damage need not have been foreseeable, it must have been directly caused by the transaction; (3) in assessing such damage, the plaintiff is entitled to recover by way of damages the full price paid by him, but he must give credit for any benefits which he has received as a result of the transaction; (4) as a general rule, the benefits received by him include the market value of the property acquired as at the date of acquisition; but such general rule is not to be inflexibly applied where to do so would prevent him obtaining full compensation for the wrong suffered; (5) although the circumstances in which the general rule should not apply cannot be comprehensively stated, it will normally not apply where either (a) the misrepresentation has continued to operate after the date of the acquisition of the asset so as to induce the plaintiff to retain the asset or (b) the circumstances of the case are such that the plaintiff is, by reason of the fraud, locked into the property. (6) In addition, the plaintiff is entitled to recover consequential losses caused by the transaction; (7) the plaintiff must take all reasonable steps to mitigate his loss once he has discovered the fraud.
85.	Mr Prentis referred to the example of the sick horse referred to by Lord Steyn at [1997] AC 254, 279:
The same legal principle must govern sales of shares, goods, a business or land. It is therefore possible to simplify the problem. The example given by Cockburn C.J. in Twycross v. Grant (1877) 2 C.P.D. 469 is instructive. He said, at pp. 544-545: 
“If a man buys a horse, as a racehorse, on the false representation that it has won some great race, while in reality it is a horse of very inferior speed, and he pays ten or twenty times as much as the horse is worth, and after the buyer has got the animal home it dies of some latent disease inherent in its system at the time he bought it, he may claim the entire price he gave; the horse was by reason of the latent mischief worthless when he bought; but if it catches some disease and dies, the buyer cannot claim the entire value of the horse, which he is no longer in a condition to restore, but only the difference between the price he gave and the real value at the time he bought.” 
Counsel for Citibank argued that Cockburn C.J. erred in saying that if the horse had some latent disease at the time of the transaction the buyer may claim the entire price he paid. He argued that in such a case there was no sufficient causal link between the latent disease and the eventual death of the horse. Counsel for Smith argued that the transaction, which was induced by deceit, directly led to the loss of the entire value of the horse. On any view it is clear that, if Cockburn C.J. is right, the law imposes liability in an action for deceit for some consequences that were unforeseen and unforeseeable when the tortfeasor committed the wrong. And if that is right it may tell us something about the correct disposal of the present case.
86.	Mr Prentis submitted that there is no evidence as to the true value of HGE at the date of the Agreement, and he is unquestionably correct. He submitted that the cause of the collapse of HGE was the failure of the Total Eclipse show, which led to an unsustainable loss of about £1 million.
87.	Mr Millett submitted that Halston’s loss of all of its investment and loans was caused by the deceit which led it to enter into and to complete the Agreement. As a result of the true level of inter-company indebtedness, which was always a doubtful asset at best and was never in fact repaid, the company had an inadequate capital base, and could not withstand the loss suffered on the Total Eclipse.
88.	It is clear that until the Agreement was entered into, HGE had serious cash flow problems. Because of the losses suffered by other companies in the Group, its major asset (the inter-company indebtedness) was of dubious worth. It had cash shortages. Its need for an injection of capital appears from the audited accounts, and its dire need for money was graphically described by Mr Verrells in the passage of his evidence cited at paragraph 75 above.
89.	The result of the inter-company indebtedness having been allowed to go to £3.8 million was that the good assets of the company were that much less (because it had paid away the £1 million difference); or that it had £1 million more of good liabilities (which is why the amounts shown for VAT and advanced ticket sales were reduced in the spreadsheet). Not only was the company insolvent on a balance sheet basis if the inter-company indebtedness was not collectable; its access to cash was affected.
90.	This is consistent with events following completion, summarised above, and the subsequent audited accounts. Mr Levinson described the condition of HGE in late 1998 as follows:
The company was struggling, we had had to put more money in to make things move along, and of course we had a £1 million hole there that we had not realised was there. There was potential for Harvey Goldsmith, but we just did not have enough capital in the company to be able to hold on and move things forward. So, in its present state, it had little value, other than the fact that Harvey Goldsmith in the past had been a substantial money earner as a company, and that one had a hope that there could be something in the future under a recapitalised position with more money coming into the company.

(Transcript 13 December 2004 at page 164.)
91.	Mr Levinson referred to the company’s need for further loans from its shareholders; I have referred to those loans at paragraph 39 above.
92.	Mr Goldsmith said that the financial position of the Allied Group had not improved between September 1998 and 1999 (14 December page 60). I refer to Mr Verrells’s fax of 24 September 1998 and to Mr Goldsmith’s evidence cited at paragraph 40 above. The deals with Tring and MMC were seen as ways of escaping from the cash flow problems of the company. An indication of the approximate sum of cash required for the company’s business is to be found in the MMC Executive Summary (paragraph 53 above).
93.	Thus the cash flow problems of the company did not start in 1999: they were inherent in the financial position of the company at completion of the agreement and always thereafter until its collapse. If the company is likened to a horse, it was a horse that was ill on 18 September 1998.
94.	The Tring and the MMC deals put a value on HGE of some £7 million to £8 million. However, these transactions were never concluded. HGE was a private company. Halston could not simply sell its shares on the stock market. Any realistic purchaser would have to put up sufficient cash for to remedy the company’s cash flow shortages. The market for the shares was manifestly limited. There is no evidence that Halston could have secured other purchasers for its shares, or that it acted unreasonably in relation to the transactions it sought to enter into. In practice, it was unable to realise its investment in HGE.
95.	So far as any duty to mitigate its loss is concerned, it could only arise once it knew of the Mr Simons’s fraud, and although it may have had its suspicions, it could not have known that it had been deceived until Mr Verrells or Mrs Drummond had given their account of events, which was, as far as I am aware, after the collapse of the company. But in any event, there is no evidence that Halston could or should at any time have done more than it did.
96.	It is a nice question whether the size of the loss incurred on the Total Eclipse should be considered as a kind of novus actus, breaking the chain of causation. The amount of the loss on the show was about the same as the understatement of the inter-company indebtedness. Clearly, the company was less able to withstand the loss with the high level of inter-company indebtedness that it had at 18 September 1997 and thereafter. In my judgment, the collapse of the company, in the circumstances that occurred, was a risk that was substantially increased by the true level of inter-company indebtedness as against that it was represented to be.
97.	In my judgment, applying the principles enunciated in Smith New Court, Mr Simons is liable of all of Halston’s loss, subject to its recoveries. This case is indistinguishable from Doyle v Olby (Ironmongers) Ltd.
Determination
98.	Mr Simons is liable to Halston in deceit for its losses.
99.	I shall hear submissions from counsel on whether Halston’s recoveries should go to reduce the amount of damages awarded or be taken into account only on execution.