Limitation and the date of deception: European Real Estate Debt Fund v Treon & Ors
Claims for deceit and conspiracy in relation to the issue of loan notes totalling nearly £15 million would have been successful but were statute barred. In European Real Estate Debt Fund v Treon & Ors1, the court conducted a detailed assessment of the law in relation to fraudulent misrepresentation in the context of the presentation of financial information. In a judgment likely to be of interest to financial services firms, it also made findings on the scope of information a reasonably diligent advisor or investor would (and should) have requested before investing. Crucially, the judgment addresses the application of s32(1) of the Limitation Act 1980 (the Act), clarifying that the test for establishing when a claimant could, with reasonable diligence, have discovered fraud can extend to the period before the claimant has actually suffered a loss.
Mr Treon, the first defendant, was a director of the European Care Group (ECG), a care home business. In 2010 it appointed the second defendant firm of financial advisors (then called RP&C) as placement agents for a new series of loan notes, through which it aimed to raise capital. Dr Srinivas, the third defendant (and friend of Mr Treon) led the search for investment at RP&C.
European Real Estate Debt Fund (the Fund2), was approached by Mr Treon and Dr Srinivas to invest in the notes. Following a review of ECG's financial information and prospects by the Fund's investment advisor, Duet Private Equity Limited (Duet), on 24 June 2011 the Fund invested in ECG via a loan note subscription for £11 million.
In 2012, the Fund alleged that it discovered that the financial information provided by ECG was false and misleading. Following a confrontation with Duet, Mr Treon was removed as a director of ECG. ECG's new management sought to restructure its debts and the Fund (in what it alleged was an effort to try to mitigate its losses) subscribed for a further £4.25 million. The restructuring was not enough to save ECG, however, and it went into administration in 2014 resulting in the Fund losing the entire value of its investment.
The Fund issued its claim against the defendants on 16 October 2017, more than six years after the initial investment. It relied on section 32(1) of the Act, arguing that the limitation period should be postponed until it had, or could with reasonable diligence have, discovered the fraud.
The court concluded that the claim was time-barred but went on to analyse the claims in detail, finding that almost all of them would have succeeded had they been brought in time.
The key representations found to have been made prior to the Fund's investment included:
- an implied representation that the financial information provided to Duet was not materially inaccurate or misleading and that it was current; and
- a representation that the warranties and representations repeated in the loan note agreement of 24 June 2011 between the Fund and Esquire Consolidated Investment Holdings Limited (Esquire), the ultimate parent company of ECG and the issuer of the loan notes, were accurate.
Almost all of the representations were found by the court to have been false. In particular, the court concluded that ECG's decision to allocate £4.25 million in staffing costs as an "exceptional" item rather than to include it in the total for "wages costs" was a deliberate attempt to misrepresent ECG's financial position and its prospects. But for this misrepresentation, the net profit figure (before mezzanine interest) would have been negative. The court found, on the facts, that this representation was one of the main factors (if not the only factor) which induced the Fund to invest.
In analysing the ingredients of the tort of deceit, the court made the following points:3
- The tort of deceit is only complete when a representation is acted on. Whether or not a representation will continue to have effect if there is a gap between the date it is made and the date it is acted upon will depend on the nature and interpretation of the representation. However, "a representation which is made during the course of negotiations with a view to inducing the representee to enter into the contract will generally be characterised as continuing to the point where the contract is entered".
- Different statements at different times must frequently be read or construed together in order to understand their combined effect.
- Where a person has made a misrepresentation it is open to him to correct it before it is acted on but it is not enough to show that the other party could have discovered the truth. The correction must be made fairly and openly.
- Where a person passes on information which has been supplied to him he may simply pass it on as information or he may adopt it as his own statement. The analysis of these two options depends on context; there is no absolute rule of law.
In relation to the representations made in the LNA between Esquire and the Fund, the court found on the facts that Mr Treon (although not a director of Esquire) was liable for the representations made by it in the LNA because he "procured the directors to cause Esquire to enter the LNA". The court found that this was "an extreme case" in which the corporate directors of Esquire were "entirely dependent" on Mr Treon and had no independent knowledge of the business.
Limitation – the law
Having established liability in both deceit and conspiracy, the court turned to the question of limitation. It examined recent case law on the postponement of the limitation period for fraud, concealment or mistake,4 and also cited with approval the analysis in Paragon Finance Plc v DB Thakerar5 to the effect that it must be proved that the claimant could not, "without exceptional measures which they could not reasonably have been expected to take", have discovered the fraud.
The Fund's position was that the postponement of the limitation period could only apply once the cause of action was complete. In the case of deceit, this meant the date the loss was suffered. A "bright line" should be drawn, it argued, between the periods before and after accrual of the cause of action. The court disagreed. While it accepted that s32(1) of the Act only applies once a cause of action is complete, it held that "it does not follow that the court investigating the claimant’s state of mind must ignore events, communications or things known to the claimant before then".
This interpretation was supported by the decision in OT Computers6, in which the court emphasised that there may be a sequence of events which give rise to the requisite knowledge and held that the language of section 32(1) of the Act did not prescribe looking at only events or knowledge arising after the accrual of the cause of action.
In reaching this conclusion, the court was careful to note that it did not contradict the principle that a fraudster is not entitled to plead that their victim "failed to take reasonable care to detect the fraud". Instead, it held it was considering the distinct issue of whether a claimant who brings their claim outside the primary limitation period is entitled to invoke the postponement of that limitation period. "Such postponement is available to a defrauded claimant who could not normally have discovered the facts, but it is not available to all victims of fraud, however careless they may be in attending to and asserting their rights. If a claimant could reasonably have discovered the fraud by virtue of events and circumstances occurring before it actually suffered a loss, there is no principled rationale for allowing it the indulgence of more than the normal six years’ period to bring its claim."
Limitation applied to the facts
The parties agreed that the burden of proof was on the Fund to establish that it could not, without exceptional measures, have discovered the fraud. The court approached the question of what a "reasonable investor" (in this case either the Fund or Duet) could or should have known against the following background:
- ECG was a well-established business with reputable professional advisors but Duet was also a well-resourced expert advisor, experienced in assessing and analysing financial information. It could be expected to approach investments with an appropriate degree of professional care and due diligence, which is not the same as "outright distrust or cynicism".
- When considering a substantial financial investment, a potential investor will not rely on speculation or assumptions. It is entitled to demand up to date financial information and to raise detailed and numerous questions and should expect to receive answers.
The court concluded that it should have been clear to the reasonable investor that the summary financial information provided to Duet was incomplete. While the reasonable investor would not necessarily have concluded that there was a continuing policy of treating substantial staffing costs as "exceptional", the reasonable investor would have noticed that those costs had been treated as exceptional items in the 2009 accounts which were provided to Duet.
In summary, the reasonable investor or reasonably diligent advisor would (without taking exceptional measures) have asked further questions and sought further financial data before it invested. Upon receipt of that further information, it would have discovered sufficient facts to enable the Fund to plead a statement of claim. For that reason, the claims were therefore time-barred.
The judgment highlights the different standards applying to successfully pleading fraud, and successfully postponing the limitation period because of fraud. The effect of the judgment in this case, combined with the recent Supreme Court decision in the Franked Investment Income Group Litigation7is to bring forward the date upon which knowledge of fraud, concealment or a mistake of law, could with reasonable diligence have been discovered. In both cases, the knowledge of the professional advisors to the underlying claimants is highly relevant. While the fraud claim might have succeeded had it been brought in time, the failure to ask relevant questions at the outset meant the attempt to postpone the limitation period failed.
Although the claim was issued well before the recent witness statement reforms, the court also addressed the strength of the witness evidence and the weight attaching to it. Noting that "memory is malleable", the court concluded that Mr Treon was often willing to say "whatever was necessary" to defend his case and, unless corroborated by other evidence, elected to approach his testimony with "real caution".
1  EWHC 2866
2 The entity which invested in the loan note issue was European Real Estate Debt S.a.r.l., a Luxembourg company within the Fund structure. It is wholly owned by the claimant, European Real Estate Debt Fund (Cayman) Limited (In Liquidation), to whom it assigned the claim. For the purposes of this article the Fund refers to both the Luxembourg entity and the claimant assignee.
3 many of which derive from the summary of the law set out in Vald Nielsen Holding A/S v Baldorino  EWHC 1926 (Comm)
4 In particular, OT Computers Limited v Infineon Technologies AF  EWCA Civ 501 and Test Claimants in the FII Group Litigation v Revenue and Customs Commissioners  UKSC 47, the latter being summarised in our article here.
6 See footnote 4
7 Test Claimants in the Franked Investment Income Group Litigation v Revenue and Customs Comrs (formerly Inland Revenue Comrs)  UKSC 19;  2 AC 337