Man Nutzfahrzeuge Ag & Ors v Freightliner Ltd., Court of Appeal - Commercial Court, October 28, 2005, [2005] EWHC 2347 (Comm)

Resolution Date:October 28, 2005
Issuing Organization:Commercial Court
Actores:Man Nutzfahrzeuge Ag & Ors v Freightliner Ltd.

Case No: 2002 Folio 1041

Neutral Citation Number: [2005] EWHC 2347 (Comm)




Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 28th October 2005

Before :


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Between :

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Mr. Dominic Kendrick Q.C. and Mr. Timothy Kenefick (instructed by Slaughter and May) for the claimants

Mr. Geoffrey Vos Q.C. and Mr. Andrew Twigger (instructed by Clifford Chance) for the defendant

Mr. Justin Fenwick Q.C. and Mr. Simon Salzedo (instructed by Linklaters) for the Part 20 defendants

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Lord Justice Moore-Bick:

  1. Introduction and Background

    1. The parties

    2. In 1933 Edwin Richard Foden began building motor lorries at Sandbach in Cheshire. That business eventually developed into the ERF group of companies of which ERF Holdings Plc was the parent and ERF Limited the principal trading company which continued to build a range of trucks sold under the `ERF' badge, mainly to buyers in this country. (References in this judgment to ``ERF'' generally refer to ERF Holdings Ltd and thus to the group as a whole, but where the production of trucks is under discussion it should be understood to refer to either or both of the companies as the context requires.) ERF did not produce its own components, but assembled trucks using components obtained from suppliers in this country and abroad. One of the most popular features of ERF trucks was the Cummins engine produced in the United States which was highly regarded for its reliability and fuel efficiency. Although it did produce a standard range of vehicles, ERF specialised in making trucks to meet the particular requirements of individual customers and was to that extent producing a bespoke product. As a result the brand commanded a high degree of loyalty among customers, many of whom also liked to buy trucks made in Britain.

    3. For some years the truck manufacturing industry has been undergoing a period of consolidation as manufacturers have sought to obtain the benefits of economies of scale. Margins on the sale of new trucks have been low and many smaller manufacturers have been taken over by larger groups as they have come under intense financial pressure. In June 1996 ERF was acquired by a Canadian truck manufacturer, Western Star Trucks Holdings Ltd (``Western Star''), whose operations were directed by its chairman, Mr. Terence Peabody. Western Star's operations were based in Kelowna, British Columbia, but its subsidiaries included a company called Orion Bus Industries Inc. (``Orion'') based in Toronto. Following the take-over of ERF by Western Star Mr. John Bryant, who had been managing director of ERF since November 1991, was appointed to the board of Western Star and at the same time also became managing director of Orion, dividing his time between that company and ERF.

    4. In July 2000 Freightliner LLC, an American subsidiary of Daimler-Chrysler AG, acquired the whole of the share capital of Western Star. Western Star's Canadian operations were merged into Freightliner Ltd, the defendant in this action. It is common ground that as a result of the merger Freightliner is the successor in title to Western Star and responsible for any liabilities incurred by Western Star prior to the merger.

    5. MAN AG (``MAN'') is the holding company at the head of a large German industrial group whose operations range from the development and production of diesel engines (including the well-known marine engines), through the manufacture and sale of printing presses and a wide range of other industrial machinery to the provision of commercial and financial services. The first claimant, MAN Nutzfahrzeuge AG (``MN''), is a subsidiary of MAN and is responsible for the operation of the group's commercial vehicle division. As such it is a manufacturer of heavy trucks and was one of ERF's competitors in the European market. It carried on business in the UK through its subsidiary MAN Truck & Bus UK Ltd.

    6. Ernst & Young are well-known accountants with a world-wide practice which is carried on through associated partnerships established in different jurisdictions. This case concerns two of those partnerships, Ernst & Young, a limited liability partnership practising in Canada (``E&Y (Canada)'') and the firm of Ernst & Young that is established and practises in this country (``E&Y (UK)''). E&Y (Canada) were appointed auditors to the Western Star group in March 1991. At the time with which this case is concerned Mr. Edward Kendrick was the partner with principal responsibility for Western Star's affairs.

    7. Following the acquisition of ERF in June 1996 E&Y (UK) were appointed auditors of ERF. Miss Alison Cunningham (later to become Mrs. Sinderson) was responsible for the group's affairs. For convenience I shall refer to her throughout this judgment as Mrs. Sinderson.

    8. The origins of the dispute

      (a) Fraudulent manipulation of ERF's accounts and false VAT claims

    9. This is an unusual case, not so much because it has its roots in fraud, but because the existence and general nature of that fraud is accepted and recognised by all parties to the action. It is common ground that from about the middle of 1997 the accounts of ERF, both the monthly management accounts and the year-end statutory accounts, were persistently manipulated by its financial controller, Mr. Stephen Ellis, who from around the same time was also responsible for systematic frauds on H.M. Customs and Excise by means of false claims for the repayment of VAT.

    10. Mr. Ellis joined ERF in August 1976 and was subsequently employed in various positions in its finance department until July 2001 when his activities were discovered. He was not a qualified accountant, but had learnt his accountancy and bookkeeping skills in the course of his employment, rising by 1998 to a senior position within the department as deputy to the then financial controller, Mr. Andrew Williamson.

    11. Confronted with the results of the investigations into ERF's financial affairs, Mr. Ellis admitted at one time or another falsifying ERF's VAT returns over the period from March 1996 to July 2001 and falsifying the financial information provided to management and to the group's auditors. At the trial he was called as a witness by MN and was therefore able to provide his own explanation of what he had done and the motives behind his actions. He was put forward by MN as a witness of truth whose purpose in giving evidence was to complete the difficult task of coming to terms with his own wrongdoing and to assist the parties to this action in discovering the truth. Other parties have submitted, however, that he has shown himself to be dishonest to the point where little weight can be attached to his evidence except where it is supported by contemporary documents which are themselves clearly reliable. Given the nature of his admissions, I think it is right to approach his evidence with a significant degree of caution, but I think one should also recognise that it takes a certain amount of courage to confess publicly to persistent wrongdoing and deception of the kind that went on in this case, particularly when there is no personal benefit to be gained from doing so other than peace of mind. It is right to make it clear at the outset that there is nothing to suggest that Mr. Ellis or anyone connected to him benefited financially from his activities. However, lest it be thought that Mr. Ellis made a clean breast of all his activities as soon as he was challenged, it is right to point out that he did not confess to the VAT frauds immediately and did not admit to the dishonest practice of early invoicing, which I describe later in this judgment, until he was under cross-examination.

    12. In March 1996 Mr. Ellis falsified ERF's VAT return to show that the company was in a repayment position, that is, that it was entitled to claim repayment of VAT from H.M. Customs and Excise. The evidence suggests that at the time that may have been an isolated event, but by his own admission from the middle of 1997 onwards he falsified the VAT returns month by month, thereby enabling ERF to receive regular repayments of tax to which it was not entitled. He said that he did so in order to relieve the group's financial problems by obtaining regular injections of cash from Customs & Excise and I am satisfied that that was so. In most cases he did not sign the VAT returns himself, but he was responsible for preparing the figures that went into them and for submitting the returns to senior management for signature.

    13. Following its take-over by Western Star ERF's financial year was changed to expire on 30th June instead of 31st March. Accordingly, a year-end balance was struck as at that date which was in turn adopted as the opening balance for the following year. Shortly afterwards the management of Western Star decided to introduce a new accounting and materials management system produced by BaaN Information Systems B.V. (``BaaN'') throughout the group. ERF was the first company within the Western Star group to transfer to this new system, although at the outset only the finance module was introduced and the existing materials recording system was retained. The introduction of the finance module of the BaaN system proved to be disastrous for ERF. It went live on 1st July 1997 replacing the previous J.D. Edwards system without any period of parallel running. It produced endless headaches for the accounts staff who for many months were unable to obtain a trial balance from the system. Difficulties in operating the BaaN system meant, among other things, that it was not possible, as it had been in the past, to produce monthly management accounts based on recorded figures for the benefit of ERF's own managers and...

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