Warranty limitations do not survive fraud: the seller’s lesson in Next Generation v Finch

On most share sales I work on, more negotiating time goes into Schedule X (6, usually) than into almost anything else – the limitation on warranties. In goes the cap, the de minimis, the basket, the time limits for general and tax warranties – and more besides. Sellers (or sellers’ solicitors like me) care about it intensely, and rightly, because it is the difference between a clean exit and an open-ended liability.

Then, usually near the back of the share purchase agreement warranties, there is a short clause saying that none of it applies in the case of fraud by the seller. It is usually agreed in about four seconds. Buyers insist on it, sellers rarely resist, and everybody moves on.

Next Generation Holdings Ltd v Finch is a good illustration of what that clause actually does. The judgments (both the High Court and the Court of Appeal) are potentially interesting if you are selling a business, and particularly if you are the one signing the disclosure letter.

The deal

On 14 September 2017 Alec Finch sold 58% of the share capital in AFL Insurance Brokers Limited to Next Generation Holdings for £2,119,900. AFL was a wholesale insurance broker authorised by the Financial Conduct Authority, which meant it had to hold client money on trust in segregated accounts under Chapter 5 of the Client Assets Sourcebook.

It had not been doing that. From 2011 onwards Alec Finch and his son Bob, working with the chief financial officer, had been taking money out of the client accounts to pay AFL’s own expenses and trading losses, and entering false income accruals into the accounting records to manufacture fictitious surpluses that concealed the hole. By completion, the deficit was £3,510,000.

The purchase price had been negotiated by reference to AFL’s EBITDA. So the buyer paid for profits that did not exist, in a company that was balance sheet insolvent, and which owed £3.5m back to its own clients.

The warranties that failed

Schedule 5 contained a conventional set of warranties. The ones that mattered were these.

Warranty 2.1.2 said the Accounts, meaning the audited financial statements to the Accounts Date of 30 June 2016, gave a true and fair view of the assets, liabilities and state of affairs of each group company and of its profits or losses. Warranty 2.2.1 said the Management Accounts had been prepared with reasonable care on a consistent basis and, given that they were unaudited and not prepared on a statutory basis, presented a reasonable view and showed with reasonable accuracy the profit and loss and financial position of the group.

Warranty 3.2.1 said there had been no material violation or material default with respect to any statute, regulation, order, decision or judgment, and that each group company had conducted its business and corporate affairs in all material respects in accordance with applicable laws. Warranty 3.5.2 concerned the company’s licences, which included its FCA authorisation.

The judge found that the audited accounts and the management accounts did not, as both Finches knew, give a fair or reasonable view of AFL’s financial position. They did not show the liability to repay a very significant sum to the client money account, and they showed income and assets improperly inflated by the false accruals. The misuse of client money also meant AFL had not been conducting its business in accordance with FCA regulations and was putting its licence in obvious jeopardy.

So the seller was in breach of at least warranties 2.1.2, 2.2.1, 3.2.1 and 3.5.2. Counsel for the Finches accepted in closing that if the fraud was made out, breach of warranty followed automatically and no separate analysis was needed.

The hole in the limitation package

Schedule 6 did what these schedules always do. It capped the value of a warranty claim and imposed a time limit within which any claim had to be brought.

Clause 5.5 then said this:

“none of the limitations set out in Schedule 6 shall apply where the liability arises as a result or in connection with any fraud of the Seller.”

That is standard wording and I would expect to see something like it in every SPA I look at. What it means in practice is that a seller’s entire negotiated protection package is conditional. Establish fraud and the cap goes, the time limit goes, and the seller is exposed without limit for as long as the general limitation rules allow.

That is not a drafting flaw. It reflects the long-standing principle that a party cannot contract out of liability for its own fraud. But it does mean that a seller who has been less than straight during the process has, in effect, no limitation of liability at all, however hard their solicitor fought for one.

Why the buyer wanted a fraud finding

Counsel for the Finches ran the obvious point. This, he said, was really a breach of warranty claim dressed up as a civil fraud in order to escape the contractual time bar. The judge recorded that he had been alive to that possibility, and then found that there had in fact been a fraud.

It is worth being honest about why buyers plead deceit. Yes, it defeats the limitations. But there is a second reason, which is that the measure of loss is different and usually much better.

A breach of warranty claim is contractual. The ordinary measure is the difference between the value of the shares as warranted and their actual value at completion. It looks backwards to the moment of the deal.

A claim in deceit is tortious. The buyer recovers all loss flowing directly from the transaction, including consequential losses caused by it, subject to a duty to mitigate once the fraud is discovered. There is no remoteness filter of the kind that applies in contract.

What that was worth here

This is where the difference shows up in cash.

Having bought the company, Next Generation kept putting money in. It contributed £1,879,793.49 to a £2.5m equity raise in 2018, £386,780.12 to a £750,000 raise in 2019, £316,753.76 to a raise in April 2020, and £633,508.94 specifically towards making good the client money deficit once the fraud came to light.

Those four figures total £3,216,836.31, and the judge awarded all of it. They were consequential losses caused by the transaction: sums paid to fund a business that the buyer had been induced by fraud to buy. None resulted from unreasonable conduct, and in any event they were all incurred before the fraud was uncovered.

Note what that means. The buyer paid £2,119,900 for the shares and recovered over £3.2m in respect of money it put in afterwards, before the court had even valued the shares. That claim, for the diminution in value of the shares themselves, was adjourned for separate determination. The £3.2m was the consequential loss alone.

Against a capped warranty claim, the seller’s exposure would have looked entirely different.

What the buyer did not recover

The buyer also claimed its due diligence costs. The judge refused them, for two reasons. They were incurred before the transaction, so they were not a loss caused by it. And the fraudulent misrepresentations were made in the course of the due diligence process rather than before it, so the costs would have been incurred anyway.

Worth knowing if you are advising a buyer on what to plead. The professional fees of discovering the business are not recoverable simply because the business turned out to be a fraud. The fees of investigating the fraud, once suspected, are a different matter.

Disclosure does not cure a false document

There was a disclosure letter, given at the time of the SPA and referred to in it. The documents that came with it included the unaudited management accounts to 30 June 2017. The last audited financial statements were only to 30 June 2016, so those management accounts were the buyer’s main window into the fourteen months immediately before completion.

They were false. And disclosing them did nothing for the seller.

That should not be surprising, but the mechanics are worth spelling out because disclosure is widely misunderstood by clients. Disclosure qualifies a warranty by carving out the disclosed matter from the warranty’s scope. It works by telling the buyer something true that the warranty would otherwise have denied. Handing over a document that is itself false does not disclose anything, because there is nothing in it for the buyer to take into account. If anything, it makes the position worse, because the seller has now put the false document into the buyer’s hands as part of the contractual bargain.

There is an interesting loose end here. It was argued that providing the accounting documents with the disclosure letter involved implied fraudulent misrepresentations by the seller, on the basis that handing a buyer a document as part of the disclosure exercise carries with it a representation that it is what it purports to be. The judge did not need to decide it, because there were other fraudulent misrepresentations and multiple breaches of warranty in any event, and it was accepted that it would not change the value of the claim.

So the question of whether the act of disclosure itself carries an implied representation as to the accuracy of the disclosed document remains open. On these facts it did not need answering. On other facts, where the disclosed document is the only route to a remedy, it might well matter a great deal.

The management accounts warranty earns its keep

There’s a practical observation for buyers too – the audited accounts here were fifteen months stale by completion. It was warranty 2.2.1, on the management accounts, that covered the period in which the fraud was being actively concealed, and it was one of the warranties found to have been breached.

The management accounts warranty is often treated as the soft one, because the standard is lower. It is qualified by reasonable care, a consistent basis, and an acknowledgement that the accounts are unaudited and not prepared on a statutory basis. Sellers sometimes push to water it down further. But where the gap between the last audited accounts and completion is long, it is the warranty that does most of the work, and a buyer should resist attempts to dilute it to nothing.

Inducement is very hard to argue against

The Finches argued that the buyer had not relied on anything they said, because it was buying a platform rather than an existing book of business.

The judge described the difficulty of that argument neatly. It involves saying that whereas I set out to defraud you, my fraud had no influence on you. Following the Court of Appeal in BV Nederlandse Industrie Van Eiprodukten v Rembrandt Enterprises Inc, there is an evidential presumption of fact that a representee will have been induced by a fraudulent representation intended to cause him to enter the contract, and that inference is very difficult to rebut.

It was not rebutted here. The purchase price had been negotiated by reference to EBITDA, the buyer’s principal had given clear evidence that he was interested in the debtors, and the elaborate effort to disguise the accruals as recent debts was otherwise hard to explain.

Only the right claimant recovers

It was argued that the money raised to plug the client money hole was a loss to the shareholders, not to the company, and the shareholders were not parties.

The judge broadly agreed, with one exception. Next Generation could recover its own contribution, because it was a party to the claim, it was the person to whom the fraudulent misrepresentations were made, and it was the company with the benefit of the warranties. That is why the judge asked counsel to identify precisely how much of the recapitalisation had come from Next Generation as opposed to other investors, and why the recoverable figure was £633,508.94 rather than the whole amount raised.

This was quite a technical point, but an interesting one.

If you are acting for an acquisition vehicle with co-investors, that distinction needs thinking about at the point the SPA is drafted, not at trial.

What I would take into the next transaction

If you are selling:

• Your limitation package is conditional. The fraud carve-out removes the cap and the time limits entirely, so the protection you negotiated is only worth something if you have been straight throughout.
• Everything you hand over in disclosure becomes part of the bargain. Disclosing a document you know to be inaccurate is worse than not disclosing it.
• Disclose properly and specifically. A general reference to a data room rarely does the job, and disclosure only protects you to the extent it actually tells the buyer something.
• If something is wrong in the accounts, the moment to deal with it is during the process, through a price adjustment or a specific indemnity. It is far cheaper than the alternative.

If you are buying:

• Get a management accounts warranty and resist attempts to dilute it, particularly where the last audited accounts are old.
• Include a regulatory compliance warranty with teeth if the target is regulated. Here it was the FCA warranties that captured the underlying wrong.
• Where there is real evidence of dishonesty, plead deceit as well as breach of warranty. It defeats the limitations and it opens up consequential losses.
• If you are investing alongside others, make sure the entity that holds the warranties is the entity that will suffer the loss.

A note on what the Court of Appeal decided

For completeness, the Court of Appeal handed down judgment on 31 July 2026 at [2026] EWCA Civ 1015 and allowed an appeal in part, but the appeal did not touch any of this. Permission was refused on every ground except one, which concerned whether the company’s own trading losses had been caused by the directors’ breaches of duty. The buyer’s damages were expressly unaffected, and the findings on fraudulent misrepresentation and breach of warranty were not appealed at all.

The warranty and misrepresentation analysis in this article therefore comes from the trial judgment of HHJ Johns KC, which stands.

If you are preparing to sell and want the disclosure exercise done properly, or you are on the buy side and want the warranty schedule to actually protect you, do get in touch.

Sources

Next Generation Holdings Ltd and another v Finch and others [2023] EWHC 2383 (Ch), HHJ Johns KC (trial judgment, containing the warranty and misrepresentation findings)

Next Generation Holdings Ltd and another v Finch and another [2026] EWCA Civ 1015 (appeal on causation of trading losses only)