Court of Appeal narrows damages in Next Generation Holdings v Finch client money fraud case

The Court of Appeal has reduced damages awarded against two former directors of an insurance brokerage found to have fraudulently misappropriated client money, holding that a trial judge wrongly treated the company's ongoing trading losses as flowing directly from their wrongdoing.

Lord Justice Snowden, with whom Lord Justice Peter Jackson and Lord Justice Bean agreed, heard the appeal from a decision of His Honour Judge Johns KC following a three-week trial. The underlying claims arose from the 2017 sale of a majority stake in AFL Insurance Brokers, since renamed Ambon Brokers, to Next Generation Holdings by Alec Finch, whose son Bob Finch was also a director. The trial judge found that between 2011 and 2017 the Finches had improperly drawn on client money held on trust, in breach of the Financial Conduct Authority's client asset rules, to fund the company's trading expenses, and had concealed a resulting £3.51 million deficit through false accounting entries that misrepresented the company's profitability to induce the share sale.

The judge found the Finches liable to Next Generation Holdings for fraudulent misrepresentation and breach of warranty, and separately liable to the company itself for dishonest breach of their director's duties under section 172 of the Companies Act 2006 and for unlawful means conspiracy. In assessing the company's damages, the judge treated the size of the client money deficit as a proxy for pre-sale trading losses, and went on to award further substantial sums for trading losses incurred after the 2017 sale, reasoning that the losses were "the direct product" of the earlier wrongdoing and that the Finches had failed to identify any intervening cause sufficient to break the chain, drawing an analogy with wrongful trading principles under section 214 of the Insolvency Act 1986.

The Court of Appeal, on the sole ground for which permission to appeal was granted, held this approach was wrong in law. Lord Justice Snowden explained that company directors owe no general fiduciary duty to prevent their company trading at a loss or while insolvent, a principle confirmed by the Supreme Court in BTI 2014 LLC v Sequana SA, and that section 214 does not itself impose any duty capable of underpinning a conspiracy claim based on unlawful means. Since there was no finding that the Finches had breached any duty relating to the commercial management of the business itself, only their misappropriation of client funds, the trading losses generated by the ordinary course of that business could not be treated as a direct consequence of the fraud.

Applying the causation principles established in SAAMCO and refined in Hughes-Holland v BPE Solicitors, together with the Court of Appeal's earlier reasoning in Galoo v Bright Grahame Murray, Lord Justice Snowden held that the fraud had merely provided the opportunity for the company to continue trading and incurring losses, rather than causing those losses directly. The true measure of the company's recoverable loss was the liability created by the breach of trust itself, namely the obligation to restore the £3.51 million taken from client money accounts, together with the £158,135 cost of investigating the wrongdoing, which was properly attributable to the fraud.

The appeal was allowed to the extent of substituting damages of £3,668,135 for the £7,114,167 originally awarded in respect of trading losses, with the court also finding that no credit needed to be given for the £2,847,038 realised from the later sale of parts of the company's business, since that transaction did not flow directly from the original wrongdoing. The net effect was a reduction of £598,994 in the overall damages payable to the company, leaving a total award of £5,525,436.02, with the separate damages awarded to Next Generation Holdings for the share sale itself left undisturbed.