CLAIMANT WAS VICTIM OF FRAUD BUT ITS ACTION IS STATUTE BARRED: SECTION 32 (1) OF THE LIMITATION ACT 1980 CONSIDERED

In European Real Estate Debt Fund (Cayman) Ltd v Treon & Ors [2021] EWHC 2866 (Ch) Mr Justice Miles made many findings adverse to the defendants. However the claim failed because it was statute barred.  The judgment considers the issue of “reasonable diligence” under Section 32 (1) of the Limitation Act 1980. It found that consideration of the question of reasonable diligence extends to the period before the claimant suffered a loss.

“The question is not whether claim is defeated by the careless failure of the claimant to spot the fraud. It is the quite distinct issue whether the claimant who brings his claim outside the primary limitation period for a fraud claim (6 years) is entitled to invoke the special statutory postponement of the 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.”

THE CASE

The claimants brought an action alleging fraudulent misrepresentation when the defendants induced the claimant to subscribe to loan notes in June 2011 and a follow-up investment in 2012.

THE JUDGMENT ON LIMITATION

The trial judge made many findings adverse to the defendants, he found that the action would have succeeded if it had not been statute barred. However the claimant did not bring the action within time.

  1. The claimant issued the claim form on 16 October 2017, more than six years after ERED’s investment. The defendants say that the claim is therefore statute barred. The claimant relies on section 32 (1) of the Limitation Act 1980 to seek to postpone the start of the limitation period.
    1. Section 32 (1) provides:
“(1) Subject to subsections (3) and (4A) below, where in the case of any action for which a period of limitation is prescribed by this Act, either—
(a) the action is based upon the fraud of the defendant; or
(b) any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant; or
(c) the action is for relief from the consequences of a mistake;
the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it. References in this subsection to the defendant include references to the defendant’s agent and to any person through whom the defendant claims and his agent.”
    1. This section has been considered in a number of cases which were reviewed in OT Computers Limited v Infineon Technologies AF [2021] EWCA Civ 501. The following points (drawn from the judgment of Males LJ) are relevant for the present dispute:
i)                   The state of knowledge which a claimant must have in order for it to have discovered the concealment has for the most part been regarded as the knowledge sufficient to enable it to plead a claim. More recent authority such as Test Claimants in the FII Group Litigation v Revenue and Customs Commissioners [2020] UKSC 47, (“FII”) suggests that time should begin to run from the (possibly earlier) point when the claimant knows, or could with reasonable diligence know, about the mistake with sufficient confidence to justify embarking on the preliminaries to the issue of proceedings, such as submitting a claim to the proposed defendant, taking advice and collecting evidence. (I shall apply the statement of claim test, as it is not clearly established on the authorities whether the potentially more liberal test applies to fraud claims. In any event the parties did not suggest that the slight differences in the test would materially affect the outcome.)
ii)                 Whichever of these tests is applied, “there will be cases where discovery of the relevant facts involves a process over a period of time as pieces of information become available. In such cases it may be difficult to identify the precise point of time at which a claimant exercising reasonable diligence could have discovered enough, either to plead a claim or (as the case may be) to begin embarking on the preliminaries to the issue of proceedings”:  [27] of OT Computers.
iii)               The following passage from Paragon Finance Plc v DB Thakerar [1999] 1 ALL ER 400 has been treated as authoritative: “The question is not whether the plaintiffs should have discovered the fraud sooner; but whether they could with reasonable diligence have done so. The burden of proof is on them. They must establish that they could not have discovered the fraud without exceptional measures which they could not reasonably have been expected to take. In this context the length of the applicable period of limitation is irrelevant. In the course of argument May LJ observed that reasonable diligence must be measured against some standard, but that the six-year limitation period did not provide the relevant standard. He suggested that the test was how a person carrying on a business of the relevant kind would act if he had adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency. I respectfully agree.”
iv)               In OT Computers Males LJ said at [47],
“… although the question what reasonable diligence requires may have to be asked at two distinct stages, (1) whether there is anything to put the claimant on notice of a need to investigate and (2) what a reasonably diligent investigation would then reveal, there is a single statutory issue, which is whether the claimant could with reasonable diligence have discovered (in this case) the concealment. Although some of the cases have spoken in terms of reasonable diligence only being required once the claimant is on notice that there is something to investigate (the “trigger”), it is more accurate to say that the requirement of reasonable diligence applies throughout. At the first stage the claimant must be reasonably attentive so that he becomes aware (or is treated as becoming aware) of the things which a reasonably attentive person in his position would learn. At the second stage, he is taken to know those things which a reasonably diligent investigation would then reveal. Both questions are questions of fact and will depend on the evidence. To that extent, an element of uncertainty is inherent in the section.”
    1. The claimant argued that a bright line is to be drawn between the periods before and after the accrual of the cause of action. Since the purpose and consequence of the section is to postpone the limitation period it can only apply once the cause of action is complete. The claimant says this is supported by the words “the period of limitation shall not run until the plaintiff has discovered the fraud…” which implies that it is only discoveries after the date when the limitation period would otherwise commence that matter. In a case of deceit this is the date when loss is suffered. The claimant’s state of mind and events occurring before that time are irrelevant. The court must restrict its examination under the section to facts arising on or after the date when the cause of action accrued.
    1. I am unable to accept this submission. Section 32(1) is of course only relevant once there is a complete cause of action because that is when the limitation period would otherwise commence, and the purpose of the section is to postpone that period. But 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. There may be cases where the claimant is aware (or could with reasonable diligence have been aware) of facts before it suffered any loss which would have enabled it to write a letter before action. In my judgment the court considering must examine all of the facts and should not artificially restrict itself to events or circumstances arising only after the cause of action has accrued.
    1. This conclusion is supported by OT Computers at [27] where Males LJ emphasised that there may be cases where there is a sequence of events which are said to lead to the claimant having sufficient knowledge. There is no warrant in the language of the section for looking at only events or knowledge arising after the accrual of the cause of action. The ultimate question under the section is whether the claimant has or could have “discovered” the fraud and that may turn on events before as well as after loss was suffered.
    1. This view of the section is also supported by the passage at [52] of OTC Computers which concerns the possibility of the claimant discovering the fraud “from the outset”.
    1. I also note that in Thakerar, a case about mortgage fraud, Millett LJ recited at p.417 the relevant events going to the plaintiffs’ state of knowledge about the fraud. Some of those took place before the transactions giving rise to the losses claimed, while others happened afterwards. That makes sense. The question is whether at some point the claimant has (actually or constructively) sufficient knowledge to articulate a claim (or write a letter before claim) and the answer depends on considering the full sequence of events.
    1. I also consider that this conclusion does not contradict the well- known principle that a fraudster is not entitled to plead that his victim failed to take reasonable care to detect the fraud (see e.g. Redgrave v Hurd (1881) 20 Ch.D.1.)  The question is not whether claim is defeated by the careless failure of the claimant to spot the fraud. It is the quite distinct issue whether the claimant who brings his claim outside the primary limitation period for a fraud claim (6 years) is entitled to invoke the special statutory postponement of the 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.
    1. I therefore turn to consider the facts arising both before and after the investment occurred.
    1. It was also common ground that the burden is on the claimant to establish that ERED could not, without the exercise of exceptional measures, have discovered the fraud. The defendants emphasise (and the claimant accepted) that in applying the section the court should consider what was known or could (with reasonable diligence) have been discovered by Duet and by ERED. The evidence at trial proceeded on this basis (and the claimant did not call any separate non-Duet witnesses to seek to suggest that its knowledge was different from that of Duet to discharge the burden under the section). For convenience I shall refer to Duet and ERED together as “the reasonable investor”; I shall also use that term as shorthand to cover a person in their position who has been reasonably diligent, without always repeating the full statutory formulation.
    1. The defendants rely on a number of documents from which they say a reasonable investor could (with the exercise of reasonable diligence) have discovered sufficient facts to enable them to plead a statement of claim. These include the VDD Report, the Interim Accounts, the 2009 Accounts, the 7 February 2011 pdf and the Colliers Report. They also say that a reasonable investor could and would have called for the audited accounts for 2010 shortly after the investments and would have received and read these in early July 2011. They also rely on meetings between ECG and Duet after the investment.
    1. I start with some general considerations. The first is that Duet believed that Mr Treon and Dr Srinivas were honest and straightforward. ECG was a well-established business. It had reputable professional advisers, including RP&C and Colliers. RP&C were backed by JP Morgan. It also advised Nationwide, an existing investor, which was large and well-regarded. Mr Treon and Dr Srinivas appeared from their communications with Duet to be helpful and responsive.
    1. The second general point is that the court should take account of the position and business of Duet and ERED. Duet was a well-resourced expert adviser on investments. As at December 2010 it was managing assets worth $2.4b. It had seven members of staff and about six investments in the relevant period. Mr Korat, Mr Moore, Ms Shah and Mr Lattanzio were all experienced in assessing and analysing financial and accounting information. Mr Korat and Mr Lattanzio had each had more than 15 years’ experience in real estate and capital market investing. A reasonable investor in Duet’s position could reasonably be expected to approach potential investments with a careful eye and an appropriate degree of professional care (which is not to say outright distrust or cynicism). It could, in other words, be expected to undertake professional due diligence. I find that Duet’s level of resources and professionalism provide a reasonable proxy for those of a reasonable investor in its position.
    1. The third general point is that it is the claimant’s case that ECG’s trading figures for 2010 and the 2010 balance sheet, which were specifically requested by Mr Korat, were significant documents for Duet in appraising the investment. I have accepted the evidence of the claimant’s witnesses that these documents were significant. It follows that, when working out what a reasonable investor would have done, I should proceed on the basis that it would have regarded the information about the 2010 trading figures and balance sheet as significant to their decisions, and would therefore have scrutinised the material (and any other documents which threw light on it) with reasonable attention.
    1. The fourth general point is that it is the nature of a substantial financial investment that the potential investor will be able to demand up to date financial information; and to raise numerous and detailed questions. Rather than relying on its own speculation or assumption such an investor will ask questions and expect to be given answers. This is what due diligence is for.
    1. The fifth is that in approaching the exercise under s.32(1) the court must be careful to avoid the dangers of hindsight and to examine events as they would have appeared at the time and in their proper context and sequence.
    1. With these points in mind, I turn to the sequence of events.
    1. I start with the Forecasted Figures for 2010. It was clear to Duet (and would have been clear to a reasonable investor) that the Forecasted Figures were incomplete figures drawn from data to October 2010. A reasonable investor would also have noted that the Forecasted Figures were no more than a short summary. They were not full management accounts. The balance sheet provided on 7 February 2011 was also an incomplete summary. It was also based on data to October 2010.
    1. A reasonable investor would also have appreciated that as 2011 progressed it was likely that further work (including audit work) would have been undertaken to produce fuller and more accurate profit and loss and balance sheet figures for 2010.
    1. As well as the January Figures Duet was provided with various other documents.
    1. These included the 2009 Accounts. In January and February 2011 these were the most recently available audited accounts and a reasonable investor would have read them carefully. The P&L account referred to exceptional items of more than £3m. The notes to the accounts said that these related to expenses incurred on new builds and homes planned for extensions and refurbishment. This did not explain that they included part of the wage costs of running the care homes. However a reasonably diligent reader would have noticed at least the reference to exceptional items. Mr Korat’s evidence was indeed that he did read the note about exceptional items. This shows that he read the accounts with some care.
    1. I also consider that a reasonably diligent person in the position of Duet would have read the balance sheet in order to consider and assess the reported assets and liabilities, and would have noticed the overall balance of net assets (c. £116m).
    1. Duet was also given the VDD Report and its appendices. Mr Korat accepted that he read these and I consider that a reasonable investor would have done the same. The document referred to the treatment of some agency costs as either “exceptional” or “extraordinary”. A reasonable investor would not necessarily have concluded that there was a continuing policy of treating part of the staffing costs of the business as exceptional items. But the reasonable investor would have seen that some costs had been treated as exceptional or extraordinary in 2009.
    1. Duet also received the Interim Accounts. These were management accounts for the first quarter of 2010. Mr Korat accepted that he read them and noticed that there were nearly £1m of exceptional items. Again I consider that any reasonable investor would have studied these accounts. Mr Korat also accepted that he had compared them with the Forecasted Figures. However a reasonable investor would also have appreciated that there were no exceptional items in the Forecasted Figures but that the latter had a different description of the bottom line (“profit before mezz”). Given that the Interim Accounts were for a quarter of the period covered by the Forecasted Figures (2010) I consider that a reasonable investment professional in Duet’s position would at least have wanted to know what had become of the exceptional items in the Interim Accounts and understand how those numbers tied in with the Forecasted Figures for the full year. Mr Korat said that he supposed that the Interim Accounts had been superseded by the Forecasted Figures. However, he did not know that. It would have been very simple to ask a question, rather than making an assumption.
    1. A reasonably diligent reader of the Interim Accounts would also have seen that the loss for Q1 2010 was £1.1m. By contrast, on their face the Forecasted Figures showed a small profit for FY 2010 of some £272,000. The reasonable investor would also have known (from the information provided by ECG) that ECG’s profitability was struggling during 2010 as a result of lower occupancy rates. Indeed Mr Korat accepted that he was aware (from the 2009 Accounts) that ECGL had a cashflow problem and was only able to pay its debts on the basis of borrowing. In my judgment a reasonable investor would have compared the Interim Accounts and the January Figures. The reasonable investor would then have wanted to understand how a loss of £1.1m for Q1 2010 turned into a profit for the full year and would have asked questions about this. I do not think that a reasonable reader would simply have assumed, without exploring the point further, that the Interim Accounts had been superseded.
    1. The next relevant document raised is the 7 February 2011 pdf, which contained two things of potential relevance. First, projections for 2011-2013 contained a line referring to “exceptional items”. Second, the summary balance sheet for 2010 included net assets of c. £110m and a figure for retained earnings of minus £8.67m. The defendants say that a comparison of that with the 2009 Accounts would have shown a fall in the net assets of c. £6m.
    1. As to the first point, the reference to the exceptional items did not lead Mr Korat to understand that the 2010 numbers had been normalised. He observed that the exceptional items for 2011-2013 were projected to be zero and there was therefore nothing to cause the reader of this document to suppose that there had been exceptional items in the 2010 figures contained in the January Figures. Moreover, the reference to exceptional items was uninformative about the accounting treatment: a reasonable reader would not have understood from that document alone that in the January Figures for 2010 ECG had been treating part of its operating wages as exceptional.
    1. On the other hand, the document has to be read together with the other documents which showed exceptional items being deducted in the accounts for 2009 and Q1 2010. Moreover, the figures for 2011-13, expressed to be “before exceptional items” (£5.5m, £18.7m and £20.4m respectively), were the same as the figures labelled “profit before mezz interest” in the January Figures from which a reasonable investor could have realised that the profit in the January Figures were before exceptional items. I consider that a reasonable investor would at least have wished to understand the basis on which exceptional items had been referred to in the earlier documents and would have explored this further with ECG.
    1. The second potentially relevant matter is the figure of minus £8.67m retained earnings in the summary 2010 balance sheet. Mr Korat read this. He said that he did not appreciate from this document that ECG was expecting to suffer a loss on its profit and loss account for 2010 of £6m. He said that he did not compare the summary 2010 balance sheet with the 2009 audited balance sheet (which he had read). He said that the entry of minus £8.6m in the 7 February document did not cause him to revisit the January Figures.
    1. I conclude that summary balance sheet for 2010 would have caused a reasonably diligent investor to ask further questions, for the following reasons. First, Duet was interested in the balance sheet numbers, and this is why Mr Korat asked for them. Indeed any reasonably diligent investor would have been interested in the balance sheet as this would contained information about the group’s reported assets and liabilities. Second, I think that a reasonably diligent investor would have wanted to consider any material developments in the balance sheet position as between 2009 and 2010 and would therefore have made a comparison between the two. I do not think that doing so could be regarded as an “extraordinary measure” (in Millett LJ’s phrase). I think that a reasonably diligent investor would also have noticed that the net assets in the balance sheet had fallen from c. £116m for 2009 to c. £110m in the summary 2010 balance sheet pdf: i.e. was some £6m lower. A reasonably diligent reader would have noted that this was reflected in the fall of the same amount in the figure for “retained earnings”.
    1. The claimant emphasised that the 7 February 2011 pdf did not actually include a comparison with 2009. But for the reasons I have just given, I conclude that a reasonably attentive investor would have wished to understand, at least in general terms, the development of the balance sheet of the group over the year. I have already found as a fact that Mr Korat read the 2009 Accounts carefully (and think that a reasonable investor would have done so). I find that a reasonably attentive investor would have noted the decline in net assets of c.£6m from 2009 to 2010. This was a material decline and a reasonably diligent investor would have noticed it.
    1. Mr Korat said in evidence that the decline of £6m in the figure for retained earnings shown by comparing the two balance sheets could have been explained by other things, such as the payment of dividends. That was unconvincing, for a number of reasons. A reasonably attentive investor would have understood that dividends can only be paid from distributable reserves (including retained earnings). It would have seen that the Group did not have such reserves in 2009 or 2010. Moreover, the whole purpose of the approach to investors was that ECG was struggling with high levels of leverage and liquidity issues. Mr Korat knew about those problems. He accepted that he knew that ECG had a cashflow deficit and was only able to pay its debts by borrowing. It would have been quite startling for the business to be paying significant dividends at the same time as the drive to raise fresh funding – that would indeed have been a red flag. The far more likely reason for the reduction in the figure for retained earnings and net assets was that ECG had incurred trading losses during 2010.
    1. In any case, rather than speculating or making assumptions about the reasons for the fall in retained earnings, a reasonable investor could and would simply have asked for an explanation. As I have said, it is the essence of due diligence to explore things by raising queries. I consider that a reasonable investor, considering the information available to Duet would have wished to understand the reasons for the fall in net assets and retained earnings between 2009 and 2010; and how these related to the profit and loss numbers contained in the Forecasted Figures.
    1. The defendants also relied on the fact that Duet had the Colliers Report. They submitted that Duet could have carried out a series of calculations and determined that there must have been wages incurred by ECG which were not included in the Forecasted Figures. I do not accept that a reasonable investor in the position of Duet (or a reasonable investor in the position of ERED) would have carried out such a calculation. Duet was interested in the valuation reached by Colliers in their Report but did not consider that they needed to go through the historical numbers in the schedules to the report to seek to verify what they had been told by ECG. I consider that was reasonable. I think that a reasonably attentive investor (or adviser) which wanted to find out more about the numbers would have asked ECG for more information (see further below).
    1. It may assist at this stage in the analysis to draw some threads together. I find that a reasonably diligent (attentive) investor armed with the information in fact given to Duet would have appreciated the following: (a) ECG had probably treated some part of its staffing costs as exceptional items in the 2009 accounts; (b) ECG’s management accounts for Q1 2010 had included exceptional items of £906,000 which were not reflected in the Forecasted Figures (despite covering some of the same period as the latter); (c) comparing the Interim Accounts to the Forecasted Figures it appeared that a loss running at £1.1m for Q1 2010 had become a small profit for the full year (despite ECG’s poor trading performance at that time); (d) the 7 February 2011 pdf also had a profit and loss format which suggested at least the possibility of exceptional items; (e) the same document contained a summary balance sheet for 2010 which, if compared to the 2009 balance sheet, showed a reduction in net assets and retained earnings of some £6m, the most probable reason for which was that the group had incurred trading losses of that amount; (f) a reasonable investor would have made such a comparison; and (g) a reasonable investor would have wanted to understand the fall between 2009 and 2010 in the net asset retained earnings in the balance sheet and how this related to the profit and loss numbers contained in the Forecasted Figures. I find that these various things would have put a reasonably attentive adviser on inquiry.
    1. I also consider that a reasonably diligent adviser could and would (without taking exceptional measures) have asked for further, updated, P&L and balance sheet figures for 2010 before ERED invested in June 2011. Duet knew that the January Figures were based on numbers up to October 2010. The same is true of the balance sheet provided on 7 February 2011 which was called a “projected balance sheet”. As already noted, it is part of the claimant’s own case that the numbers for 2010 were used by Duet to benchmark the projections for 2011-13 and were therefore significant. I consider that a reasonable investor looking to invest in June 2011 would have asked for updated figures, which would have taken into account further information. A reasonable investor or adviser would also have appreciated that it was likely that by late June 2011 much of the task of auditing the 2010 accounts would already have been carried out.
    1. I also consider that a reasonably diligent adviser would have asked for more detailed figures than the very brief breakdown contained in the Forecasted Figures and summary balance sheet. A reasonable investor would have sought fuller figures so that a proper comparison with the forecasts could be carried out.
    1. For these reasons I consider that a reasonably diligent investor would have put been sufficiently on inquiry to be prompted to ask some basic questions and demanded further information. It would have asked about the treatment of exceptional items in the 2009 Accounts and Interim Accounts. It would have asked how a projected loss of £1m for Q1 2010 in the Interim Accounts had been turned into a small profit for the FY 2010, despite the troubling trading conditions. It would have wanted to understand the reasons for the reduction of c.£6m in the net assets and retained earnings between the balance sheets for 2009 and 2010 and how these related to the small profit apparently shown in the Forecasted Figures for 2010. It would have asked for updated and more complete figures for 2010 than those provided in the January Figures – by the time of the transaction in June 2011 the figures were based on numbers some nine months or so old.
    1. The claimant submitted that there was nothing to trigger these inquiries or requests for further information. In other words there was nothing to put Duet on inquiry. I do not agree. I consider that these would have been basic questions prompted by the very information that was in fact provided to Duet and indeed by the simple passage of time; seeking this further information would not have been an exceptional measure which a reasonably diligent investor could not be expected to take. It would to my mind have been a routine part of due diligence. Moreover, as Males LJ explained in OT Computers the statutory test of reasonable diligence has to be applied at all stages, including when considering whether there was anything to cause the claimant to make inquiries; the first stage postulates a reasonably attentive person.
    1. The next question is what would have happened had Duet raised these further inquiries and requests with ECG and RP&C. I consider that Mr Treon and Dr Srinivas would have explained that ECG was treating some of the staffing costs as exceptional items, for the following reasons. First, if Duet had asked for an explanation of the fall of £6m in retained earnings as between 2009 and 2010 the only explanation would have been that there was a loss for the year. There was no other plausible candidate. It would not have been possible for Mr Treon to avoid explaining the full position. That would necessarily have led on to an explanation of the exceptional items. Equally, if Duet had asked whether the treatment of exceptional items in the 2009 accounts had carried over to 2010, the true position would have emerged. I have found earlier that Mr Treon’s modus operandi was not to flag up the normalisation of the numbers at the outset but to anticipate having to explain the full treatment of the figures once asked more detailed questions about the numbers during the investor’s due diligence. Where investors did ask about the treatment of exceptional items in 2010 they were given further information (see the case of Mehmet Ahmed).
    1. Secondly, I consider it more probable than not that if Duet had asked for more detailed and updated trading numbers for 2010 they would have been given fuller management accounts for 2010 which would probably have included the exceptional items. Information of this kind was provided to Mr Mehmet and to other third parties (see annex 2 to the submissions of the second and third defendants). In this context, the reasonable investor would also have appreciated that ECG was likely to have more detailed and accurate figures for 2010 as 2011 progressed and the audit work for 2010 was undertaken. I consider that a reasonable investor considering making an investment in June 2011 would have expected the audit process to be well advanced and would have sought updated versions of the P&L account and balance sheet. I consider it more probable than not that if a reasonable investor had required more detailed and up to date information in early June 2011 Mr Treon and Mr Dr Srinivas would have provided much fuller information, which would have shown the January Figures (and the balance sheet of 7 February 2021) to be unreliable.
    1. So far I have addressed events before the investment. The defendants also referred to events or circumstances in the period between the investment and 17 October 2011.
    1. The first is that ERED was entitled under the LNA to the delivery of audited accounts for ECG, which had to be produced within 180 days of the year end. They submitted that an investor exercising reasonable diligence would have called for and considered audited accounts for 2010 as soon as they were published (on 4 July 2011). ERED was also entitled to consolidated management accounts within 60 days of the end of each quarter.
    1. It was the provision of the accounts (together with an explanation of the variances given by KLSA) which led Mr Lattanzio to accuse Mr Treon of misrepresentation at the meeting of 5 March 2012. Hence the provision of the accounts quickly revealed the facts giving rise to the normalisation claims.
    1. Mr Korat accepted that he understood that ERED was entitled under the terms of the LNA to call for accounts within 180 days of the relevant year end. He also accepted that Duet generally sought accounts as and when they became due. He also said that Duet sought accounts during the Fund’s reporting round and that this accorded with their normal practice. Duet did not in fact ask for the 2010 audited accounts until December 2011.
    1. I consider that a reasonably attentive and diligent investor having the right to call for audited accounts would, in the exercise of reasonable diligence, have requested (at the end of June or in early July 2011) the audited accounts for 2010, and well as quarterly accounts for Q1 2011. Investors and advisers need to monitor their portfolios of investments and, acting reasonably, can be expected to call for the information to which they are contractually entitled as it becomes available. The reason for stipulating a contractual entitlement to information is to ensure that the investor (and its advisers) are able to receive and review up to date timely information. By July 2011 the latest trading numbers available to Duet (the Forecasted Figures) were stale being based on data to the end of October 2010. To ask for information to which the investor is contractually entitled would not be an exceptional measure which an investor could not reasonably be expected to take. I do not think a reasonable diligent investor would simply wait until its own reporting round was approaching. It might need to take appropriate protective action before then and, in any event, needs to know how its portfolio of investments is performing. It is also relevant that simply obtaining accounts and reading the accounts would not have involved the expenditure of unusual resources by Duet or ERED: this was, as I have said,  information to which it was contractually entitled.
    1. The defendants also rely on a business update given at the meeting on 12 September 2011. Duet learnt that there was a six month time lag in reaching the occupancy levels set out in the original business plan. I do not think that merely being told that, without more, would have led to a reasonable investor to think that there had been anything wrong with the circumstances surrounding the investment, or to lead it to take further steps that would have led to the discovery of the fraud. But it seems to me that it would have led a reasonably attentive person to request a copy of the audited 2010 accounts and Q1 management accounts for 2011. Indeed it seems to me that a reasonably attentive person in Duet’s position would have wanted those accounts in advance of the meeting in order to be properly informed with the most recent information beforehand.
    1. I find that if Duet (or the putative reasonable investor) had asked the further questions and information requests set out in [‎805] above or sought the 2010 audited accounts and Q1 2011 management accounts in July 2011 it would have discovered sufficient facts to enable ERED to plead a statement of claim. It would have discovered the “normalisation” of the Forecasted Figures from the answers given by ECG or the 2010 audited accounts. It would have been apparent to Duet/ERED that the figures had given a false impression of ECG’s profitability for 2010. I find in all the circumstances that the reasonable investor could and would have known enough to enable it to plead a statement of claim before 17 October 2011.
    1. The same reasoning and conclusion applies to the outdated 2010 figures claims. A reasonable investor which had taken the steps I have concluded could and would have been taken would have ascertained that the Forecasted Figures for 2010 were unreliable. Moreover, a reasonable investor thinking of investing in June 2011 would have asked for updated management accounts for 2010 (not least because the investor would have known that the audit would have been nearly complete). The reasonable investor would also, shortly after the investment was made, have sought management accounts for Q1 2011 and audited accounts for 2010. These would have revealed that the Forecasted Figures were unreliable and out of date.
    1. As to the claims based on the misleading projections for 2011-13, the defendants observe that the claimant’s pleaded case (at para 10.2 of the particulars of claim) is that:
 “the Forecasted Figures were used to assess the reliability of the forecasts for the years 2011 onwards contained within the Projected Figures, which were repeated in the [7 February 2011 pdf] and in the Operating Model dated 8 March 2011. Had an accurate and/or fair depiction of ECG’s financial performance for 2010 been presented to Duet, Duet would have challenged and/or rejected the Projected Figures, i.e. the forecasts for 2011 onwards, and the growth assumptions on which those were based. Accordingly, Duet would not have recommended an investment in the Loan Notes, and ERED would not have invested in the Loan Note Issue.”
    1. The defendants submitted that it follows that (on the claimant’s own case) if it had taken the various steps set out above it would have challenged and rejected the Projected Figures too. It could and would therefore have discovered the facts giving rise to this element of the fraud claims at about the same time. I accept this submission. I also consider that once the reasonable investor had been provided with the audited accounts it would quickly have concluded that all of the figures it had been provided with in January to March 2011 were flawed and unreliable.
    1. Furthermore, for reasons already given I consider that, using reasonable diligence, a reasonable investor could (and would) have sought and read the management accounts for Q1 2011, as well as the audited accounts for 2010. It could and would have done this in late June or early July 2011. The reasonable investor would have then realised that the projections it had been provided for 2011 were out of line with the numbers in the more recent management accounts for Q1 2011. Had it also received and read the 2010 audited accounts the putative reasonable adviser/investor would also have concluded that the projections for 2011-13 were implausibly optimistic.
    1. Moreover, even if (contrary to my finding in the previous paragraph) the reasonable investor had not previously seen the need for the Q1 2011 management accounts, I am satisfied that a reasonably attentive person in the position of Duet would have been prompted by being told at the meeting of 12 September 2011 that ECG’s assumptions about the growth in occupancy were delayed by six months. Occupancy was a key driver, and a reasonable investor who learnt of the delay would have wanted the most up to date management information available. The investor would then have asked for further information which would have revealed sufficient detail to enable it to plead a statement of claim by 17 October 2011.
    1. I also consider (as an independent point) that a reasonable investor would in any event have demanded more up to date projections than those provided in January-March 2011. The transaction did not take place until 24 June 2011 and there was therefore a long delay between the provision of the projections in January (and the various iterations of the same projections) and the deal being consummated. I consider that a reasonably attentive and diligent investor would have asked in the run up to the transaction for the latest set of projections. Had that happened in my judgement it is probable that Mr Treon and RP&C would have provided (at least) the same projections as had been provided to Colliers. I do not think it likely that they would have provided projections as stale as those found in the January Figures (which were ultimately derived from the Original Financial Projections of November 2010).
    1. The claimants did not advance any additional or separate reasons for seeking to argue that s.32(1) would apply differently to the LNA claims than to the misrepresentation claims. There is good reason for that. The facts giving rise to the LNA claims are essentially the same as those that give rise to other claims. The same circumstances, steps and events that would have enabled ERED to plead a case in respect of those claims would equally have allowed ERED to plead a case in respect of the LNA claims. The same reasoning applies to the conspiracy claims.
    1. For all these reasons the claimant has failed to satisfy the requirements of s. 32(1).
(i)        Conclusions
  1. The claim is statute-barred and must therefore be dismissed. The claims would otherwise have succeeded.