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Selling a Business? Watch Out for Comebacks!

In a warning to entrepreneurs that there can sometimes be unpleasant comebacks following the sale of a business, the ex-boss of a car insurance company is facing a £2 million-plus High Court claim following discovery of an alleged mis-selling can of worms.

The businessman had sold his 94 per cent shareholding in the company to a large player in the insurance market. However, shortly after the deal went through, the buyer claimed that some of the company’s employees began to raise concerns about its sale processes. It was the buyer’s case that it had carried out a review and found that, for about two years before the sale, the company had illegitimately increased its own arrangements fees between quotation and sale in 28,575 cases.

The buyer said that it had responsibly reported the matter to the then Financial Services Authority (FSA), which stated that customers had been misled; that pressurised selling techniques had been used and that ‘redress was due’. As a result, the buyer said that it had put in place a scheme to compensate affected customers and estimated that it would take a total loss in excess of £2.4 million.

It was not suggested that the businessman had any knowledge of the alleged mis-selling; however, the buyer sued him for 94 per cent of its projected loss. It pointed to a clause in the sale contract by which he and the other former shareholders agreed to indemnify the buyer in respect of losses arising from mis-selling, or suspected mis-selling, in the period prior to the sale.

At a preliminary hearing, the businessman argued that the indemnity clause was not triggered because no customer had directly complained to the company, or to the FSA, the Financial Ombudsman Service or any other regulatory authority.

However, in dismissing those arguments, the Court noted that there were many ways in which alleged misconduct could be brought to the attention of the FSA, now the Financial Conduct Authority, including employee whistleblowing and responsible referrals by management.

There was no good reason why the indemnity clause should only have effect if the FSA investigation had been prompted by direct customer complaints. Ruling that the buyer’s construction of the clause made good commercial sense, the Court observed that the businessman’s interpretation would produce the ‘anomolous result’ that the indemnity would be engaged if the buyer wrote to customers, inviting them to lodge claims, but not where it simply wrote cheques to those who were alleged to have lost out.