High Court fraudulent misrepresentation ruling a timely reminder for investors

Andrew Herring, commercial disputes and fraud investigation specialist at Pinsent Masons, said: “This case is a timely reminder of the claims investors may have in connection with misrepresentations relating to investments in private limited companies. Investors need to be wary of potential deals that are ‘too good to be true’ and be alive to the risks particularly in a ‘hot’ market sector. They must ensure that they carefully consider and critically analyse statements made by private companies looking for investment if they are to mitigate the risk of losses from bad investments.”

The dispute revolved around false statements made by Martin Charles Heath in various investor materials, which induced investors to enter into contracts under false pretences. The misrepresentation related to Heath’s start-up tech business, Seed Media Limed, which he founded and was both a shareholder and director of.

The information provided by Heath included misrepresentations as to the nature and capabilities of software developed by Seed Media Limited, the identity of the company’s customers, and the state of the company’s finances. In fact, during the trial, the court determined that Heath knew that the company was not cash flow positive, and it did not have a complete, tested, and validated product that worked. The investors claimed they suffered substantial financial losses as a result of the investments they made in reliance on these misrepresentations.

 Heath argued that the claims were inadequately pleaded and lacked merit. He argued that the claimants knowingly made a high-risk investment in a start-up tech company with the new firm’s failure not an unforeseeable event. Heath stated that the investors had nothing to complain about in relation to the information provided by him in terms of the company’s potential and financial state.

The court examined the nature of the misrepresentations made by Heath. It was determined that the statements were not merely negligent or innocent but were instead made with the intent to deceive, qualifying them as fraudulent misrepresentations.

The court found that the investors had relied upon Heath’s statements when reaching their decision to enter into the contract. This reliance led to significant financial damages, which the court quantified based on the investments made and losses incurred.

The court underscored that claimants are entitled to rescission of the contract and damages. Rescission aims to restore parties to their pre-contract position, while damages compensate for the financial loss suffered due to the fraudulent misrepresentation.

Herring said: “While the case shows that losses can be recoverable against individuals responsible for fraudulent misrepresentations, investors can expect the persons responsible to ‘dig in’ and defend their reputations. Whilst there is currently a lot of attention on potential statutory claims by investors under s.90/s.90A Financial Services and Markets Act 2000 against UK listed companies that publish misleading information to the market, this case is a timely reminder of the claims that investors may have in similar circumstances in connection with misrepresentations relating to investments in private limited companies.  Specialist legal advice should be sought if investor claims are under consideration.”