Background

In Ruby Properties (Scotland) Limited v. (First) James Alistair Watt and (Second) Kathleen May Watt [2025] CSOH 61, Lord Braid in the Outer House of the Court of Session considered a claim arising from a share purchase agreement (SPA). The defenders sold their shares in Thistle Aviation Services Ltd (TASL) to the pursuer. TASL was, in turn, the shareholder in Tayside Aviation Ltd (TAL).

TAL operated a flight training school, running an honours degree in collaboration with Middlesex University, among other services. The core dispute centred on the accounting treatment of tuition fees paid in advance by students.

The dispute

The pursuer alleged breaches of warranties in the SPA, particularly regarding whether tuition fees paid in advance had been properly recognised as deferred income (a liability) or prematurely treated as income in TAL's accounts.

The pursuer argued that early recognition inflated TAL's financial position, resulting in an alleged loss of nearly £910,000.

Key legal issues

• Firstly, whether there had been a breach of the warranties based on whether TAL's 2020 accounts had been prepared in accordance with FRS 102 and accurately reflected the company's liabilities.
• Secondly, whether the 2020 accounts were prepared using the same accounting policies as in the previous accounts.
• Thirdly, whether the method of recognising revenue – either by spreading income evenly over time or by reference to completion of services (e.g. flying hours) – complied with UK accounting standards and the specific warranties in the SPA.
• Finally, the admissibility, weight of expert and factual evidence, including challenges based on the best evidence rule and adequacy of disclosure.

Decision

Lord Braid ultimately held:

• The pursuer failed to prove that the 2020 accounts breached the warranties on accurate accounting and proper recognition of liabilities.
• The evidence presented, including a key spreadsheet and expert testimony, was found unreliable or inadmissible due to methodological flaws, missing primary documents and lack of clear factual grounding.
• However, the court found for the pursuer in relation to warranty 18.1(e) as the 2020 accounts had not been prepared using the same accounting policies as the 2017 accounts and this change in policy had not been adequately disclosed. The defenders were therefore in breach of warranty 18.1(e) in respect of the 2017 accounts only.
• The case was put out by order for further procedure on quantification of any loss.

Significance

This judgment highlights the importance of a number of aspects when drafting warranties in SPAs and preparing accompanying disclosures.

• Warranties should be drafted by a buyer (and reviewed by a seller and its counsel) carefully, with clarity and specificity. Ambiguities or generic language may create uncertainty about what is being warranted and how compliance is assessed. Where a warranty requires accounts to be prepared using the same accounting policies as previous years, consideration should be given as to whether clarity could be provided by defining what constitutes a change in accounting policy. If an accounting policy was changed in relation to warranted accounts, this case makes clear that such change should be specifically disclosed.
• The standard of fair disclosure agreed in an SPA and drafting of general disclosures should also be considered carefully to ensure disclosures meet the agreed standard. Furthermore, sellers should carefully assess whether a general disclosure will suffice to draw attention to a particular matter. In this case, the court's views on the meaning of "apparent" (as used in the general disclosure "matters apparent from an online search of the Companies House file") is significant. The judgment states that the change to the policy applied in 2017 had not been "fairly and accurately" disclosed by amending the figures in the 2018 accounts or by resubmitting amended 2017 accounts. The court's comments that, in order to meet the standard of disclosure, the matter should be "plainly visible" and not simply "possibly discoverable" is helpful in clarifying the standard that sellers need to meet in order to be comfortable they have disclosed a matter.

This judgment also highlights the difficulties in mounting a successful warranty claim without robust documentary and expert evidence.