Engineering giant Hampson Industries is facing a multi-million-pound bill after a judge slammed its “fraudulent” £3.1 million deal to sell off an ailing car parts firm.

Hampson Industries’ former chief executive kept quiet about a key customer being on the brink of deserting subsidiary Hampson Precision Automotive (HPA) before selling it to a group of investors led by Midland industrial heavyweight David Grove, it emerged in the High Court in London.

Mr Justice Field ruled ex-Hampson Industries chief executive Kim Ward, who stepped down from the firm last year, was behind a “fraudulent misrepresentation” in the £3.1 million deal.

And now in a very rare step, the judge has opened the way for the investors, trading as Erlson Precision Holdings, to hand back Lancashire-based HPA to Hampson Industries and claim their money back, with interest.

Erlson is also seeking damages for “wasted transaction costs”, the time and expense of continuing to run HPA and “for its loss of opportunity of making a different acquisition”, meaning Black Country firm Hampson’s final bill could spiral well beyond the original £3.1 million it made from the deal.

Responding to the decision, former Hill & Smith chairman David Grove said: “It is clear that the outcome fully vindicates our decision to take legal action against Hampson Industries.”

Describing Mr Ward’s behaviour as “truly extraordinary” for the chief executive of a publicly listed company, the judge said that Erlson Precision Holdings paid £3.1 million for HPA on the basis of “false and misleading” sale forecasts.

Erlson discovered soon after the deal went through that Cummins Turbo Technologies – which made up 37 per cent of HPA’s turnover – was “exiting” from its 10-year relationship with HPA, which employs 150 people and specialises in manufacturing turbocharger components.

That, the judge added, came as “to say the least, a bolt from the blue”, and “horrified” Erlson, which swiftly claimed it had been deceived and sought to rescind the deal.

Mr Justice Field ruled HPA’s sale “was achieved by fraudulent misrepresentation”.

The judge said HPA’s business was in the process of recovering from deep recession and its future looked positive when it was decided to seek a buyer in July 2009.

However, the critical moment came on April 30 last year, when Mr Ward had a 15-minute telephone conference with Cummins’ managers, who told him that the company, which had re-sourced its supplies in the Far East, was calling off its long-standing relationship with HPA.

The judge said Mr Ward was told that the decision was “final” and that there was nothing either he or Hampson Industries could do to keep Cummins as an HPA customer.

Mr Ward told the court he thought that was just a “negotiating ploy” by Cummins, to get a lower price, and did not believe that the company would really depart the HPA fold.

He denied saying that, with the loss of Cummins as a customer, HPA would become “unsaleable”.

On June 22, the day before the HPA sale went through, Cummins sent a “termination letter” to Mr Ward, but the judge accepted his evidence that he did not see it until after the deal was struck.

Charles Hollander QC, for Hampson Industries, emphasised Mr Ward’s unblemished business reputation and pointed out that he had already announced he was stepping down as the company’s chief executive officer before the deal went through.

Although he was concerned to achieve a sale for the sake of HPA’s workforce, he stood to gain nothing financially from the deal, the court heard.

However, the judge said that, after the telephone conference, Mr Ward could only have “entertained the faintest hope” that HPA would keep Cummins as a customer and his failure to discuss the matter even with colleagues involved in the prospective sale was “truly extraordinary”. Instead, Mr Ward – who the judge said “knew all too well” what Cummins’ termination would do to HPA’s prospects – “kept silent” about it, with the result that potential buyers of HPA would continue to rely on misleading sales forecasts.

 At the end of his ruling, Mr Justice Field exonerated other HPA executives involved in the sale, saying their reputations remained “entirely intact”.

Hampson Industries chairman Chris Geoghegan said: “We are naturally disappointed and are very surprised at this outcome, given the professional advice consistently received by the board on this matter.

“While we respect the court’s findings, we will carry out a detailed review of the judgement and will consider whether to appeal.

“We note in particular that the majority of the allegations made by Erlson, including all allegations of fraud against current officers and directors of Hampson named in the proceedings, were withdrawn following detailed evidential submissions and prior to the court awarding judgement.

“The court in the judgement acknowledged that the good reputations of these individuals remain wholly intact at the end of the trial.”

Earlier, Erlson’s counsel, Gregory Mitchell QC said that Erlson could have “washed its hands of any further responsibility for HPA”, in which case the company would have had to enter insolvency.

That would have resulted in the loss of 150 jobs at a difficult time in the labour market so, instead of abandoning the shares in HPA, Erlson had “acted responsibly” by deciding to run the company as best it could pending the outcome of the High Court dispute.

David Grove named High Sheriff: Page 10