England and Wales Court of Appeal (Civil Division) Decisions

Case No: A3/1999/0868

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

Royal Courts of Justice

Strand, London, WC2A 2LL

Wednesday 13th December 2000

THE VICE-CHANCELLOR:

1. On 27th May 1992 Mr Colin Platt and Mr Denis Platt, in consideration of £1, transferred to their elder brother, Mr Keith Platt, their respective holdings of preference shares in a family company called LJK Holdings Ltd ("Holdings"). For the sake of brevity I shall refer to the brothers by their respective first names. On 19th July 1999 Mr David Mackie QC, sitting as a deputy judge of the Chancery Division, found that such transfers had been executed in reliance on misrepresentations made to Colin and Denis by Keith and in consequence of a breach of a fiduciary duty Keith owed to them. It was agreed that the transfers could not be set aside so that the remedy of Colin and Denis was for compensation only. The judge assessed the value of Holdings on a net asset basis as at 27th May 1992 in the sum of £220,000. By agreement between the parties that sum was allocated by way of damages as to £99,860.34 to Colin and £120,139.66 to Denis. Judgment was entered in favour of Colin and Denis for such sums and interest.

2. This is the appeal of Keith from that judgment. He contends that the judge was wrong to conclude that he was liable for (1) misrepresentation or (2) breach of fiduciary duty. Even if he was so liable Keith contends that the judge was wrong (3) to have assessed the value of Holdings as £220,000. He asserts that the judge was wrong in three specific respects the combined effect of which was to convert a deficiency of net assets into the surplus to which I have referred. In the circumstances I will explain in due course we did not hear full argument on issue (2). Accordingly this judgment is limited to issues (1) and (3). Before considering those issues it is necessary to set out the facts in more detail.

3. In the 1980s the brothers' father, Mr Platt, passed on to them in equal shares the issued share capital of his businesses called Jarman and Platt Properties Ltd ("Properties") and LJK Garages Ltd ("Garages"). Garages held a franchise for BMW cars. Keith was the only one of the brothers to work in that company. Also in the 1980s Colin set up a business called Original Art Shops ("Artshops") in which he was later joined by Denis. Garages held 10% of the issued capital of Artshops and guaranteed its liability to pay rent for its several shops to its various landlords. In 1990 Garages transferred its shares in Artshops to Properties in return for an indemnity against its liabilities under its guarantees to the Landlords which remained unaffected.

4. On 16th July 1990 Holdings, which had been recently incorporated, acquired the brothers' shares in Garages in exchange for an issue of shares in itself. Keith obtained 781,998 ordinary shares; Colin and Denis took preference shares, in the case of Colin 650,000 C preference shares and in the case of Denis 782,000 D preference shares. Neither Garages nor Artshops prospered. As the judge found Garages did badly in the recession. Artshops too was hit by the recession and rising overheads. The position of Properties was no better due to a bad investment decision. The consequence was that Holdings was financially weak, gearing was high, there was pressure on cash flow and it faced substantial claims on its guarantees. Colin and Denis had to waive their rights to preferential dividends.

5. In March 1992 BMW received copies of the accounts of Holdings for the year ended 31st December 1990. It learnt of the potential liabilities of Garages under the guarantees. It was concerned at the financial position of Garages. A meeting was held in April between Keith and two representatives of BMW of whom a Mr Giorgio, who gave evidence in this case, was one. Following the meeting BMW expressed its concern that the operation was not generating enough money to pay shareholders and to invest in the future. The brothers considered with their advisers various suggestions whereby the assets of Garages might be protected from the liabilities under its guarantees. In the course of these discussions, by a letter dated 9th May 1992, Colin and Denis refused to transfer their shares to Keith in return for his promise to "look after" them. Shortly thereafter Holdings lent £37,000 to Artshops to fend off the risk of insolvency. The attempt was unsuccessful and in July 1992 Artshops went into liquidation. Properties went into receivership in January 1993.

6. On 27th May 1992 there were two meetings. The first took place in the morning between Mr Giorgio, Keith and his co-director of Holdings, Mr Jaques. The judge heard evidence from all three of them. He preferred the evidence of Mr Giorgio. Mr Giorgio's evidence as summarised by the judge in paragraph 11 of his judgment was

"Mr. Giorgi of BMW....was under the impression when he got there that Keith had already arranged to see his brothers that evening. He would certainly have emphasised the need to move forward to deal with Garages' problems. He said however that he would not have threatened termination of the dealership as that was a step that could not be taken without the consent of his superiors and/or the board at BMW(GB). He did feel that between the three brothers something should be done and that it was "preferable" for Colin and Denis to give up their Preference Shares. He might well have said that the company was technically insolvent. He did not believe that he had ever suggested that it would be best for Garages to sell the business and then negotiate a job or consultancy for Keith. He might have mentioned to Keith, as something to explore as an option, the sale of the business but in his own view this was not possible at that time in the middle of recession and given the problems which the business faced."

7. I will consider the evidence as to what occurred at the second meeting when I come to deal with the first issue. For present purposes it is sufficient to note that it is the crux of this case and the outcome was, as I have already recorded, that Colin and Denis repented of their previous refusal to transfer their shares to Keith and transferred them to him for a nominal consideration.

8. Thereafter Keith, as the judge put it, brought the contingent liabilities under control. By March 1993 claims with a face value of £425,000 had been settled for £72,000. Business picked up and the pressure previously exerted by BMW was relaxed. Colin and Denis expected to get their shares back again primarily because of what they thought had been said at the second meeting held on 27th May 1992. Keith disagreed. Proceedings were commenced by Denis in March 1996 and by Colin in May 1998. In the meantime the BMW franchise had been terminated and, in April 1996, the business of Garages sold for £1.955m yielding a profit before tax of £769,743.

9. The material allegations of Colin and Denis are contained in paragraph 6 of their respective statements of claim. In the case of Denis it is alleged:

6. At a meeting between the Plaintiff, Colin Platt, the Defendant and Mr. Russell Jacques in or about May 1992 and in order to induce, inter alia, the Plaintiff to agree to transfer his `D' Preference Shares to the Defendant, the Defendant orally represented that:

(1) the Defendant had been told by representatives of BMW that it was imperative that the `D' Preference Shares be acquired by the Defendant or otherwise BMW would terminate the Dealership Agreement; and/or

(2) the Defendant intended to investigate the possibility of selling the business and/or the issued share capital of the Company (in either case) with the Dealership Agreement remaining in place with Garages, but that, in the event of such a sale not proceeding, the `D' Preference Shares would be transferred back to the Plaintiff.

The effect of that paragraph was accurately summarised by the judge in paragraph 28(b) of his judgment.

10. The findings of fact relating to the events of the second meeting held on 27th May 1992 are contained in paragraph 26 of the judgment. They are:

"Keith undoubtedly and knowingly exaggerated the seriousness of the situation. BMW were primarily concerned about the contingent liabilities and Keith was under real pressure to do something about these by 30^th June. While BMW were concerned about Preference Shares this was, in the context of the company's other troubles, not of itself a pressing matter. While BMW recognised that sale of the business was one possibility it did not expect, let alone require Keith to sell. Keith misled his brothers by suggesting first that BMW were on the point of withdrawing the franchise and secondly that they were urging him to sell. Keith knew that matters were not as grave as that. His later actions in doing nothing about a sale were themselves inconsistent with his assertion that BMW were applying pressure on him to sell. These were features which had not been present before and which caused the brothers to transfer their shares to Keith when in not dissimilar circumstances they had earlier flatly refused to do so. There was a temptation for Keith to exaggerate. At this stage a business which he, almost alone, had built up over many years was under severe pressure because of the problems of Art Works which were no fault of his. Keith took advantage of the position and, at the least, failed to disclose to his brothers BMW's true intentions."

11. The judge's conclusion on the claims for misrepresentation are contained in paragraph 29 of his judgment. He correctly pointed out that there was no dispute as to the principles to be applied the dispute being the factual one whether Keith made the misrepresentations on which his brothers relied. He continued

"I find that Keith did misstate the extent of the company's financial troubles and exaggerate the urgency of BMW's concern. In particular he wrongly claimed that the shares had to be transferred to him so that on BMW's insistence the business could be sold. I am also clear that Keith said he would return the shares if no sale materialised but had no intention of keeping this promise. There was no such insistence and, against the background I have described, I do not believe that the shares would have been transferred but for this misrepresentation. The misrepresentations were, at the least, negligent ones."

12. The submission for Keith is that the judge's findings did not meet the allegations. It is pointed out that the representations relied on were (1) that it was imperative that the preference shares be acquired by Keith or the dealership would be terminated, and (2) that Keith intended to investigate the possibility of selling the business but, if there was no sale, the shares would be returned. By contrast the findings were (3) BMW required or insisted that the business of Garages be sold, (4) the business was in a poor financial state, and (5) if the business was not sold the shares would be returned on terms to be negotiated and agreed at some future date. In reliance on these discrepancies it is submitted that Colin and Denis failed to prove the misrepresentations on which they claimed to rely and cannot now claim to have relied on representations the judge found to have been made. Further, it was contended, the representation I have numbered (4) was, as the judge's findings showed, true.

13. No application was made to the judge or to us for permission to amend the statements of claim so as to match the judge's findings or otherwise. The response of counsel for Colin and Denis was that the findings in paragraph 29 should not be read as made with reference to a different case from that correctly summarised in paragraph 28(b). It was submitted that the findings in paragraph 29 are, in their context, only shorthand references to the pleaded representations which the judge had so recently summarised.

14. It is unfortunate that the form of the judgment is such as to enable counsel for Keith to advance the submission he has. The judge could and should have made clear findings in relation to the pleaded allegations to which he had specifically referred. He did not. The findings he did make had not, in most cases, been pleaded and at least one of them was a finding of fraud. Nor do I accept the submission made for Colin and Denis that findings in relation to the first of the pleaded representations can somehow be implied into or inferred from the findings which were made.

15. Counsel for Colin and Denis also submitted that, insofar as the judgment did not contain the necessary findings, then the cross-examination of Keith clearly justified a finding that the representations relied on had been made out. The suggested consequence was that if and in so far as the findings of the judge were inadequate then the material before this court entitled us to make any further finding which might be required. In his reply counsel for Keith did not challenge this submission; instead he relied on the submissions he had made in opening his appeal. On this aspect of the appeal I would accept the submissions for Colin and Denis. I will take the two alleged representations in turn.

16. The first representation was that it was imperative that the preference shares be acquired by Keith for otherwise the dealership would be determined. In Keith's cross-examination on the second day of the trial the following exchange took place (Transcript 15th June 1999 page 16D-F):

Q. I think, Mr. Platt, your evidence before had been that there was no choice but to sell this company and the dealership would be terminated? A. It was looking very much like that, yes.
Q. What I am going to put to you, Mr. Platt, is that you said to my clients and Mr. Russell Jaques on that evening that unless their preference shares were acquired the dealership would be terminated. A. No, I did not say that, definitely. I said that I thought that BMW would pull the rug from beneath our feet. That meant that they would remove the dealership - remove the franchise - and we would have nothing to sell."

It is plain that the qualification introduced into the second answer by the word "definitely" related to the likelihood of the franchise being terminated, not whether Keith had made the representation alleged. In my view this passage amounts to an admission of the allegation and entitles this court to make the necessary finding; its falsity is demonstrated by the evidence of Mr Giorgio which, as summarised by the judge, I have quoted in paragraph 6 above.

17. The second representation alleged was that Keith intended to investigate the possibility of selling the business, but if there was no sale, the shares would be returned. The first part of that alleged representation concerning investigating the possibility of sale had never been disputed and was inherent in the exchange I have just quoted. The second part, namely that if there was no sale the shares would be returned, and its falsity, was found by the judge in paragraph 29 of the judgment where he said:

"I am also clear that Keith said he would return the shares if no sale materialised but had no intention of keeping this promise."

18. For these reasons I would reject the submission for Keith that the judge's conclusion that he was liable for misrepresentation was not justified. Counsel for Colin and Denis accepted that if that was the conclusion of the court then it was not necessary for him to uphold the judge's findings on breach of fiduciary duty. Accordingly we did not hear argument from him on that point. As the judgment of Mr Mackie QC has been reported [1999] 2 BCLC 745 I should make it plain that I express no view on the correctness or otherwise of his conclusion on the issue of breach of fiduciary duty.

19. Given his conclusion on liability for misrepresentation the judge then had to assess the damages. As he correctly observed the measure of damages for misrepresentation is the sum necessary to put the claimant in the position he would have been in if the misrepresentation had not been made. For that purpose he had to reach a conclusion as to the value of the shares transferred by Colin and Denis in reliance on the misrepresentations as at the date of the transfer.

20. Each side adduced evidence from an expert valuer. Colin and Denis relied on the evidence of Mr Maher of Deloitte & Touche, Keith on the evidence of Mr Pattrick of Derek Webster & Co. The initial report of each expert was produced in March 1999. Mr Maher considered that the appropriate method of valuation was the net realiseable value of the assets. Mr Pattrick did not adopt this method. He sought to ascertain from the previous years accounts the sustainable future income stream, but he did not find that there was one. In those circumstances he sought to ascertain the value of the net assets but concluded that there was no net surplus. Mr Maher issued a revised report on 28th May 1999. The experts met on 7th June 1999 and produced a report dated 11th June setting out matters both agreed and not agreed. Mr Pattrick could not agree with Mr Maher's net realiseable value for he had not discounted the value of the assets and had taken no account of certain contingent liabilities. Mr Maher, by contrast, did not agree that any deduction should be made on account of the contingent liabilities. On the same day Mr Pattrick wrote to Mr Mayer setting out why he could not agree with Mr Mayer's valuation as at 27th May 1992. He pointed to three further matters of disagreement. First, he considered that the book value of the parts stock should be written down because some of it was slow moving; second, the book value of the stock of used cars should be likewise discounted and third, some provision should be made for the costs of realisation. Both Mr Maher and Mr Pattrick were cross-examined.

21. The judge recorded that there was no dispute that the value of the preference shares in Holdings could not exceed the value of the company or on how such value should be allocated between the C and D preference shares. Having considered the evidence of the experts he decided that the basis of valuation should be an assets valuation, that is a valuation of the business assuming an orderly realisation of its assets. Thus, in this respect, he preferred the views of Mr Maher. The basis of valuation is not now in issue. The consequence of that decision was to start the calculation in accordance with the report of Mr Maher of which the opening figure was £401,522 being the value of the consolidated net assets at 31st December 1991. From this figure Mr Maher deducted £30,037 "for what seemed like five months trading losses to 27th May 1992", and various other items not in dispute so as to arrive at a net asset figure of £287,990.

22. The judge did not accept those figures as they stood. His calculation, as explained in paragraphs 38 and 39 of his judgment, was

"With these uncertainties the figures provided by the two helpful experts have been adjusted in ways that are necessarily subjective. There is precision in their calculation which is necessarily spurious. To do broad justice I take Mr. Maher's valuation of £287,990 and first correct it to take account of the fact that what was assumed to be five months' loss to 27^th May, £30,037 was in fact a profit of £74,693. I then deduct £48,194 and £15,800 as additional discounts to be applied to net assets reflecting the views of Mr. Pattrick, but only to some degree. For the contingent liabilities I deduct the sum of £110,000.
The resulting figure for the value of Holdings in May 1992, which I emphasise reflects the need to look at things broadly and in the round, appears to give a value to Garages as of May 1992 of £218.726. I round this up to the sum of £220,000 which then falls to be allocated between the Claimants by the method set out in Mr. Maher's report, with which Mr. Pattrick agrees.

It is the case for Keith that the judge was wrong in (a) adding the profit as opposed to deducting the loss, (b) making inadequate provision for the contingent liabilities and (c) making no provision for the costs of realisation. I will deal with each in turn.

23. In reducing the figure for the value of the consolidated net assets as at 31st December 1991 from £401,522 to £287,990 for net assets at 27th May 1992 Mr Maher deducted amongst other items £30,037 for losses incurred between the two dates. The amount of the deduction was 5/12ths of the loss for the year to 31st December 1992 as shown in the audited accounts. In evidence before the judge was also a set of management accounts from 1st January to 27th May 1992 recording a profit for that period of £74,693. As explained in paragraph 38 of his judgment the judge corrected the figure of £287,990

"to take account of the fact that what was assumed to be five months' loss to 27th May, £30,037, was in fact a profit of £74,693."

24. Counsel for Keith contends that such treatment was wrong for the simple reason that a profit as shown in the management accounts does not necessarily translate into an equivalent increase in net assets.

25. I appreciate the point, but the judge had only two pieces of evidence on the post balance sheet adjustment which had to be made to bring the valuation forward from the balance sheet date of 31st December 1991 to the valuation date of 27th May 1992. The first was Mr Maher's attribution of 5/12ths of the loss for the year to 31st December 1992; the second was the profit for the particular period as shown in the management accounts. In my view it is obvious that the latter required him to reject the former. Had Keith wished to challenge the amount of the profit then it was up to him to adduce evidence for that purpose. Not only did he not do so but Mr Maher, whose decision it had been to make a deduction for the apportioned loss, appeared to accept that it was proper to make the adjustment the judge made. During his cross-examination he said (Transcript 16th June 1999 page 41) with reference to the deduction of £30,037

"Then the last line, which is the one I wanted to refer to, is at that point I did not have the management accounts to May 1992 and so I have got a provision there for £30,000 losses. In fact the company made a profit of about £75,000. So strictly speaking, if one was to replace that minus 30 with the 75 you would come up with a valuation which is perhaps £100,000 higher."

In my view, notwithstanding the relative crudity of the adjustment, on the evidence before him the judge was entitled, and indeed bound, to make it. I would reject this ground of appeal.

26. The relevant liabilities were those which had arisen in connection with the guarantees given by Garages to the landlords of Artshops various shops in respect of the liabilities of Artshops for rent. When Garages disposed of the shares in Artshops to Properties it obtained an indemnity from Properties but remained liable to the creditor landlords.

27. In the accounts of Holdings for the year ended 31st December 1991 no provision was made for this liability. In a document dated 20th May 1992 Keith estimated the liabilities to be approximately £239,000. The Accounts were signed by the director, Keith, in October 1992. In note 19 to the accounts he explained that he was seeking to reduce the liabilities by negotiation and expected any liability which could not be avoided to be satisfied eventually by Properties under the indemnity. In the accounts for the year ended 31st December 1992, signed by the director in October 1993, provision for these liabilities was made in the sum of £90,000. As the judge recorded, Keith was successful in his negotiations in reducing the liabilities to £72,000 from a much higher figure, but that was many months after the valuation date.

28. In his letter to Mr Maher dated 11th June 1999 Mr Pattrick commented that he, Mr Maher, had made no provision for payments under the guarantees. He pointed out that eventually £90,000 was paid so that a deduction from the asset valuation of at least this amount should be made, adding

"I realise that this provision is made with the benefit of hindsight but even if an optimistic view was taken of the potential guarantee liabilities in 1992, it must have been realised that some payments would have to be made."

29. The judge agreed with Mr Pattrick. In paragraph 37 he said

He [Mr Pattrick] also believes that a substantial reduction should be made for contingent liabilities. So do I, though not the extent he suggests. While initially inclined to value the contingent liabilities by reference to what they turned out to be, less than £75,000, I see that would be the wrong approach. There are conflicting and mutually inconsistent pointers in the papers and the evidence of what the contingent liabilities might really have been seen to have amounted to in May 1992. I have had regard to all of these. The contingent liabilities can plausibly be argued to be either zero or the maximum potential exposure under the guarantees. They were also considered at various figures in between for particular purposes. Keith gave a figure of about £200,000 in May 1992, a view shared by Colin and Denis in evidence but of course at that time neither would have been aware of Keith's actual or expected progress in negotiating down the liability. It is likely that by May 1992 it would have been clear to Keith that these liabilities would be capable of being negotiated. I therefore propose to take as a compromise and in the round the sum of £110,000 for contingent liabilities at May 1992."

30. Counsel for Keith submits that the judge was wrong in this regard. He claims that as at May 1992 all three brothers considered that these contingent liabilities amounted to about £200,000 and there was no justification for reducing the amount of the necessary deduction to any lower figure. I do not agree. First, it is plain that negotiations were then proceeding with a view to reducing them; it is not the case, as submitted, that the negotiations only started months later. Second, as counsel for Keith accepted, the judge was entitled to take subsequent events into account. Third, it would be necessary to take the value of the indemnity from Properties into account. In his evidence Mr Pattrick pointed out that Properties' accounts at the time suggested that it had net assets of £1m. As the judge said it was necessary to strike a balance between the competing considerations. I see no grounds on which this court could consider that the balance the judge struck was not open to him on the evidence. In particular I would reject the submission that his finding was arbitrary. I would dismiss this ground of appeal also.

31. In his letter to Mr Maher dated 11th June 1999, commenting on Mr Maher's valuation, Mr Pattrick wrote

"No provision has been made for the costs of realisation. In addition, in Clause 8 of the sale agreement dated 16 April 1996, the contracts of employment and hence the potential liability for redundancy and compensation were taken over by the purchaser. It is customary for some acknowledgement to be given for the discharge of this potential liability and a provision of at least 10% of the annual staff costs at 31 December 1991 of £1,359,627 would be a prudent move. It is not clear if this point was considered in 1996 and whether it was incorporated into the calculation of the goodwill figure. In any event, the possibility of liquidation and hence the need to pay redundancy etc. was far higher in 1992 than in 1996."

In the computation at the end of the letter Mr Pattrick deducted £135,963 for "Realisation Costs (10% annual salary costs)"

32. The judge did not refer to this item in the calculation at all. It is not suggested that the point was not fairly taken before him. The omission is all the more surprising in that the judge accepted all the other deductions suggested in the computation at the end of Mr Pattrick's letter in the agreed amounts subject only to increasing the deduction for contingent liabilities from £90,000 to £110,000. Those deductions included the amount by which parts and used car stocks should be written down to produce realiseable values.

33. Counsel for Keith submits that the judge should have made a deduction on account of the costs of redundancy payments. He points out that the net realiseable value basis of valuation assumes an orderly realisation of the company's assets. This was the evidence of Mr Maher in paragraph 10.3 of his revised report and accepted by the judge in paragraphs 35 and 37 of his judgment.

34. In Tolley's Share and Business Valuation Handbook, on which counsel for Keith also relies, the editor points out that there is more than one sort of asset valuation and instances Straight net asset basis, Break up basis and Forced sale basis. The first is adopted where it is not expected or necessary to realise the assets. In such a case the full current market value of the assets is taken. The second is used to ascertain what would be realised on the winding up of the company. As the editors point out some discount must be applied to the full market value for each asset to account for the possibility of a loss on or the costs of realisation. One such cost is possible redundancy pay and compensation for which "a provision of at least 10% of the annual staff costs would be a prudent move". The third is a forced sale basis which the editors describe as a rather more serious version of the break up basis.

35. Counsel for Keith submits that it is evident that the judge did not adopt the first of those bases because he did discount the book values of the parts and used car stocks; nor did he adopt the third for he assumed an orderly, not forced, realisation of the assets. Accordingly, so it is submitted, he must have adopted the second basis and, consistently therewith, should have made a deduction for the costs of realisation, including redundancy, in the sum of 10% of the annual salary cost, that is £135,963.

36. For Colin and Denis it is submitted that the judge had subsumed all realisation costs in the discounts he did allow, namely £48,194 and £15,800, because he did not specifically relate them to either the parts or used car stocks. It is also suggested that the judge was envisaging a sale of the business as a going concern with the BMW franchise in place so that there would not be any redundancies.

37. For my part I do not accept either of those submissions. It is clear from the figures that the discounts to which the judge referred in paragraph 38 of his judgment, quoted in paragraph 22 above, did relate to the parts and used car stocks. I did not understand counsel for Colin and Denis in his oral submissions to contend otherwise. The fact that the discounts can be so related is of importance to the consideration of the second issue.

38. Mr Maher had not thought it appropriate to allow either of those discounts. In his cross-examination on the second day of the trial (transcript 15th June 1999 page 37) the following exchange took place:

Q....On the basis that it is not an ongoing business in 1992 for the moment, would you accept that those [write] down of part stock at £48,000 is a reasonable figure to use? A. So this is assuming that you cannot run it yourself and you cannot sell it to anybody else either?
Q. I am assuming that you are not selling a profitable business. A. Yes. If the business is irredeemable and you cannot sell it on the basis that anyone could make profits, I would accept that as a deduction, yes. I do not believe that is a valid assumption for this company but if you assume that, I accept a deduction.
The Deputy Judge: So those two assumptions would be what again? A. They would be that you could not continue the company yourself as a profitable concern and you could not sell it to anybody who could run it as a profitable concern either.

39. It seems to me to be clear that in accepting the two discounts which he did the judge must have accepted Mr Maher's assumptions as recorded in this passage in his evidence. Those assumptions reflected both the views of Mr Giorgio (see paragraph 6 above) and the opinion of Mr Pattrick who had been unable to discern either a future sustainable income stream or any net assets. His letter of 11th June 1999 indicated a deficiency in net assets at 27th May 1992 of £30,917. But in a sense this begs the question because Mr Pattrick struck the balance after deducting £135,963 for realisation costs.

40. I have found nothing in either the evidence of the experts or in the extract from Tolley to which I have referred to suggest that it is permissible to take a partial net asset valuation, that is to say the realisation of the land and stocks but not the dissolution of the employment contracts. And even if it is there are no findings of the judge to suggest that it was appropriate to do so in this case. I conclude that the judge overlooked this item. The logic of his other findings suggests, and I conclude, that in computing the value of the shares in Holdings as at 27th May 1992 on the basis of an orderly realisation of assets the judge should have deducted a further £135,963. Deducting this amount from the judge's valuation of £218,726 produces £82763, say £83,000, as the value of Holdings on 27th May 1992.

41. For all these reasons I would allow the appeal to the extent of substituting a value for Holdings on 27th May 1992 of £83,000. It will then be necessary for the parties to agree the valuation of the shares of Colin and Denis on the same basis as before save that the value of Holdings is to be taken to be the lower sum of £83,000. The respective figures so ascertained together with interest thereon from 27th March 1992 to judgment less, in each case, £1 is the measure of damages to which Colin and Denis are entitled to be paid by Keith. I would invite counsel for the parties to agree a form of order.

CHADWICK LJ:

42. Save as to one matter, I agree with the judgment of the Vice-Chancellor. In particular, I agree that, as the judge held, the claimants, Mr Colin Platt and Mr Denis Platt, were entitled to succeed in a claim for damages for misrepresentation. That conclusion makes it unnecessary to express any view on the judge's finding that they were also entitled to succeed on a claim for damages for breach of fiduciary duty.

43. The matter on which I differ from the Vice-Chancellor relates to the assessment of damages. The judge's task, as he appreciated, was to assess damages in an amount which would put the claimants in the position that they would have been in if the misrepresentations made by their brother, Mr Keith Platt, had not been made. As the Vice-Chancellor has observed that required the judge to reach a conclusion as to the value of the shares transferred as at the date of the transfer.

44. The judge had the assistance of expert evidence. The expert called on behalf of the claimants, Mr Maher of Deloitte & Touche, took as his starting point the consolidated net assets of the LJK Holdings Limited group of companies as shown in the balance sheet as at 31 December 1991. He did so because, for the reasons set out in his report (first dated 15 March 1999 and revised on 28 May 1999), he took the view (i) that an earnings based method of valuation was either not available (see paragraph 6.3 of that report) or not appropriate (see paragraphs 7.3 and 8.8) and (ii) that the other asset based method of valuation which he identified (replacement cost) was also inappropriate.

45. The value of the net assets shown in the consolidated balance sheet as at 31 December 1991 was £401,522. Mr Maher, in his revised report, accepted that it was necessary to make adjustments to that figure. He did so for three reasons. First, for the reason explained in paragraph 10.2 of his revised report: "When using an asset basis of valuation it is normally appropriate to make some adjustment to the value of the assets as shown in the balance sheet, as the realisable value of the assets may well be very different." Second, for the reason explained in paragraph 10.16 of the revised report: "I understand that in return for payments totalling £20,000 each, [the claimants] agreed to waive their rights to the Preferential Dividend for the years ended 31 December 1990, 1991 and 1992". And third, to take account of a perceived trading loss (based on apportionment pro rata of the loss for the year disclosed by the consolidated profit and loss for the year to 31 December 1992) for the period from 31 December 1991 to 27 May 1992 (the date of the transfer of the shares).

46. The first of those reasons led Mr Maher to discount the book value of the group's debtors as at 31 December 1991 (in respect of debts due within one year - £434,948) by 10%. He did not think it necessary to discount the value of freehold land, buildings and other assets or the value of stock for the reasons which he explained at paragraphs 10.5 and 10.9 of the revised report.

47. The effect of the adjustments which Mr Maher had identified in his revised report was to reduce the net realisable value of the assets, as at 27 May 1992, to £287,990. This was set out at Table 7 in the revised report:

Consolidated net assets as at 31 December 1991 £401,522

Less:

Discount to book value in respect of debtors £43,495

Payments due in respect of dividend waiver £40,000

Apportioned loss to 27 May 1992 (5/12 x £72,090) £30,037 £113,532

£287,990

£318,907

£218,726

60. The judge gave no explicit answer to the fourth of those questions - should any (and if so what) provision be made for realisation costs - save, perhaps, in so far as an answer to that question is to be found in the phrase ". . . reflecting the views of Mr Pattrick, but only to some degree". But the effect of his conclusion that the company was to be valued at £220,000 is, necessarily, that he included no provision for realisation costs.

61. The appellant challenges the answers given by the judge to the first and third of the questions which I have identified. It is said that to substitute a trading profit of £74,693 as shown in management accounts for an apportioned loss of £30,037 based on an audited year end consolidated profit and loss account is to "confuse apples and pears" - as it was put in argument. By that is meant, I think, that the judge failed to appreciate that he was not comparing like with like. A trading profit shown in management accounts does not, necessarily, equate to an increase in net assets over the five month period. But neither does an apportioned loss based on year end accounts necessarily equate to a decrease in net assets over the five month period. Both are more or less crude indicators of the actual movement of net assets over that period. I agree with the Vice-Chancellor that, on the evidence before him, the judge was entitled to answer the first question in the way that he did.

62. I agree, also, that the judge was entitled to take a figure of £110,000 as the appropriate provision to make in respect of the company's contingent liabilities as guarantor of the Original Art Shop leases. The best evidence as to what provision was thought to be necessary from time to time appears in the notes to the 1991 and 1992 accounts, to which the Vice-Chancellor has already referred. When the appellant signed the 1991 accounts, on 26 October 1992, he endorsed the view expressed at note 19 that:

"The Director anticipates that any claims [under the guarantees] will be compromised at a figure which the Company can meet and can be recovered from Jarman & Platt Properties Limited.

. . .

The Director has no reason to suppose any amount ultimately payable under the guarantee will not be fully recoverable from Jarman & Platt Properties Limited . . ."

By the time the appellant signed the 1992 accounts, on 8 October 1993, Jarman & Platt Properties Limited was in receivership. Nevertheless, he felt able to subscribe to note 18, in these terms:

"An amount of £90,000 has been provided in the Company's accounts to 31 December 1992 of which £67,990 has since been utilised in obtaining the company's release from guarantees on 14 of the Company's 18 leases. The remaining leases have tenants in place who are paying rent and the Directors are not aware of any arrears.

The Directors do not anticipate having to make further payments under the guarantees, but if any amounts have to be paid are confident that such amounts can be met from the provisions already made as referred to above."

For my part I would, I think, have taken the view that the appellant would have had no ground for complaint if the judge had adopted the figure for which he, the appellant, had made provision in the 1992 accounts. But it is not necessary to decide that point. The judge's decision to take, as he said "as a compromise and in the round", the figure of £110,000, cannot be criticised.

63. The appellant challenges, also, the judge's failure to include any provision for realisation costs - that is to say, for potential redundancy or compensation claims. It is on this point that I find myself unable to agree with the conclusion reached by the Vice-Chancellor.

64. The effect of the omission of any provision or deduction in respect of the potential liability of the company or its subsidiary to make redundancy or compensation payments, or of any provision for other realisation costs, is that the judge valued the company on the basis that its business was saleable as a going concern to a purchaser to whom its undertaking would be transferred; and who would thereby accept the obligations of the employer pursuant to the Transfer of Undertakings (Protection of Employment) Regulations 1981. Unless that hypothesis underlies the valuation it is impossible to justify valuing the company (whether on an assets basis or on any other basis) without taking account of realisation costs. But it does not follow, in my view, that that hypothesis precludes the further hypothesis that a purchaser for the business as a going concern would be prepared to pay no more than an amount equal to the net realisable value of the assets employed in the business. In other words the valuation assumes that there is a purchaser willing to purchase the business as a going concern (and so willing to accept the employment obligations under the TUPE regulations) but not willing to pay more for the business than the net realisable value of the assets employed. The possibility that a business might be sold as a going concern for a price equal to the net realisable value of the assets employed was clearly envisaged by Lord Reid in Attorney General of Ceylon v Mackie [1952] 2 All ER 775, 779F-G, when he said, in a passage cited by the editors of Tolley's Share and Business Valuation Handbook at paragraph 6.3, that:

"If it is proved in a particular case that at the relevant date the business could not have been sold for more than the value of its tangible assets, then that must be taken to be its value as a going concern."

As the editors point out, that is not to say that the business is deemed to be a going concern, but that a going concern business cannot necessarily be regarded as worth more than the value of its assets. For my part, I find no conceptual difficulty in a bargain under which the purchaser purchases the business as a going concern - because it wants some benefit (for example, a licence, a franchise or a dealership) which will pass with the business as a going concern - but on terms that it will pay no more than a price based on the value of the assets employed. The vendor and the purchaser are free to make whatever bargain as to price they find mutually acceptable.

65. There are, as it seems to me, two distinct questions in the present case. First, whether there was evidence upon which the judge would have been entitled to reach the conclusion that it was appropriate to value the business on the basis of a purchaser willing to take a transfer of the undertaking but only at a price based on the value of the assets employed. Second, whether he did, in fact, reach that conclusion. That that was the effect of what he did is not, I think, in doubt. But he did not say, in terms, that that was the basis which he intended to adopt.

66. I differ from the Vice-Chancellor in that I am satisfied that there was evidence upon which the judge would have been entitled to reach the conclusion that it was appropriate to value the company on the basis that its business was saleable to a purchaser willing to take a transfer of the undertaking but only at a price based on the value of the assets employed. That is, I think, the necessary hypothesis that underlies Mr Maher's revised report: necessary, because (absent that hypothesis) Mr Maher could not have valued the company on the basis of an orderly realisation of its assets - "the net realisable value approach" - without taking account of the costs of realisation, including the costs associated with a cessation of the business. Further, I think it is clear from the answer which Mr Maher gave in cross-examination, at page 37G of the transcript for 15 June 1999, to which the Vice-Chancellor has referred, that that was the hypothesis which Mr Maher did adopt:

"Q. I am assuming that you are not selling a profitable business. A. Yes, if the business is irredeemable and you cannot sell it on the basis that anyone could make profits, I would accept that as a deduction, yes. I do not believe that is a valid assumption for this company but if you assume that, I accept a deduction." [emphasis added]

67. Whatever else Mr Maher may be saying in that answer, he must be taken to be rejecting as a basis for valuation the assumption that the business was not saleable. His answer can only be understood in the context of the valuation which he had made - that is to say, in the context of a valuation of the company on the basis of an orderly realisation of its assets - if it is accepted that that valuation has been made on the hypothesis that the business was saleable to a purchaser willing to take a transfer of the undertaking but only at a price based on the value of the assets employed. Further, the possibility that there might be such a purchaser was recognised by Mr Pattrick in the penultimate paragraph of his letter dated 11 June 1999. After demonstrating that, on the basis of his deductions from Mr Maher's figure of £287,990, there were insufficient assets to meet realisation costs, he went on:

"I also believe that little more than hope value can be placed on the company at May 1992. I would suggest that a reasonable price that someone might have paid at that time for the business was, at most, in a range of £10,000 to £50,000, taking account of the guarantees that were assumed at that time."

Clearly, Mr Pattrick and Mr Maher were not in agreement as to the amount which a purchaser might pay for the business. But the existence of a potential purchaser for the business was not in dispute. And, if there were a potential purchaser who would be prepared to pay anything for the business, the amount that that purchaser would pay had to be estimated on the basis that the purchaser would assume the obligations in respect of existing employees (including obligations in respect of redundancy and compensation payments) that would be transferred with the undertaking pursuant to the TUPE regulations.

68. I agree with the Vice-Chancellor that it is surprising that the judge did not address, in terms, the question whether realisation costs should be deducted in a valuation based on the net realisable value approach; which, as he said, he adopted. If the judge intended to adopt as a basis for valuation the hypothesis of a purchaser willing to take a transfer of the undertaking but only at a price based on the value of the assets employed, it is surprising that he did not say so. But it is, to my mind, equally surprising that, if he intended to adopt as a basis for valuation the hypothesis that there would be no transfer of undertaking - that is to say, that the business would cease - he overlooked the need to make a deduction in respect of realisation costs. The point had been identified by Mr Pattrick's letter of 11 June 1999, from which the judge took the figures of £48,194 and £15,800 which he did allow as deductions.

69. The fact is that the judge did not make a deduction in respect of realisation costs. For the reasons which I have sought to explain I am satisfied that if, but only if, he intended to adopt as a valuation basis the hypothesis of a purchaser willing to take a transfer of the undertaking but only at a price based on the value of the assets employed that was a course which he was entitled to take. The question for this court, as it seems to me, is whether he did intend to adopt that valuation basis - but failed to say so in terms - or whether he intended to adopt as a valuation basis the hypothesis that there would be no transfer of undertaking - and so fell into error in failing to deduct realisation costs.

70. That question must be answered by identifying and examining such indications as there are in the judgment as to the judge's intention as to the appropriate valuation basis to adopt. I regret that the judge has not made that task easy. But I have reached the conclusion that the judge must have intended to adopt as a valuation basis the hypothesis of a purchaser willing to take a transfer of the undertaking but only at a price based on the value of the assets employed. There are, as it seems to me, three pointers to that conclusion. First, the judge chose to adopt Mr Maher's general approach in preference to that of Mr Pattrick. Mr Maher's approach, as I have sought to explain, was consistent only with the transfer of undertaking hypothesis. Second, the judge recognised, at paragraph 37 in his judgment ([1999] 2 BCLC 745, 758h), that, despite the financial uncertainty surrounding the company, the opportunity to purchase a BMW dealership "might still have been very attractive to a commercial purchaser". A purchase of the dealership was consistent only with the transfer of undertaking hypothesis. Third, the judge referred, at paragraph 38 in his judgment ([1999] 2 BCLC 745,759d), to the application of additional discounts to net assets "reflecting the views of Mr Pattrick, but only to some degree." He must be referring, there, to the views expressed in Mr Pattrick's letter of 11 June 1999. Of the items identified in that letter, the judge accepted the additional discounts in respect of parts stock (after eliminating the error introduced by double counting) and in respect of used vehicles; and he allowed as a provision against the potential liabilities under the guarantees an amount (£110,000) which was greater than that proposed (£90,000). The only respect in which he has not given effect to the views in that letter is in omitting any deduction in respect of realisation costs (£135,963). The qualifying words in paragraph 38 of the judgment - "but only to some degree" - can refer only to that item. Those words must be taken to indicate that the judge considered whether to make a deduction in respect of that item and decided not to do so. A decision not to make a deduction in respect of realisation costs - as distinct from overlooking the need to do so - is consistent only with the transfer of undertaking hypothesis.

71. I am not persuaded that the judge's decision to make the deductions which he did make in respect of parts stock (£48,194) and used vehicles (£15,800) is inconsistent with a decision not to make a deduction in respect of realisation costs or with the transfer of undertaking hypothesis. The deduction in respect of used vehicles reflects that which was actually made when the business was sold as a going concern in 1996. The deduction in respect of parts stock which had not moved for twelve months seems to me to be just the sort of deduction which a purchaser of the undertaking would require in respect of obsolete stock when negotiating a price. It is true that Mr Maher - in the passage in his cross-examination which the Vice-Chancellor has set out - appears to link his acceptance of those deductions to an assumption that the business would not be sold as a going concern. But the judge was not bound to accept that link; and nowhere in his judgment does he say that he does so. In my view those deductions are as consistent with the transfer of undertaking hypothesis as they are with what may be called a break up basis of valuation.

72. For those reasons I would uphold the judge's valuation and dismiss this appeal.

LATHAM LJ:

73. I agree with both the Vice Chancellor and Chadwick LJ that the claimants were entitled to succeed in their claim for damages for misrepresentation. I express no view as to whether or not they were also entitled to succeed in their claim for damages for breach of fiduciary duty.

74. The Vice-Chancellor and Chadwick LJ both agree that the judge was entitled, in determining the loss suffered by the complainants, to conclude that the value of their shares should be determined on the basis of the asset value of the company. The difference between them is as to the need, in determining that value, to make provision for what have been described as "realisation costs", that is the costs of providing for redundancy payments for the staff in the event of the company ceasing to trade.

75. As has been explained the judge did not, unfortunately, deal explicitly with this problem. There is no doubt that if the company were simply sold for the value of its assets, with no prospect of its continuing to trade, allowance would have to be made within the calculation of its value for the consequences of bringing to an end the contracts of employment of those who worked for it. The Vice-Chancellor has taken the view that the basis upon which damages should be assessed in this case requires that allowance for this should be made.

76. The logical consequences of this approach to the valuation of the company is that it would not be sold as a going concern. But, as Chadwick LJ has explained, a valuation based on asset value does not inevitably have as its corollary that the company must be treated as ceasing to trade. I agree with Chadwick LJ that the inevitable conclusion from the reasoning of the judge in the present case is that, although he did not expressly state it, he considered that the value of the BMW franchise was such that the company was bound to have been sold as a going concern He was entitled so to find. It follows that the shares fell to be valued on the basis that no discount should be made for redundancy, because no redundancy payments would be required.

77. I would therefore dismiss the appeal.

Order: As minuted by Counsel