England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BRISTOL DISTRICT REGISTRY
(His Honour Judge Weeks QC)

		Royal Courts of Justice Strand London WC2 Thursday, 2nd November 2000

1. LADY JUSTICE ARDEN:This is an application by the first respondent in these proceedings for permission to appeal against an order dated 24th August 2000 made by His Honour Judge Weeks, whereby the judge terminated the appointment of a jointly agreed expert valuer and ordered the appointment of a substitute expert on similar terms.
2. The court directed that the application should be heard in open court and there have appeared today Mr Ascroft for the proposed appellant and Mr Marsden for the proposed respondent to the appeal.
3. The background is that the petitioner in these proceedings, represented by Mr Marsden, is a minority shareholder in a company called Ecocolor Limited ("EL") which he formed with the first respondent and a Mr Higham, who has since dropped out of the picture. These proceedings are for relief against unfair prejudice pursuant to section 459 of the Companies Act 1985. One of the principal allegations is that the second respondent engaged in transactions with the Bituchem Group whereby goods, services and cash to a value in excess of £100,000 were transferred out of the company and its wholly owned subsidiary, Colourpave Limited, for the benefit of the Bituchem Group. The petitioner was a director of EL and the first respondent acted as a director of it.
4. On 30th March 2000 the first respondent agreed to purchase the petitioner's entire shareholding in the company, so that two issues only remain, namely the value of the shares for the purposes of the parties' agreement and the number of shares which the petitioner owned.
5. The matter came before the court on that date and the court made an order which, so far as material, contained the following provisions. Paragraph 1 provided:

"UPON hearing Counsel for each of the Petitioner and the First, Second and Third Respondents and by CONSENT of each of the Claimant and the First, Second and Third Respondents it is ORDERED that the First Respondent do purchase the Petitioner's entire shareholding in the Third Respondent (`Ecocolor Limited') at a price equal to the appropriate market value as at 5th August 1998."

6. It will be noted that that part of the order was by the consent of each of the claimant and the first, second and third respondents and that the material wording in the order is that the purchase is to be "at a price equal to the appropriate market value as at 5th August 1998".
7. Paragraph 2 of the order provided, among other things, that the petitioner was to serve particulars of claim restricted to:

"1.the issue as to the extent of the Claimant's shareholding in Ecocolor Limited (the `Shareholding Issue');

2.the issue as to the appropriate market value of the Petitioner's shareholding for the purposes of the First Respondent's purchase of that shareholding pursuant to the Court's order above (the `Valuation Issue'); ..."

8. Paragraph 2.5 of the order provided that:

"as regards the Valuation Issue the Petitioner and the First Respondent shall agree directions and in default of agreement the matter shall be restored for directions to be given by the Court on 4th May 2000."

9. I would observe that both counsel agree that the terminology "appropriate market value" covers the situation where the market value has to be adjusted because it was not at the date of that order known how many shares the claimant had in the company. So the expression "appropriate market value" does not mean a fair market value as fixed by the court, but a market value adjusted according to the number of shares. In addition, I would observe that paragraph 1 of the order, which I have read, being a consent order, appears, so far as I can tell at this stage, to have much the same effect as a contract. Obviously that is a matter which may have to be considered further.
10. The matter was then referred back to the court and the court made a further order on 11th May 2000. The court gave detailed directions as to the valuation. These stated, among other things, that the valuer should be free to choose the method and basis of valuation and to give such weight to the existing accounts as he thought fit. The parties were to be free to make submissions to him. In addition, he was to have access to the company's records. As regards the identity of the expert, this was to be agreed by the petitioner and respondents by 19th May 2000. The order then provided that, failing such agreement, either party could apply to the district judge for his determination of the identity of the joint expert.
11. The joint expert, who was indeed instructed by agreement between the parties, was Mr Peter Uglow of Deloitte & Touche. He was instructed on 8th June 2000. The parties then made detailed submissions to him. On 4th August 2000 the expert wrote to the judge setting out his proposed approach to valuation and seeking confirmation that what he proposed was in accordance with the order. In essence, he proposed not to investigate any of the allegations that had been made, but to proceed on the basis that a purchaser would have been told that the allegations had been made.
12. The case was restored for hearing in open court on 24th August 2000, when the judge made the order which is now proposed to be appealed. At that hearing the petitioner's counsel submitted that the expert's approach was arbitrary and that the court should consider appointing another expert who could do the task within the amount allowed; alternatively, that it should increase the cap, the cap being the limit of £10,000 which was placed on the expert's investigations. That cap was imposed by the order of 11th May 2000 in these terms:

"In preparing your report you shall undertake only such investigations and enquiries as are consistent with an overall fee of £10,000 (exclusive of value added tax) (or such higher figure as may be agreed between the parties or such lesser sum as may be approved by the Legal Services Commission) for production of the report."

13. I now turn to the learned judge's judgment. At page 6 of the transcript he says:

"In my judgment, this approach [and there he is referring to Mr Uglow's letter] is not consistent with the spirit, at least, of the order. What Mr Uglow is proposing to do, as I understand him, is to give no weight at all to Mr Kranidiotes's allegations that this company, Ecocolor Limited, had been milked of funds, albeit with his connivance at the time. On the other hand, Mr Uglow proposes to take into account the defendant's submissions to the extent that they would depreciate the value of the company and, hence, Mr Kranidiotes's shareholding. He is not proposing to pay any attention to the records and documents of the Bituchem Group, although he has the right to have complete access to those records for the purposes of his investigations.

Unfortunately, Deloittes have already incurred some £4,500 in fees, probably plus VAT, in making their investigations to date, and I have to consider what directions I should now give to Mr Uglow in order to achieve a fair result between the parties, bearing in mind that the cost of the joint expert must be proportionate to the issues in dispute. Mr Uglow has, I am informed, given a quotation of £75,000 for a full audit of Ecocolor and any other associated company whose accounts are to be audited over the last five years before the date of valuation, and an estimate of £30,000 for producing figures based on trial sampling only and not on a full audit.

In those circumstances, it seems to me that Deloitte and Touche are not appropriate experts to continue with a valuation in a matter where the amount at stake does not exceed £130,000, and I note that their charging rate is very much higher than at least one of the other firms which tendered for the work. It would seem to me that Deloittes are an inappropriate vehicle to continue for this purpose and that the best thing to do is to write off the cost to experience, pay the £4,500 and instruct either Solomon Hare or some firm that thinks it can do the work for a much lesser sum and hope that at least the work that Deloitte and Touche have done so far will provide some guidance to the new accountant.

Solomon Hare have been approached for an estimate. They say that a full audit for the required period would cost £20,000 to £25,000, which is at least two thirds less than Messrs Deloitte and Touche. They have not been able to quote on the basis of trial sampling only, and I would hope that they would think fit to approach the submissions and the allegations on both sides with a predisposition to reach a figure without conducting a full audit.

In all the circumstances, the best course, and the course which I propose to adopt, is to direct that Deloitte and Touche should cease to be the expert, that they should be paid a proper fee for their services to date and I hope that in return they will make available their working papers so that new accountants can be instructed. In the absence of any other agreement between the parties, I would propose to instruct Solomon Hare as experts in their place and to give them an initial budget of £10,000 to enable them to report back to the court when they are in a better position to indicate how much, if any, over £10,000 they would need to be paid to achieve what, in their view, would be a satisfactory result."

14. Mr Ascroft has submitted a lengthy document setting out the proposed grounds of appeal. He contends that the expert would be complying with the order if he followed the course proposed by Mr Uglow; that it was not against the spirit of the order; that the expert intended to take the allegations into account; that the judge had already indicated at an earlier hearing that the allegations might refer to transfers; that the court could not review or revoke the previous directions given; that there had to be a material departure by the expert from his instructions before the court could set aside his valuation; that it was inappropriate for the expert to become involved in questions of fact: see North Holdings Ltd v Southern Tropics Ltd [1999] 2 BCLC 625; and that the petitioner had raised extensive allegations going back over many years which could only be determined at disproportionate cost and might involve experts from other disciplines.
15. Mr Ascroft also referred me to O'Neill v Phillips [1999] 1 WLR 1092 and to the existence of the cost cap in the order of 11th May 2000. He referred to the fact that costs to date would have to be written off and that it was not clear that the substitute expert would be able to do anything different within the cost cap of £10,000. He referred to the informal estimate given by the new expert of £20,000 to £25,000 and he said that the expert had been unable to estimate the costs of trial sampling only and that trial sampling would be both unfair and expensive. He said that the judge's decision, although a case management decision, was clearly wrong and such that the court could interfere on an appeal. He said that, in the context of these proceedings, valuation was a significant question and the method of valuation went to the heart of the appeal.
16. The respondents, too, have submitted a skeleton argument. In essence - and I hope I may summarise their arguments - they submitted that the judge was right to say that it was unfair to have a valuation in terms of what Mr Uglow proposed. It was unfair because - if I may use my own words - it amounts to a discount in two stages: first, on the basis that assets have already been extracted, on the petitioner's case; and secondly, because the effect of Mr Uglow's method would be to depress the valuation.
17. Mr Marsden has also submitted that the submissions made by his client were not by way of resuscitating the allegations of unfair prejudice, but were to indicate that there were contingent assets of this company which would not have been shown in the accounts, namely, for instance, claims it would have to the repayment of monies which had been overpaid to the associated company, Bituchem Group. He says that the approach of Mr Uglow would be to ignore the existence of those assets when valuing the shares of the company and therefore he would not be achieving the market valuation as directed.
18. I must now set out my conclusions on the application. I am, of course, only dealing with an application for permission to appeal and therefore I will deal with this matter as briefly as I can from here on.
19. It is said that this matter concerns case management and therefore the high test for review applicable to case management decisions has to be shown for that standard: see, for instance, Biguzzi v Rank Leisure plc [1999] 1 WLR 1926 and Tanfern Ltd v Cameron-MacDonald [2000] 1 WLR 1311 at 1317. But in this case I have approached the matter on the basis that this is not simply a question of case management, because it concerns the rights of the parties under the terms of the order of 30th March. It is not, as I see it, at least arguably, purely a matter of case management.
20. Next, I would observe that what the learned judge did was, of course, strongly supported by arguments of cost and a desire to achieve proportionality in settling the question of the valuation of shares. Those are matters which assist in the achievement of the overriding objective laid down in the Civil Procedure Rules. But as I see it, it is arguable that he failed to consider a vital matter. He defined the question he had to consider as what directions he should now give to Mr Uglow in order to achieve a fair result between the parties, bearing in mind that the cost of the joint expert must be proportionate to the issues in dispute. That was in the passage of the judgment that I have already read. It seems to me arguable that he failed to consider whether or not the parties had made a binding agreement and, if so, what were the terms of that agreement; whether or not the valuer's method complied with the terms of the agreement or, alternatively, whether the valuer had made some mistake in understanding his instructions; if, indeed, he had made a mistake, whether the appropriate course to take was to replace him; and whether the court had power to do that and whether the matter should be remitted to it.
21. It seems to me that the question of the effect of the orders of 30th March and 11th May was arguably a matter which the court should have considered in deciding what to do in the circumstances placed before it, in the light of the request for directions by Mr Uglow.
22. In those circumstances I propose to give permission to appeal.
Order: Permission to appeal granted; costs in the appeal.