England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BRISTOL DISTRICT REGISTRY
(His Honour Judge Weeks QC)
(sitting as a deputy High Court judge))

		Royal Courts of Justice Strand London WC2 Thursday 8th March, 2001

1. LORD JUSTICE ALDOUS: This appeal is against an order of His Honour Judge Weeks QC sitting as a deputy judge of the Chancery Division. In that order he terminated the appointment of a court-appointed joint expert engaged to value shares of a minority holder in a company that the majority shareholder had agreed to purchase after a section 459 petition had been presented. Even though the petition has not been heard, the basic facts are not in dispute.
2. The relevant company was called Ecocolor Ltd. It was incorporated on 13th February 1992 with its registered office at Laymore Road, Forest Vale Industrial Estate, Cinderford, Gloucester. Its purpose was to manufacture and sell colour surfacings. The 100 £1 ordinary shares were split between Mr Paul Paschali, the first respondent, Mr Higham and Mr Kranidiotes, the petitioner.
3. In 1994 Mr Higham fell out with Mr Paul Paschali and ceased to be a director. His shareholding was subsequently purchased by the other shareholders, the first respondent and the petitioner.
4. The petitioner was appointed a director in June 1994. It is alleged by him that despite the first respondent not being a director of the company, he, as the majority shareholder, extended de facto control over the board of directors.
5. The petition was presented on 17th February 2000 by the petitioner seeking relief under section 459 of the Companies Act 1985. In it, it was alleged that a series of transactions, goods, services and cash to a value in excess of £100,000 had been transferred out of the company and its wholly-owned subsidiary, Colorpave Ltd, for the benefit of a company owned and controlled by the first respondent and his family.
6. There was no doubt that the petitioner was a minority shareholder, but there was a dispute as to the extent of his shareholding. That has been determined by the court as amounting to 20 of the 100 £1 shares that had been issued.
7. At the first direction hearing on the petition which took place on 30th March a consent order was made which required the first respondent to purchase the petitioner's entire shareholding in the company "at a price equal to the appropriate market value as of 5th April 1998". The order went on to provide that the parties should agree directions to enable the valuation to be made, and in default of agreement the matter should be restored to the judge. The parties could not agree as to how the appropriate market value was to be arrived at and the petition was restored for further directions by the judge. After extensive argument the judge made an order. The relevant parts are in these terms:

"2.0 A Joint expert (the `Joint Expert') shall be appointed to prepare a report (the `Report') as to the market value, in each case as at 5 August 1998 of:

2.1 the entire issued share capital of Ecocolor Limited;

2.2 a shareholding comprising 20 shares in Ecocolor Limited; and

2.3 a shareholding comprising 33 shares in Ecocolor Limited.

3.0 The identity of the Joint Expert shall be agreed between the Petitioner and the Respondents by 19 May 2000. Failing such agreement, either the Petitioner or the Respondents may apply to the District Judge for his determination of the identity of the Joint Expert. On the hearing of any such application the Petitioner and the Respondents shall each provide a list of their suggested candidates for the position of Joint Expert, such lists to number no more than 3 candidates each.

4.0 The Joint Expert shall be instructed in the following terms, namely:

`You are jointly instructed by, on the one hand, the Petitioner and, on the other, the First and Second Respondents (together `the Respondents'). You are instructed to provide a report giving your opinion as to the market value as between a willing purchaser and a willing seller of certain shares in Ecocolor Limited as at 5 August 1998:

You shall provide your opinion of the market value as between a willing purchaser and a willing seller, in each case as at 5 August 1998 of:

... [the particular shares]

The method and basis of valuation to be adopted shall be entirely in your sole discretion taking into account normal accounting principles. In the manner referred to below, the Petitioner and the First Respondent shall be free to make such submissions in writing to you as each sees fit on the method and basis which it is considered appropriate to adopt. You shall give such weight if any as you think fit to any existing accounts but you are not bound to accept any such accounts whether audited or not.

...

In preparing your report you shall take into account, to the extent and in the manner in which you see fit, any written submissions, as are made to you by either the Petitioner or the Respondents by 30 June 2000 provided copies of such submissions have also been served on the other parties to this litigation.

You shall serve on each of the Petitioner and the Respondents and file at Court your report by 31 August 2000.

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 the production of the report.'

...

6.0 There be liberty to each party and to the expert referred to above to apply to the Court for any clarification or further directions needed."

8. The amount of £10,000 as the fee was chosen as the value of the shareholding claimed by the petitioner was thought by him not to exceed £130,000, but was thought by the respondent to have a value of about £14-15,000. Thus the judge clearly had in view the need to adopt a proportionate attitude to the trial.
9. After obtaining quotations, the parties decided to instruct Mr Uglow of Messrs Deloitte & Touche as joint expert. He was given instructions by letter dated 8th June 2000. The relevant parts of that letter coincide with the parts of the order that I have read.
10. Each side provided Mr Uglow with extensive written submissions. In the petitioner's written submissions it was contended that the accounts did not accurately set out the true position, as money had been paid unnecessarily to companies controlled by the respondent and had been transferred without warrant. As I have said, the amount was said by the petitioner to be about £100,000.
11. Having read those submissions, Mr Uglow realised that he could not deal with the matters raised in the submissions without exceeding the £10,000 limit. He therefore wrote to the court a letter dated 4th August 2000. The relevant parts are in these terms:

"I have now received lengthy submissions from both parties and have considered them in detail. They each contain a number of allegations, and responses thereto, regarding the contents of the accounts of Ecocolor and its subsidiary Colourpave Limited, and in particular regarding transactions between those companies and the Bituchem Group which I understand is controlled by Mr Paschali. Both parties indicate that the statutory accounts contained material errors.

My reading of the submissions has led me to the view that, although Ecocolor is only related to the Bituchem Group by means of common ownership, it was treated by management, to all intents and purposes, as part of that group. There appears to have been no attempt to create a proper divide between the two.

Further, the Order of 11 May 2000 and the letter of instruction dated 8 June 2000 require me to carry out only such investigations and enquiries as are consistent with an overall fee of £10,000 (excluding VAT) or such higher figure as may be agreed between the parties. Whilst I should not propose to investigate the allegations relating to 1992/93 and 1994/94, the nature of the remaining allegations is such that I am of the view that to investigate them to an extent sufficient to arrive at a conclusion in each case would be an extremely expensive exercise, out of proportion to the claim. Such an exercise would require a level of work close to a complete re-audit of the accounts of Ecocolor, Colourpave, and to some extent the companies in the Bituchem Group, for at least the past three to four years.

Equally, I believe that it would be inappropriate to investigate some of those allegations, for example, those which might be possible to resolve without an excessive amount of work, but not others. This would be likely to lead to a very unbalanced conclusion. As a result, I am not intending to investigate the allegations made in the submissions further.

The approach I am intending to take is as follows.

The requirement is to provide my opinion of the market shares as between a willing buyer and a willing seller. In an actual transaction, the seller would be likely to provide the buyer with an information memorandum of some sort. In turn the buyer would carry out his own investigations into the business.

In reality, if the buyer became aware of the allegations regarding the accounts, the most likely outcome is that he would walk away from the transaction. At the very least a buyer would require specific warranties and probably an `earn out' mechanism, whereby an element of the purchase price would be delayed until levels of future profits under the new ownership could be established, in order to protect his interests as far as possible. However, it is not possible to provide the valuation required on this basis. Clearly, I am unable to assume that the buyer would walk away as the valuation is to be based on the assumption that the buyer is willing. In addition, a valuation cannot build in the types of safeguards which a buyer may seek in practice.

As a result, and given that I do not consider it feasible to investigate the allegations to the extent required, I believe that it is necessary to assume a somewhat artificial situation in which a buyer would be aware of the nature of the allegations and the relationship with the Bituchem Group, but would not be in a position to investigate the allegations further. As a result he would base his view of value on that knowledge, the statutory accounts and detailed profit and loss accounts of the company, any budgets and forecasts available, and any relevant information in the public domain, for example accounts of competitors.

However, I believe that the knowledge of the allegations and the relationship with the Bituchem Group would inevitably cause a potential buyer to treat the investment as having a much higher than average risk. As a result I should expect him to discount the value he placed on the company accordingly.

I should be grateful if you could consider the above and advise me as to whether the Court considers that my approach is appropriate in the circumstances. If it is not considered appropriate I should be grateful for instructions as to how to proceed."

12. At that stage the matter came back before the judge for further directions. The parties' attitude differed considerably. So far as the petitioner was concerned, he realised that the matters raised in his submissions would not be taken into account. Further, the investigation proposed was to be of a somewhat artificial situation and would be on the basis in which the potential buyer would treat the investment as having a much higher than average risk, and therefore a discount to the value would be placed on it. So far as the respondent was concerned, that of course was acceptable.
13. After hearing submissions, the judge concluded that the approach suggested by Mr Uglow was not consistent with the spirit of the order that he had made and that the best course was to dispense with the services of Mr Uglow and use a cheaper expert. In his judgment he recited the history and then said:

"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 a 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 that 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 & 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 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. The judge made an order in terms which reflected the latter part of his judgment.
15. I should say that the figure of £130 was calculated on the basis that the petitioner's shareholding would be 30 shares. Subsequently to his judgment, the judge decided that the shareholding was only 20 shares and therefore the maximum recovery was just less than £80,000.
16. Mr Richard Ascroft, counsel for the appellant, accepted in his written submissions that the judge had a discretion to make the order that he did. However, he submitted that the judge had exercised it upon wrong principles and in fact was plainly wrong in the conclusion that he arrived at. In particular he submitted that the judge had failed to consider whether the parties had made a binding agreement, and whether the method to be adopted by Mr Uglow complied with the terms of the agreement.
17. It is at least arguable that there was agreement between the parties that the petitioner's shares should be valued "at a price equal to the appropriate market value as of 5th April 1998". That was the terms of the consent order. But it was for the judge to decide what that appropriate market value was. It was also for him, in the absence of agreement, to decide, taking into account the submissions of the parties, the extent of the inquiry that the expert should conduct. As the shares might have been worth only £14,000 he needed to have in mind costs. I have no doubt that he did have costs in mind, and it was for that reason that he made the order that he did on 11th May 2000. I accept that the order was made in furtherance of the consent order, but its purpose was to enable the judge to decide what was the appropriate market value with evidence obtained as cheaply as possible. At no time did he, nor could he, have transferred to the expert witness that obligation to decide what the appropriate market value was.
18. I think Mr Ascroft did not dispute that it was for the judge to decide what was the appropriate market value. But in his written submissions he said it was difficult to envisage what scope there was for the trial judge to depart from the value arrived at by the expert. In my view there clearly would be scope. The judge at trial would need to consider the evidence as a whole, taking into account the evidence of the joint expert, the criticisms made by the parties of his evidence and of course any evidence of fact adduced by the parties. In this particular case, I would anticipate that the petitioner would be able to give evidence of fact relating to the accounts.
19. Clearly Mr Uglow had doubts as to whether his proposed approach, set out in his letter, was that which the judge had anticipated, as he wrote to the court pointing out the difficulties that he had and suggesting a way round them. In my view he was right. The judge, I believe, made it clear that he expected a proportionate investigation of the facts to help him to produce a reasoned judgment, which of course would take into account the submissions of the parties. He was therefore met with the problem of what to do and had to make a case management decision. He either had to go ahead with the Uglow approach or give directions to Mr Uglow for another approach or to obtain a report from an expert who would charge less to make a more detailed inquiry. He chose the latter.
20. Mr Ascroft in his persuasive submissions reminded us of Rule 1 of the Civil Procedure Rules which provides as overriding objectives that the case has to be dealt with justly in a proportionate manner, taking into account the amount of money involved, the importance of the case, the complexity of the issues and to the financial position of the parties. However, the judge has to deal with the case fairly. Mr Ascroft drew to our attention that in this particular case the first respondent's costs were just over £18,000, the petitioner's costs were between £40,000 and £50,000 and the amount at issue was at the highest £78,000 and at the lowest about £15,000. He submitted that the judge had been plainly wrong to take the course that he did. He said that the order that was made by the judge in May bore significant risks to both sides. The valuer might have adopted an approach which would be detrimental to his clients. The proportionate approach, he submitted, was to direct that Mr Uglow should proceed as he suggested.
21. Mr Marsden who appeared for the petitioner submitted that the judge had adopted a proportionate approach. He had to decide what was the appropriate market value. He had also to consider the future conduct of the case. If the Uglow approach had been adopted, it could have resulted in applications by the petitioner to introduce further expert evidence to deal with the case being advanced by them. He submitted that the judge would have also had to consider evidence of fact put in his by client which if the Uglow approach was adopted would mean that the judge would have no expert help with which to decide whether they were correct or not. He supported the view of the judge that the Uglow approach was not consistent with the spirit of the order made.
22. The correct approach of this court to a judgment of a judge who exercises his discretion when considering a case such as this was indicated in Tanfern Ltd v Cameron-MacDonald [2000] 1 WLR 1311. At page 1317 Brooke LJ said this:

"32. The first ground for interference speaks for itself. The epithet `wrong' is to be applied to the substance of the decision made by the lower court. If the appeal is against the exercise of a discretion by the lower court, the decision of the House of Lords in G v G [1985] 1 WLR 647 warrants attention. In that case Lord Fraser of Tullybelton said at p.652C:

`Certainly it would not be useful to inquire whether different shades of meaning are intended to be conveyed by words such as `blatant error' used by the President in the present case, and words such as `clearly wrong', `plainly wrong', or simply `wrong' used by other judges in other cases. All these various expressions were used in order to emphasise the point that the appellate court should only interfere when they consider that the judge of the first instance has not merely preferred an imperfect solution which is different from an alternative imperfect solution which the Court of Appeal might or would have adopted, but has exceeded the generous ambit within which a reasonable disagreement is possible.'

33. So far as the second ground for interference is concerned, it must be noted that the appeal court only has power to interfere of the procedural or other irregularity which it has detected in the proceedings in the lower court was a serious one, and that this irregularity caused the decision of the lower court to be an unjust decision."

23. In this case it is not suggested that there is a procedural irregularity, and it is quite clear that this court will not interfere with a case management decision, such as the one under consideration in this case, unless it considers that the judge has exceeded the generous ambit within which a reasonable disagreement is possible.
24. In the present case the judge had to and did have in mind the need for a proportionate approach. That is quite clear from the reasons that he gave. He limited the new expert to an initial budget of £10,000. He also had in mind the competing cases addressed by the parties. On the one hand, the petitioner contended that the accounts did not show the true position and that the assets were understated, as was the company's profitability. That of course was denied. On the other hand was the approach suggested by Mr Paschali that to avoid further cost the Uglow approach should be proceeded with. The judge knew that about £4,000 would have to be paid to Deloitte & Touche, but that this work would be, he hoped, available to a new expert. He had before him a cheaper quote, a clear difference between the amount that the accountants would charge. In fact Deloitte & Touche had quoted for a partner of £250 per hour, whereas the expert that he had under consideration would charge a rate for a partner of about £160 per hour and for an assistant of £60-75 per hour. Thus, the judge had before him a cheaper route which he believed would enable a reasonable inquiry into the facts to be considered, and which would, perhaps, give him guidance at the trial as to whether the facts relied upon by the parties were relevant and true.
25. To select the route that he did was seen by him as an imperfect solution. For my part, I do not believe it relevant to consider whether I would have adopted the same solution. In coming to the conclusion that he came to, I believe he exercised his discretion in such a way that this court should not interfere with it. The decision that he had to take was clearly a difficult one and different people might take different views as to what was correct. The amount of money in issue did not warrant a payment of very substantial costs. He had to arrive at a fair result and in the end the route that he chose was the one which he thought best. I do not believe that this court should interfere. I believe it fell well within the ambit of his discretion to decide as he did.
26. I therefore would dismiss the appeal.
27. LORD JUSTICE LAWS: I agree entirely.
ORDER: Appeal dismissed; the appellants to pay the respondent's costs of the hearing of 2nd November, to be the subject of a detailed assessment, and the costs of 8th March assessed in the sum of £2,572.75. (Order not part of approved judgment)