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
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
THE HON MR JUSTICE DAVID STEEL

		Royal Courts of Justice Strand London WC2 Wednesday, 27th March 2002

Wednesday, 27th March 2002

1. LORD JUSTICE PILL: Sir Martin Nourse is going to give the first judgment.
2. SIR MARTIN NOURSE: This is an application by the claimants in the action for permission to appeal, with the appeal to follow if permission is granted, against a case management decision given by Mr Justice David Steel in the Commercial Court on 26th February of this year. The judge had before him an application by the claimants for specific disclosure of documents by the Sixth Defendant, Fruit Shippers Ltd ("FSL"). The application was partially successful. The judge made the order sought in respect of seven categories of document, but refused to do so in respect of seven others. The claimants say that that refusal was wrong.
3. It is important to emphasise at the outset that in order to get the judge's refusal reversed by this court the claimants must show that it involved an error or errors in principle, alternatively that it was, in whole or in part, plainly wrong. Further, it must be said that the difficulties in meeting that standard in relation to a case management decision are even greater than usual because the area of reasonable disagreement over such matters is so much wider. This court is extremely reluctant to interfere with such decisions.
4. For present purposes, no extensive recital of the facts is necessary. FSL is the Bahamian holding company in a group of companies whose business is the production and sale of bananas grown almost exclusively in Ecuador. The first and second claimants are sisters and the first defendant is their brother. The claimants contend that the first defendant, by means of fraudulent misrepresentations and promises (including in relation to the management and control of FSL), persuaded them to relinquish ownership and control of that company and to permit a distribution of shares to him. It is common ground that, as a consequence of that and of what the claimants allege is the first defendant's fraudulent conduct, FSL is now controlled by the first defendant and is therefore aligned with his interests.
5. The claimants' primary claim is for rescission of the agreements effecting the redistribution of the shares in FSL. In the alternative, however, they claim damages in deceit, for breach of warranty and in lieu of rescission against the first defendant. The claim for damages is based on the value of actual and hypothetical shareholdings in FSL. The claimants say that the claim for damages will be very substantial, running into many millions of dollars. They also say, on the advice of their forensic accountancy expert, Mr RES Boulton, FICA, that all the documents of which disclosure has been sought are necessary in order that a proper valuation of FSL and the shares in it may be made.
6. It is also said, no doubt correctly, that without a proper valuation the claim for damages cannot be particularised. That has become a matter of some urgency because the trial is fixed to start on 2nd October next, the estimated length of the hearing being four to five weeks. More immediately, an order was made on 16th May 2001 for an alternative dispute resolution process, which is now fixed to take place within four weeks of 19th April, that being the date by which the exchange of expert accountancy evidence has been ordered. It was in those circumstances that an order was made on 15th March by Lord Justice Potter for the hearing of this application to be expedited.
7. The seven categories of documents ordered to be disclosed were the following: first, organograms showing the legal structure of FSL for the years 1995, 1996 and at the present date, including any documents therein referred to; second, copies of the Corporate Information Tables which accompanied certain charts exhibited in evidence; third, copies of the final (audited or unaudited) consolidated financial statements of the FSL group for the year 1995, together with any corresponding supplementary information schedules and consolidating schedules; fourth, copies of the audited consolidated financial statements of FSL for the year 2000, together with any corresponding supplementary information schedules; fifth, copies of the latest drafts of the (unaudited) consolidated financial statements of the FSL group for the years 2001 and, if available, 2002, together with any corresponding supplementary information schedules; sixth, copies of any budgets, forecasts or plans (of a quantitative or qualitative nature), including copies of any associated narrative, for the FSL group for the years 2001 and 2002; and seventh, documentation containing or evidencing any valuation of the shares in FSL between 1995 and the present date.
8. It will be necessary to go through the seven categories of document in respect of which disclosure was refused, one by one, in order to see whether the judge's reasons for refusals involved any error which would entitle this court to interfere. But before I start on that process it must be pointed out that the judge was in the claimants' favour on two important general points: first, that there was a sufficient justification for them to seek disclosure by reference to a valuation at the end of 2001 as well as in 1997; second, that there was such a significant overlap between the material needed to value the shares and that needed to value FSL itself that no distinction should be made between the two at this stage.
9. On the other hand, in two respects the judge evinced a certain reserve towards the claimants' application. First, having agreed with Mr Joseph, for FSL, that the claimants had opened their mouths very wide in their initial application for discovery, he said:

"They have to a significant extent drawn back from the scope of discovery originally sought, and to some extent that throws into doubt the justification for the original application as supported by Mr Boulton, and I approach the application, albeit in its more confined form, with a degree of circumspection."

10. Secondly, the judge referred to a valuation of 1,000 shares in FSL at $392,500 each made in 1997 and used as the basis of a settlement with certain members of the family. Having summarised the claimants' objections to that valuation, the judge concluded that, given its existence, it was appropriate for the court to pause before embarking on a very elaborate disclosure exercise.
11. In regard to the categories of documents still in issue Mr Rabinowitz, for the claimants, has helpfully placed them in their order of importance from Mr Boulton's point of view. First, he seeks disclosure of copies of the management accounts and management reports accompanying such management accounts for the years 1995 to 1997 and 1999 to 2001, first, for FSL, second, for the individual businesses in the FSL group "at the next level down in the operational structure" and third, if available, for the Noboa Corporation for 1995 to 1997 only.
12. Of those documents the judge said:

"Quite apart from the fact that I had some difficulty in understanding what I should be actually ordering with regard to disclosure relating to the 'next level down' in the operational structure, the thrust of this application appeared to have been directed to identifying the contribution made to the overall success, or lack of it, of the group by the individual stages of production of bananas, shipment of bananas, selling of bananas, and so on. This did not seem to me when I read the evidence - and, having listened to Miss Hopkins' submissions, I remain equally dubious - to be a useful exercise where one is faced with a group which has in effect one business, namely the production and sale of bananas. It is not a conglomerate which has a collection of individual enterprises under a holding company whereby it would be perhaps necessary in order to identify the shareholding value of the holding company, the individual values of the individual companies that it held. Unless I have completely misunderstood the advantages of investigating the four stages of the banana value chain referred to in the witness statement of Mr Aguirre by reference to shareholder value, I am confident that this will not contribute significantly to the exercise which the experts are hoping to embark on."

13. Mr Rabinowitz referred us to Litigation Support and Financial Assessment of Damages (1991) in which, at page 437 under the heading "Information Gathering", it is stated that certain sources of information should be considered in preparation of a share valuation for use in court. They include:

"a review of papers about the business's financial position and future prospects, including management accounts, board minutes, profit forecasts, market surveys."

14. I am in no doubt that there may well be cases in which the consideration of management accounts and reports would be a vital part of the valuation of the shares in a company. I would go further and say that it may be that another judge would have taken a different view about the management accounts and more particularly the management reports in the present case. But this was a decision made by this judge and, for my part, I do not think it is possible to say that the reasons he gave for rejecting disclosure of that category of documents involved any error of principle or were plainly wrong.
15. Next, in order of importance, Mr Rabinowitz seeks disclosure of copies of the reporting packs, or similar documents, used or being used to prepare the audited consolidated financial statements of the FSL group for the years 1995 to 1997 and 1999 to 2001, corresponding to 12 reporting units, being 12 companies in the FSL group. We were told that those 12 companies were selected from a larger number of 35, the 12 companies being between them responsible for the generation of about 95 per cent of the net income of the FSL group.
16. In relation to those documents the judge said:

"I again have great difficulty in understanding what value there would be from the perspective of valuation of the shareholding in obtaining the supporting material for the consolidated financial statements.

It seems to me that it is not established that the reporting packs or like documents would contain any material which was not fairly summarised or set out in detail in the consolidated accounts."

17. In regard to those observations Mr Joseph, for FSL, has told us that the consolidated accounts in fact included the balance sheets and income statements for all 35 of the companies referred to. That clearly was what the judge had in mind, and again I do not think it is possible to say that there was any error in principle, or that his decision in refusing to order disclosure of those documents was plainly wrong.
18. Next, in order of importance, Mr Rabinowitz seeks disclosure of copies of budgets, forecasts or plans (including any associated narrative and any documented explanation of the basis or assumptions on which they have been prepared) first, for the FSL group and, secondly, for the individual businesses in the FSL group "at the next level down in the operational structure", such documents to be in existence as at April or October 1997 and to relate to periods after those dates respectively. About those documents the judge said:

"That seems to me to be rather overtaken by events so far as the years 1995/96/97 are concerned, given that the accounts for the years 1995/96/97/98, and so on, have been already produced."

19. It will have been noted that the judge did order disclosure of those documents in respect of the years 2001 and 2002, to which he said rather different considerations applied. Again I do not see that his refusal to order disclosure of the earlier documents in this category is a decision with which this court could interfere.
20. Next Mr Rabinowitz seeks disclosure of two closely related categories consisting of, first, the minutes of management meetings concerning marketing or competitors for the individual businesses in the FSL group "at the next level down in the operational structure", and, secondly, the files of market or competitor information collated by the Miami office of the FSL group, all for the months October 1996 to October 1997 and January to December 2001. In regard to those documents the judge said, and I agree with him:

"Again, I am very doubtful about the value of this material to the valuation exercise. If it is said to be directed at identifying maintainable earnings, I cannot think it is helpful because either the management team assessed their competition correctly, in which case the proof is in the pudding or, if they guessed the impact of their competitors wrongly, again the proof is in the pudding. If, on the other hand, it is intended to assist in identifying the multiplier that needs to be applied to maintaining earnings, it seems to me that this is material which the claimants will inevitably extract from exterior sources, and indeed I understand that that is in fact the view of Mr Boulton. So, again, I do not think that those are appropriate categories in which to require disclosure."

21. Here I should say that Mr Boulton's two witness statements and that of Mr Anton (FSL's valuer) referred to both assets and earnings valuations. However, it is clear that in the case of a group of trading companies, such as the present, the valuation would, save in exceptional circumstances which have not been suggested to exist here, be valued on the earnings basis, which involves an assessment of the maintainable earnings to which a multiplier is then applied.
22. Finally, Mr Rabinowitz seeks disclosure of organisational diagrams summarising the operational structure of the FSL group, just for 1995 to April 1997, secondly, for October 1997 and, thirdly, as at the present date. As will have been noted, the judge did order disclosure of organisational diagrams summarising the legal, as opposed to the operational structure of the FSL group. Having then considered the diagrams summarising the operational structure he said:

"I have come to the conclusion that the process of valuation will not be advanced by production of such diagrams. The organisational diagrams summarising the legal structure, taken with the audited accounts that I have been shown, seem to me to be enough for any valuer to understand the structure of the FSL Group."

23. Again I consider that that is not a decision with which, by an application of the principles I have stated, this court can interfere.
24. Standing back from the individual categories of document, I can well understand that a conscientious valuer in the position of Mr Boulton would, in an ideal world, wish to have as much information as possible in order to prepare his valuation. But a judge of the Commercial Court conducting a case management exercise does not move in an ideal world. He is concerned with the practicalities of preparing the case for trial as expediently as possible and with balancing competing considerations of many different kinds.
25. For the reasons I have given, I would dismiss this application for permission to appeal.
26. LORD JUSTICE LONGMORE: This is an application for permission to appeal from a decision made by David Steel J, in exercise of his case management powers, in relation to an application for specific discovery. Permission to appeal such decisions will only rarely be given and then only if there is a real prospect of showing that the judge has made some error of law, or has made a perverse decision. Despite his arguments Mr Rabinowitz does not, in my judgment, have any real prospect of showing either of those matters. I agree with Sir Martin Nourse for the reasons that he has given that the application for permission to appeal should be dismissed.
27. LORD JUSTICE PILL: I also agree that the application should be refused for the reasons given by my Lord, Sir Martin Nourse.
Order: Application dismissed with costs subject to detailed assessment