England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIS HONOUR JUDGE WILCOX
SITTING IN THE TECHNOLOGY and CONSTRUCTION COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		30th July 2003

Lord Justice Mantell:

Introduction.

1. This is a judgment of the Court on an appeal and cross-appeal from a judgment of His Honour Judge Wilcox handed down in the Technology and Construction Court on 2^nd August 2002.

Background.

2. The judgment below contains a detailed account: for our purposes, what follows is sufficient.
3. In 1993 and 1994, and possibly before and beyond, Glaxo was developing a research facility at Stevenage. It has been described, accurately enough, as a major construction project. The main contractor was L. M. K. Vendors Ltd. Johnson Control Systems Ltd (Johnson) was the preferred sub-contractor for the installation of the business management system which included a number of elements one of which involved the provision of electrical connections. It was this work which Johnson sub-contracted to Techni-Track Europa Ltd (Europa) and has led to the present dispute. Although the work proceeded smoothly enough for a time, by January 1994 Europa was claiming approximately £50,000 in respect of monies due and Johnson was asserting that Europa had received more than its due. Their differences remaining unresolved, on 9^th February 1994 Europa was locked out of the site. On 15^th February Johnson obtained a freezing order against Europa's assets with the result that Europa's bank not only denied Europa use of its account but, also, on 2^nd March called in Europa's debts of approximately £236,000.
4. Although the Mareva had been set-aside on 23^rd February, the relief came too late to save Europa from going into administrative receivership.
5. In setting aside the injunction on 23^rd February, His Honour Judge Malcolm Lee QC had ordered an inquiry as to damages.
6. Although Johnson issued proceedings on 23^rd March 1994 and Europa, presumably, served a defence and counter-claim, the action went to sleep until the second half of 2000 when it was resurrected by Europa with help from a private backer. The inquiry as to damages was also brought back to life and consolidated with the main action. So it was that both matters came before His Honour Judge Wilcox.
7. In the event, and no doubt because Europa was in receivership, Johnson did not pursue either its claim for damages for wrongful repudiation or seek to recover the alleged overpayments. Those claims were dismissed.
8. Europa's counter-claims for loss and expense totalling £221,000 odd and for additional work valued at some £53,000 were also dismissed.
9. Those orders are only relevant to Johnson's second ground of appeal (see paragraph 15).
10. So far as the inquiry as to damages is concerned, the judge took the view that a proper award should reflect the value of Europa immediately prior to the grant of the injunction. That was and is not controversial. He then proceeded to value the company at £225,000 which became the sum reflected in the award.
11. In the action the judge found Europa to be due £64,000 in respect of contractual work carried out at the site. That, too, formed part of the award.

The Appeal.

12. By its appeal Johnson makes six complaints. One may be disposed of straight away. As part of his award in the inquiry the judge included bank interest of £1,847, which had not been claimed. On behalf of Europa it is accepted that Johnson's appeal must succeed to that limited extent.
13. Of the five remaining grounds, the first three involve criticisms of the manner in which the judge assessed the value of Europa at the relevant date.
14. By the first it is said that he wrongly included the profits of an associated but separate company namely Techni-Track Europa Engineering Ltd (Engineering) when assessing Europa's profits, thus arriving at an over-estimate of Europa's worth.
15. The second ground or complaint is that, in assessing Europa's maintainable earnings as part of the valuation exercise, he wrongly took into account the sum of £86,000 which he had disallowed as part of Europa's counter-claim in the main action.
16. The consequence of either or both of the first two grounds succeeding would be an assessment of Europa's value at nil.
17. The third ground is that, in any event, the judge failed to deduct interest, depreciation and amortisation from the figure arrived at for maintainable earnings.
18. The fourth ground relied upon by Johnson is that on the counterclaim the judge erred in awarding Europa what he found to be due under the contract for work done between 18^th January and 9^th February, rather than damages for breach.
19. Lastly, there is a complaint about the judge's order for costs

The Cross-Appeal.

20. As mentioned the judge was concerned to value Europa on the basis of a figure for maintainable earnings projected over a given period. He settled on a multiplier of 4½. There is no quarrel with that figure. The sum for maintainable earnings at which he arrived was £75,000. After delivering judgment it appeared to the learned judge that he had made a mistake since £75,000 was the appropriate figure for eight months and not twelve. Accordingly, as we understand it, he wrote to the parties if not to this Court stating that he had intended to 'annualise' the £75,000, which would have produced a sum of £112,500, which in turn would have increased the value of Europa to £337,500. Europa's cross-appeal, therefore, seeks to correct what is said to have been an oversight on the part of the judge.
21. We now propose to consider the several grounds in rather more detail.

Ground 1.

22. Although this occupied as much time in argument as the remaining grounds put together, it is essentially a short point. In looking at an eight month trading period for the purpose of reaching a figure for maintainable earnings of £75,000, it is said that the judge wrongly included the trading profit of Engineering which was in all respects a separate company the share capital and assets of which had never been acquired by Europa and having different directors and shareholders.
23. In the main, the evidence had come from accountants called for each side, a Mr Kapila for Johnson and a Mr Granger for Europa. The judge was unimpressed by Mr Kapila (see paragraph 175) and preferred the evidence of Mr Granger the effect of which he summarised as follows at paragraph 176:

"'Engineering existed as a sales invoicing vehicle for sales which would be factored with International Factors Ltd. 'Europa' made the purchases, employed the staff and provided the premises. 'Engineering's' customers were clearly customers of 'Europa' and its cost of sales represents the management charge from 'Europa' with its expenses and interest charges relating wholly to the factoring arrangements. As such, the profitability, or otherwise that it would report to a separate statutory entity was entirely dependent upon the level of the management charge from 'Europa'. It is apparent that the un-audited financial statements for 'Engineering' for the period ended 31^st October 1993 were made up for a period for which no financial statements were made for 'Europa' and moreover were not filed until August of 1994 by which time 'Engineering' was the trading vehicle. It is apparent from the 'Engineering' profit and loss account that for the eighth month ended 31^st December 1993 that in the two month ending 31^st December 1993, 'Engineering' invoiced sales of £92,468 while the cumulative management charge had increased by £136,000 in the same two month period. I accept Mr Granger's evidence that 'Engineering's' apparent trading record prior to the Mareva injunction must be regarded as part of the trading record of 'Europa' since the only trading of 'Engineering' was invoicing derived from 'Europa'.'"

24. It is argued on behalf of Johnson that the conclusion is not warranted by the evidence and even if the reality of the situation was as found by the judge, that reality must remain unrecognised behind "the corporate veil".
25. We do not agree. The judge heard evidence over many days. It is apparent from the judgment as compared with such parts of the evidence as we have been shown that his preference for the evidence and conclusions of Mr Granger were well justified. So far as the permissibility of his approach is concerned it is conceded that the true test is 'what would a prudent purchaser having made all appropriate enquiries have been prepared to pay for Europa at the relevant date'. In our view the 'prudent purchaser' would have had regard to the economic realities rather than to a principle of company law which is concerned to distinguish the persona of a corporation from that of its members.
26. It follows that we would reject the first ground of appeal.

Ground 2.

27. The operating profit of £92,807 for the eight months ending 31 December 1993, as stated in the management accounts, included an estimated credit of £86,192 in respect of 'claims and variations' for work done under the Glaxo contract. The variations referred to extra work said to have been done outside the contracted-for works. The claims were said to arise out of delays and disruption to the work. When deciding the counterclaim in the main action, the judge held that Europa had been unable to establish a claim under either of these heads. Johnson therefore argue that these sums should not have been taken into account in calculating Europa's future maintainable income stream.
28. The question for the judge, however, was not whether those claims would eventually turn out to be good (it is difficult to know what might have happened had they been adjudicated nearer the event). The question for him was how the sums involved would be treated by a purchaser looking to buy the company immediately before the Mareva injunction was obtained. The accountancy experts were agreed that it was appropriate to exclude the value of unagreed claims from the credit side of the account.
29. However, the experts disagreed as to whether a corresponding adjustment should be made to the debit side of the account. In other words, the sums listed in the accounts as 'cost of sales' would include all the costs of the work done on the Glaxo contract, including some costs which were attributable to these claims and variations, which obviously had an impact on the overall profitability of that work. Mr Kapila took the view that those sums should remain in the accounts, as it was reasonable to assume that irrecoverable costs of this nature would be a recurring feature of the company's business: in other words, that the company would have continued to have contracts which were as troublesome and unprofitable as the Glaxo contract turned out to be. Mr Granger's view was that this was a one-off problem. The distorting effect should therefore be eliminated from the accounts. The appropriate way to do this was by deducting from the cost of sales (or adding back into the accounts) the estimated value of those claims. In his report (at para 5.4) he made it clear that 'this add-back is not anticipating income, but is eliminating the distorting effect of the additional costs incurred and as yet unrecovered'.
30. The judge rejected Mr Kapila's view that such problems might be a recurring feature of Europa's prospective activities and preferred Mr Granger's opinion that they were properly characterised as a 'one off ' (para 180 of the judgment). He also accepted that the effect should be neutralised in the way proposed. Having given good reasons for generally preferring the evidence of Mr Granger, he was entitled to do so on this point. The Glaxo contract had proved a nightmare for Europa: it makes sense to try and ignore the effect of the disputes it generated when assessing the value of the company.
31. Johnson further argue that, even if this be correct, there is no evidence of what those extra costs in fact were which would support the sums involved. Once again, however, the issue is how a purchaser, no doubt with the help of his accountants, would value the company. The sums attributed to the claims and variations in the accounts were only a small proportion of those which the company eventually claimed, albeit unsuccessfully, in their counterclaim.
32. It follows that we reject the second ground of appeal.

Ground 3.

33. The judge's finding as to the appropriate figure for maintainable earnings is to be found at paragraph 201 of the judgment. There it states:

"The appropriate multiplicand, namely the earnings before interest, tax, depreciation and amortisation, in my judgment is £75,000."

34. It is submitted that, save for tax, the judge failed to make the appropriate deductions. Had he done so the resulting figure for maintainable profit would have been £10,907.45, putting a valuation on Europa of just under £50,000. It has never become clear what is meant by "amortisation" in the context of this case and no one has attempted to put a figure on it. What is clear, however, is that in arriving at £83,206 for maintainable earnings before tax and rounding down to £75,000 the judge had already deducted £17,271 for interest and as is pointed out in Mr Eklund QC's skeleton argument the only relevant sums for depreciation had also been deducted as is clear from the management accounts which the judge accepted.
35. So it would seem that in expressing himself as he did the judge failed to convey his true intention. Later he was to deduct tax and it is inconceivable that he had overlooked the other items. In any event we are perfectly satisfied that on the evidence accepted by the judge that the figure of £75,000 for maintainable earnings is secure from attack.

Ground 4.

36. The fourth ground is simply misconceived.
37. By paragraph 25 of the Amended Defence and Counterclaim Europa had sought to recover the value of work carried out after 18^th January 1994. It was put in the following terms:

"In breach of contract, the claimant has failed to pay to the defendant sums due to the defendant in respect of work…between 18^th January and 19^th February when the claimant repudiated the sub-contracts."

There then follows particulars of unpaid work after 18^th January 1994. By its prayer for relief Europa claimed sums due under the contract "alternatively, damages." At paragraph 57 of the judgment the judge said,

"It is not seriously contended by Johnson that no work was undertaken at all. If work was done pursuant to the contract and the proper documentary procedure was not adhered to by (Europa) in consequence of Johnson's action, it would be wrong for a court not to do its best on the evidence before it, to ascertain the value of that work and what, if any, monies are due to (Europa)."

38. The judge then proceeded to do his best on the evidence and came to the conclusion that the proper sum due for work carried out after 18^th January was £25,972. That sum formed part of his award. He went on to explain at paragraph 62:

"Payment is a contractual entitlement. I reject the submission that because some workmen may have been paid arrears by Johnson after 9^th February that this sum is not due."

39. So it can be seen that the claim was in debt and the judgment in similar terms. The fact that the prayer contained an alternative claim for damages is nothing to the point.

Ground 5.

40. Johnson is dissatisfied with the judge's order as to costs. There was some question whether Johnson had sought permission to appeal the order for costs and if so whether permission had been granted but in the end the court was persuaded that the costs order was subject to appeal.
41. The matter was argued and judgment given on 18^th September 2002. It will be apparent from what has gone before that Europa succeeded on the inquiry as to damages but was only moderately successful in its counter-claim. Johnson has not pursued its claim for damages for wrongful repudiation. In those circumstances Mr McMullan had sought an order that Johnson should pay 25% of Europa's costs but Europa should pay Johnson 75% of their costs. In the end the Judge decided that Johnson should pay two-thirds of Europa's costs on a standard basis. He expressed himself as follows:

"In relation to the two substantive matters I have referred to, Europa did not succeed. The trial of those matters occupied time. It gave rise to expense. The issue is, who should pay for that? In cases such as this, particularly where the Mareva is heard together with other (that is the inquiry together with the other matter) where there is overlap of material, it is sometimes very difficult to analyse issue by issue how the costs should fall, particularly after a very long trial. …the fact, however, does remain that Europa did not succeed on two substantial matters, that time was occupied in court and gave rise to costs that otherwise would not be incurred …looking at the matter overall, the proper order in relation to the counter-claim is that Johnson do pay the costs of Europa on the standard basis, as to 66.6%, two-thirds of the costs. I have not made a contra-costs order against Europa because the proportion I have selected has taken account of that. It also reflects some account of the conduct of Johnson. The strong impressions I have had of their overall conduct in this matter I have recorded in my findings in relation to the inquiry on the Mareva injunction matter."

42. It is seldom that this court will interfere with a judge's order for costs, particularly when he has had charge of the matter over a substantial period of time and is able, amongst other things to take into account the conduct of the respective parties. We are simply not satisfied that the judge erred in the exercise of his discretion and reject this ground of appeal also.

The Cross-Appeal.

43. Mr Eklund for Europa has argued that once it is determined that the £75,000 for maintainable earnings was properly arrived at and given the judge's acknowledgement that he had failed to annualise that figure, it becomes a matter of simple arithmetic to supply what would have been the correct figure and the cross-appeal ought to succeed to that extent. In our view, that is an over simplification of the problem.
44. It is, of course, correct that the judge should have looked to a twelve-month period as part of the exercise upon which he had embarked. But as we have noted elsewhere the figure arrived at would be that seen through the eyes of the informed, prudent purchaser immediately prior to the grant of the Mareva. Europa did not make a profit between December 1993 and 9^th February 1994. Nor had it been anything like as profitable immediately before the eight-month period selected by the judge. It was Europa's own evidence through Mr Terry that there was a falling away in work and therefore profits during the winter months. None of this would have been lost on the prudent purchaser. Accordingly we are unpersuaded that the judge's admitted error can be corrected by simply multiplying £75,000 by 1.5. Indeed, we are unpersuaded that any uplift at all can be justified on the material before this court. It would be a speculative exercise on our part and it does not seem appropriate for the matter to be returned to the judge for a further hearing on this subsidiary question. It follows that we dismiss the cross-appeal.

Conclusion.

45. In summary, therefore, we allow the appeal as to bank charges and dismiss all other of Johnson's grounds of appeal. We also dismiss the cross-appeal.
Order: appeal as to bank charges in sum of £1,847 allowed; all other grounds of appeal dismissed and cross-appeal dismissed; counsel to lodge an agreed minute of order. (Order does not form part of the approved judgment)