England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(CHANCERY DIVISION) (COMPANIES COURT)
HIS HONOUR JUDGE HODGE QC
[2011] EWHC 2186 (Ch)

		Royal Courts of Justice Strand, London, WC2A 2LL
		26/02/2013

Lady Justice Arden:

1. Mr Maidment now appeals certain of the directions ("valuation directions") given by HHJ Hodge QC in his judgments of 23 May 2012 ("the May judgment") and 16 July 2012 ("the July judgment") for ascertaining the fair value of the shares in Annacott Holdings Ltd ("the company") held by Mr Attwood, the respondent to this appeal. The judge had previously ordered Mr Maidment to purchase those shares following a successful petition brought by Mr Attwood for relief for unfair prejudice under section 994 of the Companies Act 2006. Mr Maidment and Mr Attwood had effectively been 50:50 shareholders. The petition succeeded principally on the ground that Mr Maidment as sole director had procured the company to transfer its entire portfolio of 46 properties to him at an undervalue.
2. The following valuation directions given by the judge are not appealed:

• That the valuation date ("the Valuation Date") should be 1 October 2005, which preceded the transfer of the properties.

• That there should be no discount to reflect the fact that the petitioner's shares represent a 50% shareholding or the fact that the respondent was sole director.

• That Mr Attwood should additionally receive an award of interest, referred to in this appeal as "quasi-interest", on the price for his shares from 1 October 2005 to compensate him for loss of the use of the money in the meantime.

3. However, the following valuation directions given by the judge are appealed:

i) That the company's business should be valued on a going concern and not a liquidation basis (referred to below as a "break up" basis) of valuation.

Issue: Mr Maidment contends that this valuation direction was inconsistent with the judge's holding on 22 September 2011 that, failing agreement with Mr Attwood, Mr Maidment should have put the company into liquidation, rather than procure the transfer of properties to himself at an undervalue.

My conclusion: For the reasons given below, there was no such inconsistency.

ii) That the contingent liability for corporation tax payable on the disposal of the company's properties should be valued at the amount actually paid as tax by the company on the disposal at an undervalue to Mr Maidment.

Issue: Should the judge instead have used the figure of £983,205.52, being an estimate of the tax which would be payable if the properties were sold at valuation?

My conclusion: For the reasons explained below, the judge was entitled to decide that the appropriate deduction was an amount equal to the tax actually paid.

iii) That there should be no discount for the likely reduction in the proceeds of sale if the company's properties were sold as a single portfolio.

My conclusion: I agree with the judge. There was no need to sell the properties as a portfolio.

iv) That there should be no deduction for the costs of selling the properties.

Issue: Would the deduction have been a windfall for Mr Maidment, as the judge appears to have thought?

My conclusion: As explained below, I consider that the deduction of the selling costs of the actual sales should have been ordered and would not result in a windfall to Mr Maidment.

v) That the rate for quasi-interest should be 2% over Bank of England base rate ("BBR") from 1 October 2005 to 31 October 2008 and 3% over BBR for the period from 31 October 2008 to 16 July 2012. The date in 2008 was chosen to coincide (approximately) with the considerable fall in BBR at that date.

Issue: Was this rate excessive given, for example, that there was no evidence that Mr Attwood had borrowed to buy his shares in the company?

My conclusion: For the reasons given below, I consider that the judge's decision to award interest at this rate cannot be set aside.

4. On all these points, I bear in mind that valuation directions concern the ascertainment of fair value. This calls for an evaluation of a number of factors, including the history of the events in issue in the litigation (Re Bird Precision Bellows Ltd [1986] Ch 658). In those circumstances, an appellate court needs to be satisfied that the judge was clearly wrong before intervening. Of course, it is easier to surmount this hurdle if there has been a misdirection in law.

Issue 1: Inconsistency between direction as to going concern basis and judge's earlier reference to Mr Maidment's obligation to put the company into liquidation?

5. A going concern basis assumes that a company is to continue carrying on its business. By contrast, where shares are valued on a break up basis, the assets of the company are valued as if the company had been put into liquidation and the liquidator had sold its assets. The resulting valuation is generally lower than one conducted on a going concern basis.
6. The judge undoubtedly expressed the view that Mr Maidment should not have transferred the properties to himself without seeking Mr Attwood's agreement, or putting the company into liquidation, so that the disposal of its properties could take place properly. That view was entirely correct.
7. The main point made by Mr Thomas Grant, who appears for Mr Maidment with Mr James Sheehan, is that it was inconsistent with this holding for the judge to go on and direct a valuation of Mr Attwood's shares on a going concern basis. He also points to the fact that the judge held that the company was not a quasi-partnership at the date of the transfer of the properties. For these reasons, he submits, the valuation should have been on a break up basis.
8. We did not call on Mr Andrew Clutterbuck, for the respondent, on this ground.
9. A quasi-partnership is a company where there is a special relationship between the parties which imports equitable considerations derived from the law of partnership. It is unnecessary to say more about those obligations in this case.
10. As I see it, Mr Grant is effectively seeking to undermine the judge's previous direction that there should be no discount for the fact that Mr Attwood did not have a majority shareholding.
11. In any event, however, the judge had to fix a price which was fair. There is no inflexible rule that only in a quasi-partnership case can the court order a valuation on a going concern basis. If the company was valued on a liquidation basis, Mr Maidment (the purchasing member) would receive the difference between the going concern value of the entire company and its break up value. He would therefore receive a windfall at the expense of the outgoing member, Mr Attwood.
12. There was therefore no inconsistency. The judge had to decide whether this resulted in a fair value being fixed for Mr Attwood's shares. A valuation on a break up basis would ignore the fact that Mr Maidment had acquired the assets. As the judge explained:

"[66] It is true that I referred to what should have happened; but it does not follow from what should have happened that I should undertake a valuation of Mr Attwood's shares on a basis which assumes that that had in fact happened, closing my eyes to what in reality had happened, namely a transfer of the properties to Mr Maidment…."

13. The judge explained that he found support in the holding in Re Sunrise Radio Ltd [2010] 1 BCLC 367 that the court had to determine the most appropriate basis of valuation taking into account all the circumstances of the case. He also referred to CVC/ Opportunity Equity Partners Ltd v Demarco Almeida [2002] 2 BCLC 108, a quasi-partnership case in which the appellant had been excluded from management. The Privy Council, on appeal from the Cayman Islands, held that an offer to purchase his shares on a break up basis would not be a fair offer for his shares which would justify giving an injunction against the appellant to prevent him from presenting a winding up petition on the just and equitable ground. The Privy Council reached this conclusion although there was no provision in the Cayman Islands companies legislation which enabled the court to grant relief from unfair prejudice. The Privy Council held that it would not be fair for the respondent to carry on the company's business and pay the petitioner only the break up value.
14. Mr Grant's submission is that the judge should not have relied on Demarco because in the present case, unlike the position in Demarco, the company was formed to make capital profits through property disposal. In addition the company's days were numbered: to carry on business as a limited company made it more difficult for Mr Maidment to raise mortgage finance. Whether that is so in practice or not, that distinction seems to me to be irrelevant to the valid point which the judge was making. The fact was that Mr Maidment would derive a windfall from a valuation on a break up value even if he decided to realise it and liquidate the company, and became liable for tax on it. Accordingly, Demarco is relevant by analogy to the present case, and the judge was thus entitled to rely on it in that way.
15. There is nothing in the further point made by Mr Grant that Mr Attwood had before his success on his s 994 petition pressed Mr Maidment to agree to a resolution for liquidation. Events had moved on by the date of the judge's order.

Issue 2: Appropriate allowance for corporation tax on the disposal of the properties

16. Mr Michael Taub of RSM Tenon, the joint expert on share valuation, opined that there should be an allowance for corporation tax. His starting point for his calculation of the correct figure for that was to apply a tax rate of 30% to the notional gain on the properties as at the Valuation Date. The resultant figure, which I will call the notional tax charge, amounted to some £983,305.52. He then discounted that figure by 50% to take account of factors such as the possible availability, when the properties came to be sold, of reliefs which would reduce the tax. The figure he actually allowed for tax was therefore £491,652.76. The reasons for the difference between actual tax paid and the notional tax charge were as follows:

the sales to Mr Maidment were at an undervalue,

the sales had taken place over 4 years, and

in some years the gain on disposal had been set against trading losses.

17. The judge rejected the opinion of Mr Taub. He held that the appropriate reduction was the aggregate amount ("the disclosed amount") of the actual tax paid (£214,000) by the company as disclosed in its 2006, 2007 and 2008 annual accounts. The disclosed amount reflected deductions that had actually been made for losses available for set off, reliefs and the fact that the properties were sold at an undervalue. The judge directed that the question of any further deduction for corporation tax be referred back to Mr Taub. Mr Maidment provided no further evidence to Mr Taub of tax paid or any other matter relevant to the allowance for tax. Mr Taub reported back to the court that he did not think it was appropriate to take into account the actual tax paid having regard to the fact that the basis of valuation was one of a notional negotiated sale.
18. At the July hearing, Mr Grant submitted that the judge should adopt the proposal originally made by Mr Taub, or give directions for evidence as to the calculation of actual tax paid. The judge rejected both submissions and instead discounted the disclosed amount to £200,000 to take account of the time value of money. The judge took the view that that figure was the fair allowance in respect of corporation tax.
19. Mr Grant submits that it was erroneous for the judge simply to look at the disclosed amount for the following reasons, which I will address in turn:

i) The actual tax charge in 2006 to 2008 was insufficient because (a) prior years' losses were utilised and (b) not all properties were sold.

I reject this submission:

There was no evidence about this before the judge.

The judge's rejection of Mr Maidment's application to put in that evidence was a matter of case management and thus cannot be set aside save for misdirection or perversity. Neither ground can be shown. As Mr Clutterbuck submits, it was for Mr Maidment to put in evidence to Mr Taub, or alternatively to the court, to show the true amount of the tax burden. Mr Maidment had previously put in evidence without any directions in advance, as the judge himself recorded in his judgments.

ii) The judge should in any event have valued the contingent liability for tax at its full nominal value. It was wrong in law for the judge to take the amount when it became an actual liability as that event occurred subsequent to the Valuation Date.

On being directed by the court to the leading case for the contrary proposition, namely Bwllfa Merthyr Dare Steam Collieries (1981) Ltd v Pontypridd Waterworks Company [1903] AC 426, Mr Grant submits that this case is not authority which supports the proposition. In my judgment, the Bwllfa case is binding on this court for the proposition that in valuing a contingent liability the court should take into account events subsequent to the valuation date which shed light on its value. As Lord Macnaghten said in Bwllfa:

"With the light before him, why should [the tribunal] shut his eyes and grope in the dark?"

See also for example, Phillips v Brewin Dolphin Bell Lawrie [2001] 1 WLR 143. It is clear that the judge had this well-known principle in mind. I therefore reject Mr Grant's submission as a general proposition of law.

iii) As to whether the judge's approach produced a fair valuation of Mr Attwood's shares, Mr Grant reverts to the point that the judge should proceed on a real and not a fictional basis and that he failed properly to engage with the fact that there was no conceivable possibility that the company would continue to carry on its business as it had done in the past because of the financing difficulties to which I have already referred. In my judgment, the judge was entitled to proceed on the basis he did. The fact was that Mr Maidment was continuing to benefit from the properties by having transferred them to himself. He had chosen to transfer them to himself at a depressed figure. He might or might not sell them in the future. As the judge noted, a prudent owner did not have to sell the properties. If he wanted to raise cash he could remortgage them, although, as Mr Grant submits, this would not unlock the whole of their capital value.

20. Both counsel referred to Shah v Shah [2011] EWHC 1902 (Ch). The valuation of the contingent tax liability in that case (also a section 994 case) turned on the facts, but Newey J applied the same basic approach as the judge of having regard to what was going to happen in that case in the real world. That approach is in turn consistent with the approach in Bwllfa. Accordingly, Shah does not assist Mr Grant's case.
21. In my judgment, the judge was entitled on the facts of this case to rule that actual tax paid was a suitable deduction for the purpose of achieving fair value.

Issue 3: Discount for the sale of the company's portfolio of properties in a single lot

22. Mr Grant submits that the judge wrongly refused to make a deduction to take account of the fact that those portfolio properties would be sold as a single lot. The experts had agreed that the proceeds would be less in that event.
23. In my judgment, the judge was entitled to leave this discount out of account. The properties could clearly be sold over a period of time. They could be sold singly or at auction so that any loss through sale as a portfolio could be avoided. This was a realistic assumption to take. Even in 2012 Mr Maidment had not sold all the properties.

Issue 4: discount for selling costs

24. The judge made no deduction to compensate for these costs. Mr Clutterbuck submits that they were correctly disallowed since it would result in a windfall to Mr Maidment.
25. In my judgment, there should be some allowance for the selling costs to reflect the fact that the company could never have realised any value from the properties without paying these costs. Selling costs are typically paid as a percentage of proceeds of sale. The judge considered that the appropriate rate for selling costs was 1.5% in total. There is no appeal against that rate. Although Mr Clutterbuck sought to argue in submissions submitted after the circulation of our draft judgments that this figure should be discounted, I consider that we should not entertain that argument. Thus, in my judgment, the rate for selling costs should be that found by the judge.
26. The judge did not decide whether, if he was wrong in making no deduction for selling costs, the liability to pay selling costs on sale of the properties should be ascertained by applying the appropriate rate (1.5%) to the notional agreed aggregate values of the properties as at 1 October 2005 or the amount which Mr Maidment paid the company for them. I would allow this matter to be raised after the circulation of our draft judgments as it raises an issue of consistency with the other issues on this appeal, and we have now had submissions from both sides. I consider that the liability for selling costs should be valued by applying the rate to the actual sale proceeds on the sale to Mr Maidment. If the company had retained the properties included in the valuation at the Valuation Date, the selling costs would have been deducted from the gross value of the company, but here the company has already disposed of the properties at an undervalue to Mr Maidment. The company will never incur the costs of selling the properties at their agreed values, and any further disposal by Mr Maidment is uncertain. To make a deduction on the basis of the agreed values of the properties would confer a windfall on Mr Maidment. Doing the best we can I would direct the application of the rate to the actual sale proceeds and allow a deduction on that basis. At the trial of the unfair prejudice petition the judge was satisfied as that there had been a sale at an undervalue though he could not find the precise amount of the undervalue. If the amount of the actual sale proceeds is not agreed, the judge will have case management powers to ensure the just and proportionate determination of the actual proceeds for the purpose of quantifying the deduction.

Issue 5: Quasi-interest

27. As I have explained, since the judge chose a historic date for valuing the shares, he took the view that the petitioner should be compensated for the time value of money by an award of interest. In Pro-Finance Trust SA v Gladstone [2002] 1 WLR 1024, this court sanctioned this approach but held that the power to award such interest should be exercised with great caution. The power ought, therefore, only to be exercised with a proper evidential basis.
28. The principal ruling of the judge on quasi-interest is in the May judgment:

"…At the time I delivered my September [2011] judgment, I had not been addressed on the question whether interest should be awarded on a borrowing, or a lending, basis. It seems to me here that the appropriate basis must be an investment, or lending, basis. Mr Attwood chose to leave his monies invested in Annacott. In those circumstances, it would be wrong for him to be awarded interest on a borrowing basis, particularly in the absence of direct evidence of whether he had been borrowing money, and, if so, at what rates. It seems to me that the appropriate basis for an award of interest should be on the lending, or investment, basis. Mr Attwood has regrettably not chosen to adduce evidence himself of what rate of interest he would have earned. The only evidence comes from Mr Maidment; and, as I have indicated, it seems to me the evidence he has produced is of unduly low rates of interest which do not represent what a prudent investor, with money of the level we are talking about, would have earned had the monies been placed on deposit.

[74] I am left, therefore, with little better guidance than I was in September. Doing the best I can, and based upon my own experience and knowledge, and bearing in mind that base rates have been kept artificially low in order to promote the general interests of the economy and, as a result, have resulted in better deals being around for investors than there might have been if base rates were at a higher level, it seems to me that the appropriate rate to take is a rate of 2% above base up to 31 October 2008 and a slightly higher rate of 3% above base thereafter. That, it seems to me, is the best I can do on the available evidence." (emphasis added)

29. Mr Grant submits that the award of interest was excessive:

i) The judge ignored Mr Maidment's evidence showing that the rate paid on deposits with no instant access was approximately 2% on average.

ii) The judge held that he was taking a rate appropriate for a lender or investor, but in fact took the higher rate appropriate for a borrower.

iii) Mr Attwood was not a borrower as he was receiving sums from the parties' other company, Tobian Properties Ltd.

iv) The judge wrongly decided the matter on the basis of his personal experience.

30. Mr Clutterbuck submits that:

i) Mr Maidment's evidence, which the judge considered at the July hearing, was about term rates and household rates and was therefore inappropriate.

ii) The judge's rates were consistent with the practice in the Commercial Court: see, for example, Jaura v Ahmed [2002] EWCA Civ 210.

iii) The judge was simply doing the best he could using his experience in a legal sense in making awards under section 35A of the Senior Courts Act 1981.

31. In my judgment, it is clear that the judge saw the award of quasi-interest as an essential part of the relief granted in this case: see the unappealed valuation directions at paragraph 2 above. The principle that the judge had to act with great caution went to both the award in principle and to the rate. The question of borrower or lender is only indirectly relevant since the judge was awarding quasi-interest under section 994 of the Companies Act 2006. But the rates used on awards of damages under section 35A were a useful benchmark for him to take.
32. In my judgment, the judge was entitled in his discretion, which was of course to be exercised judicially, to reject Mr Maidment's evidence as it related to small deposits. The value of Mr Attwood's shareholding exceeds £1.5m.
33. The judge similarly had a discretion as to the rate to be awarded. He had to exercise caution so as not to overcompensate Mr Attwood. That militated in favour of a conservative rate. I consider that the judge adopted that approach. The rate that he ultimately ordered was in fact a rate often ordered under section 35A of the 1981 Act. No compound interest was awarded.
34. It would not have been correct for the judge to say that he was taking the rate appropriate for a lender, and then to take a rate appropriate for a borrower, or to make his decision on the basis of evidence not available to the parties. However, in my judgment, he did neither of these things. It is tolerably clear that he was working on the basis of the practice of the court under section 35A of the Senior Courts Act 1981. The rate that he directed was not an unusual rate (see Jaura v Ahmed above, but note now the observations of Tomlinson LJ in F& C Alternative Investments Holding Ltd v Bartholemy [2012] EWCA Civ 843, with which I there agreed). On the contrary it was one that would be properly capable of being awarded under section 35A.
35. There is a subsidiary point with which I must deal. Mr Grant submits that the award of interest in a case such as this is different from the case where interest is awarded on damages pursuant to section 35A. In the latter case an obligation was breached. I do not accept that submission: Mr Maidment breached the obligations of fair dealing that he owed to his co-shareholder.
36. In those circumstances, I do not consider there is any error of law, or other basis, for interfering with the judge's decision on the rate.

Conclusion

37. For these reasons, I would allow this appeal as regards selling costs but otherwise dismiss it.

Lord Justice Elias:

38. I agree with the conclusions reached by Arden LJ in her admirably crisp analysis, essentially for the reasons she gives.
39. I confess that I did have some concerns that the corporation tax liability might have been under-estimated, not because it was wrong in principle to focus on the tax liability actually incurred rather than to speculate what it might have been – the Bwllfa principle is manifestly appropriate here – but because that liability was assessed by reference to a price which was an undervalue.
40. Accordingly, by focusing on the tax actually paid, it may be said that Mr Attwood is obtaining a windfall as a result of Mr Maidment's breach of duty. However, that tax is all that the company in fact had to pay when it sold the properties, and in effect the business. Accordingly, a fair and equitable division of the value of the company, in accordance with the Demarco principle, justifies taking that figure into account.
41. It is true that on any subsequent sale of the properties Mr Maidment may have to pay more tax than would otherwise have been the case had he paid the true price for them, because the profit on a resale will be larger than it would have been had he paid full value. But that is not a factor which was relevant to any assessment of the value of the shares.
42. Logically, it seems to me that there is no sensible answer to the contention that the judge should have taken into account sale costs also. They are costs necessarily incurred by the company on the sale of the properties and it is a windfall to Mr Attwood to ignore them. Given that the properties have now been sold, it is also consistent with the Bwllfa principle to look at what costs were in fact incurred rather than to speculate, just as with the tax liabilities.
43. I see no basis for treating costs and tax liabilities differently in this regard. However, in the absence of any evidence about what those costs actually were, I agree with Lady Justice Arden that the judge's assessment of 1.5% of the value of the properties should be adopted. That might arguably be marginally favourable to Mr Maidment since presumably no estate agents' costs will have been incurred by the company on these sales, but some general figure has to be adopted, and this seems to me to be an appropriate one. It is, however, consistent with the Bwllfa principle to apply that percentage to the actual price paid for the properties rather than their notional value.
44. Save in relation to these costs, I too would dismiss this appeal.

Lady Justice Black:

45. I agree with both judgments.