England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		24 July 2006

The Hon Mr Justice Blackburne:

Introduction

1. On 10 March 2006 I handed down judgment on this section 459 petition. The principal complaint of the petitioners was that the first respondent, Ian Irvine ("Ian"), had conducted and was continuing to conduct the affairs of the second respondent ("CIHL") in a manner prejudicial to the petitioners' interests in that he had procured the payment to himself of excessive and unjustified levels of remuneration. A further complaint was that, as a consequence of the payment of the excessive remuneration, the shareholders had received either no dividends at all or, in respect of CIHL's financial years ended 31 December 2000 and subsequently, had received what the petitioners referred to as inadequate dividends. A yet further complaint was that Ian had failed to run CIHL in accordance with the requirements of the Companies Act 1985.
2. Relevant to the complaints was that the petitioners' shares together represented 49.96% of the issued shares in CIHL and that the balance, 50.04%, was held by Ian. Of the petitioners' 49.96%, just under half were and are held by the first petitioner ("Patricia") and the balance by the second petitioner ("the Trust"). Their shares were acquired from the 50% holding in CIHL formerly owned by Malcolm Irvine ("Malcolm"), Patricia's late husband and Ian's younger brother. Malcolm had died on 1 March 1996. In August 1994 Malcolm had given half of his shareholding to the Trust. By his will, he had given one share to Ian and the remainder to Patricia. The Trust, of which Patricia was one of the two trustees, is for the benefit of Patricia's three sons who are all now adults. For all practical purposes Patricia and the Trust speak as one voice.
3. Patricia and Ian were at all material times and remain the only directors of CIHL which acts as a holding company. At all times it has operated through wholly owned trading subsidiaries, principally Campbell Irvine Ltd ("CIL"). The business of the group has been that of insurance broking with the bulk of its income derived from travel insurance. The remainder of the business has been in general insurance broking. With effect from 1 January 2003 the general insurance side of CIL's business was transferred to and since that date has been conducted by Campbell Irvine (Insurance Brokers) Ltd ("CIIBL") which is another wholly owned subsidiary of CIHL. Prior to that date all of the business had been conducted through CIL.
4. As regards the first and second of the petitioners' complaints I found that the petitioners succeeded. In paragraph 325 of the judgment dated 10 March 2006 I stated that the petitioners succeeded:

"… to the extent that [Ian] drew more by way of remuneration for the years 1996 to 2004 … than he should and that, in consequence, he prevented Patricia and the Trust from receiving as much by way of dividend as they would have received – consistently with the historic policy of profit distribution – if the remainder of the profits (after deduction of Ian's proper remuneration and the annual sums actually carried to retained profits) had been paid out by way of dividend."

5. Relevant to this was my conclusion, set out in paragraph 322, that Ian's

"…appropriate remuneration would have been 40% of the business's net profits (calculated after payment of all expenses but before tax) subject to a minimum of £300,000 (for the year 2003) and discounted down…[as per certain calculations]…for each preceding year back to 1996. The excess would have been available for payment as dividends to Ian, Patricia and the trustees of the Trust according to their respective shareholdings and, given the practice of distributing as much of the Company's profits as possible (subject only to the small amounts annually retained), would probably have been dealt with in that way."

I went on to state in paragraph 323 that "this split, ignoring tax, produces a 70/30 division of profits between Ian on the one hand and Patricia and the Trust on the other".

6. The sums in fact drawn by Ian as remuneration exceeded, by a very wide margin, the 40% of distributable profits (subject to the stated minimum) to which I had referred. I was not concerned in the judgment to state the precise amount of the excess.
7. I also found that there had been failures by Ian to comply with requirements of the Companies Act 1985 in various respects but concluded that they had not caused the petitioners to suffer any material prejudice.
8. On the issue of relief I accepted the petitioners' submission that Ian should be required to buy or procure the purchase of the petitioners' shares. I so ordered. I stated that in fixing the price account should be taken of the excess remuneration drawn by Ian in accordance with my earlier conclusions. I stated that I had no particular view on the date as at which the buy-out order and therefore the share valuation should be treated as taking effect and that if necessary I would hear further argument on those matters. I also stated that, if necessary, I would consider whether there should be a discount to reflect the fact that the petitioners' shareholding constituted a minority of CIHL's issued shares. In making a buy-out order I recorded a submission made on Ian's behalf that if, as occurred, I should conclude that Ian had drawn excessive remuneration and that he should repay the excess, the harshness of that on Ian could be reduced by directing that a dividend be paid by CIHL to its shareholders thus enabling Ian to set off his dividend entitlement against the amount that he should be found to owe with the court fixing the level of Ian's remuneration for the future. This had been put forward as an alternative to the making of a buy-out order.
9. A further hearing in the matter took place on 16 March 2006 to determine whether in the working out of the buy-out the 49.96% shareholding of the petitioners was to be valued on a pro-rata, non-discounted basis or whether it should be valued to reflect the fact that it was a minority holding. On 23 March 2006 I handed down a short written judgment concluding that the petitioners' shareholding must be valued for what it was, namely less than 50% of CIHL's issued share capital and that it should be discounted accordingly. I stated that the extent of the discount would be a matter for the valuers.
10. At the time of handing down the judgment on 23 March I was supplied with a draft order agreed between the parties intended to give effect to that judgment and the main judgment delivered a fortnight earlier. The order, which I approved, contained an undertaking by Ian that in relation to the financial year ending 31 December 2005 and until such time as the petitioners' shares in CIHL should have been purchased, Ian would not draw any more than 40% of the total net profits of the Campbell Irvine business (after payment of expenses but before tax) by way of remuneration in accordance with the formula set out in paragraph 322 of the main judgment. The order then went on to provide that pursuant to section 461 of the Companies Act 1985 the petitioners' shares in CIHL should be purchased by Ian or Ian should procure that CIHL should purchase them. It then went on to provide by paragraphs 2 and 3 as follows:

"2. …the Petitioners' shares in CIHL shall be valued as at 10^th March 2006 on a going concern basis, with a discount for the fact that the Petitioners' combined shareholding represents a minority holding and taking into account all of the excessive remuneration that has been taken from CIHL by the first Respondent and which sum he must notionally repay to CIHL;

3. …the First Respondent shall pay interest compounded annually at the Judgment rate on all of the excessive remuneration that he has taken from CIHL or any of its subsidiaries;"

The order then set out directions concerned with the further hearing to determine the valuation of the petitioners' shares.

11. This judgment follows the hearing to determine that valuation. As before, Miss Catherine Roberts appeared for the petitioners and Mr Nigel Dougherty appeared for Ian.

The issues to be decided

12. The experts on each side concerned with valuation - Mr Emile Woolf of Kingston Smith for the petitioners and Mr Mark Collard of KPMG LLP for Ian - were agreed that there were two elements to the valuation: (1) a calculation of the excess remuneration drawn by Ian over the period 1996 to 2004 plus interest thereon (to give effect to paragraphs 2 and 3 of the order made on 23 March) thus creating, as Mr Woolf put it, "a notional surplus cash balance within CIHL's balance sheet as at 10 March 2006" and (2) a valuation of the underlying business (to be valued as a going concern as the order required) conducted by the two trading subsidiaries, CIL and CIIBL. Although it was agreed between the two valuation experts, or was implicit in their respective valuations, that the valuation should not distinguish between the travel and non-travel (or general) sides of the business (ie that the business should be treated as a whole, as if run by CIHL, rather than as distinct businesses conducted through CIL on the travel side and through CIIBL on the non-travel side) and that CIHL's maintainable gross commission income ("gross commission") as at 10 March 2006 was £2.3 million and its maintainable profit before tax ("PBT") as at that date was £750,000, they disagreed on the following issues: (1) whether the value should be by reference to multiples of gross commission (as Mr Woolf contended) or by reference to a combination of multiples of gross commission and multiples of PBT (as Mr Collard contended); (2) what the relevant multipliers were; (3) what the minority discount should be; (4) whether the minority discount should apply to the notional cash surplus as well as to the value of the underlying business (as Mr Collard contended) or whether it should only apply to the value of the underlying business, with the cash surplus divided according to the existing shareholdings, in effect as if it were a distribution to shareholders (as Mr Woolf contended); and (5) how the actual surplus cash in CIHL, namely the profits available for distribution earned in 2005 and any cash surplus built up in the ten weeks to 10 March 2006, should be dealt with.

The experts

13. Before coming to those issues I should say something about the two valuation experts and, much more briefly, the two other experts who were called. As regards valuation issues, Mr Woolf, who had given evidence at the main trial, has had experience of valuations largely if not exclusively in connection with his very wide ranging forensic accounting experience, largely concerned with the preparation over many years of many reports dealing with accountancy and related disputes. He has had some experience of the acquisition of insurance brokerages in his capacity as a non-executive director of The Hyperion Insurance Group although his knowledge of the particular acquisitions was limited not least because he was not personally involved in their negotiation. It was clear, however, that he has not had anything like the detailed day to day experience of company and shareholder valuations that Mr Collard has had. Mr Collard is currently a Director in the Valuation Unit of KPMG Corporate Finance and one of KPMG's accredited valuation experts. His work since 1981 has been in valuations. Between 1981 and 1989 he served in the Shares Valuation Division of HM Inland Revenue, valuing unquoted shares, businesses and other assets for various tax purposes. Between 1989 and 1997 he was with Deloitte Haskins & Sells (later, following a merger, with Coopers & Lybrand), initially valuing unquoted shares, businesses and other assets for various tax purposes both for individuals and for companies and, from 1992, valuing such assets for purely commercial purposes (for example under a company's articles or under a shareholder agreement). From 1997 he performed a similar role at KPMG, becoming a director in the valuation unit in 1999. He estimated that since 1981 he has prepared or been responsible for over one thousand valuations, including the valuation of between fifteen to twenty businesses comprising or including insurance brokerages.
14. Miss Roberts described Mr Collard as being "over elaborate" and "opaque" in many respects and over influenced by his taxation background. She criticised his report as "over complex".
15. I do not consider that these were fair criticisms. I consider that her reference to the "over elaborate" nature of Mr Collard's report was, in part at least, to compensate for the fact that Mr Woolf's valuation was short on any detailed analysis and rather longer on his general feel for the matter and his reliance on experience. In particular, it did not strike me that Mr Collard's approach was overly influenced by his years of valuing for tax purposes. In any event, it was not obvious to me why such experience was in some way to be held against him in respect of his general expertise in the field not least when Mr Collard had acted, when carrying out valuations for tax purposes, both for the Revenue and, after 1989, for the taxpayer.
16. Of the two valuation experts I consider that Mr Collard brought a greater degree of experience and analysis to his opinion than Mr Woolf did. That said, as will appear, there was little to choose between them.
17. Each side also called a taxation expert, Mr Peter Holgate for the petitioners and Mr David Kilshaw for Ian. Mr Holgate is a senior equity partner in Kingston Smith, of which Mr Woolf is also a partner. Mr Kilshaw is, like his fellow expert Mr Collard, a partner with KPMG LLP.
18. Since Mr Holgate and Mr Kilshaw agreed on the relevant tax principles which were applicable and how those principles applied, it is not necessary to go further into their respective professional background and experience. They were agreed that the order requiring Ian to purchase or procure the purchase of the petitioners' shares for a consideration incorporating the excess remuneration as part of the consideration would not bring about a change in the taxation position of CIHL or its subsidiary companies or have any taxation impact on them. They were also agreed that if Ian had not drawn the amount of the excess remuneration and the monies in question had remained within CIHL, corporation tax at 30% would have applied leaving the remaining profits available for distribution by way of dividend. They were also agreed that in arriving at that part of the consideration represented by Ian's excess remuneration, a deduction for notional corporation tax at the rate of 30% would appear to be appropriate and that such a deduction would not give rise to any "windfall" to Ian. There was a difference between them over how the excess remuneration drawn by Ian was to be dealt with (a difference of opinion shared by the other experts and the parties generally) but, as they acknowledged, this was not within the area of their expertise.
19. The only other matter which I should mention at this stage is that Mr Kilshaw had very helpfully drawn up some calculations showing what, after taking into account corporation tax and national insurance contributions, the amount of surplus cash, ignoring interest, would have been which would have appeared in CIHL's balance sheets if Ian had only taken remuneration equal to 40% of each year's distributable profits. This was not something which strictly arose for him (or Mr Holgate) as taxation experts to comment upon and therefore Mr Holgate had not dealt with it in his report. Nevertheless, as will appear, I was greatly assisted by Mr Kilshaw's calculations.

The basis of approach to the valuation of the underlying business

20. Mr Woolf considered that the application of a multiplier to the maintainable gross commission income was the approach "most commonly" adopted when valuing an insurance brokerage for the purposes of acquisition. He said that this approach, rather than a multiple of PBT, was appropriate where the acquiring entity has an existing costs structure capable of accommodating the additional turnover of the business to be acquired, thereby achieving what he described as "synergetic cost savings". Mr Collard, although accepting that this approach is a recognised industry rule of thumb, warned of the dangers of relying on this approach alone to valuation. He set out his reasons for this in paragraph 5.2.3 of his report. I see force in his reasons for expressing such caution. It led him to adopt the mixed approach of using both multiples of gross commission income and multiples of PBT. That seemed to me to be a prudent method of approach.

The relevant multiples

21. Mr Woolf considered that the relevant multiplier - to be applied to gross commission - lay between 1 and 2, with 1.25 to 1.75 being the correct range. In deciding what particular multiplier within that range should be selected he took into account the importance of Ian's role to the success of the Campbell Irvine business (and therefore to the maintenance of the commission income), Ian's uncertain state of health, Ian's age (65), the dependence of the business on the Trailfinders account, the strong and enduring connection between Ian and Mr Gooley (now aged 70) of Trailfinders, the statement by Mr Gooley that if Ian were not running Campbell Irvine, Trailfinders would put its account with Campbell Irvine out to tender, and the various matters which emerged from a meeting he and Mr Collard had with Ian in early April. Those matters included difficulties facing the travel industry, namely lower commission rates, the increasing tendency of customers to look for travel insurance by approaching insurers direct, or by resorting to the internet, or by taking out annual or multi-trip cover (rather than holiday-specific cover), and increasing regulation. Mr Woolf noted also that none of this appears to have impacted on Campbell Irvine's turnover, which, overall, had remained remarkably constant over recent years. He also took into account Ian's stated willingness (as expressed at the meeting) to continue for two or three more years and the views of colleagues on the board at Hyperion on how best to secure the all-important services of a person who like Ian was key to the continued success of a business such as Campbell Irvine's. Taking all of these matters into account Mr Woolf considered that a multiplier of 1.25 was appropriate. He noted that this multiple was lower than the multiple which was implicit in Towergate's offers for CIHL in early 2004. On the footing of a multiple of 1.25, he therefore valued CIHL's business as a whole at £2.9 million as at 10 March 2006. To this was to be added the notional cash surplus referred to earlier and to which I shall return later in this judgment.
22. Mr Collard's approach to the issue of multiples, whether when applied to turnover or to PBT, was to look to two separate sources: the quoted company sector and the prices paid for companies that had recently been sold. The companies and transactions in question all involved insurance brokers or closely related businesses. In his report Mr Collard referred to the former as comparable companies and to the latter as comparable transactions.
23. As regards comparable companies, Mr Collard felt able, by extracting certain information available from their published accounts and averaging the results, to estimate overall benchmark multiples, both in respect of gross commission which he found to be 1.7 and in respect of PBT which he found to be 11.2. Mr Collard's next task was to adjust the multiples to reflect the fact that CIHL is a private company and to take account of CIHL's particular circumstances. That involved a number of factors, two of which, namely the so-called "control premium" (the need to reflect the fact that CIHL was being valued as a whole whereas the share prices of the quoted companies were of very small parcels of shares) and the fact that CIHL's PBT, assuming Ian's remuneration is no more than 40% of PBT, is very much greater than that of the comparable companies, argued in favour of an increase in the relevant multiple. By contrast, others, namely the relatively greater difficulty in realising value from a sale of a private company as compared with the sale of quoted shares, CIHL's reliance on Ian as its key executive, the fact that CIHL is perceived by many to be Ian Irvine's business, Ian's age and uncertain state of health, the lack of turnover growth in recent years and the business's gradually declining profit margin (40% in 2001 falling to 32% in 2005), argued, in Mr Collard's view, in favour of a reduction in the relevant multiples. Overall, and exercising his judgment in such matters, Mr Collard considered that there should be a significant discount to the comparable company multiples. He judged the discount to be 45% to 50% against the gross commission multiple of 1.7 and 70% to 75% against the PBT multiple of 11.2.
24. Since Mr Collard relied on very few examples of comparable companies (there were no more than four quoted companies in the reckoning) and since he had carried out very little analysis of the underlying position of each company to determine the extent to which that company could be sensibly described as comparable and therefore the extent to which the information to be gleaned should be adjusted to reflect the particular circumstances of the Campbell Irvine business, it was evident that the exercise was very approximate and, given the scale of the adjustments needed, ultimately a very subjective process. The difficulties were no less in the case of the comparable transactions of which about ten were relied upon by Mr Collard. The comparable transactions involved the sales of private companies most but by no means all of which had a turnover roughly comparable to that of CIHL. From the information available from those transactions he felt able to derive a range of turnover multiples which, after removing so-called "outliers", he found to lie between 0.8 to 1.2 times gross commission. Although these transactions involved private companies so that, unlike the comparable companies which were all quoted, no adjustments were needed to reflect the fact that CIHL is a private company, there was even less information available to compare them with CIHL and only minimal information about the terms of each particular transaction. As Mr Collard himself fairly observed:

"..it is rare to have full information surrounding such a transaction and so the wide range of multiples displayed is difficult to explain …"

25. The net result of Mr Collard's consideration of these matters was a range of value of £1.95 million to £2.16 million when assessing CIHL's value on the basis of gross commission and £2.1 million to £2.55 million, when measured on the basis of PBT. His comparison of CIHL's business with the supposedly comparable transactions produced a range of value of £1.84 million to £2.76 million. Mr Collard then averaged the three ranges to produce an overall value for the underlying business in the range of £2 million to £2.5 million.
26. It is exceedingly easy to criticise both Mr Woolf's and Mr Collard's approaches to what in truth is very much a matter of valuation judgment. As it happens, the difference between the two was not that great. At the end of the day the role of Ian is, it was common ground, key to the value to be attached to the future trading prospects of the Campbell Irvine business. Considering the position as at 10 March 2006 a third party would be aware that Ian was subject to no contractual tie, was approaching 65, and was central to the maintenance of turnover and profitability. The third party would be concerned about the uncertainty over Ian's health (there was in evidence a medical report indicating that Ian suffers from progressive degenerative change in his knees and hips, and from a measure of cardiovascular degradation which has probably resulted in a recent minor stroke and is said to constitute "an increasingly and seriously limiting factor in the future") but aware also (as was evident from the note of the meeting with Ian attended by the two experts in early April) that, assuming his health allows, Ian was prepared to continue working for a further two to three years at the most. Taking these factors in the round and bearing in mind that, as the evidence amply demonstrated, although insurance brokers face increasing difficulties, both competitive and regulatory, in maintaining their business turnover, Campbell Irvine had nevertheless succeeded in maintaining turnover at roughly the same level for the past five years but showed no sign of increasing that level, I consider that a third party would be wary about placing too much reliance on Ian's continued availability in the Campbell Irvine business and wary therefore of the ability of the business to maintain its income and therefore profits in other than the relatively short term.
27. I consider that Mr Collard's approach, although admirable in theory, depended in its application upon "comparable" material which was too small in scope and too unresearched in point of underlying detail and, on its face, too different from CIHL, to provide any kind of reliable guide. That said, the top of Mr Collard's valuation range was £2.5 million. Ignoring the paucity of material supporting his recourse to comparable companies and transactions, and after allowing for what seemed to me to be a degree of overlap between several of the factors which Mr Collard separately identified as matters which went to reduce the multiples, it is appropriate in my view to take a figure which is marginally above the top of Mr Collard's range of values. Equally, I consider that Mr Woolf was attributing rather too much dependence on Ian's willingness and ability to continue in the business.
28. Doing the best that I can, and accepting that the application of a multiplier to gross commission is in all the circumstances the preferable approach, I consider that making every allowance for the matters referred to above the appropriate multiple to be applied is 1.1. In the circumstances, therefore, I propose to fix the value of CIHL's business, ignoring any surplus cash element, at £2.53 million.

The minority discount

29. It is important to be clear about what is involved. The assumption to be made is that, contrary to the actual fact (at any rate as far as Ian is concerned), the parties to the sale assume a willing vendor in the petitioners and a willing purchaser in Ian. The discount must reflect the fact that the holding, even though 49.96% (and this assumes, as was common ground, that that holding is to be treated as a composite entity), provides no more control over how Ian, who is in control, can conduct the business - within the tolerances allowed by general company law, than if the holding had been no more than, say, 30%. The petitioners' holding can block the passing of a special resolution but can achieve little more. It is not to be assumed that because, as a result of the sale, Ian will control, either by purchasing the shares direct or by procuring that CIHL purchases them, all of the issued share capital, that gives to the petitioners' holding some kind of premium value. Although the sale is to Ian, the assumption to be made is that the sale is to a willing third party purchaser. Moreover the sale is of a going concern as it is on that basis that, rightly, the business has been valued.
30. Mr Woolf considered that the range of discount was 10 to 30%. He opted for the mid-point, 20%. In his report he gave no particular reason for selecting that figure. In his oral evidence he was inclined, for no particular reason, to disregard such guidance on the matter and on the range of discount that they indicate, to be found in materials such as HM Revenue and Customs' Share Valuation Manual, or in Mr Christopher Glover's oft-cited book "The Valuation of Unquoted Companies". He also seemed inclined, in selecting his figure, to attach weight to the fact that it was only because Malcolm had made a gift to Ian of a single share that Ian enjoyed his majority control and also to the fact that, by acquiring the petitioners' shares, Ian would, at one stroke, be free of further shareholder criticism of his conduct of affairs. But, as Mr Dougherty observed, the first of those matters is irrelevant since it is not suggested that any restrictions were attached to the gift of the one share; the fact is that it gave Ian overall shareholder control. And the second is in truth an attempt to say that Ian as the actual purchaser is in some sense a special purchaser. For the reasons already stated, that is not a correct way of approaching the level of the discount. The matter is to be approached on the footing that the purchaser is acquiring a minority holding.
31. Mr Collard stated that the size of the discount lay between 25% and 40%. He referred to the Revenue's Share Valuation Manual in support of that range and to Mr Glover's book as an illustration of the particular discount of 35% that Mr Collard considered should apply.
32. Both experts acknowledged, as do the source materials to which Mr Collard referred, that there is no simple rule of thumb and that the matter is one of judgment dependent upon all the circumstances.
33. I am of little doubt that the discount is nearer to Mr Collard's 35% than to Mr Woolf's 20%. I propose to adopt a discount of 30%. It follows that I value the petitioner's 49.96% shareholding at £884,791 (ie £2.53 million x 0.4996 x 0.70), say £885,000.

The cash surplus

34. The task here is to compensate the petitioners for the fact that Ian withdrew substantially more by way of remuneration than he should have done. There is also, it was common ground, a need to compensate the petitioners for the value of the cash actually in the business and available for distribution in respect of the year 2005 and the first ten weeks of 2006 (ie up to 10 March 2006).
35. It occurred to me during the present hearing that one way in which it would be possible to put right the consequences of the excess drawings would be to calculate what, year by year, the excess was that Ian had drawn and, after adjusting the figure for employer's national insurance contribution and corporation tax, work out how much of the excess would have been paid to Ian and the petitioners by way of dividend if, instead, they had resolved to distribute that amount. Relevant to this was my finding, see paragraphs 25, 317, 318 and 322 of the main judgment, that from before Malcolm's death the policy of Ian and Malcolm had been, after payment of all expenses (including all remuneration except their own) and after setting aside a small sum annually, to extract as much profit from the business as they could and to do so in a manner which attracted the least charge to tax and national insurance contribution, and that this policy continued after Malcolm's death. Ian could then be directed to make a payment to the petitioners of what they would have received by way of dividend, calculated on this basis. Thus Ian would in effect retain that part of the excess remuneration drawn by him which he would have received by way of dividend if, after drawing his reasonable remuneration, the excess had been distributed as dividends. To the additional amount that the petitioners would have thus received (over and above what they actually received) would be added interest to compensate them for the fact that they had been deprived of the benefit of these monies (and that, instead, Ian had had the use of them). The interest would be calculated on what distributions the petitioners would have received by way of dividend from the respective dates that they should have received them.
36. After the conclusion of oral argument, a calculation was supplied to me by those acting for Ian showing that, if approached on this basis, the sum, inclusive of interest, to be paid to the petitioners calculated up to 10 March 2006 would be 49.96% of £2,534,260, namely £1,266,116. (This figure takes into account the fact that in 1996 and 1997 Patricia drew more by way of remuneration than she and the Trust would have received by way of dividend if, after deducting Ian's 40% of distributable profits and after allowing for the small amount actually retained out of profits in 1996 (there was no such retention in 1997), the balance had been distributed by way of dividend.)
37. But, as Mr Dougherty pointed out, that was not how the order agreed between him and Miss Roberts had been drawn - and which I had approved - following the judgment on 23 March 2006. As appears from the passages quoted earlier, the order directing the valuation proceeds on the assumption that the whole of the excess remuneration is to be treated as notionally repaid to CIHL and that compound interest (at the judgment rate) is to be paid by Ian to CIHL on the amount of that excess remuneration. To this end, Mr Emile Woolf produced a calculation which the experts called by Ian did not dispute (indeed the taxation experts agreed the figure) which, when revised to carry the position down to 10 March 2006, showed (a) the amount of Ian's excess remuneration (measured as the difference between the amount of remuneration actually drawn by Ian and 40% of CIHL's pre-tax profits) and (b) interest, compounded annually at 8%, on that difference calculated from the dates when the tranches of remuneration were taken. The calculation was done for each separate accounting year of CIHL from 1996 down to and including 2004. The revised calculation yielded a figure of £3,881,848 for the excess remuneration for those nine years and an overall amount of £1,530,252 for interest on that sum down to 10 March 2006. After allowing for corporation tax which, as Mr Woolf correctly envisaged and the taxation experts agreed, would have been charged since the business profits would have been greater to the extent of the excess remuneration notionally retained, the additional amount (inclusive of interest) to be treated as notionally retained within CIHL over and above what was actually retained by CIHL for the years in question was £3,788,470. I call this figure "the notional cash surplus".
38. In addition a calculation was made of the amount of actual cash available in the business for distribution in respect of 2005 and as likely to be available for distribution in respect of the period 1 January 2006 to 10 March 2006, a period of ten weeks. Based on the un-audited accounts for 2005 of CIL and CIIBL, the accuracy of which was not questioned, and on the assumption that the figures for 2006 would not be materially different, the resulting surplus (after deducting Ian's 40%, corporation tax at 30% and a retention at the rate of £25,000 per annum) was £502,431 for 2005 and, calculated on a pro-rata basis after making the same deductions, £96,154 for the ten weeks to 10 March 2006, an overall figure of £598,585. I call this figure "the actual cash surplus".
39. The question is whether, as the petitioners maintained, the notional cash surplus and the actual cash surplus are to be treated as having been distributed by way of dividend to the shareholders of CIHL (and therefore received by them in accordance with their shareholdings) or whether, as Ian maintained, those sums fell to be treated as an asset of the company like any other with the result that the value of the petitioners interest in that asset is as a minority shareholder and therefore subject to the same discount as I have found when valuing their interests in the remainder of the business.
40. Miss Roberts submitted that, adopting what was set out in Mr Woolf's report, the correct approach was to treat the cash surpluses (both notional and actual) as having been distributed to the shareholders immediately prior to 10 March 2006. The justification given was that this is what would have happened if there had been an arms-length sale of CIHL to a third party as at that date as regards the actual cash held by the business, the normal assumption being that shareholder vendors leave in the business only so much cash as is needed to meet the payment of current liabilities and to maintain a reasonable level of day-to-day working capital. The same assumption, she said, should apply to the notional cash surplus.
41. While accepting that this is what often happens on the sale of a cash-rich business to a third party, Mr Dougherty submitted that the consent order of 23 March 2006 setting out the basis on which the valuation of the petitioners' shareholding in CIHL was to be calculated makes no mention of any deemed distribution, whether of the notional cash surplus to which the consent order expressly refers, or of any actual build up of cash within the business. In fixing upon a valuation of the petitioners' shares, the order, he pointed out, makes no distinction between the various types of asset be they cash, goodwill or any other kind, of which the Campbell Irvine business was comprised as at the buy-out date. In short, he submitted, the same discount should apply to the cash as applies to the remainder of the business.
42. I have come to the conclusion that, in view of the terms of the consent order of 23 March 2006, it would not be right to treat the notional and actual cash surpluses as if they had been distributed immediately prior to 10 March 2006, and therefore to treat them as distributed in accordance with shareholdings. I consider that the minority discount should apply as much to the cash in the business (both notional and actual) as to the other elements of the business as at the buy-out date.

The overall result

43. On that footing, and on the footing that the notional cash surplus in CIHL as at 10 March 2006 is £3,788,470 and the actual cash surplus as at that date is £598,585 making a total of £4,387,055, the petitioners' share of that sum, applying the same 30% minority discount, is £1,534,240. To that must be added the £885,000 representing the value of the petitioners' 49.96% interest in the reminder of the business. The overall figure is £2,419,240 which I propose to round up to £2,420,000. That is the figure at which I value the petitioners' shares in CIHL as at 10 March 2006.
44. This is not an unfair result. The calculation of the notional cash surplus of £3,788,470 makes no allowance for the fact that the petitioners have already received very substantial remuneration in the early years. (Nor is it adjusted to reflect the fact that if less remuneration had been drawn by Ian the notional cash sum available in the business would have been increased by the amount of national insurance contribution thereby saved.) As I have endeavoured to explain (see paragraphs 35 and 36 above), a more principled approach might have been to estimate the excess remuneration in the manner calculated by Mr Kilshaw (see appendices Ib and III to his report, adjusted only to provide for the correct level of distributable profits of the business in 2004) and then to calculate, as Mr Kilshaw has done, the petitioners' share of that figure and award them that figure with interest calculated by reference to what year by year they would have received if distributions by way of dividend had been made. But that was not how the consent order directed the valuation exercise.
45. By a coincidence, however, the net result of the approach required by the consent order is only slightly different (by my calculation only £31,000 less) from what it would have been if that other approach had been adopted. In my judgment the overall result is a fair one.