BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
Fetter Lane, London, EC4A 1NL |
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B e f o r e :
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KRISHNA HOLDCO LIMITED |
Petitioner/ Claimant |
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- and - |
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(1) GOWRIE HOLDINGS LIMITED (2) SAMIT GOVINDJI HATHI (3) GOVINDJI THAKERSHI HATHI (4) ALPA HATHI (5) PORTSIDE NORTH LIMITED (6) LAXMICO GROUP FINANCE LIMITED (7) SYRI LIMITED (8) LAXMI BNS HOLDINGS LIMITED |
Respondents/ Defendants |
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Mark Anderson KC and Samir Amin (instructed by ORJ Law) for the Respondents/Defendants
Hearing dates: 5, 6, 10, 11, 12, 13, 14 and 21 March 2025
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Crown Copyright ©
Paragraph | ||
I. | Introduction and Context | 1 |
II. | The Trial and the Evidence | 13 |
III. | Some Points of Law | 19 |
The Court's Remedial Function | 20 | |
Hindsight in Valuation | 21 | |
IV. | SYRI Enterprise Value | 26 |
Some relevant background | 26 | |
The competing positions | 34 | |
Why I am not persuaded of Dr Frei's basic approach | 42 | |
Why I prefer Mr McKeown's basic approach | 54 | |
Was SYRI in a period of substantial growth? | 56 | |
Selection of comparables (and therefore a multiple) | 57 | |
Forward Multiples | 61 | |
Maintainable EBITDA on Mr McKeown's Approach | 70 | |
Hathi Family Remuneration | 73 | |
The SYRI Budget | 80 | |
Conclusion on SYRI enterprise value | 88 | |
V. | LBNS Enterprise Value | 89 |
Background | 89 | |
The competing positions | 98 | |
Maintainable EBITDA for LBNS | 100 | |
Adjustments | 122 | |
Exchange Rate Losses Reduced | 127 | |
Exceptional Costs Reversed | 133 | |
Bad Debts Reversed | 139 | |
Professional Charges Reversed | 141 | |
What is the appropriate multiple? | 142 | |
Comparator Pool: Regression Analysis | 144 | |
Historic or Forward Multiples? | 151 | |
Dispute over Ms Hart's Approach | 157 | |
Is any further discount justified? | 161 | |
Conclusion on LBNS | 167 | |
VI. | What is the relevant net debt? | 168 |
The Perivale Property | 169 | |
Colorama Contingent Liability | 180 | |
Third Party Loans | 187 | |
VII. | The Equalisation Amount | 196 |
Hathi Family Remuneration | 197 | |
Excess Rent for Bradfield Road and Stonefield Way | 198 | |
Payments to UHY | 204 | |
HMRC Liabilities | 206 | |
Payments to NSL | 208 | |
Professional Fees and Credit Notes | 214 | |
Miscellaneous Invoices/Annex III Payments | 223 | |
Annex B Payments | 226 | |
VIII. | Additional Matters | 227 |
Quasi-Interest | 227 | |
Buy-Out Order against the Gowrie Respondents? | 238 | |
IX. | Conclusion | 245 |
Mr Justice Adam Johnson:
I. Introduction and Context
i. Determination of the enterprise value of the clinicals business operated by SYRI, as at the Valuation Date. (The enterprise value of a business is its entire value financed by both debt and equity investments).
ii. Determination of the enterprise value of LBNS, minus SYRI.
iii. Determination of the enterprise value of LBNS assuming it is consolidated with SYRI.
iv. Determination of the net debt of the consolidated enterprise – i.e., determination of the adjustments to be made to move from enterprise value to equity value, the latter representing the value only attributable to the equity shareholders.
v. Determination of the Equalisation Amount, which then needs to be deducted from the equity value of the consolidated enterprise deduced under steps (i)-(iv), with the remaining equity value after that deduction divided by 2, to give a final value for the B Shares.
II. The Trial and the Evidence
"Q. Who drafted the meeting note?
A. This would have been drafted by the lawyers.
Q. On your instructions?
A. It would have been drafted – the reason why this was drafted is because of the various notes that were being made at that date, so the various strategies, various things that were going on at that time. This wasn't a meeting that was held. This wasn't a document that was ever offered to anybody, yes. It was something that, if we needed to, we could use.
Q. So my question: this was drafted on your instructions, wasn't it?
A. Yes. I believe so."
III. Some Points of Law
The Court's Remedial Function
"... In fixing the price at which a plaintiff's shares are to be acquired the court is not conducting a valuation as such. In other words, it is not conducting a mathematical exercise dictated by the expert evidence and by reference to accountancy principles alone. Instead, it is conducting an evaluation. In other words, it is performing a remedial function involving a judgment call which is made in light of all the circumstances of the case and by reference to principles of fairness ...".
Hindsight in Valuation
"Mr Craggs reached conclusions that were (generally) the same as or (in aggregate) lower than his 2011 values, lower than CBRE's 2013 values, and substantially lower than his 2015 values. That is not to say that Mr Craggs' 2014 values were unreasonable but that, as part of the process of sense-checking his values and standing back from the technicality of the discounted cash flows and the residual valuation, he should have asked himself questions about why his 2014 values did not fit very well into the proven trend of values."
IV. SYRI Enterprise Value
Some relevant background
Y/E March 16 (£000s) | Y/E March 17 (£000s) | Y/E March 18 (£000s) | 15 month period to June 2019 (£000s) | |
Total revenue | 5,563 | 4,443 | 6,230 | 14,866 |
Revenue growth rate | n/a | -20.1% | 40.2% | 90.9% |
Gross profit | 5,493 | 4,389 | 5,790 | 14,358 |
The competing positions
Why I am not persuaded of Dr Frei's basic approach
Year ended | March 2019 (£000s) |
Sept 2020 (£000s) |
Sept 2021 (£000s) |
Sept 2022 (£000s) |
Sept 2023 (£000s) |
Revenue | 11,351 | 16,024 | 13,643 | 15,255 | 19,281 |
EBITDA | 5,057 | 6,359 | 4,971 | 5,342 | 7,986 |
Why I prefer Mr McKeown's basic approach
Was SYRI in a period of substantial growth?
Selection of comparables (and therefore a multiple)
Forward Multiples
Maintainable EBITDA on Mr McKeown's Approach
Hathi Family Remuneration
"In short, on the topic of Hathi family remuneration, I accept that in calculating the value of the B Shares, an allowance will need to be made for excess amounts beyond the market remuneration levels identified in ... the Blake Morgan letter. Calculation of the precise figures can await the quantum stage, but I should say now that the figures put forward by Krishna's expert Ms Hart (a £3m excess up to 31 March 2018, excluding pension benefits of an additional £1.15m) appear persuasive, and the Court will need good reason to depart from them".
i. Mr McKeown, in his calculation of maintainable EBITDA for SYRI, allows for remuneration to Samit (or an equivalent manager) at a market level of £300,000 p.a. in respect of SYRI alone as at the Valuation Date. That takes no account of the Liability Judgment. It is based on Mr McKeown's own desktop research, and as he himself concedes (Report at 5.2.5), he is not an expert in the field of remuneration.
ii. Mr Davies, in a section of his Report headed "Excess Remuneration", assumes market levels of remuneration for Samit in his two roles (at LBNS and SYRI) up to March 2018, at the levels shown in the Blake Morgan letter and effectively endorsed in the Liability Judgment – so, for example, he takes figures for the period to 31 March 2018 of £180,000 p.a. and £147,613 p.a. (see above). Importantly, though, in calculating the maintainable EBITDA for LBNS, Mr Davies did not go beyond March 2018 and express any view, or propose any adjustment, as regards market remuneration levels as at the Valuation Date in June 2019. That is because he was instructed not to. He said so in the Joint Statement:
"JD's understanding of his instructions is that directors' remuneration following FY 18 was not brought into question in the liability trial hence JD does not consider it necessary to make this adjustment within his own or [Ms Hart's] approach."
iii. Mr Davies adopts the same approach in dealing with the Equalisation Amount, and makes no deduction for any overpayments after 31 March 2018. At the same time, in coming to an overall adjustment to the Equalisation Amount, Mr Davies nets off what he effectively treats as underpayments for the years ending March 2011 and March 2012, when the actual remuneration paid to members of the Hathi family was at rates lower than the market levels recorded in the Blake Morgan letter.
iv. Ms Hart meanwhile, in calculating maintainable EBITDA for LBNS as at the Valuation Date in June 2019, assumed market rates for LBNS's management of £380,000 p.a., including for Samit of £180,000 per annum, based on the concessions in the Blake Morgan letter and the findings in the Liability Judgment. These figures were below the amounts recorded by LBNS in its audited accounts, which totalled £600,000 when annualised; and so Ms Hart made an adjustment by way of a £220,000 deduction, which had the effect of increasing LBNS's maintainable EBITDA by the same amount. Ms Hart took the same approach as regards the Equalisation Amount: she assumed that any remuneration above £380,000 per annum was in excess of market rates for periods between 1 April 2018 and the Valuation Date in June 2019, and thus should be deducted from the Equalisation Amount.
i. A fair reading of the Liability Judgment is that I proposed to adopt the figures in the Blake Morgan letter for valuation purposes, unless there was good reason not to. Even at the time of the Liability Judgment, the parties had settled on 25 June 2019 as the Valuation Date: their agreement on it is referenced in the Liability Judgment at [377].
ii. That being so, it seems to me it was up to any party who wished to depart from the approach in the Liability Judgment to produce evidence which would justify such a departure. Ms Hart did not wish to depart from it, and so she assumed that what the Liability Judgment had identified as market levels of remuneration would continue up to the Valuation Date. That was a perfectly sensible and proportionate approach. The purpose of dealing with the issue of remuneration in the Liability Judgment was to resolve matters that would contribute to the valuation exercise: the Liability Judgment said so at [313] (quoted above in this Judgment at [75]).
iii. Gowrie have not produced any evidence which persuades me there is good reason to depart from the view expressed in the Liability Judgment. As noted, Mr Davies did not produce any evidence at all as to market rates after March 2018, on the basis of his instructions that directors' remuneration following FY 18 was not brought into question in the liability trial. I think those instructions were based on a misapprehension. After the Liability Judgment, matters were left on the basis that Ms Hart's calculations would apply for valuation purposes, unless some good reason was advanced for displacing them. That required Gowrie to take positive action if they wished to do so. Not having done so – and indeed having positively chosen to adopt a passive posture in Mr Davies' evidence – they cannot complain if the approach suggested in the Liability Judgment is now implemented by the Court adopting Ms Hart's figures, both in calculating maintainable EBITDA for LBNS, and in calculating the Equalisation Amount. Also to the latter, I agree with Krishna's submission that it would be wrong in principle to adopt Mr Davies' netting-off approach, described above: the fact that LBNS may have elected to pay its directors less than market rates in FY11 and FY12 does not mean that the differences should be netted off from the later excessive sums taken. There is no good reason why Krishna should have to pay for that earlier election.
iv. What of Mr McKeown's figures? One problem is that by his own admission Mr McKeown is not an expert in the field of remuneration. As he himself says (Report at para. 5.2.5), the role occupied by Samit was a somewhat bespoke one, and moreover there was plainly overlap between Samit's function in relation to LBNS and his role in relation to SYRI, which makes the process of assessing remuneration costs that much more difficult. Thus, although generally impressed by Mr McKeown's evidence, I feel much more cautious in accepting his desktop research as providing a reliable guide. Nonetheless, I do take the point that Ms Hart's original figures did not make any allowance for the cost of a managing director of the SYRI business. She included an allowance of only £180,000 per annum for Samit in relation to LBNS, and made no allowance for the costs of his function in SYRI - the £147,613 in respect of "R&D" referenced in the Blake Morgan letter. I thus propose to deal with this point as follows. First, I consider that it is legitimate, in calculating a maintainable EBITDA for SYRI, to include an allowance for the cost of a manager performing the functions performed by Samit. But given my doubts over Mr McKeown's desktop research, I consider that the best and fairest approach is to use the figure Gowrie themselves were happy with, set out in the Blake Morgan letter. Accordingly, I think the calculation of maintainable EBITDA should reflect a salary cost for a senior manager of £147,613 per annum, plus the cost of corresponding NI contributions and pension contributions. There is then though the issue of the Equalisation Amount. What is the proper outcome there? I think the position is different, and in my opinion the proper approach is for any remuneration paid to Samit in respect of SYRI to be treated as an overpayment and deducted from the Equalisation Amount. Assessing maintainable EBITDA has to involve an allowance for the cost of having someone run the business. But equalisation is about an accounting between the parties. I think it entirely fair to deduct from the running account the value of compensation received by Samit for running a business which, as the Court has found, was fraudulently diverted from the parties' joint enterprise. To do otherwise would not be an appropriate remedial response to the unfair prejudice the Court has found. On the contrary, it would involve rubbing salt into the wound.
The SYRI Budget
"Well, without hindsight, I would have questioned why the number looks so strong, given the number of licences, and with the increasing competition on the existing products they had, I would have expected the margin to reduce, and yet the management accounts were showing this substantial number."
Conclusion on SYRI enterprise value
V. LBNS Enterprise Value
Background
"Yes, so it's a very specialist role and it requires a full-time person to do it. We made the mistake that we were doing this as a part-time thing. The reality of it is that we needed senior people only concentrated on this."
"That was one of the things that I got wrong. I should not – I should have hired other people to do the job, taken on the expense. I didn't".
Item | 2019 (£'000s) (Actual) |
2020 (£'000s) | 2021 (£'000s) | 2022 (£'000s) |
Revenues | 255,490 | 258,176 | 259,835 | 262,636 |
Gross profit | 32,471 | 30,241 | 30,349 | 30,446 |
EBITDA | 6,433 | 3,965 | 3,553 | 3,425 |
The competing positions
i. Ms Hart assessed maintainable EBITDA at £8.164m (£8.2m rounded up), and applied a multiple of 8.2x, to give an enterprise value of £67.2m in round figures.
ii. Mr Davies' figure for maintainable EBITDA was 5.6m, to which he applied a 7x multiple before further discounting, to produce an overall enterprise value of between £33m and £38.3m.
Maintainable EBITDA for LBNS
Adjustments
i. Perivale Rent: This is dealt with below at [169]-[179]. For the reasons set out there, I agree with Ms Hart's conclusion that LBNS's maintainable EBITDA should be reduced by a notional market rent in respect of the Perivale Property.
ii. Licence suspension: Gowrie in the end accepted that it was appropriate, if calculating EBITDA using trading results which are diminished by the June 2019 licence suspension, to adjust upwards as Ms Hart had done.
iii. Hathi family Remuneration: I have set out my position on this topic above at [79]. It follows from what is said there that I accept Ms Hart's adjustments as correct.
Exchange Rate Losses Reduced
Exceptional Costs Reversed
Bad Debts Reversed
Professional Charges Reversed
What is the appropriate multiple?
Comparator Pool: Regression Analysis
Historic or Forward Multiples?
" ... what I have set out here is that if I was to apply 7.9 to that forward looking information, the valuation would reduce by 2.4 million. If I took the other method of calculating EBITDA based on the management accounts and I apply that to the last 12 months' multiple, the valuation would increase by 1.7m. I consider both approaches to calculating EBITDA are equally valid, so I see that one's saying the valuation would go down a bit, one that's saying it would go up a bit, so I have stayed in the same place."
Dispute over Ms Hart's Approach
"... as I said in my report, I would actually prefer to use that information as a basis for calculating EBITDA had it been available to me at the time. I didn't seek to revisit the entire approach at this stage".
Is any further discount justified?
Conclusion on LBNS
VI. What is the relevant net debt?
The Perivale Property
Colorama Contingent Liability
Third Party Loans
VII. The Equalisation Amount
Hathi Family Remuneration
Excess Rent for Bradfield Road and Stonefield Way
"Given the lack of clarity over which entity is/should be paying rent for the Ruislip property, the size of the property and whether this, and the rent for Stonefield Way, is at a market rate (which I consider to be a matter best addressed by property expert evidence), I am unable to make any adjustment for rent for the Ruislip Property or Stonefield Way".
Payments to UHY
HMRC Liabilities
Payments to NSL
Professional Fees and Credit Notes
Miscellaneous Invoices/Annex III Payments
Annex B Payments
VIII. Additional Matters
Quasi-Interest
" ... If a petitioner seeking an order for the purchase of his shares contends (either as his only claim or in the alternative) that they should be valued at a relatively early stage but then augmented by the equivalent of interest, he must put forward that claim clearly and persuade the court by evidence that it is the only way, or the best way, to a fair result."
"... in the meantime the petitioner has (in an extreme case of that sort) been receiving no benefit of any sort from his membership of the company, either in the form of dividends, or in the form of director's remuneration, or otherwise. He has been locked into an investment which has been made worthless as a result of the majority shareholder's oppression."
"It would be different if he had been continuing to receive a stream of dividends and director's remuneration and his complaint was limited to excessive remuneration and benefits enjoyed by the majority shareholder. In the latter case there would be obvious force in Jacob J's observation that he should not be entitled to interest or the equivalent of interest so long as he owns the shares".
Buy-Out Order against the Gowrie Respondents?
"Krishna seeks an order against all of the Gowrie Respondents (i.e. not just Gowrie) ... In particular, Krishna asks for an order that the Gowrie Respondents account to LBNS for all of the assets and monies improperly transferred to them – in line with the relief which would be available in a derivative action."
i. I am unattracted by the idea of any further order, certainly for now. I find the basis on which the request is made somewhat confusing, and I am not clear that it would have any practical utility.
ii. My confusion arises from the fact that the principal purpose sought to be achieved by fn. 188 of Krishna's liability closing, was the purpose of ensuring that any value illegitimately transferred away from LBNS was transferred back by the wrongdoers. That purpose though is effectively achieved by the buy-out order already made, which requires the present valuation exercise to be carried out as if any value transferred away was reversed. It is not clear to me why any further order is needed against those who were actually responsible for the relevant extractions of value, and it may in practice be a complicated business to identify what they should and should not be responsible for. The submission made by Mr Quirk KC in closing the present trial was in any event a different one: his proposal was that all the Gowrie Respondents should be made jointly and severally liable for the whole of the purchase price payable by GHL, but that is not what fn. 188 of the closing in the liability phase appeared to be asking for.
iii. This leads into the question of practical utility. As far as I am aware, GHL does not want Krishna as a fellow shareholder in LBNS. It has its own commercial interest in buying Krishna out and wants that to happen. And as far as I am aware, it has not been said that GHL cannot or will not pay the purchase price. If all that is correct, and the further order sought is only as regards liability for the purchase price, and not as regards ancillary matters, then what is the practical point of it?
iv. The submissions on all these issues were rather undeveloped at trial, likely because of the relatively short period allowed for oral closing submissions. It is possible there is more to be said, and that justice and fairness do require some form of further intervention. But I think the situation too unclear to be resolved at present.
v. Accordingly, I propose a practical response for now. I will not accede to Krishna's further request, but I will keep the point open. If there is in fact real doubt about GHL's ability to pay the purchase price for Krishna's shares, then depending on how that has come about, there may be a basis for considering relief against other parties as well. If the point arises and needs to be addressed, then the assessment will need to engage with Gowrie's submission that the matter is res judicata, and has been since the Liability Judgment and the Order flowing from it. I see some force in that submission, but the point is not so obviously correct that I feel happy to accept it without further debate, certainly if the effect of doing so would be to frustrate the purpose of the Order already made and of the valuation exercise now carried out, by leaving Krishna out of pocket as regards the value of its shareholding.
IX. Conclusion