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Cite as: [2012] EWCA Civ 333

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Neutral Citation Number: [2012] EWCA Civ 333
Case No: A3/2011/2310


[2011] EWHC 1834 (Ch)

Royal Courts of Justice
Strand, London, WC2A 2LL

B e f o r e :



- and -



(Transcript of the Handed Down Judgment of
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Paul Marshall (instructed by Bell Lax) for the Appellant
Christopher Boardman (instructed by Berry & Berry) for the Respondent
Hearing dates : 13th March 2012



Crown Copyright ©

    The Master of the Rolls :

  1. This appeal raises a short and one-off valuation point, arising out of an unfair prejudice petition brought by Ivan Ng against Steven Crabtree under Section 994 of the Companies Act 2006.
  2. Mr Ng and Mr Crabtree each owned one share in the National Duvet & Pillow Company Limited ("the Company"). They fell out, and, to cut a rather long story short, pursuant to a decision made by Peter Smith J on 6th May 2010, it was ordered that Mr Crabtree should buy Mr Ng's share ('the Share') in the Company at a price to be determined by the court as being its fair value, as at 10th March 2005.
  3. The parties were unable to agree the value of the Share, and accordingly a trial to determine the value took place before Arnold J over four days in June 2011.
  4. Because of an order made by Lewison J on 4th May 2011 (and upheld by this court on 9th June 2011) no witnesses of fact were called, and the parties were "restricted to calling the experts whose reports [had] already been filed and served". There were three such experts. Two were called on behalf of Mr Ng. The first was Kelvin King, whom the Judge described as having "had a long and distinguished career in the field of valuation" and being " an impressive witness". Mr Ng's other expert was Stuart Leaman, whom the Judge described as "a chartered accountant with considerable experience in share valuation and forensic accountancy" and "clear and careful in his evidence". For Mr Crabtree, Linda Cheung was called; the Judge described her as "an experienced forensic accountant, but not a valuer", and therefore "inevitably at a disadvantage compared to Mr King". The Judge also considered that Mrs Cheung had made "a number of inappropriately partisan comments" in her evidence, and described her approach as "trying to minimise the value of [the Company] rather than seeking to arrive at an impartial and objective valuation", although he "found her explanations of the accountancy issues helpful".
  5. The evidence of Mr King was that the normal method of valuing an interest "in a small profitable trading company in the absence of properly constructed forecasts going forward (as is the case here)" was to apply a P/E ratio, i.e. an appropriate multiplier, to "a maintainable earnings figure". However, he also said that where "the adjusted net asset value is in excess of an earnings based valuation then I would normally take an asset based approach to value a company."
  6. In his judgment, given on 18th July 2011, [2011] EWHC 1834 (Ch), the Judge held that the appropriate approach to adopt to valuing the Share was that:
  7. i) The Share was to be valued on the basis of its value " to the co-owner of the Company, and not an open market value": Parkinson v. Euro Finance Group Ltd [2001] 1 BCLC 720, paras 94-98;

    ii) Subject to that, the Share was worth one half of the value of the Company, following CVC/Opportunity Equity Partners Ltd v. Demarco Almeida [2002] UKPC 16, [2002] 2 BCLC 108, paras 38-40;

    iii) What the Judge called "the primary financial source material" consisted of the Company's statutory accounts based on the financial years ending on 28th February 2003, 2004, and 2005;

    iv) the Company should be valued at a figure equal to the product of an appropriate P/E multiplier and its annual sustainable earnings;

    v) on the evidence, the Company's annual sustainable earnings as at the valuation date were 143,600, and the appropriate multiplier was 7.

  8. Although a number of these conclusions were adverse to Mr Crabtree's case, he does not challenge any of them on this appeal. What he does challenge is the way in which the Judge dealt with a debt which the Company owed to its principal supplier, Zhejiang Liuquiao Feather Company Limited ("ZLF"). The precise quantification of this debt ("the ZLF debt") had from time to time been in dispute, but it was ultimately agreed, at least for the purpose of these proceedings, at 1.8752m. In an agreed statement, the parties' experts had agreed that, on the basis that "the earnings basis [was] an appropriate valuation basis", "consideration should be given to the terms of any loan, debt or other facility, and maintainable earnings [should be] adjusted as necessary, if considered fair". They also agreed that if there was "a requirement to service the ZLF debt, a reasonable interest rate is 6.75% [which amounted to] 126,576 at the valuation date".
  9. In the course of his judgment, the Judge described " the principal issue between the parties" as being "the level [the Company's] maintainable earnings", which, he explained, turned largely on two issues. The first issue is irrelevant for present purposes; the second issue was "whether the Company should be treated as having to pay interest on the ZLF debt".
  10. The Judge dealt with that second issue in paragraphs 60-64 of his judgment. He explained that Mrs Cheung considered that the company's "maintainable earnings [should] be reduced to reflect the commercial cost of financing the ZLF debt"- i.e. that they should be reduced by 126,576. However, he said, there was "simply no evidence that [the Company] was obliged to pay interest on amounts due to ZLF" and, as Mrs Chung accepted, "the free credit provided by ZLF was an established and fundamental feature of [the Company's] business as at the valuation date".
  11. On behalf of Mr Crabtree, Mr Marshall's first contention is that the Judge was wrong not to reduce the sustainable annual earnings of 143,600 to take into account a liability to pay interest on the ZLF debt. On that point, it seems to me the Judge reached a conclusion that he was entitled to reach.
  12. It is clear that there was no express, and it appears that there was no implied, liability on the Company to pay interest on the ZLF debt. It is also clear that, ever since the ZLF debt had started to accumulate, the Company had never been called on to pay any interest to ZLF.
  13. Further, there was expert evidence, from witnesses whom the Judge clearly found impressive, to support his conclusion on this point. In particular, Mr King had carried out his earnings-based valuation of the Company on the assumption that no interest was to be paid in respect of the ZLF debt, and Mr Leaman's assessment of the valuation exercise carried out by Mr King had made no criticism in this connection. Further, as pointed out during argument by Hallett LJ, the expert witnesses had agreed in their joint statement that "consideration should be given to the terms of any loan, debt or other facility and adjust maintainable earnings as necessary", and, as already mentioned, there has been no suggestion that the ZLF debt carried any interest liability. Mr King was asked in cross-examination about his decision not to allow for any interest on the ZLF debt, and he maintained the view that he was correct in adopting that attitude.
  14. In the light of these facts, it seems to me that on the first way in which Mr Marshall puts his case on this appeal, namely that the judge's valuation wrongly failed to take into account any interest liability on the ZLF debt, the appeal should be dismissed. Essentially, there was ample evidence, based on (i) the absence of any liability to pay interest, (ii) the absence of any demand for, or any payment of, interest in the past, and (iii) the opinions of expert witnesses, which entitled the Judge to reach the conclusion that he did.
  15. The other way in which Mr Marshall advances the appeal on behalf of Mr Crabtree is that the Judge should have reduced his valuation of the company by a very substantial amount, possibly to nil, as a result of the liability of the Company to repay the ZLF debt.
  16. The Judge addressed that issue at para 63 of his judgment, where he identified two arguments raised on behalf of Mr Crabtree in this connection. The first was that it was Mr Ng who had a relationship with ZLF, and, as he was leaving the Company, there must be a real risk that ZLF would call its debt; the second was that, in any event, ZLF could call in its debt at any time. The Judge was not sure that the first argument was a good one, in light of the basis upon which he had to assess his valuation, but in any event, he considered that "in the circumstances of the present case ZLF had an established commercial relationship with [the Company] , and there [was] no reason to think that Mr Ng's departure would necessarily change that." He also considered that there was "no admissible evidence to show that it would do so". As to the second argument, the Judge considered that, as at the valuation date, ZLF was supporting [the Company] and had a commercial interest in continuing to do so."
  17. In the event, as the Judge explained in the next paragraph, the correct approach was to "round down" his valuation of the Company from the figure of 1.0052m (being the product of 7 and the sustainable annual earnings) to 1m.
  18. At first sight at any rate, there is obvious attraction in the simple argument mounted by Mr Marshall on behalf of Mr Crabtree, that, ignoring the small rounding down I have just mentioned, the effect of the Judge's decision was that the Company was worth the same, irrespective of the value of the ZLF debt. Thus, it is said, on the basis of his reasoning, the Judge would have reached the same valuation whether the ZLF debt was 18,750 or 18.75m as opposed to the agreed figure of 1.875m. Accordingly, it is said, it was self-evidently unrealistic not to take into account the existence of the ZLF debt, particularly as, at least taken on its face, that debt wholly submerged the value which the Judge had attributed to the Company.
  19. While that argument is attractive, consideration of the unusual facts of this case, together with the evidence of the expert witnesses, has persuaded me that the Judge was entitled to take the view that he did, or, to put it another way, that the view taken by the Judge was not one with which an appellate court could properly interfere. I reach this conclusion from a combination of six factors.
  20. First, the Judge was carrying out an earnings valuation. As a matter of logic, when carrying out an earnings valuation, one does not alter the eventual figure by adding to it the capital value of an asset, or subtracting from it the capital value of a liability. A pure earnings valuation does not take into account capital values. If, on a particular set of facts, a pure earnings valuation is unrealistic, it seems to me that the answer would be that one does not adopt a pure earnings valuation: one adopts either an asset (or balance sheet) valuation, or some hybrid valuation. However, in this case, as the experts agreed in terms that "for a company generating earnings, or a small profitable trading company, the earnings basis is an appropriate valuation basis". (It is only fair to add that Mrs Cheung said that an earnings-based valuation was inappropriate in this case, but that was only because of her view, rejected by the Judge, as explained above, that the cost of servicing the ZLF debt should be taken into account.)
  21. Secondly, there appears to have been nothing in either of the two statements from Mrs Cheung to support the proposition that a valuation on the earnings basis had to be reduced to take into account any liability to repay the ZLF debt. (As mentioned at the end of the previous paragraph, Mrs Cheung considered that the Company's profits should be reduced to take account of the cost of servicing the ZLF debt, but that is not the same as a liability to repay that debt.)
  22. Thirdly, on the facts, the ZLF debt was a very unusual liability. Depending on whether one takes into account the fact that it had accrued initially in relation to an associated company, the debt had been allowed to run for between two and five years, and had not merely never been called, but the creditor had not even sought any security or interest.
  23. Fourthly, because the ZLF debt was owed to the Company's main supplier with whom the Company had built up goodwill, and for whose products the Company represented an arguably important supply route, this was a case where, at least according to Mr King's evidence in cross-examination, the existence of the debt gave the Company as much of a hold over ZLF as it gave ZLF over the Company.
  24. Fifthly, because no evidence of fact could be called, the Judge was placed in a particularly difficult position when it came to the ZLF debt. He had to do the best he could in relation to an unusual and obscure state of affairs, which one would normally have expected to be clarified by witnesses of fact. The problem is well illustrated by the difficulty which Mr Marshall understandably had in suggesting the appropriate course for these proceedings to take if we had allowed the appeal. In effect, he accepted that, if the question of the appropriate deduction to be made for the ZLF debt had to be reconsidered by another court, then, unless there was to be an agreement between the parties or a rehearing, that court would have to "pluck a figure out of the air". This seems to me to underline the fact that the Judge was faced with a particularly knotty problem, and we should be slow to interfere with his resolution of it.
  25. Sixthly, the notion that, by disregarding the existence of the ZLF debt, the Judge significantly over-valued the Company, seems to me to be called into severe question by an asset valuation of the Company provided to the Judge by Mr Leaman. This asset valuation appears to have been a carefully compiled document: it took into account the ZLF debt at the eventually agreed figure of 1.8752m, and made an appropriate upward adjustment in corporation tax liability, and resulted in an adjusted balance sheet valuation of the Company of 723,209. That is, of course, significantly less than the earnings-based valuation arrived at by the Judge. However, although it would be wrong to make too much of the point, it does seem to me that this asset-based valuation provides a degree of support for the Judge's conclusion that the Company was worth around 1m, as opposed to a very substantially lower sum, which is what Mr Marshall's submission involves.
  26. Accordingly, whether Mr Marshall's argument is based on the failure of the Judge to take into account any liability to pay interest on the ZLF debt, or whether it is based on the Judge's failure to allow anything other than a token reduction in his valuation to allow for the fact that the ZLF debt may be called in, it seems to me that this appeal must fail. On the unusual facts of this case, and in the light of the expert evidence given to the Judge, it seems to me that he was entitled to reach the conclusion that he did, and, accordingly, that this appeal must be dismissed.
  27. Lady Justice Hallett:

  28. I agree.
  29. Lord Justice Stanley Burnton:

  30. I also agree.

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