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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Sethi v Patel & Anor  EWHC 1830 (Ch) (19 July 2010)
Cite as:  EWHC 1830 (Ch)
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IN THE MATTER OF SCITEC GROUP LIMITED
AND IN THE MATTER OF THE COMPANIES ACT 2006
Strand, London, WC2A 2LL
B e f o r e :
| SUDHIR SETHI
|- and -
SCITEC GROUP LIMITED
Mr Timothy Sisley (instructed by Magwells) for the First Respondent
Hearing dates: 9-11 and 14-17 June 2010
Crown Copyright ©
Mr Justice Newey:
i) Whether Mr Patel should be ordered to buy Mr Sethi's shares as opposed to merely agreeing to do so;
ii) Whether, if an order is to be made, the obligation to purchase the shares should be dependent on Mr Patel having the financial means to do so;
iii) Whether Mr Patel should be ordered to pay Mr Sethi interest (or quasi-interest) in respect of the period from 13 March 2007 (the valuation date) to the present; and
iv) Whether any (and, if so, what) directions should be given as to the basis on which Mr Sethi's shares should be valued as regards (a) sums paid in respect of rent, (b) sums spent on refurbishment, (c) debit/credit card "chargebacks", (d) bad debts as at 30 June 2007, (e) payments made in respect of cars and (f) payments made in respect of a property in Cyprus.
"any increase in rental value of the demised premises attributable to the existence at the review Date of any improvements to the demised premises or any part thereof carried out with consent where required otherwise than in pursuance of an obligation to the Landlord or the Landlord's predecessor in title by the Tenant any authorised Sub-tenants or their respective predecessors in title or permitted occupiers during the said term or during any period of occupation prior thereto arising out of an agreement to grant the said term".
The draft contained a covenant on the part of the tenant to keep the demised premises (including additions) in "good and substantial and decorative repair and condition".
"On 1 July 2002, the company acquired the entire share capital of Infinity Computer Systems Limited on a share for share exchange basis at market value. On the same day, the trade of Infinity Computer Systems Limited was transferred to [Scitec]. In accordance with Section 131 of the Companies Act 1985, the company recorded £27,217 excess of the value attributed to the shares issued as consideration for shares of Infinity Computer Systems Limited over the nominal value of those shares as merger relief reserves."
"I am not great with figures as you know and whilst I have tried to study the figures available to me I am struggling to fully comprehend them."
"In light of what has currently come to surface over the last week, I feel I have no trust and confidence left in the way you have been handling the company's affairs."
"I recall that on 12 March 2007, I spoke with Mr Jariwala (Scitec's accountant) to explain that I was very worried that Mr Patel was involved in money laundering and had deliberately processed payments for goods when he knew that the credit card details had been stolen by his associates in Nigeria. I also expressed concern to Mr Jariwala that Mr Patel was using Scitec's funds as if they were his own. Mr Jariwala advised me to resign immediately and he, dictated over the telephone, a letter of resignation, which I gave to Mr Patel. I felt that my livelihood was at stake due to Mr Patel's conduct. "
In his oral evidence, Mr Sethi said (and I accept) that he did not want to be involved with the risks that Mr Patel was taking.
Should there be an order for purchase?
Should there be an escape clause?
"One further submission made on Mr Bolton's behalf must be considered. He said in evidence that he could not, out of his own resources, find the money to buy Mr Lewis's shares. The judge seems to have envisaged that he might have to sell his own shares or raise money in some other way to buy out Mr Lewis. The evidence from the expert witnesses was that the sale of shares in Cumana might be difficult. All this led counsel for Mr Bolton to submit that the judge should have made an order containing what he called an 'escape clause', that is to say a provision which would enable the court to make some other order if, despite Mr Bolton's best endeavours, he was unable to raise the money to purchase Mr Lewis's shares at the price fixed. Despite the initial attractiveness of this submission, it is wrong in principle. What the judge was deciding was the amount of the compensation which Mr Bolton should pay Mr Lewis for the wrong he had done him: see Scottish Co-operative Wholesale Society Ltd v Meyer  3 All ER 66 at 89,  AC 324 at 369, per Lord Denning. The fact that a wrongdoer is impecunious is no reason why judgment should not be given against him for the amount of compensation due to his victim. What Mr Lewis should do to get money out of Mr Bolton, claiming, as he still does, that he is impecunious, is a matter for him to decide, not the court."
Nicholls LJ said (at 444-445) that the "difficulties in formulating and implementing an appropriate escape clause [were] such as to make this proposal impracticable and unsatisfactory".
" In our judgment the deputy judge was right in his view that an order for the equivalent of interest is not beyond the powers of the court under s 461(1) [of the Companies Act 1985 the predecessor of section 994 of the 2006 Act]. The court has repeatedly emphasised the width of the discretion conferred by that subsection, which is not limited to the particular powers enumerated in subs (2). The House of Lords has (in relation to the court's closely comparable powers under s 210 of the Companies Act 1948) approved the making of adjustments in the valuation process which mean that the court is actually valuing shares, not as they are, but as they would have been if events had followed a different course; and that practice is regularly followed by the court in orders under s 461(1). In these circumstances a denial of the court's power to award the equivalent of interest would come close to straining at a gnat.
 It is however a power which should be exercised with great caution. [Counsel for the appellant] has rightly drawn attention to the need for lawyers to be able to advise their clients as to the likely range of outcomes of s 459 proceedings, in order to encourage compromise in an area in which litigation can be cripplingly expensive. 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 date 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. It should not be a last-minute afterthought (as it may have been, to some extent, in Re Bird Precision Bellows and Re Planet Organic). Unless a petitioner is asking for no more than simple interest at a normal rate he should also put before the court evidence on which the court can decide what amount (if any) to allow ."
i) Scitec was liable for rent at the rate of £36,000 per annum;
ii) Mr Patel nevertheless caused Scitec to pay rent at the rate of £48,000 per annum between July 2002 and June 2004 and again from January 2005 to November 2006;
iii) Scitec thus overpaid by, in total, £47,000;
iv) Mr Sethi's shares should be valued on the basis that, as at 13 March 2007, Scitec was entitled to recover the £47,000 overpayment.
"During this period [as I understand it, the first half of 2002], I asked Mr Patel how the refurbishment works were being funded and he explained that it was through a loan from Scitec which he would eventually repay to the company. In or around mid 2003 I asked Mr Patel how much the refurbishment works cost and he informed me that the sum was in the region of £60,000. Mr Patel advised that this sum had been paid by Scitec and that he would later arrange to repay this amount . Towards the end of 2003 I reminded Mr Patel of his obligation to repay Scitec and he then informed me that the actual cost of the refurbishment works was in fact £40,000. In or around March 2007, shortly before I resigned Mr Patel informed me that he had repaid Scitec for the refurbishment works."
In cross-examination, Mr Sethi broadly adhered to this account, and I accept that it is substantially accurate. It plainly lends support to Mr Sethi's claim that the sums expended on the Palmerston Centre represented loans by Scitec to Mr Patel.
"On all occasions on a sale to Nigeria [Mr Patel] checked passport details and obtained verification of the address."
In similar vein, Mr Patel stated in a witness statement:
"As far as credit card fraud went, for the entire history of the company I had always taken verification of identity by copy passports and verification of address for any sales abroad."
In oral evidence, Mr Patel spoke of asking Victor to fax him passport detail for the card-holders and of himself speaking to card-holders. In the course, however, of cross-examination, Mr Patel came to accept that he never obtained passport details for card-holders who were not customers. He said, moreover, that he did not remember asking for such information. Further, Mr Patel will not, in my judgment, have spoken to the holders of the cards used in the chargeback transactions.
"For the period that [Mr Sethi] was with the company, he and I would lean towards optimism in classifying bad debts. That was because we did not want to give an unduly poor impression of the company's balance sheet. Once he left we lost all our credit lines, and I have described the problem with the bank. As there was nothing to be lost by being forthcoming over bad debts, I wrote them in at the end of the year, on that occasion leaning towards pessimism . The approach that I took at the end of the year on 2007 was to treat all debts over four months old as being bad debts."
|Bob International Limited||3,000.00|
|Bonvic Computers Limited||1,200.00|
|D S Office||3,029.33|
|I.E. Maduobi Enterprises||2,190.00|
|Intellect Systems Limited||415.10|
|Mercury Games Limited||5,099.54|
|MVS Digital Limited||135.13|
|PC Care & Repair||1,164.44|
|Plumbers Depot Limited||2,989.47|
|Remedy CS Limited||1,442.00|
|The Sethi Partnership||4,893.64|
|Glad & Godwin Resources Limited||2,385.00|
|Uhuru Trading Company||37,765.11|
|Underrocks Technologies Limited||6,571.00|
|Visual Data Limited||8,850.00|
The Cyprus property
i) Mr Patel should be ordered to purchase Mr Sethi's shares in Scitec;
ii) no interest or quasi-interest on the purchase price should be awarded;
iii) Mr Sethi's shares should be valued on the basis that, as at the valuation date (13 March 2007), Scitec was entitled to recover (a) £47,000 in respect of overpaid rent, (b) £100,000 as a result of the refurbishment works and (c) £67,707 in relation to the chargebacks;
iv) the valuation of Mr Sethi's shares should be conducted on the basis of the matters set out paragraphs 72-78 above, if and so far as relevant;
v) neither of the cars bought for Mr Sethi and Mr Patel in early 2007 should be treated as an asset of Scitec as at the valuation date, and such moneys as were later paid to Scitec on the sale of Mr Patel's car will have represented a loan to the company, except, perhaps, if and so far as he was previously indebted to it;
vi) if and to the extent that Mr Patel had not in fact been credited with the £21,500 mentioned in paragraphs 85-86 above by the valuation date, he should be treated as having been owed this sum by Scitec at that date.