The principal question on this appeal is whether the respondent, Ms Sheingold, in her capacity as a former director of Baja Ltd (“Baja”), is liable to account for the goodwill of a restaurant run by Baja before it went into liquidation and, if so, in what amount. The appellants sue as assignees from the purchaser from the liquidators of Baja of all claims to which Baja would have been entitled. This appeal largely turns on the inferences to be drawn from the judge's findings of fact but I shall need to state the meaning of goodwill for this purpose, and in addition to consider a question which arose at a very late stage in this appeal as to what order the judge should have made if he had taken the view that Ms Sheingold was liable to account for the value of the goodwill. There were facts suggesting that it was not worth the amount which she and the purchaser had attributed to goodwill in their sale agreement, and so the question arises as to who had the burden of proof as to its value. The judge dismissed the claim.

In my judgment, for the reasons explained below, the judge erred in the conclusions which he drew from the facts as found by him and he should have ordered Ms Sheingold to account to the appellants for £71,837, being the amount attributed to goodwill in an assignment (“the assignment”) dated 17 December 2001 and made between Ms Sheingold and a Mr John Henry Nesbit.

The facts are straightforward, and can be drawn from the judgment of HHJ Griggs, sitting in the Truro County Court, dated 21 December 2006, and documents to which he refers. The Key Street Bar and Brasserie was situated in Quay Street, Truro. It was originally run by a Mr Poole through his company, Poole Catering Services Ltd (“PCS”). The premises were leased by Mr Poole from Greenalls. From about 1997, he and Ms Sheingold ran the restaurant jointly. PCS became insolvent and went into liquidation. Within a few days, Mr Poole and Ms Sheingold had formed Baja, of which they became equal shareholders and directors. They then entered into a business development agreement (“BDA”) with Greenalls under which they undertook to take a lease of the premises in their joint names. The judge was told that Greenalls were unwilling to enter into a BDA with a limited company. Ms Sheingold contended that she and Mr Poole granted Baja a licence. This was not in writing and one of its terms was that Baja would pay the rent due under the lease to Greenalls, which it duly did. Mr Poole became bankrupt in 1998, and accordingly Ms Sheingold entered into a BDA on 8 October 1998 in her own name. She thus became the sole lessee of the premises under a new three year lease. The lease expired in 2001, and she entered into a further BDA with Inn Partnership Ltd, which is said to be associated with Greenalls. On 1 October 1998, Mr Poole became an employee of Baja. He was, however, dismissed on 7 May 2000. He brought proceedings for unfair dismissal, but these were dismissed.

Mr Poole’s shares in Baja were meanwhile transferred to a Mr Miner. Ms Sheingold made an offer to buy his shares, first for £100, and then on 21 March 2001 for £500. When he refused, she caused notice to be given for a creditors’ voluntary liquidation. Baja duly went into liquidation. Ms Sheingold swore an affidavit verifying a statement of affairs for Baja. This did not include any asset representing goodwill. According to the statement of affairs, there was a deficiency as regards creditors of £23,044.

The liquidators sold the fixtures and fittings of the business to Blok Corporation Ltd (“Blok”), which was owned by Ms Sheingold. The sale price was based on a valuation obtained by the liquidators. Ms Sheingold carried on the restaurant business and bought some more equipment which was said to be worth £3,000. She also negotiated a further three year lease of the premises from the landlord. By an agreement dated 17 December 2001, Ms Sheingold and Blok agreed to sell the business to Mr Nesbit for a total consideration of £90,000, of which £71,837 was attributed to goodwill, £1 to the lease and the balance to fixtures and fittings. The BDA was novated in favour of Mr Nesbit. Ms Sheingold also executed the assignment referred to in [2] above. For the purposes of sale, goodwill was valued by taking a proportion of the average amount of the last three years’ turnover as shown in Baja’s accounts and adding the cost of fixtures and fittings. In these proceedings, the appellants claim that Ms Sheingold held the lease and the BDA on trust for Baja. It is not contended that there was a business tenancy. In essence, Ms Sheingold contends that she held the lease and BDA personally, and that the goodwill of the restaurant business belonged to her. The judge accepted Ms Sheingold’s evidence that she personally owned the lease and had granted a licence to occupy to Baja. He further found that the lease and goodwill of the restaurant business belonged to her beneficially:

The judge also rejected the claim that the fixtures and fittings of the business have been sold at an undervalue. He held that there was no evidence to support this.

While Baja drew up its statutory accounts as a going concern, it produced abbreviated accounts and took advantage of the exemption from audit as a small company in accordance with ss 246 and 249A of the Companies Act 1985 respectively. The assets disclosed by these accounts included neither the lease nor any goodwill. Its trading receipts appear, however, to have been the receipts of the restaurant business, and those receipts were used for establishing the value of the goodwill of that business when it was sold to Mr Nesbit. Its business was stated to be “catering”.

Mr Colin Elliott, for the appellants, relies on the following passage from the speech of Lord Macnaghten in Commissioners of Inland Revenue v Muller & Co. Margarine [1901] AC 217 at 223:

In the same case, Lord Lindley said at 235:

Any goodwill which Baja had would have been internally generated, rather than purchased. Internally generated goodwill may not be shown in the statutory accounts of a limited company: see note (3) of the notes to the balance sheet formats in schedule 4 to the Companies Act 1985. (By contrast, goodwill representing the surplus of the fair value of the consideration paid on the acquisition of a subsidiary over the fair value of its net assets may be shown in consolidated accounts). Accordingly, nothing turns on the fact that Baja’s accounts did not show any goodwill from the restaurant business. The question whether in this case the goodwill belonged to Ms Sheingold or Baja is a question of fact: see generally Butler v Evans [1980] STC 613.

It is common ground that Ms Sheingold owed Baja fiduciary duties in her capacity as a director. Those duties included a duty not to appropriate for herself corporate property. When the company went into liquidation her powers as a director ceased: Insolvency Act 1986, s 103. However, her fiduciary duty not to misappropriate company property continued.

The judge dealt with the lease and goodwill together. He held that neither belonged to Baja, even though the goodwill sold to Mr Nesbit was described as goodwill in relation to the restaurant business known as The Key Brasserie at 3-4 Quay Street, Truro. For the reasons given below, in my judgment, this conclusion was inconsistent with his earlier findings and cannot stand. The fact that neither PCS in the past nor the liquidators had extracted any payment for it does not alter this conclusion. The principle of unanimous shareholder consent is not available here, as I explain below.

Mr Elliott submits that the goodwill which was sold by Ms Sheingold was in fact goodwill belonging to Baja. Alternatively, he says that the goodwill which Baja sold was derived by Ms Sheingold or Blok from its (Baja’s) goodwill. In addition, the opportunity to sell the goodwill was acquired by Ms Sheingold in her capacity as a director of Baja. She is liable to account for the goodwill sold accordingly.

As to these submissions, Mr Andrew Marsden, for Ms Sheingold, makes a number of responses. First, he submits that, on a proper interpretation of the facts, the restaurant business was not owned by Baja at all. It was owned first by Mr Poole, then by Mr Poole and Ms Sheingold jointly, and then by Ms Sheingold alone. They also owned the lease and the goodwill of the business. Baja did no more than carry on the business previously carried on by PCS. Therefore all it did was to supply food and drink and services in connection with the restaurant. He points to the structure of the BDA and submits that, because of the structure of those arrangements, goodwill did not belong to Baja.

In my judgment, this submission is inconsistent with the judge's findings and I accordingly reject it. The judge found that Ms Sheingold carried on the restaurant business through Baja in the same way that it had been carried on before. The judge also made findings as to how the business had in fact been carried on before Baja came on the scene. He found that Mr Poole had carried on the restaurant business through PCS. On this basis it was PCS who carried on the restaurant business. It was not simply a manager. In addition, Ms Sheingold said in her evidence that “the limited company [Baja] ran the business”, though she qualified this later. If Baja were a manager, it would have been remunerated as a manager. There was a suggestion that it was entitled to the total receipts of the business as a fee for its services as manager, but that hypothesis is neither supported by any finding of the judge nor consistent with commercial reality since it would have left Ms. Sheingold with no share of the profit and with the risk of non-compliance by the licensee with the BDA. In my judgment, the judge clearly found in [2] of his judgment that Mr Poole carried on business through PCS. He did not find that PCS simply provided support services to Mr Poole as owner of the restaurant business. He found that this was the way in which the business had been carried on in the past and accordingly when he referred to that in [33] he must have been referring to Mr Poole carrying on the restaurant business through his company. Moreover, the presentation in Baja’s accounts of its trading receipts is more consistent with the company having carried on the restaurant business rather than its having provided catering services. (The same is arguably true of the description of Baja’s business in its accounts). There was no evidence that Ms Sheingold ever produced accounts drawn up on the basis that she was the proprietor of the restaurant business. I attach little importance to the statement in the particulars for the sale of the business following liquidation that, “The business has been owned and managed by the present vendor for the last 5 years”, since that statement was made on Ms Sheingold’s instructions in circumstances where any distinction between her and Baja may have been immaterial. The judge dealt with the lease and the goodwill together and appears to have overlooked the fact that the goodwill related to the business, and that it could be separated from the lease and the subject of separate ownership. Baja’s licence to occupy the premises could be terminated by Ms Sheingold but this point goes to the value of goodwill not its ownership.

Mr Marsden also submits that the fact that the liquidators did not themselves seek to realise any payment for goodwill supports his case. I reject this submission also. There is no evidence why the liquidators decided not to assert that Baja was entitled to the goodwill. They may have been influenced by the fact that there was no cash in the liquidation to enable them to pay the costs of pursuing a claim for recovery of the goodwill. They may have been advised that the goodwill was worth little or nothing. In any event, even if the reasons were known, the question of ownership of any goodwill must be a question for the judge.

Mr Marsden submits that it is significant that Baja did not make a payment for goodwill when it took over the business of PCS. Mr Elliott submits that this is not conclusive because it may be that the goodwill had no value at that point in time. I agree. He further submits, in my view correctly, that the fact that Baja failed to make any payment for goodwill does not necessarily mean that no goodwill existed. So, in my judgment, there is nothing in the respondent’s submission here either.

Mr Marsden’s next submission proceeds on the basis that the last argument is rejected. He submits that, when the lease and BDA were taken in 1997, Baja had only recently been formed. Its directors and shareholders were Mr Poole and Ms Sheingold and they must have agreed between themselves that the benefit of any goodwill from the business run by Baja should belong to the lessees personally. He thus relies on the principle of unanimous shareholder consent, namely the principle that a company is bound if all the corporators of the company consent to a particular matter, (see generally Buckley on the Companies Acts at [381A.6] and [381A.7]). The principle is subject to a number of limitations, but counsel have not referred to any of these. The subject matter of consent in this particular case would have been the taking of corporate property by a director.

I would reject this argument on the basis that it is not supported by the judge’s findings. As I have explained, the judge held that Baja was actually carrying on the restaurant business on its own account. It was not merely providing services to Ms Sheingold and (for a short period) Mr Poole as lessees. Ms Sheingold’s evidence was that they owned the lease beneficially. The judge did not, however, make any finding that there was an agreement by the members of Baja to vest the ownership of the goodwill of the business in the individual shareholders. It would have been an unusual arrangement to make and there was no obvious reason for making it, unless perhaps it was feared that Baja might have financial difficulties. In any event, any consent would have to have been given in 1997 since Mr Miner became a shareholder before the lease was renewed in 1998 and he would have objected to any proposal to vest the goodwill in Ms Sheingold alone. It is, moreover, open to question whether consent given in relation to goodwill arising under the original BDA would apply to goodwill arising under any future BDA. I accept, however, that if Mr Poole had given consent and it related to goodwill built up under future BDAs, it would not be open to Mr Miner to withdraw the consent or to say that it did not bind him. That consent would be an incident of the bundle of rights constituting the shares which he acquired. In the circumstances, I do not consider that unanimous shareholder consent to the vesting of the goodwill of the restaurant business by Mr Poole and Ms Sheingold, (and then by them in Ms Sheingold alone) could simply be inferred.

For all these reasons, I conclude that the judge was wrong to dismiss the appellants’ claim and that he should have held that Ms Sheingold was liable to the appellants for misappropriation of Baja’s goodwill. Accordingly, this court must make an appropriate order that Ms Sheingold should now account for the value of this asset.

The appellants claimed in their particulars of claim that Ms Sheingold was liable to account for £90,000 which included the sum of £71,837, the amount of the consideration apportioned to goodwill in the agreement with Mr Nesbit. Mr Marsden submits that when Baja went into liquidation the goodwill would have been rendered worthless. When Ms Sheingold sold it, she was able to sell him the benefit of a three-year lease. This was not the position when Baja went into liquidation. So, he submits, it was self-evident that the goodwill could not at the date of the liquidation be worth the amount attributed to it in the agreement with Mr Nesbit. In any event, he submits that it was clearly overvalued because it was valued by reference to the gross profits of the business before directors’ remuneration rather than net profits, which were low. Moreover, he submits that the parties are likely to have taken the view that to avoid tax they should attribute nearly all the consideration paid for the lease and the goodwill to goodwill, and that in those circumstances, this court should take a realistic view and find that a greater proportion of the consideration in fact related to the lease.

The judge was not asked to order accounts and inquiries to determine the value of the goodwill if he found Ms Sheingold liable to account. The difference was potentially significant. But, if the matter is either one that the court should raise of its own initiative or one which can now be raised on appeal, Ms Sheingold is entitled to resist an order requiring her to pay the amount claimed (£71,837) and this court would instead direct an inquiry in the court below as to the amount for which she ought to account.

In my judgment, none of Mr Marsden’s arguments succeed. Once it has been decided in principle that Ms Sheingold is liable to account, it falls to her to raise any matter that can be raised as a proper deduction from the profit she actually received: see the decision of this court in Murad v Al Saraj [2005] EWCA Civ 959, [2005] All ER (D) 503, at [77] to [79] and [96], to which I was a party. It is not open to her to argue that the value of the goodwill sold to Mr Nesbit was attributable to her efforts after liquidation because the judge rejected the argument that the goodwill had been increased in value as a result of anything which Ms Sheingold did in the period between the liquidation and the sale to Mr Nesbit. There is no appeal against this finding. Accordingly the value of the goodwill which Ms Sheingold sold to Mr Nesbit was no different from its value at the date Baja went into liquidation.

Furthermore, it is not open to this court to find that the consideration was not in fact apportioned by Ms Sheingold and Mr Nesbit in the proportions set out in the assignment. According to the sale agreement, the parties agreed on that apportionment. Furthermore, the purchaser was prepared to pay the sum of £71,837 for goodwill, and the value of the goodwill was what the purchaser was prepared to pay for it so it did not matter whether (if they did) Ms Sheingold’s agents made some error in its calculation. If parties put into the agreement an apportionment which did not reflect what they had agreed so as to obtain some fiscal advantage, the court cannot go into that. The agreement would have been unlawful and the loss must therefore lie where it falls.

At a late stage in the argument, Mr Marsden suggested that the court itself should have taken the point that there was a doubt about the value of goodwill and that this court should direct accounts and inquiries even if Ms Sheingold had neither taken the point below nor raised it in a respondent’s notice.

In my judgment, however, Ms Sheingold has no right to complain on appeal of any failure of the judge in this regard. He might well have spotted that there was a point to be made about the value of the goodwill for which Ms Sheingold should account. He could not in my judgment have been criticised if he raised the question with the parties and invited submissions or if he did not raise it because (for instance) it was not material in the light of his conclusions. It was always open to Ms Sheingold to have taken a point at trial or in a respondent’s notice. I do not consider that this court should give permission for the point to be taken now. If it had been raised below, the court would no doubt have considered whether on the facts that was a real prospect of success in showing that there was likely to be reduced amount found to be due on the inquiry. Otherwise (and this would apply to an inquiry ordered by this court) an inquiry could lead to a waste of substantial costs. Moreover, the appellants still have the argument that Baja could have compelled Ms Sheingold to obtain a renewal of the lease so that it could continue in business. In those circumstances, there would not necessarily be any difference between the value of the goodwill at the date of liquidation and its value at the date of sale. The appellants would also have the argument (which was not raised, but to which provisionally I see no answer) that the goodwill ought in any event to be taken at the value stated in the agreement with Mr Nesbit since the appropriate remedy for breach of the duty in question is an account of profits, rather than the value at the date of breach. Finally, the appellants have had no notice that this point was going to be taken before the hearing. The sum of £71,837 was within the amount claimed in the particulars of claim. In the circumstances, I consider that it is too late for Ms Sheingold to take this point now.

The judge found that Mr Miner ought to have objected at the time of the passing of the resolution for creditors’ voluntary liquidation that goodwill was not treated as an asset of Baja and ought to have been so treated (see [33] of his judgment set out above). In my judgment, this failure to object was not a bar because Ms Sheingold did not rely on any estoppel. In any event it was her responsibility as sole director to produce an accurate statement of affairs: Insolvency Act 1986, s 99.

I have concluded that Ms Sheingold must account for the amount which she received from Mr Nesbit for the goodwill of the restaurant business sold to him. She is also liable to interest on that amount. In those circumstances, it is unnecessary to consider whether she held the benefit of the lease for Baja. The appellants made it clear that they did not wish to proceed with this point if the goodwill belongs to Baja and so the point has not been fully argued. That means it is also unnecessary to consider whether Ms Sheingold, in her capacity as licensor, could properly have refused to give her consent to Baja continuing to trade from the premises.

That leaves the appellants’ claim that the judge was wrong to hold that fixtures and fittings were not undervalued at the time of their sale by the liquidators to Ms Sheingold. I agree with the judge on this point. There was no evidence to support the allegation that this transaction was at an undervalue.

For the reasons given above I consider that this appeal should be allowed in part and that Ms Sheingold should be ordered to pay the sum of £71,837 plus interest to the appellants. If the rate and period of interest is not agreed, the matter should be dealt with on paper by written submissions.

I agree.

I also agree.