Bilkus v King & Anor

The price payable by your client for the Share (‘the Purchase Price’) will be the total of the sums set out in the Initial Valuation and in the Further Valuation."

On August 4, 2003 Isadore Goldman wrote on behalf of Mr King seeking confirmation in the light of Stockler Brunton’s settlement offer that "Mr Bilkus no longer proposes to pursue his claim that out client’s share in the Company should be purchased by him ... " In the absence of such confirmation, on August 13, 2003 Isadore Goldman served an application on Stockler Brunton (returnable on August 15, 2003) seeking to strike out the passages in the points of claim relating to the Control Issue. On August 15, 2003 Mr Registrar Baister directed that Mr Bilkus should sell his share to Mr King or the Company, and that this hearing be used to determine all issues of fact and law relevant to the valuation of the share, and gave consequential directions.

On September 9, 2003 Mr King’s solicitors wrote to Mr Bilkus’ solicitors to invite Mr Bilkus to abandon his claims in relation to the Mismanagement Issues, leaving the court to consider (i) the valuation date; (ii) the Challenged Payments referred to under paragraph 11 of the points of claim and (iii) costs. On September 10, 2003 Stockler Brunton replied declining to concede the Mismanagement Issues: "these matters remain at large and will have to be decided by the court."

On October 1, 2003, Mr Bilkus’ solicitors wrote making an open offer in settlement of the petition, under which the valuer would take into account only the Challenged Payments and would not take into account the Mismanagement Issues (other than the payments to Mr King’s wife and to Jeffrey King referred to above). The offer (which differed in certain respects, particularly in relation to the matters which the valuer was to take into account, from the proposal of July 31, 2003) included these terms:

The valuation of our client’s share (‘the Share’) will be undertaken by a chartered accountant to be agreed between us or failing such agreement to be nominated by the Court (‘the Valuer’). If the parties are unable to agree on the identity of the Valuer prior to 13^th October 2003, each party will disclose to the other the curriculum vitae of the Valuer which it proposes, plus 2 other valuers.

The valuation will be based upon the value of the Shares as at the date of the valuation. In our view, this is ‘at such date as the Court thinks fair and reasonable’, as stated in the Petition. However, it modifies other dates for the valuation in the Particulars of Claim.

Each party or its representative will be permitted to examine the records of the Company (at its offices, if necessary) and to make representations to the Valuer. The Valuer will be given access by your client to all the relevant Company documentation and correspondence, including e-mail and documents held by the Company’s auditors. Your client will also ensure that the Valuer will be able to interview employees of the Company, past and present.

The price for the Share will be calculated and paid in the following manner:-

The Valuer will conduct an initial valuation of the Share (‘the Initial Valuation’)

The Initial Valuation will be made in the following manner:

It will be based on 50% of the value of the Company as at the date of the valuation, with no discount to reflect our client’s lack of a majority interest;

It will assume that the contact between the Secretary of State for the Home Department (‘the Home Office’) and the Company dated 16^th March 2000 (‘the Home Office Contract’) will terminate on 2^nd April 2005 and will not be renewed;

It will take into account the matters set out in paragraphs 7.5 (Mrs King only) 7.10 (Mr Jeffrey King), 11.1, 11.2, 11.3 and 11.4 of our client’s Points of Claim dated 25^th March 2002.

It will not take into account the specific acts of mismanagement by your client referred to in paragraphs 10, 7, 7.1 to 7.5 (first sentence) and 7.6 to 7.9 of the Points of Claim, for which no adjustment will be made.

If:

the Home Office Contract is renewed for any period beyond 3^rd April 2005; or

a new contract for the provision of accommodation and/or other services to asylum seekers or homeless people is granted by the Home Office, another government department or a local authority to:

The price payable by your client for the Share (‘the Purchase Price’) will be the total of the sum set out in the Initial Valuation and in the Further Valuation."

On October 2, 2003 Mr King’s solicitors asked for confirmation that the Mismanagement Issues were no longer live, and by a letter of the same date (mis-dated October 1, 2003) Mr Bilkus’ solicitors confirmed "unambiguously" that their client would not ask the court to decide on the Mismanagement Issues.

It is common ground between the parties that the price to be paid for Mr Bilkus’ share is to be determined by an independent valuer, and not by the court. The valuer will act as an expert (and not as an arbitrator) and will act on appointment by the court rather than by the parties: see North Holdings Ltd v Southern Tropics Ltd[1999] 2 BCLC 625, at 639, per Morritt LJ. It is also accepted that Mr Bilkus will be repaid a loan account amounting to £274,363.

The issues which divided the parties prior to the present hearing were:

who the valuer should be and how the valuer should be chosen;

whether (as Mr Bilkus contends) there should be a two-stage valuation, or whether (as Mr King contends) there should be a once and for all valuation, and (if so) as at what date;

whether the Challenged Payments should be the subject of an evaluation by the Court (as Mr King contends) or whether they should be evaluated by the valuer (as Mr Bilkus contends);

whether (as Mr Bilkus contends) the price should include an element (8% interest) to reflect the return enjoyed by Mr King but denied to Mr Bilkus;

whether there should be an interim payment to Mr Bilkus; and

the incidence of the costs of these proceedings.

Mr King’s solicitors have proposed Mr Peter Clokey of PriceWaterhouseCoopers; Mr Andrew Caldwell of BDO Stoy Hayward; and Mr Lawrence Sacker of Hacker Young. Mr Bilkus’ solicitors have indicated that their first choice is Mr David Bowes of WJB Chiltern (which I was told was part of Moores Rowland), and then Mr Jim Eales of Ernst & Young and Mr Andrew Grantham of KPMG. I was told that each of them has in principle agreed to act. The parties have agreed to bear their own costs of the reference to the valuer, and that the valuer’s fees will be shared equally unless the valuer decides otherwise.

Mr King has reservations about Mr Bowes (although no reasons were given), and neither party has voiced any concern with regard to the other names.

I do not think that there would be any point in a reference to the President of the Institute of Chartered Accountants. I accept the suggestion put forward on behalf of Mr King that each side should have the right of one veto. I shall treat Mr King as having exercised that right, and if Mr Bilkus exercises that right within one day of this judgment being handed down I shall choose the expert from one of the 4 remaining names. If he does not do so, I will choose from the remaining 5 names.

It is common ground that the value of the Company is extremely sensitive to the prospects of the NASS Contract being renewed, and that is itself a question which is extremely difficult to gauge. Mr Bilkus’ position is that the Company will continue to have a contract with NASS in one form or another, and that it will use its experience with the NASS contract to obtain similar contacts from local or central government.

His contention, stated in the correspondence to which I have referred, is that the valuation should be carried out in the first instance on the assumption that the NASS Contract is not to be renewed, with the price payable for his shareholding determined and paid accordingly. Provision should be made for the valuation to be revised, and for a addition to be made to the price payable for his shareholding, in the event of the NASS Contract being renewed: in effect there should be an element of deferred consideration by reference to the added value which hindsight will have demonstrated to have been appropriate by reason of the fact that the NASS Contract had not simply expired in 2005. In fixing the price the valuer will not have to speculate as to future events.

Mr King’s position is that the two-stage valuation proposal was inconsistent with Mr Bilkus’ position in the petition and the points of claim, and contrary to the policy in section 461(2)(d) of the 1985 Act of a clean break between parties who are unable to continue to work together. The objective should be "economy and expedition, even if this carries the possibility of a rough edge for one side or the other (and both parties in this respect take the same risk) compared with a more elaborate procedure": O’Neill v Phillips [1999] 1 WLR 1092, 1107 (H.L.), per Lord Hoffmann.

A two-stage valuation would have the effect that Mr King would be tied in to the Company until after the second stage, and that Mr King would be required to pay a substantial sum of money within 14 days of the initial valuation, but without obtaining title to Mr Bilkus’ shareholding in return until after the final valuation in 2005. The "overriding requirement" is that the court’s "order should be fair": Shareholder Remedies (Law Comm. Consultation Paper No. 142), para. 10.18. An order that conferred on Mr Bilkus the immediate benefit of the consideration for his asset but did not simultaneously confer title to that asset on Mr King in return would be manifestly unfair. Mr Bilkus would stand to benefit not only from the renewal of the NASS Contract, but from any unrelated increase in the value of his holding between the date of the initial and further valuations. Any such increase will be attributable to the skill and hard work of Mr King and his colleagues in the interim.

Mr King relies on the O’Neill v Phillips offer made on March 1, 2002. The offer was expressed to remain open for 21 days. The offer was not accepted, and expired on March 22, 2002, since when Home Office pronouncements as to future policy in relation to the housing of persons claiming refugee status have markedly diminished the future prospects of the Company and, already, the net values of referrals have markedly declined. In such circumstances it is submitted, having regard to Mr Bilkus’ rejection of the O’Neill v Phillips offer, that the appropriate course is for the valuer to value the share capital of the Company both as at March 22, 2002 and at the date of the order of Mr Registrar Baister, August 15, 2003, including the future prospects of the Company at each such date and for Mr Bilkus to receive whichever is the lower of 50 per cent of the value at those two dates.

I am satisfied that the court should not adopt the two-stage valuation process in this case. In fact, as is apparent from the draft order put forward on behalf of Mr Bilkus, what is envisaged is not so much a two-stage valuation process, but a deferred sale, with part of the purchase price payable in the near future and the balance (if any) payable in 2005.

No doubt there might be exceptional circumstances which would justify such an order under section 460(2)(d). But two important policies militate against it. The first is that in cases such as this justice is normally served by a clean break. The second is that it is an important consideration that the shares should be valued at a date as close as possible to the actual sale so as to reflect the value of what the shareholder is selling: Profinance Trust SA v. Gladstone [2002] 1 B.C.L.C. 141, 153 (C.A.), approving Re London School of Electronics Ltd [1986] Ch 211, 224.

Valuers routinely have to assess the future risks to which a company’s income-producing assets are subject, and to adjust their appraisals of present capital worth accordingly. This is precisely what Mr Bilkus himself contemplated in the petition and the points of claim if Mr King were ordered to sell out to him. Whenever property is acquired on an open market valuation basis, the hypothetical purchaser takes into account the impact of future events, whether positive or negative. The valuation of future earnings of every trading company is dependent on the continuation of a market for the goods or services of that company. If a company has only one customer there is a risk of that customer going elsewhere or, indeed, ceasing to operate at all. Any market valuation involves an element of speculation as to future events.

With a single valuation date each side bears the risk of the "rough edge" to which Lord Hoffmann referred in O’Neill v. Phillips [1999] 1 WLR 1092, 1107 (H.L.).

In Profinance Trust SA v. Gladstone [2002] 1 BCLC. 141, 160 (C.A.) Robert Walker LJ said that the starting point (subject to the overriding requirement that the valuation should be fair in the particular case) should be the proposition stated by Nourse J in Re London School of Electronics Ltd [1986] Ch 211, at 229 that: "Prima facie an interest in a going concern ought to be valued at the date on which it is ordered to be purchased."

In the circumstances of this case, in which an O’Neill v. Phillips offer was allowed to expire in March 2002, and in which the main value lies in the going concern, I am satisfied that a valuation date close to the actual valuation would be the appropriate one, provided that the valuation is conducted expeditiously. I will therefore order that the valuation be made by the valuer as expert, as at December 1, 2003 on the basis of fair market value as a going concern with no discount to reflect the fact that Mr Bilkus is not a majority shareholder.

The original position of Mr Bilkus was that the Challenged Payments (which for this purpose also include the payments to Mrs King and Jeffrey King) should be resolved and taken into account in the valuation process by the valuer. It was submitted that the valuer should be permitted to give consideration to these payments and, if he thinks appropriate, to take them into account in his valuation. For example, if the valuation approach is by reference to the Company’s profit or net earnings, the Valuer should be entitled to disregard such of those payments (or so much of those payments) as the valuer would expect a purchaser to disregard when assessing profitability or potential earnings. Conversely, if and to the extent that the valuer thinks that the payments have in fact given rise to claims by the Company which could be expected to influence a purchaser, those claims should likewise be brought into account.

Mr King’s position was that: (1) whether or not the Challenged Payments were wrongful is a matter for the court to determine, not for the valuer; (2) as a matter of fact, all of the Challenged Payments were proper; (3) further and in the alternative to point (1), Mr Bilkus cannot now go beyond his pleaded case and seek subsequently to attack additional transactions which have not been expressly attacked in these proceedings. It was plainly inappropriate for allegations of misfeasance to be left for the valuer to determine, since such issues are pre-eminently suited to determination by the court before remission to a valuer (and this is what was contemplated in the directions orders made by both Mr Registrar Simmonds and Mr Registrar Baister in any event).

In North Holdings Ltd v. Southern Tropics Ltd. [1999] 2 B.C.L.C. 625, 637 (C.A.) the Court of Appeal made it clear that disputed questions relating to such matters as misuse of funds were for the court and not for the expert accountant.

The order of August 15, 2003 directed exchange of witness statements containing further evidence relating to the issues of the valuation of the shares and also directed that the trial was "to determine all issues of fact and law relevant to the valuation of the shares."

In the event, in the course of argument Mr Bompas QC accepted for Mr Bilkus, as did Mr Potts QC for Mr King, that a valuer, in considering the operating results and profits which a potential purchaser might be looking at, may disregard certain payments made in the past as not likely to recur or be allowed in the future without entering onto the province of the court and determining their propriety. In those circumstances it was accepted that nothing need be said about the Challenged Payments in the valuer’s terms of reference, and that there were no issues relating to them to be determined by the court.

Mr Bilkus’ position is that he has not so far received any return from the Company, whether by way of remuneration or by way of interest on the substantial advances made to the Company. This will not be put right by requiring Mr King or the Company to purchase Mr Bilkus’ shareholding at a price equal to 50% of the Company’s value. As Mr Bilkus should have, but has not, received a return from the Company, the price to be paid for his shareholding should include an element to reflect the return enjoyed by Mr King but denied to Mr Bilkus. This return should arrived at in the form of interest at 8% per annum on the purchase price calculated from August 31, 2000.

Interest was not claimed either by the petition or the Points of Claim, and the claim was made for the first time in the skeleton argument on this hearing. Mr Potts QC for Mr King says that the "interest" element proposed is not interest in any real sense but rather an element interest to increase the price to be paid for Mr Bilkus’ shares to replace the "return" enjoyed by Mr King but "denied" to Mr Bilkus. The only "return" received by Mr King but "denied" to Mr Bilkus is Mr King’s remuneration. That remuneration is for services rendered by Mr King and unmatched by any services rendered by Mr Bilkus. Mr King’s remuneration is not alleged to have been in any way excessive. Mr Bilkus will be fairly (if not more than fairly) compensated for his exclusion by receiving a sum equal to 50 per cent of the value of the entire company.

In Profinance Trust SA v Gladstone the Court of Appeal emphasised ([2002] 1 BCLC 141, 152) that:

I am satisfied that there is nothing in this case which takes it out of the ordinary so as to justify the claim for interest.

It is common ground that the court has jurisdiction under CPR Rule 25.6, or alternatively under section 461 of the 1985 Act, to order an interim payment: Ferguson v Maclennan Salmon & Co, 1990 SLT 658, [1990] BCC 707 (Court of Session, Inner House).

It is said that Mr Bilkus needs the money to pursue the valuation of his shares, and that there is no ground for further delay. Mr King says that in the past Mr Bilkus has always contended that he possesses ample means, and he sought and persisted in seeking an order that Mr King sell his one share to him. In any event the repayment of Mr Bilkus’ loan account provides him with ample funds to pursue the valuation of his shares.

This is a claim made for the first time in the skeleton argument for this hearing, and unsupported by any evidence. On the material available to the court, Mr Bilkus will suffer no hardship by having to wait a couple of months for the purchase price.

Mr Bilkus says that Mr King should pay Mr Bilkus’ costs of these proceedings down to July 9, 2002, when Mr Registrar Jaques ordered a split trial. Mr Bompas QC accepted that for the period from the order of Mr Registrar Jaques to this hearing, the costs of the Control Issue and the costs of the Mismanagement Issues should be borne by Mr Bilkus. He accepted that the court might order the Challenged Payments costs to be included as part of the Mismanagement Issues.

Mr Potts QC relies on the O’Neill v Phillips offer as justifying an order of costs in Mr King’s favour for all costs incurred since March 22, 2002. In any event he is plainly entitled to his costs of the Control Issue and the Mismanagement Issues in view of Mr Bilkus’ late abandonment of the Control Issue and very late abandonment of the Mismanagement Issues.

I consider that Mr Bilkus should have his costs of the petition until March 22, 2002, other than those (if any) relating to the Mismanagement Issues, which ought to be Mr King’s. Mr King should have the costs from March 23, 2002 until this hearing, and also (subject to any further submission on behalf of Mr Bilkus) the costs of this hearing, in which Mr King has substantially succeeded.

If they cannot be agreed, I will hear argument on (a) the split of the costs; (b) the costs of this hearing; and (c) the form of the order.