Shah v Shah & Ors

On 24 February 2010, I handed down judgment on the liability issues in a bitterly contested “unfair prejudice” petition under Section 994 of the Companies Act 2006 (“the main judgment”). I shall use the same nomenclature in this judgment as in the main judgment. In the main judgment, I held that unfair prejudice was established and that the shareholding of Dinesh should be purchased by either CJ or the Company at a price to be determined. Dinesh’s holding amounts to 11,334 shares in the Company out of a total issued and paid up share capital of 50,000 shares.

The extended time that has elapsed since the main judgment has largely been due to the desire to give the two sides an opportunity to reach a settlement. Unfortunately, that has proved unsuccessful but two matters have been agreed: (a) the date of valuation shall be the date of the main judgment, ie 24 February 2010; (b) there shall be no discount for the minority shareholding.

The matters that remain to be determined are the following:

There is also the question of rectification of the Companies Register to give effect to the finding in the main judgment that Dinesh remained a director of the Company and of its subsidiary Chas Polsky. An order for rectification should not strictly be necessary in the light of the clear finding in the main judgment: see at paragraphs 90-91. However, for the avoidance of doubt the order to be made consequent on the present judgment should direct that the Companies Register be rectified to show that Dinesh has remained a director and did not resign on 18 November 2005.

For the present hearing, both parties instructed expert property and share valuers as follows:

THE PRICE

The general approach to determination of the price to be paid for the purchase of shares following a finding of unfair prejudice is not in doubt. As stated by Nourse J in Re London School of Electronics Ltd [1986] 1 Ch 211 at 224B, the “overriding requirement” is that “the valuation should be fair on the facts of the particular case”. In Re Bird Precision Bellows Ltd [1986] 1 Ch 658, decided only a few months later, the Court of Appeal firmly rejected the submission that the court was constrained to make an order for the purchase of shares only at the market price, to be arrived at by ordinary valuation principles. On the contrary, Oliver LJ, with whose judgment Purchas LJ agreed, stated (at 669D) that the statutory regime confers on the court:

“a very wide discretion to do what is considered fair and equitable in all the circumstances of the case, in order to put right and cure for the future the unfair prejudice which the petitioner has suffered at the hands of the other shareholders of the company; …”

There are three properties at issue:

The two valuers valued the properties on an open market basis: indeed, that is the only realistic way that they could approach valuation. With the benefit of a very short adjournment after the start of the hearing, they reached agreement on the value of Unit 1, 199 Eade Road, at £1.1 million. However, there was no agreement regarding the values of the other two properties. As regards 38-40 Commercial Road, Mr Hirani valued it at £5 million and Mr Costa valued it at £2.9 million on the investment method and £3.47 million on an alternative price per sq ft basis. As regards 165-167 Commercial Road, Mr Hirani valued it at £600,000 but on behalf of the respondent, CJ, no expert valuation was submitted in accordance with orders covering expert evidence and, indeed, at the time for exchange of experts’ reports, CJ’s solicitors stated that he would not be submitting a valuation report. Although an attempt was made to introduce a further report from Mr Costa furnished only very shortly before the hearing, I held that was inadmissible. Accordingly, there was no contrary expert valuation of this property but on behalf of CJ, Mr Walker QC (as he was entitled to do) challenged various aspects of Mr Hirani’s valuation by way of cross-examination.

It is a commonplace to observe that property valuation is an art not a science. As Watkins J stated in a frequently quoted passage in Singer & Friedlander v John D Wood & Co [1977] 2 EGLR 84:

“The valuation of land by trained, competent and careful professional men is a task which rarely, if ever, admits of precise conclusion. Often beyond certain well-founded facts so many imponderables confront the valuer that he is obliged to proceed on the basis of assumption… Thus, two able and experienced men, each confronted with the same task, might come to different conclusions without anyone being justified in saying that either of them has lacked competence and reasonable care, still less integrity, in doing his work.”

Watkins J went on to record the view of the experts in that case that a reasonable margin of error is regarded as 10% either side of “the right figure” or, in exceptional circumstances, 15%. But whatever the permissible margin, in the present case I must do the best I can, on the available evidence, to determine a specific figure, while recognising the limitations involved in this exercise.

The experts are agreed that location and the nature and condition of the property are particularly relevant when determining value. In a very full and helpful joint statement, they describe this property as located about 100 metres to the east of Aldgate East and refer to Commercial Road as:

“a busy traffic thoroughfare which lies close to the Aldgate office district but …is not a recognised retail or office location. The main retail location is along Whitechapel High Street/Whitechapel Road, less than ¼ mile to the north. Most retail units nearby are used as showrooms predominantly by the garment trade.”

They note that the property is well served by road and public transport links, with an underground station less than 200 metres away. They describe the area as follows:

“This is a predominantly commercial area traditionally associated with the wholesale and manufacture of garments. There is also a mix of residential properties of various types and ages nearby. Aldgate and Whitechapel suffered generations of economic and environmental decline until the early 1980’s, when incipient improvement began. Traditional rag trades that dominated this part of the East End have been declining as large and smaller scale, mostly residential, developments have been completed. The run down image of parts of the area is gradually changing, as it is becoming an increasingly fashionable City Fringe residential and business quarter. At the rear of the property on Alie Street are offices which are intended for redevelopment as planning permission has been granted for a large mixed commercial and residential scheme.”

They refer to the property itself as “an imposing, mid-terrace, 7 storey building, plus basement of indeterminate age but probably at least 70 years old but it has been refurbished in parts over recent years.” I have been supplied with a photograph that fully bears this out, showing that the property has a wide street frontage.

At present, the Company occupies the ground floor as a garment showroom with the basement and first to second floors used as ancillary storage. The third to fifth floors are each let separately to educational institutions. The sixth floor is currently vacant and is being refurbished, save that a divided part at the rear is let to a telecommunications operator to hold its telecommunications (telecoms) equipment. That is apparently linked to separate installations of telecoms equipment on the roof that are subject to further leases to Mercury and Orange.

The leases of the third to fifth floors are all short-term leases outside the protection of the Landlord and Tenant Act 1954. The details in summary are as follows:

The joint statement includes agreed schedules of comparable properties to which the experts had regard in coming to their valuations. As they both recognised, the comparables are far from being equivalent. They can provide guidance, but sometimes that is by way of contrast rather then similarity. Much of the difference between Mr Hirani and Mr Costa came down to the degree of similarity or difference that they attributed to the various “comparable” properties and then to adjustments which they made in consequence to arrive at their overall figures. Although both experts clearly have considerable experience and were acting in good faith, having heard them being cross-examined in exhaustive detail I found that each was prone to seek to reach a view which favoured the interest of the party that had instructed him. Each then became rather defensive in refusing to accept any possible qualification to the approach which he had adopted, even on matters of minor detail.

As regards valuation, the experts’ joint statement says this:

“Market demand for manufacturing space and in particular, offices, is limited. Commercial Road is a fringe office location and given the current economic climate, there are competitively priced and more modern offices available to let around Aldgate. Although it is in close proximity to the City, the building is unlikely to appeal to most occupiers in the market place and lacks sufficient off-street parking, which is a major drawback for a building of this size.”

The net internal floor areas of the building are agreed. The investment method of valuation involved taking an estimated rental value for each floor and for the installation of telecoms equipment on the roof. The total estimated rental value (“ERV”) was then capitalised at an investment yield to produce a capital value. It follows that the higher the selected yield, the lower will be the resulting capital value.

The experts agreed that the building would be in multiple occupation as it was unlikely that a single tenant could be found to take all the floors. The experts also agreed that there is no “hope” value attributable for redevelopment. For the floors that are currently let, given that the leases were entered into not long before the valuation date, the experts took the current rental as the ERV.

Ground Floor. Mr Hirani assessed the ERV at £20 per sq ft compared to Mr Costa at £15 per sq ft. The ground floor currently has planning permission for Class B1 (office or light industry use) but the experts agreed that Class A1 (retail) permission could readily be obtained and that it can be regarded as a retail space. As I noted, it offers a wide frontage on Commercial Road. The experts also agreed that retail use of the ground floor will generally command a higher rent than pure office use. But Mr Costa thought that it would be rather difficult to find an ordinary retail tenant for the ground floor because the building is somewhat isolated from other retail outlets and does not have a direct “footfall” in front of it. That was because most pedestrians heading for Aldgate East underground station would cross over Commercial Road away from the south side, on which the building is situated, at the corner with Whitechurch Lane. I am not altogether persuaded by that view since there are retail premises on the opposite side of Commercial Road close by, and pedestrians before crossing the road at the traffic island would, according to the scale plan, be on the pavement within 15 metres of the building with the shop front clearly in sight.

Of the comparables, 99-101 Commercial Road was a ground floor office letting at £15 per sq ft but although the same as Mr Costa’s estimated valuation of the subject property, that is not for retail use and, moreover, it has a very much narrower frontage as evident from the photograph produced to the court. Mr Costa in his own report had not produced any retail comparables. For the joint report, he accepted as relevant three retail comparables that were found by Mr Hirani. 180 Commercial Road has a rate of £20 per sq ft, but Mr Costa emphasised that this was in the heart of the garment section of Commercial Road and would therefore be more attractive to the garment trade, who are among the more likely prospective tenants for properties in this area, and therefore it would command a higher rent. However, Mr Hirani considered that it was a less good location as it was further away from the City. I found Mr Costa’s analysis of that property convincing. So also, in my view, was Mr Costa persuasive in showing that 43a Commercial Street, where the ground floor is let at £21.02 per sq ft, was clearly a better location, being close to Petticoat Lane and not far from Spitalfields Market. Moreover, since that property has Class A3 (restaurant) permission, and the tenant is in fact a restaurant, I accept that it would command a higher rent. 52-58 Commercial Road is not far away, and is let at £21.43 per sq ft, but it is a smaller retail premises which, the experts agreed, would command a higher rent. I note also that 63 Mansell Street, albeit as an office on the ground and also the first floors, is let at £18.50 per sq ft. Although Mr Hirani sought to suggest in his oral evidence that 63 Mansell Street was only a slightly better location than the subject property (“not much in it”, as he put it), the experts had agreed that it was a superior accommodation in a superior location, and from the agreed description it is evidently a much more attractive building.

Taking all this into account, I think that the ground floor at the subject property would command less than £18.50 per sq ft but that £15 per sq ft is too low. I determine the rental value at £17 per sq ft.

Basement. It was agreed that this would be let for ancillary use to the ground floor, providing storage and some office space. Mr Costa determined the ERV at £5 per sq ft; Mr Hirani at £7 per sq ft. Mr Costa, who is very familiar with the area as his firm’s offices are based there, said that the most he had valued a basement at was £7.50 per sq ft. The basement here has some natural light, lift access and good head-height. I think the ERV of the basement would reflect that for the ground floor as they are likely to be rented together and, therefore, merits a similar adjustment as between the two experts’ valuation. Accordingly, I consider that the ERV for the basement is £6 per sq ft.

First and second floors. The third to fifth floors are let at £13 per sq ft. Mr Hirani’s opinion was that the lower floors (ie first and second) would fetch more, whereas Mr Costa did not think that in this location there would be much distinction as between those and the higher floors since the building has a lift and there is a communal entrance that covers all the upper floors. The comparables do not provide any assistance as to the relative rentals of first and second floors compared to the ground floor within the same building. Given the contrasting views of the two experts and the 10% margin of appreciation that I refer to above, I shall determine a fair ERV at mid-way between their two valuations, ie £14 per sq ft.

Sixth floor. This is, as Mr Hirani put it, something of an anomaly because part is let for the storage of equipment related to the aerial transmitters on the roof. Neither expert could produce relevant comparables involving a partial letting of an upper floor. Mr Hirani made reductions from the fifth floor rental of £13 to get to an estimated £10. Mr Costa also took the view that a downward adjustment had to be made but felt that the presence of advanced electrical equipment in one room would act as a deterrent to letting. I accept that as a general observation, but this does not point to a particular figure as the appropriate downward adjustment. I am not persuaded that Mr Costa’s reduction of over 40% to £7.50 is warranted on that account and I determine an ERV for present purposes of £9 per sq ft.

Adding the resulting calculations to the agreed ERV of the third to fifth floors and for the telecoms equipment, derived from the actual rental claimed under the current leases, produces a total ERV of £391,615.

As explained above, to calculate the open market value, the total ERV is capitalised on the basis of the required yield, reflecting years purchase. As an investment, this will be a reflection of the location, size, type of building, strength of tenant covenant, lease terms and general level of amenity provided. A building with a single occupier will generally have a lower yield. That much was common ground. Mr Hirani accepted that it was appropriate to make allowance to reflect potential vacancies but did not consider the length of period for which the property would be vacant on the basis that this was uncertain. He considered that this was not a poor location but what he described as a “good secondary location” just off the City fringe and that the existing tenants of the upper floors were fairly standard. Mr Costa thought that it would be much more difficult to let and noted that premises in this general area often took a considerable time to let so that void periods were likely. The leases of the third to fifth floors were all short-term (maximum five years). Although the tenants might renew, that was obviously not guaranteed. Mr Costa expressed the view that because of the nature of the property, and assuming that it will remain multi-let, “an investor purchaser would make an adjustment to reflect the underlying vacancy rate in the order of say 20%” on the ERV. Then, after noting two recent transactions where the purchase price reflected gross yields of 5.8% and 6.8%, he continued:

“Based on the above and, in particular, the state of the market in February 2010; the size of the building relative to these investments; the inferior location; the likely void period in achieving lettings of the remaining floors; the perceived poor tenant covenants and lack of sufficient rent deposits, I adopt a cautious approach, as would a prospective investor purchaser, and imply a yield in the order of 10%.”

By contrast, Mr Hirani expressed his view as follows:

“A 6.5% or 7% yield could easily be justified if the building was fully let. However I have deliberately used 8% …to reflect on the fact that any prudent purchaser would allow for the part vacant state and the necessity to partially update the building to modern standards. I have also taken into account the current tenancies existing.”

I consider that since Mr Costa’s yield of 10% is designed to reflect likely void periods and the poor tenant covenants, the criticism made of him is valid that by also applying a 20% reduction to the ERV to reflect the underlying vacancy rate there is an element of double counting. Although he said in evidence that his yield of 10% was determined on the basis of looking at the building as fully let, that is not the way it was expressed in his report as being calculated. The fact that Mr Costa sought to apply his 20% allowance also to the quite significant ERV derived for the telecoms equipment (£364,944) to my mind only demonstrated that it was quite inappropriate. Mr Hirani stated in cross-examination that there was sustained demand for rental of roof-space for such equipment whereas supply had been limited by a change in the planning rules such that it is now difficult to get new permission of rooftop equipment. That was not seriously challenged and Mr Costa accepted that he did not have experience of rooftop installation leases. There is no doubt that the tenants under most such leases, as is the actual case here, offer strong covenants.

The difficulty, however, is to arrive at the appropriate yield, as both experts, at least by implication, acknowledged. Although their joint statement sets out five properties as comparables for yields, I consider that they are all appreciably different. Despite the attempt by Mr Hollington QC on behalf of Dinesh to suggest that 8–10 Brushfield Street is closest in character (where the gross yield is 5.8%), I accept the evidence of Mr Costa that it is appreciably different, affording direct access between the floors, as reflected in the fact that it is in single occupation by Starbucks, with the ground and first floor used as a coffee shop and customer seating and the other floors as ancillary offices. The net internal area is also substantially smaller, which makes it a much more attractive investment prospect.

However, I note that two of the comparables, 2-3 Sandy’s Row and 118 Middlesex Street, which it is accepted are clearly superior locations close to Bishopsgate, both of which are smaller properties and the first of which is in single occupation, were sold at prices reflecting yields of about 7%. Mr Hirani, as I understood his evidence, explained that as regards those comparables it would be appropriate to make an upward adjustment of the required yield of about 2% for location and 1% on account of single occupation. That takes the subject property to an expected yield of around 10%. Based on the analysis of those comparables, I do not see any basis to take it down as low as 8%, or indeed his proposed 8.14% which seemed to me an arbitrary figure designed to produce a capitalised value close to £5 million. Accordingly, I think that applying a yield of 10%, as proposed by Mr Costa, seems more realistic. That produces ten years purchase and thus, on the ERV I have arrived at above, a valuation of £3.9 million.

As an alternative method of valuation, the experts valued the building on the assumption of a sale with vacant possession on a price per sq ft basis. For this purpose, they agreed a schedule of seven comparable properties to be considered.

As to rates, it was common ground that the price per sq ft for the basement would be significantly lower than that for the ground and upper floors. But for the ground, Mr Costa estimated £150 per sq ft compared to Mr Hirani’s estimate of £175 per sq ft. For the basement, Mr Costa’s figure was £50 per sq ft; Mr Hirani’s was £87.5 per sq ft.

For the ground and upper floors, it is necessary to take an overall view and none of the comparable properties comes close to the subject property. They are mostly significantly smaller and, as Mr Costa pointed out, a smaller property will be attractive to a much wider range of potential purchasers and so attract a higher price. However, of the comparables I note that a lower ground floor unit in Plumbers Row, E1, achieved a price in late 2009 equating to £155 per sq ft. That was sold with the benefit of three parking spaces and is part of a recently built development. But if £155 is the price for a lower ground floor, the price for the ground and upper floors will be higher (as indeed was the case for another unit sold in the same development at the same time for a price equating to £174 per sq ft). Moreover, although this may be an attractive development, Mr Hirani stressed that it is in a small side street, which he regarded as much inferior. Considering all the evidence, I have concluded that £150 as proposed by Mr Costa is in all probability too low for the subject property. Accordingly, I increase Mr Costa’s price per sq ft by 10%, which is within the margin of discretion to which I referred earlier, and the resulting figure of £165 per sq ft is of course within 10% of Mr Hirani’s figure.

There was put to Mr Costa in cross-examination an earlier valuation that he had carried out of the Company of its properties in September 2009 for the purpose of the Company’s accounts. In that report, he estimated that on a sale with vacant possession the price would be £120 per sq ft for the ground and upper floors and £50 per sq ft for the basement. When asked why his valuation as of a date only five months later than that pervious valuation showed such a marked difference for all but the basement, Mr Costa responded that he considered the market was stronger by February 2010 and would take a more optimistic view, whereas at the time of his earlier report available funding was very limited. I did not find that explanation convincing, given that his account of market demand in his earlier valuation report is word-for-word identical to that in the report prepared for these proceedings. I have to say that I consider it indicates a certain flexibility of opinion as applied to the range of possible values, according to the purpose for which the valuation is produced. When asked by the court why if there was such a significant increase in the price of the ground and upper floors there was no increased allowance at all in the price of the basement, Mr Costa answered that in his experience basement rates are consistent irrespective of what happens to the other floors. However, in a case where it is common ground that the most likely use of the basement is as ancillary storage to at least the ground floor, I cannot accept that an increase in the strength of market demand for the ground floor would have no effect on the price per sq ft attributable to the basement. In my view, it is reasonable to apply the same percentage increase to the basement as to the other floors, particularly where the assumption is that the building is being sold as a whole. An equivalent 37.5% increase to Mr Costa’s earlier basement rate produces a price of £68.75 per sq ft. I think that is reasonable and also reject Mr Hirani’s figure as too high.

In both his earlier and present valuations, Mr Costa further applied a reduction of 15% to reflect the fact that the building had current tenancies and therefore was not immediately available for sale with vacant possession. Mr Hirani disagreed and took the view that no reduction should be made since the valuation was being made on the assumption of vacant possession and, he said, it therefore could not include any allowance for the tenancies. I was unable to follow his reasoning on this point and it seems to me, as a matter of principle, that Mr Costa’s approach is correct. Therefore some discount should apply; but the question is, how much? Mr Costa accepted that there was no evidence to support his figure 15%, and I note that in his own report he expressed it as intended “to reflect the existing tenancies in place, as well as the potential deterrent of the telecoms tenancies”. In this, he was consistent with the approach adopted in his previous valuation. However, while I understand his approach as applied to the tenanted floors which therefore preclude vacant possession, I do not consider that it should apply to the telecoms equipment that was on the roof (save only for one separated room on the sixth floor). Mr Costa acknowledged that the planning permission for telecoms equipment on the roof might increase the market value of the building and I consider that this is highly likely. Furthermore, the fact that the building has such equipment installed under leases that produce a valuable rental stream from good quality companies would be seen as a distinct advantage and certainly not the basis for a discount. I accept Mr Hirani’s evidence in that regard. Since Mr Costa’s figure of 15% was a discount designed also to encompass some reduction for the telecoms leases, I consider that the correct discount to apply should be a little lower. Since the 15% was not calculated on any particularly reasoned basis, I must do the best I can and therefore reduce it only slightly to 14%.

Moreover, because of the benefit which the telecoms lease potential brings to the ownership of the building, Mr Hirani considered it appropriate to increase the estimated purchase price to account for that. He said, and it was not disputed, that there is no market on a price per square footage basis for the roof space and so the additional factor has to be calculated in some other way. Mr Hirani used the income as a yield percentage that he capitalised to derive a number of years purchase. I consider that approach is reasonable, but again there is the question: what yield percentage should be applied? Mr Hirani used 8.21%, but it became clear that this was a rather arbitrary figure designed, working backwards, to produce the overall total that he wished to reach. I face the difficulty that as Mr Costa made no allowance for this at all, I have no alternative expert evidence suggesting an appropriate yield or multiplier. Therefore, proceeding on the basis that I have found that in general Mr Hirani’s figures were too high, I shall make a downward adjustment by capitalising the telecoms rents on a 10% yield, which of course produces a multiplier of 10. It is clear that if this approach is used, the area of the small room on the sixth floor that is linked to the telecoms leases on the roof must be deducted when calculating the square footage of the sixth floor to which the price per sq ft is applied.

The calculation on this basis resulting from my determinations set out above is as follows:

In conclusion, since any attempt at a precise figure is specious, having regard to the results at which I have arrived applying both methods of valuation, I shall determine the open market value of 38-40 Commercial Road at £4 million.

This property is in a section of Commercial Road that is well known for wholesale clothing outlets. The property is a five storey building, including basement, divided at the ground and basement floors to form two retail outlets, with combined use to the upper three floors. It is held by Chas Polsky under a lease which, as at the valuation date, had 7 years and 10 months to run. The ground rent is £150 per annum and the property is entirely sub-let, generating rental income of £112,500 per annum.

In reaching his value, Mr Hirani used the investment method of valuation. As the property is fully let, he applied the current net profit rent achieved of £112,350 to which an investment yield is to be applied to produce a capital value. To reach the yield, Mr Hirani considered five comparables, all of which are included in the comparables already considered regarding 38-40 Commercial Road. On that basis, he arrived at a likely yield of 6.5% if the property was sold with a freehold title. However, because this was only the short residue of a lease, a higher yield would be required and he therefore increased the yield to 9.5%. This yield was capitalised using the multiplier applicable to a lease of 7 years and 10 months to produce a current market value of around £600,000. The method of calculation used the valuer’s standard work, Parry’s Valuation and Investment Tables, as explained in a helpful supplementary note from Mr Hirani, and is not controversial.

Given that many of the same comparables were used for this property as for 38-40 Commercial Road, for which Mr Hirani determined the investment yield as, in his view, a little over 8%, it is unclear to me on what basis a freehold purchaser would be satisfied with a lower yield on 165-167 Commercial Road. I see no basis for determining that it is a superior building, and Mr Hirani did not really suggest that. It seems to me that, on the available evidence, the expected yields should be about the same, ie 10%.

The next question is by how much the freehold yield has to be increased to reflect the fact that this property has less than 8 years of the headlease remaining. In determining the amount of the adjustment, the only expert opinion before the court is that of Mr Hirani. Mr Hirani accepted that an investment buyer would affectively be purchasing an income stream for those 7 years 10 months and would be unlikely to purchase this lease for re-sale. There was the possibility that the existing tenants might vacate at the end of their short sub-leases, some of which expire in 2011. However, Mr Hirani’s opinion was that these are reasonable properties which should be fairly easy to re-let if vacated. He explained that his overall adjustment from the freehold yield was made to reflect these various risks. In effect, his bottom line was that assuming a net profit rent of £112,350 for the remainder of the lease, a market value of £600,000 produced a potential overall profit of about £280,000 which was a sufficiently attractive level of profit to attract buyers.

I consider it was a reasonable criticism of Mr Hirani’s approach on the part of the First respondent to say that the potential for some void periods and costs of finding new tenants, and also for potential liability for dilapidation under the headlease that may prove irrecoverable in practice, should be allowed for. The appropriate way of making such adjustment is by an increase in the investment yield required. Mr Hirani accepted that allowance should be made for some of those factors but disputed it as regards others, and he considered that, overall, increasing the yield by an addition of 3% was a fair reflection of what is required.

The First respondent failed to take the opportunity at the appropriate time to put in a valuation proposing any alternative figures. In those circumstances, I think it would be wrong to reject Mr Hirani’s adjustment altogether and I shall therefore simply incorporate a small increase to reflect the fact that he did not take into account all the matters which I think should reasonably be taken into account and to which I have just referred. As I have held that 10% is the appropriate freehold yield, I therefore increase that figure by a further 4% (instead of Mr Hirani’s 3%) to produce an applicable yield of 14%. On that basis, using Parry’s valuation tables in the manner explained by Mr Hirani, the capitalised value is £514,615. I shall therefore determine the value at £515,000.

As well as the ownership and letting of the properties, the Company continues to trade as a wholesaler of women’s clothing.

In their joint statement, the two expert accountants, Mrs Naylor and Ms Hennessey, agreed that the wholesaling garment business is loss making and that it has no goodwill value. On that basis, since the net realisable value of its net assets exceeds the value that may be derived from its earnings, it is appropriate to value it by reference to its net asset value. They agreed that the reasonable value of the wholesaling business as at the valuation date was £102,000.

As regards the properties, the accounting experts agreed that an adjustment should be made to the open market values where there was a contingent tax liability, ie a liability to corporation tax on the accrued capital gain should the property be sold. In fact, on the valuation figure agreed by the property valuers for Unit 1, 199 Eade Road, there is no such liability. As regards 165-167 Commercial Road, this issue has a relatively small impact. Its real effect is as regards 38-40 Commercial Road.

Although both experts consider that some adjustment is appropriate, they differed sharply as to the degree of discount that should be made. In Ms Hennessey’s opinion, the full 100% amount of corporation tax that would arise if the properties were sold should be deducted. As she accepted in cross-examination, this was effectively a break-up valuation of the Company. Mrs Naylor considered that on the facts of the business here, there was no likelihood of an immediate sale. Even if it were desired to sell the properties, as regards 165-167 Commercial Road, that was in a separate company (Chas Polsky) and so the shares in that subsidiary could be sold avoiding the crystallisation of any gain. As regards 38-40 Commercial Road, the same arrangement could be made by restructuring the Company and transferring 38-40 Commercial Road into a new subsidiary which could be sold outside the group after six years without triggering a liability. Ms Hennessey acknowledged that she was not experienced in tax planning and could not give firm evidence on such possible arrangements. Mrs Naylor nonetheless considered that a small allowance for contingent tax liability should be made since any buyer would take over that liability so that this would be reflected in the purchase price: in her view, 10% of the maximum chargeable gain should be deducted on the facts of this case.

Although there are a large number of reported judgments on unfair prejudice petitions and the question of how to treat contingent tax liability must have arisen in many cases when a buy-out was ordered, the researches of counsel revealed no authority that considered this question in that context. The standard works on share valuation, which consider the matter more generally, all indicate that there is no hard and fast practice as to what provision should be made for contingent tax: all will depend on the circumstances. Hence Eastaway & ors, Practical Share Valuation (5^th edn, 2009) states at para 7.14:

“When the company’s assets have been calculated by direct valuation it will be necessary to make an adjustment for taxation in respect of the chargeable gains or the chargeable realised development value which would be taxable if the assets were to be disposed of at the realised value. This adjustment is normally only made in respect of interests in property and, unless the company being valued on a break-up basis, it will be necessary to take account of the fact that such taxation would not be immediately payable as there would be no actual disposal. It would normally be appropriate to discount the potential tax charge to take account both of the fact that it would be over stating the net asset value of the company to ignore the tax charge, but also to recognise the fact that there is no immediate intention to dispose of the properties concerned and therefore no actual crystallisation of the tax charge.

The extent of the discount on the tax charge depends on the circumstances. If there is very little possibility of the tax charge crystallising, then only a small percentage of the potential tax charge should be deducted but if, for example, a controlling interest is for sale in a company which has no possibility of profits so that it is to the purchaser’s advantage to liquidate, then the whole of the potential tax charge is a good deduction.”

Similarly, Tolley’s Practical Share and Business Company Valuation (2008) states at paragraph 14.7:

“The reality is that the corporation tax liability is unlikely to be triggered unless the asset is actually disposed of, usually on sale. Some companies do dispose of their assets on a regular basis, changing, for example their property or share portfolios in order to realise the profits. For such companies it would be perfectly acceptable to make a fairly full deduction from the value to reflect the incidence of taxation on these gains, although what might represent fairly full is of course a subjective judgement dependant upon the circumstances.

For companies that do not change their assets in this way, it may be sensible to take a different view. Even if such assets are to be included in the financial statements at full current value, ie the amount which they might be expected to fetch if sold, if there is in fact no probability of sale within the foreseeable future, is there any case for the inclusion of any of the tax liability at all? Clearly it will be important to understand the directors’ intentions in relation to possible sales of assets, and it is probably dangerous to presume that simply because assets have been retained for capital appreciation thus far, that position will continue in perpetuity.

The consensus appears to be that there should be some recognition of the possibility of tax becoming payable, even where, as is often the case, payment is actually a remote possibility, that can be postponed indefinitely, and in many cases not arise at all. Those possibilities argue strongly against the deduction of the entire amount of contingent tax. Indeed, SAV have a rule of thumb, which is that only 10 – 15% of the contingent tax should be deducted from the Company value for valuations for any fiscal purpose. This appears in the author’s experience to amount to a general rule with little variation irrespective of size of shareholding, although SAV are sometimes rather more flexible in cases where substantial or control holding is being valued.”

In Goldstein v Levy Gee [2003] EWHC 1574 (Ch), [2003] PNLR 35, Lewison J considered the question of contingent tax in a case where the valuation of shares was specified by the articles of association as being the value as between a willing vendor and a willing purchaser (without discount for minority holding). In that case, it was accepted by the partner in the defendant accountants that although there were cases where the whole of the contingently payable tax was reflected in the share price of the company, that was exceptional and that in practice it was likely that a discount on the percentage would have been negotiated on an open market sale of the company’s shares. Lewison J stated, at para [103]:

“The natural aspiration of the seller would be to achieve no deduction for contingent tax liability. The natural aspiration of the buyer would be to achieve 100% deduction. Both the hypothetical buyer and the hypothetical seller are willing. I do not think that anyone suggested any particular reason why one would have a stronger bargaining position than the other. If the parties are of equal bargaining power, it seems to me that they would meet in the middle and agree a deduction of 50% of the contingent tax liability.”

Lewison J proceeded to quote part of the passage from Eastaway that I have set out above.

I respectfully follow Goldstein v Levy Gee in finding that Ms Hennessey’s approach of discounting the full extent of contingent tax liability is in any event inappropriate. Moreover, the Goldstein case was expressly concerned with a contractually prescribed formula for valuation on the basis of an open market sale. By contrast, the present case is far from the situation of a willing seller and willing purchaser. As the Court of Appeal emphasised in In Re Bird Precision Ltd, the court is not bound to apply an open market value.

In my judgment, it is appropriate to have regard to the context and the reality of the position on the facts here. The shares are not being sold on the open market but are being acquired either by CJ directly or by the Company which CJ controls. If the Company purchases the shares, it has no need to liquidate its property assets to fund the price since its accounts show that (as at the valuation date) it had close to £2.5 million in cash. Although it has long term creditors of about £1.6 million, that figure is accounted for by a very long-standing loan to the Company by CJ’s brother-in-law (“the Shah loan”) for which no interest has ever been charged and which there is apparently no pressure at all to repay. There is no evidence from CJ that he has any intention that the Company should sell 38-40 Commercial Road. As the balance of the lease on 165-167 Commercial Road was (at the valuation date) under 8 years, the prospect of the Company selling the residue of that lease, which provides a useful income stream, seems even more remote and, again, there is no evidence to suggest otherwise. In my judgment, on these facts a break-up valuation of the properties is not appropriate.

As regards 165-167 Commercial Road, I accept Mrs Naylor’s approach that 10% is the appropriate reduction. As regards 38-40 Commercial Road, I cannot dismiss the possibility that, at some time in the future, the Company may choose to realise that asset and even if that were done through a restructuring of the kind referred to above, the contingent tax liability would be reflected in the price negotiated for sale of those shares. Mrs Naylor said that for fiscal purposes HMRC typically accept a discounted charge of 10%-30% of the maximum contingent capital gains. Although this is not a fiscal case, in my view it is appropriate to take the middle of that bracket as the relevant discount for this property, and I therefore determine the discount at 20%.

As regards the rate of tax to apply, in their first reports prepared in March-April 2011, both Mrs Naylor and Ms Hennessey applied the corporation tax rate of 28%, that being the rate applicable as at the valuation date. However, by the time of their joint statement of 16 May 2011, the corporation tax rate had been reduced to 26% for profits arising after 1 April 2011, and Mrs Naylor considered that it was appropriate to apply the lower rate. In her oral evidence, she explained this on the basis that one was looking into the future, since the properties had not been sold on the valuation date, and considering the prospects of such a sale and what tax liability would then accrue. On that basis, it was appropriate to consider expected future rates of tax. She said that originally, she did not feel that there was enough evidence that rates would come down but when the announcement was made that they were to be reduced it was appropriate to take that into account.

On this point, I do not accept Mrs Naylor’s approach. If Mrs Naylor did not consider when writing her first report on 25 March 2011 that it was sufficiently clear that the tax rate would be reduced to 26% such that she could apply that lower rate, still less would this have been clear on the valuation date more than one year beforehand. Speculation as to future rates of tax is a perilous exercise, and there is no basis in this case for applying anything other than the rate pertaining on the valuation date. Accordingly, the rate of 28% should be applied.

Finally, Ms Hennessey, as well as deducting 100% of the contingent tax liability also considered it reasonable to deduct the expected selling costs of the property and a contribution to the stamp duty that would be payable by the purchaser. However, these are again only relevant on a break-up valuation. Where there is no prospect of a sale in the near future, I do not consider that it would be fair on the facts of this case to take any of these further matters into account.

INTEREST

Dinesh seeks the equivalent of interest on the purchase price as from the valuation date. That submission is resisted by CJ. However, it was agreed that it would be appropriate for the question of interest to be considered along with issues of costs that would be raised at a subsequent hearing.

THE PURCHASER

Dinesh is neutral as regards the question of whether it should be the Company or CJ that is the purchaser, so long as it is lawful for the Company to purchase the shares. I consider that there is no realistic prospect of the creditors under the Shah loan objecting to a purchase being made by the Company and it was agreed that I should leave it to the parties to agree a purchase structure in the manner that is fiscally most advantageous following this judgment.

POTENTIAL LIABILITIES OF DINESH

Both sides are agreed that it is desirable after so many years of acrimony and expensive litigation, to achieve a clean break. As regards the Shah loan, since that replaced a loan from the Equatorial Bank, of which Dinesh was a guarantor, despite the absence of any paperwork there is at least a possibility that he has become a guarantor of the Company’s liability under the substitute Shah loan. CJ has offered to provide a personal indemnity to Dinesh as regards any liability under such a potential guarantee, but Dinesh reasonably, in my view, submits that this is inadequate since he knows nothing about CJ’s current personal financial position and obligations. His request that CJ should procure a release of any potential guarantee from the Shah lenders has been met with the response that they have not answered any enquiries. Obviously, as between the parties presently before the court, the court cannot order such release by third parties. In my view, if the parties cannot come up with an alternative, mutually satisfactory arrangement, the fair approach is for there to be a charge on 38-40 Commercial Road in favour of Dinesh as regards any potential liability under the loan. I consider that the court has power to order the provision of such a charge pursuant to Section 996(1). I shall leave it to counsel to come up with appropriate wording.

Dinesh also expressed concern regarding his potential liability as a director for any penalties or charges arising out of the Company having claimed tax relief on the mortgage payments on the property at 175 Commercial Road. However, in my judgment, this is entirely independent of any unfair prejudice and is not affected by the way the Company may be conducted in the future. In the event that any charges should arise over the period when Dinesh was director, I see no reason why he should be protected from such liability any more than the other directors. There will be no indemnity in that regard.

In the light of the determinations in this judgment, I shall leave it to the parties, with the assistance of their advisers, to re-calculate the price that should be paid for the shares which can then be included in the final order.