Potamianos v Prescott & Anor

This is the trial of a number of issues of quantum following my judgment on liability in two sets of proceedings (see Sprint Electric Ltd v Buyer’s Dream Ltd & Anor [2018] EWHC 1924 (Ch), [2018] WLR(D) 585) (“the Liability Judgment”). The background to the dispute is set out in detail in the Liability Judgment and need not be repeated.

The first of those claims (“the Source Code claim”) concerned source code and other materials used by Sprint Electric Limited (“SEL”), and was brought by SEL against (a) a former director of SEL and the author of the source code (“Dr Potamianos”) and (b) Dr Potamianos’ service company, Buyer’s Dream Limited (“BDL”).

SEL is a wholly owned subsidiary of Sprintroom Limited (“SRL”), and 40% of the shares in SRL are held by Dr Potamianos. The second of those claims (“the Unfair Prejudice claim”) involved a petition presented by Dr Potamianos against (a) SRL and

In the Liability Judgment, I decided the Source Code claim substantially in favour of SEL, and no appeal was made against that decision. The Source Code claim proceeded to a trial on quantum, in which SEL claimed damages in the total sum of £5,331,413. The trial on quantum was heard by His Honour Judge Hacon, who held that SEL was entitled to recover the cost of two weeks of the charging rate of Dr Fells under one head of claim, the cost of five months of the charging rate of Dr Fells under a second head, £2,000 for the time of Mr Lock and Mr Kelly under a third head, and £3,250 under some further heads (see Sprint Electric Ltd v Buyer’s Dream Ltd & Anor [2020] EWHC

Following the Liability Judgment, I ordered (1) that Dr Potamianos’ 40% shareholding should be bought out at a price to be determined by the Court, (2) that any purchase of Dr Potamianos’ shares should be at full pro rata value, without discount for the fact that his is a minority holding, and (3) that a payment should be made by SEL to BDL to reflect payments received by Mr Prescott’s service company, Sameaim Limited (“Sameaim”), after the exclusion of Dr Potamianos from management, which had not been matched by similar payments to BDL - such that £4 should be paid to BDL for every £6 paid to Sameaim in the relevant period (“the Balancing Payment”). However, the first of those orders was subject to future determination of whether various offers made by Mr Prescott to buy Dr Potamianos’ shares meant that there had, in fact, been no unfairly prejudicial conduct in the affairs of SRL, with the result that the petition should be dismissed. That question was left over to a further trial of matters relating to the quantification of such of Dr Potamianos’ claims as might require expert evidence.

Both Mr Prescott and Dr Potamianos appealed those orders on a number of grounds.

Accordingly, the Court of Appeal ordered that the issues for the trial of quantum should be recast to exclude consideration of the offers that had been made by Mr Prescott.

At [393] of the Liability Judgment, I said “I do not consider that the fault in this case lies by any means all on one side”. At [67] of the Appeal Judgment, the Court of Appeal said:

“We would add that in each party’s skeleton argument for this appeal he ‘puts his best foot forward’ in identifying the features of the case upon which he relies to put the other in the worst possible light: see e.g. paragraph 11 of the argument for Mr Prescott and paragraph 5(5) of Dr Potamianos’s argument. In our judgment, such paragraphs only serve to support the judge’s overall conclusion that fault lay on both sides.”

The issues which I now have to decide comprise, in essence: (1) the amount of the Balancing Payment; (2) the price to be paid to Dr Potamianos for his 40% shareholding in SRL; and (3) whether Dr Potamianos is entitled to interest or quasi-interest, and if so for what period(s) and at what rate(s).

I am most grateful to Mr Pavlovich (for Dr Potamianos) and Ms Page (for Mr Prescott) for their full, clear and very helpful written and oral submissions on those issues.

Section 994(1)(a) Companies Act 2006 allows a member of a company to petition the Court on the ground that “the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of… some part of its members (including at least himself)”. In accordance with section 996(1), the Court “may make such order as it thinks fit for giving relief in respect of the matters complained of”. In particular, by section 996(2)(e) it may order the other members or the company to purchase the petitioner’s shares (a “buy-out order”). That has happened in this case.

In Re Bird Precision Bellows Ltd [1986] Ch 658, Nourse J said (in relation to the predecessors to s.994):

“Although both sections 210 and 75 are silent on the point, it is axiomatic that a price fixed by the court must be fair. While that which is fair may often be generally predicated in regard to matters of common occurrence, it can never be conclusively judged in regard to a particular case until the facts are known.”

In the same case, Oliver LJ said at p669:

“The whole framework of the section, and of such of the authorities as we have seen, which seem to me to support this, is to confer 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; and I find myself quite unable to accept that that discretion in some way stops short when it comes to the terms of the order for purchase in the manner in which the price is to be assessed”.

Similarly, in the Liability Judgment, I stated at [373] that “when considering unfair prejudice, the central concern of the court is to determine what is fair, just and equitable”.

Among other things, the Court “retains a wide freedom to disregard the views of experts and apply the court’s view of what is fair and sensible in all the circumstances” (Hollington on Shareholders’ Rights, 9^th ed, §8-45).

Mr Pavlovich submitted that, beyond the above general approach, the question of the share price will depend on the evidence, so care must be taken in deriving any points of general principle from decided cases (see Hollington at §8-45). In particular, when dealing with the hypothesis of a sale by a willing seller to a willing buyer, as in the present case, “any departure from reality must either be compelled by the hypothesis, or at least based on solid evidence rather than assumption or speculation” (Chilukuri v RP Explorer Master Fund [2013] EWCA Civ 1307, Lewison LJ at [57]). This is the

“principle of reality” upon which Mr Prescott also relies. However, care is needed in deriving any other principle from Chilukuri, which concerned the assessment of damages for breach of contract, rather than relief for unfair prejudice. The crucial difference is that in the present case the Court is concerned with a notional sale of the entire share capital, whereas there the sale was limited to a 26% minority holding.

Mr Pavlovich further submitted that in valuing a contingent liability (or a contingent asset), the court is permitted to take into account events subsequent to the valuation date that shed light on its value. In Re Annacott Holdings Ltd [2013] EWCA Civ 119, [2013] 2 BCLC 46, for example, the actual corporation tax paid, as opposed to an estimate at the valuation date, was a suitable deduction for the purpose of achieving fair value. The conclusion may be different if an external, unforeseen factor arose after the valuation date, such as a change in the rate of corporation tax (see Shah v Shah [2011] EWHC 1902 (Ch) at [54]; Joffe, Minority Shareholders, 6^th ed, §7.127). Similarly, the court is entitled to have regard to matters subsequent to the valuation date in order to confirm or cross-check its assessment of circumstances at that date (see Re Southern Counties Fresh Foods Ltd [2010] EWHC 3334 (Ch) at [126.a]; Joffe at §7.126(c)-(d)). These last two points are exceptions to the “general starting point” or “basic rule” that the court will look at the evidence available to a purchaser at the valuation date (see Joffe at §7.126 and Hollington at §8-62). This is far from an absolute rule and the court is obliged to depart from it in considering contingent liabilities (and contingent assets): “With the light before him, why should [the tribunal] shut his eyes and grope in the dark?” (Re Annacott at [19], quoting Bwllfa Merthyr Dare Steam Collieries (1981) Ltd v Pontypridd Waterworks Company [1903] AC 426).

Mr Pavlovich also made submissions concerning the power of the Court to award “the equivalent of interest” (or “quasi-interest”) on the buy-out price if that is the best way to a fair result (see Re Annacott at [27]-[36]). I consider that issue separately below.

Ms Page submitted that share valuation is not an exact science. Although it ultimately involves a finding of fact, elements leading up to such finding might well involve points on which different minds, approaching the matter judicially, could quite properly take different views “in other words, points to which there cannot be said to be exclusively one correct answer” (Joiner & Anor v George [2003] BCC 298, [101]). In an appropriate case the Court may consider what the outcome of negotiations in an arm’s length sale would have been (see Wann v Birkinshaw [2017] EWCH Civ 84 at [40]-[45], where the Court of Appeal concluded that the price on an earnings basis would have been reduced in the course of negotiations - in that case the issue was whether the price should be reduced by the net borrowings).

Ms Page placed extensive reliance on Chilukuri v RP Explorer Master Fund [2013] EWCA 1307, in which an appeal to the Court of Appeal was allowed and nominal damages were substituted for the sum found by the judge.

In Chilukuri, Lewison LJ said at [59]:

“the first and fundamental principle of valuation; namely that things are to be taken as they are in reality on the valuation date, except to the extent that the exercise requires a departure from reality. In the old cases this is summarised in the Latin phrase rebus sic stantibus. In the more modern cases it has been described as the principle of reality.”

With regard to the principle of reality, Ms Page submitted that in any valuation, it is critical that that the valuer “steps back and checks its provisional valuation against commercial reality and business common sense” (Hollington at §8.45). In Chilukuri, Briggs LJ said:

“It is axiomatic that in any complicated process of valuation, the valuer must take the relevant aspects of the world as he finds them (unless constrained by his instructions), and that he must, after looking at each element of the process, stand back and ask himself whether his provisional valuation makes commercial or business sense, viewed in the round”.

Briggs LJ considered the reality pertaining to the company in that case:

“Standing back therefore, the putative market for this shareholding in July 2009 would have been offered a 26% minority holding in an apparently incompetently managed Indian company, the majority shareholders of which were close-knit private individuals with no reason to take any notice of the purchaser’s views about the conduct of the company’s affairs, with a track record of mismanagement, or nonmanagement, of its principal asset which they had allowed to become dormant, in a deteriorating political and economic environment in the DRC, and who had allowed a winding up petition to be presented and served, with the immediate consequence of prohibiting the completion of any share sale transaction in any event. The interested purchaser would have discovered, upon due diligence, that the supposedly valuable rights in the JVA were still inchoate as the result of the outstanding presidential decree, that attempts to fund the project had come to nothing, and apparently ceased a year previously, that the company lacked its own resources with which either to fund the project or to deal with its creditors, and that the commercial substratum upon which the JVA had been constructed, namely an immediate local demand in the DRC for bitumen needed in a large government roadbuilding programme, had in all probability evaporated due to the deterioration in the political and economic state of that country.”

Briggs LJ concluded:

“In all the circumstances, I find myself quite unable to imagine any reasonably prudent and well-advised prospective purchaser paying anything for this 26% shareholding. In my judgment the only conclusion on the largely undisputed facts is that no such person would have touched these shares with a barge pole”.

With regard to hindsight, Ms Page submitted that the basic rule in valuing shares in a company is to reject evidence of events which occurred after the valuation date (Holt v Inland Revenue Commissioners [1953] 1 WLR 1488; Joiner v George [2003] BCC 298 at [68] (Court of Appeal)). However, regard may be had to events subsequent to the valuation date (see Joffe at §7.126): (a) for the purpose of checking what forecasts for the future could reasonably have been made and what a proper estimate was at the valuation date (Buckingham v Francis [1986] BCLC 353, at 355, 358); (b) for the purpose of a cross-check or as a form of comfort (Re Southern Counties Fresh Foods Ltd [2010] EWHC 3334 at [126], where the expert accepted this in evidence); (c) to demonstrate circumstances as at the valuation date: for example where it is known that the value of an asset at the valuation date is speculative and precarious and this is borne out by later events (Stanley v TMK Finance Ltd [2011] BPIR 876 at [8]-[16]): that involves using the evidence of the subsequent event to put a value on the asset at the valuation date; and (d) to value a contingent liability (in Annacott Holdings Ltd [2013] 2 BCLC 46 at [19] the Court of Appeal took account of events subsequent to the valuation date which shed light on its value).

In Edgar v Munro [2017] EWHC 1814 (Ch) the court adopted an “opentextured” approach (see Joffe at §7.126). Mr Robin Hollington QC sitting as a Deputy Judge of the Chancery Division said at [14]:

“it would be a blinkered court which was not prepared to take into account, with caution and mindful of the overriding objective to arrive at a valuation at a given date, the direct evidence on those issues for at least a relatively short period after the valuation date. I would note that in the real world a purchaser and seller might well have agreed upon a formula which took into account the performance of the business for a similar period, and I do not see why in this case the court should adopt a completely different. My ultimate task is to arrive at a “fair” or “proper” sum of money which Mr Munro should pay Mr Edgar for this 50% shareholding: Re Bird Precision Bellows [1986] Ch 658, at 668-669”.

Ms Page made a number of submissions as to how the above general principles should be applied to the facts of the present case:

With regard to the principle of reality, Ms Page submitted that the Court’s task is to value SRL, and assess the fair price to be paid for the shares on the Valuation Date, and that the following factors are significant. There is a wealth of evidence which amply demonstrates that SEL was experiencing significant problems with the source code to which it had access at the Valuation Date alongside multiple other business difficulties. The expert evidence is that there would have been a commercial negotiation of the purchase price. It is manifestly unreal, having regard to SEL’s documentation and knowledge of the difficulties, to hypothesise that a notional buyer would not have sought and obtained a downward adjustment to the purchase price. Fairness to Mr Prescott requires that this is taken into account. To ignore the reality would, in effect, result in Mr Prescott being compelled to pay a price greater than the market value. Not only would this not be fair and equitable, but it would go beyond what is necessary in order to put right for the future the unfair prejudice established in this case.

Mr Pavlovich submitted that the evidence of Dr Potamianos was straightforward and to the point. Further: (a) he had considerable experience in running SRL and SEL and was able to give a realistic assessment of the requirements of doing so; and (b) his evidence about the technical aspects of SEL’s business was not open to serious challenge.

As to the evidence of Mr Prescott, Mr Pavlovich placed particular reliance on the findings of HH Judge Hacon in the Source Code Quantum Judgment at [123], which he submitted were equally, and regrettably, pertinent in the present context:

“I think that Mr Prescott did his best to give honest answers to all the questions put to him. However, he was highly invested in the outcome of this inquiry and I cannot exclude the possibility that his recollection of some of the events covered may have adapted over time to be consistent with SEL’s claim to damages. I think that the assumptions Mr Prescott made in support of his quantification of the loss suffered by SEL were astonishingly over-optimistic. I have little confidence in them as I will explain below. I have the impression that Mr Prescott was given free rein to devise those assumptions as he saw fit without much if any critical scrutiny being applied to them before the trial.”

Mr Pavlovich submitted that this phenomenon is particularly important because Mr Prescott has full access to information concerning SEL, whereas Dr Potamianos’ knowledge is limited to (a) what Mr Prescott has disclosed and (b) historical information predating Dr Potamianos’ exclusion from SEL. Accordingly, when Mr Prescott complains of problems at SEL as at the Valuation Date, Mr Pavlovich submitted that his evidence is self-serving and is generally limited to assertion. Overall, while Mr Prescott presumably again did his best to give honest answers, one again cannot exclude the possibility that his recollection has adapted to be consistent with his case. That adaptation is illustrated by Mr Prescott disputing HHJ Hacon’s findings about Dr Fells’ work, and, further, by his attempt to re-run his failed case from the liability trial that the dispute about BDL’s invoices arose before July 2016.

Ms Page’s submissions were to the opposite effect. She submitted that Mr Prescott was an honest and credible witness. He was able to assist the Court with first-hand evidence of the position of SRL and SEL at the Valuation Date. His evidence was clear, consistent and reliable, and no criticism should be made of it. Ms Page emphasised that the Liability Judgment at [390] records that I was “entirely unpersuaded” by Dr Potamianos’ allegations that Mr Prescott had acted in breach of duty and that:

“… On the contrary, having heard and seen Mr Prescott give evidence, I have no doubt that he acted in what he believed to be the best interests of SEL (and SRL) throughout, and that he went to great lengths to try and maintain a working relationship with Dr Potamianos and to keep him on board, even though the two men had very different personalities and even though they had difficulties working together. In my judgment, these findings are also supported by the documents considered above.”

Ms Page submitted that, in contrast, Dr Potamianos was, at times, an evasive witness. For example:

These submissions echo the submissions which were made to me about the reliability of Dr Potamianos and Mr Prescott during the trial of the Source Code claim. They also echo the points made in the Liability Judgment and in the Court of Appeal Judgment which are referred to in paragraph 8 above. I propose to adopt the same course as I took in the trial on liability, as recorded at [14] and [15] of the Liability Judgment:

“In cases, like the present, which relate to events which happened over many years, in which feelings run high, and in which individuals have taken up entrenched positions in their written evidence by the time the case comes to trial, there are significant risks that witnesses may be honest but mistaken about what took place, and may give evidence about what they would like to think happened rather than what they can truly recollect. These factors make the appraisal of their evidence more difficult. At the end of the day, the best guide to the truth is often to be found not so much in the demeanour of the protagonists, or even concessions made in cross-examination, but in the contemporary documents and in an objective appraisal of the probabilities overall. These matters were discussed more fully in Gestmin SGPS SA v Credit Suisse (UK) Limited, Credit Suisse Securities (Europe) Limited [2013] EWHC 3560 (Comm) …

For these reasons, I have thought it right to focus on the documentary materials, which are extensive in the present case, and to place less weight on the differing accounts and recollections of the witnesses, save where they appear uncontroversial, or objectively probable, or are supported by the contemporary documents. That does not mean that the reliability of the witnesses is of no consequence. Where it is significant, however, I consider that it is often safer to make findings with regard to specific instances, rather than to form a view as to overall reliability and then apply that finding to what may be disparate circumstances. I have made such findings as I consider appropriate below.”

With regard to the expert share-valuation evidence, Mr Pavlovich submitted that (a) Moira Hindson for Dr Potamianos: gave clear and independent evidence on matters of company valuation; set out which matters were points of principle and which were assumptions derived from her instructions; and readily conceded points where it was proper to do so; whereas (b) David Stern for Mr Prescott: was less clear, particularly in his explanation as to why he considered the accounting value (or “net asset value”) of SEL to be irrelevant; broadly agreed with Ms Hindson, and accepted that the essential difference between them was in their instructions as to matters of fact; but appeared to have pre-prepared answers to some questions, which were not always on point.

Ms Page submitted that both Mr Stern and Ms Hindson (a) are highly qualified independent professional accountants, (b) provided clear and credible explanations for their joint opinions, and (c) entirely properly, accepted the limits of their expertise. Like Mr Stern, Ms Hindson is not a corporate financier, and (i) she could offer no expert evidence on costs of employing engineers, (ii) she rightly accepted that she had no firsthand experience of SEL and that her conclusions in respect of the replacement costs of the engineers and a salesperson (“Z”) were based on the factual instructions provided by Dr Potamianos, and (iii) she also rightly accepted that if those facts were not accurate, her conclusions did not necessarily stand: “They depend on the evidence”.

I explained my decision to order the Balancing Payment in [398] of the Liability Judgment as follows:

“… Dr Potamianos complains that Sameaim has continued to invoice SEL and to be paid by SEL while he and … BDL, have been shut out from doing so since disputes arose and, more particularly, he was excluded from management. Dr Potamianos asserts that this was in breach of a promise made by Mr Prescott on 15 July 2016 that Sameaim would stop invoicing SEL, and, in any event, that it has allowed Mr Prescott to extract monies from SEL in a way that is prejudicial to Dr Potamianos. In my judgment, the answer to this complaint is that Mr Prescott and SEL should be held to the bargain that was made with Dr Potamianos in or about 2007, to the effect that they would each invoice SEL and be paid by SEL in a manner that was proportional to their respective shareholdings. Accordingly, for every £6 that [Sameaim] has been paid which is not matched by a payment of £4 to BDL since relations broke down, I consider that BDL is entitled to be paid a balancing payment (save that (a) in so far as the payments that were made to [Sameaim] were used to pay Dr Fells, that element of those payments should be left out of account, and (b) I will hear submissions as to whether BDL is entitled to charge VAT in light of the fact that, in the events which have happened, BDL has not performed any services for SEL). That may seem like rough justice in light of the fact that BDL and Dr Potamianos have made no contribution to SEL since that time, but, as against that, it is relevant to have regard to my finding that Dr Potamianos was unfairly excluded from management, and to set this decision in the context of my determination of wider issues as to the valuation date and other terms of buy-out discussed below.”

At [105] of the Appeal Judgment, the Court of Appeal held that I was “entitled to find that (in the face of the exclusion) the appropriate relief includes an order that Dr Potamianos be paid Balancing Payments calculated in the manner agreed”, having earlier said at [104]:

“We accept that the judge, although rightly describing the mechanism adopted by the parties for extracting money from SEL as involving “an element of artifice”, did not go so far as to find that the arrangements were a sham. He recognised that BDL’s contractual right to receive payments was conditional on the provision of (or upon Dr Potamianos being ready and willing to provide) services to SEL. That was why the judge observed that his order requiring the Balancing Payments to be made might “seem like rough justice”. Nevertheless, the judge was entitled to have regard to the underlying rationale and objective of the payments and to take the view that, in all the circumstances, it was fair that, for as long as Dr Potamianos was participating in the management of SEL or was ready and willing to do so, he should continue to receive his agreed share of the profits of SEL. The judge took account of the fact that Dr Potamianos stopped providing programming services to SEL by excluding from the calculation of the Balancing Payments the sums which Sameaim invoiced to SEL for the cost of employing Dr Fells to provide such services. The judge also properly had regard to his finding that the reason why Dr Potamianos ceased to participate in the management of SEL was that he was unfairly excluded from doing so.”

There was no dispute between the parties as to the amounts paid during the relevant periods. They also agreed that the appropriate end date for the purposes of calculating the amount of the Balancing Payment is 28 September 2018, which is the date of the Order that I made following the determination of consequential matters arising from the Liability Judgment (“the Valuation Date”). However, the parties disagreed as to whether certain sums should be included in the calculation of the Balancing Payment.

The main difference between the parties related to the appropriate starting date for the period to be used for the purposes of the calculation. Mr Pavlovich, on behalf of Dr Potamianos, argued for 15 July 2016, on the basis that it was only on this date that SEL stopped paying BDL, and, it was submitted, that Mr Prescott breached the bargain to split payments in the ratio of 60:40. Ms Page, for Mr Prescott, argued for 19 February 2016, on the basis that it was on this date that relations between Dr Potamianos and Mr Prescott broke down, and that to take 15 July 2016 as the relevant date would leave out of account a period in 2016 during which BDL invoiced and received more than Sameaim (because, it was submitted, Sameaim was refraining from issuing invoices).

A further difference between the parties related to an invoice from Dr Fells to Sameaim numbered 00032 and in the sum of £3,744. This invoice was dated 28 September 2018 (i.e. the Valuation Date), but it was not paid until 2 October 2018. Mr Pavlovich contended that this invoice should be left out of account. Ms Page argued the contrary.

Accordingly, at the beginning of the present hearing, Dr Potamianos was contending for a Balancing Payment of £406,370.67, and Mr Prescott for one of £372,981.13.

During the course of the hearing, I indicated that in ordering the Balancing Payment I was more concerned with restoring the parties to the distribution of monies in the ratio of 60:40, rather than with requiring there to be carried out an accounting exercise which depended on the ascertainment of the precise date when (whether by reference to the contents of emails or the payment of one invoice or another) it could be said that there was a breakdown in relations such as to signify a decision by Mr Prescott no longer to abide by the bargain that he and Dr Potamianos had made in or about 2007.

In light of that indication, Mr Pavlovich very sensibly recast his client’s case to run from the date when, as he submitted, there was first a mismatch between the invoices raised by BDL and those raised by Sameaim. On this basis, he argued that the appropriate starting date for the purposes of calculating the Balancing Payment was May 2016, and not any earlier date as submitted by Ms Page. He also argued that Dr Fells’ invoice 00032 should continue to be left out of account (i) because the Order relating to the Balancing Payment suggested that it should be calculated on a cash basis (i.e. having regard to the date when payments were made, rather than when they were earned), (ii) because that invoice was not paid until after the Valuation Date, and (iii) because that invoice matched an invoice from Sameaim which is not included in the calculation. In the result, Dr Potamianos sought a Balancing Payment of £361,810.67.

As this sum was less than the sum of £372,981.13 which Mr Prescott had contended was due to Dr Potamianos as a Balancing Payment, it is perhaps unsurprising that in her closing submissions Ms Page was willing to accept that basis of calculation.

Nevertheless, Ms Page adhered to the argument that invoice 00032 should not be left out of account. She submitted that, for the purposes of the Balancing Payment calculation, this sum should be deducted from the payments made to Sameaim as (i) it is not disputed that Sameaim paid Dr Fells £3,744 in respect of this invoice out of monies received by Sameaim from SEL (and, moreover, in accordance with the evidence of Mr Prescott, received by Sameaim prior to the Valuation Date), (ii) it is irrelevant that Sameaim paid Dr Fells a few days later on 2 October 2018, and (iii) it is also irrelevant whether the schedules and invoices of Dr Fells and Sameaim tally by reference to the Valuation Date. According to my calculations, the effect is that the Balancing Payment would become: £361,810.67 – (4/6 x £3,744) = £359,314.67.

Mr Pavlovich submitted in reply that it was “somewhat bizarre” that Mr Prescott should adopt Dr Potamianos’ calculations in place of Mr Prescott’s own calculations, reducing Mr Prescott’s final figure from £372,981.13 to £359,314.67.

The effect, as Mr Pavlovich submits, is that Mr Prescott (a) accepts Dr Potamianos’ position in closing save only as regards Dr Fells’ last invoice, and (b) in particular, accepts that Sameaim invoiced a total of £686,000 after April 2016 without matching invoices from BDL, and that BDL invoiced a total of £30,000 after April 2016 without matching invoices from Sameaim. On that basis, Mr Pavlovich submitted as follows: (i) the approach of matching invoices (which leads to the above figures for the invoices of

I prefer the submissions of Ms Page on this issue. I consider that they better accord with my decision that “in so far as the payments that were made to Sameaim were used to pay Dr Fells, that element of those payments should be left out of account”. I accept that this has the effect that Dr Fells’ invoice dated 28 September 2018 and paid out of monies received by Sameaim before the Valuation Date is included in the calculation, while an invoice from Sameaim which is dated after the Valuation Date is not included. In my view, however, that is not in contradiction with the agreement of the parties that the appropriate end date for the purposes of the calculation is the Valuation Date.

Before leaving it, I note that the value of this point is not great. This is because if Dr Potamianos had succeeded on it he would have received £3,744 more as part of the Balancing Payment, but he would receive 4/10 x £3,744 = £1,497.40 less for his 40% shareholding in SRL, because that £3,744 would fall be deducted from the net assets of SEL. Conversely, although in the result Mr Prescott has succeeded in paying £3,744 less to Dr Potamianos as part of the Balancing Payment, that will increase by 40% of that sum (i.e. £1,497.40) the price that Mr Prescott will have to pay Dr Potamianos for his shareholding in SEL. That does not mean that the point was not properly arguable, although it may say something about the unwillingness of these parties to compromise.

Turning to interest, Mr Pavlovich submitted that it would be fair to add quasi-interest to reflect the fact that BDL has been kept waiting for the Balancing Payment, whereas Sameaim received its corresponding payments between 2016 and 2018. He argued that the same reasoning applies as in the cases which deal with quasi-interest on a buy-out price, namely that it is required to provide fair compensation for the delay in payment.

As to the rate which should be awarded, Mr Pavlovich submitted:

Ms Page submitted with regard to the claims for quasi-interest generally that the jurisdictional basis for the interest claimed is unclear. The Petition does not plead interest under section 35A Senior Courts Act, and such interest would not be available on the share purchase order as no date for payment has yet been ordered, so there is nothing on which interest can run (Elliott v Planet Organic [2000] BCC 610, 616c). It is also well established that there is no jurisdiction under section 35A or the equitable jurisdiction to award interest on the purchase price in respect of any period prior to the making of the purchase order (Re Bird Precision Bellows Ltd [1984] Ch 419, 437c).

Further, the power to order quasi-interest under section 996 is to be exercised with great caution based on evidence (including of the rate) of which there is none (Profinance Trust SA v Gladstone [2002] 1 BCLC 141 [31]-[32]). In Re BC&G Care Homes [2016] BCC 615, the need to exercise “great caution” was emphasised. Whilst the court made an order for quasi-interest in that case, it is distinguishable from the present case, as the respondent had not made any open offers at all for the petitioner’s shares.

Ms Page submitted that it would be unfair for the Balancing Payment to be augmented by an award equivalent to interest for the following principal reasons:

Although those points were attractively put by Ms Page, they have not persuaded me that this aspect of the claim should be treated otherwise than as an ordinary commercial debt. I consider that the first three points fail to acknowledge the basis on which the Balancing Payment was ordered. In short, it was ordered to restore the 60:40 payment split agreed by the parties, in spite of the fact that BDL/Dr Potamianos were making no contribution to SEL, having regard to the consideration that Dr Potamianos had been unfairly excluded from management. As to the fifth point: (i) there is no evidence that the Valuation Date is very favourable to Dr Potamianos (in fact, in ordering that date I rejected his case that an earlier date should be ordered, which I imagine he considered would have been more favourable to him), (ii) I do not consider that his conduct, as found in the Liability Judgment, should operate as a bar to ordering interest on the Balancing Payment any more that it operated as a bar to ordering the Balancing Payment itself, and (iii) the argument that the Balancing Payment and the share purchase order already provide Dr Potamianos with full fair and equitable compensation for the material unfairly prejudicial conduct seems to me to contain an element of circularity, and I am unpersuaded by it in any event. As to the sixth point, the costs issues relating to the Source Code claim are not before me, and it seems to me that they now form or are likely to form part of a wider series of issues relating to costs, including those arising from the Source Code quantum trial and the quantum trial that is now before me. I consider it more appropriate to deal with quasi-interest on the claims that are in front of me, and leave questions of interest on costs claims to be dealt with as and when those claims are before the Court, than to speculate what will happen with regard to those questions, and make orders on the claims before me on that basis.

If I was against her on those points, Ms Page submitted with regard to the appropriate rate that I should award quasi-interest on the Balancing Payment at a commercial rate of no more than 1% above base. The Balancing Payment is payable to BDL, which should be assumed to be able to borrow at commercial rates, and this supports a rate of no more than 1% above base. Ms Page placed reliance on Baker v Black Sea and Baltic General Insurance Company Ltd [1996] LRLR 353, in which Staughton LJ said that rate “is somewhat less than almost all plaintiffs would have to pay if they were borrowers, but significantly more than they could earn as lenders” and Otton LJ said:

“The practice whereby interest is normally awarded at 1% over Base Rate amounts to a presumption which can be displaced if its application would be substantially unfair to either party. That rate represents something of a compromise (albeit weighted in favour of the plaintiff) between what a plaintiff kept out of his money might have earned on it and what he might have had to pay by way of interest: see per Staughton J in La Pintada Compania Navegacion SA v President of India [1983] 1 Lloyds Rep 37, 43”.

In this regard, a number of earlier cases concerning awards of statutory interest under s.35A of the Senior Courts Act 1981 were considered by the Court of Appeal in Carrasco v Johnson [2018] EWCA Civ 87. Hamblen LJ (as he then was) said at [17] that the guidance to be derived from these cases includes the following:

“(1)

Interest is awarded to compensate claimants for being kept out of money which ought to have been paid to them rather than as compensation for damage done or to deprive defendants of profit they may have made from the use of the money.

(2)

This is a question to be approached broadly. The court will consider the position of persons with the claimants’ general attributes, but will not have regard to claimants’ particular attributes or any special position in which they may have been.

(3)

In relation to commercial claimants the general presumption will be that they would have borrowed less and so the court will have regard to the rate at which persons with the general attributes of the claimant could have borrowed. This is likely to be a percentage over base rate and may be higher for small businesses than for first class borrowers.

(4)

In relation to personal injury claimants the general presumption will be that the appropriate rate of interest is the investment rate.

(5)

Many claimants will not fall clearly into a category of those who would have borrowed or those who would have put money on deposit and a fair rate for them may often fall somewhere between those two rates.”

The cases considered by Hamblen LJ included Fiona Trust & Holding Corporation v Privalov [2011] EWHC 664 (Comm), in which Andrew Smith J stated at [16]:

“A ‘broad brush’ is taken to determine what rate of interest is just and appropriate: it would be neither practical nor proportionate (even in a case involving as large sums as these) to attempt a minute assessment of what will precisely compensate the recipient. In particular, the courts do not have regard to the rate at which a particular recipient of compensation might have borrowed funds. This policy is adopted in order to control the extent of the inquiry to ascertain an appropriate rate: see the Banque Keyser Ullman case (cit sup). The court will, however, consider the general characteristics of the recipient in order to decide whether to assess interest at a rate that is higher or lower than is conventional. So, for example, in Jaura v Ahmed [2002] EWCA Civ 210, Rix LJ awarded interest at base rate plus 3% to reflect that ‘small businessmen’ had been kept out of their money and in recognition of the ‘real cost of borrowing incurred by such a class of businessman’. Thus, the court will examine what has been called ‘a question of categorisation of the plaintiff in an objective sense’ (see the Banque Keyser Ullman case, cit sup), recognise relevant characteristics of the party who is awarded interest and reflect them when determining the fair and appropriate rate.”

I consider that it is appropriate to award quasi-interest on the Balancing Payment for the reasons submitted by Mr Pavlovich. I also consider that Re Annacott Holdings Ltd provides a more reliable guide to the appropriate rate than the Baker v Black Sea and Baltic case to which Ms Page referred, which predates Re Annacott Holdings Ltd by 17 years. I consider that I am entitled to assume that BDL (the entity entitled to be paid the Balancing Payment) was a borrower rather than a lender, such that I should “have regard to the rate at which persons with the general attributes of [BDL] could have borrowed”. Further, BDL would appear to be a “small business”. However, although I have rejected Ms Page’s submissions as a basis for refusing to award quasi-interest altogether, I consider that she makes a valid point that there is a risk of overcompensating Dr Potamianos. In addition, I am concerned that any order which leaves room for argument, whether as to base rates from time to time or as to when elements of the Balancing Payment fell due, will generate disputes. In the exercise of my discretion, I will therefore award interest at 3% and from the Valuation Date simplicter.

In accordance with the Order which I made consequential upon the Liability Judgment, and which was upheld by the Court of Appeal, Dr Potamianos’ shares in SRL are to be valued as at the Valuation Date on the basis of “a sale between a willing buyer and a willing seller, acting at arm’s length, of the entire share capital of [SRL]”.

SRL has two principal assets, namely (1) the equity in Peregrine House and (2) the shares in SEL. So far as concerns Peregrine House, I was informed on the last day of the present trial that an up to date valuation had been produced in draft, which placed a value of £1.6m on the property. Somewhat surprisingly, the valuation report was not produced until 28 October 2020, and it was only provided to the parties on 3 November 2020. It was then provided to the Court on 6 November 2020 under cover of an email from Counsel which confirmed that both parties accepted the valuation of £1.6m and that accordingly neither party was seeking to adduce further evidence or make further submissions about the value of Peregrine House. There fall to be deducted from that figure (a) a mortgage in the sum of £460,352, and (b) in accordance with the agreement of the experts, 15% of a latent capital gains tax liability which would arise in the event that Peregrine House is sold. By the same email dated 6 November 2020, the Court was informed that both parties calculate the adjustment to the value of SRL resulting from the prospective capital gains tax liability on Peregrine House as £6,370. In the result, the net value is approximately £1,600,000 – (£460,352 + £6,370) = £1,133,278.00.

So far as concerns the value of the shares in SEL, as set out above the parties instructed experts: Ms Hindson for Dr Potamianos, and Mr Stern for Mr Prescott. They are both very experienced and well qualified Chartered Accountants, and experienced expert witnesses. Their reports on share valuation were exchanged on 30 June 2020, and they subsequently produced a Joint Statement. Appendix 1 to their Joint Statement contains a helpful comparison of their respective calculations relating to the value of SEL.

Ms Hindson and Mr Stern were in agreement on a significant number of matters.

First, they agreed the appropriate valuation methodology, as follows:

Second, in addition to agreeing that SEL had surplus cash of £450,000, the experts agreed:

The experts had also agreed that a sum (£220,000 according to Ms Hindson, and £176,000 according to Mr Stern) should be included in the assets of SEL to reflect the costs of the trial on liability in the Source Code claim, in which SEL was substantially successful. It seemed to me that there were a number of problems with that approach.

By the conclusion of the trial, the parties were both content to follow this course.

The main matters upon which the experts were unable to reach agreement concerned (a) the cost of staff to replace Mr Prescott and Dr Potamianos and (b) whether a notional buyer would consider that Z should be retained. In outline:

Accordingly, the following issues arise for determination now:

Mr Stern put forward the cost of a replacement CEO at £101,417 for 2016, £103,547 for 2017, and £99,068 for 2018 on the basis that these are the figures yielded by using “the median cost associated with a full time CEO in the South-East of England as inflated by 20% (to allow for National Insurance, pension contributions etc) as per the

Ms Hindson’s evidence was to the effect that there was no warrant for this degree of fine tuning, and that the results of the exercise were unreal in that it seemed unlikely that a notional buyer would approach matters on the basis that the CEO would take a pay cut between 2017 and 2018.

Further, I consider that Mr Stern’s approach in this regard may be contrasted with an answer that he gave to Mr Pavlovich when asked about another aspect of the figures: “… if we were going to embark on a detailed, forensic, in depth analysis, then we would need to look at all of the costs that were incurred in the business. As Ms Hindson said yesterday, it is an art not a science”.

I agree with Ms Hindson’s approach in this instance. It should be noted that the consequence of adopting Mr Stern’s approach would be minimal: (£101,417 +

As set out above, Ms Hindson’s approach is based on the costs actually incurred by

Ms Hindson stated at §5.2.16 of her report:

“Given that Mr Keen, Dr Gardiner and Dr Fells together undertake the managerial and technical work formerly carried out by Dr Potamianos and Mr Prescott, Mr Levine’s assumptions that an additional CEO and two engineers would also need to be recruited seems to me to result in excessive remuneration costs being deducted from SEL’s EBITDA”.

Mr Stern explained his approach in §§3.14 and §3.15 of his report as follows:

“3.14

For the purposes of identifying the notional replacement costs that would be taken into account by a willing buyer, I have relied upon the contemporaneous email exchanges between Mr Justin Levine and Mr Prescott and Dr Potamianos in March 2016, being the point in time at which Mr Levine was exploring the possibility of purchasing SEL.

3.15

It is my understanding that both the Petitioner and the First Respondent accept that Mr Levine, whom they had in engaged in 2015 to act as their corporate finance advisor to try and sell the Company, has a detailed knowledge of the industry in which SEL operates. As such, I consider that, notwithstanding an element of self-interest (which would apply in the case of any willing buyer), Mr Levine provides a reasonable proxy for the behaviour of a willing arm’s length buyer, including in relation to:

i

The evaluation of future EBITDA; and

ii

The replacement costs (including the requisite staff) that it would be considered appropriate to reflect in lieu of the management charges paid to Mr Prescott and Dr Potamianos in order to properly reflect the ongoing costs of generating the future EBITDA of SEL.”

Mr Pavlovich submitted that it is much more realistic to use the actual costs, as Ms Hindson does. Moreover, there are reasons to doubt the reliability of Mr Stern’s approach. In summary:

Mr Pavlovich also relied on a number of findings of HH Judge Hacon in the Source Code Quantum Judgment. Those findings included the following:

“160 I find that in January and February 2016 Dr Potamianos was doing what he could to avoid SEL having access to the PL/X source code.

161

But I think it makes no difference… On 27 May 2016 Dr Gardiner found what is now agreed to be v.6.11 of the source code. On 2 June 2016 Dr Fells started work on v.6.11.

162

There seems to me to have been no good reason for the delay in finding v.6.11. In cross-examination Dr Gardiner did not provide a convincing answer to the suggestion that permission from the IT administrator to access Dr Potamianos’ partition could have been sought in January 2016. My impression is that there was no sense of urgency at SEL during the first part of 2016 in seeking to find v.6.11.

163

There was a meeting between Dr Gardiner and Dr Fells on 10 June 2016, in which they discussed the way forward for SEL now that they had what they (correctly) believed to be v.6.11 of the PL/X source code. Their discussion is evidenced by an exchange of emails between 11 and 13 June 2016 …

164

Despite the tone of the exchanges between Dr Gardiner and Dr Fells, Dr Fells answered to Dr Gardiner who, as between them, took the decisions on priorities and direction.

165

Three significant points emerge from their discussions. First, Dr Fells would not try to re-create the source code for v.6.13. Secondly, he would re-write the v.6.11 source code using C code, a high-level programming code. Thirdly, he would make improvements to v.6.11 along the way.

166

In cross-examination Dr Gardiner accepted that converting v.6.11 into C code was by itself going to involve a very substantial re-writing of v.6.11. He confirmed that no engineer other than Dr Fells was recruited to carry out the work on v.6.11.

167

Dr Gardiner said that it took Dr Fells until late 2016 just to compile the v.6.11 source code because he did not have access to the compiler that Dr Potamianos had used, namely C30. Dr Gardiner did not provide a convincing answer in cross-examination when it was pointed out that C30 was stored on SEL’s server and that it had been the only compiler used by SEL for several years. It seems to me likely that the time taken to compile was due to the decision in June to re-write v.6.11 so that, among other things, it could be compiled under MPLAB X and XC16 compiler. Alternatively, this is further evidence of a lack of urgency.

168

Dr Gardiner also said that they had doubts as to which version of PL/X they had, but in cross-examination accepted that it was now known to be v.6.11, i.e.

the exact version released to Bardac in 2014.

169

Dr Fells compiled v.6.11 on 11 November 2016. Dr Gardiner said that it still did not work correctly, but after modification it was released for testing on 16 January 2017 as “v.6.11.01”.

170

On 16 March 2017 Dr Gardiner made a presentation to SEL entitled “Product Roadmap”. It provides an updated insight into SEL’s ideas as to the way forward with PL/X and the instructions that were being given to Dr Fells. A slide headed “PL/X State of Play” stated …

171

This shows that SEL was continuing to sell drives using v.6.13 object code and found the software to be stable with only minor bugs. Dr Gardiner was of the view that the functionality of v.6.11 was close to that of v.6.13, that it had many bugs but these were probably to be found in v.6.13 as well and, as he had already observed, they were minor.

172

Dr Gardiner identified four ways forward …

…

174

Dr Gardiner’s evidence on what SEL then did was sparse. However there is no doubt that Dr Fells embarked on a major project to remove bugs from v.6.11 and make improvements to it. It is possible to measure the scale of the project

by the fact that it is still continuing. In the meantime and up to the present SEL has continued to sell products using v.6.13 firmware.

175

In October 2018 SEL received the source code for v.6.13. SEL has not used v.6.13 as a base for further work. It is to be inferred that SEL did not believe that its commercial interests were best served by switching Dr Fells’ focus to v.6.13 to remove bugs and to use it as a base for improvements. So far as bugs were concerned this does not come as a surprise. V.6.13 has served SEL very well since its launch in January 2015 and up to the present date. To the extent that v.6.13 has bugs, SEL and its customers have evidently had no trouble in coping with them. With regard to a base for potential improvements, it is to be inferred that SEL took the decision in late 2018 that the version Dr Fells was working on at that time, developed from v.6.11.01, was the better bet.

…

180

It is clear from what SEL actually did (a) upon finding the v.6.11 source code in June 2016 and (b) upon receiving Dr Potamianos’ v.6.13 source code in October 2018 that SEL was determined upon an ambitious project of improvement to create much better software. In the meantime, drives have been sold using the tried and trusted v.6.13 software without any modification.

181

I take the view that SEL’s priorities in the real events of June 2016 and October 2018 would have been reflected in the no breach counterfactual [i.e. that Dr Potamianos supplied SEL with the v.6.13 source code in January 2016]. Once Dr Fells hypothetically began work in earnest on v.6.13, he would have used that source code as the starting point for an ambitious improvement project. He would have re-written it line by line, or module by module, into C code, attempting to enhance the performance of the software along the way and making the source code compatible with a preferred compiler. In the meantime, products would have been sold, as before, using v.6.13 firmware.”

Ms Page submitted:

In my judgment, the most reliable guide to the cost which a reasonable buyer would take into account in respect of a software engineer is the actual cost to SEL of Dr Fells.

By the time of the Valuation Date, Dr Potamianos and SEL had parted company for well over a year, and Dr Fells had been providing software engineering services to SEL in his stead. In my view, it matters not whether Dr Fells was providing his services directly or indirectly, whether his hourly rate would have equated to a salary of £65,000 if he had been employed full time, and indeed precisely what he was focussed on doing.

The facts which weigh most with me are that as at the Valuation Date: (i) SEL had seen no need to engage anyone other than Dr Fells to provide software services; (ii) SEL had seen no need to spend more than £37,000 on obtaining such services; and (iii) as found by HH Judge Hacon in the Source Code Quantum Judgment, SEL had been carrying on business satisfactorily, in summary “using the tried and trusted v.6.13 software without any modification” in circumstances where v.6.13 had “served SEL very well since its launch in January 2015” and to the extent that v.6.13 contained bugs “SEL and its customers have evidently had no trouble in coping with them”, while Dr Fells embarked “upon an ambitious project of improvement to create much better software”, in particular by “remov[ing] bugs from v.6.11 and mak[ing] improvements to it”, and “no engineer other than Dr Fells was recruited to carry out the work on v.6.11”.

Those findings contradict Mr Prescott’s evidence that all that Dr Fells was engaged in was “a task that should not really have been necessary”, in that he was “concentrating on … trying to restore the status quo with 6.13”. HH Judge Hacon had the benefit of much greater evidence (including evidence from Mr Prescott) and much more extensive argument that I have had concerning the matters summarised above, during the course of a trial lasting several days, and I see no basis for going behind his detailed findings, albeit made in a trial involving Dr Potamianos and SEL and not Mr Prescott personally.

In my opinion, those conclusions undermine the reliance that can properly be placed upon Mr Levine’s figures. If Mr Levine’s figure of £60,000 p.a. in respect of the cost of a replacement software engineer is not a dependable guide as to the approach which would have been adopted by a reasonable arm’s length buyer as at the Valuation Date, there is no obvious reason why his other figures should be regarded as dependable.

Indeed, Mr Levine’s calculations attributed a cost of £150,000 to a new CEO, although the experts agreed that the appropriate figure under this head was about £100,000. Mr

Those conclusions also undermine the reliability of Mr Prescott’s evidence. The fact that Mr Prescott’s account of the role of Dr Fells is not dependable does not mean that his evidence in other respects should not be accepted; but it does raise doubts about it.

Even if a reasonable buyer would have taken the view that a further hardware engineer would be needed in addition to the CEO, the two JMDs, and the other employees who could assist with hardware issues, the question therefore remains as to what cost the buyer would have attributed to that hardware engineer. Although the figure of £60,000 p.a. was used by both sides in the negotiations with Mr Levine in 2016, and indeed by Mr Prescott in calculating what to offer Dr Potamianos in 2015, it is clear on the evidence that it would be possible to employ such an engineer for less than that, and indeed (perhaps depending on seniority) that one could be employed for £45,000 p.a..

These factors militate in favour of accepting Dr Potamianos’ case that, in accordance with the evidence of Ms Hindson, and as submitted by Mr Pavlovich, the sum of £220,000 (or more) used by Mr Stern in respect of the costs of a CEO and two engineers is too high. So also does the consideration that a CEO and two JMDs seems to me a rather top heavy structure to maintain for a relatively small company like SEL.

At the same time, I consider that a reasonable buyer would be concerned that Mr Prescott’s unique pool of knowledge and experience might be difficult to replace. I also consider that, as stated by Mr Prescott and, in my view, in accordance with the evidence of Dr Potamianos, the somewhat improvisatory and “all hands to the pump” structure of SEL while it was run by persons who were financially invested in the success of the business gave rise to a leanness of operation which might not be easy to replicate with the same number of employees once both of the shareholders in SRL had sold their shares and ceased to be involved in SEL (even taking account of the prospect that a new CEO would enable Dr Gardiner to be more freed up to deal with hardware).

I therefore consider that a reasonable buyer would include provision for an additional hardware engineer. In my view, however, the right provision is for a salary of £45,000 p.a. I accept Dr Potamianos’ evidence that SEL operated perfectly well without employing people at the top of the salary range, and I consider that a reasonable buyer would take the same view. SEL’s Business Plan also seems to me to support that figure.

In making that finding, I have taken into account that, on Mr Prescott’s evidence, there was an overlap between the need to make provision for an additional hardware engineer and the “significant issues” raised by him at paragraphs 16(i)-16(xvi) of his 5^th witness statement. I have in mind, in particular, Mr Prescott’s evidence that Dr Gardiner would not be freed up to replace him on the hardware side because Dr Gardiner was extensively engaged (as indeed was Mr Prescott) in an R&D project, which SEL had felt the need to embark upon due to concerns about ownership of IP and copyright.

Accordingly, I consider that the cost of staff to replace Mr Prescott and Dr Potamianos which should be inserted into the calculation is neither (a) £37,000 for each of the years 2016, 2017 and 2018, nor (b) £120,000 for 2016, increased to £122,520 for 2017 and further to £126,564 for 2018, as suggested by Ms Hindson and Mr Stern respectively.

On the contrary, I consider that it is £37,000 plus £45,000 for each of those three years.

Ms Hindson considered that in circumstances where a new CEO is recruited, one of the Joint Managing Directors of SEL, Mr Keen, would have more time to devote to sales, such that Z would not be required (§5.2.22 of her report), and she “therefore added back to EBITDA [Z’s] salary of £50,000” (§5.2.2.3 of her report).

Mr Pavlovich suggested that Mr Prescott’s acceptance that a new CEO would give Mr Keen more time to devote to sales carried with it an acceptance that Z would no longer be required. However, Mr Prescott did not agree with that: instead, he maintained that Z was required to stop Mr Keen from getting overloaded, and, further, that Z was engaged to develop new sales and new clients while Mr Keen serviced old ones. Mr Pavlovich submitted that a notional buyer would be able to agree a higher price on the basis either of saving the cost of Z or of additional sales that he would generate if he was retained, so that in either case SEL’s maintainable earnings would be higher. He further submitted that as both experts accepted the principle that the historic earnings have to be matched to the resources that produced them, it followed that any excess resources would lead to greater earnings.

Ms Page submitted as follows: (1) there is no evidence of a willing buyer taking the approach suggested by Ms Hindson; (2) this is based on the assumption that Mr Prescott was working as a part-time CEO when in fact he was working full-time for SRL/SEL at the Valuation Date, as he said in evidence “very intensively”; (3) a willing buyer would wish to prioritise the retention of sales staff, like Z, with knowledge of

In this instance, I accept the evidence of Mr Prescott as to the respective roles of Mr Keen and Z, and I prefer the submissions of Ms Page. I do not consider that £50,000 should be added back in for the 2017 and 2018 years as Ms Hindson suggests.

The experts agreed that at the Valuation Date SEL had surplus cash of £450,000 (see

As the matter was in issue, and because it did not seem to me to be right that Mr

Ms Hindson also confirmed that it was relevant that SEL was engaged in a research and development project:

“I think I referred to investment and that is what I meant. If they needed to invest in developing products for the future, then yes, you would not want to reduce your ability to do that by cutting your cash to the bone.

For his part, in the course of his evidence Mr Stern said:

“I think Ms Hindson made the comment about not cutting it to the bone, which I think is a valid point to make. And it comes back to the issue of what is the amount of surplus cash, how much should be retained in the business, in order to cover the eventualities, and one is looking at it from a valuation point of view. And on that basis, we have agreed £450,000.”

Ms Page argued that this evidence was supported by the following points:

Mr Pavlovich began by pointing out that Dr Potamianos is not bound by the experts’ agreement (see CPR 35.12(5)) and that it is therefore open to him to submit that their figure is too low, particularly when, as both Ms Hindson and Mr Stern accepted, there is no definitive methodology for identifying surplus cash.

Dealing first with the amount of the cash balance on the Valuation Date, Mr Pavlovich accepted that the sum of the bank balances (i.e. £955,168.97) should be the most accurate figure. He submitted, however, that this balance was not built up to manage cash flow; and that there were disagreements about how it should be used. For example, in 2016, Dr Potamianos wanted a substantial dividend be paid but Mr Prescott disagreed. Dr Potamianos said: “…it was cash accumulated over 25 years or whatever it was. … It was nothing to do with keeping the balance high for a catastrophe”.

Moving on to how much of the cash balance was required for the business, Mr Pavlovich accepted that this is hard to judge. However, Mr Prescott’s assessment that the cash balance fluctuated by “the order of +/- £100K” is borne out by the monthly cash balances shown in the management accounts, in a table produced by Mr Pavlovich relating to the financial years 2016, 2017 and 2018, leaving aside the fact that litigation costs depleted the balance in the last 12 months or so of the dates shown in that table. Mr Pavlovich thus submitted that £200,000 should be set aside to manage cash flow.

In the alternative, Mr Pavlovich submitted that, at the very most, the amount required would be what Mr Prescott assumed in his own calculation of SEL’s value as part of his offer for Dr Potamianos’ shares in 2015, namely £327,000 (i.e. £1,077k cash less £750k which was described as “realisable”). Mr Pavlovich submitted that Mr Prescott had struggled in cross-examination to explain why this situation is not comparable to the present situation, even though the experts have performed a similar calculation.

In fact, when asked about this topic, Mr Prescott’s answers included the evidence relied upon by Ms Page, and when it was put him (at a later stage in his cross-examination) that £327,000 must be the most that would be needed to run the business he replied

“Well, no. Bear in mind I expected quickly to be able to reinforce that”. I see no reason to reject that evidence, and nor do I see that it contradicts the experts’ agreed position.

Mr Pavlovich submitted that the experts’ stance was to the effect that: (a) SEL needed a cash buffer “for a rainy day”; (b) the amount of £505,000 (i.e. £955,000 - £450,000 = £505,000) is quantified in a broad-brush way as three months’ administrative expenses (although Mr Pavlovich argued that this does not tally with the figures in the FY18 accounts); and (c) there are some adjustments for excess salaries (which presumably refers to Sameaim and BDL), and no adjustments for legal expenses (which are treated

Although these points were attractively put, I am not persuaded that they provide any proper basis upon which to reject the clear, cogent and considered views of not only Mr

In §5.1.2(c) of her report, Ms Hindson states:

“Advertising and marketing costs – we agree that excess marketing costs of £78,635 relating to payments to Futuretech in FY17 should be added back to EBITDA. The figure of £78,635 represents the value of payments to Futuretech of £128,635 less annual costs of £50,000.”

In §3.7(iii) of his report, Mr Stern states:

“In particular, the experts agree that the following adjustments are to be applied:

…

iii.

Adding back excess advertising costs incurred in the year ending 31 October

2017 in the amount of £78,635 …”

It became clear in cross-examination that the experts’ approach was not based on what precise figures for the surrounding years of 2016 and 2018 were “correct”. Rather, in the words of Ms Hindson, it was, like the valuation exercise overall, a “slightly broadbrush approach” bearing in mind that, when assessing what level of profits the buyer is going to get in the future “He knows it is not going to be absolutely the same to the pound as in the previous year, but he wants to be in the right ball park”. Ms Hindson also agreed that if the figures which should properly be taken for 2016 and 2018 were for some reason higher than £50,000, then the adjustment to be made for the 2017 year would be lower (e.g. if £60,000 was “right”, only £68,635 should be added back).

Mr Pavlovich submitted that in order to apply the experts’ approach consistently, the following adjustments should be made:

Beyond that, Ms Page submitted with regard to the contentions (i) that there were excess costs for 2016 of £10,833 in respect of a Futurestech invoice dated 30 September 2016 which was paid to Futurestech while another marketing business (i.e. GCE) was engaged; alternatively (ii) that £8,335 was paid to GCE in respect of a handover to Futurestech:

As to the 2018 financial year, Ms Page pointed out that Dr Potamianos’ position in his opening Skeleton Argument that payments of £19,353 represented excess costs which should be added back in was flawed. Moving on to the position which Mr Pavlovich sought to rely upon in his closing submissions, namely that the total Futurestech and GCE invoices considered by the experts for 2018 were £56,774 and that £6,774 of this sum should be treated as an “excess” amount for 2018, Ms Page submitted:

I prefer the arguments of Ms Page on these issues. I accept that I am not tied by the joint views of the experts, and that it is open to me to disregard their views and apply my own view of what is fair and sensible in furtherance of the overall objective of determining what is fair, just and equitable. In this instance, however, not only have the experts reached a joint view about marketing costs. Also, first, they have each adhered to that view in spite of having been afforded the opportunity to reconsider it in light of each of the points relied upon by Dr Potamianos; and, second, they have explained why they consider that their original approach is right and why the kind of adjustments which Mr Pavlovich submits I ought to make are not, in their view, appropriate. I am not persuaded that there is any justification for disturbing their persisted-in conclusions.

There is an issue as to whether, as a matter of fact, the marketing costs for 2016 should be reduced by either £10,533 or £8,335, but even if, in principle, there is a factual foundation for stating that those costs should be reduced by one or other of those sums, both experts declined to accept that it would be appropriate to adjust their agreed figure for 2017 accordingly. If, contrary to those joint views, a reduction for 2016 was appropriate, it seems to me that it ought to be as follows: £64,303 - £8,335 = £55,968

In my judgment, the upshot of the foregoing is that, if Dr Potamianos’ invitation for me to revisit the experts’ approach to the underlying facts were to be accepted, the “right” figure for 2017 would be between £55,968 and £56,774 (e.g. £56,400). I have not calculated the consequences for the valuation of Dr Potamianos’ 40% shareholding in

The argument that the value of SEL should be adjusted to take account of the cost of remedial work to the source code is based on the contents of the letter of claim from SEL’s solicitors, MB, dated 8 January 2019 to the solicitors for BDL and Dr Potamianos, BM, sent pursuant to the Professional Negligence Pre-Action Protocol. That letter is 11 pages long. It was answered by a three page letter from BM dated 29 April 2019. That in turn prompted a two page reply from MB dated 12 December 2019.

The issues raised in this correspondence are complex. The letter of claim of 8 January 2019 contains detailed sections entitled “Background” and “Your clients’ duties” before moving on to a section entitled “The issues with the source code and documents delivered up by your clients”. This section then sets out a very long list of contentions. I do not repeat them in this judgment on the grounds that they comprise or may comprise confidential matters principally within the scope of an Order made pursuant to CPR 31.22 during the course of these proceedings, which Ms Page asked to be redacted from the publicly available version of this judgment, as to which Mr Pavlovich was neutral.

Unsurprisingly in light of the nature and complexity of these allegations, two pages later the MB letter before claim goes on to say that “expert evidence will be required”.

In the intervening pages, the letter sets a number of matters (as to much of which the final sentence of paragraph 122 above also applies) under the following headings:

“Your clients’ failures

…

Breach of contract, negligence, director’s duty

As a result of the issues detailed above your clients have breached:-

1.

Clause 4.1 of the 1997 Contract because they have failed to use their best endeavours to develop our client’s business to its full potential in the most economic efficient and profitable way and in accordance with best business

practice;

2.

Clause 5 of the 2000 Contract because they have failed to undertake the Services in a professional manner at all times and have failed to undertake the Services in the capacity of a specialist;

3.

Clause 7 of the 2000 Contract because they have failed to devote such time, attention, skill and ability as the Contract Works required;

4.

Clause 2.1 of the 2015 Contract because they failed to provide Services with all proper skill and care; and

5.

Their duties of care to our client because they failed to exercise the level of skill and care to be expected of a reasonably competent software programmer professing expertise in the field of digital motor controllers and in particular the software for such controllers.

In addition

6.

Dr Potamianos has acted in breach of his obligations as a director under the provisions of the Companies Act which we have identified above. He should have taken steps to correct the deficiencies and to warn our client of their existence.

The losses suffered by our client as a result of your clients’ breaches

…

An estimate of our client’s claim

Based on its review to date and subject to expert evidence in due course our client estimates that it will cost in the region of £468,000.00 …

This estimate does not include making any improvements to the software …

The above estimates are for coding only …”

Ms Page submitted that the value of SEL should be adjusted not only to take account of these matters but also to take account of the further “significant issues” raised by Mr Prescott and listed at paragraphs 16(i)-16(xvi) of his 5^th witness statement dated 21 April 2020, which reads as follows:

“I believe that a due diligence process of SEL in September 2018 would in fact have revealed some very significant issues, as follows:-

i)

The PL/X and JL/X source code would only compile on an obsolete compiler.

ii)

There had been no development of the flagship product and it was losing ground to the competition.

iii)

The source code used in production had known bugs which would cause damaging problems in certain applications. SEL faced the risk of legal action from end users whose businesses had been affected by the bugs which SEL was unable to respond to.

iv)

SEL suffered reputational damage from selling faulty product.

v)

We were waiting for delivery up of the source code and all the documentation required to be able to use it and had no clarity about what would be delivered up.

vi)

The style of the code prevents it from being ported to a different microprocessor. This had already caused 7 years of delay and cost moving from the Intel to the Microchip processor. This situation could easily re-occur and a buyer would have the same problem. The only solution is a re-write from scratch in high level language - an enormous task.

vii)

[An issue concerning alleged source code provenance (“the provenance issue”)].

viii)

SEL did not own the configuration tool used with the flagship product and needed to create its own.

ix)

The CE approvals on the flagship product were about to expire and the Electro Magnetic Compatibility approvals process needed repeating. This is an expensive and time-consuming task.

x)

SEL had been historically operating with a very lean workforce, which has flattered the profits.

xi)

The profile of SEL’s workface was aged and the older people were the ones with the historical experience in DC Drives. A new buyer was going to have to manage the retirement of this group and find replacements.

xii)

The machine used to test the PL/X flagship product in production was only supported by one person in his late 60s.The software that runs it is written in Pascal and the hardware is based around a 20-year old PC running on windows 98. This machine needs completely upgrading but it cannot be taken out of production. The only solution is to buy or make a completely new machine, which is a large cost liability with uncertain timescales.

xiii)

The product manuals had been neglected and all needed modernising.

xiv)

The business system was over 20 years old and consisted of different packages which didn’t all communicate with each other. It was designed by David Van Der Wee and when he left there was no one with that skillset in SEL. Will Pearson was given the task of sourcing a new system. The switchover was scheduled to be on 1 November 2018. Switching to a new business system is notorious for creating unexpected business casualties.

xv)

In an effort to mitigate the potential of not owning the source code SEL embarked on a 5 year R&D project to design a new product range. This is a significant liability for a potential purchaser.

xvi)

We also had the prospect of a damages case but as of 28 September 2018 had not assessed the level of damages, or the prospect of recovery. We knew that it would tie up cash to fund legal fees and would take a significant amount of management time.”

In a letter from MB dated 12 August 2020, the following was said (again, much of the detail has been omitted from this public judgment for the reasons given above):

“Our client will contend at trial that the valuation of your client’s shares in [SRL] should be adjusted by £218,400.00 … for the following reasons …

7.

Our client estimates that it will cost in the region of £468,000.00 …

8.

This estimate does not include …

It is assumed that this will take an engineer one man-year at a cost of £65,000.00. It is assumed that there will be overheads of 20% on that figure, totalling

£13,000.00.”

The figure of £218,400 contained in that letter appears to be calculated as follows: £390,000 + £78,000 + £65,000 + £13,000 = £546,000; £546,000 x 40% = £218,400. On one view, that letter is only addressing the alleged costs … resulting in the claimed figure of £468,000 contained in MB’s letter of claim dated 8 January 2019 plus the alleged costs … which add the claimed figure of £78,000 which is referred to in paragraph 8 of the letter. (Some details omitted for the reasons given above). On another view, that letter is also addressing under the rubric of “the quality of the source code” at least some of the “significant issues” which are referred to in Mr Prescott’s 5^th witness statement, because (for example) that letter refers to the issue identified at paragraph 16(vii) of that witness statement. On any view, it does not appear to be addressing all of those “significant issues”, although Ms Page’s written closing submissions at [117] seem to subsume all of those issues into the figure of £218,400: “[Mr Prescott] contends that an adjustment should be made to the price of the shares of £218,400 or such other amount as the court sees fit to reflect a commercial negotiation. The risk of a windfall to [Mr Prescott] in the event SEL succeeded with a claim in respect of the quality of the source code can be avoided by an order for payment of a sum representing deferred consideration of 40% of the net recoveries of the claim.”

Ms Page’s written closing submissions on these issues ran to over 17 pages. They included, in summary, the following points:

Mr Pavlovich submitted as follows.

Mr Prescott was unable to make good his claim that the source code delivered up by BDL in the Source Code Claim is of poor quality in the absence of (a) extensive copies of the source code and other technical documents to demonstrate the alleged problems; (b) live evidence from Dr Gardiner and Dr Fells, and (c) appropriate expert evidence. In the result, Mr Prescott’s evidence consisted of lengthy, largely self-serving documents raising a number of alleged areas for improvement in the code. However, as any user of computer software knows, there is always room for improvement. Such work, even fixing “bugs”, is part of the normal development process. Accordingly, the only credible evidence on the quality of the source code comes from Dr Potamianos, as the only witness qualified to comment. Mr Prescott accepted in cross-examination that firmware and programming are not part of his area of expertise.

Dr Potamianos’ case on this question is set out in the letter from BM dated 12 August 2020. First, he contends that the valuation should not be adjusted, because he would have provided any documentation or explanation of the source code that was required in a sale (and of course it would be in his interests to facilitate a sale). Second, and in any event, the quality of the source code was not poor, and, as found in the Source Code Quantum Judgment, the code available to SEL was sufficient for its business.

As to Mr Prescott’s case concerning costs which amount in total to £546,000, Dr Potamianos’s evidence that these figures are “not in touch with any reality” should be accepted. This is a prime example of Mr Prescott exaggerating his complaint about the source code, as he did in the Source Code Quantum trial. Indeed, his complaint has already been dealt with there, as illustrated by his extensive reliance on the Source Code Quantum claim witness statements and by the fact that about £2m was claimed there for delays in improving the PL/X firmware (see [219]ff in the Source Code Quantum Judgment). Consequently, there is nothing in any of the specific points raised by Mr Prescott; and there is no reason for the price to be “negotiated downwards” by the notional buyer as he suggests. Indeed, the “principle of reality” relied on by Ms Page is a reason for the Court to consider the substance of these points rather than speculating about a hypothetical negotiation.

Further to the above, Mr Pavlovich submitted as follows with regard to a number of the “significant issues” identified by Mr Prescott:

Yes, but the fact was that 6.13 would not compile on the new compiler.”

Paragraph 63 of SEL’s Particulars of Claim in the Source Code Claim pleads: “By letter dated 24 October 2016, BDL’s solicitors informed the claimant’s solicitors that software acceptance specifications and test results did not exist. Pending provision of such Source Code and Documents as are in the possession or control of BDL or Dr Potamianos, the claimant is not able to say whether the work undertaken by BDL was conducted (a) in accordance with best business practice as required by clause 4.1 of the 1997 Contract (b) in a professional manner as required by clause 5 of the 2000 Contract or (c) with all proper skill and care as required by clause 2.1 of the 2015 Contract. However the absence of such materials indicates that it was not. The claimant reserves its right to make a claim for breach of the above mentioned provisions of the 1997, 2000 and 2015 Contracts when the Source Code and Documents which BDL and Dr Potamianos are obliged to provide have been provided to the claimant”.

However, SEL has not brought any such claim, in spite of its letter of claim dated 8 January 2019. If it did sue, the potential recovery should be added to the value of SEL for the present purposes. In other words, any defects would have both a positive effect on the valuation, reflecting the right to sue for damages, as well as a negative effect due to the defects themselves. The overall effect would be negligible. Thus, the fairest approach is to leave SEL to sue if it wishes, in which case Dr Potamianos and BDL will bear 100% of any damages ordered (unlike the consequences of a recovery in the Source Code claim, where Dr Potamianos would only bear 60% ). Mr Prescott cannot reasonably complain about litigation risk and enforcement in circumstances where SEL has taken so long to decide whether to sue.

Further, the assorted complaints listed by Mr Prescott do not advance his case because the experts have not seen fit to make any additional allowance for those matters. In this regard, Ms Hindson’s evidence was that these matters were features of SEL at the time it generated the earnings used in the valuation, and “… the buyer is buying the historic profits that SEL was able to generate … and … whatever flaw or warts … are already in there so they are already accounted for in that way” and “… if these issues were not there … then the assumption is that the historic profits would have been higher”. Many of these issues were ventilated in the source code quantum trial. None is properly explained before me. For example, the alleged need for SEL to create its own configuration tool is mere assertion; and renewing CE approvals ought to be a routine process, which the notional buyer would be able to complete, as Dr Potamianos observed. Mr Prescott accepted that some of the items are normal business tasks.

I have not found it entirely easy to decide what would be fair, just and equitable with regard to these issues, which were very fully argued by both sides. At the end of the day, however, I am not persuaded that they require any adjustment to the value of the shares in SRL as at the Valuation Date, for the following principal reasons:

I am reinforced in my conclusions above by considering the effect on the value of SEL of accepting the issues, problems and complaints advanced by Mr Prescott. First, they would render SEL “unsellable”, and therefore for all practical purposes worthless, as, I believe, Mr Prescott was prepared to accept, if not positively to assert. In the language of Briggs LJ in Chilukuri v RP Explorer Master Fund [2013] EWCA 1307 that would mean that “no well-advised prospective purchaser … would have touched these shares with a barge pole”. Second, they would depress the value of SEL to a very low level in comparison to its net asset value, and, as far as I can see, below the value of the cash of £955,168.97 which SEL held in its current account on the Valuation Date. In this regard, there was a difference of opinion between the experts. Ms Hindson was of the view that any figure which was less than the value of SEL’s net assets must be too low, whereas Mr Stern was of the view that the correct principle is that SEL could not be worth less than the net value of its assets on a break up basis and that the better benchmark to use in comparison to a maintainable EBITDA valuation “would be to say that the owners of a business would not sell the business for less than they could achieve were they to have an orderly winding down of the assets and payment of the liabilities”. I do not consider that I have to resolve that difference, because even on Mr Stern’s view, which is the more favourable to Mr Prescott, SEL had a value considerably in excess of that which would be produced by acceptance of Mr Prescott’s case. The consequences of accepting the effect on the value of SEL of the issues, problems and complaints he asserts are very far removed from the views of the experts, even making all due allowance for the prospect that their valuation based on maintainable EBITDA produces a figure which they were each prepared to accept might be subject to an element of commercial negotiation on an actual sale in reality.

Mr Pavlovich submitted that it would be fair to add “quasi-interest” to the share price to reflect the fact that the sale is taking place after the Valuation Date and that in the intervening period Dr Potamianos will have been kept out of his money, and will have received no benefit from his shares in that time, whether in the form of dividends or the further Balancing Payment, whereas all the benefits have accrued to Mr Prescott. The suggestion that Mr Prescott’s previous offers to buy Dr Potamianos’ shares provide a reason not to award quasi-interest is unfounded: Mr Prescott’s highest offer was £1.34 million in October 2015, but Dr Potamianos has obtained a better result by retaining his shares, including at least the price for his shares and the Balancing Payment. Moreover, the offer was made at an early stage, funding for the offer was in doubt, and a sale to a third-party was a possibility: see [141] of the Appeal Judgment. In any event, the fact remains that Mr Prescott chose to contest both liability and quantum, and Dr Potamianos should not be penalised for any resulting delay. Mr Pavlovich made the like submissions as to the appropriate rate as he made in respect of the Balancing Payment.

Ms Page submitted that it would be quite unfair for the share price to be augmented by the equivalent of interest for the following reasons:

In this instance, and in contrast to the approach which I consider right in respect of the Balancing Payment, I consider that the better course is to wait until it is possible to ascertain the final outcome of (a) the findings above and (b) the consequential orders made following the Source Code Quantum Judgment. At that stage, the Court will be in a better position to assess, for example, whether Dr Potamianos has been kept out of the purchase price for his shares in SRL by the unwillingness of Mr Prescott to admit and pay what is due to him or by his own unwillingness to accept reasonable proposals from Mr Prescott. Such issues may well, as envisaged by the Court of Appeal, have a bearing on who should be ordered to bear the costs of the present proceedings. As at present advised, on the one hand, the resolution of the same issues (which cannot be achieved at this time) may also be relevant to the proper exercise of the Court’s discretion as to whether and if so at what rate and for what period to award quasi-interest; and, on the other hand, if in the final analysis that is not relevant, it will cause no prejudice to wait.

I ask Counsel to agree an order which reflects the above rulings. I will deal with any arguments about costs, the form of the order, and any other issues such as permission to appeal, either (if both Counsel agree to this) on the basis of written submissions alone, or else on an adjourned hearing on some convenient date. It is my intention that the time for seeking permission to appeal should not start running in the meantime.