Makdessi v Cavendish Square Holding BV & Ors

This is an application by the Claimant for an interim payment by the First Defendant pursuant to CPR 25.7. The parties have been litigating since 2011 over the exercise by the First Defendant on 13 December 2010 of an option to purchase the Claimant’s 20% shareholding in the Third Defendant at a price of US$9,519,000. They have been locked in battle on the issue as to whether the option was unenforceable as a penalty. The Claimant said it was a penalty and was therefore unenforceable. The Commercial Court held that the option was not a penalty, the Court of Appeal held that it was and the Supreme Court restored the judgment of the Commercial Court that it was not a penalty. One might have thought that would be the end of the matter and indeed, on 1 December 2015, shortly after the judgment in the Supreme Court, the Claimant confirmed its willingness to transfer the shares and suggested that its costs liability to the First Defendant (arising out of the Claimant’s failed contention that the option was a penalty) be deducted from the price of US$9,519,000. But there was no response from the First Defendant notwithstanding a chasing letter on 16 March 2016. So on 9 December 2016 the Claimant sent an executed stock transfer form and sold note in relation to the shares to the First Defendant and sought a payment on account. On 15 December 2016 the First Defendant rejected the Claimant’s request for an interim payment. Thus on 22 December 2016 the Claimant issued its application for an interim payment of US$6m.

The reason for the First Defendant’s reluctance to proceed with performance of the option notwithstanding its triumph in the Supreme Court is that the First Defendant believes that as a result of alleged dishonest and fraudulent activity by another shareholder in the Third Defendant the valuation which the First Defendant placed on the 20% shareholding in 2010 of US$9,519,000 is unreliable. The First Defendant says that the purchase price (which is dependent upon an assessment of the Net Asset Value of the Third Defendant) can only be assessed when proceedings against the other shareholder reach the disclosure and quantum stages. The First Defendant believes that the price could be significantly lower than US$9,519,000. For that reason the application for an interim payment is resisted.

Before considering what must be established in order to obtain an interim payment it is necessary to mention two matters. First, the Claimant says that the price which is payable for the shares is of the order of US$13-14.5m. Whether that is so is an issue to be resolved at trial. On the present application the Claimant says that at trial he will obtain judgment for at least US$6m. Second, whereas the Claimant has previously pleaded that his obligation to transfer the shares is conditional upon the First Defendant paying or tendering the price it is plain that the Claimant is now willing to transfer the shares without the price being paid or tendered. Indeed he has purported to transfer the shares. There is a dispute as to the effect of the purported transfer but the Claimant accepts that if he succeeds in his claim for an interim payment such payment must be conditional on the shares being transferred. The transfer would be without prejudice to the Claimant’s claim for the full price at trial and must be expressed in such a way as is compliant with Stamp Duty requirements.

CPR 25.7(1)(c) provides the court with power to order an interim payment where it is satisfied that, if the claim went to trial, the claimant would obtain judgment for a substantial amount of money (other than costs) against the defendant from whom he is seeking an order for an interim payment. By CPR 25.7(4) the court must not order an interim payment of more than a reasonable proportion of the likely amount of the final judgment.

These provisions have been considered by the Court of Appeal in Test Claimants in FII Litigation v Revenue and Customs Commissioners (No.2) [2012] EWCA 57, [2012] 1 WLR 2375. Aikens LJ (with whom Lewison and Ward LJJ agreed) considered three matters at paragraphs 32-43. First, he considered the burden and standard of proof. The requirement that the court be “satisfied” of certain matters meant that the burden of proof was on the claimant and that the claimant must satisfy the court that the requisite condition has been satisfied to the civil standard, that is, upon the balance of probabilities. Second, he considered the matters on which the court was to be satisfied. The rule requires that the court be satisfied that if the matter went to trial the claimant “would obtain judgment for a substantial amount of money”. Aikens LJ said that on an interim application the court is looking at what would happen if there were to be a trial on the material before it. The court must be satisfied that the claimant would in fact succeed and would in fact obtain a substantial amount of money. It is not enough if the court were to be satisfied that it was likely that the claimant would obtain judgment or that it was likely that he would obtain a substantial sum of money. Third, he considered what is meant by a substantial amount of money. Aikens LJ said that that meant substantial as opposed to negligible but noted that the judgment had to be made in the context of the total claim made.

The court may be persuaded that judgment will be obtained for a substantial sum of money which it can identify at that stage. But Aikens LJ recognised (at paragraph 51) that there may be cases where the court is satisfied that there will be judgment for a substantial sum of money without being satisfied what precisely that sum will be. In that event the court must decide what is “the likely amount of the final judgment” (see CPR 25.7(4)) and must not order an interim payment of more than a reasonable proportion of that likely amount.

Mr. Bloch QC, on behalf of the Claimant, submitted that the Claimant would obtain judgment for at least US$6m. In support of that submission he relied upon several matters. First, the Defendant had initially calculated the price at US$9.5m but even after knowing of the alleged wrongdoing of the other shareholder had calculated the price at US$8.8m., see paragraph 45 of the pleading against that shareholder. Second, nowhere is it said that the recoverable amount would be negligible. Mr. Oxnard, the solicitor acting for the Claimant had merely said that it “could well be significantly lower than USD 9,519,000. But at present, the DSOP is simply not capable of being calculated.” Third, although an extensive investigation had been carried out by Ernst & Young (EY) the result of that investigation has not been stated or disclosed. Fourth, in a communication from the First Defendant’s solicitor to an official at the Supreme Court concerning costs it was said that “the fact that [the Claimant] will recover a substantial sum of money in due course is nothing to the point.” It was submitted that these matters taken together showed that, subject to certain deductions, a sum of US$8.8m. will be recovered. Were it the case that the recoverable amount was likely to be less than US$8.8m. Mr. Oxnard would have said so and the pleading against the other shareholder would have said so. The “irreducible minimum” of US$6m. is reached after taking into account the deductions relied upon by the Defendant.

Miss Smith QC, on behalf of the First Defendant, submitted that neither the First Defendant nor the court was able to calculate the amount which the Claimant would recover at trial. The First Defendant’s investigations into the alleged wrongdoing of the other shareholder were not complete and in any event could not be completed until the disclosure and quantum stages of the action against that shareholder. It was misconceived to rely upon the fact that the Defendant has not said that the recoverable amount is negligible because the burden lies on the Claimant to prove that the irreducible minimum would at trial be substantial and in what amount. Thus the “threshold requirement” that the court must be satisfied that the claimant would obtain judgment for a substantial amount of money at trial could not be satisfied.

Miss Smith complained that until the hearing no mention had been made of the figure of US$8.8m., not even in counsel’s skeleton argument. On instructions she said that that figure had not been calculated by EY and that their report could not be used in this case because it had been prepared for use only in other proceedings. Also on instructions she described the figure as rough and ready in circumstances where the accounts of the Third Defendant had not been restated. In the light of the importance now given to the figure of US$8.8m. she requested an adjournment in order to adduce evidence explaining how that figure had been calculated. I acceded to that application.

When the hearing resumed there was evidence from Mr. Douglas, the Deputy Group Financial Controller of WPP (of whom the Defendants form part). It is clear from that evidence that the figure of US$9.5m. in respect of the DSOP in relation to Mr. Makdessi and the figure of US$8.8m. in respect of the DSOP in relation to the other shareholder were both calculated in the same way but using a different date and a different figure for bad debts. The calculations were not rough and ready in the sense that they followed a particular formula. But, importantly, neither figure made any allowance for the effect of the alleged wrongdoing by the other shareholder. Mr. Douglas explained that the extent and effect of the shareholder’s wrongdoing could not be assessed accurately until disclosure had been obtained from him and that against that background it was not possible in December 2015 (when the proceedings against the shareholder were issued) to restate the Third Defendant’s accounts or to undertake any sort of partial restatement.

Mr. Bloch submitted that in circumstances where EY had investigated and reported the First Defendant could not be heard to say that the alleged wrongdoing prevented a calculation being made and that the court could infer that the First Defendant must have recognised that the alleged wrongdoing would make no difference to the calculation. However, it seems clear that EY was concerned with uncovering the alleged wrongdoing rather than with any restatement of the Third Defendant’s accounts or of the DSOP. I do not consider that EY’s involvement enables the court to infer that the First Defendant must have recognised that the alleged wrongdoing would make no difference to the calculation.

Mr. Bloch further submitted that Mr. Douglas’ statement that a restatement of the Third Defendant’s accounts was not possible did not bear scrutiny for it made no sense for the First Defendant to put forward as against the other shareholder a DSOP of US$8.8m. if such figure significantly overstated the DSOP. It would mean that that figure which had been pleaded and had been supported by a statement of truth was misleading. However, the explanation given by Mr. Douglas was that the priority of the First Defendant was to secure the other shareholder’s shares. It was therefore necessary to calculate the DSOP on the basis of the available financial information. In the absence of a formal re-statement of the audited accounts there was no other way in which the shares could have been valued and obtained.

I was surprised at the First Defendant’s position because it appeared that the First Defendant was willing to pay the other shareholder US$8.8m. for its shares, a price which was thought to overstate the true DSOP on account of serious wrongdoing by the very shareholder. Miss Smith said that that was indeed so. The First Defendant had commercial reasons for paying that price because, if accepted, it would mean that the shares in the Third Defendant could be secured. I asked whether the First Defendant, in circumstances were that price had not been accepted, was still willing to pay that sum and was told probably not, though the relevant part of the pleading remains unamended.

Mr. Douglas said in his witness statement that the First and Third Defendant would have a remedy against the other shareholder for this wrongdoing but it was unclear precisely how. Although the Third Defendant had a claim for damages against him, it was not explained how this would enable the Third Defendant to obtain recompense for a voluntary over payment by the First Defendant.

Notwithstanding these odd features of the First Defendant’s position, I was not persuaded that I should view Mr. Douglas’ evidence with suspicion or distrust. It seemed to me much more likely that he was being honest with the court when explaining why the First Defendant had been willing to pay US$8.8m. to the other shareholder and that he was not hiding from the court an appreciation that the alleged wrongdoing of the other shareholder would make little difference to the calculation of the DSOP. It is likely that he had not thought through precisely how the First Defendant could recover any voluntary overpayment of the price via a claim for damages in the name of the Third Defendant.

I can now return to the threshold question, namely, can the Claimant persuade the court on the balance of the probabilities that he will recover judgment for a substantial amount at trial. The starting point is the First Defendant’s own calculation of the DSOP in the sum of US$9.5m.

Mr. Bloch commented upon the two items of wrongdoing highlighted by Mr. Oxnard, the solicitor for the Claimant, in his evidence. The first was an allegation in paragraph 33(c) (i) of the pleading against the other shareholder that “a number of debts owed to suppliers (or the subject of dispute) were kept out of the accounting records of MEC. A spreadsheet produced by Joyer Pinto (then the Finance Director of MEC) in 2011 identified these liabilities as amounting at that time to AED 23,960,768, the majority of which pre-dated the SPA and so had been, and continued to be, hidden from the Claimants/WPP.” Mr. Oxnard said that that stated sum of AED amounted to US$6.5m. Mr. Bloch suggested that it would be appropriate to take about half of that figure to account (a) for those debts which were the subject of a genuine dispute and (b) those which post-dated the SPA. Since the DSOP was based upon a 20% shareholding it would be appropriate to take that percentage of the resulting figure, thereby suggesting a reduction of the DSOP of about US$650,000. This would reduce the price of US$9.5m. to under $9m. The other example mentioned by Mr. Oxnard was said by Mr. Bloch to be irrelevant because it related to events after the date of the SPA. Thus Mr. Bloch submitted that, when allowance was made for the deductions in relation to tax and costs also mentioned by Mr. Oxnard, the Claimant would obtain judgment for a sum of at least $6m.

Mr. Bloch’s 50% reduction was ambitious and optimistic but whatever the rights and wrongs of his analysis Mr. Oxnard and Mr. Douglas said there was a difficulty in using it to establish the threshold requirement, namely, that a full assessment of the extent and effect of the other shareholder’s wrongdoing must await disclosure from that shareholder. That would appear to be right but at any rate it is not fanciful to suggest that it is. In those circumstances there is, it seems to me, uncertainty as to what might be the DSOP price and hence the likely amount of the final judgment.

Mr. Bloch said that the First Defendant had not engaged with the threshold issue or with the second issue of what sum should be awarded by way of an interim payment. In one sense that is true. But the reason is, according to Mr. Oxnard, that “at present, the DSOP is simply not capable of being calculated”. Further, as Miss Smith emphasised the burden of proof was on the Claimant.

Having considered the arguments and counter-arguments and then sought to stand back from them the following considerations appear to me to be important.

First, the DSOP payable by the First Defendant to the Claimant has been calculated by the First Defendant (absent any wrongdoing) in the sum of US$9.5m.

Second, the best example to date of wrongdoing is the US$6.5m. of off balance liabilities. That would reduce the NAV and hence would reduce the DSOP by 20%, namely, US$1.3m. Some of those liabilities post-date the SPA and some may be the subject of genuine dispute. So it is unlikely that 20% of the entire sum should be deducted from the calculated sum of US$9.5m. However, it does not appear to me to be fanciful to suggest that as much as US$1m. may fall to be deducted from the calculated DSOP of US$9.5m., leaving a DSOP of US$8.5m. Of course more significant wrongdoing may be revealed on disclosure but given a no doubt thorough investigation by EY this seems unlikely.

Third, it appears to be accepted that account must also be taken of the Claimant’s liability in costs to the First Defendant (arising out of the parties’ journey through the courts to the Supreme Court) which is said to be about US$3.6m. This liability does not affect the assessment of the NAV or the DSOP but is a straightforward deduction from any sum payable by the First Defendant to the Claimant. Mr. Bloch says that not all of that sum would be recovered on a detailed assessment and he suggests some US$2.5-$2.7m. should be allowed. That seems likely (though not inevitable). If one deducts US$2.6m from US$8.5m one has a figure payable by the First Defendant of US$5.9m.

Fourth, Mr. Oxnard says that account must also be taken of an underpayment of Saudi tax in the sum of US$4.59m. and certain other much smaller sums (EY’s fees in relation to that underpayment of tax, and certain Kuwait tax liabilities) which total a sum in excess of US$5m. There is little information about these and so Mr. Bloch said that little account should be taken of them. He described them as a “smoke screen” but Mr. Oxnard describes them as matters which will have an effect on the level of the DSOP. If all of these are established and taken into account when assessing the NAV, the DSOP would be reduced by a further 20%, namely, about US$1m., though the reduction could be much less given the absence of supporting evidence. This would result in a DSOP of about US$4.9m.

These considerations persuade me that if the claim went to trial the Claimant would obtain judgment for a substantial sum. Mr. Oxnard has not suggested that the DSOP is likely to be a negligible figure. To take account of this is not to reverse the burden of proof. But it is relevant to bear in mind that there is no evidence before the court that the DSOP is likely to prove in a negligible rather than in a substantial amount.

I therefore consider that, on the material before the court at this time, if the matter went to trial the Claimant would obtain judgment for a substantial sum of money.

I cannot however on the material presently available say precisely in what sum the Claimant would obtain judgment. It is likely to be about US$4.9m. but it may possibly be less (if further significant wrongdoing is found and/or the First Defendant’s costs are assessed in a higher figure than seems likely). The court must not order an interim payment of more than a reasonable proportion of the likely amount of the final judgment. A reasonable proportion would be such as would ensure that any risk that the Claimant may not recover final judgment for an amount at least equal to the interim payment is not realistic. In my judgment US$3m. would be a reasonable proportion to award as in interim payment.