Unfair prejudice to members - Relief

Ng v Crabtree and others: Chancery Division (Mr Justice Arnold): 18 July

The second respondent company (NDP) was incorporated on 10 October 2001 with an authorised share capital of £1,000, of which just two shares of £1 were issued, one to the petitioner and the other to one to the first respondent. The principal objects for which NDP was established were to carry on the business of a general commercial company. NDP was a joint venture between the petitioner and the first respondent for the purpose of selling natural (non-synthetic) bedding to the United Kingdom retail market. It was a quasi-partnership based on a combination of different skills and contacts of the petitioner and the first respondent.

The petitioner's function was to source and purchase feather-down bedding using his sources and contacts in China, whilst the first respondent was to administer the company as well as marketing and selling the goods in the UK. On or about 10 October 2001, the petitioner and the first respondent and were appointed as directors. An initial business plan was prepared in October 2001 stating that both shareholder-directors were very experienced and known in the trade.

It was agreed that they would receive equal remuneration and an equal share of profits. ZLF was a large Chinese manufacturer which the petitioner had always maintained a good personal relationship with ZLF. Consequently, ZLF was prepared to offer NDP a substantial credit facility. Further to an agreement between NDP and ZLF dated 20 April 2002, NDP became ZLF's sole distributor and agent in the UK. Subsequently, large sums became owing from NDP to ZLF. ZLF did not seek to enforce payment of the debt, however, nor did it charge NDP any interest on it. DPC Ltd (DPC) was a separate company, the sole shareholder and director of which was the first respondent. It supplied synthetic (non-natural) bedding to the UK market.

On 10 March 2005, NDP entered into a lease of new premises in Bolton (the premises). Between 2005 and 2006, the following events occurred: (i) the first respondent personally acquired the premises from the landlord with the benefit of finance from a bank; (ii) the first respondent permitted DPC to use NDP's premises, staff and facilities and caused NDP to cross-guarantee DPC's debts; and (iii) the first respondent dismissed NDP's operations manager. For those latter, and perhaps other, reasons, the trust and confidence between the petitioner and the first respondent broke down. The petitioner received no remuneration or profits from NDP after August 2006. In October 2007, the petitioner presented a petition against the first respondent and NDP, alleging unfair prejudice pursuant to s 994 of the Companies Act 2006.

On 25 November 2009, judgment by consent was granted in favour of ZLF against NDP, and on 26 November 2009, NDP was placed in administration, its assets being acquired by DPC. On 6 May 2010, an order was made by consent that the first respondent would buy and the petitioner would sell the petitioner's shares in NDP at their fair value as at 10 March 2005. On 8 December 2010, NDP went into liquidation. On 4 May 2011, it was ordered that at the trial of the petition the parties should be restricted to calling the experts whose reports had already been filed and served, and that any evidence of disputed fact within the experts' reports should not be admitted. Shortly thereafter, the Court of Appeal dismissed the first respondent's appeal against the order of 4 May 2011. The sole outstanding issue between the parties was the amount, if any, which the first respondent was to be ordered to pay for the petitioner's shareholding. The petitioner's primary expert witness was K who had had a long career in the field of valuation. The first respondent's expert witness was C, an experienced forensic accountant, although not a valuer.

The principal issue between the parties was as to the level of NDP's maintainable earnings, if any. That turned largely on the issues as to the re-allocation of expenses from NDP to DPC and as to whether NDP should be treated as having to pay interest on the ZLF debt.

The court ruled: In the instant case, NDP's maintainable earnings should be calculated following K's imethodology with the following alterations: (i) including an annualised figure for 2003 and (ii) substituting the percentage figures for allocating costs to DPC for the 30% figure used by K. The result was a maintainable earnings figure of £143,600. K's evidence had been that an appropriate P/E multiple had been 7. He had arrived at that figure by searching for quoted companies that might be considered comparable to NDP as at the valuation date. He had identified six such companies, which had an average historic P/E ratio of 13.5. He had further considered the available financial data for five non-quoted companies identified as competitors in NDP's business plan. He had then taken into account factors that had suggested adjustments upwards and downwards, and arrived at a figure of 7. By contrast, C had suggested a discounted P/E of 4 in the first joint statement, however, she had been unable to defend that choice in cross-examination.

She had done no research of the kind undertaken by K, and her choice had appeared to be arbitrary. Neither had the first respondent's counsel relied on it in his closing submissions. Consequently, the appropriate P/E multiple was 7 (see [65]-[68] of the judgment).

Multiplying the maintainable earnings figure by a P/E multiple of 7 gave £1,005,200. In the circumstances, that should be rounded down to £1m. The fair value of the petitioner's half-share was therefore £500,000 (see [69] of the judgment). Parkinson v Eurofinance Group Ltd [2001] 1 BCLC 721 applied; CVC/Opportunity Equity Partners Ltd v Almeida [2002] All ER (D) 348 (Mar) applied; Joiner v George [2002] All ER (D) 222 (Mar) applied; Holt v IRC [1953] 2 All ER 1499 applied.

Christopher Boardman (instructed by Berry & Berry) for the petitioner. Paul Marshall (instructed by Blacks Solicitors LLP) for the first respondent.