Profinance Trust SA v Gladstone

The Court of Appeal held that an appellate court will not disturb a trial judge's exercise of discretion on costs unless it was exercised on a wrong basis.

When a respondent makes an early offer to buy out a minority shareholding by independent valuation, the offer may be reasonable even if the offeree lacks complete information at that stage, provided the mechanism ensures equality of arms and an independent valuer will have access to material information.

The appeal concerned a petition under Companies Act 1985 s.459 for the compulsory purchase of a minority shareholding. The deputy High Court judge ordered the majority shareholder to purchase the minority holding but ordered the petitioner to pay half the respondent's costs below. The Court of Appeal allowed the appeal on valuation, directing purchase at the value as at the date of the substantive hearing, and heard argument on whether the costs order below was wrongly made.

The central question before the Court was whether the deputy judge had misdirected himself in exercising his discretion on costs by failing to apply correctly the guidance about offers and "equality of arms" considered in [1999] 1 WLR 1092.

1. Outcome: The Court of Appeal allowed the appeal on valuation and ordered that the respondent purchase the minority holding at the value as at the date of the substantive hearing. The Court awarded costs of the appeal to the appellant.
2. Costs below: The court refused to disturb the deputy judge's costs order. The appellate court applied the familiar principle that it will not interfere with an exercise of discretion on costs unless that discretion was exercised on a wrong basis or by reference to an erroneous principle. The fact that the appellate court has reached a different substantive conclusion does not alone justify upsetting the costs decision.
3. Offers and independent valuation: The court considered the relevance of early offers to buy out the minority and the requirement of "equality of arms" identified in the passage from O'Neill v Phillips ([1999] 1 WLR 1092). It accepted that an offer to submit valuation to an independent valuer can be reasonable even where the offeree does not yet possess all material information, provided the proposed procedure ensures that the valuer and the parties will have access to the necessary information and opportunity to make submissions.
4. Application to the facts: The correspondence showed that the respondent made repeated and, in hindsight, generous offers and proposed an independent valuation mechanism. The petitioner repeatedly rejected those offers and in some instances proposed counter-offers that were higher. On the balance of the evidence the deputy judge could reasonably conclude that costs should follow his chosen exercise of discretion.
5. Judicial agreement: The judgment was delivered by Lord Justice Robert Walker. Lord Justice Schiemann agreed with the result and reasons proposed. The court therefore dismissed the challenge to the costs order below.
6. Practical guidance: Appellate courts should be cautious about substituting their own view on costs where the trial judge has exercised a discretion within a permissible range. Early offers using an independent valuation process will not be doomed as unreasonable merely because the offeree lacks complete information at the offer stage.

• Court of Appeal (Civil Division): Allowed the appeal; varied the deputy judge's substantive order on valuation and refused to disturb the costs order below. [2001] EWCA Civ 1133
• High Court (Deputy High Court Judge, Mr K Lewison QC): Made the original order under Companies Act 1985 s.459 and ordered the petitioner to pay half the respondent's costs of the petition (order varied in part by this court).