Square Mile Partnership Ltd. v Fitzmaurice McCall Ltd.

In construing a commercial agreement, “accumulated net worth” naturally means net asset value rather than accumulated or undistributed profits where the contractual context points to a balance-sheet calculation. A clause recording the intended extraction of assets may provide the benchmark for a later adjustment, even if it does not expressly state that function. Informal, hurried calculations made before the contract do not displace the written terms unless they amount to a sufficiently firm and clear agreement. An adjustment mechanism directed to achieving a balance of assets and liabilities does not itself require an unlawful distribution of capital.

The claimant acquired all shares in Robert Bruce Fitzmaurice Ltd. The defendant was the former ultimate holding company. The claimant also acquired, by assignment, a debt owed by the defendant to the company, which the defendant admitted.

The defendant counterclaimed under clauses 6.3 and 14.2 of the share sale agreement. It argued that the audited accounts disclosed net assets which should have been removed before completion and that the agreement required an adjustment to reflect the resulting surplus. The claimant contended that the relevant calculation concerned distributable profits, which had already been distributed.

The central issue was the construction and interaction of the two clauses, particularly the meaning of “accumulated net worth” and whether it supplied the benchmark for the adjustment.

1. Construction. “Accumulated net worth” in clause 14.2 naturally meant net asset value, not accumulated profit. The references to IBA assets, the IBA fund and IBA liabilities, together with the balance-sheet context, supported that construction.
2. Clause 14.2 was intended to have operative effect. Read with clause 6.3, it supplied the benchmark against which the audited accounts were to determine whether an adjustment was due. The agreement contemplated that the company would be left with a balance of assets and liabilities, rather than a deficit.
3. The informal calculation made by Mr Rupal, and accepted by Mr Mackay, was rough, hurried and insufficiently clear to govern the contractual methodology. The written agreement was the more definitive expression of the parties’ intention, despite its defective drafting and its inaccurate description of what had actually occurred.
4. The court was entitled to consider the surrounding circumstances to identify the events to which clause 14.2 referred: The Pacific Colocotronis [1982] 2 Lloyds Rep 40. Those circumstances showed that the clause referred to the dividend and related asset-removal exercise.
5. The construction did not entail illegality. The agreement did not require the parties to effect the extraction by an unlawful dividend. It required an adjustment if the contractual objective had not been achieved. The defendant was therefore entitled to judgment on the counterclaim, although the precise amount and any balance due on the claimant’s admitted debt required agreement or further argument.