Beaver v Cohen & Ors

In an account concerning the transfer of professional practice assets, goodwill is attributable to clients who actually transfer their business by incurring liability to pay fees to the receiving parties after the transfer. Subsequent events may therefore be relevant to identifying transferring clients. A sensible cut-off date may be imposed to prevent liability arising from transfers occurring long after the original transaction.

Work in progress is acquired only for clients for whom the receiving parties complete the work sufficiently to invoice. In valuing it, the original valuation basis may provide the starting point, but the parties’ altered legal relationship must be respected. Deductions should reflect the owner’s time and the profit element, but not the consultants’ time where they were no longer principals and were paid without exposure to business liabilities.

Mr Beaver appealed an order made by Deputy Master Jefferis on 2 November 2004 concerning the basis for taking an account of goodwill and work in progress transferred to Mr Cohen and Mr Cooper when they ceased working for Mr Beaver and joined Davis Bonley.

The Deputy Master directed that goodwill be valued by reference to recurring fees from former clients who transferred to the respondents, subject to specified exclusions. Work in progress was to be valued at cost by deductions for the parties’ time, bad debts and profit. Permission to appeal was limited to the treatment of post-transfer events, the meaning of transferred clients, and the deductions for time and profit.

The appeal was allowed in part.

1. Goodwill. The issues concerning post-transfer events and the identity of transferring clients were aspects of the same question. The appropriate criterion was whether a former client incurred a liability to pay fees to any respondent after 29 August 1997. A client satisfying that criterion had taken its business to the respondents and goodwill was payable in respect of it. The court proposed 29 August 1998 as a cut-off date after which later instructions should be disregarded.
2. Work in progress. Post-transfer events were relevant. Work in progress was acquired for clients for whom the respondents completed the work to the point at which they could invoice for it. This approach made separate exclusions for later death or winding-up unnecessary.
3. The proposed pro rata approach based on sums actually received was outside the permission to appeal. The starting point of deducting 30 per cent for potentially irrecoverable fees was likewise not challenged. The court declined to treat the remaining 70 per cent as automatically payable because there was no evidence that this represented market value.
4. In the absence of other evidence, the 1991 valuation basis was a proper starting point for unscrambling the later business arrangement. The 60 per cent profit deduction had to remain, as did a deduction for Mr Beaver’s time. However, deducting Mr Cohen’s and Mr Cooper’s time was wrong in principle because, after 1991, they were paid consultants rather than principals and were not exposed to the business’s liabilities.
5. The work-in-progress order therefore stood except that the references to Mr Cohen and Mr Cooper in the deduction for time were deleted. Counsel were to be heard on the precise form of the consequential order.

1. High Court (Chancery Division): Appeal from Deputy Master Jefferis’s order of 2 November 2004. The appeal was allowed in part.