Condliffe & Anor v Sheingold

The Court of Appeal held that the respondent, a former director, was liable to account for the goodwill of a restaurant business run through the company Baja Ltd because the company, not the director personally, carried on the business and any goodwill belonged to the company. The court treated ownership of goodwill as a question of fact and emphasised the director's fiduciary duty not to appropriate corporate assets, citing the Insolvency Act 1986 in relation to the cessation of directors' powers on liquidation.

The judge at first instance had found the lease and goodwill belonged beneficially to the respondent; the Court of Appeal concluded those findings were inconsistent with other findings that the company carried on the business and with the accounting records. The unanimous shareholder consent argument relied on by the respondent was rejected because it was not supported by findings of agreement among shareholders.

The court ordered the respondent to account for £71,837 (the sum attributed to goodwill in the post-liquidation sale agreement) plus interest, holding that once liability to account was established the purchaser price apportioned to goodwill was an appropriate measure subject to any proper deductions on account inquiry.

Background and parties:

• The Key Street Bar and Brasserie in Truro had previously been run by Poole through Poole Catering Services Ltd (PCS). After PCS became insolvent, Baja Ltd was formed by Mr Poole and the respondent, Ms Sheingold, who were equal shareholders and directors. Baja carried on the restaurant business.
• Mr Poole became bankrupt and left; shareholder changes followed and Baja went into creditors' voluntary liquidation. The respondent carried on the business post-liquidation and, by agreement dated 17 December 2001, sold the business to a purchaser, attributing £71,837 of the £90,000 consideration to goodwill.

Nature of the claim and procedural posture:

• The appellants are assignees of claims which Baja could have advanced. They claimed that the respondent had misappropriated company property by treating the lease, business and its goodwill as her own and were seeking an account for the goodwill. At first instance HHJ Griggs dismissed the claim, finding the lease and goodwill belonged beneficially to the respondent. The appellants appealed to the Court of Appeal.

Issues framed by the court:

• Whether the goodwill of the restaurant belonged to Baja or to the respondent personally.
• If the respondent was liable to account, the proper amount for which she should account (including whether the purchaser price allocation to goodwill should be adopted or whether an inquiry was required).
• Whether unanimous shareholder consent could be inferred so as to vest goodwill in the individual shareholders and whether any failure by a shareholder to object at the time was fatal to the claim.
• Whether the sale of fixtures and fittings by the liquidators to the respondent was at an undervalue.

Court’s reasoning and conclusions:

• The Court of Appeal concluded that the judge’s findings that the respondent beneficially owned the lease and goodwill were inconsistent with other findings that Baja had carried on the business and with the presentation of Baja’s accounts. The court held that goodwill is tied to the business and, on the facts as found, belonged to Baja. The respondent owed fiduciary duties as a director and misappropriated company goodwill.
• The unanimous shareholder consent argument failed because there was no finding of an agreement to vest goodwill in the individual shareholders; it could not be inferred from the evidence.
• On valuation, the court held that once liability to account was established the respondent bore the onus of raising proper deductions; the sale price allocation to goodwill in the agreement with the purchaser was an appropriate measure and the court ordered the respondent to account for £71,837 plus interest. The court rejected the appellants’ allegation of undervalue as to fixtures and fittings because there was no supporting evidence.

Remarks on remedy and procedure:

• The court observed that if an inquiry into value were necessary it should have been raised below; having not been raised, the appellants could rely on the purchaser price allocation and the appropriate remedy was an account rather than an ex post valuation at a different date.

Appeal allowed in part. The Court of Appeal concluded that the judge at first instance erred in holding that the lease and goodwill belonged beneficially to the respondent; on the judge’s factual findings the goodwill belonged to Baja and the respondent, as a director, was liable to account for misappropriation of that corporate asset. The court ordered the respondent to pay £71,837 attributable to goodwill plus interest, rejecting the unanimous shareholder consent argument and finding no evidence of undervalue of fixtures and fittings.

Appeal from Truro County Court (HH Judge Griggs), judgment at first instance dated 21 December 2006; allowed in part by the Court of Appeal, judgment [2007] EWCA Civ 1043 (31 October 2007).