Franbar Holdings Ltd v Casualty Plus Ltd

For contractual purposes, accounts are not “adopted” merely because one shareholder or part of a board has approved and filed them. Where the agreement requires adoption by the company, adoption may occur informally if all relevant members agree, or if the claimant has accepted the accounts in circumstances preventing it from denying their effect. Unilateral approval is insufficient.

Accounts disclaimed by the auditors cannot ordinarily qualify as the audited annual accounts on which a contractual option price is based. A defined EBITDA figure must be distinguished from an adjusted EBITDA figure. The court determining a preliminary issue must remain within the issue ordered and should not determine an unpleaded or untried underlying dispute.

The claimant retained 25 per cent of the shares in Medicentres (UK) Ltd after the defendant acquired the remaining 75 per cent. A shareholders’ agreement contained a call option and provided that its price was to be calculated by reference to EBITDA in the company’s most recent audited annual accounts formally adopted before exercise.

The defendant exercised the call option. The parties disputed whether the relevant accounts were those for 2005 or 2006, and whether a figure of £524,830 described in the 2005 chairman’s statement as adjusted EBITDA was the contractual EBITDA. The defendant had excluded the claimant’s representatives from consideration of the 2006 accounts, which were later filed with an auditors’ disclaimer.

1. The 2005 accounts were the relevant accounts. The parties had unanimously approved the 2005 accounts through their nominated directors, despite the absence of a formal resolution. Informal unanimous assent was binding under Re Duomatic Limited [1969] 2 Ch 365, Runciman v Walter Runciman plc [1992] BCLC 1084 and Euro Brokers Holdings Ltd v Monecor (London) Ltd [2003] EWCA Civ 105.
2. The 2006 accounts had not been adopted for the purposes of the agreement. Adoption required formal approval, acceptance by the claimant in circumstances making it bound despite procedural informality, or delegated approval by authorised directors. Unilateral approval by one shareholder and its nominated directors was insufficient. The defendant’s ability to outvote the claimant did not justify excluding it from the decision, applying Harben v Phillips (1883) 23 Ch D 14 and Re Portuguese Consolidated Copper Mines Ltd (1889) 42 Ch D 160.
3. The 2006 accounts also could not properly serve as the relevant audited accounts because the auditors had disclaimed an opinion on whether they gave a true and fair view or complied with statutory requirements. The agreement was predicated on independent audit, and this was materially different from a minor qualification.
4. The second preliminary issue was determined for the defendant on the limited basis that £524,830 was an adjusted EBITDA figure, not the EBITDA defined by the agreement. The court declined to determine the underlying dispute about the adjustment because it had not been ordered or properly tried. The claim was therefore determined on the preliminary issues in the defendant’s favour.

This was a first-instance trial of preliminary issues. The judgment states that Master Price ordered the preliminary issues on 13 July 2009.