Shah v Shah

The petition under section 994 of the Companies Act 2006 was the subject of earlier liability findings. This judgment determines the price to be paid for the petitioner’s 11,334 shares following a finding of unfair prejudice, applying the agreed valuation date of 24 February 2010 and no minority discount. The court conducted an open market valuation of three properties owned by the company or its subsidiary, fixed a market value of £4,000,000 for 38–40 Commercial Road, £1,100,000 for Unit 1, 199 Eade Road (agreed), and £515,000 for 165–167 Commercial Road, and valued the continuing wholesaling business at £102,000. The court held that a deduction for contingent corporation tax should be made but rejected a full deduction: it applied a 20% discount to the contingent tax exposure on 38–40 Commercial Road and 10% for 165–167 Commercial Road. The court reserved the question of interest and costs, directed that the Companies Register be rectified to record the petitioner’s continued directorship, and provided for a charge on 38–40 Commercial Road to secure any potential liability arising from the Shah loan guarantee.

Background and procedural posture. The present hearing followed an earlier judgment that established unfair prejudice under section 994 of the Companies Act 2006 and ordered that the petitioner’s shares be purchased. The parties had agreed the valuation date (24 February 2010) and that no minority discount would apply. The hearing determined the valuation of the company’s assets, treatment of contingent tax liability, purchaser, interest, and ancillary protection for potential liabilities.

Nature of the application. The court was asked to determine the price to be paid for the petitioner’s shares, which required: (i) open market valuations of three properties (38–40 Commercial Road; Unit 1, 199 Eade Road; 165–167 Commercial Road); (ii) the treatment of contingent corporation tax on accrued gains; (iii) whether interest should be payable and from what date; (iv) whether the transfer should be effected by the first respondent personally or by the company; and (v) provision for potential liabilities of the petitioner (possible guarantee under the Shah loan and historic treatment of 175 Commercial Road).

Issues framed.

• The open market value of each property and the company’s trading assets.
• Whether, and to what extent, contingent tax should reduce the asset values used in the share valuation.
• Whether interest should be awarded on the purchase price and on what basis.
• The appropriate purchaser and protection for potential contingent liabilities of the petitioner arising from third-party loans.

Court’s reasoning and conclusions. The court applied established principles that the valuation must be fair on the facts of the particular case and that the court has wide discretion to achieve equity in unfair prejudice buy-outs. The property valuers’ evidence was evaluated on both investment (capitalisation of estimated rental value) and vacant-possession price-per-square-foot bases. For 38–40 Commercial Road the court adopted an overall open market value of £4,000,000 after considering yields, void allowances, the value of roof telecoms rents and a modest adjustment for existing tenancies. Unit 1, 199 Eade Road was agreed at £1,100,000. For 165–167 Commercial Road the court accepted a valuation of £515,000 based on a higher yield to reflect the short residue of the headlease. The wholesaling business was found loss-making with no goodwill and valued at £102,000 by net asset reference.

On contingent tax, the court rejected an automatic deduction of 100% of potential corporation tax. Applying established guidance and the specific corporate facts, it allowed a 20% discount of the maximum contingent tax for 38–40 Commercial Road and 10% for 165–167 Commercial Road, using the corporation tax rate in force at the valuation date (28%). The court declined to adopt speculative future tax rates. Interest and costs were reserved for later determination. The court ordered rectification of the Companies Register to show the petitioner had remained a director and, to secure the petitioner against a possible guarantee liability under the Shah loan, directed that a charge on 38–40 Commercial Road be provided if the parties cannot agree alternative protective arrangements.

Other determinations. No indemnity was to be provided for any director liabilities arising from historic tax claims about 175 Commercial Road; such liabilities would remain a director’s personal responsibility. The court left the parties to agree the practical method of purchase, including whether the company or the first respondent should be the purchaser, and to recalculate the final price accordingly.

At first instance the court determined the constituent elements of the buy-out price and made consequential directions. It fixed an open market valuation for 38–40 Commercial Road at £4,000,000, Unit 1, 199 Eade Road at £1,100,000 (agreed), and 165–167 Commercial Road at £515,000; valued the trading business at £102,000; allowed a discounted deduction for contingent corporation tax (20% for 38–40 Commercial Road, 10% for 165–167 Commercial Road using the 28% rate prevailing on the valuation date); directed rectification of the Companies Register to show the petitioner remained a director; reserved interest and costs; and ordered provision for a charge on 38–40 Commercial Road to secure any potential guarantee liability if the parties cannot agree an alternative. The court reached these conclusions by evaluating the expert valuation evidence, selecting appropriate yields and discounts, and applying equitable discretion to achieve a fair result in the unfair prejudice buy-out.