Crabtree v Ng

The Court of Appeal dismissed an appeal from a valuation ordered under section 994 of the Companies Act 2006 following an unfair prejudice petition. The judge below adopted an earnings-based valuation, applying a P/E multiplier of 7 to sustainable annual earnings of 143,600 to value the company at 1,005,200, rounded to 1,000,000, and valued the respondent's one share at one half of the company value. The appellant challenged two aspects: (i) failure to reduce earnings to reflect an interest liability on a substantial trade debt owed to the company's principal supplier (the "ZLF debt"); and (ii) failure to reduce the valuation to reflect the capital liability represented by that debt. The Court held the judge was entitled to reject an interest charge because there was no express or apparent implied obligation to pay interest, the creditor had not historically demanded interest or security and expert evidence supported that approach. The Court also held the judge could properly adopt an earnings basis (rather than an asset or hybrid basis) on the facts and was entitled not to make a substantial capital deduction for the ZLF debt given the unusual nature of the liability and the expert evidence, so the appeal was dismissed.

This appeal arose from an order of Peter Smith J (6 May 2010) that the appellant, Mr Crabtree, buy the respondent Mr Ng's one share in National Duvet & Pillow Company Ltd at a price to be determined by the court as the share's fair value as at 10 March 2005. The valuation trial before Arnold J (judgment 18 July 2011, [2011] EWHC 1834 (Ch)) was conducted on the basis that witnesses of fact were not called and the parties were restricted to the experts whose reports had been served.

Nature of the claim/application: An unfair prejudice petition under section 994 Companies Act 2006 led to a court-ordered buy-out and a subsequent valuation hearing to determine fair value as at 10 March 2005.

Issues framed by the court:

• Appropriate valuation basis for a one-share interest between co-owners (value to co-owner not open market value).
• Whether the share should be valued as one half of company value.
• Whether an earnings-based valuation (P/E multiplier applied to maintainable earnings) was appropriate.
• Whether maintainable earnings should be reduced to reflect interest on the ZLF trade debt and/or whether the capital value of the ZLF debt should substantially reduce the valuation.

Court's reasoning and subsidiary findings: The judge accepted expert evidence that an earnings basis was appropriate for a small profitable trading company and fixed sustainable annual earnings at 143,600 with an appropriate P/E multiplier of 7. The judge held the share should be valued as one half of the company's value. On the ZLF debt, the judge found no express or implied duty to pay interest, noted the supplier had historically provided free credit without demand for interest or security, and accepted expert evidence that no interest charge should be imputed. On whether the capital liability should reduce the valuation, the judge considered the unusual nature of the debt, the reciprocal commercial relationship with the supplier, the practical difficulties posed by lack of factual witnesses, and an asset-based valuation provided by an expert (which produced a figure substantially below the earnings valuation), and concluded only a token rounding down to 1,000,000 was appropriate. The Court of Appeal concluded the judge's approach was open to him and declined to interfere.

Procedural posture: The valuation was determined by Arnold J in the Chancery Division ([2011] EWHC 1834 (Ch)). There had been an order by Lewison J (4 May 2011) restricting the calling of factual witnesses, which this Court upheld on 9 June 2011. The appeal was heard by the Court of Appeal and dismissed on 21 March 2012 ([2012] EWCA Civ 333).

Appeal dismissed. The Court of Appeal held the judge was entitled to adopt an earnings-based valuation (P/E multiplier of 7 on sustainable earnings of 143,600, rounded to a company value of 1,000,000 and a one-share value equal to one half of that). The judge was entitled to reject imputing an interest charge on the ZLF debt because there was no express or apparent implied obligation to pay interest, no history of demand or payment, and persuasive expert evidence supported that approach. The judge was also entitled, on the unusual facts and expert evidence, not to make a substantial capital deduction for repayment of the ZLF debt; his resolution was one which an appellate court should not disturb.

Order by Peter Smith J (6 May 2010) that appellant buy respondent's share; valuation trial before Arnold J, judgment 18 July 2011, [2011] EWHC 1834 (Ch); Lewison J made an order on 4 May 2011 restricting factual witnesses (upheld on appeal to this Court on 9 June 2011); appeal to the Court of Appeal determined by this judgment [2012] EWCA Civ 333.