Crabtree v NG

In a company share valuation based on maintainable earnings, capital values are ordinarily excluded. A principal repayment liability is therefore not automatically deducted from an earnings-based valuation. An adjustment for financing cost requires evidence that the company was required to service the debt. If a pure earnings valuation would be unrealistic, an asset-based or hybrid valuation should be adopted. An appellate court should be slow to interfere with a trial judge’s valuation of an unusual debt arrangement where the conclusion is supported by expert evidence and was reasonably open to the judge.

Ivan Ng brought an unfair-prejudice petition against Steven Crabtree under section 994 of the Companies Act 2006. An order required Mr Crabtree to buy Mr Ng’s share in the company at its fair value as at 10 March 2005. At the valuation trial, Arnold J adopted an earnings-based valuation and valued the company at approximately £1 million, making only a nominal reduction for the company’s substantial debt to its principal supplier. His decision is reported at [2011] EWHC 1834 (Ch).

Mr Crabtree appealed, arguing that the valuation should have allowed for interest on, and repayment of, the debt. The central issue was whether the supplier debt required a substantial reduction in an earnings-based valuation.

Appeal dismissed. The Master of the Rolls delivered the leading judgment, with Hallett LJ and Stanley Burnton LJ agreeing.

1. The judge was entitled to refuse an adjustment for interest on the supplier debt. There was no express or implied obligation to pay interest, no demand or payment of interest in the company’s history, and the expert evidence supported the judge’s conclusion.
2. The existence of a liability to repay principal was distinct from the cost of servicing that liability. The experts had accepted that an earnings valuation was appropriate for a profitable trading company. On a pure earnings valuation, capital values are not added or subtracted. If that method would be unrealistic, the court should adopt an asset-based or hybrid valuation instead.
3. The judge’s conclusion was supported by six interrelated considerations: the nature of an earnings valuation; the absence of evidence requiring a deduction for repayment of the debt; the debt’s unusual history and lack of security, interest or demand; the commercial relationship and goodwill between the company and its supplier; the absence of factual witnesses; and an asset-based valuation which, despite taking the debt into account, produced a value of £723,209.
4. Those matters justified the conclusion that the company was worth approximately £1 million rather than a substantially lower amount. The valuation was a difficult evaluative exercise on unusual facts, and the judge’s conclusion was one with which an appellate court could not properly interfere.

The unchallenged valuation framework included valuing the share by reference to its value to the co-owner rather than an open-market value, and treating it as one half of the company’s value, following Parkinson v Euro Finance Group Ltd [2001] 1 BCLC 720 and CVC/Opportunity Equity Partners Ltd v Demarco Almeida [2002] UKPC 16; [2002] 2 BCLC 108.

• Court of Appeal (Civil Division): dismissed Mr Crabtree’s appeal against the valuation decision, [2012] EWCA Civ 333.
• High Court of Justice, Chancery Division: Arnold J determined the fair value of the share using an earnings-based valuation and gave judgment on 18 July 2011, [2011] EWHC 1834 (Ch).