Re Annacott Holdings Ltd

The Court of Appeal considered valuation directions given by HHJ Hodge QC after a successful petition under section 994 of the Companies Act 2006 ordering the appellant, Mr Maidment, to purchase the respondent's shares. Key legal principles were that the court must fix a fair value for shares by taking account of the real commercial facts and events (including post-valuation-date events that shed light on contingent liabilities), and that a going concern valuation may be appropriate even where, in the judge's view, the defendant should have put the company into liquidation.

The court rejected submissions that the valuation should be conducted on a break-up basis, accepting that a break-up valuation would give the purchaser (Mr Maidment) a windfall because he had already acquired the assets at an undervalue. The judge was entitled to value the contingent corporation tax liability by reference to the tax actually paid and to disallow a portfolio-sale discount because the properties could realistically be sold over time. The Court of Appeal allowed the appeal only in part by requiring an allowance for selling costs to be applied to the actual sale proceeds, but otherwise dismissed the appeal. The judge's award of "quasi-interest" (2% above base rate to 31 October 2008 and 3% thereafter) was upheld as a judicially reasonable exercise of discretion.

Background and parties:

• The appellant, Mr Maidment, had been ordered by HHJ Hodge QC to purchase shares in Annacott Holdings Ltd following a successful unfair prejudice petition by Mr Attwood under section 994 of the Companies Act 2006. The petition succeeded principally because Mr Maidment, as sole director, had caused the company to transfer its portfolio of properties to himself at an undervalue.
• The judge had fixed the valuation date as 1 October 2005, disallowed any discount for the 50% shareholding, and ordered an award of "quasi-interest" to compensate the petitioner for the time value of money. The present appeal challenged particular valuation directions in judgments of 23 May 2012 and 16 July 2012.

Nature of the application:

• An appeal against valuation directions: whether the shares should be valued on a going concern basis or a break-up basis; how to value contingent corporation tax; whether to apply a discount for sale as a single portfolio; whether to deduct selling costs; and whether the rate of quasi-interest was excessive.

Issues framed and court’s reasoning:

• Going-concern v break-up: The court held there was no inconsistency between the judge's prior view that liquidation should have been pursued and the choice of a going-concern valuation. A break-up valuation would have given the purchaser a windfall because Mr Maidment had already obtained the assets at an undervalue. The court relied on authorities that the appropriate basis depends on the circumstances and that fairness may require a going-concern valuation.
• Corporation tax allowance: The court found the judge was entitled to use the aggregate amount of tax actually paid (discounted slightly for time value) rather than a notional tax computed by applying a statutory rate to notional gains. The court relied on the principle that events after the valuation date which illuminate contingent liabilities may be taken into account.
• Portfolio-sale discount: The judge could properly refuse a discount for sale as a single lot because it was realistic to assume the properties could be sold singly or over time and some remained unsold years later.
• Selling costs: The Court of Appeal allowed the appeal on this point and held there should be an allowance for selling costs. The appropriate method was to apply the agreed rate (1.5%) to the actual sale proceeds to avoid giving Mr Maidment a windfall arising from the company having disposed of the properties at an undervalue.
• Quasi-interest: The judge's award of interest on a lending/investment basis (2% above Bank base rate to 31 October 2008 and 3% thereafter) was upheld. The court held the judge had a judicial discretion to award such interest, had acted cautiously and permissibly relied on established practice under section 35A of the Senior Courts Act 1981 as a benchmark.

Disposition:

• The Court of Appeal dismissed the appeal except insofar as it required allowance for selling costs to be applied to the actual sale proceeds; all other challenged valuation directions were upheld.

Appeal allowed in part. The Court of Appeal upheld the judge's directions that the shares be valued on a going concern basis, that corporation tax be assessed by reference to the tax actually paid (discounted for time value), that no portfolio-sale discount was required, and that the award of quasi-interest at the rates directed was proper. The court allowed the appeal only to require an allowance for selling costs to be applied to the actual sale proceeds (1.5% as found by the judge), to avoid conferring a windfall on the purchaser.

Appeal to the Court of Appeal (Civil Division) from the High Court of Justice (Chancery Division, Companies Court), judgments of His Honour Judge Hodge QC (May and July 2012) and earlier judgment [2011] EWHC 2186 (Ch). The Court of Appeal delivered judgment on 26 February 2013 ([2013] EWCA Civ 119).