Kohli v Lit & Ors

In a share buy-out valuation under an unfair-prejudice remedy, an earnings/multiplier method does not automatically exclude every liability. A purchaser may require a deduction for significant historic liabilities that are surplus to normal trading activities and which the purchaser would expect to repay. Liabilities attributable solely to loss-making subsidiaries which can be discarded ordinarily do not create a negative value, subject to liabilities that remain binding on the valued group. In a hybrid valuation which deducts principal debt from the price, related interest must be removed from maintainable earnings; retaining both would double count. Treatment of management charges and consultancy fees is evidence-sensitive. The appeal therefore succeeded only because the judge had failed to consider other qualifying debts.

The petitioner held a minority shareholding in Sunrise Radio Ltd and brought a Companies Act section 994 petition. HH Judge Purle QC found unfair prejudice and ordered the majority shareholders to buy her interest in the liability judgment, [2009] EWHC 2893 (Ch).

After three quantum hearings, reflected in [2011] EWHC 3821 (Ch), [2012] EWHC 1337 (Ch) and [2012] EWHC 1338 (Ch), the price was fixed at £560,000. The appeal challenged four valuation adjustments: external liabilities, bank loan interest, management charges received from subsidiaries, and consultancy fees payable by Club Concorde Ltd. The finding of unfair prejudice and most of the valuation method were not challenged. The central issue was whether the adjustments were consistent with the evidence and the adopted earnings/multiplier approach.

1. Disposition. The appeal succeeded on the treatment of external liabilities and failed on the remaining three grounds. The sum payable to the petitioner was to be adjusted, with the parties to agree the resulting calculation.
2. External liabilities. The judge was entitled to use a hybrid valuation which deducted the bank liability because a purchaser would expect to repay it. However, the reasoning that repayment of the bank debt eliminated any basis for considering other liabilities was flawed. A significant historic liability which was surplus to ordinary trading activities, and which a purchaser would expect to repay, could also be deducted from an earnings/multiplier valuation. It was unfair to rely on the respondents’ failure to provide evidence on an issue which had emerged only in final submissions. The two specifically identified debts, including the £527,643 debt owed to Global Radio Services Ltd and the £270,000 debt owed by Club Concorde Ltd to Asian Broadcasting Corporation Ltd, fell within that category and were to be taken into account.
3. Where loss-making subsidiaries could be discarded on the hypothetical sale, their liabilities ordinarily did not create a negative value for the purchaser. That did not exclude liabilities which remained binding on the valued group, including bank liabilities supported by guarantees.
4. Bank interest. In the hybrid valuation, deducting the principal bank liability while leaving the related interest in maintainable earnings would give the purchaser a double benefit. The liability had to be reflected either through reduced earnings or through a deduction of the principal debt, but not both. The judge was therefore entitled to remove the historic bank interest from the earnings calculation. The suggested need for a different multiplier was unsupported by the evidence.
5. Management and consultancy charges. The judge’s conclusion that removing subsidiary management charges would produce corresponding cost savings was a factual finding open to him on the evidence. Different treatment of consultancy fees for Sunrise Radio and Club Concorde was also permissible because the evidence showed different continuing management requirements.

• Court of Appeal (Civil Division) — [2013] EWCA Civ 667. Allowed the appeal on external liabilities and directed adjustment of the sum payable; dismissed the other grounds.
• High Court — HH Judge Purle QC found unfair prejudice and ordered a buy-out in [2009] EWHC 2893 (Ch). Following three quantum hearings in [2011] EWHC 3821 (Ch), [2012] EWHC 1337 (Ch) and [2012] EWHC 1338 (Ch), he fixed the price at £560,000.