Re Sunrise Radio

The Court of Appeal considered an appeal against aspects of a valuation award made under a Companies Act section 994 unfair prejudice remedy requiring majority shareholders to buy out a minority shareholder. The appeal challenged the trial judge's approach to valuation, specifically (i) his deduction of only the Allied Irish Bank (AIB) loan from the aggregate valuation and not other external group liabilities, (ii) his exclusion of bank interest from maintainable earnings, (iii) his treatment of management service charges received by the holding company, and (iv) his reduction of consultancy fees payable by a profitable subsidiary. The court held that the judge was entitled to exclude bank interest from the earnings calculation to avoid double counting when separately deducting a historic bank liability, and that his factual findings about management charges and consultancy fees were open to him on the evidence. However, the court found the judge's reasoning for confining deduction of external liabilities to the bank debt alone was flawed and should be adjusted to deduct two specific external debts identified in the liability judgment.

Background and procedural posture: This is an appeal from four judgments of HH Judge Purle QC arising from a Companies Act section 994 petition in which the judge found unfair prejudice and ordered a buy-out of the petitioner Ms Kohli's minority shareholding in Sunrise Radio Ltd. The liability judgment is reported at [2009] EWHC 2893 (Ch) and there were three subsequent quantum hearings and judgments ([2011] EWHC 3821 (Ch), [2012] EWHC 1337 (Ch) and [2012] EWHC 1338 (Ch)) determining price. Permission to appeal was granted by Lewison LJ on 11 October 2012.

Parties and relief sought: The petitioner, Ms Geeta Kohli, sought a buy-out of her shareholding under a s.994 unfair prejudice petition. The respondents were the majority holders (principally Dr Avtar Lit and associated entities) who appealed limited elements of the price determined by the judge.

Issues framed by the court on appeal:

• whether the trial judge should have deducted more external/group liabilities (notably debts found in the liability judgment) rather than only the AIB bank debt;
• whether bank interest should have been left as an expenditure deduction when calculating maintainable earnings;
• whether management service charges paid to Sunrise by subsidiaries should have been excluded from Sunrise's income without a corresponding cost saving adjustment;
• whether the judge was inconsistent or wrong to reduce consultancy fees charged to Club Concorde but not to Sunrise.

Expert evidence and valuation approach: Experts agreed an earnings‑multiple approach was appropriate for the trading businesses; there was disagreement about treatment of subsidiaries and the extent to which assets or net liabilities should be brought into a group valuation. The trial judge adopted a hybrid approach: value profitable trading activities by earnings/multiplier, add property value, ignore loss‑making subsidiaries, and deduct the bank facility to reach a holding company value.

Court’s reasoning and decision on issues: The Court of Appeal accepted the judge’s finding that a purchaser would pay off the AIB bank debt on completion and that it was permissible to avoid double counting by excluding bank interest from maintainable earnings and deducting the bank liability instead. The court also found the judge was entitled, on the evidence, to conclude that management charges would be offset by corresponding cost savings and that his differing treatment of consultancy fees for Club Concorde and Sunrise was supportable by differing evidence. However, the court held the judge’s explanation for treating only the bank debt as deductible (and ignoring other external debts) was logically flawed. The appellate court therefore concluded that, given the evidential record and the trial judge’s own earlier findings, two specific external debts identified in the liability judgment (a debt to Global Radio Services Ltd and a debt from Club Concorde to Asian Broadcasting Corporation Ltd) should be treated as deductible for valuation purposes. The court adjusted the position accordingly and directed the parties to agree the consequential calculation.

Wider context: The judgment illustrates the interplay between earnings/multiplier valuation methods and balance sheet adjustments for non-trading (historic or surplus) liabilities in shareholder buy-outs under s.994, and the need for evidence directed to particular liabilities where deductions are sought.

Appeal allowed in part. The Court of Appeal upheld the trial judge's approach to excluding bank interest from maintainable earnings (to avoid double counting when the bank liability is separately deducted) and upheld his factual findings on management charges and consultancy fees. However, the court found the judge's reasoning for limiting deduction of external liabilities to the AIB debt alone was flawed and ordered that two specific external debts identified in the liability judgment be deducted from the valuation, leaving the other valuation findings intact; the parties were to agree the consequential calculation.

Appeal from HH Judge Purle QC (liability judgment and three quantum judgments) reported as [2009] EWHC 2893 (Ch), [2011] EWHC 3821 (Ch), [2012] EWHC 1337 (Ch) and [2012] EWHC 1338 (Ch). Permission to appeal granted by Lewison LJ on 11 October 2012. This Court delivered judgment on 17 June 2013 ([2013] EWCA Civ 667).