Potamianos v Prescott & Anor (Unfair Prejudice Quantum Judgment)

This judgment resolves a number of quantum issues following earlier liability findings and an appeal. The court applied the statutory unfair prejudice framework (Companies Act 2006 ss.994 and 996) and the established principle that the court must do what is fair, just and equitable when ordering a buy‑out. The judge (Spearman QC) determined the amount of the balancing payment due to the petitioner, awarded "quasi‑interest" on that balancing payment at a commercial rate, fixed key valuation inputs for the buy‑out (including net value of Peregrine House, the treatment of surplus cash, CEO and replacement‑staff cost assumptions, and treatment of marketing costs), and refused to make any present deduction for alleged defects in the source code or other "significant issues", deferring valuation of the Source Code claim and related trial costs to be dealt with later.

Key outcomes were: a balancing payment of £359,314.67 (to BDL) with interest at 3% above base rate from the Valuation Date, acceptance of a £1,133,278.00 net value for Peregrine House, adoption of a maintainable EBITDA/multiple valuation methodology for SEL (multiple 4.5), a finding that replacement staff costs to be included are £100,000 pa for a CEO and £37,000 + £45,000 pa for engineers, rejection of adding back a £50,000 salesperson cost, acceptance of £450,000 surplus cash for SEL, and a decision to defer the valuation effect of the Source Code damages claim and consequential costs and any quasi‑interest on the share price until further proceedings.

Background and parties: The hearing was the quantification stage after earlier liability findings in related proceedings between Sprint Electric Limited (SEL), Sprintroom Limited (SRL), the petitioner Dr Aristides (Aris) Potamianos (40% shareholder of SRL) and Mr Edwin Prescott (60% shareholder). The litigation comprised a source‑code claim by SEL and an unfair‑prejudice petition by Dr Potamianos under Companies Act 2006 s.994. The court had earlier determined liability and made interim orders including a direction that Dr Potamianos’ shares be bought out; the Court of Appeal recast issues and confirmed aspects of relief (Prescott v Potamianos [2019] EWCA Civ 932).

Nature of the present application: This was a first‑instance quantum hearing to determine: (i) the amount of the balancing payment ordered to reflect historic profit extraction in the agreed 60:40 split; (ii) the price to be paid for Dr Potamianos’ 40% holding in SRL (valuation of SRL and its principal asset SEL, and of Peregrine House); and (iii) whether interest or "quasi‑interest" should be awarded on the balancing payment and/or on the buy‑out price, and at what rate and for what period.

Issues framed:

1. Calculation period and precise items to be included in the Balancing Payment;
2. Whether and at what rate quasi‑interest should be awarded on the Balancing Payment;
3. Approach to valuation of SRL: valuation date (Valuation Date 28 September 2018), methodology (enterprise value via multiple of adjusted EBITDA), treatment of surplus cash, replacement staff costs (CEO, engineers), sales resource (Z), marketing adjustments, treatment of the Source Code claim and trial costs;
4. Whether the asserted defects and other "significant issues" should reduce the share price now or be left to separate proceedings.

Court’s reasoning and findings (concise):

• Balancing payment: the judge adopted a pragmatic approach to restoring the parties to the historic 60:40 distribution, accepted the parties’ agreed Valuation Date (28 September 2018) and resolved a narrow invoice timing dispute in favour of the respondent’s submissions, producing a balancing payment calculation of £359,314.67. The judge considered matching of invoices and the factual matrix and accepted inclusion of one disputed invoice in the calculation.
• Quasi‑interest on the balancing payment: after considering authorities and submissions on appropriate compensation for being kept out of money, the judge awarded quasi‑interest on the balancing payment at 3% (above base rate) from the Valuation Date simpliciter, exercising a broad‑brush commercial assessment and preferring the approach in Re Annacott and related guidance.
• Valuation methodology and inputs: the court confirmed valuation of SRL by reference to enterprise value for SEL using a 4.5 earnings multiple on a weighted (1:2:3) three‑year adjusted EBITDA (2016–2018) and added other SRL assets (Peregrine House). Peregrine House was accepted at £1.6m gross with agreed deductions (mortgage and agreed CGT allowance) giving a net figure of approximately £1,133,278. The court fixed practical inputs: CEO cost taken at c.£100,000 pa (no fine tuning), replacement‑staff cost to reflect one replacement software engineer at £37,000 pa plus one hardware engineer at £45,000 pa, rejected adding back £50,000 pa for sales resource Z, accepted agreed surplus cash at £450,000, and accepted the experts’ agreed marketing adjustment approach.
• Source code / other alleged defects: the court declined to make a present downward adjustment to the buy‑out price to reflect SEL’s asserted remedial costs or other "significant issues" raised by Mr Prescott. The judge emphasised the absence of cogent expert technical evidence and the risk of double recovery; he preferred to leave valuation of the Source Code claim and related costs to further proceedings so that the rights to bring claims and any recoveries are preserved and can be properly quantified.
• Quasi‑interest on the share price: the court deferred any decision, concluding it was better determined after consequential issues and costs following the Source Code quantum outcome are known.

Wider context: The judgment reflects the court’s broad discretionary power under s.996 to order relief that is fair and equitable, its willingness to take a pragmatic/commercial approach to valuation inputs, and caution about adjusting a buy‑out price on technical points in the absence of focused expert evidence. The court stressed restoration of the parties to the 60:40 distribution and the availability of separate claims to test asserted technical defects.

This first instance quantification hearing determined consequential issues after the Liability Judgment. The court ordered a balancing payment to BDL of £359,314.67 and awarded quasi‑interest on that balancing payment at 3% above base rate from the Valuation Date. The court fixed principal valuation inputs for SRL/SEL (methodology: adjusted EBITDA with a 4.5 multiple; Peregrine House net value ≈ £1,133,278; surplus cash £450,000; CEO cost ~£100,000 pa; replacement engineer costs £37,000 + £45,000 pa; no add‑back of £50,000 for salesperson Z; marketing adjustments treated on experts’ broad‑brush approach). The court declined to reduce the buy‑out price now to reflect asserted source‑code defects or other "significant issues", deferring valuation of the Source Code claim and consequential costs and any quasi‑interest on the share price for determination after those matters are resolved. The judge gave detailed reasons based on fairness, evidential sufficiency and commercial realism.

The judgment follows an earlier Liability Judgment (Sprint Electric Ltd v Buyer’s Dream Ltd & Anor [2018] EWHC 1924 (Ch); see also Sprint Electric Ltd v Buyer’s Dream Ltd & Anor [2020] EWHC 2004 (Ch) on source‑code quantum). Both parties appealed aspects of the Liability Judgment. The Court of Appeal (Prescott v Potamianos & Anor [2019] EWCA Civ 932) allowed part of Dr Potamianos’ appeal (concerning assessment of offers) but otherwise dismissed both appeals and recast the quantum issues to exclude consideration of the earlier offers. The present hearing implements and refines the consequential orders remitted to the trial judge.