Krishna Holdco Limited v Gowrie Holdings Limited & Ors

The court allowed the unfair prejudice petition and ordered that GHL acquire Krishna’s B shares in LBNS, with valuation as at the petition date (25 June 2019). The Part 7 claim for rescission succeeded in respect of the 2013 Agreement: the Judge found a fraudulent misrepresentation by Mr Hathi that £4.5m of funding had been provided by the Hathi family alone and that representation induced the 2013 Agreement. The court rejected the allegations that (i) LBNS’s financial position was misrepresented such that it could have paid down the Equalisation Amount in 2013, and (ii) that the Equalisation Amount methodology was invalid by reason of the debt purchase programme; the Judge concluded creditor payments made under the debt-purchase programme were properly treated as additions to the Original Equalisation Amount because Krishna (through Arun) effectively requested that outcome.

The court held rescission of the 2013 Agreement appropriate, subject to practical issues of restitutio in integrum being workable. Consequential findings for valuation included (a) the £1.2m "Gowrie accruals" figure in the 2013 Agreement falls away except for a smaller admitted figure (~£100k), (b) the SYRI clinicals business should be treated for valuation purposes as part of LBNS (i.e. its benefits are available to the joint venture), and (c) a number of extractions and related-party payments (excess Hathi remuneration, waived SYRI loan, trademark royalty transfers, Leyland payment and certain professional fees) should be reflected as adjustments in the valuation. The Trade Debt claim (Keycircle v GLL) succeeded; the Loan Claim raised issues to be resolved (the Judge found Arun, not Keycircle, to be the creditor and LBNS the debtor with interest at 5.5% but left repayment timing and detailed relief for further directions).

Background and procedural posture

The proceedings arose from a 2010 merger of two pharmaceutical businesses which formed LBNS, with Krishna (via its founders Arun and Mahesh) acquiring beneficially 50% of LBNS (B shares) and GHL acquiring the other 50% (A shares). A complex suite of 2010 Transaction Documents governed payment of Cash Consideration and Deferred Consideration and created an "Equalisation Amount" to compensate GHL for its contribution. Following Colorama's insolvency and a subsequent debt-purchase programme by LBNS, a series of later agreements (2013 Agreement and 2016 Agreement) altered the parties' inter se arrangements. Krishna brought an unfair prejudice petition and a Part 7 claim seeking rescission of the 2013 and 2016 Agreements for fraudulent misrepresentation; parallel Trade Debt and Loan claims between group entities (the Keycircle Proceedings) were also contested.

Relief sought and issues for decision

• Primary relief: unfair prejudice petition (buy-out of Krishna’s shareholding) and declaratory/rescission relief under the Part 7 Claim.
• Central issues: (i) whether the 2013 Agreement was procured by fraudulent misrepresentation (alleged misrepresentations: source of £4.5m funding, LBNS’s inability to make Equalisation payments, and accuracy of the Equalisation Amount figure); (ii) whether the 2013 Agreement should be rescinded and if so what the consequences are for the Equalisation Amount, the SYRI clinicals business, the Perivale property lease, and other extractions; (iii) valuation methodology and adjustments for unfair extractions; and (iv) outstanding issues in the Keycircle Proceedings (trade debt and loan repayment/characterisation).

Court’s reasoning and findings

1. The Judge found that the single fraudulent misrepresentation made out was that the Hathi family alone had lent £4.5m to LBNS (this was untrue; significant funding had been provided by third parties such as Jumbogate and Ironcorp). That misrepresentation induced entry into the 2013 Agreement and justified rescission of that agreement.
2. The Judge rejected the pleaded misrepresentations that (a) LBNS’s financial position was misrepresented in 2013 such that it could have paid down the Equalisation Amount at that time, and (b) that the inclusion in the Equalisation Amount of sums reflecting payments to Colorama creditors under the debt-purchase programme was improper because no request had been made. On the contrary, the Judge held Arun (and thus Krishna) had effectively requested and participated in the steps that produced the debt-purchase programme; accordingly those amounts could be added to the Original Equalisation Amount.
3. The 2016 Agreement had been conceded by GHL for rescission; the 2013 Agreement was now also rescinded for fraudulent misrepresentation. The court refused to bar rescission on public policy/illegality grounds, applying the relevant policy balancing and proportionality considerations.
4. Consequential and valuation findings: the £1.2m "Gowrie accruals" addition in the 2013 Agreement falls away except for a modest (~£100k) item; the SYRI clinicals enterprise should be treated as belonging to LBNS for valuation purposes; various extractions (excess Hathi remuneration, waived SYRI loan, trademark royalty transfers, Leyland payment, certain professional fees) must be reflected as deductions or adjustments in valuing Krishna’s holding.
5. Keycircle proceedings: the Trade Debt claim succeeded; on the Loan Claim the Judge found Arun (not Keycircle) to be the creditor and LBNS to be the debtor, interest at 5.5% accrues, but whether repayment is presently due and other detailed relief were left for further directions.

Remedy and next steps

The court ordered that GHL is to acquire Krishna’s shares in LBNS (buy‑out) with the valuation date fixed at the petition date (25 June 2019). The parties were directed to address detailed valuation methodology and quantification of the several adjustments identified; the Judge indicated interested third parties (e.g. former Colorama creditors, auditors, and bankers) should be invited to consider the judgment and that further directions would follow on remaining issues.

The Petition under unfair prejudice is allowed. The court rescinded the 2013 Agreement for fraudulent misrepresentation (the false representation that £4.5m of funding came solely from the Hathi family) and ordered that GHL acquire Krishna's B shares in LBNS; the valuation date is the date of the Petition (25 June 2019). The Judge rejected misrepresentation claims about LBNS’s general financial position and about the Equalisation calculation method, held that payments under the debt‑purchase programme were properly treated as additions to the Equalisation Amount (requested/assented to by Krishna/Arun), and directed that a number of extractions and related‑party items be reflected as adjustments in the valuation. The Trade Debt claim succeeded; issues arising from the Loan Claim require further directions (Judge found Arun to be the creditor and LBNS the debtor with interest at 5.5%).