Krishna Holdco Limited v Gowrie Holdings Limited & Ors

The court conducted a remedial valuation exercise following its Liability Judgment ([2023] EWHC 1538 (Ch)) which required Gowrie Holdings Limited to acquire the Petitioner’s shares in Laxmi BNS Holdings Limited. The valuation date was agreed as 25 June 2019. The key legal principle is that a buy-out valuation under s.994 is a remedial exercise and not a purely technical accounting exercise; the court may evaluate competing expert approaches to achieve a fair outcome, and may allow some use of post-valuation information for sense-checking (following Estera Trust and Financial Technology Ventures II).

The court resolved principal valuation issues by preferring the market-approach evidence of Mr McKeown for the SYRI enterprise value (subject to specified adjustments) and the market/comparables approach of Ms Hart for LBNS, rejected large elements of Dr Frei’s optimistic income-based projections for SYRI, and accepted a number of Ms Hart’s adjustments to LBNS maintainable EBITDA and net debt (including treatment of the Perivale Property). The court declined to make an award of quasi-interest and declined, for now, to extend the buy-out order to other Gowrie respondents (while keeping the point open).

Background and nature of the proceedings: This judgment resolves valuation and remedial issues following the court’s Liability Judgment of June 2023, which found that Krishna Holdco had been unfairly prejudiced and ordered Gowrie Holdings Limited to acquire Krishna’s shares in LBNS. The present hearing determined the fair value of the B Shares as at the Petition date (25 June 2019) and associated accounting adjustments to reflect the rescission of the 2013 Agreement and other wrongful extractions of value.

Relief sought: determination of the purchase price for Krishna’s B Shares (valuation and conversion of enterprise to equity value), adjustment of the Equalisation Amount, net debt calculations, and ancillary relief including claims for quasi-interest and an order extending the buy-out liability to other Gowrie respondents.

Parties and experts: Krishna relied principally on Dr Patrik Frei for SYRI valuation and Ms Kate Hart for LBNS and Equalisation Amount issues. Gowrie relied on Mr Paul McKeown for SYRI and Mr Jim Davies for LBNS. The court found the experts helpful but preferred Mr McKeown on SYRI and Ms Hart on LBNS, with specified qualifications.

Issues framed by the court:

• Enterprise value of SYRI as at 25 June 2019 and appropriate valuation methodology (income v market approaches, public-to-private discount, maintainable EBITDA and multiples).
• Enterprise value of LBNS (excluding and including SYRI), maintainable EBITDA for LBNS, selection of comparables and multiples, and the effects of MHRA licence suspensions and competitors.
• Net debt adjustments, including the treatment of the Perivale Property, contingent liabilities relating to Colorama creditors, and historic third-party loans.
• Calculation and adjustment of the Equalisation Amount in light of payments to Colorama creditors and other ledger items.
• Whether quasi-interest should be awarded and whether a buy-out order should be extended to the other Gowrie respondents.

Court’s reasoning and conclusions (concise):

• The valuation is remedial; the court must exercise judgment taking account of fairness and the facts (Financial Technology Ventures II). Hindsight is generally excluded but post-date information may be considered for cross-checking assumptions (Estera Trust).
• SYRI: the court accepted Mr McKeown's market/comparables approach over Dr Frei’s income-based forecasts because Dr Frei’s pipeline assumptions were insufficiently supported and inconsistent with subsequent outturns. The court directed that SYRI valuation should use Mr McKeown’s maintainable EBITDA with an allowance for senior management cost (using the Blake Morgan figures), apply a FY+1 multiple of 8.04x and a 25% public-to-private discount.
• LBNS: the court accepted Ms Hart’s assessment of maintainable EBITDA (approximately £8.2m) and her approach to comparables and multiples, preferring her reasoned adjustments to the management accounts and statutory accounts. The court endorsed an enterprise value for LBNS in the region of Ms Hart’s figure (c. £67.2m in round terms) but left precise calculation to the parties per the judgment’s detailed directions.
• Net debt: the Perivale Property should be treated as a real property asset credited against net debt (with a notional rent adjustment to EBITDA of £720,000 where appropriate). The court declined to apply a contingent liability discount for potential Colorama creditor claims at this stage but directed notification measures for creditors to enable them to assert claims if they exist. The court rejected adjustments for the Jumbogate/IFG third-party advances as liabilities in the valuation.
• Equalisation Amount and ledger items: the court affirmed that illegitimate diversions should be reversed against the EqAm, accepted a number of Ms Hart’s adjustments (including adding certain credit-note related items), but rejected other proposed adjustments where evidential support was insufficient or matters were not properly litigated in this phase.
• Quasi-interest was refused because Krishna had not demonstrated a compensable loss of net shareholder benefits in the interregnum; an award was unnecessary given the Equalisation Amount regime. The court declined to make a buy-out order against other Gowrie respondents at this stage, keeping the matter open if practical necessity later requires it.

Disposition: the court resolved the principal valuation and accounting issues as described, adopted the specified expert approaches subject to adjustments set out in the judgment, declined quasi-interest and declined to extend the buy-out order at this time; the parties were directed to calculate precise figures in light of the court’s findings and to seek further directions if agreement cannot be reached.

This first-instance valuation judgment determined the remedial valuation and accounting issues following the Liability Judgment. The court accepted in substance Mr McKeown’s market/comparables approach to SYRI (with specified adjustments) and Ms Hart’s approach to LBNS, directed particular adjustments to EBITDA, net debt and the Equalisation Amount, refused an award of quasi-interest, and refused for now to extend the buy-out order to other Gowrie respondents. The court explained its rationale in light of the remedial function of s.994 valuations, expert evidence reliability, and the available documentary record.