Chilukuri and Another v RP Explorer Master Fund
| Jurisdiction | England & Wales |
| Judge | Lord Justice Briggs,Lord Justice Lewison,Lord Justice Rimer |
| Judgment Date | 29 October 2013 |
| Neutral Citation | [2013] EWCA Civ 1307 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2013/0429 |
| Date | 29 October 2013 |
[2013] EWCA Civ 1307
Lord Justice Rimer
Lord Justice Lewison
and
Lord Justice Briggs
Case No: A3/2013/0429
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
Mr L BLOHM QC
HC10C02701
Royal Courts of Justice
Strand, London, WC2A 2LL
David Cavender QC (instructed by FASKEN MARTINEAU LLP) for the Appellant
Jeffrey Gruder QC and Anna Dilnot (instructed by FARRER & CO LLP) for the Respondent
This is an appeal from the order of Mr Leslie Blohm QC sitting as a deputy judge of the Chancery Division made on 30 th January 2013, whereby he ordered the first defendant Ravi Chilukuri to pay US$5,894,858.80 to the claimant by way of damages for breach of contract. The appeal relates purely to the judge's findings on quantum. It is an entirely factual appeal. I therefore bear in mind the principles as to the correct approach of an appellate court to findings of fact set out by Clarke LJ in Assicurazioni Generali SpA v Arab Insurance Group [2003] 1WLR 577 at paragraphs 14 to 17, approved as a correct statement of the law by Lord Mance in Datec Electronics Holdings Limited v United Parcels Service Limited [2007] UKHL 23; [2007] 1WLR 1325 at paragraph 46.
The contractual obligation of which, as is now common ground, Mr. Chilukuri was in breach was contained in an escrow deed dated 19 th December 2007, by which in substance he promised to transfer to a nominee company his 26% shareholding in SRM Exploration PVT Limited ("Exploration") to be held for the benefit of the claimant RP Explorer Master Fund, as security for repayment of an investment of some US$81million-odd. The judge decided (and this is not in dispute either) that the quantification of the claimant's loss flowing from Mr. Chilukuri's failure to transfer his 26% shareholding in Exploration was to be identified by ascertaining the value of those shares on 1 st July 2009 ("the Valuation Date").
The judge's approach to that valuation exercise may be summarised, in bare outline, as follows:
1) He sought to identify the net asset value of Exploration as at the Valuation Date, by reference to the then value of its significant assets and liabilities.
2) He then identified the value of Mr. Chilukuri's shareholding in Exploration as 26% of that net asset value, less a 10% minority shareholder's discount.
Putting a little flesh on those bones, the main asset of Exploration which the judge identified consisted of what he described (in paragraph 240 of the judgment) as a "51% interest in Bitumen Deposit, DRC", to which he ascribed a then value of US$32,000,000. To this he added the aggregate value of three other assets of US$655,378. The values of those assets were not in dispute or, worthy of dispute, on this appeal. From the aggregate asset value of US$32,655,378 he then deducted his own estimate of the value of a contingent guarantee liability of Exploration, namely US$8,721,675. This produced a net asset value of Exploration at the Valuation Date of US$23,933,693. 26% of that was US$6,222,760.20 so that after applying what he called a "minority and marketability discount of 10%" the resultant figure was $5,600,484.20 as damages for breach of contract.
Most of the dispute about quantum, both at trial and appeal, concerned the judge's valuation of Explorer's 51% interest in the Bitumen Deposit. It was in fact a 51% (and therefore controlling) shareholding in a company incorporated under the law of the Democratic Republic of Congo ("DRC") called Cobit-SRM SPRL ("Cobit"), which was reputed to hold valuable rights to mine bitumen in the western (coastal) part of the DRC, pursuant to a joint venture agreement with the DRC dated 1 st November 2006 ("the JVA"). I say 'reputed' because one of the points taken both at trial and on appeal on behalf of Mr. Chilukuri is that the JVA had not, as at Valuation Date, even come into force, due to the non-satisfaction of a requirement for the issue of a presidential decree approving the JVA.
The judge's identification of $32,000,000 as the value of Exploration's 51% shareholding in Cobit flowed directly from his acceptance, without qualification but after a lengthy analysis of the issues, of a discounted cash flow ("DCF") valuation of Cobit's rights under the JVA in July 2009 by the claimant's expert in the sum of US$62,400,000, rounding up 51% of that sum (US$31.824million) to US$32million. That conclusion required the judge to resolve a large number of valuation issues, none of which had been foreshadowed in the parties' Statements of Case. In the claimant's Particulars of Loss there is a bald claim for the "market value of the Shares" (i.e. the 26% which Mr. Chilukuri held in Exploration), at various alternative dates, one of which was "as at, in, or about the end of July 2009". Mr. Chilukuri's defence merely put the claimant to proof of "the fact and quantum of any loss for which claim is made". Following those unhelpful pleadings, the quantum issues began to emerge in detail from an exchange of experts' reports in March 2012, and were amplified by an expert's joint statement which it appears became available to the parties on 11 th May, the last working day before the beginning of the trial on Monday 14 th May, although it appears that it was only signed by Mr. Chilukuri's expert Mr. Singhi on the Monday. Some further limited assistance was provided to the judge by the preparation and amendment, from time to time, of a List of Issues.
A particular disadvantage of the very late stage at which the quantum issues crystallised was that the parties' disclosure, and that of Mr. Chilukuri in particular, was undertaken before either side had any real appreciation of the way in which their opponents would be putting the case on quantum. No order was sought or made for a split trial, for further disclosure or an adjournment for that purpose. The result was that both the judge and the experts were required to deal with quantum issues of considerable complexity on the basis of seriously inadequate documentation. Furthermore, the judge derived little assistance from the oral evidence of Mr. Chilukuri himself, mainly because of adverse findings as to his credibility. Those findings are not challenged on this appeal, but Mr. David Cavender QC, who appeared for Mr. Chilukuri both at trial and on appeal, submitted that Mr. Chilukuri's credibility was of no real relevance to the quantum issues.
The valuation at a historic date of a minority shareholding in an overseas company, the principal asset of which is a bare majority stake in another overseas company which owns an unexploited mining concession in the DRC, is as obvious an example of a judicial task requiring an assessment and weighing of competing considerations as it is possible to imagine. I therefore approach this appeal with a ready disposition to respect the judge's overall conclusion unless satisfied that it lies outside the bounds within which reasonable disagreement is possible.
The main bone of contention between the parties and their experts at trial, renewed on this appeal, was whether a DCF valuation of Cobit's rights under the JVA was at all appropriate. If it was not, then the only alternative basis of valuation proffered at trial was a cost (or book) valuation which, it was common ground at least on appeal, would have yielded an insufficient sum, when aggregated with the modest value of Exploration's other assets, to overtop its contingent liability represented by the guarantee debt. Accordingly, unless a DCF valuation of Cobit's rights under the JVA could be justified, the 26% shareholding in Exploration was valueless.
As its name implies, a DCF valuation seeks to attribute a present value to an assumed future cash flow arising from a business asset. To the arithmetical aggregate of the annual cashflows, there are applied discounts reflecting both the time value of money and certain types of risk which the valuer considers may impact upon the realisation of that cashflow. As Mr. Philip Haberman FCA the claimant's expert readily acknowledged, both in his report and in more detail in cross-examination, the DCF of a business which has yet to commence has to be based upon a number of assumptions, one of which is that there are no impediments to the commencement and conduct of the business such as, for example, some defect in title to the relevant rights, or inability to comply with any contractual conditions upon which the exploitation of those rights is dependent. Mr. Haberman accepted, and the judge noted, that risks of defects or impediments of that kind could not generally be provided for as part of a DCF discount rate, unless they were of such little substance as to fall within a commonly used residual risk contingency discount of up to 5%.
Mr. Haberman also acknowledged in his oral evidence that if the aggregate discount (for time value of money and risk) which was required to be factored into a DCF valuation exceeded 40%, then this undermined the validity of a DCF valuation in relation to the business in question, so that some other type of valuation would then be required.
Mr. Haberman's discount rate for the purpose of valuing Cobit's rights under the JVA was, for 2009, 30%. It included elements for a risk free rate for the DRC, an equity risk premium for the DRC and a 4% premium to allow for residual risk. It assumed that the bitumen extraction process could be commenced immediately, and that there were no title, contractual or other obstacles, or a real (rather than residual) risk that they might...
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