Claire Lewis v Philip Clarke
| Jurisdiction | England & Wales |
| Judge | Jones |
| Judgment Date | 28 July 2020 |
| Neutral Citation | [2020] EWHC 1975 (Ch) |
| Docket Number | Case No: CR-2017-009765 |
| Date | 28 July 2020 |
| Court | Chancery Division |
[2020] EWHC 1975 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST
In The Matter Of SOLENT GARAGE SERVICES LIMITED
And In The Matter Of THE COMPANIES ACT 2006
Business Skype Remote
I.C.C. JUDGE Jones
Case No: CR-2017-009765
Mr Wilkins (instructed by Warner Goodman LLP) for the Petitioner
Mr Darton Q.C. (instructed by Churchers Solicitors) for the First Respondent
Hearing dates: 10 July 2020
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
CHJ 28/7/20
I.C.C. JUDGE Jones
A) Introduction
Solent Garage Service Ltd (“the Company”) was established in early 2012 to carry on the business of motor vehicle repairs and servicing. It provided an income for the parties whilst living together with their three children. They were both directors and equal shareholders. The extent of Ms Lewis's involvement with responsibilities for administration and finance is to some extent in issue but there is no dispute that Mr Clarke carried out the Company's vehicle repair work and MOT testing. Sadly, the relationship broke down in or about October 2016. The company continued trading until its business was transferred by Mr Clarke without the agreement of Ms Lewis to Solent Garage Services, Stubbington, Limited (“Newco”) following its incorporation on 23 May 2017. Mr Clarke was the sole shareholder in Newco and this section 994 Companies Act 2006 petition resulted.
The petition has been addressed by the court to date on the basis that proportionality between costs and value requires as summary an approach as can be reasonably achieved. The importance of the value of the shares to both parties is not to be understated but the reality is that it is small compared with the potential costs of such petitions and the difference between the values they have each argued for is even smaller. Indeed, the reality is that this is a matter which should have been bound up with the division of assets within a divorce had that route been available to them.
The need for such broad-brush approach was accepted by the parties at a hearing on 27 June 2018 when Mr Clarke decided not to oppose the existence of unfair prejudice. The court accepted jurisdiction under section 996 in reliance upon the facts and matters alleged in the unopposed Petition without having to make specific findings. The transfer of the business without consideration was evidence enough. Mr Clarke was ordered to purchase Ms Lewis's 50% shareholding in the Company because of unfair prejudice.
That approach was equally appropriate for the resulting valuation process for which the court should adopt active case management to try to reduce the time and cost of determining a “fair value” (see Re A Company No.004837 of 1998 [1997] B.C.C. 746 at 770 per Morritt LJ (obiter)). The first matter which needed to be addressed in that context was how to deal with the transfer of the Company's business and its goodwill to Newco. There were various options. For example, this misappropriation of assets could result in an assessment of damages with the resulting compensation being paid (actually or notionally for the purposes of valuation) to the Company (see, for example, the assessment of damages approach in a partnership context in Gorne v Scales [2006] EWCA Civ 311). The share valuation of the Company would take account of that compensation. Alternatively, the date of valuation for the shares to be purchased might be backdated to an earlier, appropriate time. The best approach for valuation was debated at a case management hearing on 27 June 2018.
The word “debate” is used intentionally because the process was for the court to try to achieve a solution which the parties would accept as cost effective. The parties and the court reached the conclusion that the two companies could be treated as one for the purposes of valuing the Company's shares. There followed debate as to whether a single expert should be appointed with instructions to provide a fair value for the shares of the Company and Newco, as one, at a date as near to the valuation date as practicable. Wording was proposed to that effect with counsel to draft a minute of order. The 27 June 2018 Order was made accordingly but the parties also kept open the option within the wording that they could “raise issue with the valuation and … ask the court to determine the value”. Further directions were made on 28 September 2018 concerning the valuation but it was certainly anticipated that the parties would not have to return to the High Court and there was no need to consider transfer to the County Court.
The independent expert's report issued on 16 April 2019 valued the business at between £25–30,000. If accepted by the parties, the purchase price would have been between £12,500 and £15,000. However, it threw into play a number of “curve balls” including the previously unappreciated case of Mr Clarke that the lease for Newco's business premises might not be renewed when its term expired at the end of October 2020 and the fact that he had not provided financial information for the business up to the date of valuation.
Unfortunately, more hearings were required. Whilst in value terms this was nowhere near the High Court threshold, the matters resulting from that expert report raised sufficient complexity to justify the retention of the petition. Indeed, ironically the need to restrict costs furthered the need for a specialist judge to case manage and, if necessary, determine the disputes. The recovery of future costs was severely restricted by subsequent orders to try to achieve some semblance of proportionality.
Whilst it is unnecessary to trace back every point raised, it is necessary to refer to the witness statement from Ms Lewis dated 13 May 2019. It raises the following matters concerning the exhibited report which led her to contend it did not “achieve the objective of the Order of 5 July 2018” and that there are “a number of fundamental problems with the assumptions made in the valuation”. For the following reasons she asked the court to value the shares:
(i) The valuation was made without financial information being made available to him beyond 31 May 2018, although he was provided with VAT returns for the quarters ended 30 November 2018 which identify an increased turnover.
(ii) Despite referring to comparables with far higher valuations and opining that goodwill is not necessarily linked to the owner, the valuation does not apply a multiple to maintainable earnings.
(iii) The valuation assumes the lease for Newco's garage premises will not be renewed at the end of October 2020 despite the premises being used as a garage for “many, many years (well before the business acquired the lease)” and without there being any suggestion of redevelopment.
(iv) No steps have been taken to resolve caveats in the report concerning updated financial information, personal expenditure and the directors' loan accounts. There is no reference to under-declarations of MOT test numbers or of the significant drop in cash and cheque deposits.
(v) A market not a fair valuation has been adopted.
Ms Lewis also raised issues concerning the potential striking off of the Company for its failure to file statutory accounts and also HMRC's claim that the Company has unpaid corporation tax for the financial year ended 29 October 2016.
An order made on 17 June 2019 records Mr Clarke's open offer to accept the valuation of the business as £35,000 subject to Ms Lewis accepting liability for a director's loan in the sum of £23,000. That hearing resulted from an issue as to whether the order made on 5 July 2018 obviated the need for a trial. The issue was adjourned and the petition returned to me at a hearing on 17 March 2020.
Taking the broad-brush approach and bearing in mind the problem for valuation resulting from the renewal of lease issue, it was suggested by Mr Wilkins for Ms Lewis that a pragmatic approach for valuation might be to return to the 2016 dividend of £26,000 and apply a multiplier of 4 to represent four years of dividend. He did so, Mr Clarke having accepted (whether at this or an earlier hearing, it matters not) that the business had continued to perform at a similar level after its transfer to Newco.
There was obvious attraction in that quick resolution of the dispute assuming, of course, that such payment of similar dividends could have been made by Newco. However, the resulting value would have been considerably higher than the value from the report, £52,000 as against £12,500 – £15,000. There was no agreement at the hearing (and did not have to be, subject to its relevance to costs) with the result that directions were made for (in summary): the exchange of lists of issues (agreed if possible); Mr Clarke to have the opportunity to obtain permission to rely upon any further evidence in addition to his witness statement dated 14 June 2019; the ability to call oral evidence; and the limited recovery of costs.
Commercial reality should still have resulted in settlement with both sides recognising they had to “give”. Nevertheless, this is easier written than achieved and it is important the court recognises that justice should be accessible when relatively small sums are nevertheless of great importance to the lifestyles of those involved.
Before me are differing lists of issues dated 3 and 7 April prepared on behalf of Mr Clarke and Ms Lewis respectively. There are the witness statement from Ms Lewis dated 13 May 2019 and its exhibited expert report and a witness statement from Mr Clarke...
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