John Condliffe and Another v Felicia Sheingold
| Jurisdiction | England & Wales |
| Judge | Lady Justice Arden,Lady Justice Smith,Lord Justice Ward |
| Judgment Date | 31 October 2007 |
| Neutral Citation | [2007] EWCA Civ 1043 |
| Docket Number | Case No: B2/2007/0060 |
| Court | Court of Appeal (Civil Division) |
| Date | 31 October 2007 |
[2007] EWCA Civ 1043
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM Truro County Court
HH Judge Griggs
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Ward
Lady Justice Arden and
Lady Justice Smith
Case No: B2/2007/0060
Mr. Colin Elliott (instructed by Messrs Jewill Hill & Bennett) for the Appellants
Mr Andrew Marsden (instructed by the Respondent) for the Respondent
Hearing date: 2 October 2007
Judgement
The principal question on this appeal is whether the respondent, Ms Sheingold, in her capacity as a former director of Baja Ltd (“Baja”), is liable to account for the goodwill of a restaurant run by Baja before it went into liquidation and, if so, in what amount. The appellants sue as assignees from the purchaser from the liquidators of Baja of all claims to which Baja would have been entitled. This appeal largely turns on the inferences to be drawn from the judge's findings of fact but I shall need to state the meaning of goodwill for this purpose, and in addition to consider a question which arose at a very late stage in this appeal as to what order the judge should have made if he had taken the view that Ms Sheingold was liable to account for the value of the goodwill. There were facts suggesting that it was not worth the amount which she and the purchaser had attributed to goodwill in their sale agreement, and so the question arises as to who had the burden of proof as to its value. The judge dismissed the claim.
In my judgment, for the reasons explained below, the judge erred in the conclusions which he drew from the facts as found by him and he should have ordered Ms Sheingold to account to the appellants for £71,837, being the amount attributed to goodwill in an assignment (“the assignment”) dated 17 December 2001 and made between Ms Sheingold and a Mr John Henry Nesbit.
Background
The facts are straightforward, and can be drawn from the judgment of HHJ Griggs, sitting in the Truro County Court, dated 21 December 2006, and documents to which he refers. The Key Street Bar and Brasserie was situated in Quay Street, Truro. It was originally run by a Mr Poole through his company, Poole Catering Services Ltd (“PCS”). The premises were leased by Mr Poole from Greenalls. From about 1997, he and Ms Sheingold ran the restaurant jointly. PCS became insolvent and went into liquidation. Within a few days, Mr Poole and Ms Sheingold had formed Baja, of which they became equal shareholders and directors. They then entered into a business development agreement (“BDA”) with Greenalls under which they undertook to take a lease of the premises in their joint names. The judge was told that Greenalls were unwilling to enter into a BDA with a limited company. Ms Sheingold contended that she and Mr Poole granted Baja a licence. This was not in writing and one of its terms was that Baja would pay the rent due under the lease to Greenalls, which it duly did. Mr Poole became bankrupt in 1998, and accordingly Ms Sheingold entered into a BDA on 8 October 1998 in her own name. She thus became the sole lessee of the premises under a new three year lease. The lease expired in 2001, and she entered into a further BDA with Inn Partnership Ltd, which is said to be associated with Greenalls. On 1 October 1998, Mr Poole became an employee of Baja. He was, however, dismissed on 7 May 2000. He brought proceedings for unfair dismissal, but these were dismissed.
Mr Poole's shares in Baja were meanwhile transferred to a Mr Miner. Ms Sheingold made an offer to buy his shares, first for £100, and then on 21 March 2001 for £500. When he refused, she caused notice to be given for a creditors' voluntary liquidation. Baja duly went into liquidation. Ms Sheingold swore an affidavit verifying a statement of affairs for Baja. This did not include any asset representing goodwill. According to the statement of affairs, there was a deficiency as regards creditors of £23,044.
The liquidators sold the fixtures and fittings of the business to Blok Corporation Ltd (“Blok”), which was owned by Ms Sheingold. The sale price was based on a valuation obtained by the liquidators. Ms Sheingold carried on the restaurant business and bought some more equipment which was said to be worth £3,000. She also negotiated a further three year lease of the premises from the landlord. By an agreement dated 17 December 2001, Ms Sheingold and Blok agreed to sell the business to Mr Nesbit for a total consideration of £90,000, of which £71,837 was attributed to goodwill, £1 to the lease and the balance to fixtures and fittings. The BDA was novated in favour of Mr Nesbit. Ms Sheingold also executed the assignment referred to in [2] above. For the purposes of sale, goodwill was valued by taking a proportion of the average amount of the last three years' turnover as shown in Baja's accounts and adding the cost of fixtures and fittings. In these proceedings, the appellants claim that Ms Sheingold held the lease and the BDA on trust for Baja. It is not contended that there was a business tenancy. In essence, Ms Sheingold contends that she held the lease and BDA personally, and that the goodwill of the restaurant business belonged to her. The judge accepted Ms Sheingold's evidence that she personally owned the lease and had granted a licence to occupy to Baja. He further found that the lease and goodwill of the restaurant business belonged to her beneficially:
“In my judgment the fact that experienced and nationally accredited liquidators had been involved in this matter and had formed a view that there was no claim that they could properly advance against Miss Sheingold on the basis that she held the lease on trust for the company is a factor to which I should have some regard. The fact that they had been prepared to assign any such claim for a purely nominal consideration in my judgment does provide some support that the claim was valueless. Clearly however that could not be conclusive. What does in the end persuade me that the claim must fail is that, though I have no evidence of what resolutions or minutes there may have been in the company's records about this matter, the uncontroverted evidence of Miss Sheingold was that she was carrying on the business in precisely the same way as it had been carried on when Mr Poole had been running the business on his own: similarly when they were running it together it would have been for their joint personal benefit: and that therefore when she alone became the leaseholder the position remained the same. The company was entitled to trade from premises which were the personal property of its managing director. Her duties as director did not require her, once the company began trading from the premises, only to hold the lease for the benefit of the company. That that was the position being asserted on her behalf does appear in the letter that was written to her by Mr Miller on 20 th March 2001. If Mr Miner had wanted to challenge that position that was the time when he could and should have done so. He did not. He did not attend any subsequent meeting of the company: in particular he did not attend the meeting of which he had been given notice that there was to be a resolution that the company be put into liquidation. If he was contending, as he does now, that the company was not insolvent because it was entitled to the benefit of the lease and/or the goodwill of the business that had been carried on at the premises that was when he should have done so.” (judgment, [33])
The judge also rejected the claim that the fixtures and fittings of the business have been sold at an undervalue. He held that there was no evidence to support this.
While Baja drew up its statutory accounts as a going concern, it produced abbreviated accounts and took advantage of the exemption from audit as a small company in accordance with ss 246 and 249A of the Companies Act 1985 respectively. The assets disclosed by these accounts included neither the lease nor any goodwill. Its trading receipts appear, however, to have been the receipts of the restaurant business, and those receipts were used for establishing the value of the goodwill of that business when it was sold to Mr Nesbit. Its business was stated to be “catering”.
Meaning of goodwill
Mr Colin Elliott, for the appellants, relies on the following passage from the speech of Lord Macnaghten in Commissioners of Inland Revenue v Muller & Co. Margarine [1901] AC 217 at 223:
“What is goodwill? It is a thing very easy to describe, very difficult to define. It is the benefit and advantage of a good name, reputation, and connection of business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old established business from a new business at its first start.”
In the same case, Lord Lindley said at 235:
“Goodwill regarded as property has no meaning except in connection with some trade, business, or calling. In that connection, I understand the word to include whatever adds value to the business by reason of the situation, name and reputation, connection, introduction to old customers, and agreed absence from competition, or any of these things, and there may be others which do not occur to me. In this wide sense, goodwill is inseparable from the business to which it adds value, and, in my opinion, exists where the business is carried on.”
Any goodwill which Baja had would have been internally generated, rather than purchased. Internally generated goodwill may not be shown...
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