Re Scitec Group Ltd; Sethi v Patel
| Jurisdiction | England & Wales |
| Judge | Mr Justice Newey |
| Judgment Date | 19 July 2010 |
| Neutral Citation | [2010] EWHC 1830 (Ch) |
| Docket Number | Case No: 6683 OF 2008 |
| Court | Chancery Division |
| Date | 19 July 2010 |
[2010] EWHC 1830 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Before Mr Justice Newey
Case No: 6683 OF 2008
In The Matter Of Scitec Group Limited
And In the Matter of the Companies Act 2006
Mr Gabriel Buttimore (instructed by Teacher Stern LLP) for the Petitioner
Mr Timothy Sisley (instructed by Magwells) for the First Respondent
Hearing dates: 9-11 and 14-17 June 2010
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.
Mr Justice Newey:
Introduction
On 8 August 2008, the Petitioner, Mr Sudhir Sethi, presented a Petition under section 994 of the Companies Act 2006 (“the 2006 Act”) seeking an order for his shares in the Second Respondent, Scitec Group Limited (“Scitec”), to be purchased by the Respondents. The First Respondent, Mr Alpesh Patel, is the other shareholder in Scitec.
The hearing before me was to have involved a trial of the Petition limited to determining (a) whether Mr Sethi had suffered unfair prejudice, (b) if so, the form of relief (if any) that should be granted, and (c) what (if any) directions should be given as to the valuation of Mr Sethi's shares. In the course, however, of the hearing, Mr Patel made concessions which considerably narrowed the issues between the parties. He conceded, for the purpose of this Petition only, that there had been unfair prejudice and that he should buy out Mr Sethi. He also accepted that Mr Sethi's shares should be valued as at 13 March 2007, the date of Mr Sethi's resignation as a director of Scitec. Further, it is common ground between the parties that I should give directions for the value of Mr Sethi's shares to be determined at a further Court hearing.
There remain issues between the parties as to the following:
i) Whether Mr Patel should be ordered to buy Mr Sethi's shares as opposed to merely agreeing to do so;
ii) Whether, if an order is to be made, the obligation to purchase the shares should be dependent on Mr Patel having the financial means to do so;
iii) Whether Mr Patel should be ordered to pay Mr Sethi interest (or quasi-interest) in respect of the period from 13 March 2007 (the valuation date) to the present; and
iv) Whether any (and, if so, what) directions should be given as to the basis on which Mr Sethi's shares should be valued as regards (a) sums paid in respect of rent, (b) sums spent on refurbishment, (c) debit/credit card “chargebacks”, (d) bad debts as at 30 June 2007, (e) payments made in respect of cars and (f) payments made in respect of a property in Cyprus.
Representation
Mr Gabriel Buttimore appeared for Mr Sethi, Mr Timothy Sisley for Mr Patel. As would be expected, Scitec itself took no part in the hearing.
Basic facts
Scitec was incorporated on 14 May 1999. Mr Patel became the company's sole director, and he and his wife the only shareholders. The company supplied computers and telecommunications accessories.
Mr Sethi became involved with Scitec because he and Mr Patel decided that the company should be merged with a company Mr Sethi ran, Infinity Computer Systems Limited (“Infinity”). Like Scitec, Infinity dealt in computer sales. Whereas, however, Scitec focused particularly on export transactions, Infinity's emphasis was on domestic sales.
Scitec came to occupy premises at Unit 6, the Palmerston Centre, Oxford Road, Wealdstone which Mr Patel and his wife bought in September 2001. It seems plain that Scitec entered into a lease of premises at the Palmerston Centre. No one has been to find an executed copy of such a lease, but a draft is available and Mr Patel said (and I accept) that he and his wife will have needed a signed version when obtaining mortgage finance to buy the Palmerston Centre property.
It is not clear from the draft lease what the demised premises were to comprise. The premises were to have been specified in a schedule, but the schedule in the draft refers to a quite different property, harking back, presumably, to a lease prepared for another purpose. The front page of the draft refers to “All those ground floor premises situate and known as UNIT 6 PALMERSTON CENTRE” (emphasis added), but I do not think I can assume that this wording survived unaltered into the executed document. As Mr Sisley said, the draft is at least one generation away from the engrossment. Further, the evidence shows that Scitec in fact occupied areas which were not on the ground floor. On balance, I think it likely that, in its final form, the lease was not limited to the ground floor.
The draft lease provided for a 10-year term running, to judge from the front page, from a date in 2001. The rent was initially to be £36,000, but it was to be subject to review after five years. The revised rent, following a review, was to be such as a valuer should “decide should be the yearly rent at the relevant Review Date for the demised premises” on certain assumptions. In assessing the rent, there was to be disregarded:
“any increase in rental value of the demised premises attributable to the existence at the review Date of any improvements to the demised premises or any part thereof carried out with consent where required otherwise than in pursuance of an obligation to the Landlord or the Landlord's predecessor in title by the Tenant any authorised Sub-tenants or their respective predecessors in title or permitted occupiers during the said term or during any period of occupation prior thereto arising out of an agreement to grant the said term”.
The draft contained a covenant on the part of the tenant to keep the demised premises (including additions) in “good and substantial and decorative repair and condition”.
When Mr and Mrs Patel acquired the Palmerston Centre property, it comprised a warehouse and some office space on the ground floor and an office (estimated by Mr Sethi at 30 feet by 18 feet) on the first floor. Under Mr and Mrs Patel's ownership, substantial improvement works were carried out, in particular to create a new mezzanine floor and office. Mr Sethi estimated that, overall, office space was increased by some 40%.
The documentary evidence relating to the costs of refurbishment is not very satisfactory. However, Mr Patel himself put the total price of the works at £85,000 plus VAT in a witness statement, and in the course of the trial he produced a computer print-out indicating that a further sum of, probably, £11,759 (after £2,350 had been deducted from a £14,100 invoice) had been paid for work on the mezzanine floor, to Fourways Supplies Limited (“Fourways”). Further, when giving oral evidence Mr Patel estimated that, leaving aside the work done by Fourways, £80,000 to £85,000 had been spent on the works. In the circumstances, Mr Buttimore suggested that the works were likely to have cost about £100,000, and Mr Sisley did not quarrel with that figure. I shall therefore proceed on the basis that the works cost £100,000.
The payments to Fourways were made in October 2001. A letter from Harrow Council confirms that works in respect of a mezzanine floor began in October 2001, also saying that the works “completed in December 2003”. An invoice from Surfridge Services Limited for £45,000 plus VAT is dated 21 March 2002. The invoice appears to relate to “supply and installation of 8 no ceiling supports … heat pump air conditioning unit as agreed on site”. A further invoice, for £7,000 plus VAT, was rendered on 22 January 2003.
It was Mr Sethi's evidence that he moved into the Palmerston Centre in January or February of 2002. Mr Patel said that Mr Sethi did not move in until April or May of 2002, but I think Mr Sethi is likely to be correct about the date. Mr Sethi said that, when he moved in, the mezzanine level had already been created but the refurbishment works had not yet been completed. He recalled being told by Mr Patel that the works would take a few months more to complete and asking Mr Patel in the middle of the year (but prior to the merger with Infinity) how much the works had cost.
Scitec's accounts for the period to 30 June 2002 record additions since 1 April 2001 of £32,500 in respect of leasehold improvements and £55,572 in respect of fixtures and equipment. The 2003 accounts show expenditure of £7,000 on leasehold improvements, which Mr Patel said (and I accept) relates to the invoice dated 22 January 2003. A further £10,000 payment features, Mr Patel said (and I accept), in the 2004 accounts.
The £7,000 and £10,000 payments confirm that the refurbishment works had not been entirely finished by the end of June 2002. I think it likely, however, that the works had largely been carried out by that date.
Scitec merged with Infinity with effect from 1 July 2002. The merger involved Scitec acquiring Infinity's issued shares. Following the merger, Mr Patel and Mr Sethi each held 40,000 of Scitec's 80,000 issued shares. They were also the company's only directors.
A note to Scitec's 2003 accounts deals with the merger as follows:
“On 1 July 2002, the company acquired the entire share capital of Infinity Computer Systems Limited on a share for share exchange basis at market value. On the same day, the trade of Infinity Computer Systems Limited was transferred to [Scitec]. In accordance with Section 131 of the Companies Act 1985, the company recorded £27,217 excess of the value attributed to the shares issued as consideration for shares of Infinity Computer Systems Limited over the nominal value of those shares as merger relief reserves.”
Mr Sethi and Mr Patel differed as to the extent to which, post-merger, they had...
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