Timothy McMonagle v Lee Harvey
| Jurisdiction | England & Wales |
| Judge | Mullen |
| Judgment Date | 06 October 2023 |
| Neutral Citation | [2023] EWHC 2406 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CR-2018-005729 |
In the Matter of Integrated Control Solutions (Eastern) Limited
And in the Matter of the Companies Act 2006
[2023] EWHC 2406 (Ch)
ICC JUDGE Mullen
Case No: CR-2018-005729
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMPANIES COURT (ChD)
The Rolls Building
Royal Courts of Justice
7 Rolls Buildings
London EC4A 1NL
Mr Nicholas Michael (instructed by Fosters Solicitors LLP) for the Petitioner
Mr Jack Watson (instructed by Howes Percival LLP) for the First Respondent
The Second Respondent did not appear and was not represented
Mr Matthew Morrison (instructed by Advocate) for the Third Respondent
The Fourth Respondent did not appear and was not represented
Hearing dates: 19 th – 20 th June 2023
Further written submissions: 23 rd June 2023
Approved Judgment
This judgment was handed down remotely at 10am on 6 th October 2023 by circulation to the parties or their representatives by e-mail and by release to the National Archives (see eg https://www.bailii.org/ew/cases/EWCA/Civ/2022/1169.html).
ICC JUDGE Mullen
Introduction
This judgment follows on from my judgment following the trial on liability on the petition and cross-petition under neutral citation number [2021] EWHC 1374 (Ch) (“the Liability Trial”) and should be read with it.
Following that judgment, the parties instructed Mr Stephen Reed of Price Bailey LLP, a firm of chartered accountants, as a single joint expert to provide an opinion on the market value of the Company's shares and the price payable by Mr McMonagle for Mr Harvey's shares, taking into account the determinations in the judgment. Mr Reed is a senior corporate finance partner at Price Bailey LLP, a member of the Institute of Chartered Accountants and has held a corporate finance advanced diploma for more than 15 years. He is experienced in, among other things, the valuation of small and medium-sized enterprises. He is also very familiar with this case. Over the life of this dispute he has produced:
i) a valuation of a 25% shareholding in the Company, dated 8 th April 2020 (“the Original Report”);
ii) an addendum report responding to questions raised by the solicitors acting for Mr McMonagle and Mr Harvey, dated 7 th May 2020 (“the Addendum Report”);
iii) a further valuation report following my judgment after the Liability Trial, dated 22 nd May 2023 (“the Final Report”);
iv) a response to questions raised on behalf of Mr McMonagle and Mr Harvey under CPR 35 in respect of the Final Report, dated 2 nd June 2023 (“the First Part 35 Responses”); and
v) a response to two further questions put to him on behalf of Mr Harvey, dated 19 th June 2023 (“the Second Part 35 Responses”).
The reason for the delay in producing the Final Report was, it seems, that various inconsistencies were identified in the Company's financial information, which brought to light further anomalies and cast doubt on the reliability of the Company's Sage data. Mr Reed considered it necessary that the Company's accounts as at 3 rd April 2018 be restated. This was carried out by Price Bailey LLP's business team and gave rise to a further need to modify the figures for previous years. Mr Reed was not involved in this exercise but he understands that the adjustments primarily related to the treatment of bad debts, VAT liabilities and liabilities under the Company's warranty provisions. The accounting treatment of these has been the subject of further disagreement between the parties, further prolonging the production of the valuation.
Once the exercise had been completed, Mr Reed produced the Final Report. He has provided an enterprise valuation of the Company, which is accepted to be appropriate. He has valued the Company at £496,935 and applied a minority discount of 30% so as to attribute a value of £86,964 to Mr Harvey's shareholding. This valuation is based on applying a multiplier of 5 to the earnings before interest, taxes, depreciation and amortisation (“EBITDA”) figure that he has produced. He has made further adjustments on the basis of my judgment following the Liability Trial and determined that the price payable by Mr McMonagle for Mr Harvey's shares is £48,991, assuming that Mr Harvey retains certain equipment in his possession.
I should mention one further development since the Liability Trial. Ms Harvey, though she attended the trial, had not filed points of defence or presented her own petition in relation to her own shareholding. Following judgment in the Liability Trial, and having obtained legal advice, she presented a petition under case number CR-2022-003660. At a case management hearing on 20 th March 2023 I gave directions for Ms Harvey's petition to be listed at the same time as the hearing to consider valuation. This was on the basis that Ms Harvey argued that Mr McMonagle was estopped by the findings in my judgment following the Liability Trial and, if so, it would likely have been possible to determine a price at which Mrs Harvey's shares should be bought by Mr McMonagle. In the event, Mrs Harvey's petition was settled on terms that are not known to Mr Harvey or to me. The only question that remains is that of costs. Costs will fall to be determined following the handing down of this judgment.
Issues
At this hearing, it was submitted on behalf of Mr Harvey that:
i) Mr Reed has assumed directors' salaries far in excess of those actually paid and the EBITDA figure should be recalculated on the basis of the latter;
ii) the adjustments to the financial statements of the Company were made necessary by failings on the part of Mr McMonagle or the Company's accountants, Larking Gowan, in preparing the financial information and should be left out of account insofar as they depress the value of the Company;
iii) the EBITDA multiplier selected by Mr Reed is too low and this results in part from the unreliability of the Company's financial information for which Mr Harvey should not be penalised;
iv) The minority discount is too high and should be reduced to reflect that Mr McMonagle is, once his wife's shares are taken into account, already a 50% shareholder in reality.
On behalf of Mr McMonagle there were criticisms of Mr Reed's apportionment of one director's salary to reflect Mr Harvey's limited involvement in the Company in the five months prior to 3 rd April 2018 and his treatment of Mr Harvey's director's loan account. Mr Michael also contended in his oral submissions that the minority discount should in fact be higher, though this was not foreshadowed in his skeleton argument and he appeared to concede that a 30% discount was broadly right.
Mr Reed was not called to answer these points and a number of them were not put to him in the form of written questions either. I would have been assisted if they had. Both parties acknowledge that arriving at a value, particularly in these circumstances, will necessarily be something of a broad-brush exercise.
Approach to valuation
Counsel helpfully set out the approach to be taken in their respective skeletons. I do not propose to rehearse these in full as they are not contentious but there are some particular points that I bear in mind. The learned author of Hollington on Shareholders' Rights (9 th ed.) says this of share valuation at paragraph 8–45:
“This is a very wide and specialist subject, on which one would be tempted to defer to the expertise of share valuers. This temptation is to be resisted, however, because there are questions of law and principle involved in the present context, share valuation is an art not a science ( Joiner v George [2003] B.C.C. 298), and a court retains a wide freedom to disregard the views of experts and apply the court's view of what is fair and sensible in all the circumstances: Re Bird Precision Bellows [1986] Ch. 658 at 669; Re Planet Organic Ltd [2000] B.C.C. 610 Ch D.”
Thus the court's task is to establish a value which is fair and sensible and it is not bound by a single joint expert's opinion. Nor do decided cases offer more than limited guidance as they turn on their own facts and the quality of the expert evidence adduced in them. The starting point for the valuation of a shareholding in an unquoted company is usually the value of the company as a whole assuming a hypothetical willing, but not anxious, seller and buyer ( Holt v Holt [1990] 1 WLR 1250 at 1252E).
In arriving at an appropriate minority discount (if applicable), His Honour Judge Hodge KC, sitting as a High Court Judge, said in Re Lloyds Autobody Ringway Ltd [2018] EWHC 2336 (Ch) at paragraph 113(5):
“The choice is not necessarily between an undiscounted and a fully discounted valuation. The wide terms of s994 leave it open to the court to order the purchase of the petitioner's shares at some middle figure, involving an intermediate discount, where neither a pro rata valuation nor a minority shareholding valuation would be fair…However, in my judgment such cases are likely to be rare; and the court must beware of applying ‘palm tree’ justice before adopting some middle course.”
Bearing those principles in particular in mind, I will address the parties' contentions.
Adjustments to EBITDA
Directors' salaries
Mr Reed has approached this as follows in his Final Report:
“5.14 I have made the following assumptions with regards to directors' salaries.
a) The market rate salary reflective of the Petitioner and First Respondent's roles in the business are estimated at £75,000 each, hence I have added back existing salaries taken and substituted a total cost of £150,000 plus employer's national insurance contributions in the years where both individuals were active in the business (assuming tax years equal financial...
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