Zedra Trust Company (Jersey) Ltd v The Hut Group Ltd
| Jurisdiction | England & Wales |
| Judge | Eyre |
| Judgment Date | 21 August 2019 |
| Neutral Citation | [2019] EWHC 2191 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Docket Number | Case No: F40MA013 |
| Date | 21 August 2019 |
[2019] EWHC 2191 (Comm)
HIS HONOUR JUDGE Eyre QC
Case No: F40MA013
IN THE HIGH COURT OF JUSTICE
BUSINESS & PROPERTY COURTS IN MANCHESTER
CIRCUIT COMMERCIAL (QB)
Manchester Civil Justice Centre
1 Bridge Street West
Manchester M60 9DJ
Andrew Onslow QC and George McPherson (instructed by DWF LLP) for the Claimants
Lance Ashworth QC and James Mather (instructed by Gowling WLG (UK) LLP) for the Defendant
Hearing dates: 4 th July 2019
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.
HH Judge Eyre QC:
Introduction .
By a Sale and Purchase Agreement (“the SPA”) of 31 st May 2011 the Claimants sold the Defendant the entire issued share capital of Cend Ltd. The SPA included a mechanism for determining whether there had been an over-provision for tax and related matters in the accounts and in the treatment of Cend Ltd's affairs. This was with a view to the Claimants being given credit for such over-provision against other sums due from them and potentially receiving a further payment. The SPA provided for the question of whether there had been such over-provision to be determined in the first instance by Cend Ltd's auditors acting as experts.
In October 2018 Ernst & Young LLP (“EY”) as Cend Ltd's auditors provided a determination that there had been a net over-provision of £18,435. That determination was contained in a report which EY provided to the Defendant. The Defendant in turn provided the Claimants with the first 1 1/2 pages of that report being a section headed “Background” and the “Executive Summary”.
By the current Part 8 proceedings the Claimants seek an order that the Defendant supplies them with a full copy of the report and any further work output provided by EY to the Defendant together with copies of all written communications between the Defendant and EY in relation to the instruction of EY and other material. The Claimants say that they are entitled to this material either on the basis that the Defendant acted as their agent in instructing EY or that it is an implied term of the SPA that such material be provided to the Claimants. The Defendant denies that any further material is due saying that it was not acting as the Claimants' agent in instructing EY and that the only material to which the Claimants are entitled under the SPA is that which identifies the actual amount of the over-provision.
The Factual Background .
The SPA was made on 31 st May 2011 and provided for the Claimants to sell the share capital of Cend Ltd for a cash consideration of £31,171,782 together with shares in the Defendant. The SPA defined the “Accounts” as being the accounts of Cend Ltd for the year to 30 th September 2010 and contained warranties as to the Accounts (at Schedule 4 (1)) together with a Taxation Covenant (Schedule 7 part 2) and Taxation Warranties (Schedule 7 part 3).
At Schedule 7 Part 1 the SPA contained a mechanism for additional consideration to be payable to the Claimants (or to be deducted from the sums payable by them) in the event that the Accounts had made over-provision for taxation liabilities or had understated the company's rights to repayment of taxation or that taxation liabilities were reduced or avoided by the application of reliefs. The current dispute relates to the operation of that mechanism.
Schedule 7 Part 1 paragraph 4.1 provided as follows in respect of potential over-provision and windfall rights:
“The Buyer shall at the request of the Sellers require the Auditors [defined as being the auditors for the time being of Cend Ltd] to determine (as experts and not as arbitrators and at the expense of the Sellers) whether:
a) Any provision for Taxation or for payment for Group Relief or the surrender of a Tax Refund in the Accounts has proved to be an over-provision and if so its amount.
b) Any right to a repayment of Taxation treated as an asset in the Accounts has proved to be understated and if so its amount or, where no right to repayment of Taxation was treated as an asset in the Accounts, whether any such amount should have been treated as an asset in the Accounts and if so the amount; or
c) Any Actual Taxation Liability which arises or would otherwise have arisen (other than one which otherwise have given rise to a corresponding liability of the Sellers under the Tax Covenant) is avoided or reduced or any repayment of an amount of Taxation is obtained in either case by the use of a Seller Relief, and, if so, the amount of Taxation so saved or the amount of that repayment; and
if the Auditors determine that there has proved to be such over-provision, understatement, or amount the amount of such over-provision, understatement, or amount (as the case may be) shall be dealt with in accordance with paragraph 4.3”
Paragraph 4.2 made similar provision in relation to reliefs.
Paragraph 4.3 set out the way in which the relevant amounts were to be dealt with. It provided for them to be allocated in the following order. First, as a set off against any sums due from the Claimants under the Tax Covenant or for breach of any Tax Warranty; next in the event of an excess this was to be refunded against any previous payment made in respect of the Tax Covenant or for breach of a Tax Warranty; then the remainder of any excess was to be carried forward and set against any future payment due in respect of the Tax Covenant or for breach of a Tax Warranty; and finally in the event of a surplus remaining on the seventh anniversary of completion of the SPA then that surplus was to be paid to the Claimants.
Paragraph 4.4 set out the following review mechanism:
“When such determination by the Auditors as is mentioned in paragraph 4. 1 or 4.2 has been made the Sellers or the Buyer may request the Auditors to review such determination (at the expense of the person making the request) in the light of all relevant circumstances including any facts which have become known only since such determination and to determine whether such determination remains correct or whether, in the light of those circumstances, the amount that was the subject of such determination should be amended.”
Finally paragraph 7 provided thus for the resolution of disputes:
“7.1 In the event of any dispute under paragraph 3, 4, 5, 6 or 8 of this schedule such dispute shall at the election of either/any party be determined by the Independent Expert (acting as expert and not as arbitrator) and in the absence of manifest error his determination shall be conclusive and binding on the parties. The proper charges and disbursements of the Independent Expert shall be paid and borne on each occasion by the parties concerned such proportions as the Independent Expert may in his absolute discretion consider fair and reasonable.
“7.2 If either party is dissatisfied with any determination of the Auditors the matter shall be referred to the Independent Expert for determination in accordance with the provisions of paragraph 7.1”
The Independent Expert was defined as being a member of the Chartered Institute of Taxation or of the Institute of Chartered Accountants independent of the parties and who had had a specialised taxation practice for at least ten years such person to be appointed by agreement between the parties or on application to the president of either of those institutes.
The Claimants' solicitors raised the question of the operation of paragraph 4.1 in June 2013. However, it was not until January 2015 that they made reference to the Claimants' right to request a determination by the auditors. There then followed correspondence about the likely cost of that exercise culminating in a letter of 28 th May 2015 in which the Claimants' agreement was given to the scope of the works to be undertaken by EY. On 25 th August 2015 EY sent a “statement of work” confirming that it would undertake a review pursuant to Schedule 7 Part 1 paragraph 4.1 of the SPA and saying “our output will be by way of an email or report detailing any tax amounts we consider to be over or under provided subject to an appropriate materiality of £5,000 per item as agreed”. The statement of work was addressed to the Defendant and James Pochin signed on the Defendant's behalf as Group Legal Director confirming the Defendant's agreement to the arrangements.
Nothing was provided to the Claimants as a result of that exercise. The Claimants suspect that EY made a determination or at least provided advice or a report to the Defendant which was not provided to them. However, the Defendant's solicitors have confirmed in correspondence their instructions that no determination was provided by EY pursuant to the 2015 statement of work.
In any event it was not until 2017 that the Claimants began pressing as to progress and it was only in June 2018 that the Defendant's solicitors confirmed that the Defendant had requested that EY complete the exercise expeditiously. This resulted in EY sending a new statement of work dated 24 th July 2018. This was also addressed to the Defendant. The sections as to the scope of EY's services and the form in which the output was to be provided were the same as those in the earlier statement of work although in the later document those sections were set amidst rather more extensive provisions as to the terms on which EY was acting. The Defendant's agreement to those terms was confirmed by its Director of Tax, Kelly Sutton.
On 9 th October 2018 the Defendant's solicitors wrote to the Claimants' solicitors saying that EY had completed its report and saying that they enclosed the report for the Claimant's consideration. The document which was attached consisted of 1 1/2 p...
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