Shah v Shah & ors [2011] EWHC 1902 (Ch)

Analysis

Unfair prejudice had been established by the petitioner (Dinesh) in the conduct of the affairs of the third respondent (the company). In an earlier judgment dated 24 February 2010, Roth J had ordered that either the first respondent (CJ) or the company must purchase Dinesh’s shareholding. The following matters remained to be determined:

1. (a) the price to be paid for the shares;
2. (b) whether interest should be payable and, if so, at what rate and for what period;
3. (c) whether the purchaser should be CJ or the company; and
4. (d) what provision should be made for Dinesh’s potential liabilities arising from his time as a director.

Both parties instructed expert valuers. Three properties in London were in issue. The experts agreed that Unit 1, 199 Eade Road was worth £1.1m. Evidence was heard in respect of 38-40 Commercial Road and 165-167 Commercial Road.

The experts agreed that the company’s wholesale garment business was loss-making and had no goodwill value. It was agreed that it was worth £102,000. The experts also agreed that an adjustment should be made to take account of the liability for corporation tax arising from the accrued capital gain, but did not agree on the correct level of discount. CJ’s valuer proposed to discount the full extent of the contingent tax liability. Dinesh’s valuer considered that a small allowance of 10% should be made since any buyer would take over the liability and it would be reflected in the purchase price.

Held

1. 1. The open market value of 38-40 Commercial Road was £4m (para [37]) and the open market value of 165-167 Commercial Road was £515,000 (para [43]).
2. 2. There appeared to be no authority dealing with the question of how to treat contingent tax liability (para [48]). Discounting to the full extent of the contingent tax liability was inappropriate (para [50]). In the absence of any evidence that the company intended to sell the properties, a break-up valuation of the company was not appropriate (para [51]). The discount to be applied to allow for the tax liability in respect of 38-40 Commercial Road would be 10% and in respect of 165-167 Commercial Road it would be 20% (para [52]).
3. 3. The rate of tax prevailing at the date of valuation should be applied. It was not appropriate to consider what tax rate would apply at some future date of sale (paras [53-54]).
4. 4. It was possible that Dinesh might have become a guarantor of the company’s liability under a loan agreement. The fair approach was for there to be a charge on 38-40 Commercial Road in favour of Dinesh regarding any potential liability under the loan. The court had the power to do this pursuant to s996(1) of the Companies Act 2006 (para [58]).
5. 5. There was no reason why Dinesh should be protected from any potential liability as a director for any penalties or charges arising from the company having claimed tax relief on the mortgage payments on a property at 175 Commercial Road. This was entirely independent of any unfair prejudice. If charges arose from a period during which Dinesh was a director, then there was no reason why he should be protected any more than any other director of the company (para [59]).

Judgment Mr Justice Roth: [1] On 24 February 2010, I handed down judgment on the liability issues in a bitterly contested ‘unfair prejudice’ petition under s994 of the Companies Act 2006 (the main judgment). I shall use the same nomenclature in this judgment as in the main judgment. In the main judgment, I held that …

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