Before : LORD JUSTICE LONGMORE LORD JUSTICE PATTEN and MR JUSTICE ROTH Between :

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1 Neutral Citation Number: [2015] EWCA Civ 717 IN THE COURT OF APPEAL (CIVIL DIVISION) ON APPEAL FROM THE HIGH COURT OF JUSTICE, CHANCERY DIVISION, COMPANIES COURT MR RICHARD SHELDON QC (SITTING AS A DEPUTY HIGH COURT JUDGE) [2014] EWHC 1235 (Ch) Before : Case No: A3/2014/1060 Royal Courts of Justice Strand, London, WC2A 2LL Date: Tuesday 14 th July 2015 LORD JUSTICE LONGMORE LORD JUSTICE PATTEN and MR JUSTICE ROTH Between : REBEKA BEGUM Appellant - and - (1) SUBRINA HOSSAIN Respondents (2) SUNAM TANDOORI LIMITED (Transcript of the Handed Down Judgment of WordWave International Limited Trading as DTI 165 Fleet Street, London EC4A 2DY Tel No: , Fax No: Official Shorthand Writers to the Court) Mr Christopher Mann (instructed by Capital Solicitors LLP) for the Appellant Mr Oliver Jones (instructed by Candey Parker Solicitors) for the First Respondent The Second Respondent was not represented Hearing date: 23 rd June Judgment

2 Mr Justice Roth : Introduction and Summary 1. This appeal concerns an expert s evaluation conducted under a settlement agreement reached between the Appellant, Ms Begum, and the First Respondent, Ms Hossain. In summary, Ms Begum and Ms Hossain together set up a business operating an Indian restaurant and takeaway near Maidstone in Kent. For that purpose, they formed in late 2007 a company, Sunam Tandoori Ltd ( the Company ), which is formally the Second Respondent but has taken no part in these proceedings. Ms Begum and Ms Hossain have an equal shareholding in the Company. Unfortunately, by 2009 the two had fallen out and on 28 August 2009 Ms Begum presented an unfair prejudice petition under Section 994 of the Companies Act Very sensibly, a settlement was reached in those proceedings, that no doubt avoided the very considerable costs which would have otherwise been incurred in the trial of the petition. Ms Hossain agreed to purchase Ms Begum s shareholding in the Company at a price to be determined by an independent valuer. The valuer issued his valuation in a report on 20 June 2011 ( the Valuation ). By these proceedings, Ms Begum challenges the Valuation on the basis that the valuer materially departed from his instructions. Although her claim states that she seeks a declaration that the Valuation is not final and binding on the parties, in argument Mr Mann, appearing on her behalf, acknowledged that in reality she was seeking an order that the Valuation be set aside. 3. Ms Begum s claim was heard by Mr Richard Sheldon QC, sitting as a deputy High Court Judge, without the need for any oral evidence. The learned judge dismissed her claim and, with permission granted by Floyd LJ, Ms Begum appeals. The Settlement 4. The terms of the settlement ( the Settlement ) were incorporated in a Tomlin Order made by Mr Registrar Jaques on 29 November Clause 1 provides that Ms Hossain shall purchase Ms Begum s shareholding at a price to be determined by an independent valuer with experience in valuing shares in private companies operating in the Indian restaurant sector. It is appropriate to set out clauses 2 5, 7 10 and 14 of the Settlement: 2. The Valuer shall be Neil Oxford of Christie Owen and Davies Limited. The Valuer shall be entitled to seek the assistance of other professionals at his sole discretion. 3. The valuation shall be conducted on the basis of the fair value of the Shares as at 26 March The value of the Shares shall be calculated to reflect the price that a willing buyer and a willing seller, in the actual position of the parties, would pay for the Shares. The question of whether, and if so what, discount should be applied to the value of the Shares shall be a matter for the Valuer to determine in his absolute discretion.

3 5. The Valuer shall have access to all of the books, records and documents in the possession or control of the Company. 7. The books and records of the Company includes for the avoidance of doubt any handwritten takings. The First Respondent warrants that the books and records of the Company include materially accurate records of the Company s actual takings. 8. Each party shall have an opportunity to make written submissions to the Valuer within a time to be decided by the Valuer, and further shall have an opportunity to make written observations on the initial written submissions of the other party within a time to be decided by the Valuer. 9. The Valuer shall give a written valuation in respect of the Shares, but shall not give reasons for his valuation, and shall send copies of his valuation to the parties simultaneously. 10. The valuation shall be final and binding on the parties. The Valuation 14. The costs of the Valuer will be borne equally by the Petitioner and the First Respondent. 5. Mr Oxford appears to have approached his task as being to value the Company rather than specifically the price that would be paid for Ms Begum s shareholding, but no criticism is made of the Valuation in that regard. Instead, the challenge has been to the view which he took of his task in the light of the terms of the Settlement. 6. Although clause 9 states that the Valuer shall not give reasons, in fact Mr Oxford helpfully provided a full report explaining the basis of the Valuation. In that report, at para , Mr Oxford explained the methodology which he used: In preparing my valuation, my principal approach, and the one upon which I place most reliance is the Income Approach or Earnings Multiplier. This method of valuation has a long pedigree and is the approach used most widely by investors and operators and, consequently, valuers. An all risks yield or multiplier is applied to maintainable income, which a valuer assesses following a review of historic and current trading information. The multiplier is selected to directly reflect market sentiments. Mr Mann does not seek to criticise that methodology, nor could he: not only is it well established but the method of valuation to be used was very much for Mr Oxford to determine in his discretion as an expert.

4 7. However, in calculating the maintainable income, Mr Oxford based himself entirely on the Company s profit and loss accounts. He did not give any consideration to the figures or information set out in the handwritten takings referred to in clause 7 of the Settlement. Mr Oxford referred (at para of his report) to the fact that Ms Begum s solicitors had provided information regarding the trading performance of the business which suggested that the trading information set out in the profit and loss accounts was not accurate. That appears to be a reference to an accountant s report which Ms Begum s solicitors had submitted to him on her behalf, which analysed the handwritten takings by comparison with the trading accounts and concluded that the figures in the trading accounts were significantly understated. Mr Oxford s report continued: The Law It is my view that it is not the role of the valuer to decide whether or not the trading accounts provided are truthful and on the basis that they have, to date, been relied upon for VAT purposes, I have no alternative than to assume that they are reliable. In the event that a jointly appointed independent forensic accountant determines that they are not accurate and both parties agree to the revised accounts, I reserve the right to amend my opinion of value accordingly. There is a similar passage in the Summary/Conclusion section of Mr Oxford s report, as follows: 17.8 The trading accounts that have been provided to me are those that have been used for VAT purposes and reflect the trade that has taken place at the property for the first two years of operation from the date of opening to the date of valuation The validity of these accounts has been questioned, however, until such time as an independent forensic accountant that has been jointly instructed by both parties can provide an alternative, I have no option than to rely on what I have been given. It is my view that it is not the role of a valuer to carry out the role of a forensic accountant and this is beyond the scope of my instruction in this matter. 8. The authorities concerning the circumstances in which an expert s determination can be challenged were set out in the judgment below and there is no dispute between the parties as to the law. In Jones v Sherwood Computer Services Plc [1992] 1 W.L.R. 277, Dillon LJ (with whose judgment Balcombe LJ agreed) stated at 287: On principle, the first step must be to see what the parties have agreed to remit to the expert, this being, as Lord Denning M.R. said in Campbell v. Edwards [1976] 1 W.L.R. 403, 407G, a matter of contract. The next step must be to see what the nature of the mistake was, if there is evidence to show that. If the mistake made was that the expert departed from his instructions in a material respect e.g., if he valued the wrong number of

5 shares, or valued shares in the wrong company, or if, as in Jones (M) v Jones (R.R.) [1971] 1 W.L.R. 840, the expert had valued machinery himself whereas his instructions were to employ an expert valuer of his choice to do that either party would be able to say that the certificate was not binding because the expert had not done what he was appointed to do. 9. Further, in Veba Oil Supply & Trading GmbH v Petrotrade Inc [2001] EWCA Civ 1832, [2002] 1 All E.R. 703, Simon Brown LJ (as he then was) set out the governing principles at [26]: i) A mistake is one thing; a departure from instructions quite another. A mistake is made when an expert goes wrong in the course of carrying out his instructions. The difference between that and an expert not carrying out his instructions is obvious. ii) Under the old law a mistake would vitiate the expert's determination if it could be shown that it affected the result. That was the concept of material mistake established in Dean v Prince and the Frank H. Wright case. Not so, however, with regard to a departure from instructions... iii) Under the modern law the position is the same as it was with regard to a departure from instructions, different with regard to mistakes. As Lord Denning explained in Campbell v Edwards, if an expert makes a mistake whilst carrying out his instructions, the parties are nevertheless bound by it for the very good reason that they have agreed to be bound by it. Where, however, the expert departs from his instructions, the position is very different: in those circumstances the parties have not agreed to be bound. Simon Brown LJ then approved the passage quote above from Dillon LJ s judgment in Jones v Sherwood Computer Services and continued: The Submissions vi) Once a material departure from instructions is established, the court is not concerned with its effect on the result. The position is accurately stated in para 98 of Lloyd J's judgment in the Shell UK case ([1999] 2 All ER (Comm) 87 at ): the determination in those circumstances is simply not binding on the parties. 10. Ms Begum s claim in these proceedings is essentially a simple one. Mr Oxford was provided with the Company s books and records, in accordance with clause 5 of the Settlement, and those included the handwritten notes of takings referred to in clause 7. Ms Begum contends that by failing to consider at all the substance or contents of the handwritten takings, and adopting the view that he had no alternative but to rely on the trading accounts, Mr Oxford disregarded his mandate as set out in the Settlement. Mr Oxford was required to arrive at a fair value of the shares and that required him to

6 take account of all the information in the Company s books and records. The handwritten takings were expressly declared to be part of those books and records but Mr Oxford put them aside. If he felt that attempting to reconcile the handwritten takings with the trading accounts, or considering what might be the actual turnover in the light of those handwritten takings, was outside his expertise, he was expressly given the option of seeking the assistance of an accountant. But to pay no regard to the contents of the handwritten takings was an abdication of his responsibility. If necessary, Mr Mann sought to rely on an implied term in the Settlement that the valuer should consider in a substantive sense the handwritten takings and the submissions and evaluate their worth. 11. In a spirited response on behalf of Ms Hossain, Mr Jones stressed that an expert determination was designed to be final and binding, and therefore bring about a quick and inexpensive resolution of the matter. He argued that Mr Oxford had not disregarded the handwritten takings. Mr Oxford was clearly aware of them as they were part of the submissions made to him by Ms Begum s solicitors to which he referred. The expert valuer is given a broad discretion as to his valuation under the Settlement, considering the price to which a willing buyer and a willing seller would arrive at. It was entirely rational and within Mr Oxford s mandate for him to say that, faced with a conflict between the trading accounts submitted for VAT purposes and a series of handwritten notes of takings, the notional willing buyer would say that he was only prepared to rely on the trading accounts. Mr Oxford therefore cannot be said to have ignored the handwritten takings. Mr Oxford was clearly aware of the allegation that the trading accounts were understated: he expressly referred in para 2.6 of his report to the uncertainty over the trading figures of the business, and when determining the multiplier to be applied to the figure he derived for the Company s EBITDA he reduced that from what he said was the customary figure of 1 year s purchase to 0.5, in part to reflect the uncertainty with regard to the financial performance (para ). Analysis 12. The Settlement requires that the valuation should be conducted on the basis of the fair value of the Shares (clause 3). Mr Jones accepted, when this was put by Patten LJ in argument, that the fair value should be calculated having regard to the books and records of the Company. Clause 7 expressly states that those books and records include the handwritten takings. Objectively viewed, I consider that this means that the process of valuation must take account not merely of the fact that such handwritten takings exist but of what they state. How much weight is to be given to the information in the handwritten takings; whether any, and if so what, adjustment to the figures in the trading accounts is required, or whether the handwritten takings are to be preferred those are all matter for the expert in his discretion. His conclusion cannot be challenged on the basis of the conclusion he reaches or the calculation he makes. However, Mr Oxford in effect put the handwritten takings altogether aside. Indeed, he recognised that they might require revision to the trading accounts but took the view that this was not part of his role and could be accomplished only if the two parties proceeded to instruct an independent forensic accountant. In taking that approach, I consider that Mr Oxford misinterpreted his mandate. If Mr Oxford felt that consideration of the handwritten takings as compared to the trading accounts fell outside his expertise or was an exercise he felt uncomfortable in undertaking, then the

7 Settlement expressly gave him the option (the decision was one for him) to instruct an accountant; and the costs of that accountant would no doubt form part of his expenses for which the parties were liable under clause 14. But here, Mr Oxford effectively directed himself that he could not have regard to the handwritten takings, and he thereby acted outside his mandate. 13. Indeed, I regard it as significant that there is no express reference to the handwritten takings at all in Mr Oxford s report, let alone to what they contain. Mr Jones argued that they are implicitly referred to in Mr Oxford s reference to the submission and information provided by Ms Begum s solicitors: para of the report. However, the handwritten takings are not to be viewed as part of a submission by one side or the other: Mr Oxford was instructed on the basis that they form part of the books and records of the Company. I also regard it as significant that clause 7 includes a warranty that those books and records include materially accurate records of the Company s actual takings. 14. I should add that although Mr Jones argued that it would be entirely rational to find that a willing buyer would be prepared to rely only on the trading accounts used for tax purposes, I regard that approach as both one-sided and artificial. The price to be determined is the price which a willing buyer and a willing seller in the actual position of these parties would have arrived at. A willing seller would clearly have put forward the handwritten takings as reflecting the actual takings of the business, on the basis that the trading accounts used for tax purposes were understated. Faced with that, a willing buyer would no doubt have looked at what the handwritten takings said and asked for an explanation of the discrepancy, unless he felt it was obvious. And if the notional willing buyer and willing seller are to be regarded as being in the actual position of Ms Begum and Ms Hossain, pursuant to clause 4, they must be assumed to be well aware of what was going on. 15. Although the court heard argument as to whether on established principles a term could be implied into the Settlement and what that term might provide, in my judgment, the implication of a term is unnecessary. The question is simply one of construction of the express terms of the Settlement. The valuer is to arrive at a fair value of the shares, having regard to the books and records of the Company, which include the handwritten takings. That means, as a matter of ordinary construction, that he is required to arrive at his valuation by considering the content of all those documents and not simply some of them. If he felt that he would like the assistance of an accountant, he was entitled to obtain it at the parties expense. In this case, Mr Oxford did not follow that mandate and the Valuation must therefore be set aside. Accordingly, I would allow this appeal. Lord Justice Patten : 16. I agree. Lord Justice Longmore : 17. I agree also.

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