Wednesday, August 05, 2015


BLOG 164


I have just finished reading the Court of Appeal decision in Begum v Hossain and Sunan Tandoori Ltd.  Frankly I am baffled!  I thought that there was a legal doctrine that a person must approach the courts with clean hands, but I seem to be mistaken – or perhaps that does not apply to contract law or the facts here are not what they seem.

Mrs Begum and Ms Hossain together set up an Indian takeaway.  The business operated through Sunan Tandoori which they owned equally.  The relationship broke down and Mrs Begum presented a petition under the Companies Acts that she had been unfairly prejudiced.  Those proceedings were settled on the basis that Ms Hossain would buy Mrs Begum’s share at a price to be determined by an independent valuer.  The terms of the settlement were incorporated in a Court Order.  This provided that “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”.  (I leave aside the fact that that seems to me a ridiculous concept as Mrs Begum and Ms Hossain were clearly not a willing buyer and willing seller, so there could not even hypothetically be such people “in the actual position of the parties”, as I am worried that it might be contempt of Court to criticise the wording of a Court Order).

The problem was the Order went on to say that “the valuer shall have access to all of the books, records and documents in the possession of the company” and that these included “any handwritten takings”.

There were indeed “handwritten takings” or, to be precise, a handwritten record of takings that showed significantly higher turnover than the takings figures shown in the accounts.

This posed a dilemma to the valuer.  A buyer would normally value a business on the basis of a multiple of earnings.  But suppose that the actual earnings and the earnings reflected in the accounts were different.  I have no knowledge of Sunan Tandoori Ltd, so I do not know why the turnover per the accounts was substantially below that shown in handwritten information.  But I am not concerned about Sunan Tandoori Ltd; I am concerned about what the Court of Appeal said.  So let’s assume a hypothetical case in which a difference between the accounts figures and memorandum figures arises because some of the takings have not been reflected in the accounts.  What is the valuer to do?

Should he assume that the hypothetical willing purchaser would base the price he is prepared to pay on the accounts or would he say to himself, “the vendors seem to have got away with fraud, I will base the price I am prepared to pay on the basis that I can continue with the fraud so should pay for the ability not to declare all of the future takings in the same way as in the past”?  I would have thought the answer obvious.  Surely no-one would pay for takings that have by-passed the books.  He would have no way of checking the amount and would either have to continue with the assumed fraud or declare a substantially higher level of takings and almost certainly trigger an HMRC enquiry.  Indeed, if my hypothetical purchaser had owned 50% of the company in the past like Ms Hossain, he would have to be crazy to purchase at a price that might well result in his being prosecuted for tax evasion.

But, said the Court of Appeal. A willing buyer might well be prepared to rely only on the accounts but a willing seller would not.  A willing seller would clearly have put forward the handwritten takings as reflecting the actually takings.  “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”.  Suppose in my hypothetical case he had asked for an explanation and was told that the discrepancy was undeclared takings?  What would he have done?  I still think he would only have been prepared to pay a price based on actual takings.

“But”, says the Court of Appeal “if the notional willing buyer and willing seller are to be regarded as being in the actual position of Ms Begum and Ms Hossain … they must be assumed to be well aware of what was going on”.  So if my assumed hypothetical willing buyer already owned 50% of the company and knew that the accounts were fraudulent, does that mean he would have paid a higher price than that warranted by those accounts?  I doubt it!

But the Court of Appeal has not, as yet, been asked to opine on that.  It was simply asked to set aside the valuation.  By a unanimous decision it did so, on the basis that the valuer did not follow his instructions.  I still find it extraordinary that if a valuer is specifically told to take into account what appears to be illegal actions but declines to do so, the Courts will find him in breach of the law!