ICAEW.com works better with JavaScript enabled.

Valuation Community

When mother and son fall out

Author: Andrew Strickland

Published: 15 Apr 2024

Exclusive content
Access to our exclusive resources is for specific groups of students, users, subscribers and members.

Smith and Smith [2022] EWHC 1035.


Clive Smith (Oxford) Limited had started life as a car distribution franchise; over the years its car sales and servicing activities dwindled and faded, and its property ownership interests increased. By 2021, the only trading activity was a modest MOT testing bay. The rest of the income of the company was derived from rents, including some student accommodation.

Joan held 80% of the shares and Tim, an adopted son, held the remaining 20%. For whatever reason, the relationship broke down: Joan dismissed Tim as an employee; she also removed him as a director by ordinary resolution.

Tim brought a claim under section 994, Companies Act 2006 that the conduct of the affairs of the company was unfairly prejudicial to one or more shareholders.

The Judge examined the activities of Joan and Tim in relation to the company. He concluded with crisp clarity: “Given my finding that the Company is a quasi-partnership, I am in no doubt that Tim’s shares should be valued on a non-discounted basis.”

The value of the shares

Joan and Tim each appointed a valuation expert: as the main drivers of the valuation were the freehold properties, these were valuations undertaken using the cost approach, the summation method, the market value basis (but see below) and the going concern premise.

I have tabulated the respective calculations of the two experts:

  Expert 1 Expert 2
  £’000 £’000
Net assets at 31 July 2021  1,955
Profits after 31 July 2021
Uplift value of properties
Less tax on uplift at 19%
Value of MOT bay business
Less: provision against loan to Joan

The property and the related tax

Expert 1 used information from a recent property valuation report. For some reason, that is not explained in the written decision, Expert 2 reverted to an earlier valuation report prepared for bank security purposes.

It appears that 100% of the 19% contingent tax has been adjusted by Expert 1. The July 2021 balance sheet included provisions of £313,000. There are strong indications that these relate to deferred tax on the uplift in value of the investment properties. The contingent tax netted from the valuations by Expert 1 was therefore seemingly a total of £437,000 – the existing £313,000 and a further £124,000.

We can therefore consider the way that contingent tax was treated in an earlier case that is sometimes cited. This is the 2003 case of Goldstein v Levy Gee (EWHC 1574 [2003]). In that case, the Judge stated:

"The natural aspiration of the seller would be to achieve no deduction for contingent tax liabilities. The natural aspiration of the buyer would be to achieve 100 per cent deduction. Both the hypothetical buyer and the hypothetical seller are willing. I do not think that anyone suggested any particular reason why one would have a stronger bargaining position than the other. If the parties are of equal bargaining power, it seems to me that they would meet in the middle and agree a deduction of 50 per cent of the contingent tax liabilities."

With absolutely no disrespect intended, it is my view that there is a flaw in the logic of the Judge in that case: there is not one buyer and one seller – there is a host of potential buyers and one seller in a notional transaction. The buyer with the longest-term view of property retention will offer the highest price. In my view, this moves the dial towards a discount of 75% rather than 50%.

In this case, there may have been some special feature such as an anticipated sale of the properties which was not disclosed in the written decision.

Joan’s overdrawn loan account

Joan’s overdrawn loan account was £147,000. Was this an asset for valuation purposes?

Expert 2 suggested that any valuation ought to be done based on a willing buyer and a willing seller; a willing buyer would not view any balance due from a shareholder/director as a recoverable asset and, as such, would reduce the amount they would pay by such balance.

The Judge said that there was no rational basis for this conclusion.

We would normally recognise that, in a notional sale, an overdrawn loan account would be included at full value: provided that 80% of the value of the company exceeded £147,000, the buyer would hold that sum back from Joan and advance it to the company as loan repayment. He would only remit the residual balance to Joan. This means that it is perfectly normal and good practice to include an overdrawn loan account as an asset in those circumstances.

Expert 1 valued the MOT bay based on turnover of £120,000 less costs of operations, leaving an operating profit of £30,000. A multiple was applied and we must assume that the related balance sheet components were then adjusted in order to give the residual goodwill of £73,000.

Expert 2 reviewed the accounts of the business and concluded that the MOT bay did not generate any profits. It appears that this was due to the company ascribing 55% of its entire overheads to this part of the business. The trading activities were a small part of total activities and the Judge considered that this overhead allocation was excessive.

The Judge took some nail scissors and trimmed the MOT bay goodwill down to £50,000. He otherwise accepted the figures presented by Expert 1.

Expert 2 was in some difficulty on some of the stances that he took: it is not easy to understand his position on the property values and the overdrawn loan account. However, we must constantly recognise that we peer through a dark and narrow porthole into these cases, relying solely on what finds its way into the written decision.

*The views expressed are the author's and not ICAEW's