Sethi v Patel & Anor [2010] EWHC 1830 (Ch)

Case No 6683 OF 2008[2010] EWHC 1830 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
IN THE MATTER OF SCITEC GROUP LIMITED
AND IN THE MATTER OF THE COMPANIES ACT 2006
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 19/07/2010
Before
MR JUSTICE NEWEY
Between
SUDHIR SETHIPetitionerALPESH PATELRespondentsSCITEC GROUP LIMITEDRespondent
Mr Gabriel Buttimore (instructed by Teacher Stern LLP) for PetitionerMr Timothy Sisley (instructed by Magwells) for First RespondentHearing Hearing dates: 9-11 and 14-17 June 2010
Judgment

Introduction

[1]On 8 August 2008, the Petitioner, Mr Sudhir Sethi, presented a Petition under section 994 of the Companies Act 2006 (“the 2006 Act”) seeking an order for his shares in the Second Respondent, Scitec Group Limited (“Scitec”), to be purchased by the Respondents. The First Respondent, Mr Alpesh Patel, is the other shareholder in Scitec.[2]The hearing before me was to have involved a trial of the Petition limited to determining(a) whether Mr Sethi had suffered unfair prejudice,(b) if so, the form of relief (if any) that should be granted, and(c) what (if any) directions should be given as to the valuation of Mr Sethi’s shares. In the course, however, of the hearing, Mr Patel made concessions which considerably narrowed the issues between the parties. He conceded, for the purpose of this Petition only, that there had been unfair prejudice and that he should buy out Mr Sethi. He also accepted that Mr Sethi’s shares should be valued as at 13 March 2007, the date of Mr Sethi’s resignation as a director of Scitec. Further, it is common ground between the parties that I should give directions for the value of Mr Sethi’s shares to be determined at a further Court hearing.[3]There remain issues between the parties as to the following: i) Whether Mr Patel should be ordered to buy Mr Sethi’s shares as opposed to merely agreeing to do so; ii) Whether, if an order is to be made, the obligation to purchase the shares should be dependent on Mr Patel having the financial means to do so; iii) Whether Mr Patel should be ordered to pay Mr Sethi interest (or quasi-interest) in respect of the period from 13 March 2007 (the valuation date) to the present; and iv) Whether any (and, if so, what) directions should be given as to the basis on which Mr Sethi’s shares should be valued as regards(a) sums paid in respect of rent,(b) sums spent on refurbishment,(c) debit/credit card “chargebacks”,(d) bad debts as at 30 June 2007,(e) payments made in respect of cars and(f) payments made in respect of a property in Cyprus.

Representation

[4]Mr Gabriel Buttimore appeared for Mr Sethi, Mr Timothy Sisley for Mr Patel. As would be expected, Scitec itself took no part in the hearing.

Basic facts

[5]Scitec was incorporated on 14 May 1999. Mr Patel became the company’s sole director, and he and his wife the only shareholders. The company supplied computers and telecommunications accessories.[6]Mr Sethi became involved with Scitec because he and Mr Patel decided that the company should be merged with a company Mr Sethi ran, Infinity Computer Systems Limited (“Infinity”). Like Scitec, Infinity dealt in computer sales. Whereas, however, Scitec focused particularly on export transactions, Infinity’s emphasis was on domestic sales.[7]Scitec came to occupy premises at Unit 6, the Palmerston Centre, Oxford Road, Wealdstone which Mr Patel and his wife bought in September 2001. It seems plain that Scitec entered into a lease of premises at the Palmerston Centre. No one has been to find an executed copy of such a lease, but a draft is available and Mr Patel said (and I accept) that he and his wife will have needed a signed version when obtaining mortgage finance to buy the Palmerston Centre property.[8]It is not clear from the draft lease what the demised premises were to comprise. The premises were to have been specified in a schedule, but the schedule in the draft refers to a quite different property, harking back, presumably, to a lease prepared for another purpose. The front page of the draft refers to “All those ground floor premises situate and known as UNIT 6 PALMERSTON CENTRE” (emphasis added), but I do not think I can assume that this wording survived unaltered into the executed document. As Mr Sisley said, the draft is at least one generation away from the engrossment. Further, the evidence shows that Scitec in fact occupied areas which were not on the ground floor. On balance, I think it likely that, in its final form, the lease was not limited to the ground floor.[9]The draft lease provided for a 10-year term running, to judge from the front page, from a date in 2001. The rent was initially to be £36,000, but it was to be subject to review after five years. The revised rent, following a review, was to be such as a valuer should “decide should be the yearly rent at the relevant Review Date for the demised premises” on certain assumptions. In assessing the rent, there was to be disregarded:
“any increase in rental value of the demised premises attributable to the existence at the review Date of any improvements to the demised premises or any part thereof carried out with consent where required otherwise than in pursuance of an obligation to the Landlord or the Landlord’s predecessor in title by the Tenant any authorised Sub-tenants or their respective predecessors in title or permitted occupiers during the said term or during any period of occupation prior thereto arising out of an agreement to grant the said term”
. The draft contained a covenant on the part of the tenant to keep the demised premises (including additions) in “good and substantial and decorative repair and condition”.[10]When Mr and Mrs Patel acquired the Palmerston Centre property, it comprised a warehouse and some office space on the ground floor and an office (estimated by Mr Sethi at 30 feet by 18 feet) on the first floor. Under Mr and Mrs Patel’s ownership, substantial improvement works were carried out, in particular to create a new mezzanine floor and office. Mr Sethi estimated that, overall, office space was increased by some 40%.[11]The documentary evidence relating to the costs of refurbishment is not very satisfactory. However, Mr Patel himself put the total price of the works at £85,000 plus VAT in a witness statement, and in the course of the trial he produced a computer print-out indicating that a further sum of, probably, £11,759 (after £2,350 had been deducted from a £14,100 invoice) had been paid for work on the mezzanine floor, to Fourways Supplies Limited (“Fourways”). Further, when giving oral evidence Mr Patel estimated that, leaving aside the work done by Fourways, £80,000 to £85,000 had been spent on the works. In the circumstances, Mr Buttimore suggested that the works were likely to have cost about £100,000, and Mr Sisley did not quarrel with that figure. I shall therefore proceed on the basis that the works cost £100,000.[12]The payments to Fourways were made in October 2001. A letter from Harrow Council confirms that works in respect of a mezzanine floor began in October 2001, also saying that the works “completed in December 2003”. An invoice from Surfridge Services Limited for £45,000 plus VAT is dated 21 March 2002. The invoice appears to relate to “supply and installation of 8 no ceiling supports … heat pump air conditioning unit as agreed on site”. A further invoice, for £7,000 plus VAT, was rendered on 22 January 2003.[13]It was Mr Sethi’s evidence that he moved into the Palmerston Centre in January or February of 2002. Mr Patel said that Mr Sethi did not move in until April or May of 2002, but I think Mr Sethi is likely to be correct about the date. Mr Sethi said that, when he moved in, the mezzanine level had already been created but the refurbishment works had not yet been completed. He recalled being told by Mr Patel that the works would take a few months more to complete and asking Mr Patel in the middle of the year (but prior to the merger with Infinity) how much the works had cost.[14]Scitec’s accounts for the period to 30 June 2002 record additions since 1 April 2001 of £32,500 in respect of leasehold improvements and £55,572 in respect of fixtures and equipment. The 2003 accounts show expenditure of £7,000 on leasehold improvements, which Mr Patel said (and I accept) relates to the invoice dated 22 January 2003. A further £10,000 payment features, Mr Patel said (and I accept), in the 2004 accounts.[15]The £7,000 and £10,000 payments confirm that the refurbishment works had not been entirely finished by the end of June 2002. I think it likely, however, that the works had largely been carried out by that date.[16]Scitec merged with Infinity with effect from 1 July 2002. The merger involved Scitec acquiring Infinity’s issued shares. Following the merger, Mr Patel and Mr Sethi each held 40,000 of Scitec’s 80,000 issued shares. They were also the company’s only directors.[17]A note to Scitec’s 2003 accounts deals with the merger as follows:
“On 1 July 2002, the company acquired the entire share capital of Infinity Computer Systems Limited on a share for share exchange basis at market value. On the same day, the trade of Infinity Computer Systems Limited was transferred to [Scitec]. In accordance with Section 131 of the Companies Act 1985, the company recorded £27,217 excess of the value attributed to the shares issued as consideration for shares of Infinity Computer Systems Limited over the nominal value of those shares as merger relief reserves.”
[18]Mr Sethi and Mr Patel differed as to the extent to which, post-merger, they had specific roles in Scitec. Mr Sethi said that it was agreed that he should have responsibility for business development and focus on domestic sales while Mr Patel would be the managing and finance director. In contrast, Mr Patel said that he and Mr Sethi did not have separate defined functions. Regardless, however, of whether Mr Patel was referred to as managing or finance director, it is plain that he was much more involved than Mr Sethi in financial matters. Mr Patel accepted in cross-examination that he was principally in control of financial matters and that he and Mr Sethi had discussed the fact that he was more comfortable than Mr Sethi with such matters. He also observed that Mr Sethi was not really interested in accounting matters. I note, too, that in a letter dated 20 March 2007 to the company’s then accountant, Mr Prakash Jariwala of Sterling Chartered Accountants, Mr Sethi said:
“I am not great with figures as you know and whilst I have tried to study the figures available to me I am struggling to fully comprehend them.”
[19]Many of the transactions which Mr Patel dealt with involved Nigeria. These transactions were often effected on a cash basis. (Mr Patel said in cross-examination that cash was the easiest way to deal with Nigerians.) The sums received in cash could be substantial: total cash receipts from a transaction could potentially, Mr Patel accepted, run into tens of thousands of pounds. Mr Patel would sometimes pass cash on to a company called Alvabond Limited, which had an exchange bureau, in return for cheques, which Scitec would then bank. Mr Patel said in a witness statement that the “idea was to reduce bank charges, by reducing the number of deposits”. When giving oral evidence, however, Mr Patel said that the objective was to reduce the amount of cash deposited, not the number of deposits. In my judgment, neither explanation was accurate. Mr Patel’s real reason for exchanging cash for cheques is, as it seems to me, to be found in the fact that Mr Patel conceded to Mr Sethi in March 2007 (as Mr Sethi said, and I accept) that “he was not able to pay the cash into Scitec’s account as the legitimacy of the payment or source of payment would be questioned by the Bank”.[20]While cash was frequently used for Nigerian transactions, payment in respect of such transactions was sometimes made by credit or (more usually) debit card. It was as a result of some such payments that, in March 2007, accounts of Scitec were frozen. On 9 March 2007, Lloyds TSB Cardnet (“Cardnet”) faxed to Mr Patel a letter dated the previous day in which Cardnet stated that it was processing Scitec’s deposits and was withholding £116,957.77 for the time being. At first, Mr Sethi thought that Mr Patel was an unwitting victim of credit card fraud. By Monday 12 March, however, Mr Sethi had changed his view. He also became very concerned that Mr Patel had undertaken large-scale cash transactions without the company having been registered as a “high value dealer” under the Money Laundering Regulations 2003. In cross-examination, Mr Patel accepted that Mr Sethi had raised the Regulations with him on a number of occasions between their introduction and 2007 and that Mr Jariwala must have advised in 2004 that Scitec should be registered as a “high value dealer”. It seems that, at one stage, an application for registration was partially completed. Nonetheless, Mr Patel had not submitted any application by March 2007.[21]Understandably, Mr Sethi decided that he should resign. He tendered his resignation in a letter dated 13 March 2007, in which he stated:
“In light of what has currently come to surface over the last week, I feel I have no trust and confidence left in the way you have been handling the company’s affairs.”
[22]Mr Sethi explained as follows in a witness statement:
“I recall that on 12 March 2007, I spoke with Mr Jariwala (Scitec’s accountant) to explain that I was very worried that Mr Patel was involved in money laundering and had deliberately processed payments for goods when he knew that the credit card details had been stolen by his associates in Nigeria. I also expressed concern to Mr Jariwala that Mr Patel was using Scitec’s funds as if they were his own. Mr Jariwala advised me to resign immediately and he, dictated over the telephone, a letter of resignation, which I gave to Mr Patel. I felt that my livelihood was at stake due to Mr Patel’s conduct. ”
In his oral evidence, Mr Sethi said (and I accept) that he did not want to be involved with the risks that Mr Patel was taking.[23]Mr Jariwala was asked by Mr Sethi and Mr Patel to prepare a valuation of Scitec. On 10 April 2007, he supplied such a valuation based, as he explained, on financial and management accounts to 28 February 2007. This assessed the company to have net assets of £318,559 and to be worth the same amount. Mr Jariwala observed, though, in the email to which the valuation was attached that the valuation was a “starting point” which needed to incorporate “many issues on both sides”. On 18 April, Mr Patel wrote that Scitec was “not worth the kind of figures that [Mr Sethi was] thinking of”. Nothing came of Mr Jariwala’s valuation.[24]Mr Patel has, through his solicitors, made a number of offers to purchase Mr Sethi’s shares. The first such offer was contained in a letter dated 3 October 2007 and so pre-dated the Petition (which was presented in August 2008). Offers were also made by letters dated 27 November 2008, 18 August 2009, 4 January 2010 and 10 February 2010.[25]Not long after the Petition’s presentation, following a hearing before Chief Registrar Baister on 5 December 2008, a draft order was circulated providing for a valuer to be appointed. However, the order was never finalised. After a time, Mr Sethi’s solicitors arranged a further hearing, and Mr Buttimore’s skeleton argument for that hearing explained that Mr Sethi “now … has no faith in [Mr Patel’s] professed desire to settle the matter via the route which was proposed at the directions hearing”. On 7 April 2009, Chief Registrar Baister ordered Mr Patel to pay costs of both that hearing and that of 5 December 2008, reflecting no doubt where he felt blame lay.[26]As regards the moneys withheld by Cardnet, Cardnet eventually retained £72,796.49 in respect of chargebacks and £2,460 for management fees, a total of £75,256.49.[27]Mr Sethi now trades through Abacus Computers Limited.

Witnesses

[28]Mr Sethi and Mr Patel each gave evidence. Mr Sethi struck me as an honest, and broadly reliable, witness. Mr Patel was far less satisfactory. Mr Sisley accepted in closing that Mr Patel had not been the world’s best witness. It seems to me that I cannot regard Mr Patel as a reliable witness. There were various occasions when his evidence shifted significantly in cross-examination or when he himself ultimately accepted that statements made in his written evidence or his Points of Defence were incorrect.[29]Evidence was also given by Mr Sethi’s wife, by Mrs Manjinder Kalsi (who worked for Scitec between 2004 and 2007), by Mr Sanjai Mistry (an employee of Scitec), by Mr Philip Ermiya (another employee of Scitec) and by Mr Patel’s wife. Their evidence is, however, of relatively little significance in relation to the issues I have to determine.[30]In the course of her evidence, Mrs Sethi made reference to some notes which, she said, related to a telephone conversation she had had with Mr Jariwala on 21 March 2007. It was suggested to Mrs Sethi that she had made up the notes. While the notes do not seem to me to be of much importance in relation to the matters that, in the event, I need to decide, I think I ought to state in terms that I am satisfied that the notes were made on 21 March 2007, as Mrs Sethi said.

Should there be an order for purchase?

[31]Mr Sisley argued that Mr Patel should not be ordered to purchase Mr Sethi’s shares. He submitted that there was no need for such an order (because Mr Patel was willing to buy the shares anyway) and that it would be unfair to give Mr Sethi the “whip hand” of an order. Mr Sisley supported his submissions by reference to aspects of Mr Sethi’s conduct. The relevant conduct included, he said, leaving Mr Patel to run Scitec alone and refusing to collaborate in new banking arrangements. Conduct in relation to the proceedings was also the subject of criticism (for example, failing to respond constructively to open offers, making excessive allegations and giving untruthful evidence). Mr Sisley relied on Amin v Amin [2009] EWHC 3356 (Ch) as showing that misconduct on the part of a Petitioner can affect the relief he should be granted.[32]In my judgment, however, I ought to make an order for purchase. As I have already indicated, Mr Patel concedes (albeit only for the purpose of this Petition) that there was unfair prejudice and that he should buy Mr Sethi out. In such circumstances, it seems to me that it will ordinarily be appropriate that an order for purchase should be made. The history of this dispute suggests, moreover, that the certainty of an order is desirable: proposals for Mr Patel to buy Mr Sethi’s shares on the basis of a valuation from Mr Jariwala and for a valuation to be carried out following the hearing before Chief Registrar Baister in December 2008 both came to nothing. Nor can I see anything in Mr Sethi’s conduct which should lead to a different result. I note in particular that (as I have said above) I regard Mr Sethi as an honest witness and that I regard Mr Sethi’s decision to resign as a director as understandable. More generally, I do not see Mr Sethi’s conduct as open to serious criticism.

Should there be an escape clause?

[33]Mr Sisley contended that, if there were to be an order for Mr Patel to purchase Mr Sethi’s shares, the obligation to purchase should be dependent on Mr Patel having the financial means to do so. There should, Mr Sisley said, be an “escape clause”.[34]On this aspect, I was referred to Re Cumana Ltd [1986] BCLC 430. In that case, it was argued that an order to purchase shares should have contained an “escape clause” to enable the Court to order alternative relief should the purchaser be unable to raise the money to buy the shares. The Court of Appeal did not accept the argument. Lawton LJ said (at 436-437):
“One further submission made on Mr Bolton's behalf must be considered. He said in evidence that he could not, out of his own resources, find the money to buy Mr Lewis's shares. The judge seems to have envisaged that he might have to sell his own shares or raise money in some other way to buy out Mr Lewis. The evidence from the expert witnesses was that the sale of shares in Cumana might be difficult. All this led counsel for Mr Bolton to submit that the judge should have made an order containing what he called an 'escape clause', that is to say a provision which would enable the court tomake some other order if, despite Mr Bolton's best endeavours, he was unable to raise the money to purchase Mr Lewis's shares at the price fixed. Despite the initial attractiveness of this submission, it is wrong in principle. What the judge was deciding was the amount of the compensation which Mr Bolton should pay Mr Lewis for the wrong he had done him: see Scottish Co-operative Wholesale Society Ltd v Meyer [1958] 3 All ER 66 at 89, [1959] AC 324 at 369, per Lord Denning. The fact that a wrongdoer is impecunious is no reason why judgment should not be given against him for the amount of compensation due to his victim. What Mr Lewis should do to get money out of Mr Bolton, claiming, as he still does, that he is impecunious, is a matter for him to decide, not the court.”
Nicholls LJ said (at 444-445) that the “difficulties in formulating and implementing an appropriate escape clause [were] such as to make this proposal impracticable and unsatisfactory”.[35]Mr Sisley sought to distinguish Cumana on the basis that, in the present case, it had not been decided that Mr Patel had committed any wrong. He also invoked the alleged misconduct of Mr Sethi by reference to which he had argued against an order for purchase being made at all.[36]However, it seems to me that the fact that there has been no decision to the effect that Mr Patel has committed a “wrong” is of no significance in circumstances where it is conceded, for the purpose of the Petition, that there has been unfair prejudice. Moreover, I have said above that I do not regard Mr Sethi’s conduct as open to serious criticism. In all the circumstances, it seems to me that I should follow Cumana, and I shall not, accordingly, include any “escape clause” in the order.

Interest

[37]It is Mr Sethi’s case that Mr Patel should be ordered to pay interest (or “quasi-interest”) on the purchase price of the shares from the valuation date (13 March 2007) to the present. Mr Patel, on the other hand, maintains that there should be no provision for interest.[38]Both sides referred to the decision of the Court of Appeal in Profinance Trust SA v Gladstone [2002] 1 BCLC 141, where “quasi-interest” had been awarded at first instance. On appeal, Robert Walker LJ, delivering the judgment of the Court, said the following:
“[31] In our judgment the deputy judge was right in his view that an order for the equivalent of interest is not beyond the powers of the court under s 461(1) [of the Companies Act 1985 – the predecessor of section 994 of the 2006 Act]. The court has repeatedly emphasised the width of the discretion conferred by that subsection, which is not limited to the particular powers enumerated in subs (2). The House of Lords has (in relation to the court's closely comparable powers under s 210 of the Companies Act 1948) approved the making of adjustments in the valuation process which mean that the court is actually valuing shares, not as they are, but as they would have been if events had followed a different course; and that practice is regularly followed by the court in orders under s 461(1). In these circumstances a denial of the court's power to award the equivalent of interest would come close to straining at a gnat. [32] It is however a power which should be exercised with great caution. [Counsel for the appellant] has rightly drawn attention to the need for lawyers to be able to advise their clients as to the likely range of outcomes of s 459 proceedings, in order to encourage compromise in an area in which litigation can be cripplingly expensive. If a petitioner seeking an order for the purchase of his shares contends (either as his only claim or in the alternative) that they should be valued at a relatively early date but then augmented by the equivalent of interest, he must put forward that claim clearly and persuade the court by evidence that it is the only way, or the best way, to a fair result. It should not be a last-minute afterthought (as it may have been, to some extent, in Re Bird Precision Bellows and Re Planet Organic). Unless a petitioner is asking for no more than simple interest at a normal rate he should also put before the court evidence on which the court can decide what amount (if any) to allow….”
[39]In the present case, Mr Buttimore argued that it would be appropriate, in achieving a fair result, for the purchase price of Mr Sethi’s shares to be augmented by the equivalent of interest at the rate of 5%. Mr Patel had, he said, had control of Scitec since 13 March 2007 and thus been able to draw large sums for himself. Interest, Mr Buttimore said, would represent a fair response to what had happened.[40]Mr Sisley opposed the making of any order for interest or quasi-interest. Amongst the points he made was that matters could have been resolved much sooner if Mr Sethi had pursued Mr Patel’s offers (in particular, that of October 2007).[41]I have concluded that I should not award interest or quasi-interest. It is apparent from the Profinance case that the power to do so should be exercised “with great caution”. I do not consider that there is sufficient reason to exercise the power in the present case.[42]It is noteworthy in this context that it would have been open to Mr Sethi to ask for his shares to be valued as at the date of the order for purchase; in fact, Profinance shows that the starting point is that shares should be valued as at the date of the order. Had that course been adopted, account could, so far as appropriate, have been taken of the extent to which Mr Patel had derived benefits from Scitec since Mr Sethi’s departure in 2007. In the event, however, Mr Sethi has chosen to ask for his shares to be valued as at March 2007. That date has much to commend it, but the fact remains that the three-year interval between the date of valuation and this hearing is attributable to a choice on Mr Sethi’s part.

Rent

[43]As mentioned above, the draft lease provided for Scitec to pay rent of £36,000 a year for the first five years of the term. It is fair to assume that these provisions were incorporated in the lease as executed.[44]It was also, in my judgment, orally agreed between Mr Sethi and Mr Patel that the rent should be £36,000 a year. Mr Sethi gave evidence to this effect. Mr Patel disputed the point, claiming that a rent of £48,000 had been agreed. However, I prefer Mr Sethi’s evidence. It is, in particular, consistent with Mr Patel’s reaction when challenged over the fact that rent of £48,000 was being charged (as to which, see below). It is significant, too, that there was no reference in either Mr Patel’s solicitors’ letter of 3 October 2007 or the Points of Defence to a rent of £48,000 having been agreed.[45]In the event, Scitec sometimes paid rent at a rate higher than £36,000 a year. Scitec’s accounts to 30 June 2002 state that, during the period, the company paid £36,000 by way of rent, but the accounts for the next two years each show rent of £48,000. Subsequent accounts again record rent of £36,000. While, however, bank statements show that in the latter part of 2004 there was a standing order in favour of Mr and Mrs Patel of £3,000 a month from Scitec (consistent with rent of £36,000 a year), the monthly payments rose to £4,000 in January 2005 and remained at that level until November 2006. In the absence of a satisfactory explanation to the contrary, I can only suppose that over this 23-month period Mr Patel was causing Scitec to pay rent of £4,000 a month.[46]When giving oral evidence, Mr Patel suggested that an appropriate adjustment must have been made at the year-end. However, no documentation to substantiate this assertion was produced notwithstanding that (as Mr Patel accepted) the Petition alleged from the outset that excessive rent had been paid. I cannot accept, therefore, that any adjustment was made.[47]Mr Sethi gave evidence to the effect that he discovered in 2004 that Mr Patel had unilaterally increased the rent to £48,000 and that Mr Patel agreed to restore the rent to £36,000 when challenged. Mr Patel accepted that the rent had been reduced after a protest from Mr Sethi.[48]I arrive at the following conclusions: i) Scitec was liable for rent at the rate of £36,000 per annum; ii) Mr Patel nevertheless caused Scitec to pay rent at the rate of £48,000 per annum between July 2002 and June 2004 and again from January 2005 to November 2006; iii) Scitec thus overpaid by, in total, £47,000; iv) Mr Sethi’s shares should be valued on the basis that, as at 13 March 2007, Scitec was entitled to recover the £47,000 overpayment.

Refurbishment works

[49]It is Mr Sethi’s case that his shares should be valued on the basis that, at the valuation date, Scitec was owed moneys by Mr Patel as a result of the refurbishment works at the Palmerston Centre.[50]In its original form, the Petition alleged that the refurbishment works had gone substantially beyond Scitec’s obligations under its lease and, hence, that Mr Patel had “acted in breach of his fiduciary duties to the Company in that he acted for the ulterior purpose of personal gain and misapplied Company assets to the detriment of the Company and its shareholders”. As, however, Mr Buttimore recognised in closing, this way of putting the case faces the obstacle that Mr Patel and his wife were until July 2002 the sole shareholders of Scitec as well as the owners of the Palmerston Centre and, in Mr Patel’s case, the only director of Scitec. On the face of it, therefore, expenditure incurred before July 2002 is likely to have been sufficiently authorised by Mr and Mrs Patel as Scitec’s board and members. Further, as explained above (see paragraph 15), I take the view that the works had largely been carried out by the end of June 2002.[51]That does not wholly dispose of this way of putting the case since it is evident that some work was carried out after June 2001. As Mr Buttimore pointed out, Mr Patel himself explained that payments totalling £17,000 featured in subsequent years’ accounts. Further, the fact that the payments appear to have been taken into account as “leasehold improvements” suggests that they went beyond Scitec’s obligations under its lease.[52]In any event, Mr Sethi introduced an alternative claim by an amendment to the Petition for which I gave permission during the hearing. This alleges that the sums expended on the Palmerston Centre were loans by Scitec to Mr Patel or, alternatively, that Mr Patel is estopped from denying that they were loans.[53]In this respect, Mr Sethi gave evidence to the effect that Mr Patel had told him that money spent on refurbishment works would be repaid. Mr Sethi said the following in a witness statement:
“During this period [as I understand it, the first half of 2002], I asked Mr Patel how the refurbishment works were being funded and he explained that it was through a loan from Scitec which he would eventually repay to the company. In or around mid 2003 I asked Mr Patel how much the refurbishment works cost and he informed me that the sum was in the region of £60,000. Mr Patel advised that this sum had been paid by Scitec and that he would later arrange to repay this amount …. Towards the end of 2003 I reminded Mr Patel of his obligation to repay Scitec and he then informed me that the actual cost of the refurbishment works was in fact £40,000. In or around March 2007, shortly before I resigned Mr Patel informed me that he had repaid Scitec for the refurbishment works.”
In cross-examination, Mr Sethi broadly adhered to this account, and I accept that it is substantially accurate. It plainly lends support to Mr Sethi’s claim that the sums expended on the Palmerston Centre represented loans by Scitec to Mr Patel.[54]Scitec’s accounts paint a different picture. The accounts for the period to 30 June 2002 record, by way of debtors, “Trade debtors” and “Social security and other taxes”; no sum is shown as owed by Mr Patel. The following year’s accounts include an entry for “Director’s loan accounts”, but the figure given is only £1,109. The 2004 and 2006 accounts show nothing as owing by either director. The 2005 accounts state that £8,674 was owed on “Directors’ loan accounts”.[55]I do not think, however, that I can regard the accounts as a reliable guide to how the expenditure on the refurbishment works was to be treated. It is true that Mr Sethi saw the accounts and raised no objection to the debtor entries, but, as I have indicated above (paragraph 18), he had relatively little involvement or proficiency with financial matters.[56]On balance, therefore, I have concluded that the sums spent on refurbishment works represented loans by Scitec to Mr Patel. As I see it, the best evidence as to the basis on which the expenditure was incurred is to be found in Mr Sethi’s account of conversations between himself and Mr Patel (as to which, see paragraph 53 above). In this respect, no distinction falls to be drawn between expenditure before the merger and expenditure after it. I find that all the expenditure was intended to be by way of loan to Mr Patel. It follows that, in my judgment, Mr Sethi’s shares should be valued on the basis that, at the valuation date (13 March 2007), Mr Patel owed Scitec £100,000 (as to which figure, see paragraph 11 above) as a result of the refurbishment works.[57]That conclusion could possibly have implications for the value of Scitec’s lease. Having regard to the rent review provisions in the draft lease (as to which, see paragraph 9 above), which I take to have been incorporated into the lease as executed, the lease could have been expected to be of more value had Scitec incurred the costs of refurbishment on its own account.[58]It was suggested on Mr Patel’s behalf that regard should be had to(a) the possibility that the terms of the merger between Scitec and Infinity did not take account of the sums which, as I have found, were owed by him as a result of the refurbishment works and(b) the benefit which Scitec derived from the works. It seems to me, however, that no adjustment falls to be made for these matters. With regard to the terms of the merger, it was, as I see it, understood between Mr Patel and Mr Sethi at the time of the merger that sums spent on refurbishment works would be repaid, but Mr Patel and Mr Sethi nevertheless went into the merger, as Mr Sethi said and I accept, on the basis that neither would make any payment to the other. As for Scitec having derived benefit from the works, it is not clear either how far the works were in fact of benefit to Scitec or how Scitec’s rent (£36,000 a year until reviewed) compared with market rates. In any case, the parties having (on the view I take) proceeded on the basis that the expenditure on refurbishment works would be repaid, I cannot see that any adjustment need be made to take account of whatever benefits may have accrued to Scitec from the works before the valuation date. What matters is the value of Mr Sethi’s shares on 13 March 2007. In that context, the significant points are those summarised in paragraphs 56 and 57 above.

Chargebacks

[59]It is Mr Sethi’s case that the transactions in respect of which Cardnet retained sums totalling £75,256.49 (see paragraph 26 above) involved serious mismanagement on Mr Patel’s part and that Mr Sethi’s shares should be valued on the basis that Scitec had a claim against Mr Patel for resulting loss.[60]The chargebacks for which Cardnet withheld money arose out of a dozen sale transactions between 8 December 2006 and 1 February 2007. In each case, the customer was Nigerian and the goods were shipped to the customer in Nigeria. The customers in question were Datamasta Computers Limited (“Datamasta”), Just Computers and Uhuru Trading Company. Mr Patel described Datamasta and Just Computers as “portals” and explained that the two were very closely connected; an individual called Victor would, Mr Patel said, place orders for both.[61]The transactions giving rise to the chargebacks involved the use of debit (or credit) cards in the names of persons other than the customers. Each such card would, moreover, be registered to an address in the United Kingdom rather than Nigeria. Victor would sometimes, Mr Patel said, use a number of debit cards to pay for a single order. It seems, too, that debit card payments would not always be made in respect of particular orders but would rather provide a fund from which payment could be made as and when orders were placed.[62]On each occasion, the cardholder’s security number (on the back of the card) and postcode appear to have been checked. However, Mr Patel accepted that a fraudster could supply that information if he had no more than the card and the card-holder’s address (say, because a wallet containing both a debit card and a driving licence had been stolen).[63]In respect of one transaction, for £8,500, Mr Patel was supplied with a copy of a driving licence, from which it could be seen that the holder was born in London and lived in Uxbridge. Mr Patel was also given a copy of a driving licence for another transaction. Here, the holder was born in London and lived in Northumberland. This transaction was not, however, one of the twelve where there were ultimately chargebacks.[64]The Points of Defence assert:
“On all occasions on a sale to Nigeria [Mr Patel] checked passport details and obtained verification of the address.”
In similar vein, Mr Patel stated in a witness statement:
“As far as credit card fraud went, for the entire history of the company I had always taken verification of identity by copy passports and verification of address for any sales abroad.”
In oral evidence, Mr Patel spoke of asking Victor to fax him passport detail for the card-holders and of himself speaking to card-holders. In the course, however, of cross-examination, Mr Patel came to accept that he never obtained passport details for card-holders who were not customers. He said, moreover, that he did not remember asking for such information. Further, Mr Patel will not, in my judgment, have spoken to the holders of the cards used in the chargeback transactions.[65]Mr Patel said in evidence that it was “notorious that anyone doing business with Nigeria faces a considerable risk of fraud”. That he was alive to the risks at the time is apparent from the fact that he told Mr Sethi in March 2007 (as Mr Sethi said, and I accept) that he was concerned that he might go to prison as a result of the credit card problems.[66]In cross-examination, Mr Patel said that, with hindsight, he probably accepted that he had been foolish and that he should have asked for copies of passports.[67]On balance, I have concluded that Mr Patel failed to exercise due care in relation to the transactions giving rise to the chargebacks. A number of factors indicated that there was a risk of debit card payments proving to be unauthorised. These included, aside from the perceived risk of “doing business with Nigeria”, the fact that payment was being made using cards with no evident links to the customers, the fact that payment for a single order might be made using more than one debit card, the fact that payments would not necessarily be tied to particular orders, and the fact that the goods were to be shipped to addresses in a country different from, and having no known links to, the card-holders. It seems to me that, given such risks (of which Mr Patel was probably aware), Mr Patel ought reasonably to have proceeded with the transactions only if supplied with appropriate passport details for the card-holders.[68]Mr Sisley argued that Scitec had suffered no loss because the risks had been factored into the prices. He relied on a passage in a witness statement in which Mr Patel said that he charged “the Nigerian credit customers more than [he] charged to other people”. As, however, Mr Buttimore pointed out, that passage is not borne out by the documentary evidence. In this connection, Mr Buttimore referred me to a print-out showing “profit by order taker” for the period from 1 July 2006 to 30 June 2007. This shows Mr Patel to have taken orders amounting to nearly £4 million with a gross profit margin of 10.37%. The other “order takers” named had higher gross profit margins. Mr Sethi, the second biggest order taker, had a gross profit margin of 20.21%.[69]On the other hand, I am not satisfied that, had Mr Patel insisted on passport details, Scitec would have received all of the £72,796.49 retained in respect of chargebacks (see paragraph 26 above). It may be that some or all of the sales would not have proceeded if Mr Patel had required passport details to be provided. In that event, Mr Patel’s failure to demand passport details would have caused Scitec to lose the costs of fulfilling the relevant orders rather than the sale price of the goods.[70]Doing the best I can on limited information, I think that Mr Sethi’s shares should be valued on the basis that, at the valuation date, Scitec had a claim against Mr Patel for £67,707. That figure represents 89.63% (taking account of Mr Patel’s gross margin of 10.37%) of the amount of the chargebacks (of £72,796.49), plus the management fees of £2,460 charged by Cardnet.

Bad debts

[71]The extent to which Scitec had bad debts may be of relevance when valuing Mr Sethi’s shares.[72]The profit and loss account included in Scitec’s accounts for the year to 30 June 2007 shows administrative expenses at £491,639. This figure included “Bad debts” of £157,525.[73]It is evident that debts were treated as bad more readily in the context of the 2007 accounts than had been the case in previous years. In this connection, Mr Patel said the following in a witness statement:
“For the period that [Mr Sethi] was with the company, he and I would lean towards optimism in classifying bad debts. That was because we did not want to give an unduly poor impression of the company’s balance sheet. Once he left we lost all our credit lines, and I have described the problem with the bank. As there was nothing to be lost by being forthcoming over bad debts, I wrote them in at the end of the year, on that occasion leaning towards pessimism …. The approach that I took at the end of the year on 2007 was to treat all debts over four months old as being bad debts.”
[74]It is apparent from a schedule that the £157,525 figure for bad debts in the 2007 accounts was derived from the following debts: Debtor Amount (£) Artflora 264.38 Redlight Audio 57.58 Bob International Limited 3,000.00 Bonvic Computers Limited 1,200.00 Casio 65.80 D S Office 3,029.33 I.E. Maduobi Enterprises 2,190.00 Ifeanyi Anyanwo 3,240.00 Intellect Systems Limited 415.10 Mercury Games Limited 5,099.54 MVS Digital Limited 135.13 PC Care & Repair 1,164.44 Plumbers Depot Limited 2,989.47 Remedy CS Limited 1,442.00 The Sethi Partnership 4,893.64 Glad & Godwin Resources Limited 2,385.00 Uhuru Trading Company 37,765.11 Underrocks Technologies Limited 6,571.00 Visual Data Limited 8,850.00 Cardnet 72,797.00[75]The Cardnet sum was, of course, written off because of the money withheld for chargebacks. As regards the other debts, the periods for which they had been outstanding are apparent from an aged debtors report as at 30 June 2007. This shows that the sums owed by the following had been outstanding for upwards of 90 days by 30 June 2007: Artflora, Redlight, Casio, Intellect Systems Limited, MVS Digital Limited, Plumbers Depot Limited, Remedy CS Limited and Underrocks Technologies Limited. £2,312.56 of the money owed by D S Office had been owed for more than 90 days, as had £540.51 of PC Care & Repair’s debt, £2,710.78 of the Sethi Partnership’s debt and £3,527 of the Visual Data Limited debt. The debts relating to Bob International, Bonvic Computers Limited, I.E. Maduobi Enterprises, Ifeanyi Anyanwo, Mercury Games Limited, Glad & Godwin Resources Limited and Uhuru Trading Company had been outstanding for no more than 30 days.[76]It is apparent from Mr Patel’s evidence that the write-offs as at 30 June 2007 were in part based on subsequent events, the accounts not being approved until September 2009. As regards Bob International Limited, for example, the £3,000 had been outstanding for only a short period by 30 June 2007 (the end of the accounting period), but it remained unpaid when the accounts were finally approved in 2009. It was deemed a bad debt as at 30 June 2007. Again, by way of further example, the £37,765.11 owed by Uhuru Trading Company was written off, Mr Patel explained, as a result of the loss of a consignment of goods in 2007-2008. There was, I conclude, no reason why, on 30 June 2007, the debt should have been viewed as bad.[77]Conversely, certain of the debts which were treated as bad for the purposes of the 2007 accounts had in fact been discharged by the time the accounts were finalised. That was the case with D S Office, for instance. As regards Bonvic Computers Limited, the £1,200 was treated as a bad debt because, although payment was not overdue as at 30 June 2007, the debt subsequently came to have been outstanding for more than four months. The debt was consequently deemed bad even though it was discharged in full early in 2008 (and so well before the 2007 accounts were approved).[78]There was some debate before me as to whether the Uhuru Trading Company debt of £37,765.11 was ultimately paid. Mr Buttimore suggested to Mr Patel in cross-examination that it had been, but Mr Patel doubted the point. I do not think that I am in a position to arrive at a conclusion on the point.[79]I consider that the valuation of Mr Sethi’s shares should be conducted on the basis of the matters set out paragraphs 72-78 above. It is, however, for those concerned with the valuation to determine what (if any) implications those matters have for the valuation exercise.

Cars

[80]In March 2007, a car was bought for Mr Sethi at a cost of about £11,000 using company funds. At about the same time, a similar sum was spent on a car for Mr Patel. Mr Sethi said, and Mr Patel accepted, that they had agreed between them that the expenditure would be treated as interim dividends.[81]In the event, Mr Patel seems to have sold his car in late 2007 and to have paid the proceeds to Scitec. Mr Patel explained in cross-examination that Scitec needed the money, and he referred to documents which appear to confirm that the proceeds of sale were deposited in Scitec’s bank account.[82]I conclude that neither of the two cars should be treated as an asset of Scitec as at the valuation date (13 March 2007) and that such moneys as were paid to Scitec on the sale of Mr Patel’s car will have represented a loan to the company, except, perhaps, if and so far as he was previously indebted to it.

The Cyprus property

[83]It is common ground that in early 2007 Mr Sethi and Mr Patel, who at the time were friends as well as business partners, planned to buy a holiday home in Cyprus for their common use. To that end, payments of £7,500 and £14,000 were made from company money in January 2007, in particular to fund a deposit. In the event, the property was bought by Mr Sethi alone, with the result that the payments accrued to his sole benefit.[84]Mr Sethi gave evidence to the effect that the £21,500 was to be treated as an interim dividend. In cross-examination, Mr Patel agreed.[85]In my judgment, the best course is for Mr Sethi’s shares to be valued on the footing that Mr Patel was entitled to a dividend corresponding to the £21,500 payments from which Mr Sethi benefited. Since Mr Sethi and Mr Patel were equal shareholders, they would be expected to receive equivalent dividends.[86]Mr Sethi raised the possibility that Mr Patel might have taken some money for himself. I do not consider that I am in a position to make findings in this respect. However, it seems to me that, if and to the extent that Mr Patel had not in fact been credited with the £21,500, he should be treated as having been owed this sum by Scitec at that date.

Conclusions

[87]I can summarise my conclusions as follows: i) Mr Patel should be ordered to purchase Mr Sethi’s shares in Scitec; ii) no interest or quasi-interest on the purchase price should be awarded; iii) Mr Sethi’s shares should be valued on the basis that, as at the valuation date (13 March 2007), Scitec was entitled to recover(a) £47,000 in respect of overpaid rent,(b) £100,000 as a result of the refurbishment works and(c) £67,707 in relation to the chargebacks; iv) the valuation of Mr Sethi’s shares should be conducted on the basis of the matters set out paragraphs 72-78 above, if and so far as relevant; v) neither of the cars bought for Mr Sethi and Mr Patel in early 2007 should be treated as an asset of Scitec as at the valuation date, and such moneys as were later paid to Scitec on the sale of Mr Patel’s car will have represented a loan to the company, except, perhaps, if and so far as he was previously indebted to it; vi) if and to the extent that Mr Patel had not in fact been credited with the £21,500 mentioned in paragraphs 85-86 above by the valuation date, he should be treated as having been owed this sum by Scitec at that date.[88]I should be grateful if the parties would seek to agree an order giving effect to my conclusions in this judgment.

Cited in 1 later judgment