Omitted Takings Affect Share Valuation, Rules Court

A recent case on company valuation may well end up being of great interest to HM Revenue and Customs (HMRC) as well as the two directors involved. It concerned a company which operated a restaurant. When the directors fell out, in order to enable one director to buy out the other’s shareholding, the company shares had to be valued.



The problem that arose was that the valuer, quite sensibly, based the valuation on the company’s profit as per its statutory accounts. The director being bought out took issue with the valuation on the basis that the disclosed accounts had been artificially suppressed by excluding some of the takings from the financial records.



She claimed that some of the takings were only recorded as ‘handwritten takings’, and that their inclusion was necessary to form an accurate picture of the company’s profitability. These arguments were rejected by the judge and the director appealed to the Court of Appeal.



The Court upheld her challenge and overturned the valuation, concluding that the handwritten takings formed part of the company’s ‘books and records’ and that the valuer, by failing to take them into consideration, had failed to place a fair value on her shareholding. It was not enough to argue that a willing buyer would have been found at the price indicated by the expert’s valuation, but ‘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…’