Kohli v Lit & Ors

Thursday, 8 March 2012 Approved Supplemental Judgment JUDGE PURLE QC:

1. A number of points have been raised for clarification; plus there is a further application for permission to appeal. I will deal with the application for permission to appeal first.

2. Mr Griffiths seeks permission to appeal on the basis that interest on costs should not be at the judgment rate of 8 percent. Mr Hanke resists that application and justifies the 8 percent further, as he did during the course of argument, by saying that the conventional figure of 1 percent over base applicable to commercial borrowers is inappropriate in the case of Miss Kohli as a retail borrower, and that 8 percent is much more likely to be closer to what is appropriate in her case. It seems to me that this is ultimately an exercise of discretion and that there is no basis for an appeal. Permission to appeal is accordingly refused.

3. I am also asked by Mr Hanke to confirm the figure of £200,000 as a payment on account. Mr Griffiths, for the purposes of today, does not seek to persuade me that £200,000 is an inappropriate figure, though he would wish me to deduct from it £20,000, being a very rough and ready estimate of what the costs are that are likely to be recoverable from Miss Kohli under existing orders. I consider, however, that the figure of £200,000 is sufficiently safe to cover that £20,000 as well, and accordingly the order for payment on account is in the sum of £200,000.

4. I am asked to clarify one point in my judgment. I adjusted the Kismat valuation down to nil. This was because in her valuation Ms Hindson had added back management charges. I have not, however, deducted management charges from the Sunrise valuation, i.e. management charges payable by its subsidiaries, including Kismat.

5. Mr Hanke accepted during argument that, assuming the management charges were not, as Mr Griffiths was seeking to argue, deductible, they should, in order to avoid double counting, be taken out of the Kismat valuation, which reduced the Kismat valuation to nil. That did not, however, explain why I did not deduct the management charges.

6. Ms Hindson in her report said: “Management charges are generally intended to reflect the cost of the provision of management time to the subsidiary companies by the directors of SRL. I have been instructed that the amounts charged for directors’ remuneration do not include an additional increment to reflect their services to SRL’s subsidiary companies. On this basis I consider that no further adjustment is required in this regard.” She had already adjusted in her valuation income earned by way of management charges for the purpose of calculating Sunrise Radio’s expected future average annual maintainable earnings. No further adjustment was needed to deal with a profit element.

7. As Ms Hindson points out, generally management charges reflect the cost of the provision of management time. Mr Griffiths speculated, probably correctly, that Ms Hindson was not talking simply about the directors. That must be so, because the directors in some of the years that she was considering did not receive any remuneration. She was probably including Dr Lit, and other management as well. But a significance of Sunrise shedding many of its subsidiaries is that the cost of the provision of management time will no longer be a cost that Sunrise need incur, which means that its management team can either be slimmed down, thus reducing its costs, or can devote their time to increasing, even beyond the level of maintainable earnings that I have found, the profitability of Sunrise.

8. There is simply no evidence that the cost which is provided for as management time will now have to be incurred on the hypothetical valuation that I was undertaking. Taking out the management charges, therefore, which is logical, should also be met by taking out the corresponding cost, so that if management charges come out, the costs go down, and the maintainable income is unaffected. Accordingly, it is not necessary, on the evidence I heard, to deduct the management charges, because the cost savings would correspond to the deduction. That again is a fact-finding exercise based on relatively slender evidence. It was, however, the evidence that came from Sunrise’s side. If they wished to maintain that there would still be the same level of costs if the management time was deducted, it was for them to put forward evidence to that effect. ( Further discussion followed )

9. JUDGE PURLE QC: The parties are agreed that the arithmetical consequences of my rulings are that the share value is now (ignoring pence) £562,105. As I have said previously, valuation is not an exact science. It seems unlikely to me that in any course of negotiation the parties would stumble upon a figure of such preciseness. I shall round the figure down to £560,000.

10. The details of the valuation are shown in the attached schedule, prepared since this judgment was delivered . SCHEDULE A. Sunrise Radio Limited 2006 2007 2008 2009 £ Year ended 31 December 1,583,048 702,022 246,328 - Profit (loss) on ordinary activities before tax Add back (deduct) Exceptional and non-recurring items: Bank loan interest 131,002 193,725 240,568 - Profit on disposal of leasehold property -58,297 Subsidiary debt written off 107,484 Loss on disposal of shares in subsidiaries 100 Loss on disposal of investment 500 Adjusted profit (loss) before tax 1,655,753 1,003,331 487,396 0 Weighting 1 Weighted adjusted profit before tax 786,620.00 Less corporation tax at 28% 220,253.60 Maintainable earnings 566,366.40 Value with PE 8.4 4,757,477.76 B. Club Concorde Limited Year ended 31 December 2006 2007 2008 2009 £ Profit (loss) on ordinary activities before tax 371,520 611,041 599,624 531,115 Add back (deduct) Exceptional and non-recurring items Consultancy fees 51,338 120,000 [ allowance made of £60,000/year] Adjusted profit (loss) before tax 422,858 731,041 719,624 651,115 Weighting 0 1 2 3 Weighted adjusted profit before tax 687,272 Less Corporation tax at 28% 192,436 Maintainable earnings 494,836 Value with PE 5.7 2,820,566 C. TOTALS Sunrise Radio Limited £4,757,477.76 Club Concorde Limited £2,820,565.66 Kismat Radio Limited £0.00 Sunrise TV Limited £635,000.00 AIB Facility -£9,539,000.00 AIB Facility redemption -£250,000.00 Hayes Gate House mortgage £5,440,000.00 Value of Sunrise £3,864,043.42 Value of Ms Kohli's 14.78% shareholding £571,105.62 Less the unpaid shares -£9,000.00 TOTAL £562,105.62 Rounded down to £560,000.00