Case No: 10220 of 2008
Neutral Citation Number: [2010] EWHC 3334 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 17/12/2010

Before :

MR JUSTICE WARREN
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Between :

	IN THE MATTER OF SOUTHERN COUNTIES FRESH FOODS LIMITED
AND IN THE MATTER OF THE COMPANIES ACT 1985

COBDEN INVESTMENTS LIMITED	

Petitioner	
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	(1) THE RWM PURCHASER LTD
(2) SOUTHERN COUNTIES FRESH FOODS LIMITED
(3) ROMFORD WHOLESALE MEATS LIMITED	

Respondents
	
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Mr Bernard Weatherill QC & Mr Peter Griffiths (instructed by Messrs Rosenblatt) for the Petitioner
Mr Victor Joffe QC & Mr Timothy Collingwood (instructed by New Media Law  LLP) for the   Respondents

Hearing dates: 
19th, 22nd, 23rd, 24th, and 25th November 2010
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Judgment
Mr Justice Warren : 
Introduction
1.	A further hearing was held over five days starting on 19 November 2010 to deal with valuation issues outstanding as the result of my main judgment handed down on 20 November 2008 (“the Main Judgment”) and my supplemental judgment handed down on 17 June 2009 (“the Supplemental Judgment”). I adopt the same names and definitions in this supplemental Judgment. 

2.	The experts have been unable to agree.  There have also been two new developments.

a.	First, it is said by CIL that new information has come to light concerning RWM’s bone-in meat trade which has a significant impact on some of my conclusions.  That information is, it is said on behalf of CIL, wholly at variance with what Graham said in his written and oral evidence and that he must have known that he was not being honest.
b.	Secondly, CIL seeks by way of amendment of the Petition to claim an amount equivalent to interest on the outstanding purchase price for the Shares.

3.	Applications are therefore made by CIL in relation to both of those two developments.  They are to be found in an application notice (“the Application”) dated 9 November 2010 which I will come to.

4.	Quite apart from those two new developments, the outstanding issues until quite recently were firstly, historical adjustments.  There were nearly all agreed before the hearing.  The only items of historical adjustment remaining for me to resolve is further additional compensation (if any) in respect of RWM having prevented SCFF from trading the cows killed at Langport.

5.	Going forward there is disagreement about the amounts to be included in the assessment of the EBITDA in respect of the following:

a.	The SBO recharge.
b.	Adjustments to maintainable earnings in respect of rent review and insurance.
c.	EBITDA multiple.
d.	Amount due from SCS.
e.	Working capital adjustment.
f.	Adjustment to maintainable earnings as a result of the bone-in cow trade referred to in 3a above.

6.	Ms Gread, CIL’s former expert, is currently unable for personal reasons to have any further involvement in the case.  She has been replaced by Mr Clokey.  RWM did not oppose her replacement provided that the new expert did not seek to challenge her views.  Mr Clokey has been prepared to act on that basis.

7.	I propose to take the outstanding valuation issues first and to consider the two new developments after that.

8.	Before doing so, I would just say a word or two about the experts, Mr Clokey and Mr Grantham.  I found Mr Clokey’s evidence to be clear and to the point.  He was clearly trying to assist me.  He appeared to me to take a wholly dispassionate and expert view.  That is not to say that I must necessarily follow him on everything he has to say.  I am sure that Mr Grantham too was doing his best to assist me.  But I am afraid he came across as a real advocate for his clients’ cause and unwilling to accept valid points made by Mr Weatherill which might be detrimental to them.  I therefore view his evidence with particular care.

EBITDA adjustment
9.	It is necessary to say something at the outset about charges and recharges and whether, and if so how, they should feature in the EBITDA.  They featured in the “give and take” issue and they are closely connected with the appropriateness of the kill fee under the MoU.

SBO recharge
10.	The SBO recharge is also referred to as “the kickback” and “the line in the sand”.  The cost of SBO disposal is also referred to as the rendering cost.  The MoU it will be remembered provides at Clause 5 for the revision of the kill fee (up or down) “in the event that the costs of rendering and/or meat hygiene services shall increase or decrease”.  In practice what happened was that if the disposal costs exceeded £90 per tonne, then RWM would make up the difference and if they were less than that amount, SCFF would rebate the difference.  In fact, the costs never did exceed £90 per tonne.

11.	The SBO recharge was thus closely connected with the kill fee.  Mr Joffe says that it is an integral part of the structure of the kill fee. The kill fee had been set originally so as to provide a profit for SCFF.  As to a review of the MoU – in which context a review of the kill fee and credit terms would be central – I need only refer to [759] to [762] of the Main Judgment.  There was clearly a powerful case for renegotiation of the kill fee as Mr Phelps recognised.  It needs also to be remembered that SCFF was slaughtering cows for RWM.  Even leaving aside Matthew’s complaint that SCFF should not have been doing this for a fee at all, it is to be noted that SCFF did so for the same fee as the fee for killing clean cattle.  And yet cows were more expensive to slaughter.

12.	CIL’s position up to trial had always been that the kill fee should have been renegotiated.  But faced with a refusal by RWM to renegotiate the MoU and faced with the position of Mr Grantham that the EBITDA should be assessed without an increase in the kill fee being assumed, it is entirely appropriate for CIL to argue, as it now does, that the line in the sand should be redrawn so as to eliminate the claw-back.  This, Mr Weatherill would say, is one of those rough edges with which the parties to an unfair prejudice petition have to live.  And for my part, I bear in mind at all times that I must arrive at a price for the Shares which is fair as between the parties.

13.	Mr Joffe relies on my finding in the Main Judgment at [384] where I rejected the complaint of unfair prejudice based on causing or permitting SCFF to charge RWM a kill-fee of only £42.  This issue was considered at [351] to [384].  But this was concerned with the period prior to the MoU.  It does not address what I said in [759] to [762] or indeed any part of the section of the Main Judgment dealing with termination and renegotiation of the MoU starting at [749].

14.	Mr Joffe points out that I also held at [510] – [514] of the Main Judgment that the kill fee (so far as concerns bulls and cows) was within the range of reasonable fees.  That is true; but I note that it is on the basis of the retention by SCFF of the farmer deduction, a factor which I assume has already been taken into account in the experts’ figures.  These paragraphs have nothing to say about the killing fee for clean cattle.  

15.	Mr Joffe also points out that in [763], I noted that CIL had not produced any compelling evidence that a £50 kill fee would be fair as opposed to the current fee; and that in [768] I concluded that at that time there was no unfair prejudice as a result of the failure of the RWM directors to agree to termination of the MoU.  But it does not follow from any of that that when it comes to ascertaining a fair price for the Shares it should be assumed that the possibility of renegotiating the MoU should be discounted to such an extent that no value is to be placed on it.    This is particularly so given my remark at the end of [763]. And yet Mr Joffe would have me adopt Mr Grantham’s position which is that the EBITDA should be based on the kill fee being paid at the Valuation Date but with the line in sand remaining where it was.  

16.	Although I held that the conduct of RWM and the RWM directors in refusing to terminate or renegotiate the MoU did not amount to unfair prejudice, I do not go so far as to say that there should be no reflection of this factor in the EBITDA.  

17.	I turn now to what the experts had and have to say about this aspect of the case.  Ms Gread dealt with it at paragraphs 5.36 to 5.38 of her first Report.  She based herself on instructions to approach the matter on the footing that the MoU would be renegotiated so as to be more favourable to SCFF.  

18.	Mr Grantham dealt with the point in paragraphs 3.4.36ff of his first Report.  He drew a distinction between the effect on the value of the Shares depending on whether RWM was the purchaser or the seller.  If RWM was the purchaser, there would be no point in renegotiating the MoU and the profitability of SCFF would remain as it was.  In contrast, if CIL were the purchaser, Mr Grantham considered it reasonable to assume that the kill free and the treatment of the farmer deduction would remain the same; but the current arrangements regarding the rendering costs would be terminated because the kill fee is fixed and each side would be looking for certainty and a means of managing the risks.  

19.	In summarising his view (at paragraph 3.4.48) he says that in order to determine a fair value for the Shares, it is “necessary to consider the need to be equitable to both parties”, a proposition which it would be difficult to disagree with.  This is done, according to him, by assessing the respective positions of the parties, depending on which party the Court orders to sell its shareholding.  Adopting his earlier analysis, he considers that there are two analyses: RWM buys in which case SCFF’s profits would remain unchanged; CIL buys in which case the kill fee would remain but the arrangements regarding rendering would end.  Profits would be increased and a higher price would be payable.

20.	The result therefore is that CIL would pay more for the Shares than would the RWM purchaser (which phrase I use to describe whichever of RWM and RWM Langport is the eventual purchaser).  This is a startling result. If CIL purchases, it ends up paying more than the RWM purchaser would pay if it purchases.  And this is so notwithstanding that the Heffer-controlled entities end up owning SCFF with all the benefits that that has in the context of the overall business enterprise.  This strikes me as entirely unfair and inequitable.  It is, in any case, wrong in principle, since the starting point is not the price which The RWM purchaser would be prepared to pay but the price which a hypothetical purchaser would be prepared to pay albeit in the real world where RWM is the operator of the boning hall and only customer of SCFF.  The factors on which Mr Grantham relies to demonstrate a higher price payable by CIL are all equally applicable to a hypothetical purchaser who would be in no better and no worse a position that CIL.  Indeed, in purely human terms, given the total antipathy between the Heffers and the Cobdens, an outside purchaser might be expected to have a more happy relationship with the Heffers and to be able to reach a reasonable business arrangement with them.

21.	Interestingly, Ms Gread and Mr Grantham agreed the quantum of the required adjustment in their joint report at £224,000 but Mr Grantham only accepted that it should apply if CIL were the purchaser.  

22.	Mr Clokey agrees with Ms Gread’s approach.  He produces a slightly higher figure as of 4 January 2009 of £259,000.  Mr Grantham returned to the issue in paragraphs 2.29ff of his Supplemental Report.  In those paragraphs, he considers various passages in the Main Judgment.  He concludes, in essence, that the negotiating position of the hypothetical purchaser is so weak that he would not pay any more for the Shares than an amount based on the profitability of SCFF assuming no renegotiation of the MoU.

23.	Mr Weatherill submits that, in reaching this conclusion, Mr Grantham (apart from displaying his advocacy for his clients’ cause) has failed to take proper account of two matters:

a.	First, although referring to the Main Judgment at [761] in passing, he glides over both his own previous acknowledgment in his first report that there would be pressures on RWM to continue to do business with SCFF and also Mr Phelps' evidence that the case for renegotiating the MoU was "very strong" and "unanswerable"; and fails to refer to my finding that, "there is clearly a case for renegotiation which the SCFF directors must consider".

b.	Secondly, that my findings in [768] of the Main Judgment did not go so far as to justifying making no allowance or adjustment to the SBO recharges.

24.	Mr Joffe says that no explanation is provided, in the context of a hypothetical negotiation for the termination of the SBO arrangements, for how clause 5 of the MoU (which requires a 12 month termination period) would be approached between the parties.  He accepts that both experts agree that before a purchaser and a seller would agree to a sale, they would consider an attempt to renegotiate the MoU with RWM in order to agree a sale price; they would try to get certainty before they would agree to a sale.  But there was no evidence about what the result of any negotiation would be; there was nothing to show that the SBO recharge arrangement would or should be terminated let alone whether a full credit would be agreed.  Reference to Mr Phelps’ views take the matter nowhere there being no certainty that the parties would agree a renegotiated MoU or that a negotiation would produce any particular result within a possible range of results.

25.	Further, although a purchaser might well approach RWM before purchasing in order to obtain certainty, there would be many issues, as Mr Clokey accepted, which would arise and the experts could not determine the outcome.  Mr Joffe therefore says that I am faced with the reality that there is no certainty for a hypothetical purchaser.  In the absence of agreement, there is no reason why a purchaser would pay any more for the hope value.  A reasonable seller could not insist on the buyer paying for hope value when the seller had not been able to realise the termination of the arrangement in a renegotiation.

26.	Mr Joffe also points out that Mr Clokey’s view that the SBO arrangement would be terminated is based on instructions, following on from his adoption of Ms Gread’s report, she having been instructed.  That is a fair point to make in terms of the eventual valuation he reached, but it does not absolve me from considering a hypothetical negotiation or from addressing how the SBO recharges should be approached in the context of achieving a fair value for the Shares.  In contrast, Mr Joffe says that Mr Grantham’s view is based on his own expert opinion that a hypothetical purchaser would not assume that he could take this sum out of the trading relationship and he would not pay a hope value.  The risk of a negotiation not succeeding is too high.

27.	In determining what is fair it is, as Mr Weatherill says, axiomatic that the price which RWM must pay should be a fair price as between it and CIL.  It seems clear to me, also, that any hypothetical purchaser would be likely to have regard to the possibility that the SBO kickback might be renegotiated, and any hypothetical seller would be likely to acknowledge that such a renegotiation might be successful.  I said in the Main Judgment on the basis of the evidence that there was clearly a case for renegotiation of the MoU, that there was a "very strong" and "unarguable" case for renegotiating the MoU.  Further, as already mentioned, Mr Grantham himself said in his first Report that on a renegotiation between CIL (as purchaser) and RWM (as trading partner), whilst other aspects of the kill fee and MoU might not be changed, it would be reasonable to assume that the SBO kickback arrangement would be terminated.

28.	Of course, Mr Joffe is right to say that there is no evidence about what success such negotiations might have.  But what more evidence, I wonder, could be produced when so much depends on the how the Heffers and the purchaser would play this game of commercial poker.  It is more appropriate, I consider, to think that the Heffers would act reasonably.  It is in that context that Mr Phelps’ evidence is relevant because it shows what reasonable people would have thought.  The Heffers, acting in the commercial interests of RWM, would see the benefit of a negotiated agreement.  Mr Joffe is no doubt correct when he says that there is uncertainty about the outcome.  But that uncertainty should not lead the court to impose a valuation on the parties which effectively discounts the value to be attached to that negotiating position to nil.

29.	Mr Grantham’s position is that that value is to be discounted to nil.  He does not put it that way.  Rather he argues that a purchaser would not pay anything extra for the hope value.  However, I must be careful always to bear in mind that the object of the exercise is to achieve a fair value as between the parties to the litigation.  If the application of a valuation technique by the experts leads to a result which I consider to be unfair, I am entitled to ameliorate that result.  

30.	I see the force of Mr Grantham’s argument.  But there are two points to make.  The first is that I consider that it is overstated on the facts.   

31.	The second relates to the special position of The RWM purchaser as actual purchaser and its close relationship with RWM through their common, indirect, Heffer family ownership.  It is not, I readily acknowledge, open to me to place a value on the advantage accruing to the Heffer interests as a result of SCFF coming into their direct or indirect ownership alongside their other businesses (and in particular that of RWM).  To do so would be inconsistent with the agreed valuation methodology, which depends on establishing the EBITDA and an appropriate multiplier, a methodology from which the parties do not ask me to depart.   To do so (even if it could in theory be done) would be unfair to the Heffers who could justifiably respond that they should not then be bound to accept another important feature of the valuation basis namely that CIL’s Shares should be valued at half the value of the entire shareholding in SCFF without any discount to reflect the fact that CIL does not have a controlling interest.

32.	But that is not to say that I must disregard altogether the relationship between the actual purchaser and RWM when it comes to assessing what it is reasonable to assume as between the hypothetical purchaser and RWM when it comes to assessing the fair value to be placed on the Shares which CIL is selling.  As Mr Weatherill puts it, in the context of a valuation of SCFF's shares for the purposes of a hypothetical sale between a willing vendor and a willing purchaser it is wrong in principle to write off all prospect that the SBO kickback arrangement might be successfully renegotiated and/or to conclude that a purchaser (or the hypothetical seller) would discount the prospect altogether.  I agree with what he says.  

33.	I do not think that Mr Joffe disagrees that the court is not bound to adopt either the view of Mr Grantham or the view of Mr Clokey. I can, as he put it, split the difference provided that I decide what is fair on the evidence.  In that regard he identifies the problem for me just mentioned – that Mr Grantham expressed an expert view whilst Mr Clokey was acting on instructions.  I do not see that as a fair representation of the positions of either expert.  It does not take an expert to explain that the outcome of negotiations depends on the strength of your negotiating positions and the extent to which a party might be prepared to risk coming away with nothing.  It does not take an expert to know that hypothetical negotiations between a hypothetical purchaser and real Heffers will be uncertain in its outcome.  It is perhaps slightly more, but not much more, of an expert matter to assess how a hypothetical purchaser would react to the suggestion that he pay extra for the hope of a successful negotiation, even if that negotiation is conducted before the purchaser has actually contracted to purchase.

34.	Mr Grantham was of the view, expressed in his first Report, that the arrangements concerning the costs of SBO disposal would have been terminated.  The fact that he did so in the context of achieving a higher purchase price if CIL were the purchaser is, in my judgment, neither here nor there.  That is a conclusion I would reach whatever Mr Grantham had said about it.  However, in cross-examination he accepted that the hypothetical purchaser would be in the same position, in that respect, as CIL itself.

35.	He has now identified uncertainties which he says result, happily for the benefit of his clients, in the line in the sand remaining unmoved.  He has referred at some length to my own observations at [761] to [764] of the Main Decision.  He seeks to draw the sting out of my observations in [761] by expressing the view (see his Supplemental Report at paragraph 2.2.29) that “a buyer would not increase the value of [SCFF] by reference to the possible negotiation of the kill fee and the SBO recharge.  I do not consider that a buyer would increase the value of [SCFF] in these circumstances”.  This does not explain why Mr Grantham, in his earlier report  felt able to say that it was appropriate to assume that the current arrangements regarding the rendering costs would be terminated.  He said it, of course, in the context of a purchase by CIL when it was in his clients’ interests to establish a high value; he was able to do so on the basis of the evidence then available but now says that everything is too uncertain.  

36.	At paragraph 2.2.18 of his Supplemental Report, Mr Grantham points out that I concluded that there was no unfair prejudice as a result of the failure to terminate and renegotiate the MoU.  He says that “on this basis I consider that [SCFF] should be valued assuming that the current arrangements continue…..”.  Although Mr Grantham, both in his Reports and in his oral evidence, expanded on the reasons for his view, I think that his underlying approach is really reflected in that one statement.  But it is a wrong approach.  The fact that there was insufficient to amount to unfair prejudice does not mean that no account is to be taken of the possibility of renegotiation.

37.	There is also this point to bear in mind.  The MoU had been operated on the basis that cows and bulls were included, a proposition which I have held to be incorrect.  In his Supplemental Report at paragraph 2.19, Mr Clokey compares the profits per cow accruing to SCFF in slaughtering cows and the profits accruing to RWM in trading cows bone-in.  There is a stark contrast (in favour of RWM) in profitability.  Mr Grantham did not look at this part of Mr Clokey’s report since he was not instructed to deal with the matters arising out of CIL’s application seeking, in effect, to re-open that part of the case concerning trading in cows.  Mr Grantham accepted that this was a factor which a purchaser would be able to rely on in any re-negotiation of the trading arrangements and was a point to be taken seriously.  

38.	By the end of his cross-examination, Mr Grantham had not shifted his position.  I have to say that I found his answers in cross-examination on this aspect of the case to be unsatisfactory.  Although he continued to profess objectivity and a genuinely held expert view, it did seem to me that every answer was crafted to favour his clients.  I fear that he has over the long period of time of his involvement in this case become too close to his clients to retain a fully balanced view.  I do not suggest that he was putting forward indefensible views or was acting in any way improperly; but there was unwillingness to accept that any weight at all should be given to factors which might lead to a different conclusion. Thus he mentioned a number of negative factors; but where he had not omitted to mention a positive factor, he responded by saying that it had been taken into account.  This struck me as an unbalanced approach.

39.	In my judgment, it would not produce a fair price as between CIL and the RWM purchaser if the EBITDA were calculated not only on the basis that the kill fee remained unchanged but also that the arrangements concerning the SBO rendering costs also remained unchanged.  Since an adjustment to the EBITDA based on an increased kill fee is not pursued, the hypothetical negotiation of a change in the MoU must be seen as focusing on the “kick-back” or the “line in the sand”.  

40.	Whilst there may be different ways in which to achieve a fair result, one fair way is, in my judgment, (i) to assume that if a renegotiation has been successful, it would have resulted in the termination of the arrangements concerning the rendering costs but (ii) to recognise that such negotiations may not have been successful and that, even if successful, they may not have taken immediate effect (reflecting the 12 months’ notice required by clause 5 of the MoU).  There is an analogy which, of course, must not be pushed too far, in the assessment of damages for loss of a chance.  It would not be right in the present case to decide, on a balance of probabilities, whether the negotiation would have been successful.  Instead, I propose to assess the chance of a successful negotiation (taking into account both factors under item (ii)) but assuming that, if successful, the result would have been as under item (i).

41.	It is not possible to be scientific about this.  I have to form a somewhat impressionistic assessment in the light of all the evidence.  However, given Mr Grantham’s own position in his first Report and Mr Phelps’ evidence, my conclusion is that an adjustment should be made to the EBITDA as from the Valuation Date of 75% of Mr Clokey’s figure of £259,000.

Rent review and insurance
42.	There were until recently 5 outstanding historical adjustments which RWM was claiming to set off against its recharges. 

43.	I dealt with recharges in [52]ff of the Supplemental Judgment.  For the past, I reached the conclusions summarised in [85].  For the future, I considered that the experts should reconsider their positions, which they have done but without reaching agreement.  

44.	I must state, at the outset of the discussion of this aspect of the case, that entirely different approaches are applicable to historic compensation and ascertainment of the EBITDA going forward.  The adjustment for the past which I directed recognised that, in principle, all items of account either way ought to be brought into account.  But it also recognised that, since the informal way in which SCFF had been run resulted in potential charges and recharges not being made (not, as I found, of an agreed “give and take”) it was fair to restrict the set-off to items which were not otherwise the subject of agreement as to payment.  Thus set-off against electricity charges was not allowed since it was always the case that RWM contributed, the problem being that the apportionment had ceased to reflect at all closely the real attribution of cost.  Further, I confessed to finding the position in relation to effluent charges more difficult although I did allow a set-off for the matching period from the end of February 2006 to the Valuation Date.

45.	I do, however, also note that RWM did not seek to set off the recharges against anything other than the adjustment relating to licence fees, electricity charges and effluent disposal costs.  No suggestion was made by Mr Joffe in the hearing leading to the Supplemental Judgment that there should be a set-off of recharges against the insurance premiums (as to which see [743] of the Main Judgment and [49] of the Supplemental Judgment).  This is not surprising given that contribution to such premiums was a matter of legal obligation under the Lease.  Not only did he not make such a suggestion in the context of historical compensation, he did not do so either in the context of ascertaining the EBITDA.  

46.	Adjustment for the future is different.  For the future, everyone is aware of their rights.  There would be no compulsion for SCFF under the ownership of the purchaser to continue to use the services of staff provided by RMW.  If it chooses to do so, then in principle it ought to pay.  In that case, the amount of such payment should be taken out of the EBITDA. On the other side, clearly RWM would have to contribute its share of the insurance premium and pay any increase in rent following the 2008 review on which a purchaser would be entitled to insist.  

47.	In relation to Mr Alexander, I mention one point here which was raised late in the day by Mr Weatherill.   He says that his team do not know, as a matter of fact, whether part of Mr Alexander’s salary in respect of work carried out for RWM had been accounted for.  It is possible that this has already been accounted for in the figure disclosed on p 13 of the Joint Report dated 12 November 2010 in the line “Adjusted 2009 accounts”.  Mr Joffe complains that this point has been raised late in the day and that Mr Clokey has himself raised no issue on it. It really ought to be a matter of the greatest simplicity for Mr Joffe’s clients to ascertain whether that line does reflect in the calculation of SCFF’s profits a contribution by RWM to Mr Alexander’s salary.  I do hope that, by the time I hand down this judgment, the position will have been ascertained and the figure brought into account known.

48.	Mr Joffe continues to advocate the pragmatic solution (see [66] of the Supplemental Judgment) on the basis that the cross-charges which he says should be taken into account virtually cancel each other out.  Mr Weatherill does not accept that approach since, even ignoring the new concern about Mr Alexander’s salary, he says that there should be no set-off of recharges against rent and insurance premiums, with the result that the recharge issue has a significant impact on the EBITDA.

49.	Since both the purchaser and RWM would know their legal rights why, it might be asked, should not the EBITDA reflect the cost to SCFF of providing the services to which the recharges relate.  To answer that, it is right, of course, to note (i) that SCFF’s overall financial position reflects its receipt of rent and of the share of the insurance premium which it can recover from RWM and (ii) that neither of those items is relevant to its trading activities as a meat slaughterer.  In contrast, the recharges claimed by RWM relate to the carrying on of the trading activities.  I consider this to be a difference which is highly material.  It is right, I think, to allow a set-off in respect of amounts which go to the operating results of the trade.  But in the highly unusual circumstances of the present case, to allow a set-off against insurance premiums and increased rent would be unfair to CIL. 

50.	The reason for this relates, as so many issues in the present case, to the MoU and the kill-fee.  The kill fee was set to provide a certain level of profit to CIL as is shown, from an early stage, by the Heads of Agreement.  It has never been suggested by anyone, so far as I know, that by “profit” was meant the overall financial position of SCFF.  What was being talked about was a fair profit in relation to the trade being carried on.  To take an extreme example, I do not suppose that anyone would have regarded it as fair that SCFF should carry on its trade on a break-even basis justifying the outcome by reference to its overall accounting profit as a result of the receipt of rent.  If that is right, then it is clear to me that the RWM recharge should be effected only against items which themselves would fall into account in ascertaining operating profits.  Otherwise in economic terns, the trading profit would be adversely affected thus undermining the principle of fair profit.  

51.	It follows that the increase in rent and the insurance premiums should be brought into account without set-off.  This is consistent with my order that these two items should be brought into account in assessing the EBITDA.  The effect of allowing set-off would be to breach the spirit if not the letter of that order; the items would be brought into account but then removed again by way of set off.

52.	I would reach the same conclusion, although with more hesitation, if by “fair profit” everyone had understood this to mean not trading profit but overall accounting profit taking into account rental income.  I accept that the “fair profit” would not then be undermined since the recharge would be set off only to the extent that income has been increased.  But the trading profit would be undermined.  This is because the employment costs are part of the costs of the business.  The fact that the amount of the employment costs actually recoverable by way of recharge is limited by the total amount of items of charge in the other direction does not mean that those costs cease to be costs of the business in ascertaining the trading profit.  

53.	My conclusion, therefore, is that the RWM recharges payable by SCFF cannot be set off against the increased rent and the insurance premiums payable by RWM.

EBITDA multiple
54.	The starting point here is the agreement between Ms Gread and Mr Grantham based on a Valuation Date of 31 December 2007 was in the range 5x to 6x.  Mr Clokey has taken over from Ms Gread and adopts her position on the basis that this is what was agreed as a condition of the appointment of a new expert.  The question then is what impact changing market conditions have had on the multiplier.  The previous mid-point was 5.5x.  Mr Clokey now considers that the appropriate multiplier is 5x, a reduction of 10% from the previous mid-point and nearly 17% from the upper end of the previously agreed limits.  Mr Grantham considers that the appropriate multiplier should be 4x, a reduction of 33% from the previous mid-point and 20% from the lower end of the previously agreed limit.

55.	Mr Weatherill argues in favour of Mr Clokey’s favoured multiple of 5x.  Mr Joffe submits that for the purposes of the valuation the appropriate multiple is in the range 4x to 5x and that in all the circumstances a multiple of 4x is appropriate.  I am left slightly perplexed by Mr Joffe’s final position.  I think what he is saying that a valuer who adopted a multiplier within the range could not be said to be acting outside the permissible range but that I should adopt the bottom end of that range.

56.	Although Mr Grantham appears in his Reports to be saying that 4x is the appropriate multiplier, in his cross-examination he accepted the range 4x to 5x but selected the bottom end of the range (which might I suppose be anywhere from 4.x to 4.3x or so).  

57.	The experts referred to reports prepared by BDO Stoy Hayward referred to as PCPI (Private Company Price Index).  These reports track the relationship between a four month rolling average FTSE Non-financials price/earnings ratio and the p/es currently being paid on the sale of private companies to trade and private equity buyers.  Reliance was also placed on the January 2010 edition of PricewaterhouseCoopers’ Debt Markets Update.

58.	Mr Clokey takes from these reports that the p/e multiple achieved in UK private company transactions in the last quarter of 2008 was 11.4x compared to 12.9x during the same period in 2007 (a decline of 10%).  The average EBITDA multiple paid in European leveraged buyouts was 9.7x in 2007 and 2008 and 8.9c in 2009, a fall of 8.2% in 2009.  He relied on the following factors concerning SCFF

a.	Secure demand base from RWM.
b.	Financial Year budgeted EBITDA growth (on an adjusted basis) of 34%.
c.	Significant fixed asset base.
d.	Very strong relationship with farmers.
e.	Limited threat from competition due to quality and capacity of abattoir.

59.	On that basis, he considered a multiple at the lower end of the previously agreed range to be appropriate.  

60.	Mr Grantham relied on the Price Earnings Multiple for the FTSE All Share Food Producer index, which showed a decline of over 40% from 2007 to 2008.  Whilst recognizing that the various indices is directly applicable, he considered a 20% decrease on his previously agreed figures to be correct, giving a range 4x to 5x to round up.  He examined draft budgets and, emphasising every negative aspect to depress the value, concludes that it would be right to select the bottom end of the range that is to a multiple of 4x.

61.	Mr Joffe, in support of the range 4x to 5x and in support of selecting 4x from that range, says that the PCPI is a blunt tool:

a.	It is not sector specific (I might add, like the FTSE All Share Index itself).
b.	It is not a complete picture (as Mr Clokey accepted) being based on only 1/3rd of actual deals.
c.	It is based on better quality acquisitions.  Even Mr Clokey accepted that the transaction was at the bottom end of the scale.

62.	He says, as Mr Clokey accepted, that it is important to consider the market in the food industry and to compare SCFF to similar companies.  But Mr Clokey made no reference to any food market data in the joint report and did not refer to any food market specific factors in his evidence.  In response to that criticism, Mr Clokey pointed out that the FTSE All Share Food Price Index is dominated by large players where p/e ratios generally have fallen further than for private companies.  To which Mr Joffe in turn responds that Mr Clokey has failed to give any proper consideration to the fact that that Index is sector specific.  He has failed to give any recognition to the fact that there has been a greater fall in the food sector than is evidenced by the PCPI.  

63.	Then Mr Joffe says that Mr Clokey has failed to take account of the exposure of SCFF to the risk of a reduction in the volume of animals killed or the dearth of buyers.  

64.	I prefer Mr Clokey’s conclusion.  It is one which falls even within Mr Grantham’s range albeit not at the end which Mr Grantham himself would select in his opinion.  I am persuaded that the PCPI provide a more reliable indicator, in spite of all the shortcomings identified by Mr Joffe (not all of which I have mentioned), than the FTSE All Share Price Index to the movement in private company shares.  The market there is more stable than in the quoted share market; and the FTSE Index is not, as I see it, at all a reliable guide to the value of this specialist company.  I agree with Mr Weatherill when he says that Mr Grantham is over-pessimistic and has not taken sufficient account of the stability shown in the PCPI Index.  I do not overlook Mr Joffe’s submissions about the PCPI dealing with only 1/3rd of the market and then only with quality transactions.  However, the agreed range of 5x to 6x was itself a reflection of the lack of quality of SCFF.  It is not to be downgraded further because of that same lack of quality.  

65.	I only add that it is to be noted that Mr Clokey arrived at his conclusion as a matter of his expert opinion.  He did not simply apply a percentage reduction to some point in the scale previously agreed by Ms Gread and Mr Grantham.  To the extent that it is said that he simply applies a percentage reduction to arrive at his conclusion, I reject the suggestion.

66.	In my judgment, the experts should adopt a multiple of 5x.

Amount due from SCS
67.	The experts agree that SCS’s balance sheet at 4 January 2009 shows a sum of £318K due to SCFF.  It seems that this has been duly paid in the winding up of SCS.  

68.	Mr Clokey believes that the whole of the inter-company balance should be brought in separately as a surplus asset.  His view is that the £318K was not, at the Valuation Date, part of the ongoing business of SCFF and accordingly needs to be taken account of separately.  SCS had ceased trading by the Valuation Date so that the debtor which then sat on SCFF’s balance sheet does not represent a business asset.  I note that payment of the debt (which has in fact happened) at the Valuation Date would have reduced SCFF’s overdraft and thus would have reduced the line for net debt in Appendix 1 to the Joint Report.  This would have no impact on SCFF’s net assets since the asset (the debt) would be replaced by receipt of the cash of an equivalent amount.  If this item is not accounted for as a surplus asset, it simply gets lost in the valuation process. The position would have been the same as if this debt did not exist in the first place.

69.	Mr Grantham does not agree with Mr Clokey’s conclusion.  He brings nothing into account.  His position is that it does not necessarily follow that because SCFF receives the debt from an inter-company debtor which ceases to trade that it should be treated as surplus cash.  Payment of the debt does not change the working capital position of SCFF.  It simply changes the asset (debt for cash).  He therefore says that his comments in relation to working capital (another item in dispute) are as applicable here.  I deal with the working capital adjustment later.  He also says that Mr Clokey does not recognise the basis on which the £318K was derived or the use which SCFF will make of it.

70.	However, Mr Grantham did not in his Report or in the Joint Report, deal with Mr Clokey’s concern that the payment of £318k will simply be “lost” if it is not accounted for separately. Certainly this £318k was a receivable by SCFF from SCS as at the Valuation Date, and it appears to have subsequently been paid.  Further, although Mr Grantham says that payment of the debt simply changes the asset from debt to cash, with the result that one looks at SCFF’s working capital requirements, it is quite possible that the cash would have been received in SCFF’s bank account reducing such overdraft as it had at the time of payment.  

71.	Moreover, I am left puzzled by his reliance on Mr Clokey’s suggested failure to recognise the basis on which the £318K was derived or the use which SCFF will make of it.  So far as I am aware, there is no indication in the evidence (including the experts’ reports) about the derivation of that loan.  Mr Joffe says that it is trade debt.  But I do not understand why he does so.  SCS carried out its own cull business and, so far as I am aware, there was no trade between it and SCFF.  It may well be that the £318K represented working capital of SCS, but that became a meaningless concept in the case of SCS when it ceased to trade and went into liquidation.  It then needed no working capital and, being solvent, was able to pay its debts.  

72.	It is not at all easy to see how, while SCS was trading, the debt owing to SCFF from SCS between whom there was no trade, can be seen as working capital of SCFF.  The existence of this debt did not impact in any way on the trade of SCFF.  The cessation of trade by SCS cannot produce the result that the debt then became part of the working capital of SCFF: I can see that that might have been the result if the business carried on by SCS had transferred to SCFF.  But that is not what happened.  Instead, the trade ceased and, in due course, the debt was paid.  The receipt of cash by SCFF came after the Valuation Date.  But even if it had come before, it is again not easy to see how the cash would have then formed part of SCFF’s working capital requirements any more than the proceeds of Pound Farm would have become working capital.

73.	In my judgment, the SCS debt at the Valuation Date was a surplus asset.  Its value is to be brought into account as such in the same way as Pound Farm.

Working capital adjustment
74.	This is the largest figure claimed by way of adjustment to the Enterprise Value.   The issue arises because RWM and RWM Dorset did not pay their invoices in time.  This is not the issue about payment on Monday instead of Friday (although that does account for a part of the late payment).  Rather, it is a consistent late payment of invoices on a rolling basis which meant that SCFF, rather than RWM, had to suffer the detriment of not having the money in hand with a result that its overdraft was larger than it would otherwise have been.  Of course, the fact that one invoice for £X is late in payment by say 14 days is not, of itself, very significant.  But if, by the time the 14 days is up, another invoice of £X has become due and is itself left unpaid for 14 days, and so on, the effect is that at all times £X is overdue.  SCFF’s working capital requirement is effectively increased by £X.  

75.	Mr Clokey and Mr Grantham are in agreement that for the purpose of valuing SCFF adjustments should be made to the Enterprise Value if and so far as the working capital position is not representative of the normal level of working capital required  to support the maintainable earnings current at the Valuation Date. They are also in agreement that a further adjustment would need to be made if and so far as SCFF’s business required cash to fund capital expenditure over and above a normal level to support the maintainable earnings as at that date.  

76.	CIL’s evidence in relation to the working capital adjustment required in order to reflect RWM’s and RWM Dorset’s failure to pay its invoices on time and its use of SCFF as a source of interest free funding for its own businesses is set out Mr Fisher’s Supplemental Factual Report. In summary, he concludes as a matter of fact that the adjustment to working capital necessary to compensate SCFF for late payment by its RWM debtors as at the Valuation Date was some £5,668,704.  I do not understand there to be a dispute about that figure as the amount of debt overdue at the Valuation Date.

77.	 Mr Clokey considers that a working capital adjustment would be negotiated to take account of the difference between the actual level of working capital compared to a normal level, that is to say the amount required to support the maintainable earnings.  At the Valuation Date, a large proportion of SCFF’s debtors were, as Mr Clokey correctly observes, represented by overdue invoices from RWM Dorset.  He considers therefore that a reasonable proxy for a normal level of working capital is represented by the actual level of working capital per the balance sheet on the Valuation Date less the overdue invoices.  In other words, but for the late payment of invoices, the balance sheet would show a debtor balance which was £5.66m less than in fact shown; the overdraft would be zero and the cash balances would be £2.926m.  His position, therefore, is that the total amount of the outstanding invoices should be added to the Enterprise Value in ascertaining the equity value and, of course, allowing deduction of the £2.743m net debt.   To put it another way, the £2.926m cash balance would be surplus assets and should be added to the enterprise value in calculating the equity value.

78.	He accepts that a further adjustment would need to be made if, after that adjustment, SCFF did not have adequate working capital.  

79.	The experts also agree that in principle an adjustment might fall to be made in respect of exceptional capital expenditure at the Valuation Date (CAPEX).  In that regard Mr Clokey asked Mr Carswell for information about capital expenditure in 2008 and any budget for future expenditure available on the Valuation Date.  In response, Mr Carswell provided a schedule entitled “Southern Counties Fresh Foods Limited Capital Expenditure Projects” which set out planned projects for 2009 totaling £375K and actual spend to May 2009 of £150K.  Mr Carswell confirmed that this amount was in fact the entire CAPEX spend for the financial year 2009.  Mr Clokey was not told about, let alone supplied with a copy of, the first letter from Approved Designs Ltd to which I come in a moment.

80.	Although, in the joint report, Mr Grantham made a number of points, it became clear in the course of his cross-examination that the only real issue was the working capital adjustment for CAPEX.  In cross-examination he acknowledged that this was the “key issue”.  

81.	Mr Joffe identifies not one but two key issues in his closing submissions.  The first was the policy agreed between the shareholders in SCFF (in the Dividend Distribution Policy Agreement) to retain 25% of the profits in SCFF.  Mr Clokey acknowledged that a retention of 25% would be justified as a matter of general principle.  In my judgment, however, no weight should be attached to this point.  There are all sorts of reasons why a policy might be adopted of retaining profits.  The Policy Agreement takes one nowhere since the valuation exercise envisages a sale to a purchaser who would be able to take his own view about the need for retention.  If the retention is needed as working capital, then it will not be brought into account as surplus assets.  But if there is an amount properly available for distribution and not needed as working capital, it should feature in the valuation as a surplus asset.  This is particularly so given that the object of the exercise is to achieve a fair valuation as between CIL and The RWM purchaser.  It does not strike me as fair that the RWM purchaser should obtain for nothing CIL’s share of monies available for distribution which are not required as working capital.

82.	Mr Joffe’s second key issue is the same as Mr Grantham’s key issue, the need to retain cash to meet CAPEX.  Mr Joffe is correct, I am sure, when he says that the purchaser will investigate CAPEX.  It is clearly fair and just that account should be taken of CAPEX in assessing for the purposes of the valuation in the present case whether there would have been surplus assets if the invoices had been paid in due time.  

83.	Mr Joffe says that Mr Clokey disregards the effect on the hypothetical purchaser of concerns at the age of the line and the disastrous implications of a failure of the line.  He criticizes Mr Clokey for relying on the budget and the absence of large recent CAPEX.  Indeed, the absence of such expenditure is something which would concern a purchaser for the very reason that it makes it more likely that CAPEX will be of concern with problems having been stored up for the future.  A purchaser would therefore make his own enquiries and would not rely on the vendor for information.

84.	If that last point is a suggestion that Mr Clokey should have made independent investigations about the need for CAPEX, I would reject it.  The question is not so much what a hypothetical purchaser would have done, but what it was reasonable for Mr Clokey to do.  A hypothetical purchaser is to be seen as in a negotiation with the hypothetical vendor; in that context, the purchaser might be unwise to rely only on the information given to him by the company controlled by the vender.  In contrast, Mr Clokey is entitled to expect full and straightforward answers from SCFF.  Mr Carswell gave his answers, I am sure to the best of his knowledge, information and belief.  I would expect Mr Carswell to be in a better position than anyone to give the information necessary.  The fact that SCFF itself had no plans for significant CAPEX at the Valuation Date is important in determining whether any would be needed.  This is especially so given that the actual purchaser, the RWM purchaser, would not be expected to have any different a view from SCFF given the position of the RWM Directors on the board of SCFF and their relationship with Mr Carswell.

85.	 Reference has been made to two letters from Approved Design Ltd.  These are dated 24 November 2008 and 12 August 2010.  The first letter was addressed to RWM marked for Graham’s attention.  It seems unlikely that Mr Carswell ever had sight of it otherwise he would surely have shown it to Mr Clokey.  I do not know when it was first shown to Mr Grantham.  It was not known about on the Petitioner’s side until after it had been decided by me that the purchaser would be the RWM purchaser rather that CIL.  It is headed “Budget Price – Cattle Slaughter Line 70 per hour”.  It states, quite shortly:

“We have asked our French partner company Couedic Madore to give a budget price for a cattle slaughter line for 70 per hour” 

and then goes on to give several quotes for different component elements with a grand total price of 2,400,00.00 [sic] Euros.  A further piece of equipment was quoted at 350,000 Euros.

86.	The line for which the quote was given was a faster line than the existing one which was for 57 per hour.  All that one can take away from that letter is that someone, presumably Graham, had asked for a quote.  It reveals nothing about what discussions, if any, there had been about procuring this equipment. There was certainly none in an SCFF board meeting otherwise the Cobdens would have known about it: they only resigned from the board on 24 February 2009.  It reveals nothing about the intentions of anyone in obtaining the quote.  It certainly does not disclose a definite intention to proceed with this procurement at any time let alone a pressing need to do so.  And, in fact, the line has not been commissioned over 2 years later and nearly 2 years after the Valuation Date.  

87.	The second letter is dated 12 August 2010.  Mr Grantham delayed his Supplemental Report until receipt of this letter.  It is written by a Mr John Page who thanks Graham for the invitation to act as a consultant to RWM “to review the expectancy of the existing equipment associated with and on the cattle slaughter line and its suitability to meet changing commercial pressure”.  Mr Page makes general points about the need for keeping equipment up to date.  He refers to his inspection on 11 August 2010, the day before.  He identifies certain equipment needing immediate replacement and then equipment requiring replacement over the next few years.  The cost of the former is stated at just under £225K and the latter at £267,500.  The recommended option is to replace the whole line (as quoted in the first letter).

88.	Mr Joffe says that reference to the second letter is not an impermissible application of hindsight. Rather, it gives the best evidence of what an enquiry into CAPEX at the Valuation Date would have disclosed in terms of the costs and options.  It is not, he says, relied on as establishing an issue at the Valuation Date which not arisen at that time since it is clear from the first letter that the issue had arisen.  As to those submissions, it is right to assume that a purchaser would have made enquiries about likely CAPEX; it is not necessary to rely on the first letter to establish that.  I doubt very much that a letter in mid-August 2010 is much of an indicator of what would have been said to a purchaser in early January 2009.  In any event, the letter only discloses that quite modest expenditure is necessary immediately (but I wonder whether it was necessary in January 2009 – it has certainly not been incurred by SCFF even up to the present time) with the remainder “over a period of years” (unspecified).  What the letter does show is that the Heffers had not considered it necessary to take any steps after receipt of the first letter actually to progress the procuring of any equipment.  Further, although this does not feature in my reasoning, I am left with a feeling that the instruction of Mr Page had little to do with a perceived need to incur CAPEX and a great deal to do with bolstering their case against CIL.  I am surprised that Mr Grantham has been prepared to attach the weight to it which he does.

89.	Mr Clokey seeks to discount CAPEX as an improvement rather than a replacement.  That is certainly true to the extent that CAPEX relates to a new line of superior quality and throughput.  An increased capacity at least demonstrates a confidence on the part of the Heffers in demand for slaughtering by SCFF.  Mr Joffe accepts that the CAPEX requirement would be scaled down (as part of the negotiation between the hypothetical purchaser and seller) so that it is partly replacement and partly improvement.

90.	There is one other aspect which I have mentioned.  The figure of £5.669m is a snapshot of what was overdue for payment on 4 January 2009.  I did, at one stage, have a concern that it might be unfair to the RWM purchaser to bring the whole of that amount into account if this large figure might have been a blip, with the outstanding amount usually being less than that.  But on reflection, I do not think that concern is justified.  This is for two reasons.  First, the outstanding amount was generally quite high, and secondly, if the outstanding amount had been reduced to the lower more common amount, the net debt would be correspondingly less with the same impact on the equity value. 

91.	In my judgment, the correct approach is to adopt Mr Clokey’s methodology.  In other words, the approach is to assess the Enterprise Value resolving the differences between the experts in accordance with my decisions in this judgment, then to deduct net debt and to add in Pound Farm and the SCS debt.  The working capital adjustment starts by adding in the whole of the £5,669m as shown in Mr Clokey’s column in Schedule 1 to the Supplemental Joint Report.  However, I do have sympathy with the submission made by Mr Joffe that at least some allowance should be made for CAPEX.  I cannot be scientific about this.  I will allow the amount actually expended in 2009 according to Mr Carswell (£150K).  And I will take Mr Page’s assessment of immediate need as being required also (£225K in round terms), giving a total of £375K.

CIL’s Applications (see [2] and [3]3 above)
92.	I deal first with the “interest” application.  The court has jurisdiction to award compensation equivalent to interest under section 996 Companies Act 2006 on the price payable under a share purchase order made pursuant to section 994: see Profinance Trust SA v Gladstone [2002] 1 BCLC 141.  This power is, however, one to be exercised with great caution.  

93.	In spite of the quite lengthy submissions made by both Mr Weatherill and Mr Joffe, I see this aspect of the case as short.  It admits a clear answer.  It is that such compensation should be awarded.

94.	The share purchase order was made on 27 January 2009.  CIL has received absolutely no benefit from SCFF at all since then.  There has been a considerable delay in carrying out the valuation process.  But had it been carried out more promptly, in say by May 2009, some 4 months later, the price would have had to be paid.  In the meantime, the RWM purchaser has had the shares, paying £1m on account of the purchase price.  It is said by Mr Joffe that the transfer of the shares was by way of security only for the £1m (I suppose in case the purchase is not for some reason finally completed for instance because the RWM purchaser cannot pay).  I see no reason for saying that the transfer was by way of security only.  But even if it was (and certainly if it was not) the Heffer interests have effectively enjoyed full control of SCFF’s activities.  If, as I think, the transfer of the shares for a transfer of the full beneficial interest (possibly subject to a lien for the unpaid balance of the purchase price) it would be unfair not to give CIL compensation for the fact that it has not received the purchase price for the asset of which The RWM purchaser has had full enjoyment.  If I am wrong in that, so that there is a security interest only, the RWM purchaser has nonetheless enjoyed precisely that which it would have enjoyed had the price been settled and paid long ago.    

95.	However, there are two points to make against making an order, or at least in favour of limiting its extent.  The first is that it was only on 24 February 2009 that the Cobden Directors resigned from the board of SCFF and it was only on that date that CIL transferred its shares.  The second point is that the application to amend to claim this item of compensation has been made very late in the day.  It can also be said that CIL could have sought a further payment on account but has not done so and that the original interim payment of £1m was set at a figure chosen by CIL.

96.	Balancing all of the factors, the balance comes down, in my judgment, firmly on the side of making an order for compensation equivalent to interest.  However, interest should not run from the Valuation Date but should run from 24 February 2009 when the Cobden directors resigned and when CIL transferred its share to the RWM purchaser.

97.	As to the rate of interest, Mr Joffe presented me with evidence (given by Mr Michau of New Media Law, now RWM’s solicitors) about the rates available on no notice deposit accounts for business customers at Lloyds Bank.  I can take the rate for our purposes as 0.25% pa AER.  Mr Michau did not investigate rates available on other accounts or other banks.

98.	Mr Field, CIL’s solicitor, gave evidence disclosing available rates of 2.3% pa to 2.9%.pa  Some of the accounts he identified were shown by Mr Joffe to be unavailable to an entity such as CIL.  Mr Weatherill does not push for more than 2.5%pa.

99.	In all the circumstances, I have decided to award 2.5% pa.  This is an award of simple interest.  Given that there will no compounding and that the date of payment will arrive only when the experts have finally agreed their calculations (we are already 1 year and 10 months from the date from which interest is payable) I consider that the rate of interest to be adopted should fall at the higher end of the ranges identified by Mr Field and Mr Michau.  In that context, it is to be noted that the rates revealed were all AER so that annual compounding would be assumed.

CIL’s application in relation to bone-in cow trade
100.	The Application seeks an order the Shares be valued on the following assumptions:

a.	The SCFF is entitled to be notionally compensated in respect of the trade of cows bone-in up to the Valuation Date.
b.	That such trade was carried on by SCFF and continuing on the Valuation Date and SCFF’s maintainable earnings are notionally increased at the Valuation Date by the profits from such trade.
c.	SCFF is entitled to be notionally compensated in respect of the trade of cows bone-in assuming all the cows killed at SCFF’s abattoir had been sold bone-in and
d.	That such trade was carried on by SCFF and continuing to the Valuation Date and SCFF’s maintainable earnings are notionally increased at the Valuation Date by the profits from such trade.

101.	The Application also seeks permission to rely on further evidence relating to the trade of cows bone-in.

102.	The purpose of the Application is partly directed at dealing with the extent of the profits from RWM’s bone-in trade for which SCFF ought notionally to be compensated.  But it goes further in that CIL submits that it only fair that SCFF should be compensated, as a matter of valuation, in respect of RWM’s prevention of SCFF trading in cows. In the Main Judgment, it will be remembered, I rejected the allegation of unfair prejudice based on such prevention.  Mr Weatherill submits that the new evidence permits me, in the valuation, to proceed nonetheless on the basis that there was such prevention.

103.	CIL’s case is that it is now obvious beyond any doubt that trading in cows bone-in was a palpably profitable business and positively known to be such by RWM, which clearly carried it on without the suggested difficulties of which Graham gave evidence. CIL says that it is now obvious that SCFF ought to have been allowed to trade all of the cows killed at Langport after the reintroduction of cows into the human food chain. 

104.	It is now common ground that RWM did in fact carry on a bone-in meat trade with QK Meats in the Republic of Ireland after August 2007 (when Graham said it had ceased) and indeed through 2008. 

105.	Among the allegations advanced by CIL at the trial were complaints to the effect that RWM had diverted customers and prevented SCFF from carrying on a trade in cows. I dismissed all but one aspect of that.  I did, however, decide that there was unfair prejudice in the failure to bring to the attention of the board of SCFF the opportunity, taken by RWM, to trade cow carcasses bone-in.   As I said at [430], the trade actually carried out by RWM may not, in the great scheme of things, have been of great significance in terms of numbers; and it may not even have been very profitable.  But it was an opportunity which the SCFF board as a whole might have considered it appropriate for SCFF to take and it might have formed a springboard from which SCFF could develop a successful export trade.  I did, however, regard that as speculation.

106.	Mr Weatherill now says that evidence recently discovered by CIL contradicts the evidence given by Graham at the trial and suggests that the trade in cow meat sold bone-in by RWM not only achieved higher volume than suggested by RWM but also continued for a substantial period after it was said to have ceased. Graham’s evidence, according to Mr Weatherill’s reading of it, was that it had ceased in August 2007, but it is now established not only that that was not so, but also that it continued past the ordered valuation date of 31 December 2008 (now moved by agreement to 4 January 2009).

107.	The new evidence is to be found in 3 witness statements provided by Mark Chetwynd dated 11 November 2010, by Matthew dated 8 November 2010 and by Anthony Field also dated 8 November 2010.  I shall consider what the witnesses said since their evidence has to be understood before it is possible to make any ruling on the Application.

108.	Mr Chetwynd was cross-examined by Mr Joffe who wished to be clear about certain things Mr Chetwynd had said in his witness statement which might have been perceived as ambiguous.  Mr Chetwynd was an obviously truthful witness with no axe to grind and I accept what he said.  He acted, prior to the BSE crisis, as fieldsman for SCFF and before that for JHC in West Wales.  He ceased operating as a fieldsman in about 1997.  After that, he concentrated on operating his dairy farm.  As a dairy farmer, he often had to dispose of cows.  It was his practice to phone around his contacts with a view to obtaining the best price from abattoirs when disposing of cows.  In November 2007 he phoned various abattoirs to obtain a price for his cows.  Although he had not approached SCFF before, on this occasion he phoned the Producers Club at SCFF where he spoke to a Mr Morley.  He agreed a price for his cows with Mr Morley; in doing so, he believed he was dealing with SCFF.  

109.	He had 7 cows to sell on this occasion and was concerned about the cost of transport from his farm in West Wales to Langport.  He said he could get his cows on a truck used by a Mr Reese, SCFF’s local fieldsman.  Mr Morley informed him that they (by which he understood Mr Morley to refer to SCFF) were killing cows at Crosshands, an abattoir located in South Wales about 40 miles from Mr Chetwynd’s home.  Until March 2009, he sold cows from time to time through the Producers Club.  All the cows were slaughtered at Crosshands.  On each occasion he received remittance from RWM.  Although he was surprised because he thought he was dealing with SCFF, he did not really care who paid as long as he got his money (an unsurprising and perfectly fair attitude for him to have taken).

110.	On one occasion (he thinks in about November 2008), a Mr Barratt of RWM personally visited his farm to inspect the cows.  He ceased dealing with the Producers Club and took his business elsewhere in March 2009.

111.	Mr Field simply reviews the correspondence which has lead to this application.  For present purposes, I need only says that the correspondence shows: the following:

a.	RWM admits that it acquired bone-in cow meat and had cows killed at Crosshands from 2006 through to 2009.

b.	RWM denies that the cows were diverted away from SCFF.

c.	RWM accepts that SCFF should be notionally compensated for the profits which RWM earned from the sale of cows during 2008.

d.	It is unclear whether RWM also accept that this trade should be taken into account in determining maintainable earnings.  

I add that, although it may not have been clear from the correspondence, it is clear before me that RWM does not accept that.

e.	RWM denies the Graham’s evidence was untrue.  Graham himself has not given any further evidence to explain what he meant when he said what he did.  

Mr Joffe has made submissions about how Graham’s witness statement and evidence in cross-examination is to be taken.

112.	Matthew explains how he came to learn of the trading at Crosshands.  He had been contacted by Mr Chetwynd on 18 September 2010 following an advert which he, Matthew, had placed regarding dairy cattle.  He met Mr Chetwynd who told him very much what I have recorded as his, Mr Chetwynd’s, evidence.  He explains that Mr Morley had no authority from the Cobdens to take cows to Crosshands rather than Langport.  I accept that evidence.  Instructions must therefore, he says, have come from one of the RWM Directors or from Mr Phelps.  That would seem an obvious inference; at least, someone on behalf of RWM must have given the instruction to Mr Morley.  Matthew assumed that it would not have been only Mr Chetwynd’s cows which RWM were having slaughtered at Crosshands.  He accordingly contacted Mr Barratt to seek further information.

113.	He says that Mr Barratt told him (and there is no reason to disbelieve this) the following, but had declined to provide a witness statement:

a.	RWM started killing cows at Crosshands in the summer of 2006.  This continued until about August 2009.

b.	RWM had cows killed at the abattoir virtually every week during this period; this was 40-140 cows per week depending on supply.

c.	Mr Reese (a commission agent and supplied to SCFF) and Ross Bynam were the largest suppliers of cows to RWM at Crosshands.

d.	Nearly all of the cows were sold bone-in the QK Meats, a company trading in Ireland.

e.	The business was Mr Barratt’s idea and he ran it under the RWM umbrella.  The Heffers were aware of it.

f.	RWM paid Crosshands a kill fee of £60 per cow,  Crosshands were entitled to sell the hide and offal, the value of which was deducted from the kill fee.  RWM kept the farmer deduction.

114.	Mr Weatherill now seeks to rely on the trading with QK Meats and on the incorrectness of Graham’s evidence (absent an explanation from Graham of what he meant and how his evidence is to be read) to support each of the heads of relief in the Application set out in paragraph 99 above.

115.	In order to deal with each of those heads, I need to consider briefly the impact which the new material could have on one or two of my conclusions in the Main Judgment and the Supplemental Judgment. In [285]ff of the Main Judgment, I dealt with the claim of unfair prejudice based on diversion of customers and prevention of cow trade.  In those paragraphs, I considered the attitude of the board of SCFF to trading in cows and the failure by the RWM Directors to bring the opportunity of certain trading to the board.  I enlarged on this in [27]ff of the Supplemental Judgment.  I refused to allow CIL to adduce the evidence of a “cow expert”.

116.	Had I been aware of the QK Meat trade, two things can be said:

a.	It would have cast the negativity of the RWM Directors at SCFF board meeting about starting a cow trade in a different light.  It would to some extent have raised a question-mark over their insistence on a business plan in order to see whether trading should recommence.

b.	It might have led me to view more positively the suggestion that the trading carried out by RWM could have formed a springboard from which SCFF could develop a successful export trade: see [430] of the Main Judgment.

117.	In relation to both of those possible impacts, careful account must be taken of the extent and conduct of the trade with QK Meats.  The fact that this particular trade existed is not, in my judgment, a particularly strong indicator that there was out there a large and profitable market waiting to be tapped and which, had the RWM Directors only allowed it, would have been CIL’s for the taking.  Firstly, that business was not, by itself, of a very great scale.  Secondly, although that business was continuing during the course of the trial, it was not long-lived and came to an end in August 2009.  RWM did not (assuming that the existence of other trading has not been overlooked) itself use the QK Meats trade as a springboard.  Thirdly, the business depended on Mr Barratt and without him it is a matter of speculation whether Matthew or anyone else could have kept it going.  

118.	It is the case, however, that what I said in [33] and [34] of the Supplemental Judgment would need to be qualified.

119.	First, [449] of the Main Judgment (referred to in [33]) might itself have to be qualified.  That is because it might be argued that my conclusion (to the effect that the RWM Directors could not be said to be responsible for the absence of any trading in cows by SCFF with third parties) itself depended partly on the requirement, as Mr Weatherill would have it a specious requirement, for a business plan.  I reject such an argument.  If what I said was correct – and CIL cannot re-open that matter on this application – on the basis of what I then understood, the trading with QK Meats does not lead to the conclusion that trading generally was so obviously going to be successful that a business plan was not necessary.  It was one thing to take an opportunity, as Mr Barratt did, which presented itself; it would have been quite another thing to embark on a wide-ranging business at least without conducting some test trades.

120.	Secondly, [34] would be incorrect.  RWM’s cow trade, including the trade with QK Meats, was not as short-lived as the trade which I was considering.  Indeed, it was still continuing even when I came to write the Supplemental Judgment.  The extreme weakness in the springboard argument would not have been as extreme as I indicated and I would not have been able to observe that the springboard would have ceased to exist.  But that does not remove the weakness.  I would have reached the same conclusion as I did even if I had known of the trade with QK Meats although I would have expressed myself slightly differently of course.

121.	 The Supplemental Judgment was focusing, relevantly, on whether a “cow expert” should be permitted to give evidence.  The answer was that that should not be permitted; but the reason was that I considered that the prospect of establishing that SCFF would have established a viable cow trade was too speculative.  I remain of that view even given the new material concerning QK Meats.

122.	Returning to the Application, it was, according to Mr Joffe, entirely unnecessary for the first head of relief (notional compensation in respect of the trade of cows bone-in up to the Valuation Date) to be sought.  It has already been accepted on behalf of RWM that compensation should run in respect of the trade up to the Valuation Date.  That may be so.  But it can have added little or anything to the cost of the Application to have included it in an application which was going to be made in any case.  

123.	The second head of relief sought (maintainable earnings notionally increased at the Valuation Date by the profits from such trade) is a matter of dispute between the experts.  At the Valuation Date, this trade was still continuing (and as it happens did so for another 8 months) so that, according to Mr Clokey, it falls to be taken account of in the same way as any other earnings.  He would apply the same multiple (5x) as he applies to the main business.  Mr Grantham says, on the contrary, that a purchaser would look at this business separately.  He says that a purchaser would place little value on the business of trading cows, the incremental increase in value being between £100K and £150K.  Mr Joffe submits that if post Valuation Date trading is to be brought into account, it should be by way of compensation in the same way as trading before that date and that it should be left out of maintainable earnings altogether.  

124.	In my judgment, it is correct in principle to bring into the calculation of the value of the Shares the value of the bone-in cow trade business and not simply to provide compensation in the way suggested by Mr Joffe.  This was a business in fact carried on by RWM and which, on the Valuation Date, was included in RWM’s budget for 2009 at an increased profit.  Further, the experts agreed the valuation approach to be adopted in valuing the Shares.  Accordingly, unless it would produce an overall result which is not fair (fairness as between the parties being the ultimate aim), that methodology should be adopted by bringing into account in ascertaining the maintainable earnings of SCFF the profits attributable to that business.  It may be that a different multiplier should apply (Mr Grantham says a lower multiplier should be used, Mr Clokey says not) and it may be that the risks which a purchaser would identify should result in a reduction in the value otherwise attributable to that business, possibly by a reduction in the multiplier.  But the starting point should be to treat this business in the same way as the main business of SCFF itself.  

125.	In that context, it should be noted that the board of RWM must have considered that the business was viable, having included in the 2009 budget increased profitability for it.  This is not a case where, at the Valuation Date, it was known that the business was in decline and about to close.  However, Mr Joffe submits that the purchaser would not simply accept the budget at face value but would approach it with healthy scepticism.  This is so given the previous history of trading.  In that context, he relies on the shrinking trade and declining profitability as shown in Mr Grantham’s table in paragraph 2.2.3 of his Supplemental Report.  The table certainly shows a significant variation between the months of 2008.  It is important, however, to separate the shrinking trade (2006 and 2007 included that part of the bone-in trade which ceased in August 2007) and the QK Meats trade which was not shrinking (although it did fluctuate).  Since there has been no suggestion that RWM was going to trade bone-in with anyone other than QK Meats, the budget might be thought to be a good indicator.  

126.	Nonetheless, a purchaser would identify any risks.  Mr Joffe lists these risks:

a.	Reliance on Mr Barratt.  Mr Clokey accepted in evidence that it is permissible to use hindsight as a form of “comfort”.  A concern about reliance on one employee was amply borne out, Mr Joffe would say, by the actual events with Mr Barratt leaving in July 2009 and the business ceasing.  But I do take that with an eye on RWM’s own perception of the business when it set its budget.

b.	Reliance on one customer, QK Meats.  Mr Joffe submits that the trades were all “spot” trades and that there is no evidence of any contract with QK Meats.  There was a risk that the relationship was dependent on Mr Barratt.

c.	Additional competition on pricing.  There was pressure on margins in the industry (although I am not aware of evidence about this) which might lead QK Meats to source its beef from alternative suppliers.

127.	Mr Joffe submits that there is no reason in principle why different income streams should not attract a different multiplier.  I agree.  The question is whether it should do so in the present case.  I have a great deal of sympathy with Mr Joffe when he says, in effect, that a comparison of SCFF’s own trade, attracting a 5x multiplier on my adoption of Mr Clokey’s evidence about that, with one long term customer, with RWM’s trade with QK Meats must make one question whether the same multiplier should be applied to both.  This is so even though, as Mr Weatherill points out, the 5x multiplier is already at the lower end of the scale.  

128.	Mr Clokey himself accepted that, taking the bone-in trade by itself, a multiplier of 5x would not be justified.  He did not put forward a figure but suggested that it ought to be more than 2x.  

129.	Mr Grantham, taking account of all the risks, started with a multiplier of 4x and discounted it to 2x to reflect the uncertainties.  Mr Weatherill says that this is an impermissibly large discount and fails to reflect what the RWM board thought as indicated in the 2009 budget.  

130.	Mr Joffe points out that Mr Clokey approaches the matter on the basis of employing Mr Barratt for 3 days per week which he says is unrealistic as there is no evidence that RWM paid him only for this amount of time.  He says that the business would have to employ him full time; but, RWM having not responded on the evidence, there is nothing before the court to show that he could not be employed part-time.

131.	In my judgment, although it is a small part of the overall business (if treated as added to SCFF’s own business, it is so separate from the existing business) that it is appropriate to ascertain the multiplier as if it were a separate trade. Mr Grantham arrives at a multiplier of 2x but that is because he starts with a multiplier of 4x for the main business.  Mr Clokey does not give a figure other than to say it should be more than 2x.  I adopt 2.5x as the appropriate multiplier in the light of the factors I have mentioned.  The 2008 earnings level should be used as the basis for maintainable earnings.  There should also be a deduction for Mr Barratt’s cost.  I consider it appropriate to allow the figure provided in paragraph 2.11 of Mr Clokey’s Supplemental Report (£32,499).  It seems to me reasonable also to allow for company car and salary on-costs as in Mr Grantham’s Supplemental Report Basis 1 (£3,000 and £3,600).  However, since Mr Grantham relies simply on what Mr Carswell has told him and since Mr Clokey has not had the opportunity to check it, CIL should have the right to challenge these figures if they are not agreed.  As to the £5,000 item in Basis 1 for other salary costs, I do not understand why 100% of them are passed on (the same figure appears in Basis 2).  In principle, something should be allowed for administration: I leave that matter to the experts to attempt to agree.

132.	It follows from my conclusion in [120] above that the third and fourth heads of relief claimed in the Application are rejected.  These claims, in any event, go to the extreme.  They depend on the proposition that not only would SCFF have been able to establish a bone-in cow trade but also (i) that all of the cows slaughtered would have been available to SCFF for the purposes of its trade and (ii) that SCFF would have found a market, other than RWM, for those cows.  Both (i) and (ii) are highly questionable results.

133.	I do not propose to rehearse what I have already said in [285]ff of the Main Judgment.  However, from that it will be apparent that RWM was entitled to procure cows for its own bone out business; accordingly, CIL are seeking, in effect, to obtain the same result as if RWM had been compelled to deal with SCFF on a traded basis and not on the basis of a kill-fee.  This result is achieved, I think, by saying that if SCFF had developed its own bone-in business (as CIL says it should have) it would have obtained all the cows in fact supplied to RWM for its own business.  But where would it have sold them?  And how would it meet the procurement competition for cows represented by RWM’s own demand?  These are questions I do not need to answer in the light of my conclusion at paragraph 120 above.

134.	I have not so far touched on Mr Weatherill’s attack on Graham’s evidence which he says can now be shown to be untrue, suggesting that Graham must have known it to be untrue.  However, even assuming that Graham was being deliberately evasive or even untruthful, it does not make any difference to the result.  The RWM purchaser, as purchaser, is not to be punished by way of an increased purchase price for any failing on the part of Graham.  Now that it is known that RWM did in fact continue to trade, that is something to be taken account in deciding whether a cow trade might have been established, as to which I have given my decision earlier in this judgment.  It cannot make any difference to that conclusion one way or the other whether the evidence which I now have was deliberately suppressed or simply overlooked.  There is a great deal of force in what Mr Weatherill has to say about Graham’s evidence; and I am wholly unpersuaded by Mr Joffe when he submits that, in context, Graham can be seen to be talking about something other than the totality of RWM’s bone-in cow trade.

135.	In any case, I have not had the advantage of any further evidence from Graham, let alone cross-examination to enable him to explain (i) what he remembers (ii) what he knew and (iii) what he meant in paragraphs 51 and 53 of his witness statement.  Were it necessary for me to do so, I might draw adverse inferences from the absence of any explanation.  As it is, whether or not he was dissembling does not affect the outcome of the case, and I say no more about.

136.	Nor is it necessary, therefore, to address the dispute about whether the “new” evidence can be relied on in relation to the third and fourth heads of relief claimed in the Application nor the arguments surrounding disclosure.  I say nothing more about those aspects either other than to make this observation.  Disclosure is a continuing obligation.  It does not appear that disclosure was made of the documentation relating to the ongoing trading after January 2008 until comparatively recently.  If disclosure had been made during the course of the hearing, it might well have alerted those advising CIL to the fact that RWM was continuing to trade and have alerted Mr Weatherill to the need to cross-examine Graham on this aspect.  It is not an attractive submission for Mr Joffe now to say the principles in Ladd v Marshall should be applied to prevent reliance on the “new” evidence.

Conclusions on the Application
137.	As to the first head of relief claimed, compensation is to be allowed up to the Valuation Date.  As to the second head, the maintainable earnings of SCFF are to be notionally increased in the way which I have indicated in paragraph 130 above.  The third and fourth heads of relief are refused.