Burnden Holdings (UK) Limited and Fielding [2019] EWHC 1566 - part one

Mr and Mrs Fielding, the owners, demerged a valuable subsidiary undertaking, Vital Energy Utilities Limited in October 2007. A power company then acquired a 30% stake in Vital Energy Utilities for a surprisingly high figure of £6 million. Mr and Mrs Fielding then injected £3 million of this sum into Burnden in the form of directors’ loans, to be protected with fixed and floating charges on the company’s assets.

The case is summarised in two parts: it is of significant interest as the Written Decision includes very considerable detail relating to the various valuation points arising.

The October 2007 demerger was achieved through the use of a Section 110 Insolvency Act reconstruction: a holding company was placed above Burnden, this was then put into members’ voluntary liquidation and the shares in Vital Energy Utilities were transferred to a receiving company, via a three-cornered agreement. The shares in Burnden were transferred to another receiving company.

The injection of liquidity into the business did not suffice to resolve its difficulties. Eventually a compulsory winding up order was made against Burnden Holdings in December 2009.

The liquidator claimed that the transfer of a valuable subsidiary to Holdings was an unlawful distribution and that the directors had been in breach of their duties. This had taken place before measurement uncertainties had been put beyond doubt in this regard by section 845, Companies Act 2006. (This followed the decision in the case of Aveling Barford which stated that a transfer at undervalue was a distribution.) Prior to the clarity of the Companies Act 2006 the technical question was:

• Was the book amount of a distribution in specie the relevant measure for the adequacy of the distributable reserves; or
• Should the distribution in specie be assessed by reference to its market value?

It appears to be this uncertainty that fuelled the need for the valuation of Vital Energy Utilities.

The Judge decided that the critical test was whether or not Burnden was solvent after the partition of the group. If it was solvent, then he considered that the owners were within their rights to make that separation.

The liquidator also claimed under section 423, IA 1986. This can be a challenging claim to pursue: section 423 applies if a transaction has been entered into for the purpose of putting assets beyond the reach of creditors. The onus is therefore on the claimant to demonstrate clear evidence of that primary purpose.

Lastly the liquidator claimed that the fixed and floating charge put in place to secure loans made by the Fieldings to the company were unlawful as the necessary paperwork of board minutes and appropriate resolutions were lacking.

The gloves were off as far as the treatment of the valuation experts was concerned. One expert was subject to “trenchant criticism” by the other side. The Judge found some of this to be justified in view of his failure to correct errors in his report until obliged to concede under cross examination. Whether this was stubbornness or administrative oversight was not stated. However, the Judge did not accept that he failed to comply with his duty to the Court.

The Judge did find that this expert did not take due account of the evidence available at the time relating to the future trading prospects of the company, as he limited himself to looking only at a balance sheet snap shot at the relevant valuation date.

This same expert was also criticised by the other side for not taking into account the views of the auditors when considering the solvency of the holding company. The Judge made it clear that this criticism was unfounded: it was the expert’s duty to provide his own opinion on solvency and the auditors’ conclusions were not relevant contemporaneous materials for that purpose.

This criticism was a blade with two edges: the Judge found that the expert instructed by the other side provided only limited assistance with her reliance on the conclusions reached by the auditors.

The experts agreed to use the IVS definition of market value as the valuation basis. They used the income approach and the single period multiplier. One expert also used the DCF method. Looming large over the income approach was the fact that an energy company, SSE, had paid £6 million for a 30% stake in the company at the valuation point.

One of the experts expressed uncertainty as to the recoverability of balances due from related companies: if they were recoverable the valuation range was £7 million to £9.4 million. If those balances could not be recovered, the valuations fell considerably to a range from £3.7 million to £6.1 million.

The expert argued that the price paid by SSE was due to the power company being a special purchaser, making a strategic acquisition and paying a very special price. In addition to this SSE had certain protections including a seat on the board. This transaction therefore provided only very limited assistance in considering the market value of the entire equity.

This viewpoint chimes to some extent with the case of FW and FH [2019] (EWHC 1338) in which a transaction close in time was not considered to be representative of market value.

The other expert considered that the price paid by the energy company was indicative of market value. His valuation range, using this information, was £18 million to £22 million. This was then reinforced by his conclusions using other valuation methods.

In the next article a number of valuation points are addressed, including:

• The influence of the SSE valuation on the value of the entire equity;
• The use of DCF techniques;
• The role played by the BDO PCPI;
• The relevance of a contemporaneous valuation by the company’s auditors.