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England and Wales Court of Appeal (Civil Division) Decisions |
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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Chilukuri & Anor v RP Explorer Master Fund [2013] EWCA Civ 1307 (29 October 2013) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2013/1307.html Cite as: [2013] EWCA Civ 1307 |
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ON APPEAL FROM THE CHANCERY DIVISION
Mr L BLOHM QC
HC10C02701
Strand, London, WC2A 2LL |
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B e f o r e :
LORD JUSTICE LEWISON
and
LORD JUSTICE BRIGGS
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CHILUKURI & ANR |
Appellant |
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- and - |
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RP EXPLORER MASTER FUND |
Respondent |
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JEFFREY GRUDER QC and ANNA DILNOT (instructed by FARRER & CO LLP) for the Respondent
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Crown Copyright ©
Lord Justice Briggs:
1) He sought to identify the net asset value of Exploration as at the Valuation Date, by reference to the then value of its significant assets and liabilities.2) He then identified the value of Mr. Chilukuri's shareholding in Exploration as 26% of that net asset value, less a 10% minority shareholder's discount.
a) Those directly affecting Cobit's exploitation of its mining rights under the JVA;b) Those affecting Exploration's 51% interest in, and control of, Cobit;
c) Those affecting the value of the 26% shareholding in Exploration in the appraisal of any potential purchaser in July 2009.
Those categories are by no means wholly independent from each other. In particular, risks and uncertainties affecting the solvency and management of Exploration could plainly affect the practical ability of Cobit, a joint venture company led and managed by Exploration, to make a prompt start upon the mining of the bitumen deposit. As I have said, a central assumption in Mr. Haberman's DCF valuation was that there was no impediment to such a prompt start, so that his cashflow could properly be based upon a commencement of operations on or shortly after the Valuation Date. Nonetheless I shall address Mr. Cavender's submissions broadly in that order.
(a) Risks and uncertainties directly affecting Cobit's exploitation of its mining rights under the JVA
Presidential decree
"From that description it sounds to me as though the issue of the presidential decree was very much an administrative process… a bureaucratic step that would have to take place, would in due course take place and then the decree would be in place. It doesn't sound as though there is anything of substance which prevents it from happening. On that basis I would not expect there to be a further discount to make allowance for it."
""DATE OF ENTRY INTO FORCE": The date when the Presidential Decree approving the Agreement comes into force; however, if the necessary Exploration Permit has not yet been issued by then, the Date of Entry into Force shall then mean the date when such a Permit is issued."
Article 17.1 headed "Approval of the Agreement" provides:
"After its signature by the Parties, the present Agreement shall be approved by Decree of the President of the Republic."
Clearly, the JVA contemplated that the decree should have been issued immediately, or at least shortly, after the making of the agreement, rather than be outstanding more than two and a half years later.
Adverse political and economic changes by mid-2009
"The STATE guarantees to COBIT-SRM SPRL, and to any foreign natural person or legal entity working for it as an Agent or Sub-contractor, within the framework of the present Agreement, the benefit of any more favourable legislative or regulatory provisions, in monetary matters; granted to another Enterprise carrying out similar activities in the Democratic Republic of Congo."
In my judgement, as the sub-heading for article 11.1 makes clear, this was merely a qualified undertaking not to inhibit Cobit's export of hard currency from the DRC by exchange control or other regulations. I regard Mr. Gruder's submission that it amounted to a positive guarantee by the DRC to provide hard currency in exchange for Congolese francs whenever requested by Cobit as wholly misconceived.
(b) Risks and uncertainties affecting Exploration's 51% interest in Cobit
"A dispute between two of the former promoters who colluded with the 49% shareholder to try and take it to their personal names in 2008. This was litigated in the Belgian courts and the Luxembourg courts and won."
Mr. Singhi gave no explanation as to the source of his information, nor as to the parties to that litigation or the dates of its commencement and successful conclusion. The implication is however that the winner was Exploration.
"Kroll's legal sources in India identified one legal case in which SRM Exploration is involved. The case, an ongoing civil suit, was filed by SRM Exploration against Mohinder Kumar Verma in the Delhi court in 2008."
Kroll do not explain what that litigation was about, and the date of the report makes it impossible to know whether it was still pending by mid 2009.
"The evidence of such a claim, amounting to correspondence in 2008, is ephemeral, and I have no doubt that if a substantial asset had been so claimed, SRM Exploration would have litigated the point, and would not have been as assiduous as it has been in challenging the Czech guarantee claim (which of itself presupposes that SRM Exploration is of significant value – and I have not heard it suggested that it has acquired further assets in the interim). Although Mr. Chilukuri in correspondence referred to criminal proceedings for fraud being brought, the lack of information about this claim strengthens my view that it was in all probability a matter of little weight."
(c) Risks and uncertainties directly affecting the value of the 26% shareholding in Exploration
"At that stage it would have been left with the option of challenging the petition and the underlying liability or they could have sought to cause SRM Exploration to come to an arrangement with the creditor company."
He then referred to the contrasting views of the valuation experts. Mr. Haberman relied heavily on the lack of any provision for the guarantee liability in Exploration's subsequent audited accounts, whereas Mr. Singhi's opinion was that full provision would have needed to have been made for the debt.
"I agree with Mr. Singhi that a purchaser of shares, properly advised, and aware of the claim, would have independently investigated the validity of the claim arising under the guarantee. He would have reflected the potential liability in his valuation of the shares. He would have given some weight to the contention of the directors of SRM Exploration that the guarantee was not valid, but I do not think a substantial amount. He would have regarded the legal arguments as giving an opportunity to negotiate a settlement of the guarantee at a discount. Doing the best that I can, I am of the view that he would have assessed the value of the guarantee at 75% of the sum outstanding, or 161,351,000 CzK. At a dollar exchange rate of 18.5 to the Czech Koruna, the potential liability would be some US$8,721,675."
The judge then simply deducted that sum from his earlier calculation of the aggregate value of Exploration's assets.
i) If the petition was well founded then Exploration was insolvent, in the sense that it had no liquid assets with which it could pay a debt due and owing. Its main asset (namely the 51% shareholding in Cobit) was highly illiquid and the other assets were plainly insufficient to pay the debt, even if they could be realised.ii) The attitude of Exploration's management in June 2009 was not to seek to deal with the petitioning creditor by negotiating some reduced payment to settle the debt. On the contrary it was to fight the petition upon the basis that the debt was disputed. There was in any event no evidence that the owners of the remaining 74% of Exploration's shares had either the resources or the inclination to put Exploration in sufficient funds to pay the debt, or any reduced sum in settlement of it.
iii) Accordingly, the only secure basis upon which the interested purchaser could deal with an otherwise potentially deadly threat to the continued existence of Exploration was by settling the debt from its own resources. Even if the creditor were prepared to take 75% of his alleged debt, as the judge concluded, this would require an upfront payment of US$8.7 million-odd in addition to the purchase price of the shares. Even if that payment restored Exploration's net assets to the US$32.6million aggregate, that would only increase the value of the shares by 26% of the US$8.7 million upfront payment. In short, 74% of the upfront payment would benefit Exploration's other shareholders
iv) In the absence of an upfront payment of that kind, there was an unquantifiable risk that (as in fact would eventually occur) Exploration would be driven into insolvent liquidation. A liquidation sale of the 51% interest in Cobit would not conceivably produce an amount anything approaching 51% of the DCF valuation by Mr. Haberman of Cobit's mining rights under the JVA.
Conclusions
Lord Justice Lewison:
Lord Justice Rimer: