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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Square Mile Partnership Ltd. v Fitzmaurice McCall Ltd. [2005] EWHC 1565 (Ch) (22 July 2005) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2005/1565.html Cite as: [2005] EWHC 1565 (Ch)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		22/07/2005

Mr Justice Mann :

Introduction

1. The claim which started these proceedings is a claim on the assigned benefit of a debt owing between companies which were formerly in the same group. That claim is agreed, and the real dispute in this case is on the counterclaim. The basis of it is a badly drawn share sale agreement relating to the shares of Robert Bruce Fitzmaurice Ltd ("RBF").
2. The defendant, Fitzmaurice McCall Limited, was the ultimate holding company of what I will call the RBF Group. It held the share capital of Robert Bruce Fitzmaurice (Group) Limited ("Group"). Group in turn held most of the shares of RBF; so far as it did not own all the shares it bought them in immediately before the share sale transaction on which the counterclaim is based. By the time of that sale it owned all the shares in RBF. RBF itself had one subsidiary, namely Fitzmaurice Marine Limited. It needs to be mentioned only because it is referred to in the share sale agreement. On 31^st May 2002, Group agreed to sell, and did sell, all the shares in RBF to the claimant company ("Square Mile"). As at that date, a substantial sum of money was owed by the defendant to RBF – the sum exceeded £580,000. Square Mile has taken an assignment of that debt; that is the claim which is made in the claim form and which is admitted by the defendant.
3. The share sale agreement contains what the defendant maintains is a price adjustment clause which is said to operate in the event that RBF's audited balance sheet as at 31^st May 2002 demonstrates that RBF had a positive net worth. It is said that the amount of the debt owed to RBF by the defendant gave it a positive net worth of roughly the amount of that debt (with some adjustments which I do not need to go into here) and that accordingly Group was entitled to seek a sum equivalent to the amount of that net worth. Group has assigned its claims under the share sale agreement to the defendant.
4. Thus, each of the claimant and the defendant make their claims as assignees. Nothing turns on that; it just makes the overall picture a little more difficult to paint. The essence of the counterclaim is that the debt owed to RBF by the defendant was an asset which was left in the company and which inflated the amount of its net assets by about the same amount; since the bargain between vendor and purchaser was that there would be no net assets left in the company, that bargain entitled Group (and now the defendant) to claim the amount of those net assets.

The terms of the share sale agreement

5. The business of RBF was that of an insurance broker at Lloyds, until shortly after the events in New York on 11^th September 2001. In 2002 it transferred its new business and renewal activities to other brokers, and was left in run-off. As a broker it maintained separate accounts containing certain client monies which were known as IBA accounts. I am told they are in the nature of trust accounts, though RBF's financial statements do not treat them as such.
6. The share sale agreement is dated 31^st May 2002 and is made between Square Mile as purchaser and Group as vendor. The subject of the transaction was all the 500,000 £1 nominal shares issued by RBF; the price was £50,000; and completion was to take place (and took place) on the same day. It contains familiar clauses as to what is to be delivered up by way of documentation. Clause 4.3 provides:

"4.3 The vendor shall procure that at completion:

4.3.1 All indebtedness owing as:

(a) between the Vendor on the one hand and RBF and the subsidiary on the other hand (or vice versa);

(b) between RBF and the Subsidiary on the one hand and any of the directors or employees or former employees or RBF and/or the Subsidiary, except as provided in the accounts to the Last Accounts Date;

is repaid or otherwise discharged or waived (whether such indebtedness is due for payment or not)."

The Subsidiary is the single subsidiary of RBF referred to above.

7. Clause 6 is headed "Obligations concerning Robert Fleming, Audited Accounts and Tax". The first two sub-clauses refer to the transfer of business to Robert Fleming and are not material. Clause 6.3 is the clause on which the counterclaim is based, and is one of the two clauses essential to the counterclaim. It reads as follows:

"6.3 The vendor has prior to this Agreement removed certain assets from RBF on the basis of the Management Accounts and if the Audited Accounts when available show that any adjustment exceeding £1,000 is required each Party remains liable to the other Party to pay to the other Party such sum as shall be shown by the Audited Accounts to be due to the other party."

"Management Accounts" is a defined term and is defined in clause 1.1 as "the unaudited accounts prepared by RBF for 13 months from 1^st May 2001 to 31^st May 2002." There were in fact no such accounts. As will appear, there were some management accounts which dealt to a limited extent with profit and loss up to the end of April, but there was nothing else which might have fallen within the description. The Audited Accounts is another defined term; it means the audited financial statements for RBF for the 13 months ending 31^st May 2002, to be prepared by RBF's then auditors Baker Tilley at the Vendor's expense.

8. It will be noted that clause 6.3 anticipates that the Audited Accounts would show something to be "due" to one party or the other. Clause 6 contains no express benchmark by which the amounts due can be measured. The defendant says that the benchmark is provided in clause 14. This clause is headed "Proper Law and Construction", and clause 14.1 provides that this is an English law contract. Clause 14.2 is the other clause which is central to this action:

"14.2 This Agreement sets out the entire bargain and understanding between the Parties in connection with the sale and purchase of The Shares and other matters provided for in this Agreement and that prior to this Agreement the Vendor has caused RBF and the Subsidiary to transfer to the Vendor (or elsewhere as directed by the Vendor) the accumulated net worth of RBF and of the Subsidiary (excluding the IBA assets and the IBA Fund less the IBA liabilities) but including (without prejudice to the generality of the foregoing) all reserves, all brokerage paid to RBF prior to the date of this agreement, all interest earned and all investments (other than the lease of the Property)."

The various references to IBA assets, the IBA Fund and IBA liabilities are all references to the IBA matters to which I have referred. I set out the definitions later. The reference to the lease of the Property is a reference to the lease of the premises from which RBF traded, which was due to expire on 28^th September 2002. As will appear later on when I consider the arguments of the various parties, Mr Gadd for the defendant says that "accumulated net worth" means net assets, and what this clause was designed to reflect was an intention that RBF should be left with no net assets, that is to say that its assets should balance its liabilities. This is said to provide the benchmark against which the assessment and calculation required by clause 6.3 can be made. Mr Trace QC for Square Mile does not accept that.

The factual background

9. Before turning to consider the dispute on construction, I need to set out something of the factual background. There was a dispute as to the extent to which I could have regard to this, as a result of which some of the evidence that was going to be given was no longer advanced. However, certain of the events are relevant, not least because they indicate what it was that Group did by way of "moving" assets from RBF before the sale as described in the sale agreement.
10. The sale of the continuing business to Robert Fleming took place in April 2002. Once that had been done, the business of the company would have comprised the collection of premiums for insurances placed prior to run off, and the payment of premiums to those insurers and the handling of some claims. Mr McCall, who was a director of RBF and the principal shareholder in the defendant, gave evidence of what his thinking was in relation to this. RBF could have continued to handle the run off work, it could have paid a specialist to do it or it could be sold so that a third party would take over the responsibility for achieving it. He dealt with various potential purchasers and eventually negotiated a successful deal with Square Mile. Most of the negotiations were conducted by Mr Rupal, another director of RBF and of Group. He negotiated with Mr Mackay and Mr Murley on behalf of Square Mile. They came to meetings at RBF's offices on various occasions and inspected RBF's books and accounts. The negotiations started at the end of February 2002. Quite when the deal in principle was made was not clear on the oral evidence, but it probably does not matter. It was obviously some time before, but probably not long before, the date of the share sale agreement. Mr Mackay prepared some calculations which showed his thinking as to the price that was being paid and what he thought he was buying; those calculations were before me but it seems to me that in accordance with normal principles of contractual construction they are not admissible since they are the subjective views of one of the parties, and uncommunicated too. I therefore do not take this material into account.
11. On their side of the transaction, Group and RBF did various things in advance of the transaction, most of which were known to Square Mile. In order to prepare for the share sale Group had to buy in certain shareholdings that were outstanding in individuals. It did so by a series of transfers dated 30^th May. Several tens of thousands of pounds were involved. The money to pay for them actually came from RBF; it gave rise to an inter-company debt from Group to RBF. It shows a less than pure approach to the "financial assistance" provisions of the Companies Act.
12. Next, RBF had to deal with a flat in Colebrook Court, Sloane Avenue, in London. This was a flat owned by RBF. It seems to have been common ground that it would not be left in RBF at the time of the share sale. On 30^th May 2002 RBF transferred it to the defendant for the sum of £234,534. This was its book value; its real value was considered to be significantly more. No money changed hands; the consideration was left outstanding as an inter-company debt.
13. About a day before the date for exchange and completion Mr Rupal (whose responsibility it was) set about calculating the amount to be taken out by Group. He did this in the form of a dividend. A dividend of £2,187,000 was declared and paid on 31^st May 2002. The calculation for the appropriate dividend was done by Mr Rupal. He says that Mr Mackay was present when the amount of the payment was calculated. Mr Mackay denies that he was present, but accepts that the calculation was explained to him afterwards. I do not need to find which of those versions of events is correct; what is important is that Mr Rupal carried out a dividend calculation, he explained it (one way or another) to Mr Mackay, and Mr Mackay accepted the explanation. Mr Mackay told me (and I accept) that he observed to Mr Rupal that he was confident that the figure would turn out to be wrong and that there would have to be an adjustment.
14. In cross-examination Mr Rupal sought to reconstruct how he arrived at his figure. He said that he had actually done it on a piece of paper but had left it behind at RBF's offices when he left, and apparently it is no longer available. He was, therefore, reconstructing and doing the best he could in the witness box. There was therefore a certain amount of difficulty in reconciling some of the figures. His general methodology is clear enough, though his starting point is slightly less clear. His methodology was to distribute by way of a dividend. In order to do that, he started from a figure (which I shall describe in a moment) in the audited accounts for 30^th April 2001 and then did a fairly rough and ready updating of that figure by deducting certain sums from it. There was some equivocation in his evidence as to what his starting figure was. At the bottom of the 30^th April 2001 balance sheet there are two sections. The first is entitled "Equity, capital and reserves". It has two entries – called up equity share capital of £500,00 and "profit and loss account" of £2,279,628. Below that is the heading "Equity shareholders funds" against which there is a figure which aggregates the two figures that I have just mentioned, i.e. £2,779,628. This is a familiar format for such figures. It was put to him in cross-examination that in order to arrive at the dividend distribution he started with the equity shareholders' funds, and he accepted that. From that he deducted sums for losses, redundancy and (according to him) the amount paid in buying in the outstanding shares (in order to avoid having negative balances on the IBA accounts, from where the money apparently came). Later on in his evidence, some equivocation was introduced as to the starting figure. At this later point he identified the starting figure as being the total equity shareholders' funds figure of £2,779,628. However, he then corrected himself and said that he was working from the profit and loss account figure of £2,279,628. It is hard to make the figures work on either basis. The losses figure that he worked from relied on the losses shown for the year ended 30^th April 2002 which was shown in the management accounts (which are still available) as £70,972. He then says he deducted an estimated figure for the additional losses for May (since he was trying to do the calculation as at 31^st May). He was unable to say what this figure was. As to the redundancy amounts which he also deducted, at one stage he thought this was about £70,000 and at another he thought it was about £137,000. The figure for the shares, which he says he brought in, can be identified from the share transfers – it is £109,872. The trouble with these figures is that one cannot make them work so as to get to the actual dividend figure of £2,187,000. If one starts with the larger figure for shareholders' funds, the dividend figure would be greater than it in fact was; if one starts with the lower figure for the accumulated profit, then it generates a figure which is lower than the dividend that was paid. One can get quite close by allowing £70,000 for the losses for the year ended 30^th April 2002, and another £70,000 for redundancy, but that is not how Mr Rupal says he carried out the calculation.
15. On the basis of this evidence, I do not think I can make a sensible finding as to the amounts of the ingredients that were deducted from the figure from which Mr Rupal was working, but I think it is probably more likely that he was working from the £2.2m figure. One thing that is clear is that he was seeking to make a payment by way of dividend, and if he was doing that then I think it more likely that he worked from the figure which would be the one which would leap out at an accountant as being available for distribution in that way, namely the £2.2m figure. He was, by training, an accountant. It was put to him that he was trying to produce a lawful dividend, and if he had distributed a sum based on the higher figure (£2.7m) he would not have been doing that because it would have been a distribution of capital, but he did not accept that; he said that the question of the lawfulness of any dividend did not arise. He was trying to distribute in accordance with the arrangements that he had made with Mr Mackay.

The counterclaim

16. The audited figures for the year ended 31st May 2002 showed a debt due from the defendant of £583,038. This basically represented the debt owing as at the date of the share sale agreement increased by the consideration due on the transfer of the flat, with adjustments which do not matter. This is the amount sued for and admitted as a debt. In the counterclaim there is a claim for the same amount as being something which Group was entitled to procure the release of and which was by inadvertence not released. It is pleaded that such it was a sum which the defendant was (by virtue of the assignment) entitled to counterclaim (and set off) as a result of the "conjoint effect" of clauses 6.3 and 14.2 of the share sale agreement.
17. Since the pleading of the counterclaim, the calculation and arguments have become more refined. It is, I think, unnecessary to set out at this point the calculations that have given rise to the figures, because I can deal with things as a matter of principle. The defendant's case is now based on a surplus of assets of a sum of £559,279 (that is to say there is a balance sheet surplus of that amount). The defendant says that the expression "accumulated net worth" in clause 14.2 of the agreement means a balance sheet surplus, so that clause 6.3 entitles the defendant to recover that surplus. The difference between that sum and the admitted debt has been paid. Square Mile does not accept that those two clauses have that effect. Mr Trace declined on invitation to state what the baseline was from which a payment under clause 6.3 would be calculated, but said that in any event "accumulated net worth" did not bear the meaning that Mr Gadd sought to give it and meant (in effect) distributable reserves. The distributable reserves were distributed by Mr Rupal's dividend and there is no further distribution to be done.

The true construction of the agreement

18. The first task for me is to construe the two crucial provisions in the agreement. The two competing constructions can be summarised as follows.
19. For the defendant Mr Gadd submits that clauses 6.3 and 14.2 have to be read together. Clause 6.3 refers to the removal of "certain assets". Those assets are not defined there; nor is the basis of the calculation set out there. However, it is to be read with clause 14.2. This refers to the removal of the "accumulated net worth". That expression means "net assets", and when one reads it with clause 6.3 it provides what 6.3 does not, or may not, provide by itself, namely a measure against which one can assess the difference between what was done and what ought to have been done when one looks at the audited accounts. In other words, one looks to see what the net assets were according to the audited accounts, and if it transpires that they have not been effectively removed by the dividend then an adjusting payment should be made to put the defendant (originally Group) in the position it (Group) would have been in had those net assets been removed.
20. Mr Trace counters this by relying principally on various things. First, he says that the expression "accumulated net worth" means (in substance) undistributed profits. If the parties had meant "net assets" it would have been easy to say so. Second, he relies on what happened when Mr Rupal did his calculations as something that one can take into account in construing the terms of the contract, and when one looks at what he did he was calculating accumulated net profits, not accumulated net assets. Third, clause 14.2 was in effect a recital, referring back to something that had happened, not something defining the intentions of the parties as to the measure to be applied for the purposes of clause 6.3. Again, what the parties were discussing in this respect (the Rupal/Mackay calculations) shows that they did not intend to provide for the transfer of net assets; they intended to reflect the transfer of net profits.
21. It is the true construction and effect of clause 14.2 that lies at the heart of this case. After the entire agreement part of the clause it goes on (ungrammatically) to describe what has happened ("the Vendor has caused …). There is, in my view, a tension between what that clause describes as having happened and what actually happened. I do not agree with Mr Trace's interpretation of the words "accumulated net worth" as they stand in the clause. Just taken by themselves I think that their more natural meaning is "net assets" – the word "worth" suggests an overall evaluation which is capable of going beyond accumulated and undistributed profits. This view is very much strengthened by the words in brackets which follow (the references to IBA matters). The three expressions appearing there are defined in clause 1.1 as follows:

"IBA assets:


"The amount of debts owing to RBF in respect of all insurance broking transactions of RBF and the amount credited to all bank accounts of RBF designated "IBA" in accordance with the requirements of GISC."


The IBA fund is:


"The insurance broking bank accounts maintained by RBF pursuant to the regulations of GISC."


And the IBA liabilities are:


"The liabilities of RBF in respect of all insurance broking transactions of RBF and the amount debited to all bank accounts of RBF designated 'IBA' in accordance with the requirements of GISC."

As already explained, those funds are funds dedicated to a purpose, and are in the nature of trust moneys, but the important point for these purposes is that the deduction of these items in the clause 14.2 formulation is akin to taking assets out of a balance sheet calculation. They would not be appropriate deductions from a profit calculation. This is further strengthened by seeing how the IBA matters are treated in the accounts of the company. The balance sheet debtors are broken down in the notes, and the first debtor is "Insurance broking account debtors". The breakdown of creditors in the balance sheet shows, as the second item, "Insurance broking account creditors". The strong impression reached thus far is not dispelled by the four listed items which follow. If the first three are equivocal, the fourth certainly suggests a balance sheet calculation to arrive at the "net worth" of the company in a balance sheet sense. Mr Trace suggested that a familiarity with various provisions of the Companies Act 1985 (ss 135, 136 and 263) would lead the reader to a contrary conclusion, but having familiarised myself with those provisions I confess I do not see why. They did not lead me in that direction.

22. I therefore conclude that the expression "accumulated net worth" in clause 14.2, as a matter of wording, does not mean accumulated profit, but naturally means "net asset value". However, that does not necessarily get Mr Gadd home. The next question is: What is the effect and purpose of this part of clause 14.2? Mr Gadd has to establish not only that it means what he says it means, but also that it is intended to form the benchmark against which to carry out the clause 6.3 calculations. It does not purport in terms to be such a benchmark, and one could operate clause 6.3 without it. Clause 6.3 refers back to a prior activity, namely the removal of assets on the basis of the Management Accounts. There were no such accounts as that term is defined in the agreement though there were management profit and loss accounts to 30^th April 2002 as described above. It is of the essence of management accounts that they lack finality. Audited accounts produce finality. What this clause (taken by itself) seems to be doing is to require one to look back at the asset removal exercise referred to, to look to the extent to which management accounts were relied on, to compare those management accounts with the audited accounts, and to carry out any adjustments required by that comparison. In other words, it allows "final" figures to be substituted for "temporary" ones. If one applies that exercise to what Mr Rupal did one would not adjust his starting point of £2.2m odd figure because that did not come from management accounts; that was a previously audited figure (though, if it mattered, nothing in the subsequent audited accounts requires it to be adjusted anyway). The other elements were the sort of "best assessment" figures that actually came from the management accounts or which were the subject of additional assessments – the loss for the year ended 30^th April 2002 came from the management accounts, and the loss for May 2002 was estimated, as were the redundancy figures. Those other elements would be subject to adjustment on the basis of the audited accounts. That exercise can be perfectly sensibly carried out looking at clause 6.3 in the context of the actual exercise done by Mr Rupal. What was done taken together with clause 6.3 provides its own benchmarks, and one does not need to resort or refer to clause 14.2. That approach would be consistent with Mr Trace's analysis.
23. The trouble with that is that if that were the right way of going about things it would be difficult to see what point there is in the relevant wording of clause 14.2. Those words were presumably intended to have some effect, but I have difficulty in seeing what it is if clause 6.3 were intended to operate by itself in the manner referred to in the preceding paragraph of this judgment. The wording purports to record something that has been done, somewhat pointlessly if I am right about how clause 6.3 is capable of operating by itself. Some significant thought has been given to its provisions, as is demonstrated by the careful elaboration of the concept of accumulated net worth (albeit that not enough thought was given to how the wording fitted with the opening words of the clause), so it was apparently a deliberately intended provision with something specific in mind. If some effect can be given to this somewhat elaborate (though badly put together) provision then I think it should be done.
24. The contract itself refers to preceding events. One cannot make sense of it without looking at those events. That it is permissible to refer to the background facts to ascertain what it is talking about is obvious, but it is also confirmed by The Pacific Colocotronis [1982] 2 Lloyds Rep 40. The admissible background facts of this case demonstrate that the wording of clause 14.2 can only be referring to the events when Mr Rupal calculated and procured the payment of the dividend. There was no other relevant event involving the removal of assets. It is therefore referring to the same events as clause 6.3. It is therefore purporting to describe the intentions of the parties in relation to those events, either by implication or by virtue of a direct statement of what they thought they had achieved. If the argument stopped there then it would be natural and correct to treat clause 14.2 as recording the benchmark against which to carry out the calculation required by clause 6.3. However, one cannot necessarily stop it there because when one looks at the events that actually occurred they do not demonstrate the removal of net assets; they demonstrate a removal of accumulated net profits. Furthermore, they tend to demonstrate not only that that was done, but that it was done as a result of an informal agreement between the parties as to the calculation (and therefore as to the methodology). Mr Rupal says that he went through the figures with Mr Mackay and that Mr Mackay accepted what he had done, and since Mr Mackay felt himself unable to dispute what Mr Rupal said about this exercise, other than what he said about its timing, I find that he did go through them and that Mr Mackay did accept them.
25. One therefore has a tension or conflict between what the agreement records as to what the parties did and apparently intended on the one hand, and what they actually did and apparently actually agreed about the exercise on the other. What they did does not accord with what they record themselves as having intended. How is that to be reconciled? Does one give primacy to what they actually did and apparently agreed in the pre-contract event, and write off clause 14.2 as being a mistake, or perhaps give the expression "net accumulated worth" a different meaning to that which it otherwise naturally bears; or does one give primacy to the written agreement between the parties and to the intention implicitly recorded there, with the result that the parties were mistaken in the exercise they were conducting before exchange and completion?
26. I think that the answer to that problem, on the facts of this particular case, lies in looking more carefully at the nature of the pre-agreement acts and bearing firmly in mind that the detailed wording of clause 14.2 was presumably intended to have some effect. The clear impression that I have formed from the evidence was that the exercise done by Mr Rupal was a rough and ready exercise carried out fairly hurriedly and with no real preparation or forethought. The nature of the exercise as I have described it demonstrates that. It was accompanied by the somewhat hurried exercise of transferring the flat, and of buying in the outstanding shares. The flat was transferred at cost, giving rise to a book debt, but there is no evidence that he gave any thought to the consequences of that on the transfer or distribution to which he was giving effect. No-one even recorded the debt at the time. I do not get the impression that the exercise was clearly thought out by Mr Rupal. I think that he instinctively started from the accumulated net profit figure because, to an accountant, that would be a natural starting point for a hurried distribution, and once he had started from that figure the rest followed. It is also apparent that Mr Mackay did not give any greater consideration to what was going on. His own evidence was that prior to completion they "obviously" had to agree an amount that would be extracted from what he described as the "cash pool" in RBF. It was to represent what he said in the witness box was "accumulated net worth". He had a conversation with Mr Rupal and asked him how they proved that figure? He had known Mr Rupal for a long time and felt comfortable with him and (according to my note):

"I said, you know the numbers, it is simple arithmetic to calculate. The following day he showed me a sheet with numbers on it. It was after the calculation and was more or less what I had calculated and I was happy that it would be what they would write the cheque for. I said I was more or less sure that it was wrong, and if so it would be adjusted at a later date."

The last sentence was no more than an acknowledgment that the figures contained estimated amounts that would have to be adjusted when the true figures were known; I do not take it to be an acknowledgment that the starting point or methodology of the calculation was wrong. Nevertheless, what was happening at this time was an informal and quickfire acceptance of some rough and ready figures, which Mr Mackay probably knew were rough and ready. Accordingly, although there certainly was an agreement of sorts, I do not think that in the circumstances it was a sufficiently firm or clear agreement to make it the governing benchmark (in terms of methodology and objective) when measured up against the wording of the contract. The choice being between the parties getting it right and the contract getting it wrong on the one hand, and the parties getting it wrong and the contract getting it right on the other, I prefer the latter. In other words, it was the contract which more accurately expressed the intentions of the parties. It was (despite its deficiencies) likely to be the more definitive exposition of intention.

27. In arriving at that conclusion I derive some limited support from the following points:

i) Mutual indebtedness between Group and RBF was to be waived – see clause 4, quoted above. This tends to support the idea that inter-group indebtedness was not to survive the acquisition, which is understandable.

ii) The "entire contract" part of clause 14.2 gives primacy to the written contract, though I accept that this is capable of being compromised in a situation where there is express reference back to prior dealings between the parties.

iii) Square Mile's claim is based on the hypothesis that a company with a real net worth of £500,000 is sold for only £50,000. That is a little strange. It is true that it was intended or envisaged that the company should continue to trade, and Mr Trace relied on the fact that this was a loss-making business historically speaking, but that is not a complete explanation. It does not follow that it would continue to be loss-making, or that the losses would be at any particular level. Mr Trace expressly disclaimed any case based on the fact that this business was presented as being loss-making, or on any common market perception that these were loss-making activities. All one can therefore say is that this was a business that had been making a loss, and which was intended to continue as a business (apparently). That does not explain the discrepancy between the price and the "net worth" of the company on Square Mile's case. Mr Trace also suggested that the explanation lay in other liabilities which had not crystallised but to which the company might become liable, such as a dilapidations claim on the termination of the tenancy of the business premises. That is, I suppose, one explanation, but I do not find it sufficiently compelling to justify the discrepancy just referred to. Square Mile also relied on the fact that there was a Lloyds requirement that its brokers have a paid up share capital of £500,000, but on the evidence that no longer applied to the business of RBF at the time it was in run-off and had not applied to it for several years. I accept that evidence, and find that that was no motivation for leaving £500,000 of net assets behind in RBF.

28. I should also record that I have taken into account the various other points made by Square Mile which point away from this conclusion, including the following:

i) Mr Trace argued that the defendant's construction of the agreement involves an illegality. Mr Trace's point is this. The parties set about distributing by way of dividend. If Mr Rupal had tried to go beyond what he did and distribute the shareholders' funds he would be carrying out an unlawful distribution. Accordingly the transaction would be illegal and he relied on Tinsley v Milligan [1994] AC 340. This argument fails because the transaction does not necessarily involve the commission of an illegal transaction. The share sale agreement does not provide that the parties will distribute capital in any particular way, let alone an illegal way. On the construction that I have found it reflects an intention to transfer sums which would go beyond distributable profits, but does not commit the parties to doing that. It manages to mis-recite what had actually been achieved, but that does not contain an obligation to do it. What the construction provides is that if and insofar as the particular goal has not been achieved then there will be an adjustment to the sale price when the audited accounts emerged. There is nothing illegal about that. There would only be an illegality if the parties had bound themselves to achieving this by an illegal dividend, and that is not the nature of the transaction. Mr Rupal sought to go about his activity on the basis of a dividend, but that is merely the way he went about it, not a commitment to do it that way and no other.

ii) Mr Trace submitted that to do what the defendant said should have been done would have been to have reduced the company to insolvency and that cannot have been the basis of the transaction. This all depends on what one says should have been done. If it is said that the debt should have been released on top of the other payments that should have been made then that might be right. However, that is not the true effect of the agreement. The agreement posits a balance of assets and liabilities, not a deficit. The agreement does not entitle the defendant to counterclaim for the amount of the debt claimed by Square Mile; it is entitled to counterclaim for a sum which would reflect what would have happened had the company's net asset value been extracted.

29. I therefore conclude that the defendant's construction of the agreement is correct and they will have judgment on the counterclaim accordingly. The precise sum, and the amount due on the claim after taking it into account (if any) will have to be the subject of agreement or further argument if necessary. It depends on the treatment of sums that have already been paid by the defendant. I received information, analysis and submissions on this, but having reflected on the matter further the position is still not sufficiently clear to me for me to be able to determine the sum at this point and I would like further clarification from counsel. I will therefore consider this calculation, so far as necessary, on or after the handing down of this judgment.