This was an application brought under s.212 of the Insolvency Act 1986 by Mr Reynolds, as liquidator of CSB 123 Ltd ('SC1') against Ms Stanbury, a director of SC1. The Applicant claimed that the Respondent transferred SC1's business and assets for no consideration to connected parties. The Applicant maintained that this was in breach of the duties owed by the Respondent to SC1 pursuant to ss171-175 of the Companies Act 2006 and an unlawful distribution of capital. The Respondent maintained that the application was misconceived and denied any wrongdoing.
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Mr Slack struggled to defend his report in the witness box. When asked whether his report was 'accurate and complete', he stressed that it was a valuation done 'at a high level ', adding 'I didn't go into extensive detail given my instructions and budget.'
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In the opening paragraphs of his report, Mr Slack confirmed (at para 1.6.2) that 'Due to time restrictions and in the interests of proportionality and an upcoming mediation between the parties, the valuation/s have been done at a 'high-level'. This means that there has not been an in-depth analysis of various valuation metrics and evaluation model/s are not detailed or comprehensive.'
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In re-examination, Mr Slack explained that, at the time that he was instructed to value SC1, he was told that the Applicant wanted to mediate and didn't want to spend a lot of money.
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After exchange of expert's reports, Mr Slack produced 16 further documents, not referred to at all in his report, seeking to shore up its conclusions.
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For the purposes of his report, Mr Slack adopts the market approach, which treats SC1 as a going concern. His report is prepared on the basis that, whilst the Respondent 'was not contractually bound to work indefinitely for [SC1]' the Respondent (who was 37 at the First Valuation Date) 'would … have continued to be involved in [SC1] up to the date of her retirement, if not for this dispute'; and that 'by the date of her retirement,….. [SC1] would have established a succession plan so it would remain a going concern': (para 1.8).
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In preparing his valuations, Mr Slack used the operating profit shown in the financial accounts for SC1 (prorated) to estimate future maintainable operating profit (the multiplicand). At para 2.1.3, he explained 'For high-level valuations, I use a multiple range of between 4x-8x EBITDA.' He decided that SC1 'should attract a 5x multiple' (para 2.1.4). He then applied an operating profit multiple of 5x to arrive at a value for SC1 of £1.38m as at 22 October 2012 and £1.42m as at 31 January 2013: (para 5.1).
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Whilst 'sharing' some of the Respondent's concerns in respect of the FSPG valuation (paras 4.1 and 4.2), he concluded that FSPG had 'arrived at a reasonable value nevertheless' (para 5.3.1).
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In cross examination, Mr Slack accepted that when valuing a private company, earnings multiples are best suited for sectors that have relatively stable earnings and that, if historical earnings are not stable, they will not be a good basis for future projections. He struggled to explain how 2 years' trading in a company of the size of SC1 provided a sound basis for projected earnings in the future. He said that his understanding was that the Respondent had been operating the business for a number of years, but admitted that he had not looked at any of her prior earnings figures as a sole trader and knew nothing about them.
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Mr Slack had no persuasive explanation for using a multiple of 5x either. He repeated that it was a 'high level' valuation and the FSPG valuation of £1.4m was a 'clear indicator'. When it was put to him that when choosing a multiplier and calculating value, it was unacceptable to look at someone else's valuation and do a reverse calculation, he responded 'that's one way of approaching it'.
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Mr Slack was pressed to justify the 5x multiplier, particularly given SC1's high dependence on the Respondent. He and Mr Hobby had agreed in their joint statement that, without the Respondent, SC1 would have no business. Mr Slack had acknowledged in his report that the Respondent 'was not contractually bound to work indefinitely for [SC1]'. Yet for the purposes of his report, Mr Slack had proceeded on the basis that the Respondent (who was in her forties) would work for SC1 until retirement (para 1.8). When challenged in cross examination, he claimed that the 5x multiplier reflected the risk that she would leave.
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When asked why he had not used comparables when preparing his report and considering the multiple to apply, he said that he didn't consider it 'proportionate' and that he 'had a feel' for the multiple. Whilst accepting that, in a 'detailed valuation', it is a common or useful practice to use comparables, he said that 'because of the nature of my instructions, my experience, and the fact that the company sold for £1.4m, I felt that a multiple of 5 was appropriate.'
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After exchange of expert reports, however, Mr Slack did produce 'comparables'. The 'comparables' which he produced bore no resemblance to SC1. They included (1) CVS Group plc, a nationwide veterinary practice, established for over 20 years, with an annual revenue of over £100m, (2) Dignity plc, a FTSE 250 company owning 600 funeral locations with an annual revenue of over £200m; and (3) John Swan & Sons plc, livestock auctioneers established for over 100 years. When asked in cross examination what the point was of producing these examples, Mr Slack replied that the companies in question were all 'specialist retailers', adding that 'if SC1 was listed', this was the sector that SC1 would end up in. This was clearly not an adequate justification for use of such 'comparables'.
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When asked whether any of the examples produced had cash flows, growth potential and risk similar to SC1, Mr Slack said that he believed the 'risk' to be 'similar'. This was a manifestly untenable position for him to adopt.
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When asked why he had applied no keyman discount (para 1.8), he answered 'because I considered that a multiple of 5 was appropriate.' This was not an adequate explanation.
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Mr Slack had made no adjustment in operating profit for salary either. He accepted that he was valuing on the basis of a sale to an arms length purchaser and assumed continued engagement of the Respondent, but took no account of the fact that in each of the two years he had used as the basis for his calculations, the majority of the Respondent's remuneration was paid by way of dividend, not salary. The figures were stark; and even FSPG's one page valuation had allowed a deduction of a notional salary of 89k for the Respondent. When pressed to justify his failure to adjust for salary, he eventually responded: 'because the 1.4m should be treated as capitalised wages. She got 10 to 15 years wages in advance'. As Mr Trollope remarked at the time, this was 'utter and total nonsense'. It was at this stage that I reminded Mr Slack that he was under oath and should not treat the giving of evidence in court as a game. He apologised.
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Overall, Mr Slack's report was an unimpressive, results-driven piece of work. His attempts to defend it in oral testimony were entirely unpersuasive. In my judgement, very little weight can be placed on Mr Slack's written and oral expert evidence. His failure to address personal goodwill when considering the method of valuation to adopt, his assumption that the Respondent would work for SC1 for the rest of her working life, his unjustified use of a 5x multiplier, his rearguard use of entirely inappropriate 'comparables', his failure to deduct a notional salary and his attempts in cross examination to justify that failure, have led me to conclude that his evidence is not a reliable guide to the value of SC1 as at either valuation date. "