Square Mile Partnership Ltd v Fitzmaurice McCall Ltd (2006)


On the true interpretation of a share sale agreement the expression "accumulated net worth" in the clause in issue meant "net assets".


The appellant company (S) appealed against a decision ((2005) EWHC 1565 (Ch)) that it was liable to the respondent (F) on F's counterclaim and F cross-appealed against the decision and a second judgment ((2006) EWHC 22 (Ch)). F was the holding company of a group. F's subsidiary (G) had sold to S the shares in its subsidiary (B), a Lloyd's broker. S specialised in the run-off of insurance or insurance related businesses. The share sale agreement provided by clause 6.3 that G had removed certain assets from B before the sale on the basis of the management accounts and that each party remained liable to pay to the other the amount of any adjustment shown to be due by the audited accounts, and by clause 14.2 that prior to the agreement G had caused B to transfer to G the "accumulated net worth" of B. S, as assignee of B, brought proceedings to recover the sum of £559,297 owed by F to B and outstanding at the date of completion of the agreement according to the audited accounts. F, as assignee of G, counterclaimed under the provisions of clause 6.3 providing for an adjustment between the parties. The judge gave judgment in the action for £559,297 against F, entered judgment on F's counterclaim for the lesser sum of £453,732, and ordered F to pay the difference of £105,565 to S. F submitted that "accumulated net worth" meant "net assets" and that clause 14.2 was designed to reflect the intention that B should be sold in a position where its assets balanced its liabilities and it had no net assets, and that clause 6.3 entitled F to recover the surplus assets. S submitted that the transfers permitted by clause 14.2 were limited to distributions of profits that were lawfully distributable under the Companies Act 1985, as opposed to permitting the transfer of the whole of the net assets of B.


(1) On the true interpretation of the agreement the expression "accumulated net worth" in clause 14.2 meant "net assets". The provisions of clause 14.2 contemplated a transfer of accumulated net worth by G prior to completion. In the context accumulated net worth had to mean net assets. The transfer could be achieved by use of the adjustment mechanism in clause 6.3. The adjustments under clause 6.3 could be for the purpose of giving effect to the transfer of net assets, even if that could not be achieved by a transfer of assets by B before completion. Evidence that a distribution had been made and the form in which it was made before the agreement was executed was evidence that the judge was entitled to look at to see what transfers of assets were referred to in clause 6.3 and clause 14.2. The judge found that there was no agreement between the parties that transfers had to be by way of a dividend. However, evidence that the transfer was made by way of a dividend was not admissible on the interpretation of the expression "accumulated net worth". S's appeal was dismissed. (2) On the true interpretation of the agreement, the accumulated net worth of B had to be calculated on the basis that it did not include intercompany debt of £54,982 owed by B to F because that was a liability that by virtue of the agreement would no longer be enforceable, and accordingly an adjustment fell to be made for the sum of £54,982, which was shown as a liability of B in the audited accounts. Further, the judgment obtained by S against F should be reduced by the sum of £50,583 paid under cover of a letter from G offering to settle the sums due under the agreement. S had not been entitled to treat that sum as paid on account of indebtedness arising in other ways from G to S. F was entitled to require that sum to be appropriated to sums due under the agreement from it either on its own account or as assignee of G. Accordingly, the cross-appeal was allowed. (4) The judgment of the judge on the claim and the counterclaim was set aside, together with the order for payment against F. There were instead substituted judgments for £453,732 on both the claim and the counterclaim.

Appeal dismissed, cross-appeal allowed