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How Do You Value a Company When Its Accounts Are Inaccurate?

Valuing shares in a company is never easy and it becomes even harder when a business’s accounts do not reflect its true profitability. That was alleged to have happened before two directors fell out and one was required to buy the other out.

RestaurantFollowing the end of their business relationship, director A took legal action against director B, claiming that his management of the company  (a restaurant) was causing her unfair prejudice. Those proceedings were settled on the basis that the company would be independently valued and that director B would buy out director A.

The valuer based his report on the company’s profit and loss accounts. Director A argued that this had resulted in a significant under-valuation in that ‘handwritten takings’, which did not appear in the accounts, had been left out of consideration. She claimed that they more accurately reflected the company’s trading position; however, her arguments were rejected by a judge.

In upholding director A’s challenge to that decision and overturning the valuation, the Court of Appeal found that the handwritten takings formed part of the company’s ‘books and records’ and that the valuer, by failing to take them into consideration, had disregarded his mandate to place a fair value on her shareholding.