What Is The Best Way To Value Assets?

Well, it has been a fascinating Monday 3 June 2024 as stuff sprouted today (leaving aside Nigel Farage taking over from Richard Tice and to take on the Tories at Clacton) following a decision in the Court of Appeal, that touched on consideration of what is the best way to value assets.

In the case of Bahia v Sidhu & Anor [2024] EWCA Civ 605 the judge of first instance of a partnership dispute that led to dissolution, ordered four properties to be transferred to one of the partners, treating him as having received the higher of the values ascribed (or to be ascribed) to each property by surveyors and an expert valuer, as opposed to an open market sale or by private treaty.

Although this was about matters relating to partnerships the question of asset valuation was key with an open market sale with the market being tested as the best approach most of the time.

The Court of Appeal overturned the first court’s decision on matters of law in an evaluative decision notwithstanding the appellate court acknowledged the judge’s pragmatism.

The usual approach was noted to obtain the best realisation of the assets is an open market sale. However, it was also recognised that in exceptional circumstances this can be overridden:

However, there may be cases in which an open market sale would not be the best means of achieving full value, or would be unfair. As Hoffmann LJ observed in Hammond v Brearley (unreported) [1992] 12 WLUK 185:

“There is nothing in the Partnership Act 1890 which positively requires that the winding-up of a partnership shall be effected by a sale. It is true that a sale by auction is the normal way of realising the assets for the payment of debts and distribution to the partners. But the decision of the House of Lords in Syers v Syers [1876] 1 AC 174 … shows that in exceptional cases the court has a discretion to take a different course, such as allowing partners who wish to continue the business to acquire the share of another partner at a valuation. It is I think notorious in the Chancery Division that Syers v Syers is an authority far more frequently cited by counsel than applied. But the discretion which it gives seems to me a valuable one which I think judges should not hesitate to use when it suits the justice of the case.”

What Is An Exceptional Case To Sell The Assets Differently?

The Court of Appeal surveyed matters and said:

Drawing all those threads together, it seems to me that the types of case in which “exceptional circumstances” have been found to exist, or where it has been envisaged there might be justification for departing from the general practice of ordering a sale, are: (i) where one partner has a very small stake in the partnership, and selling the partnership business as a going concern would create disproportionate injury to the majority partner(s) and/or to third parties such as customers of the business; (ii) where, as in Hammond v Brearley, a sale in the open market is obviously not going to maximise the value of anyone’s share in the partnership, because the assets are worth little or nothing if sold separately from the goodwill, and selling both together would be disproportionate; (iii) where, even if its terms were breached, the partnership agreement makes provision for a buy-out on termination of the partnership, or it can properly be inferred that this is what the contracting parties intended, and (iv) (possibly) where it is established that one partner intends to use the auction process to drive up the price artificially, to the detriment of the other partner who wants to buy the property.

What Is The Best Valuation Method For Asset Valuation?

The Judge’s Approach:

The error in the Judge’s approach is apparent from the next section of the judgment, where he set out the rival proposals of the parties and weighed them up against each other, instead of beginning by asking himself whether selling the properties at auction would produce an unjust result, and then, if it would, whether the alternative course proposed by Mr Bahia would produce a fairer outcome. This may explain how it was that the Judge did not even consider the proposition that sale by auction is the normal course, and offers the best evidence of market value, until paragraph [53].

He then rejected the proposition that an auction will always provide the market price as “essentially tautological” (because it depends on defining the market price as the price that is achieved at that particular auction). He said he could take judicial notice of the fact that in many cases, property sellers prefer to obtain a professional valuation and then accept offers for the property at or by reference to that valuation. But a professional valuation, however expert the valuer, is simply one person’s view as to what the property would fetch on the open market. The only way to find out for certain what the property will fetch on the open market is to put it up for sale (no doubt using the valuation as guidance as to an appropriate asking price), and see what prospective buyers are willing to offer for it.

I would not quarrel with the proposition that one might sometimes obtain a better offer for the property by selling it privately than at auction, but the Judge was overlooking the important fact that transferring the properties to Mr Bahia at a predetermined value, particularly one which the Sidhus would have little prospect of challenging, meant that the Sidhus would be denied the opportunity to test the market. It was therefore possible that they were being forced to sell at an undervalue. At the end of the day, the Judge’s approach meant they would have no idea whether the Receiver could have got a better price for the property in an auction at which Mr Bahia would be free to bid for it if he wanted to.

The Court of Appeal said:

…It is self-evident that in a case such as this, where the property can be readily sold at auction, the amount that an arms’ length purchaser is willing to bid for it will be a better measure of the value of the property in the open market than a virtually unchallengeable expert opinion as to what it might have fetched had it been put up for sale. Any concerns about it being sold at too low a price could easily be met by placing a reserve on the property at the valuation obtained from Alexander Lawson, and by giving the Receiver a discretion to sell by private treaty, including to Mr Bahia, if it did not meet the reserve.