Trading valuations: what’s the correct method?

trading valuationsA recent case, Barclays Bank v Christie Owen & Davies, has highlighted the need to use the correct method in trading valuations. Lucy Emanuel, a solicitor in our Disputes team, provides an update.

The facts

In 2007, Mr and Mrs Thurston owned two amusement arcades: Circus Circus and the Golden Nugget (together CCGN). All trading operations were conducted through Thurstons UK Limited (Thurstons). The arcades were located at the Marine Parade in Great Yarmouth.

The arcades were subject to an all monies charge in favour of Barclays. This meant that all debts with Barlcays (including personal loans, overdrafts etc.) were secured.

Thurstons wanted to purchase a third amusement arcade, The Flamingo. It also wanted to carry out alteration works on all three arcades. Thurstons applied to Barclays for an equity release loan of £1.8m to allow it to do so.

Barclays engaged Christie Owen & Davies Ltd (Christie) to provide trading valuations (a method of valuing a company) of the arcades.

In February 2007, Christie provided two valuations. One of £2.7m for CCGN, the other of £1.5m for The Flamingo.

The loan and purchase went ahead based on a maximum loan to the value of 67% of the value of all three arcades.

By October 2007, Thurstons was in administration.

The 3 arcades were sold for £1.35 m in October 2010. Barclays suffered a loss.

Barclays obtained expert evidence that the true value of the arcades at February 2007 was only £2.1 m for CCGN, and £1m for the Flamingo.

Barclays brought a claim for negligent overvaluation by Christie in both reports.

The outcome

The following key decisions were made by the court.

  • The correct method for reaching a trading valuation is: Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA). EBITA refers to the earnings of a company before the deduction of interest, tax and amortisation expenses. It is a financial indicator used to measure a company’s efficiency and profitability. This method should not be departed from unless there is good reason.
  • Despite two separate valuations having been undertaken, he aggregate value (the value of the arcades combined) mattered the most. This was because Barclays looked at the security of the properties together when making its decision to lend.
  • The sale price agreed between the vendor and borrower was not reliable evidence of value. Both experts agreed that this would usually provide the most reliable evidence, provided the property had been competently marketed on the open market. But, it had not.
  • The court found Christie 40% negligent. To reach this percentage, they also considered Barclays’ decision to proceed with the loan, despite the fact Thurstons’ integrity was in doubt. In 2003, Barclays had advanced £300,000 to Thurstons to refinance the arcades. Instead, Thurstons used the loan to purchase a property in Spain.

This judgment demonstrates the complexities of reaching trading valuations, and highlights the importance of using the correct method. It may be of assistance – to both claimants and defendants – when considering the risks and merits of a professional negligence claim that involves a trading valuation.

Lucy Emanuel, Solicitor, Commercial Disputes