THE CURRENT IMPORTANCE OF PLEADINGS 3: EXPERT EVIDENCE WAS NOT NECESSARY, NOT PROPORTIONATE AND DID NOT REALLY RELATE TO THE PLEADED ISSUES

There is a consideration of the principles relating to the use of expert evidence in the judgment of Mr Justice Fancourt in Cohen & Ors v Co-operative Group Ltd & Ors [2025] EWHC 526 (Ch).  The judge rejected the claimants’ application to rely on one expert because it related to issues that the claimants had not pleaded.  The application in relation to the second expert was refused because it was not likely to assist the court and the costs were disproportionate.

“I therefore reject the application in respect of the business valuation experts for the simple reason the evidence will not go to any pleaded issue in the claim.”

“Far from assisting the court, it is likely that a significantly increased burden will arise in a case where there will already be ten expert witnesses, with material that is unlikely to be relevant to the issues of good faith or reasonable grounds. It will significantly increase the costs of the claim, and quite possibly require the scope of disclosure to be revisited.”

THE CASE

The applicants are the liquidators of a company.  They brought an action seeking a declaration that a sale and purchase between the company and the respondents was a transaction at an undervalue or were preferences.

THE EXPERTS THAT THE APPLICANTS WISHED TO CALL

The applicants sought permission to rely on “ business valuation experts and business restructuring experts.”

The applicants wanted to argue that the court should consider the sale of the business as a “going concern”.

THE PLEADED CASE IN RELATION TO THE BUSINESS VALUATION EXPERTS

The judge carried out a detailed consideration of the applicant’s pleaded case and observed

1. Whether it is correct or not that FROL had a business capable of being sold as a going concern, it is clearly not a matter that is currently pleaded. Nor is the business identified beyond the assets that were sold. No sale of a viable business appears in the Case Summary, and the List of Issues that was prepared for the case management conference says nothing about the value of a business. What is pleaded is that there was a sale of specified assets, including a large number of properties and the fixtures and fittings in them. As Mr. Potts KC for the defendants pointed out, that had consequences for the way in which the disclosure issues were defined in the disclosure review document, and for the evidence of fact that has just been exchanged.

1. 1. As things stand, the property and fixtures and fittings valuation experts are due to exchange their reports on 21 March 2025. What the claimants now say is that instead of these experts reporting on the value of assets sold, there should be a different expert valuing instead the entire business that was sold by the two sale agreements, as a single business and not as a portfolio of individual properties and their contents.

1. 1. Mr. Weaver said that the Foodstores Sale Agreement proves that this was a business sale and that the value of what was sold is an important component of the statutory test for a transaction at an undervalue, and that accordingly it is necessary for there to be expert evidence about the value of the business. He accepts that the exercise of valuing a single business is different from valuing individual properties or even a property portfolio.

1. 1. The issues in this case are identified, however, by the statements of case, not by what one document appears to show. The straightforward answer to the suggestion that the court needs business valuation expert evidence is that there is currently no pleaded issue to which that evidence is relevant, let alone necessary for the court to hear. If a transaction had been pleaded from the outset as a business sale, matters would have taken a very different course. At this stage, it is known that the defendants dispute that there was a viable business capable of being sold by FROL to anyone except the Co-op Group. If the claimants were to apply to amend their claim, they would have to provide a proper pleading giving particulars of the nature and extent of the business that was sold, what it actually comprised and what (e.g.) goodwill would go with the business, so that a business valuation expert would know what it was that they were valuing. The amended statement of case would also have to withdraw the pleaded case that the transaction was the sale of a collection of assets only.

1. 1. This issue of business valuation cannot be a matter that has arisen out of the blue. The terms of the sale agreements are self-evident and if the transaction was really the sale of a business as a going concern, that would surely have been raised before November 2024, more than 18 months and two case management conferences after the issue of the originating application notice. It would have been obvious that valuing the properties and certain other assets was different from valuing an entire business, if there was a viable business.

1. 1. Mr. Weaver was unable to explain why it had arisen so late, but in the course of making his submissions in reply he said that the property valuations did not capture the ability to trade from the stores that were sold with the benefit of intangibles such as goodwill. He also said that the property valuer instructed by the claimants had said that there was more value in the assets if they are a trading business; however, the property valuer was not an expert in business valuation. It does seem to me, therefore, that the claimants are seeking to change their case, to be able to assert a higher true value in the assets sold, or perhaps to avoid a large quantum discount that a property valuer would apply to a large portfolio of properties.

1. I therefore reject the application in respect of the business valuation experts for the simple reason the evidence will not go to any pleaded issue in the claim. Whatever the sale agreement may say on its face, the pleaded case is one of sale of assets. This is not merely a matter of form because disclosure and witness statements were tailored to a case of asset disposal, and the direction for property and fixtures valuation expert was given on that basis.

THE BUSINESS RESTRUCTURING EXPERTS

The judge also rejected the application in relation to business restructuring experts.

1. 1. Turning then to the business restructuring experts, unlike the business valuation evidence the possible need for restructuring evidence was noted in the orders made at the case management conferences previously. However, that in itself does not add any weight to the case that now needs to be made to show that such evidence should be permitted.

1. 1. The court is under a duty to limit expert evidence to that which is admissible and reasonably required to resolve the proceedings. Even if the evidence is not necessary to resolve an issue, it may still be admitted if it will be of assistance in determining that issue and so is reasonably required. The decision to permit or refuse expert evidence is an evaluative judgment taking into account all relevant circumstances and proportionality, see British Airways plc v Spencer [2015] Pens LR 519 and Re RBS Rights Issue Litigation [2015] EWHC 3433 (Ch).

1. 1. The need for expert business restructuring evidence is said to relate to the defence under section 238(5) and in particular the four alternatives pleaded in the Reply. It is not said to relate to what is pleaded in paragraph 45A of the Reply about obvious shortcomings of the Deloitte Report.

1. Mr. Weaver did not suggest that this evidence falls into the category of being necessary to resolve the statutory defence. He said that it would assist the court to have a professional evaluation of the alternatives open to FROL. He suggested that whether it was reasonable to enter into the disputed transaction had to be considered in the context of what other alternatives were available to FROL at the time, whether these were actually considered by the directors of FROL or not. The “benefit to the company must go hand in hand with what alternatives were available”, as he put it. One alternative was to do nothing, not to enter into the transaction, and that is always a relevant comparator as there is no benefit from the transaction unless it may improve the company’s current position, or avoid some risk. Mr. Weaver argued that where there are other alternatives, evidence about whether they were realistically available to FROL and, if so, whether they would be better alternatives than the transaction, is admissible.

THIS EVIDENCE WAS NOT NECESSARY

1. 1. Further, I am not currently persuaded that it is necessary for a respondent to a transaction at an undervalue claim, who has proved their good faith and that the purpose of the transaction was to benefit the company, to have to prove then that any alternative that a specialist restructuring professional might identify in retrospect, but which was not raised or considered at the time, was one that was not viable or not sensible for other reasons.

1. 1. Even if it is right that opinion evidence about other possibly better structures is admissible and relevant, on the facts of this case I do not consider that the court is likely to be assisted by (no doubt) lengthy and detailed analysis from a specialist accountancy firm or insolvency practitioner. The estimate of the cost of the expert evidence required was £150,000 to £200,000 on each side, which gives an indication of the sophistication and likely complexity of the evidence going to be adduced.

1. 1. The four alternatives relied on here are not complex structures and the principal argument of the claimants is that FROL did not even consider them or seek advice on them.

1. 1. As to their likely viability, I accept Mr. Potts’s argument that the issues about whether it was realistic for FROL to have done any of them in November 2015 arise not from any difficulty in understanding or evaluating the options theoretically available, but from the practical difficulty that FROL was a wholly-owned subsidiary of the Co-op Group whose business was integrated with the Group’s wider supermarket business. These are matters of fact that do not require the opinions of a restructuring professional.

1. 1. In my judgment, the court, which is a specialist court, will be well placed to evaluate evidence given about the position that FROL was in, what consideration its directors gave to alternatives, if any, what advice they obtained, if any, and what alternatives were practically available. The court will be able to assess whether, on the basis of the facts found about FROL’s position in November 2015, other solutions to its difficulties were available and viable, whether they might well provide a better solution to FROL’s difficulties, and so whether FROL should have obtained advice on them before entering into the transaction.

1. 1. This is therefore not a case where the expert evidence proposed is likely to be helpful to the court, given that the issue for determination is whether the grounds for the company’s belief that the transaction was beneficial were reasonable, not which alternative was the best for FROL. Far from assisting the court, it is likely that a significantly increased burden will arise in a case where there will already be ten expert witnesses, with material that is unlikely to be relevant to the issues of good faith or reasonable grounds. It will significantly increase the costs of the claim, and quite possibly require the scope of disclosure to be revisited.

1. For all these reasons, I therefore reject the application to allow expert evidence of this kind.