Ann L Humphrey

A loss-making company (L Ltd) was sold for £1. At the time of sale, L Ltd had significant accumulated trading losses. At the end of its most recent complete accounting period before sale (the Balance Sheet Date) those losses amounted to around £30 million. The seller wanted to be paid additional consideration if the buyer was able to use any of those losses.

Clause 4.2.1 of the share sale agreement provided that the seller would be paid “at the rate of 20p for every £1 of Tax saved as a result of the set-off after Completion of the Losses, against profits of L Ltd or Buyer's Group.” A dispute had arisen between seller and buyer over the definition of ‘Losses’ for the purpose of clause 4.2.1.

The directors of the seller had understood that the provision for the payment of additional consideration would apply to the total accumulated and unclaimed losses of L Ltd at the Balance Sheet Date. This understanding had been reflected in a draft share sale agreement reviewed by them. Clause 1 of that draft defined Losses as the aggregate of trading losses as computed for the purposes of ICTA 1988 'at' the Balance Sheet Date. For some reason, this wording was changed and, in the share sale agreement as executed, Losses were defined as the aggregate amount of trading losses as finally agreed for the purposes of section 393 ICTA 1988 with HMRC 'for' the year ending on the Balance Sheet Date. 

We were asked for  an  opinion on whether the definition of Losses in the share sale agreement as executed was broad enough to include all accumulated losses as at the Balance Sheet Date (£30 million) or whether that wording limited the seller’s claim for additional consideration to the use of losses agreed with HMRC for the year ending on the Balance Sheet Date (£8 million).