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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Cohen & Ors v Co-operative Group Ltd & Ors [2025] EWHC 526 (Ch) (04 March 2025) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2025/526.html Cite as: [2025] EWHC 526 (Ch)

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IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY & COMPANIES LIST (ChD)

IN THE MATTER OF THE FOOD RETAILER OPERATIONS LIMITED
(IN LIQUIDATION)
AND IN THE MATTER OF THE INSOLVENCY ACT 1986

		The Rolls Building 7 Rolls Buildings Fetter Lane London, EC4A 1NL
		4th March 2025

MR. JUSTICE FANCOURT :

1. This is an application issued on 29 November 2024 by the Applicants in these insolvency proceedings for permission to adduce further expert evidence at trial. By previous orders, permission was given to adduce expert evidence from five different categories of expert witnesses: property valuers, valuers of commercial fixtures and fittings, so-called "covenant experts", who are in substance valuers, solvency experts and actuarial experts. The trial is fixed for up to seven weeks starting in January 2026.
2. The Applicants now seek permission for business valuation experts and business restructuring experts. As issued, the application sought also permission for a professional services expert, but the applicants now say that, in light of disclosure given by the Respondents, that is no longer necessary.
3. The underlying proceedings are an application for declarations that a transaction of sale and purchase between the company and the Respondents in November 2015 was a transaction at an undervalue, within section 238 of the Insolvency Act 1986, and/or that elements of the transaction were preferences within section 239 of that Act, and for consequential relief. The Applicants are the joint liquidators of a company now known as The Food Retailer Operations Limited ("FROL"). FROL first entered administration on 10 February 2017.
4. I will refer to the Applicants from now on as the claimants, for convenience and the Respondents, who are companies in the Co-operative Group, as the defendants.
5. What exactly the sale and purchase transaction comprised is one of the matters that is in issue. It had previously been regarded by both sides as being the sale and purchase of a large number of freehold and leasehold properties and other specific assets, some of which are linked to the properties – hence the previous direction permitting property valuation and fixtures and fittings valuation. But now, somewhat belatedly, the claimants say that it was the sale and purchase of a single business as a going concern – which explains why they now seek to call evidence from a business valuer.
6. Among the principal issues at trial will be the following: the true value of the assets that were transferred to the defendants as part of the consideration provided by FROL; the value of the assets or business left behind with FROL; whether FROL was or became unable to pay its debts as they fell due following completion of the transaction; whether FROL entered into the transaction in good faith and for the purpose of carrying on its business ("the good faith issue"); and whether there were reasonable grounds for believing at the time of the transaction that it would benefit FROL ("the reasonable grounds issue"). These last two issues arise because the defendants have pleaded a statutory defence in section 238(5) of the Insolvency Act, and the claimants have disputed both those elements of the defence.
7. The subsection in question provides as follows:

"(5) The court shall not make an order under this section in respect of a transaction at an undervalue if it is satisfied - (a) that the company which entered into the transaction did so in good faith and for the purpose of carrying on its business, and (b) that at the time it did so there were reasonable grounds for believing that the transaction would benefit the company."

8. What is pleaded in the statements of case is of some significance on the question of whether there should be permission for further expert evidence in either of the identified disciplines.
9. Paragraph 18 of the Points of Claim says that the claimants' primary case is that the transaction comprised a single transaction for the purposes of sections 238 and 239 of the Insolvency Act. Paragraph 19 then pleads that the principal elements of the transaction were (a) the reorganisation of the Somerfield pension scheme; and:

"(b) The sale of properties and other assets by FROL to Foodstores and Rochpion on 2nd November 2015 ('the Assets Disposal') for a stated consideration of £496,334,267 ('the Assets Disposal Consideration'."

Then (c) the withdrawal of over £477 million of share capital of FROL by one of the defendants; and (d) the repayment by FROL of an intercompany loan of over £15 million to one of the defendants.

10. Paragraph 30 of the Particulars of Claim breaks down the Asset Disposal, as defined in paragraph 19, into two different agreements: the Foodstores Sale Agreement, which was made on 2nd November 2015, disposing 121 freehold properties and 315 leasehold properties along with a small number of other assets; and the Rochpion Sale Agreement, which was an agreement entered into on the same date between FROL and Rochpion disposing of four leasehold and 61 leasehold non-trading properties and other assets, for a total consideration of £5.
11. The consideration for the Foodstores Sale Agreement disposal is broken down in paragraph 30(b) into its component parts, taken from the terms of that agreement itself, which shows that over £173 million was apportioned to the properties, over £111 million to equipment, over £88 million to employee benefits, over £54 million to stock, £53.5 million (approximately) to tax assets, £14.8 million of cash and other items, £8. I will come back to those other items shortly.
12. Paragraph 57 of the Particulars of Claim pleads that the consideration provided by FROL within the sale and purchase transaction was as follows:

"FROL transferred properties and assets with a stated value of £493,002,792 to Foodstores under the Foodstores Sale Agreement."

Then there is a further pleading in relation to the Rochpion sale agreement.

13. In the Amended Points of Defence, paragraph 36 pleads that prior to the transaction all of FROL's stores were reliant on the Co-op Group for their products, staff, marketing, IT systems, procurement, supply chain and logistics and estate services, and that these were operated in a seamless way within the Co-op Group's wider food business; and that FROL benefited financially and operationally from the Co-op Group's scale and its retail strength. However, it was financially and operationally dependent on the Co-op Group in all key respects.
14. Paragraph 56 of the Amended Defence essentially admits paragraph 30 of the Particulars of Claim, save in relation to certain details including the precise number of the properties that were sold. So there is no issue on the statements of case as to what it was that was sold and bought: the properties and other assets that were set out in the Particulars of Claim.
15. Paragraph 91(1) of the Amended Defence admits paragraph 57 of the Particulars of Claim, to the extent that FROL transferred properties and other assets to the stated value, but it then pleads that the component parts of what were sold were in fact worth less than the stated consideration.
16. Paragraph 95 pleads the defence of good faith and reasonable grounds in broad general terms, and then paragraph 96 provides some particularity for that defence. It relies on a threat, so-called, by the defendants to cut off their support of FROL unless the transaction was entered into, and explains why it is contended that the transaction was better overall for creditors than if FROL had gone into an insolvency process instead, and pleads that there was a reasonable prospect of FROL avoiding insolvency.
17. In the Re-Re-Amended Points of Reply, paragraph 12 pleads that there were four specific alternatives to the transaction that were open to FROL, which were not covered by a January 2015 board paper that was prepared for the board's consideration ahead of the transaction. These alternatives are:

"(a) for FROL to continue to trade its business whether in its current form and structure or an alternative form and structure; (b) for FROL to raise finance on its assets and use that finance to fund its ongoing trading; (c) for FROL to establish itself as a standalone business, replacing the support services previously provided by CGL; and/or (d) to market and sell the business and assets of FROL for proper value and/or to encourage the shareholders of FROL to sell their shares in FROL."

I will refer to those as the "four alternatives". When considering them, it is necessary to bear in mind that FROL was a wholly-owned subsidiary of the Co-op Group.

18. Paragraph 42 of the Reply simply denies paragraphs 95 and 96 of the Amended Defence. Then paragraph 45A denies that it was reasonable for FROL or its directors to rely on the Deloitte Report (as defined), given obvious shortcomings of that report which were previously elaborated in the Reply. Paragraph 45B is a denial that FROL or its directors acted reasonably in entering or causing FROL to enter into the transaction --

"in circumstances where they failed, whether adequately or at all, to consider and evaluate alternatives to the transaction. While the alternatives to the transaction are properly a matter for expert evidence, without prejudice to such expert evidence the liquidators aver that among the alternatives to the transaction which FROL and/or FROL's directors ought to have considered and evaluated were ...."

and then there are set out the four alternatives.

19. Mr. Weaver KC on behalf of the claimants pointed to the terms of the Foodstores Sale Agreement itself, and said that it was identified in the Particulars of Claim as forming part of the asset disposal. The front page of the Foodstores agreement is entitled "Agreement for the sale and purchase of business and assets", and "Business" is a defined term meaning:

"The food retail and petrol sales business carried on by the seller at the properties immediately prior to the effective date."

20. Clause 3.1 provides as follows:

"On the terms and subject to the conditions of this Agreement the Buyer agrees to buy and the Seller agrees to sell or procure the sale of the Business as a going concern and each of the Assets with effect from the effective date, save in respect of the Properties to which the provisions of Schedule 1 shall apply for the consideration set out in this Agreement."

21. Paragraph 3.2 then identifies the assets, which are mostly defined terms for the purposes of the agreement, and they include at sub-paragraph (n):

"All other assets, rights and interests of the seller in the Business other than the Excluded Assets."

22. In light of those terms, Mr. Weaver's submission was that the pleaded case refers to a document that is drafted as a business sale agreement. Therefore it, can be taken as a pleading of a business sale.
23. Clause 5.1 of the agreement, however, provides a limitation on what is sold. It states:

"The interest which the Seller sells or procures the sale of and the Buyer buys in the Business and each Asset is only such right, title or interest if any as the Seller may have therein at the Effective Date and references in this Agreement to the Business or any Asset shall mean only such right, title or interest."

24. The apportionment of the price in clause 6 sets out the substantial sums that I have already identified for the principal assets, and for each of "the benefit of the Contracts", the "Confidential Information", the "Transferred Records", the "Computer System", the "Licences", the "Debts", rights against third parties in relation to the Business, and finally "all other assets, rights and interests of the Seller used in the Business", there is a nominal £1 each that is shown as the apportioned part of the consideration paid by the Buyers.
25. The defendants' position is that FROL operated prior to the transaction by making use of the defendants' own business resources, that is to say systems, IT, contracts, stock, logistics and such like, and did not have a viable business to sell, only the substantial and valuable assets that were identified in the transaction. The claimants dispute that and say that FROL in fact continued to trade from the retained properties for some time, in its own right, before entering into administration.
26. 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.
27. 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.
28. 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.
29. 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.
30. 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.
31. 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.
32. 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.
33. Further, an application to amend to change the nature of the case at this stage will not necessarily be straightforward, but obviously I express no view beyond that as to the likely outcome of any such application.
34. 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.
35. 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).
36. 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.
37. 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.
38. Assuming for these purposes that the first part of the statutory defence is established, namely the subjective requirement of good faith and the purpose of the transaction being to carry on the company's business, there is an objective assessment secondly required, namely whether there were reasonable grounds for believing that the transaction would benefit FROL. This requires the defendants to prove not only that the directors of FROL did believe that the transaction was beneficial to it but that, at the time, there was a reasonable basis for that belief.
39. The claimants' case is not that FROL's board considered the four alternatives and wrongly rejected them, but that they did not take appropriate advice and did not address them. Their primary argument is, therefore, that having failed do that, they could not have had reasonable grounds for their belief in relation to the transaction itself. A secondary argument seems to be that if advice had been taken, the directors would have learnt of better alternatives.
40. Whether absence of reasonable grounds can be established by relying on the viability of matters that were not considered by the board is unclear, but assuming for present purposes that is that is possible, the claimants wish to have expert witnesses in restructuring give evidence about the following issues, which were only very recently formulated in a draft order prepared for this hearing:

"(i) whether any one or more of the following address the options [I interpolate, the four alternatives] that were available to the directors of FROL at the time of, and potentially as an alternative to, the Transaction, and (ii) if so, how likely was it that any of the following options would benefit FROL."

What is meant by "available" there is not wholly clear, but it appears from the submissions made to me that "viable" is a close synonym.

41. What the defendants say is that what else the directors of FROL could have done in the circumstances, and which might have benefited FROL, is a purely factual issue based on FROL's circumstances, its assets and liabilities and, in particular, its control by and dependency on the Co-op Group and the structure of the Group, all of which are matters of fact capable of being proved by evidence of fact. The suggestion that the directors could or should have done something different are matters that should be explored in cross-examination of the defendants' witnesses. Those witnesses will be able to explain, if they can, why it was not viable for FROL to continue with its existing business arrangements, or to raise finance on FROL's assets, or to separate from the Co-op Group and make its business independent, or to sell its business and assets in the open market. The claimants can of course obtain their own expert advice so that the right questions can be put to those witnesses.
42. In response to that, the claimants submitted that the court will not be able to decide whether any such alternatives were viable without expert opinion evidence to assist it.
43. I am doubtful whether the viability of other options that could have been pursued but were not considered are ordinarily relevant to the objective element of the defence in section 238(5). The focus is on whether there were reasonable grounds for the belief that the company had, namely that the transaction would benefit it, not whether there were reasonable grounds to believe that the transaction was the best option for the company. The charge that the company faces is not that its directors failed to do what was best for the company but that it entered into a particular, disadvantageous transaction without justification. I accept that there is an implicit comparison with the existing state of affairs, but no expert evidence of restructuring possibilities is needed to address that. It raises practical questions about the support of the defendants, FROL's financial position and the structure of the Co-op Group.
44. I do see that if there was, objectively, an alternative that was obvious and obviously likely to be better for the company, that could support a case that there were no reasonable grounds for believing that the transaction was beneficial, or indeed that there was an absence of good faith, but that is not pleaded in relation to any of the 4 alternatives in this case. None of them is said to be obvious so that it was unreasonable not to consider it further, though the claimants do say that FROL in general should have obtained its own advice.
45. If there were such a pleaded case based on an obvious alternative, it would be unlikely to require expert evidence of restructuring, as the alternative would either be obviously more beneficial to the company, or at least be something that needed to be investigated before a reasonable decision could be taken.
46. If the claimants are right and it is appropriate retrospectively to investigate other possible transactions that the company might have entered into, but which were not obvious and were not in fact considered at the time of the transaction, expert evidence of this kind would be likely to be needed in many such cases. That would make pursuit of smaller claims of this type prohibitive for office holders.
47. 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.
48. 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.
49. 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.
50. 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.
51. 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.
52. 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.
53. For all these reasons, I therefore reject the application to allow expert evidence of this kind.
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