TC09562 - [2025] UKFTT 00762 (TC)

Fecha: 23-May-2025

Entitlement to the profits of the Businesses

Entitlement to the profits of the Businesses

130.

Turning then to the second essential feature of carrying on a business noted in paragraph 119 above – namely, an entitlement to the profits of the relevant business – in my view, the legal rights and obligations to which the Agreements gave rise meant that that was also entirely absent in this case so far as BBUK was concerned.

131.

The profits of a business are a function of two components – the gross revenues to which the business gives rise and the expenses which must be incurred in earning those gross revenues. In my view, the legal rights and obligations to which the Agreements gave rise meant that BBUK neither had an entitlement to all of the future gross revenues of the Businesses nor had an obligation to meet any of the expenses of the Businesses. I say that for the reasons which follow.

132.

Starting with the entitlement to future gross revenues, it is apparent from the rights and obligations to which clause 5 of the MSA gave rise that BBUK’s entitlement as regards the future gross revenues was simply to receive payments equal to a fixed percentage of those future gross revenues. CPW had no obligation to account to BBUK for the part of the future gross revenues which CPW was entitled to retain under the terms of the MSA.

133.

Turning then to the expenses of the Businesses, it is apparent that the parties’ intentions in entering into the Agreements, as reflected in the legal rights and obligations to which the terms of the Agreements gave rise, were that responsibility for bearing all of the expenses relating to the Businesses lay with CPW and not BBUK. The broad scope of CPW’s obligations under clause 3 of, and schedules 1 and 2 to, the MSA were such that responsibility for discharging all of the expenses which were incurred in relation to the management and operation of the Businesses after the Agreements became effective rested solely with CPW. There was no obligation on the part of BBUK to reimburse CPW for any of the relevant expenses or to take responsibility in any way for those expenses.

134.

It is at this point that I need to address the peculiar language in clause 5.1.2 of the SPA, which stipulated that, from completion of the SPA, CPW “shall assume the liabilities arising from the Businesses only on behalf of [BBUK]”. That was not an express statement to the effect that BBUK would be assuming any of the liabilities which CPW had incurred in respect of the Businesses before completion of the SPA. As such, it is not relevant to the point addressed in paragraph 110 above. However, it is potentially relevant in this context as it could conceivably be construed as saying that it was BBUK and not CPW which would be ultimately responsible as principal for discharging the future liabilities of the Businesses. In my view, the clause did not have that effect. This is because:

(1)

it is common ground that the SPA and the MSA should be read together and, for as long as the MSA remained in place, that would have been contrary to the terms of the MSA, which made it clear that it was CPW which had responsibility as principal for discharging all of the future liabilities incurred in the course of managing and operating the Businesses because its obligation to discharge those liabilities was part of the Management Services which it was obliged to provide;

(2)

it was clearly contrary to how the Agreements were intended to operate and did, in fact, operate, because the only way to make sense of the Agreements in economic terms was for CPW to discharge all the liabilities of the Businesses out of the share of the future gross revenues of the Businesses which it was entitled to retain under clause 5 of the MSA. The terms of clause 5 of the MSA meant that CPW had no obligation to account to BBUK for the part of the future gross revenues which CPW was entitled to retain under the terms of the MSA. It follows that the entitlement of BBUK was such that BBUK did not have the wherewithal to meet any of the expenses of the Businesses out of the amounts which it received;

(3)

as drafted, clause 5.1.2 makes no sense because, were the MSA to have come to an end, then CPW would no longer have been incurring any liabilities arising from the Businesses at all. In that event, CPW would have ceased to have any responsibilities under the MSA and would thus not have been incurring any liabilities in respect of the Businesses at all, whether for itself or for BBUK. It follows that, in that event, CPW could hardly have been incurring the liabilities of the Businesses “on behalf of BBUK”; and

(4)

finally, the clause appeared under the heading “Accounting Records”. Although the heading to a clause does not dictate its meaning, it is peculiar, to say the least, that a clause purporting to allocate ultimate responsibility for the future liabilities of the Businesses between the parties – a point of fundamental commercial importance to the parties – would be located beneath that heading.

135.

In short, I believe that clause 5.1.2 is simply another error in the documents, possibly inserted in order to demonstrate that it was BBUK and not CPW that was carrying on the Businesses after the Agreements became effective.

136.

It follows from the above that, if CPW, in the course of managing and operating the Businesses, was able to reduce the expenses necessary to run the Businesses, that was entirely for CPW’s benefit. Similarly, if CPW spent more in carrying on the Businesses than the portion of the gross revenues of the Businesses that it was entitled to retain when it made its payments to BBUK under clause 5 of the MSA, then that was CPW’s problem. In short, only CPW and not BBUK could ever make losses from the running of the Businesses. BBUK could make a loss if the gross revenues which it was entitled to receive under the MSA in any period were less than its interest cost and the Goodwill amortisation over that period but that would not have been a loss from the carrying on of the Businesses as such. It would instead have been a loss arising from its purchase of a right to receive a fixed percentage of the future gross revenues of the Businesses.

137.

It can be seen that the effect of the legal rights and obligations to which the Agreements gave rise was that BBUK’s only entitlement under the Agreements was to payments equal to a fixed percentage of the future gross revenues of the Businesses. BBUK’s entitlement was not to the profits arising from the Businesses.

138.

I do not think that the statement made in paragraph 1 of the Side Letter to the effect that the parties did not intend CPW to make any losses from carrying on the Businesses changes the above conclusion for the following reasons:

(1)

first, the Side Letter was not executed until some eighteen months after the Agreements became effective. I have already explained in the section of this discussion dealing with the ability to dictate the overall strategy and direction of the Businesses that I do not accept that the terms of the Side Letter should be implied in the MSA. Accordingly, even if paragraph 1 of the Side Letter effected some amendment in the terms of the MSA, the earliest that that change could have taken effect would have been the date of the Side Letter, which was eighteen months after CPW left the CPW Chargeable Gains Group;

(2)

secondly, the relevant paragraph purported to explain retrospectively the intentions of the parties in entering into the MSA. It did not purport to be amending the MSA. As I have already observed in the context of paragraph 3 of the Side Letter, there must be some doubt as to whether, as so drafted, paragraph 1 actually effected any change to the terms of the MSA;

(3)

thirdly, it is implicit in the language used in paragraph 1 of the Side Letter that CPW could realise a loss from carrying on the Businesses. The paragraph was merely saying that, in all but two circumstances, the parties would seek to avoid that loss by re–negotiating the management charge. It follows that:

(a)

in the two circumstances mentioned, the loss would remain in CPW; and

(b)

in any event, the paragraph merely required the parties to enter into negotiations to avoid the relevant loss. It was simply an agreement to agree and, as such, not legally binding. It therefore did not have the effect of preventing CPW from realising losses even where neither of the two circumstances expressly mentioned was in point; and

(4)

finally, it is worth noting that, as it happened, the amendment which was made to the management fee retrospectively pursuant to paragraph 4 of the Side Letter was not to prevent CPW from making a loss but quite the opposite. The fact that the management fee was reduced suggests that CPW was enjoying rather too much of the gross revenues of the Businesses than was good for BBUK.