Succession: Challenging valuations

How does one value a claim for legal rights? That was (or, perhaps, ought to have been) the question for the court in Harley v Harley’s Executrix [2022] SC PER 14.

In most cases the answer is relatively straightforward: if the assets in question are not realised by the executor (when a different value might apply), the applicable value is based on the value of the moveable estate at the date of the deceased’s death. What, though, if the value of the moveable estate is wrong or the legal rights claimant disagrees with it?

James Millar Harley died on 12 April 2019 leaving a will and codicil appointing his wife, the defender, as one of his executors. Among his assets was a shareholding in Alexander Harley Seeds Ltd. The shares in the company were not listed. The defender’s agents obtained a valuation of £1,984,930.88 from the company’s finance director. That value was returned in the application for confirmation. The pursuer’s agents intimated a legal rights claim; in response the defender’s agents sent a calculation of the legal rights based on the finance director’s valuation. At that point the value of the pursuer’s claim was £227,542.24, prior to deduction of legal fees.

At some point (it is not clear from the judgment why), the defender obtained a separate valuation from an independent firm of accountants. That valuation took into account (as the finance director appears not to have done) that Harley was a minority shareholder, and applied a discount of 75%. An effect was to reduce the value of the legal rights claim (as calculated by the defender) to £61,049.93.

Arguments

Somewhat surprisingly, counsel for the pursuer did not address the correct way in which unlisted shares ought to be valued. Instead, he argued that the defender was bound by her inclusion of the higher value in the application for confirmation. He placed much emphasis on the defender not having obtained an eik to the confirmation to reflect the revised value. It is hard to tell what the pursuer’s position would have been had the defender done so.

The pursuer also argued that the initial exchange of correspondence between the parties’ agents amounted to a contract between the parties for payment of the legal rights claim as originally valued. 

For the defender it was argued that the valuation of legal rights should be based on the lower valuation of the shareholding. Since the pursuer had not in his pleadings questioned the method of valuation or called on the defender to provide justification for it, the defender had little to answer beyond rejecting the pursuer’s assertion that the claimed contract had been formed.

Decision, analysis and practice points

The sheriff rejected each of the pursuer’s arguments and did not find herself able to grant decree even for a reduced claim. As she said at para 116 of her judgment, “The pursuer brought the action on a certain basis and has been unsuccessful.”

The pursuer’s argument that the defender was bound by the valuation in the inventory ignored the fact that that value is at best an opening statement in negotiations with HMRC. Even had the defender revised the valuation by applying for an eik, as the sheriff also made clear, that would not, of itself, have changed the position. Nor would the timing of the application for an eik have been of any significance from the pursuer’s perspective.

What was in dispute between the parties was the value of the shares. Differences of opinion on the value of items of estate are not uncommon in executry administration, although happily few of them result in court action. They can occur where a person has an over-inflated idea of the value of, say, an antique or where, as in this case, an asset is more difficult to value.   

While the value that should be ascribed to unlisted shares and business interests is their market value, determining that can be complex. Even obtaining a valuation can prove troublesome. Despite that, in many, perhaps most, estates it will not much matter what value has been ascribed to unlisted shares, particularly where business property relief for inheritance tax can be successfully claimed and there is no dispute among beneficiaries about the valuation.

Where there is such dispute it would be open to a beneficiary or legal rights claimant, if they can obtain all the necessary information, to instruct their own valuation and attempt to negotiate with the executor to reach agreement, failing which, as the sheriff pointed out in Harley, they might raise an action of accounting, or count, reckoning and payment. It is not clear why the pursuer in Harley did not do so.

Finally, although it would not have helped this pursuer, where the value returned in the inventory is wrong and this is of significant moment, and the executor declines to obtain an eik, it is open to the beneficiary to apply for confirmation ad omissa vel male appretiata, discussed in the recent case of Mackay v Mackay’s Executor [2018] SC TAI 22.