Vol 3 (2006) - Issue 3

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The Valuation of Distressed Companies: A Conceptual Framework, Part II

The first part of this article, published in the previous issue of this journal, identified the bases on which a company’s business might be valued. Drawing upon economic theory, empirical evidence, and the sophisticated principles evolved by US courts with long experience of dealing with such issues, it explained the circumstances in which one or other of these bases might appropriately be adopted. The onset of corporate distress creates unique additional problems in attempting business valuations, whether carried out in a court context or out of court. Focusing particularly on the incentives of those interested in the outcome of reorganisation proceedings, the article sought in its first part to distinguish between the ‘structural’ and the ‘strategic’ factors giving rise to these problems, and explained how these might impact upon the valuation process. It drew on the US jurisprudence on business valuation to outline three methods for putting a value on a ‘going concern’. It was submitted that the principles developed by US courts will prove helpful and persuasive as UK courts grapple more and more frequently with valuation issues.
The question of the basis on which to value a company subject to a proposed reorganisation has recently come before the English courts. In the light of the discussion in the first part of this article, the way in which the matter was dealt with is an eye-opener. The remainder of this article uses In re MyTravel Group Plc, as a case study to demonstrate the nature of the concepts and the operation of the principles elucidated thus far.
I. The facts and judgments
In In re MyTravel Group Plc, the company in question (‘MyTravel’) was the holding company of a number of companies (‘the Group’) incorporated in the UK, North America and elsewhere. The Group had its own fleet of leased aircraft, operated an airline, owned a portfolio of hotels, and capitalised on these assets to sell holiday and travel services. The UK part of the operation was closely supervised by the Civil Aviation Authority (‘CAA’) which licensed the operating company and also issued licences for the aircraft.