Dentists’ case highlights the need to drill down into completion accounts provisions

23rd September 2014

Earlier this year, the Court of Appeal considered the accounting criteria in a sale and purchase agreement for shares in a dental practice, sharpening the focus on the need for precision when drafting provisions for completion accounts.

The sellers and purchasers of shares in a dental practice had agreed – as many parties do – that the price of the shares would be adjusted after the sale according to a set of completion accounts, and that these completion accounts would be drawn up using the same policies, principles, practices and procedures as used in the company’s last annual accounts.

So far so non-controversial. But what happens when – as here – a company’s usual accounting policies, principles, practices and procedures are incorrect? (The specific error here was treating leases as operating leases rather than finance leases, thus accounting for too low an amount in respect of the liabilities.)

The answer in this case, Shafi v Rutherford, was that the expert on whom the parties had relied to settle the dispute was not entitled to determine that the incorrect accounting procedures should prevail in the completion accounts, even though they reflected the company’s usual accounting practices.

The sale and purchase agreement (SPA) for the shares defined the company’s accounts as having been prepared in accordance with the Financial Reporting Standards for Smaller Entities – where of course they had not been.

The lesson is this: if parties want completion accounts to be prepared on the same basis as the company’s previous accounts, regardless of whether this is in accordance with any specific financial or accounting regulations, express provision should be made for this, and care should be taken to ensure it is not contradicted elsewhere in the SPA. Dentists can cope with cavities, but an SPA full of holes is another matter.

Please contact Harry Perrin if you would like to discuss any of the issues raised in this article.

The information provided in this article is for general information purposes only and does not constitute legal or other professional advice and cannot be relied upon as such. Any law quoted in this article is correct as at 23 September 2014. Appropriate legal advice should be sought for specific circumstances before any action is taken. Copyright © Murrell Associates Limited, September 2014.


Hugh Murrell

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