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INSIGHT – Court: bargain deal ‘too cheap’.

A series of contracts, that had been designed to reduce the tax bill and capital requirements of one business that acquired another, created problems when the vendor went into liquidation. Stockbrokers Brewin Dolphin Bell Lawrie bought Bekhor Securities from AJ Bekhor & Co for £1 in 1989; at the same time, Brewin Dolphin’s parent company Private Capital Group (PCG) leased the computers from Bekhor that were used in the business and which were, in turn, leased by Bekhor from two finance companies. The terms of the deal were that Bekhor had to continue to service the finance companies. The deal was structured this way so that the acquisition of the computers would be an expense item rather than a capital investment. This meant that not only were the lease payments to AJ Bekhor tax-deductible, but that Brewin Dolphin’s balance sheet wouldn’t be hit with a goodwill charge that would affect its compliance with Stock Exchange capital adequacy rules. But as the vendor, AJ Bekhor, hit financial difficulties, its leases with the finance companies were terminated. PCG claimed that, as AJ Bekhor was no longer making its lease payments, PCG didn’t have to continue paying AJ Bekhor. Both the High Court and the Court of Appeal (Times Law Report, 30 March 1999) ruled that the terms of the lease deal should be treated separately from the sale of Bekhor Securities. Then the value said to have been represented by the lease agreement could be ignored by the Bekhor liquidators who could claim £1m from Brewin Dolphin because the business of Bekhor Securities had been sold “at an undervalue”. Mark Andrews, senior partner of Wilde Sapte and head of the firm’s corporate recovery practice, told Financial Director: “Transparency is still a virtue. The case shows how artificial structuring for tax efficiency can misfire. The structuring here undermined the basic integrity of the deal with what proved to be disastrous consequences for the purchaser.”

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