THE UK Privy Council dismissed the defunct Caribbean Steel Company’s case against Price Waterhouse (PW) over alleged negligence in the accounting firm’s valuation of a company, which the maker of steel products bought in the mid-1990s.

The 15-year-old legal battle ended yesterday, after the final court handed down its decision, which, among other things, stated that the way how PW approached the valuation of a surplus in the pension fund of Caribbean Cable Company — in which a majority stake was bought by Carib Steel — was not negligent.

More specifically, it was decided that Carib Steel’s borrowings from the pension fund — up to $3.6 million by early 1995 — did not diminish the $13.8 million surplus included in PW’s evaluation.

“They were receivables repayable on demand,” said the board of the Privy Council. “The board notes that it was not alleged that PW ought to have had doubts as to the company’s ability to pay on demand.”

What’s more, yesterday’s decision said that “there is no reason to doubt that Carib Steel believed that the valuation was a reasonable one, but the purchase price did not represent any of PW’s bases of valuation”.

Using three valuation methods, PW determined that Carib Cable could be valued at $43.5 million, if an estimated annual maintainable net earnings figure to which an appropriate multiplier of 6.5 was applied; $14.4 million, if the company was liquidated; and $48.3 million, if the company was able to expand into additional export markets, based on Carib Cable’s management forecast.

Carib Steel entered into a non-binding agreement to buy a 50.1 per cent stake in Carib Cable for $32 million in late 1994 and engaged PW to conduct a valuation of the cable and wire-maker before going ahead with the transaction.

“The purchase price was agreed prior to PW’s valuation and Carib Steel did not subsequently seek to adjust it,” said the Privy Council document published on its website. “It was significantly higher than PW’s estimate of the value of the shareholding in the company’s existing circumstances, but significantly less than its potential value after the injection of new working capital in order to develop new export markets.

“That prospect must have provided the motivation for the purchase.”

The accounting firm found that Carib Cable’s expansion, which was being funded by debt, had previously been stalled as a result of a workers strike combined with a drop in existing sales from the general uncertainty surrounding the elections in early 1993 and a delay in the budget of that year. As a result Carib Cable ended up in liquidity problems, where the company amassed indebtedness of almost $77 million by August 1994.

In 1998, Carib Steel sued PW and claimed special damages of $38.4 million, which included the cost of acquisition of the shares and the fees paid to PW for the pre-acquisition valuation report and the post-acquisition audit.

“The essence of the claim was that the value of the pension fund had been materially depleted by the company borrowing from it and that Carib Steel would have acted very differently if it had known of the borrowing prior to its acquisition of a majority shareholding,” said the Privy Council document.

PW denied liability and counter-claimed $940,000 in respect of unpaid fees for auditing Carib Steel’s accounts for the year ended 31 March 1996.

At first, Carib Steel actually got a favourable ruling in the Jamaican court.

In mid-2006, the judge determined that the loss from the acquisition was the amount attributed by PW in its valuation to Carib Cable’s pension fund surplus — $13.8 million — and he awarded damages in that sum together with interest and costs.

In 2011, the Court of Appeal of Jamaica set aside the original judgement and ruled for PW on the claim and counter-claim with interest and costs.

“The court considered that the trial judge had not given satisfactory reasons for rejecting the evidence of PW’s expert and had been wrong to prefer the evidence of Carib Steel’s expert, who in the court’s view was lacking in relevant expertise,” the board added. “The court considered also that Carib Steel’s claim failed on causation of loss.”

The Privy Council agreed with the Court of Appeal.

“Set against the known bank indebtedness of almost $77 million in less than three years, for the reasons explained in PW’s valuation report, it is hard to see what difference an additional borrowing of $1.4 million over recent months would have made to Carib Steel’s decision whether to inject $32 million in return for 50.1 per cent of the equity,” said yesterday’s decision. “The board, therefore, agrees with the Court of Appeal’s conclusion that Carib Steel’s decision to invest that sum was not one for which it had shown that it could properly blame PW.”

The parties will have 28 days in which to lodge written submissions about the order to be made for the costs of the proceedings before the Privy Council, which will otherwise be that Carib Steel must pay PW’s costs.