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Completion Accounts – How precise do the policies and principles need to be?


For the seller of shares in any company, the calculation of the money due for the sale of their shares will be a top priority and a key provision to be negotiated in the share purchase agreement (“SPA”). The consideration due for the shares does not need to be a fixed figure; in fact SPAs often contain mechanisms for adjusting the consideration based on the assets and liabilities of the company or its performance leading up to completion. The company accounts used as a basis for assessing the company’s assets and liabilities as at completion are often referred to as ‘completion accounts’. A recent Court of Appeal decision has highlighted the importance of clarity and precision when provision is made in SPAs for the use of completion accounts.

Background to the case

In Shafi v Rutherford [2014] EWCA Civ 1186, one co-owner of a company sold all her shares in the company to the other co-owner. The consideration for the shares was based on a fixed figure to be adjusted by reference to the company’s liabilities pursuant to the completion accounts.

The completion accounts were duly drawn up. These accounts contained a statement that they had been prepared in accordance with a particular accounting standard followed by the company known as the Financial Reporting Standard for Smaller Entities (“FRSSE”).

There was, however, disagreement between the parties in respect of a number of items of equipment which the company leased. The completion accounts, like the company’s previous accounts, treated the leases as operating leases (whereby the lessor retains the risk that the equipment will have a resale value after the lease expires); the buyer argued that the leases were in fact finance leases (whereby the lessee takes on the risks and rewards of the equipment). As the consideration due for the sale of the shares would differ depending on the classification of the leases in question, an expert was instructed in line with the terms of the SPA to resolve the issue.

The expert’s determination

The expert concluded that under FRSSE, the leases were in fact finance leases. However, he then pointed to a clause in the SPA which stated that the completion accounts were to be “prepared in accordance with the accounting policies, principles, practices and procedures adopted by the Company in the preparation of the Accounts [ie. the company’s last set of accounts]”.

As the policy actually adopted by the company in previous accounts had been to treat the leases as operating leases, the expert interpreted this clause as meaning that the completion accounts must classify the leases in the same way. He concluded that he was prohibited from classifying the leases in accordance with FRSSE.

Decision of the court

The Court of Appeal disagreed with the expert’s determination. The court held that the use of the term “practices” in the SPA did not refer to what the company actually did ‘in practice’ but should instead be interpreted as referring to a ‘set of rules’. According to Lord Justice Floyd, the inclusion of the term “practices” after “policies” and “principles” acted to “fill in the gaps not resolved by policies and principles”. The difference between these terms may require further elaboration by the courts to ensure that there is consistency in their use in the future; it seems however that, where an SPA contains such wording, and where a specific accounting policy or principle of the company does not sufficiently resolve a contentious issue arising from the completion accounts, then the general rules of accounting practice followed by the company – in this case FRSSE – will determine the issue.

The court also considered the interpretation of the term “adopt”. Although the company argued that it ‘adopted’ the ‘practice’ of classifying the leases in question as operating leases and not finance leases, the court interpreted the term as being far less specific. The term instead referred to the rules which were stated to be adopted by the company and not the customs actually carried out by the company. According to the court’s interpretation of the clause, the company adopted FRSSE, rather than adopting the classification of the leases in question as operating leases.


The policy at the heart of the court’s judgment was that the parties could not have intended that erroneous accounting treatment of liabilities should be used when drawing up the completion accounts. The accounts were expressly stated to be drawn up in accordance with FRSSE; it was wrong to imagine that the parties meant for an exception to be made simply because this was how the accounts had wrongly been drawn up in the past. If this is what the parties had intended, they should have stated this expressly in the SPA.

Clarity is key when it comes to setting out the basis on which completion accounts are to be drawn up; uncertainty in the calculation of the consideration due could have devastating consequences for sellers. The court’s ruling in Shafi v Rutherford adds weight to the importance of general accounting rules followed by companies in the context of completion accounts. Where relevant accounting standards have not been followed to a tee, and without explicit wording in the SPA to the contrary, courts will almost certainly ignore a company’s erroneous past accounting practice and instead order the correct accounting standard to be applied to the drawing up of completion accounts. Hidden liabilities could suddenly appear to the detriment of the seller and sellers may find themselves unexpectedly out of pocket.

This bulletin should not be taken as definitive legal advice. Please contact Elizabeth Shaw on 020 7955 1456 or for further advice.

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