Mok Wing Shu t/a Wing Fai Hardware Co. v. Director of Lands

Crown Lands Resumption
Reference No. 21 of 1994

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HEADNOTE

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Property law - Crown Lands Resumption - Hardware Shop - Business Losses - Valuation of Stock - Valuation of Fixtures and Fittings - Crown Lands Resumption Ordinance, Cap. 124, s. 10(2)(d) - Compensation awarded at $560,000

Ground floor rented premises used as hardware shop resumed by the Crown for urban redevelopment. The applicant proprietor claims, inter alia, loss on forced sale of stock valued at nearly $8 million, loss of machinery, fixtures and fittings at $373,400 and loss of profit rent at $230,000. The respondent disputes every item claimed. Evidence, admitted by the applicant, shows that a shop bearing the same trade name at nearby premises commenced business shortly before the applicant's shop was closed. The new shop is registered as a partnership of the applicant and his two sons. The applicant, however, says that the new shop sells a different line of goods. The respondent contends that the applicant continues business at the said new shop. In view of the meagre $22,000 fetched from the auction of the stock of the applicant's business, the respondent also alleges that some of the recorded stock being the subject of claim were not sold by auction but siphoned off to the new shop. At most, the respondent would support total compensation at $338,000 only.

Held: (1) In accordance with s. 10(2)(d) of the Crown Lands Resumption Ordinance, the applicant is entitled to compensation that would restore him to the business position where it would be had there been no resumption, i.e. an amount of compensation so as to put the applicant in the position where it was at the time of resumption. (2) There is insufficient evidence that the applicant relocated his business to the new shop. (3) Auction proceeds at $22,000 taken as a reliable indicator of the market value of the stock in question for if indeed some of the stock were not sold through auction the auction price would reflect the lesser quality or quantity. Market value of the stock determined at 5 x $22,000 = $110,000. (4) Relying documentary evidence produced by the applicant, and allowing for depreciation, value of fixtures and fittings determined at $298,720. (5) Adding other items allowed, total compensation determined at $560,000.

IN THE LANDS TRIBUNAL OF HONG KONG

(Crown Lands Resumption Reference No. 21 of 1994)

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JUDGMENT

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The Applicant is the sole proprietor of a shop known as Wing Fai Hardware Company ("the business") at rented premises situated at No. 21A, Ground Floor, San Shan Road, Ma Tau Kok ("the subject premises"). The subject premises were resumed pursuant to section 3 of the Crown Lands Resumption Ordinance, Cap. 124 ("the Ordinance") under a Notice of Resumption dated 26th June 1992, published in Volume CXXXIV Hong Kong Government Gazette on 3rd July 1992 as G.N. No. 2264 of 1992 and reverted to the Crown on 3rd October, 1992. Nonetheless, the Applicant was allowed to carry on the business at the subject premises until April 1994 when the Applicant was evicted.

2. The Applicant appointed his younger son, Mr. Mok Wang Biu, to conduct his case. Despite advice given by several members of the Tribunal at various stages, Mr. Mok refused to engage legal representatives or valuers to help him to prepare the Applicant's case. The Tribunal has also emphasized in open court that the burden was on the Applicant to prove each and every element of his claim. During the trial, the younger Mr. Mok was given ample opportunities to adduce more evidence, if any, and to canvass more effectively for his claim.

3. Under section 10(2)(d) of the Ordinance, the Applicant is entitled to com-pensation that would restore him to the business position where it would be had there been no resumption. In this regard, he has eventually limited his claim to the following items:-

	HK$
Loss of profit rent	230,000.00
Loss on forced sale of stock	7,768,664.70
Loss of machinery, fixtures and fittings	373,400.00
Transportation fee	45,000.00
Auction ground storage and security	28,000.00
Auctioneer's charges	13,424.80
	8,458,489.50
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4. Mr. Lam, counsel for the Respondent, contends that compensation should be assessed on the basis of re-location of the business. And, the quantum for each item claimed is disputed. The Respondent's assessment of the losses suffered by the Applicant, assuming compensation is payable, has been revised several times during the course of these proceedings. By way of final submission, counsel for the Respondent puts the compensation due to the Applicant as follows:-

(a) If on relocation of business basis

	HK$
Loss of profit rent	83,800.00
Decoration of new shop	176,100.00
Unproductive rents and rates	49,400.00
Transportation fee	22,000.00
Sundry expenses for relocation	6,800.00
	338,100.00
Say	338,000.00
	==========

(b) If on total extinguishment basis, at most

	HK$
Loss of profit rent	83,800.00
Loss on forced sale of stock	183,000.00
Loss of machinery, fixtures and fittings	10,000.00
Transportation fee	22,000.00
Auction ground storage and security	13,000.00
Auctioneer's charges	13,424.80
	325,224.80
Say	325,000.00
	==========

5. Before we proceed further, we should point out that the subject premises were part of a major resumption of more than one hundred properties for the Hong Kong Housing Society's Urban Improvement Scheme ("the Scheme"). In addition to San Shan Road, the Scheme site extended to Sui Lun Street, Wangg Cheung Street, Ma Tau Kok Road, Pak Tai Street and Pau Chung Street in Ma Tau Kok. The present case is one of nearly thirty applications by property owners and business operators affected by the Scheme for compensation who felt unable to accept the Crown's offer for settlement. The Scheme was actually in the winds well before the resumption notices were issued in July 1992. Earlier, the Housing Society had begun to buy out some of the landlords and tenants in the area. After the resumption was gazetted in July 1992, the intention clearly was that all the owners, occupiers and business operators would clear out in October 1992. Some did. Apparently, the landlords and tenants on the upper floors were dealt with first. The business operators on the ground level were given several extensions of time for moving out. Eviction was postponed first to the end of 1992, then to the beginning of 1993, then to September 1993 and eventually to April 1994. Upon eviction, most of the business operators had their stock, plant and machinery transported to a place in the New Territories and auctioned off by one common auctioneer. It is now undisputed fact that there is no reliable inventory of the actual stock, plant and machinery sold by auction for each claimant. This is a problem we encounter in virtually every case before us.

6. We now consider each of the issues and items of claim under separate headings.

Relocation

7. Mr. Lam adduced evidence relating to a shop under the same trade name as the business on the Ground Floor of 56 Pau Chung Street which commenced business in June 1993. In fact it is a conversion of the sole proprietorship of the business into a partnership of the Applicant with his two grown-up sons. From photographic evidence, the front part of the new shop has on display some hardware goods similar to those sold by the business. On these bases, Mr. Lam contends that the business had relocated to the new shop.

8. Mr. Mok Wang Biu says that he and his elder brother are the proprietors of the new shop. He says that he and his elder brother paid their father $400,000 for the goodwill or use of the trade name of the business and retained their father's name as a partner so that the new business could obtain supplies on credit. They have bought the goodwill of their father's business, but none of the stock. The Applicant's old shop used to sell drainage pipes and accessories. The new shop deals mainly in sanitary ware, e.g. bath-tubs, wash hand basins and toilet bowls. They are two different businesses.

9. A partnership is a different entity from a sole proprietorship even though the sole proprietor is now one of the partners in the new set up. Moreover, if Mr. Mok is to be believed, the old sole proprietor is no more than a name in the new partnership. The photographic evidence is not conclusive of what the new shop sells. We do not know what is on display further inside the new shop. Since the brothers sell them in bulk, perhaps it is not necessary to display in the new shop any sanitary ware. It may be argued that, if the Applicant did have difficulties with obtaining credit, he cannot possibly add credibility to the new partnership. It follows that either the reason for his joining the new partnership is bogus or the problem with obtaining credit is unreal. We think there is a difference for credit rating consideration between the business which was certain to suffer disruption as a result of the resumption and a new business with more resourceful partners added.

10. Taking into account all factors and circumstances, Mr. Mok's version is consistent with the evidence adduced by the Respondent. Unless there is stronger evidence to the contrary, we have no reason to disbelieve Mr. Mok. We are satisfied, on the balance of probabilities, that the new shop is not a continuation of the business run by the Applicant.

Causation

11. Mr. Mok said that since the notice of resumption, the Applicant's creditors would not extend further credit to the Applicant. This obviously created liquidity problem for the Applicant. On the other hand, the Applicant could not give credit for his customers for fear that they might default after he had to cease trading as a result of the resumption. This, too, affected the Applicant's trade. However, Mr. Mok also said that irrespective of the resumption, the business would have ceased any way because of the advanced age of the Applicant. In view of these, Mr. Lam contends that the closure of the business was not caused by the resumption and so the Respondent has no liability to pay compensation.

12. We think that the problems with credit trading were real problems caused by the resumption. It cannot be seriously argued that the sons who had the means to open a new shop could have helped to remove these problems. Nor has Mr. Lam sought to argue this way. It is true that old businessmen may and do talk of retirement. But how many of them actually give up their business even when there are capable heirs willing to take over? Until the Applicant does take steps to wind down his business, and we have no evidence that he did that before the notice of resumption, he may continue for a while longer. We think it is only fair to hold that the resumption precipitated the Applicant's retirement.

Trading Stock

13. The business had a huge stock of drainage pipes, accessories and hardware In September, 1993, officers of the Lands Department made a record of the stock and tools held by the business at the subject premises at that time. There are altogether 154 items; see the inventory lists in Exhibit R2. However, according to Mr. Mok Wang Biu, there were in addition 40 more items, of large quantities and quite valuable, stored at a place in Kam Tin, New Territories. He says he told the officers from the Lands Department about these but they refused to verify any stock not stored inside the Scheme area. We are now told that the whole lot of 194 items fetched $22,000 only at a public auction in May 1994. The Applicant puts the value of his entire trading stock at $7,768,664.70; see Exhibit A2. This figure, according to Mr. Mok, represents the market value of the entire trading stock in April 1994. Mr. Mok also produces quotations and invoices in Exhibit A3 to show both the existence and the historical purchase price of many items of the stock. According to our understanding, the Respondent did retain an expert on stock valuation to assess the worth of the Applicant's stock. However, because the expert merely adopted the recorded estimated value in the inventory list in Exhibit R2 which the Applicant now rejects, the Respondent does not produce the expert report and so there is no expert evidence for the Respondent on the value of the stock. Nonetheless, the Respondent called the officer who checked the stock of the business. According to this officer, Mr. Mok did not tell him that there was another lot of stock stored in Kam Tin.

14. Mr. Lam, on account of the new shop we have mentioned, suggests that the stock could have gone to the new shop. Mr. Mok says that he and his elder brother took none of the stock. The Applicant's old shop used to sell drainage pipes and accessories. The new shop deals mainly in sanitary ware, e.g. bath-tubs, wash hand basins and toilet bowls. They are in a different line of business. There was no need for them to take over the stock of the business.

15. The evidence of the officer who checked the stock, if believed, may lead the Tribunal to an inference that items 155-194 did not exist as part of the stock of the Applicant at the time. But it would not be an irresistible inference. And the Respondent does not seem to go so far as to allege dishonesty on the part of Mr. Mok or the Applicant. In any event, an allegation amounting to accusation of fraud requires much stronger evidence to substantiate, otherwise it is no more than conjecture or speculation. We do notice that in a number of related cases we have heard so far, where there is evidence of a new shop carrying on business not entirely dissimilar to the business alleged to have been totally extinguished by the resumption and managed by someone connected with the applicant in the case, the prices fetched from auction of the stock of the extinguished business are surprisingly very low. This is a pattern that should arouse suspicion of foul play - that perhaps valuable stock had been somehow siphoned off to the new business. We do not think we should be unduly concerned with such suspicion. In assessing compensation for loss on forced sale of stock, we have from the start consistently regarded auction prices as a dependable function of the market value of the goods sold. If indeed valuable stock had been unaccountably siphoned off, this would be reflected in the auction price. We are confident that our approach has been fool and foul proof. We now concentrate on valuation of the Applicant's stock.

16. We are rather surprised by such meagre sum of $22,000 obtained from the auction of the trading stock which, according to the Applicant's case, cost well over $2 million for purchase and worth well over $7 million in 1994. In Callwin International Electric Co. Ltd. v. Director of Engineering Development MTR 3 of 1984, the Tribunal, comprised of H.H. Judge Cruden and Mr. Phillips, found a correlation between the auction price and the market price of goods sold through auction. There, the trading stock of the applicant company was sold by auction in large lots to a single purchaser for the total of $1,410,000 which was only 27.4% of the agreed gross value of the entire stock. The Tribunal held that that was a reasonable auction price. In WONG Sau Hing, LEE Wing Tau, LI Sai Kuen and LEE Sai Ho trading as Shing Kee Metal Dealer v. Director of Lands, CLR No. 20 of 1994, taking a broad approach, we believed the price paid by the successful bidder in the auction in April 1994 reflects the variety and quantity of the trading stock, machinery and equipment on auction and took the auction price as the equivalent of 28.5% of the market value of the trading stock, machinery and equipment in that case. In TSANG Ling-chu trading as Wrench Engineering Co. v. Director of Lands, CLR No. 23 of 1994, we relied on the auction price to determine the value of the machinery, equipment, tools and stock in that case. In the circumstances of that case we multiplied the auction proceeds by a factor of 5. In FUNG Kai-yin, CHEUNG Chin, YAU Chi-hung and LING Po-sin trading as Hang Lam Tong Sun Yung Seafood and Medicine Co. v. Director of Lands, CLR No. 12 of 1995, we again relied on the auction price to determine the value of the stock in that case. In the circumstances of that case we multiplied the auction proceeds by a factor of 5. There is no need to multiply examples. If we go by conventional wisdom, supported by expert evidence in previous cases, that goods on auction should fetch 20% to 80% of the ordinary market value, the value of the Applicant's trading stock and tools to him should be no more than five times $22,000. Our experience indicates that the stock and equipment of operators affected by the Scheme can obtain very substantial price, upto $2.4 million per lot, from the same public auction service used by all the operators concerned. We have no reason to believe in this case that the price from the auction of the Applicant's trading stock was not a reliable reflection of the quantity and quality on sale in an open competitive auction market. For all these reasons, we do not think it would be useful to value the Applicant's trading stock and tools according to the inventory record.

17. Drainage pipes and their accessories, whether made of PVC or metal, have intrinsic value. At worst, they can be melted and re-cycled for making other products. We are certain that the auction price paid for in this case must at least represent the scrap value of the entire trading stock treated as base elements. Standing by conventional wisdom, the best we can do is to apply a factor of 5 to the auction price to arrive at a value of $110,000 for the entire trading stock. Accordingly, we determine compensation for loss for forced sale of the Applicant's trading stock at $(110,000 - 22,000) = $88,000.

Profit Rent

18. Before the profit rent can be calculated, the full market rent of the subject premises has to be ascertained. Mr. Mok for the Applicant admits that he relies on amateurish advice and takes the full market rent for the subject premises as $35,000 per month. Since there is really no basis for such assessment, we have no difficulty in rejecting it. Mr. Ng, the Respondent's expert, suggests a unit rate of $350 per sq. m. for the ground floor and $60 per sq. m. for the open yard. See Appendix 6 in Exhibit R2. We accept the opinion of the Respondent's expert although it is slightly on the generous side.

19. Accordingly, we determine the Applicant's loss of profit rent at $83,800 as calculated by the Respondent's expert.

Machinery, Fixtures and Fittings

20. By machinery, fixtures and fittings, we understand the Applicant actually refers to decoration expenses incurred in 1991 to the total sum of $373,400. This is supported by documents exhibited in pp. 6-1 to 6-3 of Exhibit A3. Mr. Ng, expert for the Respondent, relying on an inventory in Exhibit R2 of the fixtures and fittings found at the subject premises in September 1993, considers that the fixtures and fittings are worth $12,540 at cost. A 20% discount for depreciation is then applied to obtain the figure of $10,032 for compensation. See p. 12 of Exhibit R2. Just by the number of racks counted which were necessary for holding pipes and accessories, we find Mr. Ng's assessment unrealistic. We should also think the inventory record of fixtures and fittings do not really do justice because there were items of decoration, such as re-inforcement of the floor, which the untrained eyes of the officer concerned did not note.

21. We accept the decoration cost as supported by documents. Adopting 20% depreciation as recommended by Mr. Ng, we determine compensation for fixtures and fittings at $298,720.

Miscellaneous Items

22. The Applicant further claims transportation fees for auction at $45,000, auction exhibition ground and security charges at $28,000 and auctioneers' charges at $13,424.80. The claim for auction exhibition ground and security charges is not supported by receipts. The claim for associated transportation and auctioneers' charges is supported by copies of receipts at pp. 8-1 and 8-3 in Exhibit A3. The Respondent disputes all items. In relation to auctioneers' charges, counsel for the Respondent says that this is absurd since the auction fetched $22,000 only. If the auction is a fair means to obtain reliable indication of the market value of the goods sold, the auctioneers' charges have been well spent. It is neither absurd nor extravagant. It must be allowed.

23. Mr. Ng for the Respondent, at paragraph 6.5.1 of his report Exhibit R2 supports compensation for $22,000. We should be convinced by the bulky nature of the stock to be moved and the documents in support. The claim for transportation charges at $45,000 is allowed in full. We gather from evidence in related cases we have heard that the auction exhibition ground and security charges at $28,000 are in fact an apportionment of a much larger amount which all the business operators affected by the Scheme and had to auction their goods had to share. We have no reason to doubt this and would also allow the amount as claimed.

24. In summary, compensation for the following items is justified:-

	HK$
Loss on forced sale of stock	88,000.00
Loss of profit rent	83,800.00
Loss of machinery, fixtures and fittings	298,720.00
Transportation fee	45,000.00
Auction ground storage and security	28,000.00
Auctioneer's charges	13,424.80
	556,944.80
say	560,000.00
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The Order

25. Accordingly, we determine compensation for the Applicant at $560,000. Leave is reserved to apply for the rate of interest, if not agreed, to be determined under section 17(3A) of the Ordinance. There is an order nisi that the Respondent shall pay the Applicant's expenses incurred in prosecuting his claim which we assess at $3,000 to be made absolute unless application is made, within 21 days from the date of handing down of this judgment, to the contrary. Liberty to apply is also reserved for ancillary and consequential matters.