WILLIAM JOHN LAU v. WAN YUK LIN ALISON AND OTHERS

HCCW 576/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 576 OF 2007

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REASONS FOR DECISION

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Introduction

1.  On 5 July 2010 I made a consent order (“Order”) which provided that these proceedings be stayed save for the purposes of carrying out the terms on which the proceedings had been settled, which is set out in the Schedule to the Order.  The Schedule provided that the 1^st to 3^rd Respondents purchase all the Petitioner’s shares in the Company within 28 days of the their valuation by an independent valuer agreed by the parties.  The parties agreed to appoint RSM Nelson Wheeler as the valuer (“Valuer”) and their respective solicitors signed a comprehensive letter of appointment dated 4 October 2010.  The letter expressly referred to their appointment being pursuant to the Order.  On 1 August 2011 the Valuer delivered his valuation report valuing the Petitioner’s shares at $3,977,515 (“Report”).

2.  Initially neither party was happy with the Report.  The Petitioner by his solicitor’s letter of 5 August 2011 raised queries concerning 3 particular figures used in the Report. Correspondence between the Petitioner and the Valuer followed and in a letter of 7 October the Petitioner’s solicitors suggested that the Petitioner did not accept the report was final because it contained “manifest error”.  The relevance of the expression “manifest error” will become apparent later in this decision.  However, the Petitioner subsequently changed its position and accepted the valuation contained in the Report.  The catalyst may well have been the 1^st to 3^rd Respondents issuing on 24 April 2012 a summons for an order that the valuation be declared null and void on the grounds that it contained “manifest error”.  The Petitioner seems to have taken the view that it was better to accept the Report and bring the dispute to a close than support the 1^st to 3^rd Respondents with the inevitable result that the valuation process would have to start again.

3.  The grounds on which the 1^st to 3^rd Respondents object to the valuation are different to those initially raised by the Petitioner.  Before addressing them and explaining how the shape of the 1^st to 3^rd Respondents’ application has changed since it was first issued, it is necessary to first set out the relevant terms of the Schedule to the Order and consider the relevant legal principles.

The Schedule to the Order

4.  The Schedule contains the basis upon which the Petitioner’s shares are to be valued.  The relevant paragraphs read as follows:

“3. The valuation of the Shares shall be conducted: (i) on a pro rata basis; (ii) on the basis that the 4^th Respondent is a going concern; (iii) with no discount applied by reason of the minority shareholding of the Petitioner; and (iv) between a willing seller and willing purchaser.

4. The Valuer shall have access to all of the books, records and documents in the possession or control of the 1^st to 3^rd Respondents regarding the 4^th Respondent and Credit On Demand Limited (“COD”).

….

6. The Valuer shall be directed to:

(1) Value the Shares by reference to the 4^th Respondent’s assets, profitability and prospects, and taking into account, in particular:

(a) the database of Hong Kong civil litigation records dating back to 1989 and the copyright thereof;

(b) the 4^th Respondent’s 50% interest in the shareholdings of COD; and

(c) the 4^th Respondent’s goodwill.

(2) Value the shares, and the other aforesaid valuations, as at 7 July 2010.

(3) Not to include in the valuation of the legal costs incurred by the 4^th Respondent in relation to HCA 1255 of 2006.

  ….

8. The Valuer shall give a written valuation of the Shares, but shall not give reasons for the valuation, and shall simultaneously send copies of his valuation to the legal representatives of the Petitioner and the 1^st to 3^rd Respondents.

9. The valuation of the Shares by the Valuer, in the absence of manifest error, be final and binding upon the Petitioner and the 1^st to 3^rd Respondents.”

5.  It is clear from paragraphs 8 and 9 that the Valuer was required to provide simply a valuation.  He did not have to explain, certainly not in any detail, how it was arrived at.  The valuation was to be binding unless it contained “manifest error”.  If the valuation report did not have to contain reasons it follows that it must have been understood that “manifest error” referred to a mistake of a very obvious type which was readily apparent on a reading of the valuation.  The type of mistake which readily comes to mind as falling into this category are arithmetical errors or basic mistakes about, for example, the number of shares the Petitioner held in the Company.  This is consistent with way in which this expression has been understood in authorities in which it has been considered.

Legal Principles

6.  The 1^st to 3^rd Respondents have argued before me today that various authorities show that the court will not hold a party to a valuation that contains a mistake[1] and that there is an overriding requirement that any valuation be fair[2].  The broad statements of principle submitted by the 1^st to 3^rd Respondents derived from cases on materially different facts I find of little assistance and in the case of the reliance on Dean v Prince overlook more recent developments in the case law.

7.  In the present case I am not concerned with a building certificate issued by an architect or a quantity surveyor pursuant to a building contract.  In the present case the parties have agreed to appoint a valuer to value shares.  He does not have to provide reasons for his valuation and it has been expressly agreed that the valuation is binding unless it contains “manifest error”.  The general approach of the courts to valuation of the sort with which I am concerned is explained by Lord Denning MR in Arenson v Arenson [1973] 1 Ch 346:

“On reading all the cases, it seems to me that there is one dominant theme running through them. It is this: Whenever two persons agree together to refer a matter to be final and binding upon them, then, so long as he arrives at his decision honestly and in good faith, the two parties are bound by it. They cannot reopen it for mistake or error on his part or for any reason other than for fraud or collusion.”

8.  Lord Denning MR repeated similar views in the latter case of Campbell v Edwards [1976] 1 WLR 403:

“In former times (when it was thought that the valuer was not liable for negligence) the courts used to look for some way of upsetting a valuation which was shown to be wholly erroneous. They used to say that it could be upset, not only for fraud or collusion, but also on the ground of mistake: see for instance what I said in Dean v Prince [1954] Ch 409, 427. But those cases have to be reconsidered now. I did reconsider them in the Arenson case in this court: [1973] Ch 346, 363. I stand by what I there said. It is simply the law of contract. If two persons agree that the price of property should be fixed by a valuer on whom they agree, and he gives that valuation honestly and in good faith, they are bound by it. Even if he has made a mistake they are still bound by it. If there were fraud or collusion, of course, it would be very different. Fraud or collusion unravels everything.”

9.  In summary the position is this: if parties have agreed to be bound by a valuation then, unless they have agreed otherwise, they cannot contest the valuation on the grounds simply that it contains a mistake. As long as the valuation has been prepared in good faith it is binding. This is even more so when the parties have expressly agreed that only “manifest error” will invalidate the valuation.  The meaning of “manifest error” in the context of expert valuation was considered in Dixons Group plc v Murray-Oboynski [1997] All ER 34:

“The parties have agreed that the decision of Mr Jackson is final and binding on all the parties save in the case of manifest error. A ‘manifest error’ is an error ‘that may be easily seen by the eye or perceived by the mind’ (Chambers Twentieth Century Dictionary). There is no great difference between the defendants’ arguments regarding failure to comply with obligations and their submissions regarding manifest error.

As a matter of first impression, I find that on the true construction of the words of the agreement taken as a whole…, for an error on the part of Mr Jackson to be manifest it must be plain and obvious on the face of his written decision. The error must be manifest: the terms of the agreement do not contemplate an error which after a lengthy enquiry may be made manifest. No such manifest error appears and accordingly the decision of Mr Jackson is final and binding and cannot be reopened either directly or by the back door of a set-off.

That approach is consistent with the approach of Potter J [in Heald Foods v Hyde Dairies, unreported, QB, 1 December 1994] in the words I have cited above:

‘By the use of the word “manifest”, it is plain that [the parties] do not thereby intend to widen the area of the court’s investigation beyond the ambit of the determination itself any reasoning within it or discernible on its face.’ ”

10.  It seems to me clear that the agreement reached by the parties and contained in the Schedule to the Order was intended to, and does, prevent them arguing about the valuer’s methodology or valuation assumptions. They can only object to the valuation if it contains a clear mistake, which can be demonstrated quickly and is not open to serious debate.

The 1^st to 3^rd Respondents’ complaints

11.  The alleged “manifest errors” are identified and explained in paragraph 6 of the 1^st Respondent’s affirmation:

“6. The Report was duly prepared by the Valuer and a copy was sent to the 1^st to 3^rd Respondents’ legal representatives. Upon receipt and consideration of the same, the 1^st to 3^rd Respondents’ legal representatives wrote a letter dated 5 August 2011 to the Valuer raising with the Valuer that there is manifest error in the methodology, workings and conclusions in the Report by pointing out, in particular, to the following:-

a. That no reference was made in the Report either to the Order dated 5 July 2010 before the Honourable Mr Justice Harris or the parties’ Representations and Reply Representations;

b. That the Report appears to have been prepared on a stand-alone basis, rather than in the context of the joint instruction letter dated 4 October 2010 signed by the parties’ legal representatives;

c. That at least six of the assumptions adopted by the Valuer in the Report are flawed and inconsistent with the empirical evidence given in the 1^st to 3^rd Respondents’ Representations and Reply Representations;

d. That the three companies selected by the Valuer for comparison under the Guideline Company Method were wrongly selected and plainly not comparable such that any data or adjustment thereof resulting from the comparison is of no substantive assistance in the valuation made in the Report;

e. That the assumed GDP growth rate is erroneous;

f. That a substantial amount of cash repayment to the 1^st Respondent is wholly missing from the Discount Cash Flow in the Report and simply ignored;

g. That the high projected growth rate for the 4^th Respondent from 2011 to 2012 is erroneous;

h. That the working capital calculation is erroneously made taking into account that all service providers are facing delayed receipt of payments in general and that 80% of the turnover of the 4^th Respondent is from a single customer in particular;

i. That there should be no control premium for the associated company of the 4^th Respondent, Credit on Demand Limited (“COD”), given that 50% of the shareholding in COD is owned by the 4^th Respondent;

j. That no explanation is given in the Report for the large disparity of revenue growth in 2012 falling from 51% to 6%;

k.   That reference is erroneously made in the Report to an IPO of the 4^th Respondent and COD when this was never part of the projection.”

12.  This is the totality of the affirmation evidence filed by the 1^st to 3^rd Respondents attempting to demonstrate that the valuation contains “manifest errors”.  There is no expert evidence before me addressing and substantiating these complaints.  When the application first came on before me on 10 October 2012, I pointed this out to Mr Hart, who appeared for the 1^st to 3^rd Respondents, and asked how he proposed to demonstrate that the alleged mistakes were not only just that, but also manifestly errors, because it was far from clear to me that this was the case.  I was told by Mr Hart that the complaints were substantiated in the evidence, but that not all of it has been included in the hearing bundle, which, I accepted, was in an unsatisfactory state.  I adjourned the hearing in order that new bundles could be prepared and that the 1^st to 3^rd Respondents could file a new written submission well before the new hearing, which identified the evidence relied on to substantiate that matters complained of were errors and manifestly so.

13.  The 1^st to 3^rd Respondents served further submissions as directed, but they still did not appear to demonstrate that errors had been made.  I wrote to the 1^st to 3^rd Respondents’ solicitors prior to the hearing and pointed this out.  At the commencement of the hearing Mr Hart, who appeared for the 1^st to 3^rd Respondents, accepted that he could not demonstrate that most of the matters were errors.  He submitted, however, that 4 of the matters identified by the 1^st to 3^rd Respondents in his Firm’s letter of 5 August 2011 were manifest errors.  These are items 6(f) to (i) referred to in paragraph 11 above.  Having gone through these 4 items with Mr Hart it was clear that he was unable to demonstrate that they were wrong or had had any impact on the valuation of the shares.  As I have already explained a manifest error is an error which can be readily demonstrated.  In my view the 1^st to 3^rd Respondents have clearly failed to demonstrate that any of the matters which they claim constituted manifest errors in the valuation of the Company and its shares are so.

14.  It appears to me that in large part the present disagreements have arisen because neither party nor the valuer has proceeded as the order intended.  If the valuer had simply produced a valuation without reasons as the order directed there would have been no room for disagreement. Similarly if the Petitioner had from the outset accepted the valuation contained in the Report it may be that the 1^st to 3^rd Respondents would have done the same.  The fact that the Petitioner initially argued that the valuation was flawed and the valuer appeared to be open to reconsidering his valuation if further information was provided appears to have played some part in encouraging the 1^st to 3^rd Respondents to question the Report.  Be that as it may in my view it is clear that the Report provided the valuation required by the order and no manifest error in it has been demonstrated.  I therefore dismiss the 1^st to 3^rd Respondents’ summons with costs to be paid to the Petitioner forthwith such costs to be taxed if not agreed.

15.  Mr Hart accepted that if I dismissed his client’s summons it followed that I should order payment of the purchase price and interest.  Three issues remained.  The first was the rate of interest.  The 1^st to 3^rd Respondents argue that it should be at the judgment rate from the date at which they accepted the valuation in the Report, namely, 28 April 2012.  From that date they argue the amount payable should be treated in the same way as a precise amount adjudged due in a final judgment.  Generally, this would be correct in my view, but this case is unusual given the complications arising from the behaviour of all parties including the Petitioner.  In my view it is more appropriate in the circumstances to order that interest is payable at prime plus 1%.

16.  Mr Hart argued that as the Petitioner had been slow in paying the judgment in an associated High Court action and the costs of that action and an appeal are yet to be taxed and paid the amount payable under the order should be dealt with by requiring the 1^st to 3^rd Respondents to pay HK$1,000,000 into Court, a sum which takes into account the likely amount of taxed costs to be deducted from the share price said Mr Hart, pending determination of the amount of costs that have to be paid.  At that point an accountant can be taken of exactly how much is payable.  I do not accept this.  The actions are independent and it does not seem to me appropriate to connect the two in this way.

17.  Finally there was the question of costs.  Mr Hart argued that in December 2012 the 1^st to 3^rd Respondents had offered to accept the valuation if the Petitioner agreed to deal with payment in the manner I have described in the previous paragraph.  He says this should have been accepted and the court should take it into account when assessing costs.  As I do not consider that the proposal was reasonable it follows this does not affect the question of costs.

18.  I shall make the following order:

(1) The 1^st to 3^rd Respondents shall pay to the Petitioner HK$3,787,345 within 14 days of presentation to their solicitors of duly signed instruments of transfer, bought and sold notes and the share certificates in respect of the Petitioner’s shares in the 4^th Respondent.

(2) The 1^st to 3^rd Respondents shall pay interest on the said sum from 28 April 2008 at Hong Kong prime plus 1%.

(3) The 1^st to 3^rd Respondents shall pay the Petitioner’s costs of the 1^st to 3^rd Respondents summons forthwith such costs to be taxed if not agree.