NICHOLAS TIMOTHY CORNFORTH HILL v. ALVAREZ & MARSAL ASIA LTD

HCA 56/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 56 OF 2007

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(Heard Together)

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J U D G M E N T

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Background:

1.  These proceedings arise out of the termination of a partnership consequent upon the retirement of one of the four members of the partnership, and the establishment of a new company, comprising the three continuing partners as shareholders.  That company was to continue the business previously operated by the partnership.  The two sets of proceedings are being heard together.

2.  Two primary documents, both dated 24 June 2005, one known as an Asset Transfer Agreement, (the ATA), the other known as the LAIL Agreement require interpretation.  These two documents are the documents by which the retiring partner, Mr Hill, and a company, effectively solely owned by him, Lion Archer Investments Ltd, (LAIL), on the one part, and the continuing partners, Mr Cosimo Borrelli, Mr Kelvin Flynn, and Mr Neil Poole, effected a dissolution of the partnership.  The documents also effected the transfer of the continuing business to a new company established by the continuing partners, which became known as Alvarez & Marsal Asia Limited (A&M Asia).

The proceedings:

3.  There are two sets of proceedings, which are being heard together.  This is so for the following reasons.

4.  The ATA and the LAIL Agreement were both made on 24 June 2005.  The retirement of Mr Hill from the partnership, and the transfer of the continuing business to A&M Asia took place on 30 June 2005.

5.  On 2 November 2006, being dissatisfied at the response of A&M Asia in relation to queries he had raised in respect of the interpretation of the two agreements, Mr Hill issued a Statutory Demand pursuant to s 178 Companies Ordinance Cap 32, demanding payment of a sum in excess of $21 million within 21 days of that day.

6.  On 23 November 2006, in response to the Statutory Demand, A&M Asia issued the Originating Summons seeking certain declarations by way of construction of the ATA and the LAIL Agreement.  The effect of those declarations, if made, would be that Mr Hill was not entitled to issue the Statutory Demand. Mr Hill responded by way of Counter-Notice seeking declarations to the contrary.

7.  On 10 January 2007, Mr Hill issued the writ against A&M Asia demanding payment of the sum claimed in the Statutory Demand.  On 9 February 2007, a statement of claim was filed which set out the basis upon which Mr Hill asserted his entitlement to that sum.  Subsequently an order was made that the Originating Summons should continue as if it had been begun by writ.  Numerous affidavits were filed and those have been treated as the evidence in chief in both proceedings.  As the issues are identical in both sets of proceedings, they have been heard together.

8.  The proceedings before me were undertaken on the understanding of both parties that it was unlikely that the conclusions to be reached in this judgment would resolve all issues between parties.  This judgment is accordingly an interim judgment in which I shall deal with certain issues, with leave reserved to either party to bring the matter back before me in due course for the resolution of any other outstanding issues.

The background:

9.  Except where indicated, I find the following to be the facts that set out the background to the matter.  There are further facts which are relevant and to which I will refer when considering specific issues.

10.  The business in which the parties were engaged was that of corporate advisory and insolvency services in Hong Kong and around Asia.  The business was originally established by Mr Hill in July 1995.  A company was established by Mr Hill together with a well-known international corporate advisory and insolvency firm, RSM Nelson Wheeler International, (RSM NW).  The new company, RSM Nelson Wheeler Corporate Advisory Services Ltd, (RSM Corporate) was originally owned as to 25% by RSM NW, and 75% by Mr Hill personally.

11.  The practice flourished, and in early 2000, Mr Hill took steps to allow certain employees of RSM Corporate, by way of incentive, to share in the profits, (and the risks), of the business.  A somewhat complex procedure was adopted.  On 17 February 2000, Mr Hill’s 75% interest in RSM Corporate was transferred to a company called Blue Skies Upper Limited, (Blue Skies), a BVI company of which Mr Hill was the sole legal and beneficial owner.

12.  With effect from 1 January 2000, Mr Hill, Mr David Kennedy, and Mr Damien Hodgkinson, entered into partnership to hold beneficially 60% of the share capital in Blue Skies, the remaining 40% of the Blue Skies capital being transferred to LAIL, a BVI company controlled solely by Mr Hill.

13.  Between January 2000 and June 2005, when the relevant documents were completed, there had been certain changes to the employees who comprised the partners owning the 60% interest in Blue Skies.  By a document dated 8 July 2004, and known as the Second Partnership Agreement, the 60% interest was held between Mr Hill, Mr Kennedy, Mr Cosimo Borrelli, (Mr Borrelli), Mr Neil Poole, (Mr Poole), and Mr Kevin Flynn, (Mr Flynn).  There were then five partners holding the 60% interest.

14.  During the time of the partnership three subsidiary accounting partnerships had been established in Singapore, Malaysia and Thailand.  These were called the overseas subsidiaries.  Over the years it had been necessary for the Hong Kong practice to financially support these subsidiary businesses, the support being provided on the basis that it was hoped that in due course they would become independently viable and the loans would be repaid, with profits being returned to the Hong Kong practice.  The advance, recorded in the accounts of the partnership as a current asset, was called the subsidiaries loan debt.

15.  In December 2004, Mr Kennedy left the partnership, upon agreed terms.   Although the documentation in which the terms upon which Mr Kennedy left the partnership did not form part of the evidence, it was Mr Hill’s undisputed evidence that the calculation of Mr Kennedy’s entitlement upon him leaving the partnership had been calculated on the basis of the subsidiaries loans being valued at their nominal amount, that is the amount at which they were recorded as an asset in the firm’s accounts, with no reduction for impairment.  The relevance of this fact will become apparent later.

16.  At the relevant time the partners were Mr Hill, through his ownership of LAIL, and Messrs Borrelli Flynn and Poole, (the continuing partners).  Following the departure of Mr Kennedy, Mr Hill’s interest in the partnership, through his sole ownership of LAIL, (40%) and his interest in Blue Skies 40% share of the partnership, (19%) stood at 59%.  Mr Hill had the controlling interest.

17.  Important provisions within the Second Partnership Agreement are the retirement provisions in favour of Mr Hill.  These are contained primarily in clause 12 of the document.  The clause begins with a series of recitals setting out the basis upon which the rights and obligations of LAIL, (effectively Mr Hill), were established.  The recitals are:

“12.1   (a) (Mr Hill) established the Practice on 17 July 1995 in conjunction with RSM NW and between 17 July 1995 and 31 December 1999 was the only proprietor of the Practice engaged full-time in the Practice;

(b) the goodwill in the Practice since its establishment to 31 December 1999 was built up primarily by (Mr Hill);

(c) LAIL is a company controlled by (Mr Hill) and is the corporate vehicle for holding directly (Mr Hill’s) interest in (Blue Skies) and indirectly (Mr Hill’s) interest (including goodwill) in RSM Corporate and the Practice; and

(d) 40% of the ordinary issued capital of (Blue Skies) is held by LAIL in recognition of (Mr Hill’s) role in establishing and building up the goodwill in the Practice and to financially compensate (Mr Hill) accordingly.”

18.  Having established, and justified, by those recitals the pre-eminent position of Mr Hill in the partnership, the document goes on to provide specific terms to satisfy Mr Hill’s entitlement in the partnership upon his retirement.  It does so by requiring LAIL to sell to the remaining partners the shares it held in Blue Skies on specified terms.  Clause 12.2 is in the following terms:

“12.2   (a) LAIL shall sell and the Partners shall purchase at par value all shares in (Blue Skies) held by LAIL in 5 tranches of 20% each.  The first tranche shall be sold by LAIL on 1st January 2006 or the first anniversary of (Mr Hill’s) retirement from the Partnership whichever is the later and the remaining 4 tranches shall be transferred 12 months, 24 months, 36 months and 48 months thereafter respectively;

(b) the Partners shall procure to give LAIL access to all books and records of RSM Corporate and the Practise during the period that (LAIL) holds any shares in (Blue Skies);

(c) the Partners shall be just to LAIL and shall act in good faith at all times in all transactions when dealing with, or concerning, LAIL directly or indirectly; and

(d) the Partners shall ensure that LAIL receives its fair share of profit distributions from the Practice and RSM Corporate.”

19.  The continuing ownership of shares in Blue Skies, through LAIL, by Mr Hill for five years after his retirement, meant that for those five years Mr Hill would continue to receive profits from the business carried on by the partnership even though he was not active in the partnership.  In simple terms, Mr Hill was entitled to receive a share of the profits of the business for a period of five years from his retirement, starting at 40% for the first year after retirement and decreasing by 20% of that 40% each year thereafter.

20.  These terms, which had the potential to be onerous on the continuing partners, put Mr Hill in a powerful negotiating position should he decide to retire.

21.  In 2005, the four partners gave consideration to separating from their affiliation with RSM NW and entering into an arrangement with a New York firm engaged in the insolvency business.  They called their proposal “Project Big Apple”.  The four partners had instructed a solicitor, Mr Martin Robertson, (Mr Robertson), of Johnston Stokes & Master, (JSM), in respect of this project.

22.  In the course of the discussions between the four partners on Project Big Apple, Mr Hill decided to retire from the business.  In strict terms of the Second Partnership Agreement Mr Hill was required to give 12 months notice of his intention to retire, were he not to retire on 1 January 2006.  Upon giving that notice, and at the expiry of the 12 months, Mr Hill was entitled to a significant percentage of profit share of ongoing business generated by the continuing partners, over a period of five years.

23.  The obligation to pay to Mr Hill a share of the profits, albeit reducing, over the next five years was not attractive to the continuing partners.  But Mr Hill believed that he had achieved financial success over the 10 years in which he had run the business, and wanted, on his retirement, to ensure his financial comfort. 

24.  Consequently he decided that rather than enforcing the strict terms of the Second Partnership Agreement, and insisting upon the share of the profits, which would “maximise his assets”, (his expression), but created a difficult situation for the continuing partners, and which they may not necessarily meet, he needed to ensure that that he had sufficient money so that neither he nor his wife had to work again.  As a result, Mr Hill and the continuing partners negotiated with each other, seeking to arrive at an agreement acceptable to all, achieving Mr Hill’s objective, and enabling the continuing partners to continue with the business at an acceptable profit level.

25.  So new discussions began as to the terms of Mr Hill’s retirement.  This proposal was called “Project Bilbo”.  Prior to consulting solicitors on Project Bilbo, there had been negotiations between the four men as a result of which terms had been agreed, in broad principle.  The broad outline of the proposal involved the establishment of a new company by the continuing partners, with that company to take over and continue the existing business, previously operated by RSM Corporate.  Payment to Mr Hill of his entitlement on retirement would be made by the new company and would be guaranteed by the continuing partners.

26.  The broad terms of agreement were in writing in a document known by the parties as a “term sheet”.  There had been several drafts of the term sheet before solicitors were instructed on Project Bilbo.  The seventh version of the term sheet, was given to Mr Robertson.  I find, for the reasons given by me in a ruling delivered during the course of the trial on 19 September 2008, which reasons, for the purpose of that finding, form part of this judgment, that the four partners then jointly retained Mr Robertson to act for them in Project Bilbo. 

27.  I am satisfied that all parties were broadly happy with the terms set out in the term sheet, but at the same time all recognised that it did not necessarily represent the final form of the agreement. 

28.  Mr Robertson was responsible for drafting the two primary agreements, the ATA and the LAIL Agreement which record the terms ultimately agreed, upon which Mr Hill was to retire, his entitlement to payment, and the basis upon which the continuing partners would make that payment to Mr Hill.

29.  In the course of the discussions, the proposed new company, initially referred to as “Newco”, was duly incorporated as OnTarget Holdings Limited, (OnTarget), with Messrs Borrelli, Flynn and Poole as its only shareholders, each holding one share, and the only directors.  The company was incorporated on 11 April 2005, a little over 10 weeks prior to the execution of the documents required to complete the transaction.  For reasons which will become apparent in the next paragraph, the company was soon to change its name to A&M Asia.  For convenience throughout this judgment, because there is no dispute that OnTarget and A&M Asia are the same entity, I will usually refer to that company, both before and after the change of name, as A&M Asia.

30.  During the negotiations, separately from Mr Hill, Messrs Borrelli, Flynn and Poole had reached agreement with a New York firm, Alvarez & Marsal, to share with them the acquisition of the business from RSM Corporate.  In this respect, the continuing partners had pursued the original idea behind Project Big Apple.  It was consequently necessary for OnTarget to change its name to reflect the new involvement.  There was insufficient time to complete this change of name before the ATA had to be signed.  In consequence, the ATA, when prepared for signature by the various parties referred to:

“Alvarez & Marsal Asia Limited, a company under the laws of Hong Kong, with registration No. 962162 (a company in the process of changing its name from OnTarget Holdings Asia Limited) (“A&M Asia”)”

31.  A&M Asia has a separate arrangement with Alvarez & Marsal in USA, which does not appear to be relevant to the proceedings. Throughout the whole of the period relevant to the interpretation of the documents Messrs Borrelli, Flynn and Poole were the only shareholders and directors of A&M Asia.  Thus, when the dispute arose, it was between Mr Hill and A&M Asia, with whom lay the primary responsibility to make the payments due to Mr Hill. 

32.  The business of RSM Corporate had, in addition to its work in progress, three main assets.  These comprised certain fixed assets and rental deposits, the debtors (or accounts receivable from work done), and monies owed to it by its subsidiaries. 

33.  The subsidiaries loans debt arose from advances made by the partnership to subsidiary accounting partnerships that had been established over a number of preceding years by RSM Corporate in Singapore, Malaysia and Thailand, and in which the partnership maintained an interest.  Each of these three subsidiaries had required capital funding from the Hong Kong partnership.  The capital provided by the Hong Kong partnership to the subsidiaries was reflected in the accounts of RSM Corporate as a current asset, constituting the debt due by the subsidiaries to RSM Corporate.

34.  For reasons which will appear subsequently, great care must be taken to distinguish the debt due by the overseas subsidiaries to RSM Corporate from a new debt created by Clause 3.1(b) of the ATA, and defined in that document as the Subsidiaries Loans Debt, (SLD).  In this judgment references to the debt created in that clause will be referred to by the abbreviation SLD.  The debt due by the overseas subsidiaries to RSM Corporate will be referred to as the “subsidiaries loans debt”. 

35.  The subsidiaries loans debt and the SLD are two quite distinct debts, owed, as will be seen, by two quite distinct entities. This essential fact, to a large extent overlooked by the parties, is crucial in any consideration of the obligations arising from the ATA and the LAIL Agreement.

36.  Following their initial negotiations, on 24 March 2005, Mr Hill, by e-mail, sent to Mr Robertson, with copies to the continuing partners, what was described as “a draft Heads of Terms for my departure”.  Attached to the e-mail was the seventh version of the term sheet prepared as a result of the discussions between the four men.  Mr Hill asked that Mr Robertson confirm that he understood the terms and that he would be able to translate them into a legally binding document for the parties to sign.

37.  The terms contained in the term sheet may be summarised as follows:

(1) RSM Corporate (called in the term sheet, Oldco) would cease trading and the partnership dissolved on 30 June 2005.  The new company (called in the term sheet, Newco) would commence trading on 1 July 2005.

(2) All balances due by Oldco to Mr Hill/LAIL were to be fixed at 30 June 2005 at HK$101.4 million (called the Oldco debt).  Newco and the continuing partners were, in good faith, to pursue all of Oldco’s debts and not to compromise any debt by more than $50,000 without Mr Hill’s agreement.  Old collectable work-in-progress at 30 June 2005 was to be billed and the collection of debts from ongoing jobs was to be applied “on an earliest debtor first”.

(3) Newco was to pay HK$23.4 million (US$3 million) to LAIL which was to be treated as a loan due by Newco to LAIL, (the LAIL debt).

(4) The total amount to be paid to Mr Hill and LAIL was HK$101.4 million, (the Oldco debt), and HK$23.4 million, (the LAIL debt), plus interest, (dealt with in the document) and was called the Total Debt.

(5) Subject to a schedule of priorities set out in 6 below, Mr Hill/LAIL were to be paid all debt recoveries realised by Oldco from 1 July 2005 until the Total Debt was repaid in full.

(6) The priorities were, first, to any payments to Mr Hill/LAIL, certain payments were to be made to HSBC and other third-party liabilities of Oldco.  Then, Mr Hill was to be paid HK$335,000 per month until 31 December 2005 after which that sum would be paid by Newco on behalf of Oldco.  Before any other payments were made to Mr Hill provision was made for a working capital requirement for Newco.  This was called the Working Capital Debt.

(7) The document then recognised the subsidiaries loans debt that were due to Oldco by three overseas subsidiaries of RSM Corporate.  It recognised other relevant assets such as some rental deposits and fixed assets.  These assets were to be transferred to Newco at book value at 30 June 2005, and called the Fixed Assets and Deposits Debt (FADD).  The document recorded that the subsidiaries loans debt was “currently estimated at approximately $19,275,000 in total”.

(8) If any distributions were made to the continuing partners by Newco, other than monthly drawings in accordance with the Second Partnership Agreement, 80% of those distributions were to be paid to Mr Hill until the Working Capital Debt and the Deposit Debt were paid in full and thereafter 50% of such distributions until the Newco Debt was discharged.

38.  Using that term sheet, the negotiations continued, with the assistance of Mr Robertson, until the ATA and the LAIL Agreement were signed on or about 24 June 2006.

39.  In his opening Mr Manzoni put the essential structure of the ATA and the LAIL Agreement on the following terms, which I am satisfied accurately reflect the documents.  I have expanded on these in accordance with the evidence.

(1) Every debt which was owed by RSM Corporate to Mr Hill as a result of their relationship over the 10 years of business was assigned by Mr Hill to LAIL.  (That debt was subsequently re- assigned back to Mr Hill, consequently Mr Hill is the appropriate party to the proceedings).

(2) The amounts owed by RSM Corporate to, initially Mr Hill, and following the assignment to LAIL, were crystallised and agreed in an amount of HK$101.4 million, which amount became known as the RSM Corporate Debt.

(3) RSM Corporate was to remain in existence, but cease to trade other than for the purpose of collecting the outstanding receivables which it was then owed by its old clients.  It appointed A&M Asia as its agent for the purpose of collecting the accounts receivable.

(4) A&M Asia was the company through which the remaining partners would conduct their future business.  The existing jobs of RSM Corporate would be transferred to A&M Asia, thus providing A&M Asia with an immediate source of work, and ensuring that, as far as clients were concerned, the transition was seamless.

(5) A&M Asia would collect the RSM Corporate accounts receivable as agent for RSM Corporate and would allocate the funds so collected in a priority as set out in clause 7.3 of the ATA.  Essentially, it would pay various current liabilities of RSM Corporate (including employees), provide for any working capital requirements of A&M Asia, and then apply the rest towards repayment of the RSM Corporate Debt back to Mr Hill/LAIL.  Any further outstanding amounts received could be used either to pay to the old shareholders, or to pay off any amounts which A&M Asia still owed to Mr Hill/LAIL at that time.

(6) A&M Asia was to take over the fixed assets and rental deposits of RSM Corporate.  It was to pay RSM Corporate a consideration for those assets and deposits which was represented by the creation of a debt owed by A&M Asia to RSM Corporate (the FADD).  The amount of the debt was identified as being the “net book value” of the FADD.

(7) Similarly, A&M Asia was to take over the debts which the overseas subsidiaries owed to RSM Corporate.  Again, A&M Asia was to pay for those loans by the creation of a new debt owed by it to RSM Corporate in the amount of the net book value of the subsidiaries loans, this debt being the SLD.

(8) Consequently, RSM Corporate had one major liability, the RSM Corporate Debt and three major assets, the accounts receivable, due to it from its clients, the FADD and the SLD, due to it by A&M Asia.

(9) RSM Corporate assigned to LAIL the FADD and the SLD which A&M Asia owed to RSM Corporate.  LAIL paid a consideration to RSM Corporate for that, in that the assignment reduced the RSM Corporate Debt by an equivalent amount.

(10)   A&M Asia purchased the goodwill held by LAIL in RSM Corporate separately and directly for the sum of HK$23,400,000. This sum was called the LAIL Debt.  That sum was payable to LAIL by A&M Asia on a monthly basis at not less than $335,000 per month commencing from 1 January 2006.  This transaction is the subject of the LAIL Agreement. There is no dispute in respect of that sum, and payments by A&M Asia continue to be made to Mr Hill.

(11)   Mr Hill became a non-executive director of A&M Asia, and was to be paid for his time on a consultancy basis.

(12)   RSM Corporate was renamed as HBFP Ltd, and was put into members voluntary liquidation.

40.  To this may be added the fact that the provision requiring 80% of distributions to partners by A&M Asia, above ordinary drawings, and set out in paragraph 37.8 above, also formed part of the agreed structure.  Mr Manzoni accurately referred to this as a subordinated distribution provision.

41.  In respect of paragraph 39.9 above, it is the case for Mr Hill, but disputed by the continuing partners, that by virtue of the assignment by RSM Corporate of the FADD and the SLD, (both debts due to RSM Corporate by A&M Asia)  to LAIL, that company, is entitled to look to A&M Asia for repayment of those sums.  As to the remaining balance of the RSM Corporate Debt, initially LAIL, and after the assignment, Mr Hill, must look to RSM Corporate for repayment.  Under clause 7.3 of the ATA, (see 39.5 above), upon receipt of payment by RSM Corporate debtors, collected by A&M Asia as its agent, as third priority, the sums collected are to be paid to Mr Hill in reduction of the RSM Corporate Debt.

42.  Under the ATA the RSM Corporate Debt was payable to LAIL, and under the LAIL Agreement the LAIL Debt was also payable to LAIL.  Subsequently LAIL assigned both of those debts to Mr Hill. 

43.  Initially there was an issue between the parties as to the validity of this assignment.  A&M Asia contended that it had not had proper notice of the assignment and that consequently Mr Hill had no individual rights in the matter.  Notice was subsequently given and it is now accepted by both sides that Mr Hill is the appropriate plaintiff in the proceedings.  Consequently throughout the rest of this judgement, for convenience, unless the context otherwise requires for clarity, I shall usually refer to Mr Hill, in the place of LAIL, as he is the beneficiary of the entitlements of LAIL in the original agreements.

44.  Initially, after signing agreements on 24 June 2005, all appeared to go well.  Mr Hill came into A&M Asia’s Hong Kong office for a few days a week, even using his old office until March 2006.  He was provided with details of collections of accounts receivable and confirmation, he says, from the Financial Controller of A&M Asia, also copied to all other directors, of the amount due under the FADD and the subsidiaries loans debt.

45.  The continuing partners ran the business under the title A&M Asia.  RSM Corporate accounts receivable were collected, the continuing jobs were serviced, and new work came into the firm.  The working capital loan envisaged in the ATA was not required, it seems because A&M USA provided the necessary working capital for its new subsidiary A&M Asia.

46.  In May 2006, Mr Hill left Hong Kong for Europe.  In September 2006, he became aware that Mr Flynn and Mr Borrelli intended leaving A&M Asia.  Mr Flynn went to Goldman Sachs in Singapore.  Mr Borrelli set up his own consultancy business in Hong Kong taking with him a number of staff.  In October 2006, the only non-equity partner, and Mr Briscoe also left, taking with him further staff.  Only one of the partners with whom Mr Hill had been in partnership, Mr Poole, remained.

47.  This situation was a matter of concern to Mr Hill, because all three of his payment streams under the agreements with which he had negotiated his withdrawal from the partnership, and upon which his retirement was based, were now in the hands of people he did not know and with whom he had not previously worked.  That Mr Poole remained gave Mr Hill little comfort, because Mr Poole concentrated on expert witness work rather than insolvency work.

48.  The first income stream, the accounts receivable of RSM Corporate, were being collected by A&M Asia, but that company no longer included the two main partners with whom Mr Hill had worked for many years.  Significantly most of the jobs on which RSM Corporate was owed money, being continuing work with outstanding accounts predating June 2005, were transferred to Mr Borrelli’s new firm or Mr Briscoe’s new firm.

49.  Next, the money due to Mr Hill under the FADD and the SLD were now payable by a company, A&M Asia, in whose future Mr Hill had little confidence, it now being reduced in size and without most of his former partners.

50.  Third, he was concerned about the goodwill payments to be paid by A&M Asia at the rate of HK$335,000 per month over a period exceeding 5½ years.  As it happens it transpired that he need not have had that concern as those payments are being duly made.

51.  Mr Hill made enquiries but did not get satisfaction.  He returned to Hong Kong in October 2006, and went to the office.  Now, contrary to the previous practice, he was barred from the office and denied access to details of the collection of accounts receivable.  Thus the dispute between the parties arose.

52.  The precise nature of the arguments that went on between the various parties after the dispute arose is not relevant to the interpretation of the agreements.  From the discussions between the parties three matters emerge from which the three primary issues referred to in paragraph 8 above arise.

53.  First, A&M Asia now disputed any liability to pay any sum in respect of the SLD, now asserting that was of no value, rather than the sum of approximately HK$20 million, as recorded in the accounts of RSM Corporate.

54.  Second, A&M Asia denied any liability to pay to Mr Hill the FADD and the SLD.  This sum, A&M Asia now asserted, was a liability only of RSM Corporate. 

55.  Third, Mr Hill discovered that under the agreement by which both Mr Borrelli and Mr Flynn had left A&M Asia, they had each been paid US$800,000.  Mr Hill asserted, relying upon the subordinated distribution provision, that 80% of that sum should have been paid to him.

56.  Mr Hill then issued the Statutory Demand, and A&M Asia countered with the Originating Summons for the interpretation of the documents.

The relevant law:

57.  The issues before me requires the construction of the two main agreements, the ATA and the LAIL Agreement.  There was no dispute between counsel as to the relevant law.  The principles are set out in the judgement of Lord Hoffmann in ICS Ltd v West Bromwich Building Society [1998] 1 WLR 896, at 912-3.  Although it may be trite, I find it convenient to set out those principles.  They are:

“(1)   Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of contract.

(2) The background was famously referred to by Lord Wilberforce as the “matrix of fact, ” but this phrase is, if anything, and understated description of what the background may include.  Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their decorations of subjective intent.  They are admissible only in an action for rectification.  The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life.  The boundaries of this exception in some respect unclear.  But this is not the occasion on which to explore them.

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its works.  The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean.  The background may not merely enabled a reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co Ltd v Eagle Star Life An Assurance Co Ltd [1977] AC 749.

(5) The “rule” that words should be given their “natural and ordinary meaning” reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents.  On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to a tribute to the parties and intention which they plainly could not have had.  Lord Diplock made this point would vigorously when he said in Antaios Compania Naviera S.A. v Salen Rederierna A.B. [1985] AC 191, 201: ‘if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flops business commonsense, it must be made to yield to business commonsense.’”

58.  Of significance in this case is the exclusion of evidence of negotiations and subjective intent.  While the factual background does not usually include evidence of negotiations (since the proposed terms may change) and mere subjective intent, it includes the factual background known to the parties, the genesis of the transaction, its aim or commercial purpose and the market at the time of the contract: see Reardon Smith Line v Hansen-Tangen [1976] 1 WLR 989 per Lord Wilberforce at 995H-996A.  At p 996E Lord Wilberforce put it this way:

“When one speaks of the intention of the parties to the contract, one speaking objectively - the parties cannot themselves give direct evidence of what their intention was - and what must be ascertained is what is to be taken as the intention which reasonable people would have had is placed in the situation of the parties.”

And at p 997C:

“…. in the search for the relevant background, there may be facts which form part of the circumstances in which the parties contract in which one, or both, may take no particular interest, their minds being addressed to all concentrated on other facts so that if asked they would assert that they did not have the least facts in the forefront of their minds, but that will not prevent those facts from forming part of an object of setting in which the contract is to be construed.”

59.  Notwithstanding the exclusion by Lord Hoffmann of previous negotiations from the admissible background, the modern approach appears to be that the pre-contractual negotiations and earlier drafts of documents are reliable evidence of conduct and communications between parties which may lend support to a conclusion that a particular meaning has been attributed to words subsequently in dispute.  Examples may be found in Yoshimoto v Canterbury Golf International Ltd [2001] NZLR 523, Partenreederei M.S. Karen Oltman v Scarsdale Shipping Co Ltd [1976] 2 Lloyd’s Rep 708 at 712, and Bank of Scotland v Dunedin Property Investment Co [1998] SC 657.

60.  In Hong Kong, in Beyond The Network, Ltd v Vectone Ltd (unreported, HCA 2826/2004, 13 December 2005), Reyes J held that notwithstanding the exclusion of previous negotiations by Lord Hoffmann in the West Bromwich case, and bearing in mind Lord Hoffmann’s recognition that; “(T)he boundaries of the exception in some respect unclear”, he could not ignore, as inadmissible, evidence of a party’s stance on jurisdiction which actually lead to a change in the language of the original version of a particular clause.

61.  Consequently, while it was not open to Mr Hill, or the continuing partners who gave evidence, to assert as to a belief they may now say they held in the course of the negotiations, it was perfectly proper for Mr Manzoni to put before me the background to the terms of the partnership, particularly the Second Partnership Agreement, the circumstances leading to Mr Hill’s decision to retire, the consequences of that decision, the term sheets, the e-mails between the parties during the course of the negotiations and the draft documents showing the evolution of the final agreement.  All of that evidence properly forms part of the matrix of fact in which the documents are to be interpreted. 

62.  Mr Beresford, at the outset, signalled an intention to confine the evidence to that which was lawfully admissible and relevant.  With the exception of the argument on privilege in relation to Mr Robertson’s evidence, it was essentially not necessary for Mr Beresford to raise any objection to any of the facts led or documents put before me by Mr Manzoni, and upon which Mr Manzoni relied to mount his case.

The aim or commercial purpose of the agreements:

63.  As has been seen, Mr Hill held a dominant position in the RSM Corporate partnership.  He held a controlling 59% interest.  The Second Partnership Agreement contained retirement provisions which were favourable to Mr Hill and which potentially placed a heavy burden on any continuing partners following Mr Hill’s retirement.

64.  Upon the retirement of a partner from his partnership he may normally expect to receive the amount standing to his current account in the partnership accounts, together with any other sums to which he may be entitled under the partnership agreement.  In a professional partnership his current account will normally be a reflection of outstanding accounts receivable and the value of any assets the partnership may own, after the holder of the current account has been given credit for any drawings he might have made.  Inevitably upon the retirement of a partner, with an obligation on continuing partners to pay out the retiring partner, two primary sources of funds will be available to meet the obligation.  They are the assets of the firm, which include the accounts receivable, and the future income of the continuing partners firm. 

65.  There are competing commercial realities.  The continuing partners must recognise the contractual or legal obligation they have to the retiring partner.  He in turn must recognise that strict compliance with the terms of a partnership agreement or partnership law may be difficult for the continuing partners to meet.  A fine balance usually arises in the negotiations, and did here, between the desire of the retiring partner to be paid out and need of the continuing partners to protect future income for their own benefit.

66.  Thus, it may not be thought surprising, that in the negotiations that took place between the partners to resolve the terms of Mr Hill’s retirement, all looked to three sources of funds which might be available to pay whatever was agreed to Mr Hill.  They were first the accounts receivable, second the fixed assets and the rental deposits and the subsidiaries loans debt, and third the ongoing income generated by the continuing partners, who under the title A&M Asia would carry on the existing jobs of RSM Corporate, and, presumably, develop new work.

67.  The total amount which Mr Hill might receive was crystallised at HK$124.8 million.  The goodwill was separately dealt with by the LAIL Agreement and fixed at HK$23.4 million.  That sum could not be subject to any reduction. 

68.  A retiring partner must inevitably accept that his interest in the accounts receivable must be subject to the ability of the debtors to pay.  Even in a professional partnership the occasion arises from time to time where some of the accounts receivable, usually long overdue, must be written off.  The sum agreed to be paid to Mr Hill under the ATA in respect of accounts receivable and the other assets of the firm was fixed at the sum of HK$101.4 million.

69.  The ATA and the LAIL Agreement provided for payment of the amounts due to Mr Hill.  The sum due under the LAIL Agreement for goodwill was an obligation on the continuing partners, and the prime source of funds to meet that obligation was the income of the new practice.  The remainder, HK$101.4 million was to be met, primarily, from the assets of the old practice, the accounts receivable, the fixed assets and rental deposits and the subsidiaries loans debt, if required.  If the continuing partners were able to pay to Mr Hill that sum of $101.4 by the recovery of the accounts receivable, there would be no need for them to have recourse to either the FADD or the SLD, or their future income.  But as far as Mr Hill was concerned, those sources of funds were to be available to him as well as the accounts receivable, to ensure that he received the amount due to him.

70.  Mr Hill and the continuing partners recognised that the accounts receivable might be reduced by write-offs.  This was recognised in the ATA which included a specific provision as to the extent to which accounts receivable might be compromised with or without Mr Hill’s prior agreement: see Clause 7.1(c).

71.  I am satisfied from the evidence as to the negotiations that took place, and the final form of the documentation that the commercial context in which the agreements were reached was that the retiring partner was to be paid a sum of HK$124.8 million, of which HK$23.4 million could not be reduced, and the sum of HK$101.4 million, which might be reduced, should the actual accounts receivable successfully recovered, the FADD and the SLD, not reach that sum.

72.  The ATA makes it clear that if the recovered accounts receivable exceed the sum of HK$101.4 million, then no further sum is payable to Mr Hill.  Any further sum recovered is the property of Messrs Borrelli, Flynn and Poole: see Clause 7.3(b)(vii) of the ATA.

73.  The primary question that arises is whether or not, if the FADD and the SLD must be paid to Mr Hill, and secondly the amount due by the FADD and the SLD.  The argument of A&M Asia centres upon the use of the expression “net book value” in the definition of the FADD and the SLD in the ATA.  This they say, means Mr Hill is entitled only to the recoverable value of the FADD and the SLD, thus, just as with written off accounts receivable, if the FADD and the SLD cannot be recovered, nothing is due to Mr Hill from other sources.

74.  Mr Hill for his part says that the expression merely identifies the sum to which he is entitled from those sources, to be determined by the nominal figure appearing in the accounts at the relevant time, the Completion Date is defined by the ATA, irrespective of recoverability.

The liability of A&M Asia to pay the FADD and the SLD:

75.  In paragraph 34 above I recorded the need for care to be taken to distinguish the subsidiaries loans debt from the SLD.  It is now necessary to demonstrate the reasons for that care.

76.  The argument mounted by Mr Beresford was that A&M Asia were not obliged to make any payment in respect of the FADD and the SLD.  The submission appeared to proceed upon the basis that the SLD was a sum due by the subsidiaries which, by virtue of a series of assignments, Mr Hill was entitled to recover.  If the debt was irrecoverable from the subsidiaries, that was unfortunate for Mr Hill, but nevertheless the consequence of the agreement between the parties.

77.  I reject the submission.  The true position is this.

78.  RSM Corporate had due to it, by the subsidiaries, a debt constituting the loans that it had made to the subsidiaries, described and defined in the ATA as the “Subsidiaries Loans”.  That is a chose in action, and an asset in RSM Corporate.

79.  That asset was sold to by RSM Corporate to A&M Asia by way of the ATA, see Clause 2.1 of the ATA, and is specifically referred to in Clause 2.1(e) of the ATA as an asset passing from RSM corporate to A&M Asia.  It is described that clause as “the benefit of the Subsidiaries Loans”.  In pure legal terms the transaction was a straightforward assignment of a debt, (the amount of the overseas subsidiaries loans, due to a creditor by the Overseas Subsidiaries), by a creditor, (RSM Corporate), to a third party, (A&M Asia).

80.  By Clause 3.1(b) of the ATA, the consideration payable by A&M Asia to RSM Corporate for that particular asset is the creation of a new debt by A&M Asia to RSM corporate:

“3. Consideration

3.1    Calculation of Consideration

The total consideration to be paid by A&M Asia  to RSM Corporate for the Business and the Assets of RSM Corporate shall be the aggregate of the following months:

(a) (Deals with the FADD)

(b) The consideration for the benefit of the Subsidiaries Loans shall be an amount equal to the net book value thereof as at the close of business on the Completion date such consideration shall be satisfied by the creation of a debt due by A&M Asia to RSM Corporate (the “Subsidiaries Loans Debt”), repayable in accordance with the terms of this Agreement;” (the italicised emphasis is mine)

81.  Next, by Clause 3.2 of the ATA, RSM Corporate assigned the benefit of that new debt to LAIL, (subsequently assigned by LAIL to Mr Hill). Thus, the new debt, (its quantification being subject to the interpretation of the expression “net book value”), is a debt due by A&M Asia to Mr Hill.

82.  The flaw in Mr Beresford’s argument is the treatment of the debtor liable to pay SLD as the original subsidiaries, and not A&M Asia. A&M Asia particularly, in their approach to these proceedings have confused the debt that has been assigned to Mr Hill, the SLD, a new debt, plainly owing by A&M Asia, with the subsidiaries loans debt, a pre-existing liability, originally owed by the subsidiaries to RSM Corporate, but sold as an asset to A&M Asia, and recoverable only by A&M Asia.  Neither Mr Hill, nor LAIL, prior to the assignment to Mr Hill had any rights at all to recover any sum that might be due by any of the overseas subsidiaries.

83.  When regard is had to the commercial context in which the transaction was negotiated, I am bound to say that Mr Manzoni must be right when he says that it is probably correct to say that all of the parties expected that Mr Hill would not need to make demand for the SLD.  All plainly contemplated that the accounts receivable would be a sufficient source of income to pay to Mr Hill the HK$101.4 million due to him under the ATA.  That is clear from the terms of Clause 7.3 of the ATA.

84.  I accept Mr Manzoni’s submission that such an expectation does not create a legal obligation, and accordingly Mr Hill is not prevented from making demand of the holder of the debt, A&M Asia, to whom the benefit of the SLD had been assigned.

85.  The same logic applies to the FADD, in that the ATA plainly creates a new debt, quantified by reference to the net book value of the fixed assets and rental deposits as at the close of business on the Completion Day.  That new debt is also a debt payable by A&M Asia to Mr Hill, (by virtue of the assignment from LAIL).

86.  There can be no doubt at all that A&M Asia are liable to Mr Hill for both the FADD and the SLD.

87.  It was argued by Mr Beresford that to find A&M Asia liable for the SLD would be wrong, because to do so would effectively double Mr Hill’s goodwill payment.  The submission must be wrong.

88.  First, it is plain from the documentation that the question of goodwill was dealt with separately by the LAIL Agreement.  The document specifically dealt with Mr Hill’s goodwill in RSM Corporate, specifically defining it and making provision for the assignment of that goodwill to A&M Asia.  The LAIL Agreement, in Clause 6.4, acknowledges that the FADD and the SLD are separate debts due by A&M Asia to LAIL, and after the assignment, to Mr Hill.  The acknowledgement of separate debts plainly identifies those debts as something unrelated to the payment of goodwill.

89.  Second, the ATA simply did not deal with the goodwill in RSM Corporate.  That is plain from the description of the assets transferred by RSM Corporate to A&M Asia, and set out in Clause 2 of the ATA.  There is simply no reference whatsoever to goodwill.

90.  Third, by the ATA, the RSM Corporate Debt is a fixed sum of HK$101.4 million.  By Clause 3.2 of the ATA, upon the assignment of the benefits of the FADD and the SLD to LAIL, the RSM Corporate Debt is reduced by the net book value of those two items.  By virtue of that reduction there can be no doubling up. 

91.  Finally, by Clause 6.4 of the LAIL Agreement, LAIL acknowledges that the total amount of debt to which it is entitled to be paid by A&M Asia, by way of repayment of the LAIL debt, (pursuant to the LAIL Agreement) and the FADD and the SLD or by RSM Corporate, (pursuant to the ATA), is limited to HK$124.8 million in aggregate. 

92.  I am satisfied that it was necessary to limit that sum with an upper figure, rather than fix a precise figure, because both parties recognised, as is seen from Clause 7.1(c) of the ATA that the compromise of accounts receivable may result in sums being written off thereby reducing the total amount of available from the sources of funds being paid to Mr Hill below the amount would be required to meet the payment due under the ATA of HK$101.4 million. 

93.  Thus, if any payment was made to Mr Hill by A&M Asia of the sum due under the SLD or the FADD, Mr Hill could not demand, in addition, payment to him of accounts receivable which would take the total paid to him to a sum in excess of HK$124.8 million.  Alternatively, he could only demand so much of the SLD or the FADD as was required to achieve the target figure of HK$101.4 million, (assuming that the goodwill of HK$23.4 million had been separately paid under the LAIL Agreement).

94.  Mr Beresford’s next submission in relation to the FADD and the SLD was that there was no obligation on A&M Asia to make any payment to Mr Hill in relation to the FADD and the SLD.

95.  The submission begins with the following fundamental statement of principle from Chitty on Contracts, 29^th Ed, 21-001:

“The general rule is that a party to contract must perform exactly what he undertook to do.  When an issue arises as to whether performance is sufficient, the court must first construe the contract in order to ascertain the nature of the obligation (which is a question of law); the next question is to see whether the actual performance measures up to that obligation (which is a question of “mixed fact and law” in that the court decides whether the facts of the actual performance satisfy the standard prescribed by the contractual provisions defining the obligation).”

And para 21-002:

“The fact that a party to a contract has, in purported performance, acted in a way which may appear, in a commercial sense, to be just as valuable to the other party as the way specified in the contract does not amount to performance in law.”

96.  Mr Beresford says that the obligation undertaken by A&M Asia was not an obligation to pay the monetary amount of the FADD and SLD, as would have been an obligation to make repayments of a loan, but is instead merely an obligation to collect the accounts receivable in behalf of RSM Corporate and pay the sums recovered over to LAIL, now Mr Hill.

97.  The argument simply cannot be right in respect of the FADD. A&M Asia acquired the benefit of the FADD, that is plain from clause 2.1(a) & (g) of the ATA.  The consideration for the FADD pursuant to Clause 3.2 of the ATA is the new debt, called the FADD, quantified with reference to the net book value of the FADD Aussie Completion Date.  Plainly a money obligation arose on the part of A&M Asia to pay for that which they had received, namely the fixed assets and the rental deposits held by RSM Corporate.

98.  The argument is also wrong, for the same reasons, in respect of the SLD.  That is because the argument overlooks the fact that the SLD is a quite separate debt from the subsidiaries loans debt.  It may have been quantified by reference to the subsidiaries loans debt, but it is a separately outstanding debt due, owing to Mr Hill, and payable to Mr Hill should he choose to make demand of the sum so quantified.

99.  Whether it is unfair or unreasonable to A&M Asia that Mr Hill should be able to make demand is simply beside the point.  Again Mr Manzoni’s submission in respect of the expectation of the parties that demand would be made is relevant (see paragraphs 82-83).  A&M Asia have elected to enter into an agreement in which they have taken on a debt quantifiable in a particular manner, and assigned debt in part satisfaction of A&M Asia’s obligation to Mr Hill.  They have made no provision in the ATA or the LAIL Agreement upon which could be contended that that was some limitation upon right of Mr Hill to demand payment of the debt.  There is simply no basis at all upon which any limitation should be imposed on Mr Hill’s right to demand payment of the debt assigned to him.

100.  Mr Beresford sought to rely on Clause 7.3(b)(vi) of the ATA, to say that the expression contained therein, “of any remaining outstanding moneys due by A&M Asia and/or the A&M Asia Shareholders to LAIL (other than the LAIL Debt)” referred to the SLD.  Yet again the submission confuses the subsidiaries loans debt and the SLD.  Whether the subsidiaries had paid anything under their obligation to A&M Asia is simply beside the point.  What Mr Hill is entitled to demand is payment of the new debt, the SLD, and he is entitled to demand it in satisfaction of any monies outstanding by A&M Asia to him under the ATA.

101.  Mr Beresford also sought to place reliance on Clause 7.6 of the ATA, the subordination of distributions provision.  There is nothing in Clause 7.6 which deals with the SLD or the FADD, and the clause does not affect the obligations in respect of those debts.

102.  It is not without significance that Mr Borrelli accepted that A&M Asia had the liability to pay the amount due, as did Mr Robertson.  The real issue between the parties is the amount that is due in respect of the SLD, there being no dispute as to the FADD, and timing at which the payments must be made.

103.  I accordingly conclude that both the FADD the SLD were due and owing by A&M Asia on 23 November 2006, that is 21 days after the date of Mr Hill’s Statutory Demand.

When can Mr Hill recover the FADD and SLD:

104.  The case for Mr Hill is that both the FADD and the SLD are payable upon demand.  Mr Manzoni says that as a matter of law that both payable upon demand.  Mr Beresford says that the implication of a term in the ATA that they are payable on demand or within a reasonable time is neither fair nor reasonable and that an implied term contradicts the express terms of the contract.

105.  Neither the ATA nor the LAIL Agreement contain terms for payment of the SLD or the FADD.  Clause 7.3(b)(vi) of the ATA cannot be relied upon as establishing a provision that the FADD and the SLD must be paid by way of recoveries from the RSM Corporate accounts receivable.  That is because that provision can only be said to apply to the FADD and the SLD if those debts fall, as they plainly do, within the expression:

“any remaining outstanding moneys due by A&M Asia and/or the A&M Asia Shareholders to LAIL (other than the LAIL Debt);”

106.  That is because the expression “remaining outstanding moneys” indicates that money due under the FADD and SLD may well have been paid by the original debtor of those two debts, namely A&M Asia.  I accept Mr Manzoni’s submission that that provision merely provides for one (non-exclusive) manner in which that payment obligation can be satisfied.

107.  Although Mr Borrelli contended in evidence that the SLD would not be payable to Mr Hill until funds were received from the subsidiaries, in other words a “pay when paid” basis, there is nothing in the ATA to support such a proposition.  There had previously, in an earlier draft of the documents, been such a term but that was removed from the ATA at the end of May 2005, and was never contained in the document again.  I reject the proposition.

108.  Mr Manzoni responds to Mr Beresford by saying that Mr Hill does not seek to imply any term.  Mr Manzoni simply relies on the legal principle that a debt, for which no payment terms are specified, is repayable upon demand.  That principle may be seen from the following passage in Chitty, paragraph 21-010:

“Normally, no request or demand for performance is necessary and the promisor is bound to perform his contractual obligation without being requested to do so; and illustration is the common case of a promise to pay a sum of money, either in general terms or on a specified day.”

109.  Plainly, the SLD is a promise to pay a sum of money, in general terms. If no demand for performance is necessary then it necessarily follows that the liability for payment has arisen upon the creation of the debt.  One of the authorities cited by Chitty in support of the statement above is Bell & Co v Antwerp, London & Brazil Line [1891] 1 QB 103.  The following passage appears in the judgement of Lord Esher MR:

“Where there is no place named for payment of a debt, I think the debtor is bound to pay the creditor on demand; though it is true that, where the contract does not make a demand previous to action a condition precedent, the creditor need not demand his debt otherwise than by bringing his action; he may in that case bring his action without previous demand, and say that the debtor owes him money, and it is the duty of the debtor to come to him and pay the debt.”

Although dealing with the issue of the place at which a debt is payable, the passage plainly illustrates the principle of law that once a debt is established, in the absence of any terms as to payment, the debt is payable immediately, and without demand.

110.  Mr Beresford says that the ATA is not a contract of loan and consequently the principle does not apply.  He relies upon the decision in Joachimson v Swiss Bank Corporation [1921] 3 KB 110 to show that there is no general rule that a debt that has no repayment terms is repayable upon demand.  He accepts that the general rule in the case of an ordinary debt is that liability for repayment arises instantly on the loan.  In the present case, he argues, the court is dealing, not with an ordinary debt, but with the assignment of three choses in action which had been treated as investments, and not an advance of money.

111.  Again, the submission overlooks the separate nature of the subsidiaries loans debt, an advance made by RSM Corporate to its foreign subsidiaries, and the SLD, a simple debt due by A&M Asia, to Mr Hill, (by virtue of the assignment from LAIL), and quantified by reference to the subsidiaries loans debt.  Contrary to Mr Beresford’s submission, there has not been an assignment of three choses in action to Mr Hill.  The assignment of the three choses in action has been by RSM Corporate to A&M Asia, with the consideration for that assignment being the SLD which is quantified by reference to the three choses in action, and then assigned to LAIL. 

112.  Once established and quantified, the SLD is a separate, simple debt due by A&M Asia, initially to RSM Corporate,, subsequently assigned to LAIL, and then assigned to Mr Hill, and the situation of the three choses in action becomes simply irrelevant.  There can be no doubt at all that the SLD is a simple debt, and was, legally, due and payable upon its creation.  Who ever holds that debt, and it is now Mr Hill, must be entitled to demand payment of the sum due by the debt.

113.  There is simply no basis at all upon which can be said that the SLD and the FADD are not repayable upon demand.  Mr Manzoni’s submission the parties did not expect that Mr Hill would need to have recourse to demand for these debts is equally applicable here.

The amount of the SLD:

114.  I turn now to quantify the SLD.  The following further provisions of the ATA are relevant.

First, the definition of Subsidiaries Loans:

“ ‘Subsidiaries Loans’ means the loans are due to RSM Corporate by the Overseas Subsidiaries at the close of business on the Completion Date, the benefit of which is to be assigned to A&M Asia at Completion;”

Next the definition of the SLD:

“ ‘Subsidiaries Loans Debt’ has the meaning given in Clause 3.1(b).”

The mode by which the SLD is to be calculated as set out in Clause 3.1(b), for which see paragraph 80 above.

115.  The first point to be noted is that the date at which the calculation of the amount due by the SLD is as at the Completion Date, defined by the ATA as the date on which completion took place.  There is no dispute that that day was 30 June 2005.

116.  Having established the completion date it is next necessary to determine the “net book value” of the subsidiaries loans as at the close of business on that day.  The amount so determined constitutes the amount due by A&M Asia under the SLD.

The meaning of “net book value”:

117.  Mr Hill contends that the expression is not used as a term of accounting art, but in a colloquial sense, meaning the value in books, plus or minus (i.e. “net” of) whatever adjustments in the amounts of the loans are necessary to reflect the debits and credits to the loans caused by the day to day cash flow requirements of the various subsidiaries.   A&M Asia contend that the term is used as a technical term of accounting art, namely the recoverable value of the loans on the relevant date.

118.  The difference is substantial.  If Mr Hill is right then the value of the debt is in the nominal sum of the Debt, which, in the course of negotiations, the parties estimated at being in the order of $19.5 million.  If A&M Asia are correct, Mr Beresford says that the amount due to Mr Hill would be the estimated recoverable value of the loans.  In those circumstances A&M Asia argue that it should be recognised that it is unlikely that the subsidiaries loans will be repaid within 12 months, and that consequently their value is zero, in which event nothing is due to Mr Hill.

119.  I have concluded that the expression “net book value” as it is used in the ATA in relation to the SLD means the nominal value of the subsidiaries loans as ascertained in the books of RSM Corporate on the completion date, that is 30 June 2005.  That sum was HK $20,127,885. 

120.  I reach this conclusion for the following reasons.

121.  The primary submission made by Mr Manzoni is both simple and logical.  Up until the change to the use of the expression “net book value” all of the drafts of the ATA had referred to the overseas subsidiaries loans as being “currently estimated at approximately $19,275,000 in total”.  It is quite clear that that expression was used because the amount of the loan standing in the accounts of RSM Corporate fluctuated, primarily by way of further borrowings by the subsidiaries increasing the debt, but also, occasionally, by repayments by the subsidiaries reducing the debt.

122.  It is clear that the parties recognised this and knew that the sum could not be crystallised until the completion date.  Consequently, says Mr Manzoni, a simple expression “net book value” was used to refer to what ever nominal figure might appear in the accounts on the completion date.  The completion date was 30 June 2005, but the documentation was signed six days earlier, on 24 June 2005.

123.  It is right that Mr Borrelli said that the balance of the overseas subsidiaries loans could be pinpointed at any point of time with a couple of hours notice at the most.  But everybody knew that the documentation would be signed not hours, but days before the completion date.  The ability to fix the figure within hours is simply irrelevant.  At the date on which the documentation was to be signed the figure could not be fixed with accuracy.  But it would be fixed on the completion date by reference to the “net” figure, that is the figure having regard to any further advances or repayments between the date upon which the documentation was signed and the completion.

124.  Next, Mr Hill, in negotiating the terms for his retirement needed to ensure that he was paid an appropriate sum to reflect his interest in the business of the partnership.  The substantial value that he placed upon that interest is readily seen from the retirement provisions originally negotiated and contained in the Second Partnership Agreement.  Payments to Mr Hill of whatever sum was agreed had to come from the continuing partners.  The assets that were available to meet the payment were the accounts receivable, the physical assets of RSM Corporate and its fixed assets and rental deposits, and the debt due to RSM Corporate by the subsidiaries.

125.  By the ATA, A&M Asia acquired from RSM Corporate the business and the assets of RSM Corporate which included the benefit of the subsidiaries loans.

126.  It will be recalled that by the ATA RSM Corporate had aggregated all outstanding balances due to Mr Hill/LAIL, separately from the amount of goodwill, and crystallised that sum at HK$101.4 million, that debt being defined in the ATA as the RSM Corporate Debt.  By clause 7.3 of the ATA that sum is to be paid to Mr Hill by way of recovery of the accounts receivable.

127.  That the loans due by the subsidiaries were initially viewed as an asset which might provide a source of payment to Mr Hill is abundantly plain from the clear terms of the term sheet sent to Mr Robertson which, in paragraph 7 recorded the following:

“All repayments of the loans due to (RSM Corporate) by the subsidiaries (currently estimated at approximately $19,275,000 in total) and any realisations on the sale of shares in a subsidiary or the business of any subsidiary shall first be paid to (Mr Hill/LAIL) as payment towards the (RSM Corporate) debts.”

128.  Mr Robertson proceeded to draft the necessary documents.  In the first draft of the ATA he made provision for a definition of the subsidiaries loans debts in the following terms:

“ ‘Subsidiaries Loans Debt’ means the loans due and owing to RSM Corporate by the Overseas Subsidiaries and that close of business on the Completion Date;”

In the body of the draft ATA, in paragraph 10.3(c), dealing with provisions relating to the repayment of the RSM Corporate Debt the following provision appears:

“All repayments of the Subsidiaries Loans by the Overseas Subsidiaries (currently estimated at approximately HK$19,275,000 in total)….”

129.  It is beyond argument that both the definition and the payment provision are both provisions which plainly refer to the nominal value of the debt at the completion date, and not its recoverable value.

130.  Both of these provisions remained in the second version of the ATA.  When Mr Hill received the second version he made certain handwritten amendments and had his secretary incorporate those amendments, which were then sent to the continuing partners for comment.  Mr Hill’s marked up version became the third version of the ATA.  It contained the following provisions, first a definition:

“ ‘Subsidiaries Loans Debt’ means the debt due by Newco to RSM Corporate (and thus LAIL) on Completion in the amount that the Overseas Subsidiaries to RSM Corporate as at close of business on the Completion Date;”

And in clause 7.3 in the body of the document:

“All repayments of the moneys due by the Overseas Subsidiaries to RSM Corporate and/or Newco currently estimated at approximately HK$19,275,000 in total)…..”

Again it is abundantly clear that all parties are referring to a sum of money estimated in excess of HK$19 million, and not a recoverable value believed by any of the parties to be zero.

131.  Following the circulation of this version of the documents there was a meeting between Mr Hill, Mr Robertson, Mr Borrelli, and possibly Mr Flynn.  It is clear that the expression “net book value” was discussed at the meeting.

132.  I am satisfied that there is no evidence at all to suggest that at that meeting, or indeed at any time at all prior to the litigation, any party suggested that the subsidiaries loans debt might have a “value” less than its nominal value.  Such a suggestion would have entirely reopened the negotiations. 

133.  The accounts of RSM Corporate, in March 2005, the accounts receivable stood at HK$98,208,431. To this had to be added work in progress.  On top of that was Mr Hill’s goodwill.  Everybody knew that Mr Hill was seeking to receive, instead of the strict entitlement in terms of the Second Partnership Agreement, a total sum of HK$101.4 million or US$13 million, being the accounts receivable plus work in progress, and his goodwill.  Any reduction of the subsidiaries loans debt would reduce that sum.

134.  There is nothing at all in the contemporaneous documents, be they e-mails, handwritten notes, or draft documents, to point to any suggestion of a change in the stance of any of the parties which would have had the effect of reducing the amount to be received by Mr Hill, apart from goodwill, below the sum of HK$101.4 million.  Mr Borrelli’s evidence as to the relevance of “value”, and not a nominal sum was quite disingenuous, (see transcript Day 8 pp 114-116).  That may be seen from his statement that “we did not spend 10 minutes on the realisable value of those loans in the whole exercise”.  Up until the discussion leading to the introduction of the words “net book value”, the parties had been plainly talking about nominal value.  Having regard to the consequences of the interpretation argued for by A&M Asia, it is simply beyond belief that such a change would be agreed to in less than 10 minutes.

135.  The evidence established that the amount owed by the three subsidiaries to RSM Corporate fluctuated during the financial year.  If additional funds were required by the subsidiaries, the amount of the debt would increase.  If any form of repayment were made by a subsidiary, and only very limited repayments were made, the amount of the debt would reduce.  The accounts of the partnership were made annually, the balance date being 31 December.

136.  Throughout the first three drafts of the ATA the amount due to be paid to Mr Chappell was to be paid in part by repayments of the subsidiaries loans which were then estimated at approximately HK$19,275,000, (see e.g. the first draft of the ATA Trial Bundle G p 202).  It was only after the meeting, some time between 27 May 2005 and 31 May 2005, that the expression net book value was inserted in the ATA.  That came in the fourth version of the ATA, sent out by Mr Robertson on 31 May 2005.

137.  The evidence of Mr Robertson was that as far as he was concerned the term referred to a debt of approximately $19 million: see transcript Day 6 p 30.  Mr Robertson made changes to both the ATA and the LAIL Agreement.  I accept Mr Manzoni’s submission that the two documents must be read together, as they represent the “whole deal”, although each is capable of standing independently.  There can be no argument against the proposition that where the same expressions used in both documents it must be intended to mean the same thing.

138.  The definition used by Mr Robertson in the draft of 31 May 2005 is instructive.  He defined the SLD in the LAIL Agreement in the following terms:

“ ‘Subsidiaries Loans Debt’ means the debt due by (Newco) to RSM Corporate in the amount that the Overseas Subsidiaries will owe (Newco) following completion of the As it Transport Agreement (which shall include the assignment by RSM Corporate of the benefit of the Subsidiaries Loans to and in favour of (Newco))”

The Subsidiaries Loans were defined as:

“ ‘Subsidiaries Loans’ has the meaning given in the Asset Transfer Agreement.”

The ATA contained the following definitions:

“ ‘Subsidiaries Loans’ means the loans due to RSM Corporate by the Overseas Subsidiaries at the close of business on the Completion Date the benefit of which is to be assigned to (Newco) at Completion.”

“ ‘Subsidiaries Loans Debt’ means the debt due by (Newco) to RSM Corporate (and thus LAIL) on Completion in the amount that the Overseas Subsidiaries owe RSM Corporate as at the close of business on the Completion Date;”

Subsequently this definition was amended to read:

“ ‘Subsidiaries Loans Debt’ has the meaning given in clause 3.1(b);”

139.  In my view it is plain that the definitions inserted on 31 May 2005 are definitions which refer to the nominal value of the overseas subsidiaries loans, whether they were recoverable or not.

140.  It is significant too that the original terms provided for actual recoveries of the subsidiaries loans debt to be paid to Mr Hill, but that provision was deleted from the ATA, and substituted with the assignment of the subsidiaries loans debt to A&M Asia, and the creation of the new debt, the SLD, which was then assigned to Mr Hill.  It is right that Mr Borrelli was unable to explain why that was done, but it is clear that there was no intention that Mr Hill should shoulder any risk of non-payment of the loans by the overseas subsidiaries.  That is the precise effect of the assignment of the subsidiaries loans debt to A&M Asia, and the creation of a new debt, due to Mr Hill, and quantified by reference to the subsidiaries loans debt.

141.  As well, the documentation makes it absolutely clear that any risk that there might have been in respect of non-payment of the overseas subsidiaries loans lay with A&M Asia.  By the ATA, A&M Asia purchased assets including the benefit of the Subsidiaries Loans.  They were defined as the loans due to RSM Corporate by the Overseas Subsidiaries as at the close of business on Completion Date.  By Clause 2.2 of the ATA, quite specifically, the risk in the assets passed to A&M Asia on the Completion Date.  Irrespective of the consequences of the creation of the new debt, the SLD due to Mr Hill, in the light of that clause it cannot be open to A&M Asia to contend that Mr Hill might carry any risk of non-payment by the Overseas Subsidiaries.

142.  That accords with the commercial reality of the situation.  There is no reason why Mr Hill, having left the practice should want to be concerned about collection of the underlying loans.  Upon leaving the practice, Mr Hill had given up all control over the subsidiaries, and consequently all control over the recovery of the outstanding loans. A&M Asia, on the other hand acquired RSM Corporate’s interest in the overseas subsidiaries.  They then could control the recovery of the outstanding loans.

143.  It is right that A&M Asia acquired only the Singapore subsidiary as the ATA acknowledges that RSM Corporate had agreed to sell its interest in both the Thai and Malaysian subsidiaries to two companies, Eagle Cosmos Holdings Ltd and Idealand Holdings Ltd respectively.  But the crucial and telling fact in this situation is that those two companies were owned by Messers Borrelli, Flynn and Poole.

144.  Again the factual matrix in respect of the expected recovery from the accounts receivable is relevant.  Excluding the LAIL Debt, the amount to be paid to Mr Hill was HK$101.4 million (US$13 million).  The case for A&M Asia was that that sum was to be paid entirely out of the accounts receivable.  The cross examination of Mr Hill sought to demonstrate that there was in fact a total of around US$16 million available in the accounts receivable.

145.  Mr Hill rejected the proposition, and it was inconsistent with the evidence of Mr Poole both in his affidavit and, initially, his evidence.  That evidence was consistent with Mr Hill’s assertion that the accounts receivable would amount to approximately US$13 million but that there was a risk that there would not be that much realised.  In the course of his evidence, Mr Poole appeared to realise the consequences of what he had said and changed his evidence to assert that the real accounts receivable were approximately US$16 million.  I prefer Mr Hill’s evidence to that of Mr Poole.

146.  If there was a risk that the accounts receivable might not to yield HK$101.4 million, it is entirely consistent to provide in the agreement for an additional source of payment to Mr Hill.  That additional source was the SLD and the FADD, to which Mr Hill could look if the accounts receivable were insufficient.  Any sums paid under those obligations reduced the amount of Mr Hill’s entitlement to the accounts receivable, by reducing the RSM Corporate Debt.  If the continuing partners have failed to require the insertion of a clause restricting the entitlement of Mr Hill to look to the SLD and the FADD, only if the accounts receivable were insufficient to meet the payment to which he was due, then they must accept the consequences of that failure.

147.  Finally, for the reasons set out in paragraph 153-164 below, I accept Mr Manzoni’s submission that the reality of the situation was that the directors of RSM Corporate, which included the continuing partners, did not consider the loans to be valueless over the longer term.  If, as I find, all four men consider there to be value in the overseas subsidiaries loans, then there is no reason at all why the benefit of those loans should not be assigned to A&M Asia in consideration for a new debt that was then assigned to Mr Hill.

148.  I accordingly conclude that the amount of the SLD is $20,127,885, the nominal sum owing by the overseas subsidiaries,  and subsequently quantified on the Completion Date. 

149.  Having reached that conclusion it is not strictly necessary for me to determine the technical meaning of net book value, or what, if the SLD had any value other than its nominal value, what that value was.  But it is appropriate that I should briefly state my conclusions in this respect.

The technical meaning of “net book value”:

150.  Mr Manzoni was happy to accept the technical interpretation of “net book value”, as that contended for by A&M Asia’s expert witness, Mr Mainz, namely the recoverable value of the loans.  Mr Manzoni’s central point in this respect was the date at which that recoverable value must be determined.

151.  First, it is clear that the date at which the value of the subsidiaries loans debts must be determined is the moment in time immediately before the assignment by RSM Corporate of those loans to A&M Asia.  That valuation must ignore the potential effect of the transactions which are about to be affected by the completion.  In particular it must ignore the fact that the loans by two of the subsidiaries were not assigned to A&M Asia.  I accept Mr Manzoni’s submission that the recoverable value of those loans will be the value the directors of RSM Corporate considered them was their recoverable value at the relevant time.

152.  In this respect, I prefer the evidence of Mr Best to that of Mr Mainz.  The difficulty faced by Mr Mainz in his valuation exercise is that he viewed the value on the point of view of a prospective purchaser of the debts, that is from the point of view of A&M Asia, and not the point of view of the directors of RSM Corporate, disregarding the disposal of the business.  The requirement that the overseas subsidiary loans be fixed in relation to the Completion Date means that any view taken by a purchaser of the value of the loans is irrelevant.

153.  If the expression “net book value”, as it is used in the context of the ATA does not mean the nominal value of the subsidiaries loans as ascertained in the books of RSM Corporate on the completion date, I would find that it means the recoverable value of the subsidiaries loans prior to and disregarding the transactions surrounding the retirement of Mr Hill.

The recoverable value of the SLD:

154.  There are a number of factors which point to the directors of RSM Corporate, prior to Mr Hill’s decision to retire, regarding these loans as substantially recoverable current assets.  There is nothing relevant that changed in respect of the business of RSM Corporate between Mr Hill’s decision to retire and the completion date.

155.  First, the loans were classified as current assets in the books of RSM Corporate.  Mr Mainz was obliged to accept that his value of the assets of zero is premised on their classification as current assets and his view that they were not recoverable within 12 months.  For the reasons given by Mr Best, I prefer the evidence of Mr Best.

156.  It is clear from the evidence of Mr Hill, and it was not challenged by any of the other witnesses, but the directors of RSM Corporate did not have any real concern as to the classification of the loans as current assets or otherwise.  I accept Mr Manzoni’s submission that in the preparation of the books of RSM Corporate the directors would have regard to the solvency of the business and recorded in the books the recoverable value of the loans that may have made.  Had they not consider the loans to be recoverable, they would not have recorded them as a current asset.

157.  Some weight may be placed upon the fact that in order to wind up RSM Corporate it was necessary for there to be completed a Certificate of Solvency pursuant to s 233(1) Companies Ordinance.  That certificate was signed by the various directors on 24 June 2005.  The statement of assets described the subsidiaries loans debt as “Amounts due by Subsidiaries $20,003,628”.  Having regard to the liabilities, unless overseas subsidiaries loans were valued at that sum there would have been a deficit, and the Certificate of Solvency could not have been completed.

158.  In an e-mail from Mr Borrelli to Mr Phlegm and Mr Poole, Mr Borrelli described the Malaysians subsidiary as a lemon and sought a reduction of the overseas subsidiaries loans by HK$2 million to reflect that.  Mr Manzoni put the submission in this way: had Mr Borrelli thought that the other loans were not collectable, and were worthless, he would have sought a reduction on a similar basis for them as well.  But he did not.  I accept that submission.

159.  In fact there was no agreement to reduce the overseas subsidiaries loans figure, the criteria by which the amount of the SLD would be determined, by $2 million or any other figure.

160.  The assertion that the Singapore loan was unrecoverable is entirely inconsistent with a warranty given by Messrs Borrelli, Flynn and Poole to A&M Asia at the time they sold A&M Asia to A&M USA.  The warranties included a warranty that the Singapore subsidiary was able to pay its debts and that the directors were not aware of any circumstance in which there was likely to be any default on any other contracts to which A&M Asia was a party.  First, that is a direct warranty that the Singapore debt was recoverable.  Second, at the time of the warranty A&M Asia itself was a party to that debt, having received the benefit of the debt by assignment from RSM Corporate.

161.  Next, and I consider that considerable significance can be placed upon this, the Chief Financial Officer of A&M Asia sent out to Mr Hill (amongst others) two schedules, in June 2006, both of which had been discussed with, and approved by Messrs Borrelli, Flynn and Poole.  The schedules recorded the amount of the overseas subsidiaries loan debt at approximately HK$20 million.  If, as now is asserted by A&M Asia, the true value of the loans were zero because they were irrecoverable those schedules would simply not have been approved.

162.  In respect of each of the three subsidiaries there is direct evidence that they were considered recoverable by Messrs Borrelli, Flynn and Poole.  The evidence of Mr Hughes, from the Thai subsidiary, or that up until he left A&M Asia, Mr Borrelli was seeking to agree a repayment schedule and did not want to allow what Mr Borrelli described as a “haircut” of the loan.  Unless he considered the loan recoverable Mr Borrelli would not have sought a repayment schedule.

163.  In relation to the Singapore subsidiary the directors of A&M Asia had presented a loan repayment schedule to the resident director, Mr Wong which would have had the loan completely repaid by December 2007.  The repayment schedule may have been optimistic but the mere existence of the terms presented shows that the three former directors of RSM Corporate considered there to be significant value in the loan when the schedule was presented on 22 July 2005.

164.  In relation to the Malaysians subsidiary Mr Poole sought to alter the balance sheet to protect the loan.  I accept Mr Manzoni’s submission that if the loan was considered worthless, then there would be no reason to protect it within the balance sheet.  Mr Flynn thought that a sale of the business would be good because it might repay the loan, with a small premium.

165.  The most significant factor of all however, is the uncontested evidence of Mr Hill that the calculation of the final capital account balance to be paid to Mr Kennedy on his departure from the RSM Corporate partnership in December 2004, was undertaken on the basis that the overseas subsidiaries loans were taken at nominal value.  If they were considered worthless at that time by the remaining four partners I have no doubt at all that the matter would have been taken up and Mr Kennedy’s interest reduced accordingly.  That it was not is a clear statement that the loans were considered by all to be of real value.

166.  I am left in no doubt at all that the contention that the overseas subsidiaries loans were worthless was not a view held by any of the partners of RSM Corporate at the relevant time.  I was, I suspect, a late invention, probably at the instigation of A&M USA, designed to retrieve the situation they found themselves in, having acquired a business only to find that very quickly two of the three prime fee earners left, leaving A&M USA questioning the purchase they had made.

167.  For these reasons I am satisfied that the recoverable value of the overseas subsidiaries loans as at the Completion Date, 30 June 2005, was exactly the sum recorded in the books of RSM Corporate, namely HK$20,127,885.

Earliest debtor first:  

168.  There is, as I understand it, no argument at all that Mr Hill was entitled to receive any sums recovered by way of outstanding accounts receivable of RSM Corporate, by A&M Asia, acting in its capacity as the agent of RSM Corporate pursuant to Clause 7.1(b) of the ATA.  The provision in dispute is Clause 7.1(c) of the ATA which reads:

“A&M Asia undertakes to act in good faith to pursue the accounts receivable diligently and not act or omit to do things that compromise any individual debt by more than $50,000 without (Mr Hill’s) prior agreement.  RSM Corporate and the other Parties shall procure that all collectable work-in-progress incurred by RSM Corporate as at the 30th June, 2005 shall be billed promptly after the Completion Date the Parties agree that collections of debtors from ongoing jobs will be applied on an earliest debtor first basis.”

It is the interpretation of the expression: “on an earliest debtor first basis” that is the foundation of the dispute.

169.  The definition of the word “jobs” is important in this context.  The ATA provides a definition:

“ ‘Jobs’ means all in completed or pending contracts, and engagements, mandates or orders for the provision of financial advisory services or otherwise relating to the Business and entered into all me or accepted by RSM Corporate so far as they are still subsisting as at the close of business on the Completion Gate including, but not limited to, those contracts particulars of which are set out in Part 2 of Schedule 1;”

170.  The issue arises where in respect of a particular client’s job, begun by RSM Corporate, and billed, including work-in-progress, to the Completion Date and consequently part of the accounts receivable, and then further work on the assignment being carried out after Completion Date, and that work is also being billed.  When a payment is made by the client, which payment will be necessarily made to A&M Asia, as the collecting agent, how are the funds to be applied.

171.  The case advanced by Mr Manzoni is that if there are a still monies outstanding by way of accounts receivable by RSM Corporate in respect of any particular job, continuing and now being attended to by A&M Asia, any payments made by the client in respect of that job must be applied first to the RSM Corporate accounts receivable, and only when all accounts rendered prior to the Completion Date are fully paid, may sums be applied to any accounts rendered by A&M Asia.

172.  The counter argument made by Mr Beresford was that if a payment was made by a client in respect of an invoice which A&M Asia had issued, even though that client may also, at the same time, have monies outstanding in respect of invoices previously rendered by RSM Corporate for work done on the same job prior to 1 July 2005, A&M Asia were entitled to keep those funds.  The effect of the argument is that if the client choses only to pay current A&M Asia invoices, and to ignore RSM Corporate accounts rendered, Mr Hill was not entitled to anything.

173.  The first submission made by Mr Beresford was that it was simply not possible to put together a client’s current account in both RSM Corporate’s accounts and A&M Asia’s accounts.  The submission plainly cannot stand by virtue of the definition of “jobs” and the provisions of Clause 7.1(c) both of which plainly contemplate that, for the purpose of recovery of any amounts outstanding by a client in respect of a job which began of RSM Corporate and is continued by A&M Asia, there would notionally be one current account.  That is the plain intention of the provision and the suggestion that it requires a blending of the RSM Corporate accounts and the A&M Asia accounts provides no answer to Mr Hill’s case.

174.  I reject too, Mr Beresford’s suggestion that this interpretation provides a guarantee to Mr Hill by A&M Asia of RSM Corporate’s accounts receivable. 

175.  First, the submission ignores the right of A&M Asia to compromise an individual debt up to the sum of HK$50,000, without consulting Mr Hill.  Second, it ignores the provision in Clause 7.1(c) that any compromise of debts above that will require Mr Hill’s agreement.  Upon production of proper evidence that an RSM Corporate account, otherwise payable to Mr Hill on recovery, was irrecoverable, Mr Hill would have to agree to the sum being written off.  It must be an implied term of the clause that in respect of recovery both parties would have to act commercially and reasonably.  Such an implied term would prevent Mr Hill unreasonably resisting the writing off of a truly irrecoverable account.

176.  The next submission made by Mr Beresford in this respect was that as, pursuant to Clause 2.1 of the ATA, A&M Asia had purchased the assets “free and clear from Encumbrances”, A&M Asia were not obliged to apply funds received from clients to RSM Corporate debts.  There is no substance in the submission.  It fails primarily because, by virtue of Clause 7.1(a) of the ATA, the RSM Corporate accounts receivable were not included in the sale and purchase of the business, and accordingly did not pass pursuant to Clause 2.1 free and clear from encumbrances.  In any event the definition of “Encumbrance” in the ATA makes it quite clear that it refers to third-party restrictions on the benefit of jobs it is entirely irrelevant to the present issue.

177.  I accordingly hold that the provision in clause 7.1(c) of the ATA which requires that “collection of debtors from ongoing jobs will be applied to an earlier debtor first basis” means of all monies received by A&M Asia (either directly or via an agent of A&M Asia) from any debtor in respect of which there is an RSM Corporate Account Receivable in relation to an ongoing job, (“job” as defined by the ATA), must be applied first to discharge the RSM Corporate Account Receivable, and then to any A&M Asia Account Receivable.

178.  It became apparent during the evidence that A&M Asia have not only been applying monies received from clients in relation to continuing jobs to the most recent A&M Asia accounts receivable, but have also been unilaterally making provisions by way of write-off, effectively reducing the amount of RSM Corporate accounts receivable, and preferring A&M Asia in respect of any funds received.

179.  That approach is entirely unjustified in terms of the documentation, and ought not to have only been disclosed at a very late stage in the trial, but a long time before the trial began.

180.  In this respect I refer to paragraph 167 and 174 above.  It is quite plain that there can be no write-off of any RSM Corporate accounts receivable by A&M Asia without the agreement of Mr Hill.  The course being adopted at the present time, clearly evidenced by Mr Poole and the documentation he produced, is in clear breach of Clause 7.1(c) of the ATA, both in respect of the undertaking to act in good faith, and the agreement not to compromise any individual debt by more than $50,000 without Mr Hill’s prior agreement.

181.  I am unable in these proceedings, as the evidence presently stands to resolve the issue other than to say that the course adopted by A&M Asia is plainly wrong.  It justifies the ordering of an account to be taken pursuant to O 43 r 2.

The subordinated distribution provision:

182.  The provision in the ATA relating to subordination of distributions is in the following terms:

“7.6 (a) Subject to Clause 7.6(b), not less than 80% of all the amounts paid howsoever to the A&M Asia Shareholders will be paid to LAIL until the Fixed Assets and Deposits Debt, the A&M Asia Working Capital Loan and the Subsidiaries Loan Debt have been paid in full.  Thereafter, subject again to Clause 7.6(b) not less than 50% of all the amounts paid howsoever to the A&M Asia Shareholders will be paid to LAIL until the LAIL Debt is discharged.

(b) The subordination provisions set out in Clause 7.6(a) shall not apply to the following amounts:

(i)  monthly drawings at no more than HK$335,000 per month per A&M Asia Shareholder;

(ii)  payment of Salaries Tax by A&M Asia; and

(iii) payments to the A&M Asia Shareholders of capital and interest advanced to A&M Asia by way of A&M Asia Shareholder Borrowings on commercial terms.”

183.  The evidence is that both Mr Borrelli and Mr Flynn, both of whom have retired from A&M Asia have been paid, or are entitled to be paid, US$800,000 by A&M Asia, upon their retirement.  It is the case for Mr Hill that he is entitled to receive, in partial payment of the sums due to him, 80% of those sums.  In simple terms, he contends that they fall within the expression:

“….all of the amounts paid howsoever to the A&M Asia Shareholders….”

184.  It will be recalled that arrangements were made in the ATA for the collection of RSM Corporate accounts receivable and RSM Corporate debtor recoveries to be applied in an order of priority pursuant to Clause 7.3 of the ATA. The terms of that priority included Mr Hill effectively funding the working capital requirements of A&M Asia for a period of 12 months up to 30 June 2006, and to a maximum amount of HK$50 million, by allowing the continuing partners to use the accounts receivable and debtor recoveries, that would have otherwise been paid to Mr Hill, for working capital purposes.  Any sum so applied was known as the A&M Asia Working Capital Loan.

185.  In the event the continuing partners did not rely upon that provision in the ATA to provide them with working capital.  Instead, US$2 million in working capital came from A&M USA.  It came in this way.

186.  A&M USA owned and controlled a BVI company called Alvarez & Marsal Asia (Holdings) Limited  (A&M Holdings).  For a consideration of US$2 million paid by A&M USA to the shareholders of A&M Asia, (Messrs Borrelli Flynn and Poole), the three shares held by them in A&M Asia were transferred to A&M Holdings, and, in consideration of the same sum of US$2 million, paid by them to A&M Asia Holdings, they were allotted shares in A&M Holdings. 

187.  This transaction was effected by way of first, an “Agreement for the Subscription for Shares in A&M Asia Holdings”, dated 30 June 2005, in which, for a consideration of the sum of US$2 million, Messrs Borrelli Flynn and Poole first transferred their shares in A&M Asia to A&M Asia Holdings, and then, upon payment of that same sum, subscribed for shares in A&M Holdings. 

188.  Then, by a Shareholders Agreement of the same day, made between A&M USA, Messrs Borrelli Flynn and Poole, and A&M Holdings, it was agreed that the proceeds of the subscription was to be applied by A&M Holdings to provide working capital for what was described as the “Group”, defined in the Shareholders Agreement as “A&M Holdings and its subsidiaries from time to time”.  By virtue of A&M Holdings acquisition of the shares of Messrs Borrelli Flynn and Poole in A&M Asia, A&M Asia had became a subsidiary of A&M Holdings.

189.  Simply, A&M USA paid Messrs Borrelli Flynn and Poole US$2 million, to acquire A&M Asia, which sum was immediately paid by Messrs Borrelli Flynn and Poole to A&M Holdings, (owned by A&M USA) for them to acquire an interest in the company which owned A&M Asia.  This sum was then applied by A&M Holdings to be used as working capital for A&M Asia.

190.  The relevant provision in the Shareholders Agreement is Clause 4.1 contained in the Shareholders Agreement.  It provides as follows:

“4  PROVISION OF FINANCE

4.1    Financing the Group

The working capital of the Group shall be financed:

(a) initially out of the proceeds of subscription for the A Shares, which shall be advanced by (A&M Asia Holdings) to A&M Asia as “Working Capital Loans” to meet its working capital requirement as and when necessary;

(b) interest on the Working Capital Loans shall be payable on a quarterly basis by A&M Asia to the (A&M Asia Holdings) at the prevailing prime lending rate for HK$ loans of the Hongkong and Shanghai Banking Corporation Ltd; and

(c) the Working Capital loans shall be repayable on demand.”

191.  Upon Mr Borrelli and Mr Flynn leaving A&M Asia, sums were then paid to them, presumably to re-acquire from them, the shares they held in A&M Holdings.  Accounting documents produced show that both Mr Borrelli and Mr Flynn were credited with US$800,000 each, payable to them by A&M Asia.

192.  The case for Mr Hill is that any sum so paid was an amount that was caught by Clause 7.6 of the ATA.  The case advanced by Mr Beresford was that the payments were payments to them of capital and interest advanced to A&M Asia by way of A&M Asia shareholder borrowings on commercial terms.  Thus, said Mr Beresford, the restriction on the application of the subordination of distribution contained in Clause 7.6(b)(iii), relating to the payments to A&M Asia shareholders of capital and interest advanced to A&M Asia by way of A&M Asia shareholder borrowings served to protect the payments from the subordination required (see paragraph 181 above).

193.  The primary expression in Clause 7.6(b)(iii) is that which defines the original source of the funds which are being repaid to the A&M Asia shareholders, that it is Messrs Borrelli Flynn and Poole.  That expression is “A&M Asia Shareholder Borrowings”.  The documentation establishes clearly that the original source of the funds which were credited to Mr Borrelli and Mr Flynn was the sum of US$2 million provided by A&M Holdings pursuant to Clause 4.1(a) of the Shareholders Agreement.

194.  While it is correct that that sum falls within the expression, “all the amounts paid howsoever to the A&M Asia Shareholders”, in Clause 7.6(a) of the ATA, it is also clear that it was a payment of the sum originally advanced to A&M Asia by way of A&M Asia shareholder borrowings, (the shareholder making the advance being A&M Holdings).  Prima facie therefore, as Mr Beresford argued, the borrowings are entitled to the protection of Clause 7.6(b)(iii).

195.  But that does not conclude the issue.  For the sum to be protected it must also be a sum borrowed by A&M Asia “on commercial terms”: see Clause 7.6(b)(iii). 

196.  Although this has been an internal transaction it is unarguable that the funds were provided on commercial terms.  Interest was payable by A&M Asia to A&M Holdings at a defined and commercial rate, and just as with a bank loan, the amount was repayable upon demand.  In all respects the terms upon which the working capital was provided were commercial terms.

197.  I accordingly conclude that Mr Borrelli and Mr Flynn are protected by Clause 7.6(b)(iii) of the ATA, and that neither Mr Borrelli nor Mr Flynn are liable to Mr Hill in respect of any part of those sums so paid or still due and owing to them by A&M Asia.

The appropriate orders:

198.  As part of his submissions Mr Manzoni before me a draft schedule entitled “suggested findings of fact/law”.  Mr Beresford made no submission in respect of that schedule.

199.  In my view the appropriate courses for the parties to consider the terms of this judgment and, if they are unable to come to an agreement on the terms of orders to be made I will hear them.  In any event, as already noted, this is an interim judgement only.  If, within the scope of the present proceedings, other issues between the parties cannot be resolved leave is reserved to bring the matter back before me for such further evidence and submissions as may be required.

Costs:

200.  All questions of costs are reserved.