LAM YUK HON v. KOOK TAI WAI

HCCW 1138/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 1138 OF 1999

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D E C I S I O N

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1.  This is an application for further directions as to the manner in which the valuation exercise in respect of Ruby Arts Jewellery Limited (“Ruby Arts”), the company which is the subject of these winding-up proceedings, is to be taken forward or carried out.

2.  The brief history to this application is as follows.  The proceedings concern a petition pursuant to sections 168A and 177(1)(f) of the Companies Ordinance (Cap. 32), presented by the Petitioner, Mr Lam Yuk Hon (“Mr Lam”), against the Respondent, Mr Kook Tai Wai (“Mr Kook”), in respect of the alleged exclusion by Mr Kook of Mr Lam from involvement in the business of Ruby Arts since about 1999 onwards.  Following some correspondence prior to the proceedings being commenced, the petition was presented in early 2000.  The matter then proceeded in the normal way through exchange of evidence and discovery of documents.  The proceedings came on for trial before Madam Recorder Leong, S.C. in January 2003. 

3.  On, the first day of trial, the parties informed Madam Recorder Leong that they had reached a settlement.  The proceedings were then settled by way of a Tomlin order which provided for a stay of the proceedings, save for the purpose of carrying into effect the agreed terms which were contained in the schedule to the order.  The terms contained in the schedule provided, in effect, for the appointment of independent accountants to carry out what was described as an audit of the company’s financial affairs from the period from the last available management accounts dated 31 March 1998 down to 31 December 2002, the date at which it was agreed that the company should be valued for the purpose of what was effectively an agreed buy-out by Mr Kook of Mr Lam’s 45 per cent interest in the company.

4.  The Tomlin order set out, in some detail, various bases on which the valuation was to be carried out.  In particular, it identified a number of types of bank accounts and other matters relating to one or two related companies in relation to which assumptions or determinations were to be made by the independent accountants for the purposes of the valuation of the company as at 31 December 2002. 

5.  The Tomlin order also contained a liberty to apply.  However, that was limited to applications to be made for the purpose of putting the Tomlin order into effect.  The first application made pursuant to the liberty to apply was in March 2004 when the matter came before me because the parties had been unable to agree on the identity of the independent accountant to be appointed.  That application sought the appointment of PriceWaterhouse Coopers (“PWC”) to be appointed, and also sought that provision should be made as to the basis on which they were to be paid.  In the event, it was not necessary to make any order as to the latter part of the application because the schedule of terms to the Tomlin itself provided that the costs of the exercise to be carried out by the independent accountant were to be met out of the assets of the company. 

6.  At that time, I made an order appointing PWC as the independent accountants tasked with the carrying out of the roles envisaged by the schedule to the Tomlin order, and the parties thereupon entered into an agreement with PWC for PWC to take up that role.  Unfortunately, PWC has been unable to produce a valuation of the company as at 31 December 2002 in the timeframe originally envisaged of three months.  The reason for this failure appears to be twofold:  first, that PWC does not consider that it has sufficient information in order to enable it to carry out this task in the way that it had originally intended to go about it; and secondly, because since about May or June 2004, PWC has been insisting on payment of arrears of fees that it has incurred (and for which it has not taken sufficient payments on account) but these have not been paid. 

7.  There has been considerable debate as to the reasons why PWC has been unable to progress with the matter and complaints have been made on both sides with Mr Kook and Mr Lam essentially blaming each other for the hold-up in the progress of the valuation to be carried out by PWC. 

8.  However, it seems to me that, at the end of the day, the difficulties have been caused, first, by the absence of documentation that would enable PWC to proceed with the matter in the manner in which they had initially hoped.  It seems fairly clear from the correspondence that PWC were initially hoping to be able to carry out a complete reconstruction of the books of the company for the period from 31 March 1998 from 31 December 2002 on the assumption, which has unfortunately proved to be ill-founded, that there was available somewhere sufficient in the way of documentation and accounting records to enable that task to be carried out. 

9.  It has become apparent that that is not the position and that the accounts and accounting records of the company are in a state of some disarray.  Whoever bears the responsibility for the lack of such documentation, it seems to me that, at the end of the day, the position is that PWC are required to come up with a valuation of the company on the basis of such material as is available.  It may be that if the material available is less than complete, as it appears to be, that that valuation will be less than perfect.  But that, it seems to me, is a matter that cannot be avoided.

10.  In the circumstances, it seems to me that the appropriate way forward would be, subject to dealing with the question of PWC’s fees and their continued participation in the project, for PWC to ascertain what information is available.  For this purpose consideration will have to be given to a number of sources of information.  The first is the information is already available.  This clearly is available to PWC.  The nature and extent of it has been set out in various letters and documentation that have been produced to the court. 

11.  In so far as this information is insufficient, it should be possible for PWC to identify the sort of further information that they require.  It seems that they have attempted to do so to some extent in the past.  They have, for example, suggested that information may be obtained in relation to the company’s bank accounts and its expenditure from such accounts from the banks with which the company holds accounts.  In relation to the company’s stocks of jewellery from time to time, it has been suggested that information may be available from independent third-party sources such as the Hong  Kong Jewellery Manufacturers Association which may throw light on the level of the company’s stocks and the jewellery that it had in its possession between the dates in question. 

12.  It may be that there are other items of information that can be obtained from third-party sources as well.  Once these sources are ascertained or identified, it seems to me that the appropriate course would be for the parties to co-operate in giving such authorisations as are necessary to enable the information to be obtained from such sources. 

13.  A final source from which information may be available, would seem to be the parties themselves.  It seems to me that it would be perfectly open to PWC to seek such information as it thinks necessary from the parties in relation either to general matters or specific transactions which it identifies as a result of its review of the documentation that is available.  I see no reason why PWC should not seek such information from the parties, if necessary setting a time limit for the provision of such information, following which it should simply carry out the valuation on the basis of the information available.  In carrying out that valuation, I note that paragraph 9 of the schedule to the Tomlin order entitles both parties to make representations to PWC as to the approach to be adopted in relation to the valuation and I see no reason why, on the basis that the parties are aware of what information is available and what information is not available, they cannot make representations to PWC as to the appropriate approach to be adopted in their reconstruction of the accounts and valuation of the company.

14.  Armed with the information that is ultimately available after the various sources of information have been utilised and the benefit of submissions of the parties (which should be provided through their respective lawyers rather than personally, since that would be seem to be a more efficient course to adopt), it seems to me that it will then be for PWC to work out a valuation of the company as at 31 December 2002 identifying where appropriate the assumptions on which they have proceeded and giving an explanation which sets out their reasons for adopting a particular approach or assumption in any given situation.  That should produce a valuation of the company which will enable the balance of the Tomlin order to be carried into effect. 

15.  There has been some discussion in the course of today’s hearing as to various other matters that are, in my view, of peripheral relevance to the valuation exercise.  The first is the question of whether or not the company was in fact in operation as at the end of 2002. 

16.  Mr Chan, who appears for Mr Lam, has suggested, with some justification, that the agreement on Mr Lam’s part to a valuation as at 31 December 2002 must have been premised on the basis that the company was still in operation as at that date.  Certainly, there does not appear to be anything in the evidence filed in the course of the petition proceedings that suggests in terms that the company had ceased to operate at some particular point in time prior to the settlement, although there do appear to be statements in Mr Kook’s affirmations and evidence to the effect that the carrying on of the company’s business had been rendered difficult or more complicated by the approach that had been adopted by Mr Lam following the breakdown in the relationship between them.

17.  But be that as it may, it does not appear that there is any clear statement that the company was no longer in operation as at the time that the proceedings had reached trial.  It was therefore, said Mr Chan, something of a surprise for Mr Lam to learn in about mid-2003 that the company was said to have ceased trading as from about April 2000, although, in more recent evidence, Mr Kook has suggested that the cessation of trading was in mid-2000. 

18.  At the end of the day, it does not seem to me that this is a matter that is critical to the valuation of the company as at December 2002.  If the position is that the company has, in fact, ceased trading as at mid-2000, one would expect that there would be some information as to its activities up to that point and thereafter a lack of information as to further activities, on the basis that there were none thereafter. 

19.  However, this is I think at the end of the day, a matter which PWC will have to resolve in the context of their valuation of the company as at 31 December 2002.  If the company had, in fact, ceased business in about the middle of 2000, then there should be little change in its financial position between mid-2000 and December 2002.  But whatever the position, PWC are required under the terms of their appointment to do the best they can on the material available and come up with a valuation of the company as at 31 December 2002. 

20.  A second matter which was canvassed in the course of today’s argument was that the application that is before me today was taken out by a summons which sought, as what was apparently the primary form of relief, a summary valuation of the company at a stated value.  In the event, that application (which Mr Chan described as somewhat ambitious) was not seriously pressed by Mr Chan, either at the hearing on 10 March 2005 or at today’s hearing. 

21.  It seems to me that there is no basis on which the court could realistically be expected to carry out a summary valuation of the company.  First of all, this is contrary to the terms of the Tomlin order which embody the agreement between the parties.  Until such time as the parties, or one of them, seeks to contend that that agreement is no longer binding, it seems to me that both parties are obliged to carry out or to proceed with the implementation of the terms of the schedule to the Tomlin order.  In any event, even if it had been appropriate to consider such an application, it seems to me that the material before the court is not such as to permit the court to make any realistic assessment on a summary basis of the value of the company as at 31 December 2002. 

22.  I therefore do not consider that it would have been appropriate for me to make an order in terms of paragraph 1 of the summons.  In fairness to Mr Chan, it was not a course which he pressed. 

23.  At the hearing on 10 March 2005, I indicated to Mr Chan that it would be helpful if thought could be given to the directions that were required since, at that stage, it seemed that part of the hold-up was because there were possibly third-party sources of documentation that would be of assistance to PWC in their valuation exercise which had not been as yet explored, but which might be available if the parties were to co-operate in making the necessary requests for them.  However, it has transpired from the evidence which I have heard from Mr Parton and Miss Khoo of PWC today that the position is that PWC have not, in fact, progressed with this matter since about June or July 2004 for a number of reasons, one of which has been that their fees have remained unpaid since that time. 

24.  That being the case, it seems to me that it would be difficult at this point to identify specific items of information which should be provided or which should be sought in order to enable PWC to carry out their task.  It seems to me, in the circumstances, that the appropriate way forward is for PWC to consider the information now in their possession, ask the parties for such further information as they require, proceeding on the basis that Mr Kook clearly says now - if he has not already said so - that he has no further information in his possession. 

25.  On that basis, it should be possible for PWC to identify the third-party sources from which useful documentation might be obtained and for the parties to co-operate in ensuring that that information is provided as promptly as possible. 

26.  Mr Chan suggested, as an alternative, that Mr Kook should be required to give discovery on affidavit as to various classes of documents which, it was said, would be of assistance to PWC in their valuation exercise and which would also throw light on various allegations that have been made by Mr Lam in relation to these proceedings.  With respect, at this stage, it seems to me that it is not possible to say whether or not such information will, in fact, be necessary for PWC’s purposes. 

27.  The provision of an affidavit as to whether or not Mr Kook has in his possession certain classes of documents and, if not, an explanation for his failing to have them, is not a matter that I consider is likely to advance PWC’s task.  It seems to me that what is going to advance PWC’s task is the obtaining and production of such information or documentation as can reasonably be obtained from third parties.  Mr Kook has said in his affirmation dated 9 March 2005 that he has no further documentation in his possession in relation to these proceedings.  Mr  Parton and Miss Khoo stated, when giving evidence today, that that had in fact been Mr Kook’s position since about May or June 2004.

28.  As to this, Mr Chan has drawn my attention to various items of correspondence which suggest that PWC may have thought that there was some further documentation available which might assist them in carrying out a valuation exercise, such as a letter from PWC of 6 July 2004 in which PWC set out an alternative basis on which the valuation exercise could be carried out which appeared to envisage the existence of certain types of documentation which had not previously been provided.  It is also fair to say that in some of the correspondence from those then acting for Mr Kook in response to requests for documentation made by PWC, that Mr Kook’s then representatives did not suggest that there was no further documentation at all to be provided but asked instead for clarification with a view to seeing whether Mr Kook was in a position to assist further. 

29.  It may be that the difference between the two is that Mr Kook had indicated to Mr Parton and Miss Khoo in May or thereabouts last year that all of the information and documentation requested had been supplied, but was not making any particular representation as to whether there was any other relevant documentation in his possession.  However, it is not possible at this stage to come to a firm view as to that because I do not know the terms of any requests made to Mr Kook for documentation and the terms in which he responded to such requests.  In any event, I think it fair to note that as far as Mr Lam and Mr Chan are concerned, that the first that they could possibly have known that Mr Kook was saying that he had no further information to supply would be from Mr Kook’s affirmation of 9 March 2005.  But it seems to me that, at the end of the day, to order Mr  Kook to make an affirmation of discovery is not a matter that would, in any meaningful way, advance the implementation of the Tomlin order.  As I have said, what will advance the implementation of the Tomlin order and the exercise to be carried out by PWC will be the supply of such information as is available and the co-operation of the parties in obtaining such information from third parties where that is possible.  

30.  It therefore does not seem to me that it would be appropriate at this stage to order Mr Kook to make the affirmation that is sought. 

31.  So far as the information to be supplied or obtained from third parties is concerned, as I have said, it seems to me that the appropriate course would be for PWC first to identify that information or, if the parties consider that there is such information which can usefully be obtained, they can suggest such sources to PWC.  If PWC take the view that the suggestions are useful ones, they will, no doubt, pursue them by asking the parties to co-operate in obtaining that information. 

32.  The final direction that was sought today was an application on behalf of Mr Lam for an interim payment in the sum of $1 million in respect of the anticipated purchase price for his shares on completion of the valuation exercise by PWC.  Mr Chan suggested that this was an application that should be acceded to having regard to the very long delay that had taken place since the commencement of these proceedings and, indeed, since their settlement by way of the Tomlin order in January 2003, just over two years ago.

33.  While I have a great deal of sympathy for the position in which Mr Lam finds himself of having nothing to show for this litigation despite the fact that it was commenced some five years ago and settled some two years ago, it seems to me that there are real difficulties in the way of my making the order that is asked for. 

34.  The only case that I was referred to in which an order for interim payment in respect of a buy-out order was made was the Scottish case of Ferguson & McLennan v Salmon & Company Limited [1990] BCC 7032.  In that case, the Scottish court ordered that an interim payment be made in respect of the purchase price of shares which there had been an agreement that the respondent should purchase from the petitioner in a company that was the subject of the equivalent of a section 168A petition.  However, it seems to me that the position here is very different form that which obtained in the Ferguson & McLennan case.  In that case, the position was that the agreement that had been reached involved the court in making an assessment of the value of the company’s shares.  An assessment was in fact made by the court and therefore the company shares had been valued.  The valuation of the company shares was that each share in the company was worth £3.05.  This valuation would appear to have been reached following the consideration by the court of evidence and submissions from both sides.  Evidence filed by the respondents suggested that the value of each share in the company was no more than £1.10.  Following the court’s determination, the respondent to the petition appealed, but only as to the valuation of the company’s shares.  It was in that situation that the court made an order for interim payment on the basis that the shares of the company were (even on the respondent’s case) worth at least £1.10 and ordered that an interim payment on that basis be made to the petitioner. 

35.  In that situation, there had been a valuation of the company shares and there was an acceptance by the respondent that the shares had a minimum value of £1.10 pence.  Given that that was the case, it was apparent that, even if the appeal were wholly successful, the consequence would be that there would be an order that the shares be purchased at the price of £1.10 pence per share.  In those circumstances, it is not surprising that the court felt that it was appropriate to order an interim payment on that minimum basis pending the hearing of the appeal. 

36.  The position here, unfortunately for Mr Lam, is rather different.  Under the terms of the Tomlin order, there is no obligation to purchase the shares until such time as the valuation has been completed.  It is only when the valuation has been completed that Mr Kook will be obliged to purchase Mr Lam’s shareholding in the company on the basis of the value of the company as found by the independent accountants.  Until that is done, it seems to me that Mr Kook is not obliged to make any payment to Mr Lam.

37.  Even if one were to take the view that it would be appropriate for some form of interim payment to be made if it were possible to come to the view that the company has some minimum value, the fact is that at this stage there is not before the court any clear evidence as to what that minimum value might be.  If there had been such evidence, it might be necessary to consider whether it is appropriate to order an interim payment.  But in the light of the terms of the Tomlin order, I have serious doubts as to whether or not it would be open to the court to make an order for an interim payment in this case. 

38.  In those circumstances, it seems to me that I am not in a position to make any such order and I therefore decline to do so.  In the result the outcome is that I will make no order on the application for directions.  That is not to say, however, that the application has not had some useful effect in that it has, I think, had the effect of at least focussing the parties’ minds on the steps that need to be taken to take this matter forward.  It may also be that the reasons which I have briefly indicated above will be of some assistance when it comes to indicating to PWC the basis on which they should be proceeding with their task as independent accountants.  It therefore seems to me that the application has at least had that benefit. 

39.  I therefore make no order on the application and will now hear the parties on the question of the costs of the application itself.