NG WAI SANG AND ANOTHER v. HO PO YENG AND OTHERS

HCCW 456/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 456 OF 2005

______________________

______________________

______________________

______________________

D E C I S I O N

______________________

1.  On 20 March 2007, I gave judgment for the 1^st and 2^nd petitioners on their petition and ordered the 1^st respondent to 4^th respondents to purchase their shares in Hang Sang Engineering Factory Limited (“the Company”).  Leave was given to restore the hearing for consequential directions to be given to facilitate a purchase of the shares.

2.  The petitioners together hold 30% of the issued shares in the Company.  The Company has a wholly owned subsidiary in the Mainland, called Hang Sang Machinery (Shenzhen) Company Limited (“the Shenzhen Company”).

3.  I have found in favour of the petitioners that unfairly prejudicial conduct was made out in that they were wrongfully removed from their management positions in the Company and the Shenzhen Company and that the notices issued by the respondents to certain suppliers in 2003 had adversely affected the interests of the Company.

4.  It is not in dispute that notwithstanding the removal of the petitioners from their positions in the Shenzhen Company, they have continued to run that company.

5.  Both parties have submitted draft directions they seek from the court.  The 2^nd to 4^th respondents are now represented by the same team of lawyers as the 1^st respondent.

6.  There is no dispute that valuation of the shares should be made with no discount being applicable by reason of the petitioners’ minority shareholdings, and that the Company is to be valued on the basis it is a going concern.

7.  I have indicated to parties at the outset that I am not prepared to order the petitioners to hand over the business and assets of the Shenzhen Company and the factory before the sale and purchase of the shares is to take place, unless the respondents are prepared to make an interim payment on account of the purchase price.  I have power to make such an interim order under the wide jurisdiction conferred in section 168A (Ferguson v MacLennon Salmon Company Limited [1990] BCC 702; Re Clearsprings (Management) Limited [2003] EWHC 2516 (Ch) at paragraph 43).  Given that indication, the parties have reached an agreement on an interim payment of the purchase price to be made by the respondents to the petitioners.

8.  Mr Mok, SC initially sought an order that the 1^st respondent on the one hand and the 2^nd to 4^th respondents on the other hand be required to purchase the petitioners’ shares in the same proportion as the existing shareholdings of the respondents, so as not to disturb the shareholding structure between them.  He informed me that to simplify matters the respondents would no longer ask for that order.

9.  There is no material dispute on other directions sought on both sides.

10.  There are only 2 material issues I need to resolve.  One is the valuation date of shares, the other is the costs of the valuation exercise.

11.  On the valuation date, the petitioners proposed the date on which the order was made that the petitioners’ shares be purchased as the appropriate date, being 20 March 2007.  The respondents contended that the date of presentation of the petition being 16 June 2005 should be adopted.  I understand from Mr Chan, SC that the financial position of the Company and the Shenzhen Company has improved since 2005, due to the increase in value of real estate.

12.  Mr Chan submitted that prima facie an interest in a going concern should be valued at the date on which it is ordered to be purchased, subject to the overall requirement that the valuation should be fair on the facts of the particular case, citing Re London School of Electronics Limited [1986] Ch 211 at 224 and Profinance Trust SA v. Gladstone [2002] 1 BCLC 141 at 160d to 161b, paragraphs [60] and [61].

13.  Alternatively, Mr Chan submitted that if the court should decide the valuation date should be the date of presentation of the petition, the petitioners would seek interest on the value of their shares from 16 June 2005 to 20 March 2007, at the rate of 1% over the prime rate of Hong Kong and Shanghai Banking Corporation prevailing during the period, and thereafter at judgment rate.  Such interest awarded is not qua interest, but “a proxy to measure the increment in the value of the petitioner’s investment in the company appropriate to reflect the fact that the respondents’ interests had the use of the petitioner’s investment since the date of the petition”, in the situation where the date of presentation of the petition was adopted as the valuation date (Re Tai Lap Investment Company Limited [1999] 1 HKLRD 384 at 402J).  Mr Mok did not contend otherwise that quasi interest should be awarded if the petitioning date should be chosen.

14.  Authorities showed that there are 2 rival considerations which the court had to bear in mind in deciding what valuation date was fair on the facts of the particular case.  One is that the shares should be valued at a date as close as possible to the actual sale so as to reflect the value of what the shareholder is selling.  The other is that the date of the petition is the correct starting point, being the date on which the petitioner elects to treat the unfair conduct of the majority as in effect destroying the basis on which he agreed to continue to be a shareholder, and to look to his shares for his proper reward from participation in a joint undertaking, the valuation being adjusted to take account of unfair conduct which has depreciated the value of the shares (Profinance Trust, supra. at 153a and 153h to i, paragraphs [33] and [35]; see also Re Sparkle Consultants (HK) Limited [2002] 4 HKC 107 at 115D to 116C, paragraphs 31 to 33).

15.  Having reviewed the authorities exhaustively over the past 15 years, the English Court of Appeal in Profinance Trust came to the view that the general trend would appear to support the proposition stated in London School of Electronics, which I have mentioned earlier, as the starting point, whilst recognising that there are many cases in which fairness requires the court to take another date.

16.  Mr Chan has drawn my attention to my findings in the judgment that since 1996, most of the production and manufacturing processes of the Company had been shifted to and undertaken by the Shenzhen Company and notwithstanding the petitioners’ removal from their positions in the Company and the Shenzhen Company, they have continued to run the Shenzhen Company.  It was also found in the judgment that all along, the petitioners have played an active role in running the Shenzhen Company.  Mr Chan submitted that if the shares are valued at the date of the petition in 2005, it would not be fair as the petitioners would in effect be unable to reap the benefits of their work in running the Shenzhen Company over the past 2 years.

17.  This would appear to be the converse of the situation in London School of Electronics.  There, notwithstanding the date of order was stated to be more appropriate as the valuation date than the date of the petition as a general rule, the court directed that the shares should be valued at the date of the petition, on the ground that since the presentation of the petition, the directors who remained with the company had through their efforts made achievements for the company which owed nothing to the petitioner.

18.  Mr Mok submitted for the respondents that the petitioning date should be chosen because the respondents have not been given information or accounts of the Shenzhen Company since December 2003.  Although more recent accounts for the year ended December 2006 were produced by the petitioners to the respondents shortly before trial, the respondents have not had an opportunity to verify these unaudited accounts.  They claimed they have no way of telling what had happened to the Shenzhen Company since December 2003.

19.  I fail to see why that should be a ground for choosing a valuation date in 2005 instead of a date in 2007.  Regardless of whichever of the 2 dates is chosen, it would be within the period when the respondents have lost control of the Shenzhen Company and, according to them, they would not have been able to verify the financial position of this entity any way.  Mr Mok cited my decision in Active Team International Limited, HCMP No. 2399 of 2004, 14 June 2007, paragraphs 225 to 230, in which I chose the petitioning date instead of the date of the order as the valuation date of the shares.  The petitioning date was chosen mainly for two reasons: all audited accounts up to the date of the petition have been prepared and placed before the court, the accounts as at that date were more reliable and there was lesser risk of artificial adjustment by either party; and it would not be fair to adopt a later date as the respondents should not enjoy the profits due to the hard work of the petitioner in the subsequent years.  The present situation is different from Active Team.

20.  Mr Mok drew the attention of the court to the accounts of the Shenzhen Company for the year ended December 2003 which showed an asset position of $83 million and the accounts for the year ended December 2006 which showed an asset position of $40 million.  I do not understand what relevance the decline in asset value would have to the choice of the valuation date in the present context.

21.  Mr Mok further submitted that the petitioners have no business maintaining control over the Shenzhen Company so they cannot be heard to say that they should benefit from their work in that company after December 2003.

22.  The finding in the judgment was that the petitioners were wrongfully removed from their management positions in the Company and the Shenzhen Company and that the petitioners have held on to their positions notwithstanding they were formally removed.  I do not think it would be fair to exclude the petitioners from sharing in the profits attributable to their work in running the Shenzhen Company.

23.  I have a discretion to exercise in fixing the valuation date, to do what is just and equitable between the parties.  I am satisfied in this instance I should choose the date of the order as the valuation date.

24.  Mr Chan has asked the court to award quasi interest even if the later date is chosen.  I decline to do so, as I do not envisage the valuation to be a drawn-out exercise.  Besides, the petitioners would receive interim payment of the purchase price on account as provided below.

25.  It is not necessary to spell out in the order that the valuer is to act as an expert not an arbitrator.  The valuer, in making the valuation, is relying on his own expertise in making the award.  He should of course give reasons for his determination.

26.  Lastly, I turn to the question of the costs of the valuation.  The petitioners contended that costs should be borne by the 1^st to 4^th respondents jointly and severally.  The respondents’ position was that costs should be borne equally by the petitioners on the one hand and the 1^st to 4^th respondents on the other hand.

27.  Mr Mok pointed out that prior to the presentation of the petition, the parties had attempted to negotiate a buying out by the petitioners of the respondents’ shares and they were willing to part company.  In the event that a reasonable offer were made so that court proceedings would not be necessary, the parties would be expected to share the costs of the valuation exercise.  He submitted that the same should apply even though negotiations had failed and proceedings were brought, the costs of valuation should be regarded as separate from the costs of the proceedings.  I do not agree with his submissions.  The petitioners have to come to court to get a buy-out order.  Mr Chan informed the court that the petitioners had already incurred expenses in a valuation of the shares in the negotiations which broke down.  Costs of the valuation to be carried out form part of the costs of the proceedings and should be borne by the 1^st to 4^th respondents, jointly and severally.

28.  I make the following orders:

(1)	The 1st to 4th respondents do purchase or procure the purchase of the 20 and 10 ordinary shares of $10,000.00 each in the capital of the Company presently registered in the names of the 1st and 2nd petitioners respectively at a price to be fixed by such valuer (“the Valuer”) being a certified public accountant, as may within 14 days hereof be agreed by the petitioners and the respondents, or failing such agreement as may be appointed by the president for the time being of the Hong Kong Institute of Certified Public Accountants upon the application of either party with or without the consent of the other.
(2)	The Valuer is directed to value the petitioners’ shares by reference to the assets, profitability and future prospects of the Company and the Shenzhen Company as at 20 March 2007 (being the date on which the shares were ordered to be purchased) and without discount for the fact that the petitioners’ shareholding is a minority shareholding.
(3)	The petitioners and the respondents do provide to the Valuer all books, accounts and documents of the Company and the Shenzhen Company relevant to the valuation of the petitioners’ shares within 14 days from the date of the appointment of the Valuer.
(4)	Each party is entitled, solely for the purpose of making representations to the Valuer, to inspect the relevant documents in the possession, custody or control of the other parties or the Valuer, and take copies thereof, during normal office hours.
(5)	Leave to the petitioners and the respondents to make submissions in writing to the Valuer within 21 days of the provision of any documents by the petitioners or the respondents under paragraph (3) hereof (whichever is later) and a copy of any submission made to the Valuer is to be served on the other party at the same time.
(6)	Leave be granted to the petitioners and the respondents to make further submissions in writing to the Valuer, in answer to any submission served by the other party under paragraph (5) hereof within 7 days of service of the same.
(7)	Within 7 days of the service of the further submissions in paragraph (6) hereof, the 1st to 4th respondents do pay the 1st petitioner $2 million and the 2nd petitioner $1 million as interim payment on account of the purchase price to be paid for their shares.  Upon the payment of such sums, the petitioners shall hand over to the 1st to 4th respondents or their authorised agents all premises including the factories of the Shenzhen Company located at 深圳市寶安區松崗鎮潭頭村第一工業區 and 深圳市寶安區松崗鎮潭頭村坡仔第二工業區 (“the Factories”), equipment, machinery, assets and all other chattels and properties that are owned, operated, rented by, or otherwise used in any way whatsoever by the Company and/or the Shenzhen Company, and for such purpose shall give to the 1st to 4th respondents or their authorised agents or solicitors all the keys, access cards, documents, books, records of, and items pertaining to, the Company and/or the Shenzhen Company in connection with the access to or use of any property, premises, equipment, machinery, or assets that are owned, operated, rented by, or otherwise used in any way whatsoever by the Company and the Shenzhen Company (including the Factory) and including all items set out in the schedule to the respondents’ draft directions, which are in the possession, custody or control of either of the petitioners or the Shenzhen Company.
(8)	The respondents do pay the petitioners the balance of the purchase price of the petitioners’ shares within 28 days from the publication of the valuation of the petitioners’ shares by the Valuer.
(9)	Upon full payment of the purchase price, the petitioners are to transfer their shares in the Company to the respondents free of all charges, liens, incumbrances or claims of whatsoever nature.
(10)	The costs of the petitioners, including any costs reserved and the costs of this application shall be borne by the respondents jointly and severally to be taxed if not agreed.
(11)	The costs of valuation of the petitioners’ shares shall be borne by the respondents jointly and severally.
(12)	There be liberty to all parties to apply for further orders or directions generally.