CHAN SEUNG BUN v. WONG KING FAI JOE AND ANOTHER

HCCW 227/2018

[2021] HKCFI 3572

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 227 OF 2018

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J U D G M E N T

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1.  This the substantive hearing for determination of the market value of Top “E” Trading (HK) Limited (“Company”).

2.  The determination stems from the order dated 26 August 2021 which recorded an agreement reached between the Petitioner (“P”) and the joint executrices of the estate of the 1^st Respondent (“R1”) (together “PRs”) whereby P agreed to sell his 250,000 shares in the Company (equivalent to 50% of its issued shares) (“Shares”) to PRs on the bases that (1) the Company is a going concern, (2) without any discount for the minority holding, (3) the date of the valuation is close to the date of actual transfer of the Shares, and (4) the value of the Company will be determined by the Court after considering the reports of the single joint expert and the submissions and cross-examination of the expert by the parties (“Agreed Bases”). 

A.  Factual background

3.  P and R1 were co-founders of the Company, which was incorporated under the former Companies Ordinance (Cap. 32) on 11 November 2013.  Until the demise of R1 on 4 January 2021, the only directors of the Company were P and R1 and each of them held 50% shareholding.

4.  From 1998, P, R1 and another person had been carrying on the business of manufacturing chocolate labels, plaques, figures and decorations for sale to cake shops and food companies in Hong Kong (“Business”) through a partnership.  In August 2000, the other person ceased to be a partner, and P and R1 continued to carry on the Business as equal partners (“Partnership”).

5.  The Business had been successful and some real properties in Hong Kong were acquired in the names of P and R1 (as tenants in common) for the purpose of expanding and carrying on the Business.  There is a dispute as to whether a Mainland company and its factory which had been used by the Company to manufacture products required for the Business belonged to the Partnership.   

6.  As at the financial year ended 31 March 2013, the retained profits of the Partnership reached $5.6 million and the annual profits exceeded $910,000.  P and R1 agreed to incorporate the Company to take over the Business from the Partnership.  Since 1 January 2014, the Company has been carrying on the Business and the Partnership has ceased to carry on any business. 

7.  There is no dispute that the Partnership was dissolved prior to commencement of these proceedings.  The only dispute is the date of dissolution. R1 contends that it was dissolved on 31 December 2013 whereas P contends that it was dissolved on the date P commenced the “HCA” (as defined in §14 below).   

8.  There is no dispute that the Company is a quasi partnership established on the basis of the mutual trust and confidence between P and R1, and that each of them had equal right to participate in the management of the Company and all major decisions would be made by them jointly.   

9.  The Business has always been profitable.  The profits reached its peak in the financial year ended 31 March 2019 with over $6.8 million of net profits. 

10.  Until March 2018 when dispute arose between P and R1, the Company had declared and paid dividends to the shareholders out of the profits made by the Company.  Each of P and R1 received monthly salary of around $80,000.

11.  In March 2018, P complained about the conduct of the affairs of the Company and offered to sell the Shares to R1 for $35 million. 

12.  In April 2018, R1’s solicitors stated that “the mutual trust and confidence between [P] and [R1] over the operation and management of the Company had been broken down irretrievably” and made a counter-offer to buy the Shares at $20 million. 

13.  Despite the clear indication of the parties in correspondence that R1 was willing to buy the Shares from P, it appears that no further step was taken by the parties to come to an agreement on the price of the Shares. 

14.  On 8 August 2018,  P commenced HCA 1842/2018 against R1 to seek an account of the Partnership’s assets and business (“HCA”).  By order dated 5 December 2018, HCA was stayed pending determination of these proceedings. 

15.  At that stage (if not before), it must be clear to the parties that the mutual trust and confidence between P and R1 no longer existed, and that there should be a parting of way between them.  The only issue which divided the parties was the price at which R1 should buy the Shares.

16.  Nevertheless, by the petition presented on 16 August 2018, P sought an order to wind up the Company. 

17.  Meanwhile, since 1 August 2018 P has effectively stopped working for the Company. 

18.  It was only until the petition was re-amended on 23 July 2019 that P sought, as an alternative relief, that R1 do purchase the Shares at a fair value to be determined by the Company.   

19.  Despite R1’s own case, as pleaded in the amended Points of Defence filed on 14 August 2019, that the mutual trust and confidence between P and R1 had ceased to exist and that there had been a deadlock in the management of the Company, R1 contended that P is not entitled to any relief claimed in the petition.

B.  Appointment of Expert

20.  At the CMC held on 14 November 2019, Harris J gave directions on discovery and filing of witness statements  and “a joint expert report / separate expert report(s) to evaluate the value of the Company [as] if the Company is sold as a going concern (without the need of taking into account the value of the assets, business, and business opportunities claimed to be in dispute).  The parties shall, on or before 12^th December 2019, report to the Court on (a) whether to retain a joint expert or separate experts; or (b) the date of completion of the said expert report(s).” 

21.  The parties subsequently agreed to appoint Ms Jocelyn Chi of Borrelli Walsh Limited to be the expert (“Expert”) in assessing the value of the Company.  The Expert made a Report dated 25 September 2020 (“1^st Report”) in which she assessed the value of the Company as at 31 March 2020 at a range from $23,326,357 to $27,023,335.  

22.  Thereafter, the parties sought a number of extension of time to comply with the remaining directions and the last date for filing the witness statements was extended to 15 January 2021 .

C.  Interlocutory skirmishes

23.  Following R1’s demise, P became the sole director of the Company. 

24.  P issued a summons dated 17 May 2021 seeking an order to wind up the Company on the just and equitable ground “in that upon [R1]’s passing away on 4^th January 2021, [P] being the only surviving member of the Company, has decided that the Company be wound up by the Court” (“P’s Summons”).  In his 4^th affirmation filed in support of P’s Summons, P said that he “no longer want[s] to run the Company nor sell any shares to any person.  Instead, [he] want[s] to wind up the Company and put an end to this Petition expediently for the purpose of saving costs and court time for trial”.

25.  In response, PRs issued a summons dated 31 May 2021 for leave to join as party to the petition, and to carry on the proceedings on behalf of R1’s estate (“PRs’ Summons”).

26.  At the hearing of above summonses on 16 June 2021, this Court observed that:

(1)  P’s Summons is misconceived.  If P only seeks to rely on the demise of R1 as the basis for seeking a winding up order against the Company, he should amend the petition by deleting all other allegations pleaded therein. 

(2)  R1’s estate clearly has interest in the Company, and PRs have already indicated that they oppose the winding up of the Company.  In any event, it is unlikely that the Court would order the Company to be wound up as such order would have the effect of destroying the value of the Business, which is not in the interests of P or R1’s estate.

(3)  The Company should register the transmission of the shares from R1 to PRs in accordance with s.158 of the Companies Ordinance (Cap. 622) (“CO”)[1]. This is because PRs were appointed as joint executrices and trustees of R1’s estate pursuant to the will dated 14 October 2020.  It is well established that where an executor is appointed by a will, he derives title from the will and the property of the deceased vests in him from the moment of the testator’s death. An executor before he proves the will, may do almost all the acts which are incident to his office, except some which relate to litigation.  In particular, an executor may seize and take into his hands any of the testator’s effects (Williams, Mortimer and Sunnucks on Executors, Administrators and Probate, 21^st ed., §§5-05 and 5-06). 

D.  Options available to parties

27.  More importantly, it was clear from the submissions made by counsel that P and PRs had not been told sufficiently or at all that:

(1)  There will be no saving of costs and time, at least from the perspective of the shareholders, if the Company is being wound up by the Court.  The liquidation expenses including the release fee[2] and the ad valorem fee[3] payable on the gross amount of assets realised and brought to credit as well as the remuneration and costs of the liquidators (which will be substantial as liquidators will normally deploy many staff to administer the assets and investigate the affairs of the Company), all of which will be paid out of the assets of the Company in priority to the debts owed by the Company.  It is only after all the expenses and debts are paid in full that the surplus will be distributed to the shareholders.  The process of liquidation may take a few years, and the shareholders may not receive any distribution in the meantime or at all. 

(2)  Other than fighting the petition to the end, there are other obvious options available to P and PRs which, if deployed, may bring an end to the dispute between the parties.  These included:

(a)  make an open offer to the other party to buy or sell the Shares at a stated price based on the range of the prices stated in the 1^st Report.  The offer should make clear that if the other party refuses to accept the offer but the price ultimately determined by the Court is the same or less than the price offered, the offeror will seek all the costs occasioned from the date the offeree should have accepted the offer on a higher scale;

(b)  make an open offer to the other party to buy or sell the Shares at the price to be determined by the Expert on the basis that the Company is a going concern and without any discount for its being a minority holding.  This accords with the principles expounded in O’Neill v Phillips [1999] 1 WLR 1092 at 1106H-1108B;

(c)  engage a mediator to resolve the difference between the parties on the price of the Shares based on the range of the prices stated in the 1^st Report; and

(d)  put the Company into voluntary liquidation, so that the liquidator can proceed to sell the Business to either shareholder or a third party at the market price reasonably obtainable and to distribute all the assets of the Company to the shareholders equally. 

28.  Consequently, directions were given requiring the legal representatives to explain the above options to P and R1 and report to the Court at a further CMC to be held on 26 August 2021 as to whether the parties are agreeable to the options and the reasons therefor. 

E.  Further delay and tactical manoeuvres  

29.  By letter dated 16 June 2021 PRs requested the Company to register the transfer of the Shares to their names pursuant to s.158 of the CO and enclosed a copy of the death certificate and will of R1. 

30.  However, in P’s solicitors’ letter dated 30 June 2021, they asserted that the documents provided by the PRs did not meet the requirements of the CO and stated that the Company/P were not in a position to agree or refuse the request for registration of the transmission of the Shares. 

31.  On 29 July 2021, PRs’ solicitors informed P that they had been taking steps to obtain a grant of probate in respect of R1’s estate but the process was hindered due to the need to ascertain the assets and liabilities of R1 and that one of PRs would only attain the age of 21 by 28 September 2021. 

32.  On 18 August 2021, P commenced another proceedings, HCMP 1175/2021, to seek an order under s.570 of the CO to convene an extraordinary general meeting of the Company for the purpose of passing a special resolution to wind up the Company (“OS”).

33.  It seems to me that the OS was nothing but another ill-conceived tactic deployed by P with a view to steal a march whilst he remained the sole surviving shareholder and director of the Company. 

34.  At the hearing on 26 August 2021:

(1)  Ms Sabrina Leung, counsel for PRs, informed the Court that they are “most willing to purchase P’s shares” and urged P to sell the Shares to PRs so as to expedite a settlement of the dispute. 

(2)  Mr Alfred Sit, counsel for P, maintained that despite PRs’ indication that they are willing to buy the Shares, P still considered that the “quickest way to put an end to the dispute” is to seek a winding up order against the Company. 

(3)  In coming to such a stance, it is clear that P has not been told that the winding up relief  can be struck out if the Court comes to the view that there are other avenues available to P to put an end to the dispute, and it is unreasonable for P to insist on the relief (Re Wong To Yick Wood Lock Ointment Ltd [2001] 2 HKC 618, Yuen J (as she then was)).  Moreover, the offer made by PRs to purchase the Shares at the prices stated in the 1^st Report or as determined by the Court may constitute a reasonable offer sufficient for the Court to strike out the petition (see O’Neill v Phillips, at 1107B-D).  Neither has P been told that if the Court ultimately finds that he should sell the Shares to PRs, it is likely that P will be ordered to pay all the costs incurred by PRs from that point onwards on a higher scale to reflect the fact that such costs are wasted as a result of the stance taken by P.   

(4)  Upon taking further instructions, Mr Sit informed the Court that P agreed to sell the Shares to PRs at the price to be determined on the Agreed Bases, and Ms Leung confirmed that PRs agreed to buy the Shares on such Bases (“Agreement”).   

(5)  The Agreement was recorded in the order, and directions were given to ensure that the Expert would be provided with all books, accounts and documents she considers relevant to the valuation of the Company, and for the Expert to provide an updated valuation of the Company. 

(6)  To allow the parties to challenge the valuation made by the Expert, a hearing was fixed for the purpose of determining the value of the Company.     

F.  Approach to achieve a buy-out agreement

35.  As is clear from the above narratives, the Court did not make any buy out order against any party.  Such order cannot be made in the absence of the necessary finding that the affairs of the company have been conducted in a manner unfairly prejudicial to the petitioner in circumstances where the respondent only indicated an “in-principle agreement for a buy-out”, and leaves a myriad of matters to be determined in order to set the parameters and basis of the valuation (Re China People (Hong Kong) Limited & ors [2018] HKCFI 867, §§4-6, per Godfrey Lam J (as he then was)). 

36.  I should mention that Re China People has sometimes been mis-interpreted by legal representatives as authority to suggest that unless the parties are able to agree on all issues, the parties will have to fight the petition to the end.  Properly understood, the authority only applies to a situation where the parties are not able to agree on the terms and the basis of the valuation, such as where there are allegations which, if established, will have financial ramifications on the company.  It does not mean that the parties cannot come to an agreement on the terms and the basis of the valuation of the shares, even if the latter requires determination of the Court upon considering the valuation reports of the expert and the submissions of the parties. 

37.  Indeed, the Court encourages such agreement to be made between the parties in circumstances where it is clear that the mutual trust and confidence between the parties or the substratum upon which the company was formed has ceased to exist, and there should be a parting of way between the shareholders. 

(1)  In that situation, rather than incurring substantial costs to fight the petition, it would be in the interests of all parties to come to an agreement for one shareholder to buy out the shares of the other, and invites the Court to give directions on a mechanism to determine the value of the company (and hence the shares) in a fair and open manner.

(2)  This is often achieved by the appointment of a Court-appointed expert to value the company as a going concern, coupled with directions (a) requiring the parties to give unrestricted access of the books and records in their respective possession, custody or power to the expert if so requires, (b) giving equal opportunity to the parties to make submissions to the expert, (c) allowing the parties to consider the report made by the expert, and (d) with liberty to the parties to fix a hearing for the purpose of determining the value of the company on the basis of the expert’s report, cross-examination of the expert and submissions of the parties. 

(3)  The mechanism outlined above has the advantage of resolving the dispute in an expeditious and cost effective manner, while addressing the perceived uncertainty of the parties having to agree to be bound by the expert’s valuation without a proper opportunity to consider and challenge the same.  The latter is important in the context of the valuation of a company.  This is because while the method of valuation of a company is fairly well established, often time, if the company has an ongoing and profitable business, it is the magnitude of the price earning multiple (“P/E”) (which, in turn, is determined by reference to a basket of comparable companies and the applicable discounts and adjustment factors) which is determinative of the value of a company.  It is understandable that the parties may wish to have the opportunity to be heard on the valuation, particularly where the business is of a substantial scale, and the parties have not taken any substantive steps in the proceedings.

38.  Pursuant to the directions given at the hearing on 26 August 2021, the Expert prepared an updated report dated 2 November 2021 (“2^nd Report”). 

39.  On 11 November 2021, P registered the Shares in the names of PRs. 

G.  1^st and 2^nd Reports

40.  The Expert describes the basis of the valuation as follows:

“… valuing the Company as if it is sold as [a] going concern as at 31 March 2020 (without the need of taking into account the assets, business and business opportunities that are in dispute and subject to determination in the [petition]).” (1^st Report §20)

41.  The net profits after tax, as reported in the audited financial statements of the Company, are as follows:

Year ended	Net Profits (HK$)
31/3/2015	3,654,794
31/3/2016	3,656,532
31/3/2017	4,106,189
31/3/2018	924,825
31/3/2019	6,876,708
31/3/2020	6,572,145
31/3/2021	6,081,404

42.  The Expert observes that the substantial increase in net profits from FY 2019 was attributed to the decrease in director’s remuneration from $5 million in FY 2018 to $2.4 million in FY 2020 (1^st Report §30).

43.  The Expert adopted 2 methods to assess the value of the Company namely, the net asset value (“NAV”) approach and the market approach (“MA”) which produces a range of valuations as follows:

As at	NAV	MA
31/3/2020	23,326,357	27,023,335
31/3/2021	28,333,300	33,583,926

44.  The increase in valuation was attributed to the net profits made by the Company in the financial year from 1 April 2020 to 31 March 2021.  The financial position of the Company as at the end of financial period (31 March) are as follows:

	2019	2020	2021
Non-current assets	489,046	229,773	130,989
Cash and bank balance	14,814,947	21,276,307	26,767,278
Inventories	934,164	1,124,165	2,163,526
Accounts receivable	2,459,136	2,649,454	2,662,007
Deposits, prepayments	382,048	364,974	454,829
Total liabilities	3,360,293	3,353,480	3,806,032
Net Assets	15,719,048	22,291,193	28,372,597

45.  In respect of NAV approach, the Expert said[4] this:

“25. It is usually appropriate to use NAV method when:

25.1 the company holds significant tangible assets;

25.2 a significant portion of the company’s assets comprises liquid assets or other investments (such as marketable securities and real estate investments); and

25.3 a relatively reliable (and readily) available) financial statements of the company are available.

26. On the basis of the information and documents available and in my experience and opinion, the NAV method is likely an appropriate and reliable method to value the Company as at 31 March 2021 as the Company’s assets comprised primarily cash and bank balances totalling HK$26.8 million as at 31 March 2021 – approximately 83% of its total assets (HK$32.2 million as at 31 March 2021”.

46.  In assessing the value of the Company using the MA, the Expert has considered 4 listed companies whose material revenues were generated from Hong Kong or the Mainland and specialise in manufacturing and trading of chocolate products, and/or manufacturing and trading of packaged food with bread and bakery products (collectively “Comparables”)[5]. Their average Earning Before Interest, Tax, Depreciation & Amortization (“EBITDA”) multiples for the year ended 31 December 2020 or 31 March 2021 is 10.3.  The Expert adopts this as the P/E multiple, on the basis that it reflects the business and earning prospect of the Comparables and the industry. 

47.  The Expert then applies the following adjustment factors to the P/E multiple:

(1)  a lack of marketability discount (“DLOM”) of 35%, to reflect the risks associated with the lack of liquidity and marketability of the shares of a private company[6];

(2)  a consumer concentration discount of 30%, to address the perceived risk of the Company’s reliance on 4 customers which contributed 83% to 91% of its revenue[7];

(3)  a small size discount (“SSD”) of 20% to reflect the business risk of a small company, and the lack of diversification and lower financial flexibility;[8]

(4)  a key person discount (“KPD”) of 10% on the basis that the Company will not be managed by any of the 2 founders and the apparent lack of a sophisticated management succession policy or ability to attract talents to replace them[9]; and

(5)  a control premium of 25% to reflect the fact that the purchaser will acquire 100% control over the Company after acquiring the Shares[10].

48.  Taking into account the above adjustment factors, the adjusted P/E multiple is 4.2 (being 10.3 x 0.65 x 0.7 x 0.8 x 0.9 x1.25).  Applying an adjusted P/E multiple of 4.2 to the average EBITDA of the Company for the last 3 years, the valuation of the Company for the year ended 31 March 2021 is $33,583,926.

G1.  Issues

49.  Mr Sit contends that the Expert’s opinions in respect of the following points should not be accepted by the Court:

(1)  The NAV approach is appropriate to assess the value of the Company;

(2)  The DLOM has already reflected the fact that the Company has a much smaller operation than the Comparables.  In any event, the small size of the Company has been reflected in its lower revenue and profits as comparing to the Comparables.  There is no proper basis to apply a further SSD to the P/E multiple;

(3)  The KPD only features in the 2^nd Report and the basis for adding such discount is doubtful. He refers to an extract from Aswath Damodaran, Investment Valuation: Tools and Techniques for Determining the Value of Any Asset, 3^rd ed, p.682 where Professor Damodaran stated this: “Young companies, especially in service businesses, are often dependent upon the owner of a few key people for their success.  Consequently, the value we estimate for these companies can change significantly if one or more of these key people will no longer be associated with the firm.”  The Court is not bound to accept that a KPD should be applied.  For eg., in Hashman v Australian Medico-Legal Group Pty Ltd [2016] NSWSC 1773, at §43, the court in Australia did not accept that there was a key person factor in the business under consideration.  No KPD should apply to the Company as it is not in the service business but carries on a stable and mature business.  As a matter of fact, both founders had already ceased to be involved in the Business but the Company continued to make substantial and stable profits; and

(4)  The Expert has not taken into account the net profits made by the Company for the period from 1 April 2021 to the date of the order. 

50.  Ms Leung does not take any issue with the valuation of the Expert, and submits that the Court should not disturb the valuation.  Reliance is placed on Chan Luen Yan And Others v Chan Tin Chai and Others,HCCW 211/2007, 3 July 2013 where Ng J said this:

“22. In cases where the parties have expressly or impliedly agreed that an expert valuation is to be binding, it is settled law that the valuation cannot be challenged on the ground that mistakes have been made, unless it could be shown that the expert had departed from the instructions given to him in a material respect, or if there was fraud or collusion …

  23. In the present case, the parties have not expressly agreed to be bound by the Valuer’s reports and I am not prepared to go so far as to infer that they have impliedly agreed to be so bound simply on the basis that they have agreed on the identity of the Valuer and jointly appointed him to perform the task of valuation.  On a subject as notoriously difficult as valuation of shares in a private company, any number of experts, however reasonable, can reasonably differ on the valuation.  Unless some sensible restrictions are placed on the grounds on which an agreed expert’s determination can be challenged, the advantage to be gained from an out-of-court share valuation by an independent expert (such as its relative speed and inexpensiveness) will become illusory.  I would hold that, on a matter of opinion (as opposed to fact or law), unless patent errors can be demonstrated on the face of the report, the court should be very slow to intervene with the chosen expert’s determination solely on the ground that one party has subsequently found and engaged another expert who holds a different opinion: Kendall, Freedman & Farrell Expert Determination 4th Ed, Para 14.4.10; Campbell and Palmer v Crest Homes (Wessex) Ltd. unrep. ChD 13 November 1989.”

51.  While I agree that it is undesirable for the Court to intervene in the chosen expert’s opinion, it does not mean that the Court has to take a blinkered approach and simply accept the valuation made by the expert.  In my view, where as here a party has identified the points and explained the bases upon which he takes issue with the opinion of the expert, the Court can and should consider the points and decide whether they are well founded.  This is achieved by giving an opportunity to the parties to put the points to the expert, so that the expert can consider the points and decide whether or not he/she accepts the points or that he/she maintains his/her opinion. 

52.  I turn to the issues in the same order described in §49 above.

G2.  MA is appropriate

53.  In my view, the MA is the appropriate method to assess the value of the Company. 

54.  It is well settled that where, as here, the company is a going concern, the more appropriate basis of valuation will usually be the earnings basis[11], which is derived from an estimation of (1) the maintainable level of profits of the company and (2) the yield that a prospective purchaser would expect in making the investment (Hollington on Shareholders’ Rights, 9^th ed., §8-47; CVC v Demarco [2002] 2 BCLC 108 (PC) §38, per Lord Millett). 

55.  The “earnings basis” and the “yield” are the same as the MA and P/E multiple used by the Expert in the 1^st and 2^nd Reports. 

56.  In answer to the questions put by the Court, the Expert explains that she has used both the NAV and MA to assess the value of the Company, the former is used to reflect the fact that the Company has substantial cash and bank balances as a result of the accumulation of profits and no distribution of dividend to the shareholders since 2018.  She agrees that a proper way to deal with the accumulated profits is for such profits to be distributed to the 2 shareholders before PRs buy the Shares at the price determined by the Court. 

57.  I should add that at the hearing, both Mr Sit and Ms Leung agree that it is fair and appropriate in the circumstances of this case for the Court to direct the Company to distribute all the accumulated profits made up to the date PRs buy the Shares from P.  This accords with the fact that had it not been for the impasse between the shareholders, the accumulated profits would have already been distributed to the shareholders. 

58.  The Expert also agrees that the valuation based on the MA reflects the future earning potential of the Company, and is arrived at by multiplying the adjusted P/E multiple to the average EBITDA of the Company.  She also agrees that such valuation represents the price a prospective purchaser is willing to pay to buy the Company as a whole.  As the buy out has not been effected, the Court should adopt the (updated) valuation of the Company as at 31 March 2021.

G3.  SSD

59.  Under cross-examination, the Expert disagrees that the small size of the Company (as compares to the Comparables) have already been reflected in the DLOM and the actual revenue of the Company.  She maintains that a SSD of 20% should be applied for the reasons stated in the 1^st and 2^nd Reports.  She further explains that there are research materials which suggest that a SSD  can be as high as 48%.  She disagrees with Mr Sit’s suggestion that the Company is in niche market or that it is difficult for new comer to poach its customers, citing the risk of the Company having a single line of business and without its own brand name as the additional reasons for applying a SSD of 20%.  I agree with the Expert that a SSD discount of 20% is reasonable in the circumstances of the Company. 

G4.  KPD

60.  When asked about the basis for applying a KPD, the Expert repeats the points made in the 1^st and 2^nd Reports.  She disagrees with Mr Sit’s suggestion that the departure of the founders (P and R1) has not affected the business of the Company. She considers that as a company with a relatively long history of operation, the founders must have positive impact in maintaining the customers as well as the employees. 

61.  It seems to me that whether or not a KPD should be applied must be assessed by considering whether the departure of R1 and P has any negative impact on the business and the profits generated by the Company.  The evidence before the Court shows that despite the fact that P and R1 have ceased to be involved in the business for over 3 years and 10 months respectively, the Company has not suffered any decline in its revenue or profits.  Indeed, one of the reasons cited by PRs in contending that the Company should not be wound up is that the present management team has been able to maintain the Business without the involvement of P or R1.  I do not think there is a proper basis to apply a KPD to adjust the P/E multiple.

G5.  Profits from 1 April – 30 October 2021

62.  As the Expert explains in answer to the questions put by the Court, the latest management accounts available to her were made up to 31 July 2021. She agrees that the profits made by the Company during the 8 months period should be treated in the same way as the accumulated profits and be distributed to the shareholders before PRs buy the Shares from P. 

63.  Other than the above, the Expert does not consider that the valuation under the MA needs to be changed as such valuation reflects the future earning potential of the Company, rather than looking into the past profits made by the Company. 

H.  Disposition and costs

64.  In conclusion, I hold that the fair value of the Company as at the date of this judgment is $37,315,473, being the Expert’s valuation as at 31 March 2021 but without any KPD.  The price of the Shares is therefore $18,657,737 (“Price”). 

65.  Ms Leung indicates that PRs are able to pay the Price within 60 days of the order to be made by this Court. Mr Sit has no objection to that.  On this basis, I make an order that:

(1)  PRs do pay the Price to P by way of a banker’s draft within 60 days of this Judgment; and

(2)  P shall execute all bought and sold notes, instruments of transfer and any other documents reasonably required by PRs for the purpose of transferring the Shares to PRs and replacement of director of the Company and provide the same to P at the same time PRs tender payment of the Price. 

66.  As the parties agree that the profits made by the Company should be distributed to the shareholders and in the absence of a functioning board, I make the following directions to facilitate the process of distribution of profits:

(1)  P and PRs do procure the Company to distribute all the net profits made by the Company up to 31 March 2021 as to 50% each within 7 days of this Judgment;

(2)  P do procure the Company to provide a copy of the management accounts made up to 31 October 2021 (“Management Accounts”) to PRs within 7 days of this Judgment;

(3)  P do procure the Company to provide unrestricted access to PRs in respect of all the books and accounts of the Company for the purpose of assisting PRs to verify the Management Accounts and agree with their contents within 7 days thereafter;

(4)  If no agreement is reached between P and PRs on the contents of the Management Accounts within the time stipulated, their difference shall be resolved by the Expert within the next 7 days and her determination shall be final and binding upon the parties; and

(5)  P and PRs do procure the Company to distribute all the net profits made by the Company for the period from 1 April 2021 to 31 October 2021 as to 50% each within 7 days of the parties’ agreement under §(3) above or the Expert’s determination under §(4) above. 

67.  There be liberty to apply for the purpose of carrying into effect the above order. 

68.  Both parties agree that there should be no order as to costs of the proceedings, and I so order.