TIN CHI PING v. CHOW WAI FAN AND OTHERS

HCCW 661/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 661 OF 2006

_________________

_________________

_________________

________________________

D E C I S I O N

________________________

A. INTRODUCTION

1.  On 14 March 2014, I handed down my Judgment in this Petition after a 7 day trial (“the Judgment”).  I shall use the same expressions and abbreviations as are used in the judgment.

2.  In the judgment, I found that the Respondents had undertaken conduct which was unfairly prejudicial to the Petitioner in relation to the affairs of the Company, but only in respect of the denial of inspection of documents by him as a director in 2004 and 2005.  I dismiss the Petitioner’s other grounds of complaint as set out at para 63(1), (3) and (4) of the Judgment.  

3.  In the Judgment, I directed the parties to make further submissions on what relief I should grant, and costs. 

4.  This is my decision on those two issues.

B. RELIEF

5.  Counsel for the Petitioner has annexed to his further submissions a proposed draft order, on which counsel for the Respondents has commented.  The parties agree that a buy-out of the Petitioner’s shares in the Company (“the Shares”) by the Respondents should be ordered.  From the further submissions and the replies thereto, the following are the matters that are in issue:

(1) the date of valuation of the Shares—should it be the date of the presentation of the Petition (19 December 2006) or the date of the judgment or order?

(2) whether the Petitioner should be awarded any interest on the value of the Shares and if so at what rate; and

(3) who should pay the costs of the valuation.

B1. Date of valuation

6.  In my judgment, the date of valuation should be the date of the buy-out order, ie the date of this Decision, for the following reasons:

(1) The choice of the date of valuation is a matter of discretion for me, the overriding requirement being what is fair to all the parties on the facts of this case. 

(2) In Re Hang Sang Engineering Factory Ltd (HCCW 456/2005, 7 November 2007, at para 14, Kwan J (as she then was) said:

“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).”

(3) The Company was not a going concern, but was in effect a dormant company since the sale of the Property on 7 October 2005.  It was agreed by the parties that the substratum of the Company had gone as a result of the sale of the Property.  The Company was maintained, and its surplus cash kept in the bank and not distributed, because of the dispute between the parties and the subsequent presentation of the Petition (see para 57 of the Judgment).  There is therefore no question of whether the fortunes of the Company had improved or declined since the Petition which may cause a real difference between valuing the Shares as at the date of the Petition or the date of the order, and which requires me to decide which date should be chosen as a matter of fairness for this reason. 

(4) The factual dispute concerning whether the Petitioner was entitled to the sum of money credited as owing to Koh by the Company, but which Koh had waived, had to be resolved by the court in this Petition before the Shares could be properly valued. 

(5) If there should be any real difference between valuing the Shares as at the date of the presentation of the Petition and as at the date of the order, the difference was caused by the delay as a result of the pursuit of the Petition by the Petitioner so as to obtain a buy-out order on the basis that the amount waived by Koh belonged to him.  The Petitioner has failed on this.  He should therefore not be given any perceived advantage of having the Shares valued at a date earlier than the date of the order, as it was his own raising and pursuit of a factual dispute, on which he has ultimately failed, which had caused the delay in him getting the value of the Shares from a dissociation of himself from the Company, a position crystallised at the presentation of the Petition.  There is a good reason to depart from the date of the presentation of the Petition (the “starting point” referred to by Kwan J in Hang Sang Engineering in the second approach) as a matter of fairness.

(6) Rather, to have the date of valuation to be the date of the buy-out order will give effect to the consideration 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 Petitioner is selling.  This is also a fairer order to the Respondents given the reason for the delay as I stated above.

(7) I am aware of course of the fact that the Petitioner did establish unfairly prejudicial conduct in this case. However, all his complaints in the Petition were dismissed save for the “inspection issue”, but the failure of the Respondents to allow proper inspection by the Petitioner of the Company’s books and records did not affect the value of the Shares at any time.  Thus, the proven unfairly prejudicial conduct has no bearing on the choice of the rival dates.  

B2. Interest

7.  In Tai Lap Investment Co Ltd [1999] 1 HKLRD 384 at 403A‑B, Le Pichon J (as she then was) held that an interest factor should be allowed to the shareholder whose shares are being brought out so as to arrive at a fair price for the shares to be purchased.  However, this is not an invariable rule and the question remains whether as a matter of fairness the Petitioner should be awarded any interest on the price at which the Respondents are to purchase his shares.

8.  In my judgment, the Petitioner should not be awarded interest in the context of this case:

(1) In Tai Lap Investment at 402F‑J, Le Pichon J suggested that there is a difference, where interest is concerned, between the case where the date of valuation is the date of the order and the case where the date of valuation is the date of the presentation of the petition (see Re DR Chemicals Ltd (1989) 5 BCC 39 at 54F‑H per Peter Gibson J).

(2) The interest element is to compensate the shareholder for being kept out of the money in the meantime.  In a case where the date of valuation is found, as in here, to ought to be the date of the order, I have strong doubt as to whether the relevant shareholder can in any way be said to have been kept out of any money for any period prior to the buy-out order (see Elliott v Planet Organic Ltd [2000] BCC 610 at 616C‑D per Jacob J).

(3) But, in any event, as I have found above, the reason for any delay for the Petitioner getting the value of the Shares after the presentation of the Petition is because he raised a factual issue on which he has ultimately failed.

(4) This is not a case where the Respondents have had the use of the Petitioner’s investment since the date of the Petition for which they ought to pay compensation to the Petitioner.  Rather, any bank interest accrued on the surplus cash, which had been the Company’s only asset since the sale of the Property, since the date of the Petition would also enure to the benefit of the Petitioner as the 40% shareholder of the Company when his shares are valued.  I do not see why the Respondents ought to pay the Petitioner any interest on top of the bank interest.

B3. Costs of valuation

9.  In my judgment, the fair order in the circumstances of this case is that the Respondents should bear the costs of the valuation, as the Petitioner had established unfair prejudice conduct on the basis of which the buy-out order, which necessitates the valuation, is now made.  His pursuit of the issues on which he is ultimately unsuccessful does not affect this question because whether he pursued those issues or not the valuation has to be done.

C. COSTS

10.  By a letter dated 1 March 2007 from their solicitors, about two months after the presentation of the Petition, the Respondents offered to buy the Shares for $1,776,000.00, being 40% of what they said to be the net asset value of the Company at $4,439,236.31.

11.  In a letter dated 16 May 2007 from his then solicitors to the Respondents’ solicitors, it was said that in order for the Petitioner to consider the offer, he should be offered a chance to examine the books and accounts of the Company in order to verify whether the net asset value of the Company was as alleged by the Respondents.  The letter asked for the provision of various accounting and tax documents of the Company.

12.  By a letter dated 20 June 2007, solicitors for the Respondents provided the audited accounts of the Company as at 31 December 2005, and the management accounts of the Company as at 31 December 2006, for the Petitioner’s action.  They refused to provide the other documents requested.

13.  There is no evidence of any further correspondence on this offer, which must have lapsed after a reasonable time.  The question is whether the making, and the non‑acceptance, of this offer has any bearing on the question of costs. 

14.  In my judgment, the question is whether the Petitioner “ought to have accepted the offer and brought the litigation to an end” (O’Neill v Phillips [1999] 1 WLR 1092 at 1106F per Lord Hoffmann).

15.  The answer to this question is, in my judgment, no.  As Lord Hoffmann explained in O’Neill v Phillips at 1107H, there should be equality of arms between the parties in relation to an offer to buy out, in that both sides should have the same right of access to information about the Company which bears upon the value of the Shares.  In the light of my finding that the Respondents had improperly failed to disclose all the relevant documents in this case to the Petitioner, so that the Petitioner did not have full information relating to the financial state of the Company, one can hardly say that the attitude taken by the Petitioner in May 2007 in not accepting the offer was unreasonable.

16.  In their affirmations dated 6 March 2007, the Respondents also stated their willingness to buy the Shares “at a fair price or on such terms as this Honourable Court may determine”.  However there was also a lack of equality of arms here.  Also, while it is obvious from the rest of the affirmations that the basis of valuation suggested by the Respondents would be that the waived loan belonged to the Company and not to the Petitioner, there was no suggestion of any mechanism for determining the fair value.  See O’Neill v Phillips at 1107F‑H and Re Taipao Resins Chemical Company Limited (HCCW 590/1998, 29 March 2000) at p 2.  And, of course, the court cannot determine any terms without hearing the Petition and deciding in favour of the Petitioner that some unfairly prejudicial conduct had been committed (see para 25 of the Judgment).  The offer was inadequate for these reasons.

17.  On the other hand, I do not think that the fact that the offers did not provide for interest and costs makes the offers, on that basis, unreasonable or inadequate, having regard to the fact that they were made at an very early stage of the proceedings: O’Neill v Phillips at 1108A‑B.

18.  Thus, I do not think that the offers in the letter dated 1 March 2007 and in the affirmations dated 6 March 2007 affect the question of costs here.  I shall therefore consider the question of costs under general principles without regard to the offers. 

19.  Although the Respondents were willing to buy the Shares from the Petitioner, they denied any unfairly prejudicial conduct, and if they are right then, as I said at para 25 of the Judgment, I would have no jurisdiction to make a buy-out order.  To that extent, the Respondents were resisting a buy-out order from the court, and they have failed.  The “event” here is whether I should make a buy-out order on the basis of some unfairly prejudicial conduct committed by the Respondents, on which the Petitioner has succeeded.  While the Petitioner has failed in a number of points he took, that should only be reflected, if at all, by an adjustment or variation of the general rule that costs should follow the event.

20.  Thus, in this case, the Petitioner is the overall successful party in obtaining a buy-out order, but he has failed on his other complaints of alleged unfair prejudicial conduct which occupied a far larger amount of time in terms of preparation and court time.  In these circumstances, the guiding principles of Nourse LJ in Re Elgindata Ltd (No 2) [1992] 1 WLR 1207 are relevant:

“The principles are these. (i) Costs are in the discretion of the court. (ii) They should follow the event, except when it appears to the court that in the circumstances of the case some other order should be made. (iii) The general rule does not cease to apply simply because the successful party raises or makes allegations on which he fails, but where that has caused a significant increase in the length or cost of the proceedings he may be deprived of the whole or a part of his costs. (iv) Where the successful party raises issues or makes allegations improperly or unreasonably, the court may not only deprive him of his costs but may order him to pay the whole or a part of the unsuccessful party’s costs.”

21.  I also bear in mind Order 62, rule 7(1) of the Rules of the High Court (Cap 4A):

“Where in any cause or matter any thing is done or omission is made improperly or unnecessarily by or on behalf of a party, the Court may direct that any costs to that party in respect of it shall not be allowed to him and that any costs occasioned by it to other parties shall be paid by him to them”.

22.  I note also Order 62, rule 5(1)(f) and rule 5(2)(a).

23.  In Commissioner of Inland Revenue v HIT Finance Ltd (FACV 8, 9, 16 and 17/2007, 26 June 2008), Bokhary PJ said at para 7:

“There is a discretion in the court to deprive a successful party of the whole or part of his costs because he had caused a significant increase in the length or costs of the proceedings by raising issues on which he did not succeed. That can be done even if it was not unreasonable to have raised those issues. Whether or not it should be done depends on all the circumstances. This discretion exists for the purpose of avoiding the rigour of too inflexible an application of the rule that costs generally follow the event. It is to be approached with due circumspection so as not to undermine the utility of that general rule.”

24.  In my judgment, I do not think that principle (iv) set out by Nourse LJ, or in Order 62, rule 7(1), apply.  While the Petitioner has failed in some of the issues he raised and pursued, I do not think that he has done so unreasonably, unnecessarily or improperly, especially when he had been denied full access to the books or records of the Company, and when I have also rejected, or declined to accept, the case and evidence of the Respondents, and the evidence of Koh, in a number of material aspects after trial.  However, exercising due circumspection, I do believe that it is right that, given the significant increase in the length and costs of the proceedings by reason of the Petitioner’s pursuit of the points (in particular after discovery as ordered by Barma J on 4 December 2009) on which he fails, he should be deprived some of his costs, which the Petitioner has readily accepted.

25.  Having regard to all the circumstances of this case, I order that the Respondents pay 50% of the costs of the Petitioner.

D. DISPOSAL

26.  I make the following orders:

(1) The 1^st and the 2^nd Respondents do purchase the 4,000 ordinary shares of $1 each in the capital of the Company registered in the name of the Petitioner (“Shares”) at a price to be agreed by the parties within 56 days hereof, or failing agreement to be fixed by such valuer (“Valuer”) being a certified public accountant, as may within 14 days thereafter be agreed upon by the Petitioner and the 1^st and the 2^nd Respondents, or failing 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 any of the parties with or without the consent of any of the others.

(2) The Valuer is directed to value the Shares of the Company as at the date of this order and without discount for the fact that the Petitioner’s shareholding is a minority shareholding, and provide reasons for the valuation.

(3) The Petitioner and the 1^st and the 2^nd Respondents to provide to the Valuer all books, accounts and documents of and relating to the Company, its dealings, affairs or property in their respective possession, custody or control relevant to the valuation of the Shares within 28 days of the appointment of the Valuer.

(4) Each of the parties is entitled, at his or her own costs and expenses, to inspect and take copies of the books, accounts and documents provided to the Valuer under paragraph (3) above for the purpose of making representations to the Valuer.

(5) The Petitioner and the 1^st and the 2^nd Respondents may make representations in writing to the Valuer on the valuation of the Shares within 56 days of the appointment of the Valuer and serve a copy of his or her or their representation on the other parties at the same time.

(6) The Petitioner and the 1^st and the 2^nd Respondents may respond to the other party’s or parties’ representations to the Valuer within 14 days of the service of the other party’s or parties’ representations.

(7) The Petitioner and the 1^st and the Respondents shall respond to any reasonable question put to them by the Valuer.

(8) The 1^st and the 2^nd Respondents shall pay to the Petitioner the value of the Shares valued on the date of this order without interest within 14 days from the publication of the valuation by the Vauler and upon full payment of the purchase price, the Petitioner shall transfer the Shares to the 1^st and the 2^nd Respondents absolutely in equal proportion free from all encumbrances or claims of whatsoever nature but together with all rights benefits entitlements or interest attached thereto on a clean break basis forthwith (and in any event within 14 days).

(9) The costs of the valuation of the Shares shall be borne by the 1^st and the 2^nd Respondents.

(10) The 1^st and the 2^nd Respondents do pay 50% of the costs of the Petitioner in this Petition, such costs to be taxed if not agreed.

(11) There be liberty to the parties to apply for further directions or order generally.