CHAN KING HO LOUIS v. ORGANIC WASTE TECHNOLOGIES (H.K.) LTD AND ANOTHER

HCCW 41/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 41 OF 2011

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J U D G M E N T

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1.  I have before me two summonses. The first has been issued by the 2^nd Respondent and seeks an order directing the experts, Union Alpha CPA, to reverse various items in their valuation report dated 10 October 2013. The first of these concerns bad debts totalling HK$1,230,000. The second is HK$450,000 which represents the reversal of an item for salary accrued to a director, namely, Mr. Lloyd. These items appear as assets in the 1^st Respondent’s accounts and, therefore, increase the value of the Company. In addition the 2^nd Respondent asks the court to determine various outstanding reserved costs orders.

2.  The Petitioner’s summons seeks the uplift of a stay of proceedings made on 23 March 2011. In addition the Petitioner also asks the court to determine reserved cost orders and seeks an order that the relevant costs are paid by the 2^nd Respondent to the Plaintiff.  I shall deal first with the more contentious issue which concerns the contested items contained in the draft valuation report.

3.  On 23 March 2011 an order was made by consent staying the proceedings on the terms of a deed of settlement which was appended to the order. The terms of settlement provided that the 2^nd Respondent and Mr. Bryce Lloyd would buy the Petitioner’s shares in the 1^st Respondent. A mechanism was provided for the appointment of a valuer. The process of appointment proved to be problematic. My impression from what I have seen of the correspondence on previous hearings is that to a considerable extent this was due to the 2^nd Respondent, and in practice Mr. Lloyd for whom I understand the 2^nd Respondent is a nominee, being obstructive.  The paragraph of the deed which dealt with valuation was very simple. Clause 4 provides: “the valuer should value the Petitioner’s shares by reference to the assets, profitability and future prospects of the Companies[1] as that 31 August 2010 without discount for the fact that the Petitioner's shareholding is not a majority shareholding”.

4.  Clause 5 provided that the 2^nd Respondent and Mr. Lloyd are to pay the Petitioner the value of the Petitioner’s shares as valued by the valuer within 28 days of a valuation made pursuant to paragraph 4 of the deed. The 2^nd Respondent and Mr. Lloyd have not paid the Petitioner. The reason is that they contest the items in the valuation I briefly referred to earlier in these reasons.

5.  The deed of settlement does not provide for the review or appeal of the valuation.  It seems to me quite clear that by the deed the parties agreed to refer to the valuer for final and binding decision the question of the valuation of the Petitioner’s shares.  As I explain in my decision in Re Skydon Development Ltd [2013] 1 HKLRD 949 in these circumstances the valuation can only be challenged if it can be shown that the valuation has not been prepared in good faith.  Mr. Collins who appeared for the 2^nd Respondent argued that the court will also interfere with a valuation if a valuer has not undertaken the valuation in accordance with his instructions.  I accept that if a valuer values something other than that which he was instructed to value or is instructed to adopt a particular method of valuation and instead uses another method, than it may be appropriate for the court to interfere.  However, that does not mean that a valuation can be impugned if the valuer fails to act in accordance with directions one party purports to give to him during the valuation process in an attempt to engineer his preferred result.

6.  In their engagement letter Union Alpha state in clause 1 what they understood to be the objective of their engagement, namely, to assess the fair market value of the shares of the Companies and to do so on the basis of:

(1) Net asset value as at 31 August 2010;

(2) Contingent liabilities as at 31 August 2010; and

(3) Value of land properties to be valued by a third party as at 31 August 2010.

7.  In clause 2 they describe how they will go about this task.  It  is apparent that this will primarily involve an assessment of the information contained in the books of the accounts of the Companies.  They were not asked, for example, to prepare a valuation on the basis that they would independently determine whether or not as at 31 August 2010 it would have been prudent for the directors to have written off particular debts and I have not been provided with any evidence that suggests that they should have assumed that this was required of them.

8.  There are three bad debts about which the 2^nd Respondent complains.  The first is a debt of HK$920,000 owed by a Mr. Victor Wu.  The valuer appears to have taken the view that the board of directors had not written the debt off as at 31 August 2010 and, therefore, it should be treated as an asset.  The 2^nd Respondent, or in practice Mr. Lloyd for whom the 2^nd Respondent appears to be a nominee, submits that the Petitioner knows that it had been agreed to write the debt off and that if the valuer had asked the Petitioner to confirm this he would, if he was being honest, have confirmed it.  Mr. Collins took me to a document headed outstanding matters at 20 May 2013 produced by Union Alpha in which they ask for the contact details of Mr. Wu in order that they could ask him to confirm the debt.  Mr. Collins says that Union Alpha failed to contact Mr. Wu and that thus did not obtain the information that would have established the debt was not due.  There are two difficulties with this argument.  The first is that as Mr. Ng, who appeared for the Petitioner, pointed out, there is no evidence that either party sent Union Alpha Mr. Wu’s contact details and when I asked Mr. Collins what he understood the position to be he told me that he was not able to confirm that the information had been sent.  Secondly, the 2^nd Respondent has produced a statement from Mr. Wu in which he explains his understanding of the arrangement in respect of the debt that he, it is not in dispute, certainly prior to 2010 did owe the Company.  Mr. Wu says this in paragraphs 11 and 12 of his statement:

“11. However, as I say above, the financial crisis hit in 2008 and it became apparent that Champion was in great difficulty and I could not afford to repay the loan. I approached the Petitioner (LC) and BL in early 2009 and I recall meeting with LC for coffee in a small Chinese Restaurant in Shek Mun, Shatin, sometime in early 2009 (near Chinese New Year) and in which he told me that I should not worry about repaying the loan and that OWT would not push me to repay the loan. I do not recall receiving any follow-ups or even references by the Petitioner (LC) or BL or OWT to repay the loan at any time after the end of June 2009. I met LC in June/July 2010 where LC told me that he was leaving OWT and that LC confirmed that I can forget about the loan. I should correct the undated letter which I signed insofar as it goes further than what I just say before; namely, it would not be for me to know whether the debt had been written off and only that I would not be pushed or forced to repay the same and in fact was not further asked or pushed to repay the same. I do not say that by nature of this agreement or understanding OWT waived its claim for debt against me. Rather, that it chose (without any formal acknowledgement) to forbear from claiming against me.

 12. Although I would be surprised if OWT did now claim against me, I may not be able to defend any such claim (although I may take independent legal advice in connection therewith). In any event, I regret to say that I am not in position to readily repay any such loan and I believe my financial status is well known to the Petitioner as we have always been friends.”

9.  It seems to me quite clear that Mr. Wu is saying, very  candidly, that he is not able to say that the debt has been waived.  I can see no reason in these circumstances to interfere with Union Alpha’s inclusion of this debt amongst the assets of the Company.

10.  The other two bad debts each of HK$155,000 both owed by PT Navigat Organic.  The 2^nd Respondent contends that these items that appear in the books of the 1^st Respondent should have been written off.  It  may be that the directors of the 1^st Respondent should, if they had addressed their minds to the issue, have by 31 August 2010 written off these debts, but that is not the issue.  I can see no reason to conclude that they were wrong in taking the view that they did given that these debts were recorded in the books of the Company and certainly no reason to think that if any error was made it was sufficient to bring this case within the very restricted circumstances in which the Court will interfere with a valuation, which was intended to be final and binding.

11.  The second complaint relates to the treatment by Union Alpha of a sum of HK$450,000 paid to Mr. Lloyd, who was a director of the 1^st Respondent, which was recorded in the general ledger of the 1^st Respondent as “director’s draw”. Union Alpha have treated it as exactly what the description indicates namely a drawing by the director of the 1^st Respondent, which in the normal way would be recorded in its books as debt due to the 1^st Respondent.  It is quite common for private company directors to have such accounts.  In practice these debts will be satisfied by way of set-off when a company’s profits have been calculated at year end and the amount available for distribution by way of bonuses or dividends becomes clear.  Union Alpha have taken the view that as at 31 August 2010 the books of the 1^st Respondent record this sum as owing by Mr. Lloyd and it should be treated as an asset.

12.  The 2^nd Respondent says this was wrong because it had clearly been agreed between the parties that this sum was a “salary” paid to Mr. Lloyd and should be treated as such for the purposes of the valuation.  However, this overlooks the fact that in the 2^nd Respondent’s comments in relation to material provided by Union Alpha which dealt with this item the 2^nd Respondent says this “the company has always ledgered payments to directors as “Directors Draw”, then categorised as Directors fee or salary at year-end. This practice has not changed and the “directors draw” was in fact authorised by both the Petitioner and Respondent, and dealt with properly with respect to the IRD.”  It does not seem to have been understood by the 2^nd Respondent or her legal advisers that this is consistent with the way in which Union Alpha have treated this item and there is no basis for interfering with it.

13.  I, therefore, dismiss paragraphs 1 and 2 of the 2^nd Respondent’s summons with costs to the Petitioner. The parties agreed that all reserved costs orders should become “no order as to costs”.  So far as the Petitioner’s summons is concerned in the light of my decision in respect of the 2^nd Respondent’s summons and the agreement on costs the only matter that remains to be dealt with the application to lift the stay of proceedings, which in practice is now for the purposes of seeking interest.  Mr. Ng sought an order for interest at 1% over prime from 28 days after the date of the Union Alpha report, which is the date payment should have been made.  I agree the stay should be lifted and interest paid at that rate until the date of actual payment.  The costs of the Petitioner’s summons shall be paid by the 2^nd Respondent.

14.  I would add that the difficulties in finalising the valuation of the shares of the 1^st Respondent are an all too common feature of shareholder disputes.  It is incumbent on a party’s legal advisers to think through thoroughly and in an informed way how a valuation should be conducted and whether if it is contentious the matter should be left to the court with the assistance of experts instructed by both sides.  If an independent valuer is instructed to produce a final and binding valuation it is incumbent on the parties to cooperate in the process of appointing the valuer and providing him with the information that he requires and recognise the fact that his decision will be binding and needs to be respected.  It is not satisfactory that it has taken over three years to complete this process in the present case and in my view the 2^nd Respondent has obstructed the implementation of the settlement agreement made in March 2011.