CHAN LUEN YAN AND OTHERS v. CHAN TIN CHAI AND OTHERS

HCCW 211/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 211 OF 2007

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J U D G M E N T

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A. Background

1.  By a petition presented on 15 May 2007, the Petitioners, as shareholders of the 11^th Respondent, Goldsfine Development Limited (“the Company”), sought relief under sections 168A and 177(1)(f) of the Companies Ordinance (Cap 32).  Under section 168A, they sought an order for the Respondents to buy back the Petitioners’ shares in the Company at a price to be determined by reference to the “net asset value of the Company as at the date [of the petition] to be determined by an independent certified public accountant nominated by the Court”.

2.  All the individual parties to these proceedings share a common surname. According to the Judgment handed down on 14 May 2010 (“the Judgment”) by the learned trial judge Barma J (as he then was), they are all members of the same extended family, but from different branches of it.  It is common ground that all of the individual parties to these proceedings are members of a Chinese family tong known as the Chan Him Muk Tong (“the Tong”).  Since about the early twentieth century, members of the Tong have, together with members of another Chinese family tong known as the Li King Sun Tong, operated a Chinese medicine business in Hong Kong known as Chan Li Chai or Chan Li Chai Medical Factory (“Chan Li Chai”). In July 1952, the Chan Li Chai business was registered as a partnership under the then Business Regulation Ordinance. Subsequently, the partnership and its business were converted into a limited company namely Chan Li Chai Medical Factory (Hong Kong) Company Limited (“CLC Limited”). 

3.  The Company was at all material times the owner of Units A1 and A2 of the 2^nd and 3^rd floors, Block A, and a car parking space at No. 40 Lee Chung Street, Chai Wan, Hong Kong (“the Property”). The Property (or rather parts of it) was later rented out by the Company to CLC Limited under a tenancy agreement pursuant to which rent was payable to the Company.

4.  The Petitioners complained about the way in which the Company and CLC Limited were being run. One of their principal complaints concerned the failure of the Company to take steps to recover outstanding rentals and loans due from CLC Limited, and a decision by the Company in January 2005 to defer repayment of such loans for 18 months, to waive rental for a similar period, and to make all loans to CLC Limited interest free with effect from 1 November 2004.

5.  At paragraph 52 of the Judgment, the learned Judge found that the decision in January 2005 to grant CLC Limited a waiver of rent for 18 months, and to make all loans to CLC Limited interest free from November 2004 onwards was conduct by the majority that was unfairly prejudicial to the interests of the Petitioners, since the effect was to benefit the majority (through their additional shareholdings in CLC Limited) at the expense of the minority.

6.  At paragraph 55 of the Judgment, the learned Judge ruled that “the appropriate way in which to deal with the unfairly prejudicial conduct, which is likely to continue so long as the Respondents are in control of [the Company], is by requiring [the Company] itself to buy out the shares of the Petitioners on the basis of its net asset value as at the date of the petition, adjusted so as to include interest on outstanding loans and advances by [the Company] to CLC Ltd and all arrears of rental (ignoring any agreement by [the Company] to waive outstanding or future rents)” (emphasis added). An Order in the same terms was subsequently drawn up (“May 2011 Order”).

7.  There is no appeal from the Judgment.

8.  On 25 July 2011, pursuant to a joint application by consent, the learned Judge ordered the Petitioners and the Respondents to jointly appoint Mr Philip Lam of KLC Kennic Lui & Co (“the Valuer”) to perform an independent evaluation of the Company’s net asset value pursuant to the May 2011 Order (“July 2011 Order”). Paragraph 5 of the July 2011 Order provided that the valuation when completed be placed before the court with liberty to the parties to restore the matter for further consideration by the court.

9.  The Valuer issued a valuation report on the net asset value of the Company on 3 November 2011 (“First Report”). 

10.  The Valuer’s conclusion, set out in section 16 of the First Report, was that the adjusted net asset value of the Company as at 15 May 2007 was HK$2,894,238. On the basis that the total numbers of Class A and Class B shares were 1,800 and 1,500 respectively, and that both Class A and Class B shares had the same rights to dividends, entitlement and benefits, he assessed the adjusted net asset value per Class A and Class B share at HK$877.04.

11.  On 16 January 2012, upon the Petitioners’ application, Barma J directed the parties to file expert evidence, ordered them to seek a further report from the Valuer and gave the parties liberty to fix a hearing after receiving the Valuer’s supplemental report (“January 2012 Order”).

12.  After the January 2012 Order, several rounds of affidavit evidence were filed by the parties. One of the affirmations filed on behalf of the Petitioners was made by a Mr Lam Yat Cheong, CPA, the Petitioners’ expert. According to his evaluation, the adjusted net asset value per Class A and Class B share should be HK$5,058.28.

B.  The present application

13.  By a summons filed on 27 June 2012 (“the Summons”), the Petitioners sought a review of the First Report.

14.  The Summons set out the Petitioners’ requests to revise various aspects of the First Report as follows:

“a. request for the amount of $5,226,292 written off could be added back as asset of the Company;

b. request for the waived rents of 30.5 months could be payable at the market rental, together with interest accruing at the commercial rate or judgment rate;

c. request for the purchase of the related company’s shares for $350,000 which have been devalued to $1 could be reversed;

d. request for the directors’ estimated valuation of $15,863,000 … could be taken as the “Valuation” of the property;

e. request for the payment of the solicitor’s fees related to this case and the solicitor’s fees which should not be borne by [the Company] could be reversed;

f. request for direction … on how the market rental, appreciation in value of the property and interest should be calculated after 15^th May, 2007 in order to compensate our interests.”

15.  The net result of these requests, if allowed, would be an upward adjustment to the net asset value of the Company.

16.  The Petitioners further sought an order that a date be set for completing the procedure for the buyout of their shares and that the Company should repay the loans due to them at the same time as the payment of the purchase price for their shares. According to paragraph 2.12 of the Petitioners’ expert report, the total amount due to the Petitioners was over HK$4.3 million as at 15 May 2007.

17.  On 18 July 2012, Barma J gave leave to the Petitioners and the Respondents to file further affidavit evidence and directed the Valuer to take into consideration the further evidence in preparing his supplemental report (“July 2012 Order”).

18.  On 13 August 2012, the Valuer issued his Supplemental Report (“Supplemental Report”). His revised conclusion, set out in section 13 of the Supplemental Report, was that the adjusted net asset value of the Company as at 15 May 2007 should be HK$4,011,849. On the basis that the total numbers of Class A and Class B shares were 1,800 and 1,500 respectively, and that both Class A and Class B shares had the same rights to dividends, entitlement and benefits, he assessed the net asset value per Class A and Class B share at HK$1,215.71.

19.  Apparently, the Petitioners were still not satisfied with the revised valuation. Upon their application, there was yet another round of affidavit evidence after the issuance of the Supplemental Report in relation to the valuation of the Company’s shares.

20.  This is the adjourned hearing for the purpose of considering the two valuation reports.

C.  The Petitioners’ challenge to the Valuer’s reports

21.  In an affirmation of the 1^st Petitioner dated 28 September 2012 (“September affirmation”), the Petitioners made a number of challenges to the Supplemental Report. In essence, the Petitioners complained that the Valuer had failed to accept their/their expert’s previous comments on the First Report and thereby failed to make proper and sufficient revisions to the valuation of their shares for the purpose of the buyout. There was also an opaque criticism of the Valuer as being unfair and not truly independent, given his aforesaid failures.

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: Campbell v Edwards [1976] 1 WLR 403; Jones v Sherwood Computer Services Plc [1992] 1 WLR 277; Nikko Hotels (UK) Ltd v MEPC plc [1991] 2 EGLR 103; Dlugash v Mayers [1997] 2 HKC 814; Lau Yee Ching v Wong Tak Kwong & Ors unrep. CACV 172/2006; 26 January 2007.

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 4^th Ed. para. 14.4.10; Campbell and Palmer v Crest Homes (Wessex) Ltd. unrep. ChD 13 November 1989.

24.  It is important to note that, in the present case, there is no suggestion that the Valuer has departed from the instructions given to him in a material way; in particular, there is no suggestion that the Valuer has failed to conduct an evaluation of the Company’s net asset value pursuant to the terms of the May 2011 Order. In so far as the Petitioners criticised the Valuer for not being truly independent, I find that criticism is no more than a bare assertion, unsupported by the evidence placed before this court.

25.  I now turn to the Petitioners’ challenges to the Supplemental Report.

Value of investment in CLC Limited, Goodwill of CLC Limited & Provision for Impairment Loss on loans to CLC Limited

26.  These three challenges are all concerned with CLC Limited and can be dealt with together.

27.  First, it is common ground that the Company has acquired a minority stake ie 1.4778% (225 shares) in CLC Limited at the historical (1998) cost of HK$350,000. The question is what was its value on 15 May 2007.

28.  The Valuer observed from the audited accounts of CLC Limited for the year ended 30 June 2007 that it had incurred significant operating losses over the years with an accumulated loss of HK$6,874,272 as at 30 June 2007. These losses had depleted the entire share capital of CLC Limited and resulted in a net assets deficit of over HK$5 million. These figures were not challenged by the Petitioner’s expert or in the September affirmation as such. On the basis of these figures, the directors of the Company had written down the carrying value of the shareholding in CLC Limited to HK$1 in its 2007 audited accounts. The Valuer took the same view and accorded the Company’s shareholding in CLC Limited a nominal value of HK$1, rather than its historical cost of HK$350,000. The Valuer’s view, based as it is on the figures in CLC Limited’s audited accounts, is entirely reasonable and prudent. I do not see what mistake the Valuer is said to have made. The only complaint discernable in the September affirmation was that CLC Limited had given special bonus to its directors in 2006. In my view, whether or not that was true, it was irrelevant.

29.  Second, the Petitioners’ own expert had previously opined that CLC Limited possessed goodwill value derived from its brand name and patented medicine sold in Hong Kong and overseas. The Petitioners’ expert further assessed this goodwill value at HK$37,978,871 (which figure did not appear in CLC Limited’s audited accounts) and attributed HK$2,136,311 to the Company as a value enhancement.

30.  The Valuer, on the other hand, took the view that no (upward) adjustment to the Company’s NAV on account of the goodwill of CLC Limited was required. He based his opinion on CLC Limited’s audited balance sheets as at 30 June 2004, 2007 and 2011 which did not show any intangible properties, whether brand name, patent or trademark, as assets of CLC Limited. He also took into consideration a note in CLC Limited’s 2004 audited accounts under “Principal Accounting Policies” that no value had been placed on the trademarks of the company. The latter was not challenged in the September affirmation as such – the Petitioners only insisted that CLC Limited possessed registered trademarks in the US and other countries, but without adducing any evidence in support of their expert’s assessment that the goodwill was worth anywhere near HK$37 million.

31.  As I observed earlier, CLC Limited’s 2007 audited accounts recorded a net assets deficit of over HK$5 million. The directors of the Company have accordingly written down its investment in CLC Limited to a nominal value of HK$1, which the Valuer agreed. Consistent with this approach, I fail to see how the Valuer can be criticised for rejecting the approach of the Petitioners’ expert in attributing the sum of HK$2,136,311, or any sum, to the Company as a value enhancement.

32.  Third, in CLC Limited’s 2007 audited accounts, its auditors had expressed concern of its ability to continue as a going concern. In view of CLC Limited’s doubtful ability to repay its loan in full to the Company, the directors have made a provision of HK$5,226,292 (out of a total of HK$5.9 million odd) in its 2007 audited accounts for impairment loss of the loan to CLC Limited. The Valuer has expressed his view in both reports that such a provision was in line with the concept of prudence in generally accepted accounting principles. The Petitioner’s expert in fact acknowledged that this was so at paragraph 2.9 of his report. There is therefore in fact no divergence of views between the experts on a matter of opinion, and the Petitioners’ complaint is baseless.

Valuation of the Property

33.  In the September affirmation, the Petitioners criticised the Valuer for not adopting the estimation of the Company’s directors in its 2007 audited accounts that the Property be valued at HK$15.8 million odd.

34.  The Valuer’s explanation was that the directors were not engaged in the real estate appraisal practice and were not qualified to express a professional opinion on the fair market value of the Property as at 15 May 2007. The Valuer therefore relied on outside professional surveyors instead. In the First Report, the Valuer adopted the opinion of Miss Lau Pik Yu Isabel of Jointgoal Surveyors Limited, a registered professional surveyor, who gave a valuation of HK$11.2 million. In preparing the Supplemental Report, the Valuer took a second opinion from the firm CBRE HK Limited which gave a slightly higher valuation of HK$12.1 million. After reviewing both, the Valuer decided to adopt the higher valuation.

35.  This Court realises that real estate valuation is an art and not a science and the opinions of professional surveyors may often vary by a margin, sometimes a wide margin. A fortiori, the opinions of professional surveyors compared to non-professionals such as the Company’s directors. It is a matter of professional judgment whether the Valuer should simply rely on the Company directors’ estimation at the time or to entrust the task to professional surveyors. In my view, the Valuer’s approach in preferring the opinions of outside professional surveyors is sound and within the ambit of his instructions. Further, having obtaining a second professional opinion which was in line, albeit not identical, with the first, the Valuer was entitled to adopt the valuation of HK$12.1 million as the value of the Property. The criticism of the Petitioners in this regard is not justified.

Legal expenses

36.  As best as this court tries to understand, the complaint seems to be this. The Petitioners’ expert alleged, at paragraph 2.8 of his report, that the Company had paid legal fees in the sum of HK$320,000 to Messrs Rowland Chow, Chan and Company for their services relating to these proceedings. In his opinion, these legal fees were unrelated to the Company’s business and should therefore be added back to the Company’s NAV as at 15 May 2007.

37.  The opinion makes no sense to this court. Either the expenses were incurred by the Company or they were not. The fact that these were legal and not business expenses is neither here nor there. It might be different if there were a court order precluding the Company from incurring legal expenses (or disallowing legal expenses already incurred) in relation to what was essentially a shareholders’ dispute, in accordance with established authorities such as Re Crossmore Electrical and Civil Engineering [1989] BCLC 137 and Re CG & L Investment Ltd. [1992] 1 HKC 78. But there is no suggestion by the Petitioners that Barma J had made such an order. It would certainly be different if Barma J had found that incurring such legal expenses was itself an unfairly prejudicial act on the part of the majority shareholders and should be reversed. But there was no such finding or direction in the Judgment.

Adoption of market value for waived rents and judgment rate

38.  The Petitioners’ suggestion that the Valuer should have used market rents of the Property and judgment rate as the interest rate for waived rents in adjusting the NAV of the Company is baseless and can be dealt with briefly.

39.  At paragraph 55 of the Judgment, Barma J directed that the NAV of the Company should be adjusted to ignore the Company’s agreement to waive CLC Limited’s outstanding or future rentals of the Property as this was an unfairly prejudicial act and should be reversed. This is exactly what the Valuer did at paragraph 14 of the First Report. There is no evidence before this court that the actual rent agreed between the Company and CLC Limited at the time was lower than the market rent and the learned Judge did not direct the Valuer to adjust the NAV of the Company by ignoring the rent actually agreed between the Company and CLC Limited ie HK$43,000 and replacing it with the market rent of the Property, whatever that might be. In my view, the Valuer has made proper adjustments in accordance with the Judgment and cannot be faulted.

40.  As far as interest rate is concerned, there was no judgment in favour of the Company against CLC Limited in respect of the waived rents (or outstanding loan for that matter) as at 15 May 2007. There was also no direction from Barma J in the Judgment that the Valuer should add back interest at judgment rate on the waived rent (or outstanding loan for that matter) in adjusting the Company’s NAV as at 15 May 2007. In making the adjustment, the Valuer has adopted the interest rate of 2.5% which was the rate approved by the Company’s board of directors and mutually agreed in 2003 by the Company and CLC Limited in respect of the outstanding loan. In my view, it is not unreasonable for the Valuer to adopt a uniform interest rate for waived rents as well as outstanding loan in adjusting the Company’s NAV as at 15 May 2007, and what he has done is within the ambit of the direction given to him in paragraph 55 of the Judgment.

Repayment of shareholders’ loans

41.  Lastly, for reasons incomprehensible to this court, the Petitioners (and their expert) take the view that the amounts allegedly due to them from the Company should be repaid at the same time when the Company completes the buyout of their shares.

42.  As far as this court can ascertain from the Judgment, there was no finding that the amounts allegedly due to the Petitioners were in fact due and immediately payable, and there was no direction by Barma J that the shareholders’ loans, if any, should be repaid at the same time as the completion of the buyout. This is not surprising since there was no such claim in the Petition itself.  In these circumstances, this court is not prepared to make an Order to that effect in these proceedings. The Petitioners will have to make a demand on the Company, and, if necessary, take separate legal proceedings for repayment of the loans.

D.      Disposition and Costs

43.  For the reasons set out above, this court is not minded to disturb the revised valuation made by the Valuer in the Supplemental Report. I hereby make an order as follows:

a. the Petitioners’ shares in the Company, whether Class A or Class B, be valued at HK$1,215.71 per share;

b.   the Company do pay each of the Petitioners the purchase price for their shares in the Company in accordance with the valuation aforesaid, and interest, if any; such payment to be made by bankers draft on a date to be agreed between the Petitioners and the Company, such date to be not later than 60 days from the date hereof;

c.    concurrent with the payment by the Company of the purchase price and interest, if any, on the date to be agreed, each of the Petitioners shall execute all bought and sold notes, instruments of transfer and other documents reasonably required by the Company to effect the transfer of the Petitioners’ shares to the Company;

d.   liberty to apply.

44.  So far as interest on the purchase price is concerned, unless the payment and the calculation of the same is agreed, I will give leave to the parties to file with this Court, and exchange among themselves, written submissions on whether interest should be payable, and if yes, the rate of interest and the period for which it is payable, within 14 days from the date hereof.

45.  So far as costs are concerned, I will give leave to the parties to file with this Court, and exchange among themselves, written submissions on costs, including all costs previously reserved, within 14 days from the date hereof.

46.  Upon receiving the parties’ written submissions, or, if no submissions are received from either or both parties, upon the expiry of 14 days from the date hereof, this court shall thereafter dispose of the question of interest and costs on paper.