DAVID KONG v. PINE GROWTH MANUFACTURING CO LTD AND OTHERS

HCCW321/2006

& HCCW322/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 321 OF 2006

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D E C I S I O N

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1.  This application arises out of a settlement of proceedings that was reached some years ago.  In the proceedings, the petitioner sought orders under section 168A and 177(1)(f) of the Companies Ordinance in relation to the two companies that are the subject of these petitions alleging unfair prejudicial conduct against his interests by the respondents.

2.  The matters did not go to trial because prior to that stage being reached, the parties were able to agree that the matter should be compromised on the basis of a Tomlin order by which the respondents agreed to buy out the interest of the petitioner in the two companies concerned on the basis of a valuation to be conducted by valuers to be appointed for that purpose.

3.  Although this happened upwards of some four years ago, regrettably, as from the court’s experience happens from time to time, there have been difficulties in relation to the valuation.  In this case, the difficulties have resulted in an impasse being reached between the valuers on the one hand and at least the respondents on the other, as to the manner in which the valuation should be carried on and payment of their fees, causing a general breakdown in the relationship between them.

4.  I do not, at this stage, propose to embark on any sort of examination of those matters.  Those are matters which may be relevant to one aspect of the application that is before me today, but it is one which I have decided should be dealt with at a later stage.  However, the effect of this breakdown in the relationship between the valuers on the one side and the parties, or at least one of them, on the other, is that the valuation by the appointed valuers, who were Messrs Grant Thornton (now known as JBPB), is not going to be completed.

5.  In these circumstances, a new valuer has to be appointed and indeed it appears that the respondents, in about April this year, suggested that Messrs Baker Tilly should be appointed in place of Grant Thornton in order to carry out or complete the valuation exercise.  Baker Tilly, as a matter of history, was in fact the candidate that had been proposed for the role of such valuer by the respondents themselves at the time when the Tomlin order was entered into.

6.  The petitioner agreed to this suggestion.  However, for various reasons which it may be relevant to consider in due course but not today, this did not happen immediately.  Instead, the respondents suggested that it would be desirable first to retrieve documentation from Grant Thornton so as to provide it to Baker Tilly.  For various reasons, that has not been possible.

7.  In the result, the petitioner took out this application seeking the appointment of Messrs FTI Consulting (Hong Kong) Limited (“FTI”) to be the valuers in place of Grant Thornton.  He also seeks in this application directions for the further conduct of the valuation which I understand from Mr Carolan to be directed principally at ensuring that documentation that was provided to Grant Thornton is provided to the new valuers to be appointed at a reasonably early date so that their valuation can be carried out with as little further delay as possible.

8.  A third matter that is the subject of the summons that was issued by the petitioner on 13 October this year, is to seek an order that the costs of this application be borne by the respondents, it being the petitioner’s case that the need for this application to be made has been brought about by the respondents unwillingness to co-operate and act in a co-operative or sensible manner in relation to the difficulty that has now arisen.

9.  In his skeleton argument filed in support of this application, Mr Carolan has suggested that those costs should be ordered to be paid on an enhanced basis - on the indemnity costs basis - to reflect the court’s disapproval, which he says the court should express, at the way in which this matter has been dealt with by the respondents.

10.  Although the application was taken out on 13 October, no evidence was filed by the respondents until shortly before 9.30 this morning.  More accurately, that evidence was not filed but it was produced to the court and to the petitioners shortly before the court sat this morning at 9.30.  Faced with that situation, I adjourned the matter until 3.00 this afternoon so as to afford Mr Carolan and myself an opportunity to read the material that had been provided.  We have now done so.

11.  For the purposes of today, I am satisfied that it is desirable to make the orders in relation to the appointment of a valuer and to give directions as to the provision of documents to that valuer today if at all possible.  This is to avoid further delay to an already lamentably delayed valuation being produced.

12.  The questions that arise are, first, as to the identity of the valuer and, second, as to the directions to be given to them.  So far as the identity of the valuer is concerned, the petitioners have indicated that they propose the appointment of FTI.  In their evidence, they explain that FTI is, in fact, a successor company of Baker Tilly, the valuers originally proposed by the respondents.  The evidence that I have seen indicates that this is indeed the case.

13.  The respondents, however, now object to the appointment of FTI and propose instead that either Messrs PricewaterhouseCoopers (“PwC”) or Messrs Ernst & Young (“EY”) should be appointed as valuers instead.  This suggestion was made only in the affirmation of Mr Chan, who is the respondent in one of the proceedings, which was produced this morning.

14.  Mr Yeung, who appears today for the respondents, provided a skeleton argument at about lunchtime, in which he set out various matters.  The first paragraph of that skeleton indicates that the respondents do not oppose directions being given for the appointment of a replacement valuer and asserts that the respondents are anxious for a valuer to be appointed as soon as possible.  They say that the issue is who a suitable candidate might be and whether the valuation work should be conducted afresh, or from scratch, or by taking advantage of such work as has been done by Grant Thornton as may be available to them. 

15.  On the first issue, paragraph 11 of the skeleton argument (paragraphs 2 to 9 deal principally with some aspects of the alleged delay in the matter and whether or not this was the fault of the respondents which, as I have said, is not a matter I propose to go into today) indicates that, in the view of the respondents, PwC or EY are obviously more suitable candidates to act as replacement valuer.

16.  First, it is said that because PwC and EY belong to what is colloquially known as ‘the big four’ - the four largest accounting practices worldwide – they are for that reason to be obviously more reliable and reputable than FTI which, it is suggested, may not even be a firm of certified public accountants.  Second, and, according to Mr Yeung more importantly, PwC and EY are prepared not to conduct the valuation work from scratch and are therefore, it is said, in a position to complete it more expediently. 

17.  Dealing with the first point, it is undoubtedly correct that PwC and EY are accountancy firms that belong to the big four.  That is not, however, to say that other firms would not be equally capable of carrying out the work of producing a valuation of the companies.  I would also note that so far as PwC at least is concerned, it would not be PricewaterhouseCoopers, the big four accounting firm itself, that would be carrying out the work but one of its associated companies through which work relating to forensic accounting and valuation exercises is carried out.

18.  The material before me indicates that FTI is part of an organisation that has a substantial worldwide practice, albeit perhaps not quite as substantial as that of either PwC or EY, and that FTI is the company in that group or that organisation which carries out valuation and forensic accounting work.  There are other companies in the group, including a company called FTI Consulting Asia Limited, which appears to be on the Official Receiver’s panel A of appointment-takers for insolvency and winding-up work. 

19.  It appears to me that it is not at all unusual for firms of accountants and insolvency practitioners to structure their businesses in such a way that different functions are carried out by different companies within their umbrella organisation.  I therefore do not think that the fact that FTI is a company with a somewhat limited amount of paid-up capital is a relevant matter for the court to take into account against their being appointed.  What is more important is the ability of the firm to provide the services required and the identity and experience of the persons who will be carrying out the work in question. 

20.  So far as FTI is concerned, the material that I have before me indicates that FTI is staffed or run by practitioners from two well-known insolvency and forensic accounting and accounting firms, formerly known as Ferrier Hodgson and Baker Tilly.  The person signing the draft engagement letter put forward by FTI is Mr Simon Blade.  He is certainly someone who is known in Hong Kong to have acted as a liquidator and to have provided services along the lines of forensic accounting and valuation services. 

21.  In my view, there is nothing to suggest that FTI would not be able to conduct the valuation exercise as efficiently, expeditiously and economically as either PwC or EY.  I bear in mind also that Messrs Baker Tilly (FTI’s predecessor firm) were, in the first place, the proposed valuer put forward by the respondents.  It seems to me to lie ill in the mouth of the respondents to now suggest that this firm, which they themselves put forward, and which is in effect the same entity as they put forward some four years ago, is somehow no longer suited to provide the services that are now required.

22.  Apart from this, it seems to me that looking at the proposals that have been put forward, there is not a great deal of difference between them, save that FTI have proposed that they are prepared to charge a fee on a capped fee basis for the entire piece of work.  This is something that counts to a small extent in favour of their appointment since it provides a modicum of certainty as to the costs that will be involved.  Their proposed capped fee is HK$800,000.  This is the same as the estimate provided by PwC and about 9 per cent lower than the estimate that has been put forward by EY.

23.  Moving on to the second point, it was originally contended by Mr Yeung that, in contrast to FTI, EY and PwC were prepared to take advantage of whatever work had been done by Grant Thornton and, so it was suggested, would be able to complete the work perhaps more speedily and perhaps at less cost than would be the case if FTI were appointed. 

24.  However, that appears to be a misconception on Mr Yeung’s part as it is quite clear from FTI’s proposed engagement letter and the covering letter accompanying it, that they too would be prepared to take advantage of such work as has already been done by Messrs Grant Thornton.  That work seems to consist primarily of a draft valuation of the companies on a net book value basis based on the book value or historic costs of various assets in the books. 

25.  There is some dispute as to whether or not this is an appropriate basis for valuation, it being, in particular, the petitioner’s case that the appropriate basis for valuation would not be net book value but a fair value, taking into account the fair value of the assets recorded in the books of the company as at the date at which the valuation is to be carried out.  That, again, is not something that it seems to me that I need to determine or consider today. 

26.  What is important is that the valuer who is appointed is, first of all, willing to have regard to such work as has been done by Messrs Grant Thornton which is available to them in order to minimise, so far as possible, the time and expense of the valuation exercise, although at the same time, it must be understood that if (as I propose to do) a new valuer is appointed, the work product and the valuation that is to be produced will have to be the product of that valuer, exercising its own professional judgment.  It would not, in my view, be appropriate for the valuer to uncritically adopt work done by another valuer, but it would of course be open to it to have regard to that work if it felt, exercising its professional judgment, that it were appropriate to do so.

27.  FTI have, as have PwC and EY, indicated that they are prepared to look at the work done so far to the extent that it is made available to them, and to the extent that this results in the work being completed in a shorter time than might otherwise have been the case and their time spent therefore being less, that the fees charged would be reduced accordingly to reflect the actual time spent if the time spent, when applied to their hourly rates, produced a figure of less than the estimate. 

28.  In other words, FTI, like PwC and EY, would be amenable to passing on any savings that might accrue as a result of being able to have regard to the work that has been done by Grant Thornton so far.

29.  In those circumstances, it does not seem to me that the second point that is taken by Mr Yeung is in fact a point of substance.  In fairness to Mr Yeung, when this was pointed out to him in the course of argument, he did not press it. 

30.  This therefore means that the only point that is being made relates to the status of PwC and EY as members of the big four, but that is not a determinative matter.  There are a number of firms that specialise in valuation and forensic accountancy and insolvency work, all of which are, in the court’s experience, competent, and there is no reason to think that FTI will not be as competent as PwC or EY.

31.  In those circumstances, I do not think that the grounds put forward for objecting to the appointment of FTI have any real substance and I therefore think that the appropriate course would be to appoint FTI to be the valuers for the purpose of the valuation referred to in the Tomlin order in place of Grant Thornton.

32.  Turning now to the question of directions to be given concerning documentation to be provided to them, there was initially some confusion, not least on my part, as to what documentation was actually available in terms of documentation that had been supplied previously to Grant Thornton by the two parties. 

33.  However, following clarification by Mr Yeung, it appears that the position is this.  Both parties have provided documentation to Grant Thornton over the period during which Grant Thornton had been acting as valuers.  The petitioner appears to have kept a full set of copies of the documentation that he provided to Grant Thornton along with a full set of copies of such documents as were provided by the respondents to Grant Thornton, insofar as he was provided a copy of them (not all documents provided to Grant Thornton were copies to the petitioner).

34.  The petitioner, therefore, is in a position to make available a further set of such copies to FTI within a reasonably short period of time.

35.  From the point of view of the respondents, however, the position appears to be slightly different.  It appears that the documentation provided by the respondents to Grant Thornton can be divided into two broad categories.  First, copies of hard copy documents maintained by the respondent companies and their associated or subsidiary companies in various parts of the mainland which were sought by Grant Thornton for the purpose of the valuation exercise.

36.  As I understand it, the respondents have a list, or have a record of the documents that were provided but do not necessarily have a full set of copies of what was provided.  They may have some copies but not, it seems, a full set, so that a number of the documents, copies of which were provided to Grant Thornton, exist only in their original form in their original locations.

37.  In addition, certain documents were provided in soft copy format.  These were mainly various accounting documents and cash flow statements, some of which may not have existed as such at the time that the order was made but which were created by the respondents based on, presumably, underlying documentation for the time period in question, being created at the request of Grant Thornton.

38.  Such soft copies which had been provided to Grant Thornton, I understand to still reside on various computers or servers maintained by the respondents, although they may not all reside in one place. It is also not clear whether any of these documents, or copies of these soft documents, have been made available to the petitioners.

39.  The position, therefore, is that while it will be probably relatively straightforward and a relatively quick task for the petitioners to produce a set of copies of the documents that they handed over to Grant Thornton, the respondents may not be in a position to do so quite as quickly.  Mr Carolan suggested that a period of three weeks should be afforded to the respondents to enable them to produce a fresh set of such documents for the benefit of FTI.

40.  Mr Yeung, having taken instructions, suggested that a period of four weeks was needed.  In the overall scheme of things, I do not think that the additional delay that will be caused by accommodating the request made by Mr Yeung will make any real difference to the timing of the delivery of the report and, in those circumstances, I would accede to the request that a period of four weeks be set, rather than three weeks. 

41.  I would therefore direct that each party should provide to Messrs FTI Consulting (Hong Kong) Limited a full set of the documents which they provided to Grant Thornton during the time when Grant Thornton was acting as the valuer appointed by the court, within 28 days from today.

42.  A further question has arisen as to whether or not a set of copies should either be provided by each party to the other, or whether each party should be entitled to inspect and take copies of such documents in the possession of the valuer.  In the event, I think both parties are content that the other side should have access to, for the purpose of inspection and taking copies, such documents in the possession of the valuer. 

43.  It seems to me that that would be a sensible approach given that, first, it will result, presumably, in less cost to the party seeking to obtain copies in that it will be able to acquire the copies or make the copies itself without having to go through the offices of the other side’s legal representatives; and secondly, it will also have the benefit of being less disruptive to each of the parties in that it will not be necessary to have the other party coming onto its premises to inspect such documentation and take copies thereof.

44.  I therefore would direct that each party is to be at liberty to seek and obtain copies of any documentation provided by the other party to the valuers pursuant to my earlier direction.  I do not propose to put any time limits in respect of that.  That will be a matter for the parties to decide with the valuer, and to do so in a manner that will be compatible with enabling the valuers to carry on their work as expeditiously as possible.

45.  So for the reasons that I have given, I shall appoint FTI to be the valuers in place of Grant Thornton and I shall give the directions that I have indicated. 

46.  In the event that FTI should consider it necessary to seek further information or documentation from either party, that will be a matter for them.  If there is any difficulty in relation to that, then that is a matter that may have to be referred back to the court if necessary. 

47.  However, I would express the hope that it will not be necessary to do so because it seems to me that this valuation has already been substantially delayed and it must be in the interests of all parties for it to be concluded as quickly as possible.  With that in mind, I would hope that the valuers will make the best use that they can of the information available and limit such further requests for information to matters which they consider to be truly critical to their ability to produce a valuation that will fairly value the shares of the companies that are to be transferred.