RE OCEAN TIME DEVELOPMENT LTD

HCCW 334/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 334 OF 2004

______________________

______________________

______________________

J U D G M E N T

______________________

1.  On 12 August 2003, Zhu Kuan (Hong Kong) Company Limited (“ZKHK”) went into compulsory liquidation.  Mr Cosimo Borelli and Mr Kelvin Flynn were appointed its liquidators.  Prior to its liquidation, ZKHK was a window company for the Zhuhai municipal government.  It had a number of direct and indirect subsidiaries.  One of its indirect subsidiaries was Ocean Time Development Limited (“Ocean Time”), which it held through a subsidiary known as Tinson International Limited (“Tinson”).  Ocean Time had one main asset, a piece of land in Lok Ma Chau, namely the Remaining Portion of Lot No. 750 in Demarcation District No. 99 (“the Lok Ma Chau Land”).  With a view to realising the assets that were ultimately owned by ZKHK, Messrs Borelli and Flynn took steps to have various of ZKHK’s subsidiaries (direct and indirect), including Tinson and Ocean Time, put into liquidation, with themselves appointed as the liquidators of such subsidiaries.  I shall refer to them in this judgment as “the Liquidators”.

2.  Ocean Time was not a wholly owned indirect subsidiary of ZKHK.  Its immediate parent company, Tinson, was owned as to 60% by ZKHK and as to 40% by Grand Gain Investment Limited (“Grand Gain”), a company whose main shareholder is Mr Lau Wong Fat (“Mr Lau”).  Tinson itself owned 98% of Ocean Time, the remaining 2% of Ocean Time’s shares being owned by a third party unrelated to ZKHK or Grand Gain.  Grand Gain and ZKHK (in liquidation) are members of the Committee of Inspection of Ocean Time.  Mr Lau is a prominent businessman with extensive interests and contacts in the New Territories, and it would appear that ZKHK and Grand Gain and their respective related companies had, prior to ZKHK’s liquidation, a fairly substantial history of cooperating with one another in relation to business opportunities.  The investment in Tinson and, through it, in Ocean Time and the Lok Ma Chau Land would appear to be an instance of such business cooperation.

3.  Apart from being a shareholder in Tinson, Grand Gain is also a creditor of Ocean Time, to the extent of HK$875,155 (although its proof of debt had been rejected by the Liquidators, it successfully appealed against such rejection and was admitted to proof in this amount – see my judgment dated 1 June 2006 in HCCW 334, 336 and 338 of 2004 and HCA 1463 of 2005 (unreported) at paragraphs 33 to 38).

4.  The Lok Ma Chau Land had a total area of just under 2.25 million square feet.  However, prior to ZKHK going into liquidation, the Government resumed part of the Lok Ma Chau Land (some 500,000 square feet odd) for which it paid compensation, leaving Ocean Time with a little under 1.75 million square feet of property.

5.  Following their appointment as liquidators of Ocean Time, the Liquidators took steps to sell the remaining part of the Lok Ma Chau Land.  According to the Liquidators, there was little interest from potential purchasers, and only one formal offer was received.  Following negotiations, the initial offer made was improved to HK$53 million, and the intending purchaser signed a provisional sale and purchase agreement for a sale at HK$53 million on 25 January 2005.  The Liquidators signed the provisional sale and purchase agreement some two days later, on 27 January 2005.  It appears that at just about this time, Mr Lau or Grand Gain had some interest in purchasing the land themselves, this being something which (according to the Liquidators) Mr Lau communicated to the estate agents handling the sale of the property on behalf of the Liquidators.  It also appears to be the case that in the month or two prior to this, Grand Gain had been making inquiries as to the progress of attempts to sell the property.

6.  Grand Gain complains that the sale was effected at considerably below the market value of the property, which is said to have been some HK$126 million, on the basis of a valuation provided by another firm of estate agents and valuers.  Initially, Grand Gain instituted proceedings against the liquidators personally, claiming damages for negligence and misrepresentation (this was HCA 1463 of 2005, which I struck out on 1 June 2005 as disclosing no reasonable cause of action – see my judgment referred to in paragraph 3 above).  In my judgment, which did not go into the underlying merits of the complaints, I expressed the view that if Grand Gain had a valid complaint, the proper vehicle for advancing it was by way of misfeasance proceedings against the Liquidators in the liquidation of Ocean Time, pursuant to section 276 of the Companies Ordinance (Cap. 32) and not by an action against the Liquidators.

7.  Grand Gain subsequently issued a summons in the liquidation of Ocean Time on 8 December 2006, seeking a declaration that the Liquidators had been guilty of misapplication of the property of Ocean Time, and of misfeasance in relation thereto in two respects.  First, by negligently causing Ocean Time to sell the remaining part of the Lok Ma Chau Land at what was said to be a gross undervalue, and without giving notice of the sale to Grand Gain or any other member of the Committee of Inspection; and second, by negligently and wrongfully paying out substantially all of the available assets of Ocean Time without paying any dividend on, or otherwise discharging, Ocean Time’s debt to Grand Gain.  The summons also sought consequential orders requiring the Liquidators to make good the loss caused to Ocean Time’s estate by their allegedly wrongful acts.

8.  This application arises in connection with that summons.  Following the issue of the summons, affidavit evidence was filed on behalf of Grand Gain and the Liquidators.  This included a considerable amount of valuation evidence from various firms of estate agents, valuers and surveyors.  However, Mr Lau’s affirmation in which he set out his evidence in reply on behalf of Grand Gain also included among its exhibits what purported to be an expert report (“the Report”) prepared by Mr Joseph Lo, an insolvency practitioner who is a partner of Messrs Deloitte Touche Tohmatsu, Hong Kong (“Mr Lo” and “Deloitte” respectively).

9.  In section 1.2 of the Report, Mr Lo describes its purpose in the following terms:-

“	[Deloitte] was engaged to:
	(a)	provide an expert opinion on the proper and appropriate procedures that a liquidator should take in disposing of a valuable property of a company in liquidation in order to properly discharge his duties;
	(b)	provide an expert assessment on the conduct of the Liquidators in relation to the sale of the Lok Ma Chau Land, in particular the procedures adopted by them in the sale, including but not limited to the rationale, and reasonableness for [sic] the appointment of two associated companies as the valuer and sole agent for the sale of the Lok Ma Chau Land and the sale of the Lok Ma Chau Land without consulting the [Committee of Inspection] of [Ocean Time] before agreeing the final sale terms.”

10.  In the body of his report, Mr Lo goes on to deal with such matters as the general duties of a liquidator (section 3.1), various aspects of what he describes as the “proper and appropriate steps in disposing of a peculiar asset of significant value” (section 3.2) which included the view that it was incumbent on the Liquidators to have consulted the Committee of Inspection before agreeing the final terms of the sale (section 3.2.5), followed by a detailed criticism of the manner in which the Liquidators marketed and sold the property (section 4), dealing with such matters as the Liquidators having (at least in Mr Lo’s view) disregarded enquiries and criticisms by Grand Gain, undertaken insufficient marketing activities, acted hastily in selling the property, the terms of the agreement for sale that was entered into, failure to obtain a second valuation or an updated valuation prior to the sale, using associated companies as valuer and sale agent, and failing to consult the former directors of Ocean Time to see if they might be able to assist in introducing potential purchasers or by providing information as to the characteristics of the property which might influence the price or terms of the sale.

11.  The inclusion of the Report as an exhibit to Mr Lau’s reply affirmation resulted in the Liquidators applying to have the Report excluded from the evidence to be adduced in the misfeasance proceedings.  The matter was first raised in a directions hearing on 29 June 2007, when I directed that this issue should be dealt with at a substantive hearing, in respect of which the Liquidators should give notice to Grand Gain of the grounds upon which they contended that the Report should be excluded.  This was that hearing.

12.  On 6 July 2007, the Liquidators filed a notice of the grounds of their application.  These were that:-

(1)	There was no recognised professional practice as to the matters which the Report dealt with, namely the procedures to be adopted by liquidators in disposing of a valuable property and an assessment of their conduct in relation to the sale of the Lok Ma Chau Land;
(2)	These matters were questions of fact and law which the court could best deal with without receiving what purported to be expert evidence;
(3)	The Report was no more than Mr Lo’s personal opinion of what he would have done in the Liquidators’ position;
(4)	The view that the Committee of Inspection should have been advised of the process and progress of the sale was wrong as a matter of law;
(5)	Mr Lo’s view that the Liquidators disregarded the Committee of Inspection was wrong as a matter of fact, or, alternatively, was irrelevant;
(6)	The particular criticisms of the manner in which the sale was conducted were outside Mr Lo’s area of expertise;
(7)	Those criticisms were matters which the court could consider without the need for assistance from an insolvency practitioner;
(8)	As the Liquidators were officers of the court, the court could well assess their conduct without the necessity of opinion evidence such as the Report;
(9)	The admission of the Report would result in the unnecessary incurring of possibly substantial costs;
(10)	Mr Lo’s opinion went to the ultimate issue in the proceedings, namely, whether the Liquidators had been negligent in respect of the sale of the Lok Ma Chau Land; and
(11)	The only issue on which the court might derive assistance from expert evidence was in relation to the value of the Lok Ma Chau Land, and whether it was sold at a “gross undervalue”, this not being something that was addressed by Mr Lo, nor within his area of expertise.

13.  At the hearing, the Liquidators were represented by Mr Carolan, and Grand Gain by Mr Chan SC and Mr Lee.  Both parties were in agreement as to the approach to be taken by the court, agreeing that if the court was of the clear view that the Report should not be admitted, then it could and should direct its exclusion at this stage.  There was also broad agreement as to the legal principles to be applied, it being agreed that these were set out in Barings Plc (in liquidation) v Coopers & Lybrand [2001] Lloyds LR (Banking) 85 (applied in Hong Kong in Annabell Lee v Lee Wing Kim (unreported, HCA 9522 of 1997, CFI, Chu J, 6 December 2001).  In the Barings case, Evans-Lombe J described the test to be adopted by the court as a two stage test, in the following terms (at paragraph 45 of the judgment):-

“

In my judgment the authorities which I have cited above establish the following propositions: expert evidence is admissible under section 3 of the Civil Evidence Act 1972 [equivalent to section 58 of the Evidence Ordinance (Cap. 8)] in any case where the court accepts that there exists a recognised expertise governed by recognised standards and rules of conduct capable of influencing the court’s decision on any of the issues which it has to decide and the witness to be called satisfies the court that he has a sufficient familiarity with and knowledge of the expertise in question to render his opinion potentially of value in resolving any of those issues.  Evidence meeting this test can still be excluded by the court if the court takes the view that calling it will not be helpful to the court in resolving any issue in the case justly.  Such evidence will not be helpful where the issue to be decided is one of law or is otherwise one on which the court is able to come to a fully informed decision without hearing such evidence.”

14.  Mr Carolan submitted that it was doubtful whether there is a recognised expertise in relation to the conduct of the office of a liquidator, although he accepted, I think, that in relation to certain aspects of that office, there might be room for it to be concluded that such a recognised expertise existed, such as, perhaps, in relation to such matters as the accounting expertise that might be required for the production of liquidators’ accounts.  He also submitted that to the extent that it might be said that there might be some elements of expertise in the carrying out by a liquidator of the functions of his office, in that most liquidators will be professional persons (usually with accounting or legal qualifications) and there is a body of law relating to the duties of liquidators and the standards to be expected of them, for the most part, an assessment of their conduct would involve questions of law, in that it would be necessary to apply the relevant standards established by the law to the conduct in question.  On this basis, he submitted that even if it were considered that there was a recognisable expertise of acting as a liquidator, opinion evidence in relation to the standards required would not be helpful to the court, as it would largely involve questions of law.  Finally, he submitted that having regard to the nature of the actions that were to be the subject of scrutiny in these proceedings – namely, the steps taken in relation to the sale of property – there could either be little in the way of recognised expertise in relation to this beyond the practice of any businessman engaged on the sale of a piece of property, or at best, that any such expertise would be the province of someone in the business of estate agency or property selling, rather than a professional liquidator and insolvency practitioner.

15.  Mr Chan, however, contended that in order for expert evidence to be admissible, it was not necessary for there to be a recognisable profession as such, and that it was sufficient if there were a recognisable body of expertise in relation to the matter in question.  He went on to suggest that it could not seriously be argued that no such body of expertise existed in relation to the actions of the Liquidators that would come under scrutiny in this case, since Mr Borelli himself, in the evidence filed in answer to the claims advanced by Grand Gain, had repeatedly referred to his firm’s, and his personal, experience of handling liquidations and restructurings of some complexity, these being matters in respect of which he professed to have real expertise.  He went on to submit that what Mr Lo had to say in the Report would be of obvious relevance to an assessment of the Liquidator’s conduct, and that certain points canvassed by Mr Lo, such as the question of whether or not the Committee of Inspection should have been consulted, were peculiarly matters that would arise in the context of an examination of a liquidator’s handling of the sale of property.  He therefore suggested that not only was there a recognisable body of expertise to which the court could usefully have regard, evidence in relation to it would probably be of assistance to the court in this case.

16.  I would accept Mr Chan’s submission that it is not necessary to have a recognisable profession in order for there to be a recognisable body of expertise in relation to the matter in question (see the Barings case at paragraphs 39 to 40).  I would also accept, as he suggested, that the ultimate objective is that the court should reach a fully informed decision, and that expert evidence which has a bearing on the issues and which is helpful to the court in coming to its decision should be received (see e.g. United Bank of Kuwait v Prudential Property Services Ltd (unreported, English Court of Appeal, 27.11.95) at p.3 of the transcript, and the Barings case at paragraphs 20, 44 and 45).  I would also be inclined to accept that, while there may be no profession of acting as liquidators, the conduct of that office is something that requires skill, experience and expertise, as is witnessed by the fact that most liquidators (at least those who carry out that office on a full-time or paid basis) are professional persons from, as I have observed, the accounting or legal professions.

17.  That said, however, it does seem to me that in respect of the matters which Mr Lo raises in the Report, there is, in relation to most of the points which he makes, no body of expertise that exists in relation to the office of liquidators.  As will be apparent from my summary of the Report, most of Mr Lo’s criticisms of the way in which the Liquidators acted in this case relate to the manner in which they went about the sale of the property.  While it might be that there is a certain amount of expertise involved in marketing and selling a property so as to obtain the best possible, or at least a good, price for it, I do not see that such expertise is such as would be peculiar to liquidators or insolvency practitioners.  In truth, the position would appear to be no different to that which would obtain in the case of any person transacting a sale of property in circumstances in which he may be under a duty to act in such a way as to obtain the best, or a reasonable, price for it – such persons might include trustees, executors or administrators, directors of companies or mortgagees, among others.  I do not think that there are particular aspects of the sale of property by a liquidator that give rise to a separate and identifiable body of expertise, such as would justify the admission in evidence of a report along the lines of the Report.

18.  While I would be prepared to accept that some evidence as to the best method of selling a property to best advantage might be admissible in the context of a case such as the present, I would not agree that such evidence would appropriately come from an insolvency practitioner such as Mr Lo.  Rather, it seems to me that such evidence might, at best, be adduced from a professional estate agent, such as one of the many valuers who are, it seems, poised to give evidence as to the value of the Lok Ma Chau Land for the purposes of these proceedings.

19.  Further, in relation to those aspects of the Report which might be thought to be peculiar to the situation of a sale of property by liquidators – in particular the need, if any, to consult the Committee of Inspection, it seems to me that this, even accepting for the sake of argument that it is a matter on which there may be a body of expertise, is really something which involves the application of the obligations or standards imposed on liquidators by statute or the general law to the facts of the particular case, so as to amount to what is really a question of law, on which the opinion of an experienced liquidator is not going to be of assistance to the court.

20.  So far as Mr Chan’s point relating to Mr Borelli’s own assertions of expertise and experience are concerned, I do not think that this takes matters any further.  Just as I would not regard Mr Lo’s views as being of any particular assistance on these matters, I would regard Mr Borelli’s experience as a liquidator (which I accept is extensive) in much the same way – that it does not follow from the fact that he is very experienced that what he has done in the present case is necessarily right or without blemish.

21.  For these reasons, therefore, I am satisfied that Mr Lo’s report is not admissible for the purposes for which it is intended.  I do not think that Mr Lo can be regarded as an expert in relation to the sale of property, and do not think that his evidence on these matters is at all likely to assist the court.  To the extent that the contentions which are canvassed in the Report are matters which Grand Gain desires to raise in the proceedings, they are already raised in Mr Lau’s affirmations, and are open to Grand Gain to advance, through Mr Lau or perhaps the valuation experts, or by way of submission as to the duties and obligations of liquidators as a matter of the general law applicable to them.

22.  These reasons (which are comprised in grounds (1), (2), (6), (7) and (8) of the notice of grounds for objection summarised in paragraph 12 above) are sufficient to dispose of this application.  For completeness, however, I shall deal briefly with the other grounds advanced by the Liquidators in the notice of grounds for objection to the admission of the Report (which Mr Carolan did not, in fairness to him, stress at the hearing).

23.  In relation to the suggestion in ground (3) that the Report represents only the personal opinion of Mr Lo, I would have accepted Mr Chan’s submission that this is probably just a matter of the way in which the report is worded, and that Mr Lo’s intention was to state his opinion as to the way in which a reasonably competent liquidator should have acted.

24.  As for the points made in grounds (4) and (5), these are matters which should be considered at the trial of the proceedings.  If I had considered that the Report should be admitted as evidence, these points, which go to the correctness of the views or facts stated in it, would not have been matters which I would have thought it appropriate to reach any conclusions on at this stage.

25.  As for ground (9), I do not think that the fact that costs and expense would be incurred in responding to and dealing with the Report would have constituted a basis for excluding it, had it otherwise been proper to admit it in evidence.

26.  As for ground (10), it is well established that it is possible for an expert to give opinion evidence as to the ultimate issue in the proceedings in an appropriate case, and I would not have been inclined to exclude the Report on this ground had I thought it otherwise admissible.

27.  In the circumstances, however, I am satisfied that it would be appropriate for me to exclude the Report from the evidence in these proceedings, and I therefore decline leave to Grand Gain to adduce it.  I shall leave it to the parties to formulate an appropriate form of order to give effect to this ruling.

28.  So far as costs are concerned, as the Liquidators have been successful in their application, and no significant time was spent on the grounds other than those which have proved successful, I think that the costs should simply follow the event, and I shall therefore make an order nisi that Grand Gain is to pay the Liquidators’ costs of this application, to be taxed on the party and party basis if not agreed.