WU CHI MAN v. MOE FANG

HCA 607/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 607 OF 2010

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J U D G M E N T

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1.  On 18 February 2013, just over a week before today which is the date appointed for the pre-trial review of this action, the plaintiff issued a summons for leave to adduce expert evidence in the form of a written report of a certified public accountant attached to the summons. The action has been set down for trial for 4 days starting on 27 May 2013. The defendant opposes the application.

2.  In order to understand the purport of the expert evidence concerned it is necessary to know the main points of contention in the action.  The subject matter of the plaintiff’s claim is the beneficial ownership of 495 paid-up ordinary shares (“the Shares”) (out of 1,000 issued shares) in a company called BBQ By the Beach Limited (“the Company”), which was set up in Hong Kong in 2004 and has since operated a barbecue yard in Siu Lam, Tuen Mun.  The Shares used to be registered in the plaintiff’s name.  The defendant was and still is the owner of another 495 shares and an estate agent who introduced the site to the parties was and is the owner of 10 shares.

3.  It is common ground that the plaintiff has known the defendant and her husband for many years.  The plaintiff says that in 2007 or 2008, he was being pursued and harassed by debt collectors in relation to his liabilities to a third party creditor.  This having come to the attention of the defendant, she exploited the opportunity and asked the plaintiff to sign certain documents, which the defendant had prepared, for the purposes of transferring the Shares to the defendant and resigning as a director of the Company, so that the plaintiff would not be identified by the debt collector or the creditor as having any relationship with the Company.  The defendant assured the plaintiff that she could be trusted to hold the Shares for him temporarily pending resolution of the dispute between the plaintiff and the third party creditor.  The defendant also promised the plaintiff that his interest in the Shares would be intact and that she would continue to distribute 30% of the profits of the Company to him every year.

4.  There is no dispute that the defendant subsequently refused to transfer the Shares back to the plaintiff.  The defendant’s case is, broadly, that there was no such agreement as alleged by the plaintiff for her to hold the Shares on trust for him. Instead, she says that there was an investigation into the company by the Inland Revenue in 2008 as a result of which additional assessments were raised in the amount of approximately $1.7 million in respect of the profits of 2005/6 and 2006/7 and a further penalty was likely to be imposed.  When asked by the defendant to contribute funds either to engage professionals to contest the assessments or to pay them, the plaintiff, preferring to focus on his other businesses and his financial problems, opted to relinquish his interest in the Company and to leave the defendant to cope with the problems caused by the tax investigation and assessments.  There is no dispute that the defendant did not pay any money to the plaintiff for the Shares.

5.  Based on the facts alleged by him, the plaintiff claims that the Shares were held by the defendant on an express trust for him.  He also says that the defendant has not provided any consideration for the transfer and therefore holds the Shares on resulting trust in his favour.  He seeks a declaration that the Shares were his and an order for their return to him.  If the claim based on trust fails, he nevertheless seeks restitution of the Shares on the basis of mistake and total failure of consideration.

6.  In addition, the plaintiff claims that the defendant made fraudulent or negligent misrepresentations to him in that, in particular, the defendant never had any intention in fact to return the Shares to the plaintiff and thus misrepresented to the plaintiff the state of her own intentions.  On that basis he claims, as an alternative to his claim for the Shares, damages in respect of the value of the Shares.

7.  For her part, the defendant counterclaims against the plaintiff for repayment of money lent, from May 2005 to February 2010, in various sums totalling almost $2.8 million. In reply, the plaintiff admits he has received sums from the defendant totalling about $1.4 million up to January 2007, but does not admit receipt of other sums.  In any event, he says these sums were paid by the defendant to him as distribution of the profits of the business of the Company and not as loans.

8.  The expert report that the plaintiff seeks to adduce is dated 8 February 2013.  It is 18 pages long with over some 100 pages of annexure.  It is issued by a certified public accountant who is the managing director of a Hong Kong based accounting firm.  He is also a certified tax adviser and, having previously worked for over 12 years in the Inland Revenue Department, relies in the report on his experience in that Department.  The report states the opinion sought as being on the fair market value of the Shares as at 10 November 2008 — the date of the transfer of the Shares to the defendant.  The plaintiff’s counsel submitted that the report is a “valuation report” that deals essentially with the fair market value of the Shares and the profits of the Company since its incorporation in 2004.

9.  As part of the exercise, the expert has sought to reconstruct the proper profits of the Company for the years 2005/6 and 2006/7 by reference to the additional assessments imposed by the Revenue.  He has also re-computed the financial results of the Company for the financial years ended on 31 March 2008, 2009 and 2010 by making adjustments for the tax penalty and director’s remuneration.  Based on the work carried out he expressed doubts on the reliability of the audited accounts for those years.  He has also tried to analyse the results of the Company for the period from commencement of business to 31 March 2006 and to work out its profits based on the monthly reports received by the plaintiff at the time.

10.  The expert explains the various methods of valuation and expresses his views on which method is more or less appropriate for the Company.  The valuation in the report is based on a combination of the assets basis and the earnings basis.  The expert assesses the future maintainable profit of the business run by the Company (based on the average of net profits from the date of incorporation to 31 March 2008) and uses a multiplier of one to arrive at the value based on the earnings basis. 

11.  He then assesses the value of the Company on the assets basis as being the accumulated profits of the Company less the distributions to the shareholders which he assumes to have been made corresponding to the distributions to the plaintiff.  He adds together the values obtained by these two methods respectively and opines that the sum is the fair market value of the Company as a whole, with the Shares being worth a proportionate 49.5% thereof.

12.  The plaintiff submitted that the expert evidence in the report is relevant to three matters:

(1) the quantum of the plaintiff’s claim pleaded in paragraph 19 of the Re-Amended Statement of Claim represented by the “market value of the Shares (to be assessed)” and “30% of the annual profits arising from the business operation of the [Company] since October 2008 (and/or the capital gain on the Shares and/or the dividend income on the Shares) (to be assessed)”;

(2) the defendant’s defence that the transfer of the Shares was supported by sufficient consideration; and

(3) the dispute whether various payments made to the plaintiff were distribution of the profits to him or loans advanced to him.

13.  The last two of these can be quickly disposed of.  As to the second matter, the plaintiff submits that the defendant’s contention that she provided consideration necessitates a comparison between the consideration paid by the defendant with “the true value” of the Shares.  I reject this submission.  There are only three possible outcomes of the trial so far as the facts are concerned: (a) the Court accepts the plaintiff’s account of the reasons for the transfer of the Shares to the defendant, in which case the question of consideration does not arise; (b) the Court accepts the defendant’s account of the reasons for the transfer, in which case the plaintiff deliberately relinquished the Shares once and for all and the defendant in any event provided consideration by taking over responsibilities for dealing with the revenue; (c) the Court rejects both parties’ factual cases.  None of these scenarios will require the Court to determine the precise value of the Shares.  As a matter of general principle, the Court does not concern itself with the adequacy of consideration.

14.  As for the third matter to which it is said the expert evidence is relevant, the nature of the payments to the plaintiff and in particular whether they were distribution of the profits of the business or loans advanced to him is a question of fact.  The resolution of this question will depend on the Court’s evaluation of the factual evidence adduced by the parties.  I fail to see how an accountant acting as an expert can shed any light on the matter.  All that he seeks to do is to re-construct the profits made by the Company.

15.  I come now to the first matter relied upon by the plaintiff — the quantum of his claim for damages.  On the face of it, the measure of damages for the plaintiff’s claim for misrepresentation is indeed the value of the property with which he parted as a result of being misled together with any lost income from or accretions to the property since he transferred it.  And the expert report does purport to deal with that value.  (I note that the expert report does not address the measure of damages pleaded in paragraph 19(2) of the Statement of Claim in the form of “30% of the annual profits arising from the business operation of the [Company] since October 2008 (and/or the capital gain on the Shares and/or the dividend income on the Shares)”.)

16.  However, it seems to me that the plaintiff’s primary claim based on the facts alleged is the claim for the shares.  If the plaintiff’s version of events is established, the Shares will in all likelihood be found to have been held on trust by the defendant for the plaintiff.  If the plaintiff’s factual case is rejected, the misrepresentation case will probably fall away.

17.  The claim for damages measured by the value of the Shares is only an alternative claim, and only arises if the Shares for whatever reason are not or cannot be ordered to be returned.  Indeed, if the Shares are returned, the plaintiff will have suffered no relevant damage that is represented by the value of the Shares as at the date of the transfer.  The plaintiff can point to nothing to show why the Shares could not be returned or, if returned, would not provide full recompense to him (subject to his claim for any lost income).

18.  There is moreover, in my view, an unusual feature of the misrepresentation claim.  The plaintiff pleads that the defendant represented to him at the time of the transfer that “she would be an appropriate and/or trustworthy person to hold the Shares on trust for the Plaintiff”.  The principal part of the misrepresentation case (said to be “more important” in paragraph 17(2) of the Statement of Claim), is that “the defendant had from the outset intended to retain the plaintiff’s Shares, and to usurp all the Plaintiff’s rights and/or interests in Shares”.  On that basis, it is said that the defendant did not in fact have an intention to return the Shares to the plaintiff, nor did she intend to distribute or cause the Company to distribute the profits of the business.  Further, it is said that the defendant “did not genuinely hold the opinion and/or view that she was an appropriate and/or trustworthy person to hold the Shares on trust for the Plaintiff”.  The misrepresentation case is therefore largely based on alleged representations regarding the defendant’s own state of mind including her intentions and opinions, rather than representations of external verifiable fact.  There is little in the misrepresentation claim which is independent of the trust claim.

19.  The plaintiff’s claim as originally pleaded in April 2010 was confined in terms of relief to a declaration of ownership and an order for the return of the Shares.  There was no claim for damages. 

20.  When the Statement of Claim was first amended in March 2011, allegations of misrepresentations were inserted.  A prayer was also added to seek “an Order that an independent market evaluation report will be sought from independent Certified Public Accountant to quantify the updating true and fair market value of the Company for the Court’s reference” (sic).  So the plaintiff was already alive then to the issue of the fair market value of the Company (and therefore of the Shares), but decided to frame his prayer in that way.  This remains on record part of the relief still being sought by the plaintiff.

21.  In December 2011, the Statement of Claim was amended again, and in March 2012 re-re-amended, to its present form.  The particulars of damage as quoted in paragraph 12(1) above had therefore been put forward by the plaintiff in as early as December 2011.

22.  While paragraph 19 of the Re-Amended Statement of Claim included the phrase “to be assessed” after setting out the particulars of damage, no application for any split trial has been made.

23.  Nor was any direction for expert evidence obtained by the plaintiff from the Court in the usual way, notwithstanding the provisions of RHC Order 38, rule 36.

24.  The present firm of solicitors acting for the plaintiff came on record (after acting for him also at the initial stage of the case) in September 2012.  It appears from the affirmation of the plaintiff’s solicitor filed in support of the summons that the decision to seek to file expert evidence was only taken afterwards.  But there is no explanation why the application for leave to adduce expert evidence has not been made earlier, nor any information as to whether the matter had been considered by the plaintiff or his former legal advisers before. 

25.  Since the Re-Amended Statement of Claim was filed, many further steps have been taken in the action.  The Defence and Counterclaim was re-amended in December 2011 and the Reply and Defence to Counterclaim amended in January 2012. Witness statements were filed and exchanged between the parties in February and March 2012.  The Statement of Claim was re-re-amended in March 2012.

26.  Listing questionnaires were filed by the plaintiff and defendant on 16 and 20 March 2012.  A CMC was held in December 2011 and again on 26 March 2012, at which leave was given to set the case down for trial.  (I pause here to note that Order 25, rule 3 provides that “[a]t the determination of the case management summons, the Court shall in particular consider, if necessary of its own motion, whether any order should be made or direction given in the exercise of the powers conferred by” inter alia, Part IV of Order 38, i.e. expert evidence.) 

27.  In the middle of last year, the trial dates were fixed.  The appointment for the pre-trial review today was given at the same time. 

28.  In light of the procedural history, there was plainly, in my view, inordinate delay in the present application for leave to adduce expert evidence.

29.  On 7 November 2012, the plaintiff issued a summons to seek leave to file a supplemental witness statement of the plaintiff.  That application was granted by consent. According to the solicitors’ affirmation filed in support of the summons now before me, the plaintiff already intended at that stage to seek to adduce expert evidence.  But even then, inexplicably, he did not apply for directions for expert evidence, or disclosed to the defendant his intention to adduce expert evidence on the matters covered by the report now produced.

30.  Instead, after the defendant consented to leave being given for the supplemental witness statement of the plaintiff to be filed, the plaintiff gave instructions to his expert to prepare a report, still without informing the defendant.

31.  In the event, the expert took 3 months to prepare the report, signing it off just before the Chinese New Year holidays.  The present summons was only issued by the plaintiff on 18 February 2013, another 10 days after the report was issued. 

32.  The plaintiff says there are still three months before the trial commences.  That is true.  But in order to respond properly if the plaintiff’s application is granted, the defendant would have to find an appropriate expert, perhaps an accountant with comparable tax experience.  The expert would then have to be instructed, to digest the materials provided, and to produce a report.  This is no simple task.  As the plaintiff’s solicitor said in his affirmation filed in support of the summons, “the expert evidence involved is not a straightforward valuation of the shares but requires analysis of the available information arising from the discrepancies between the results set out in qualified audited reports and the results of tax investigation”.  The facts on which the plaintiff’s expert has based his opinion may well be in dispute.  Moreover, the plaintiff’s expert says there are various relevant documents which should be looked at to which he did not have access.  So the defendant’s expert would be expected to review even more documents.

33.  There would also probably be need for the defendant to communicate with her expert back and forth.  A meeting of the experts would then have to be arranged, and joint or supplemental reports drawn up.  All these steps would take time, and would now have to be done at a time when the defendant and her legal advisers should be concentrating on preparation for trial.

34.  This is to be seen in the context of the plaintiff’s inordinate delay, not only in making the present application, but also in notifying the defendant of his intention to adduce expert evidence.  There has not been any satisfactory explanation from the plaintiff.

35.  In these circumstances, I am not prepared to grant leave to the plaintiff to adduce the proposed expert evidence at trial.  The application is therefore dismissed.