CYBERWORKS AUDIO VIDEO TECHNOLOGY LTD (in Compulsory Liquidation) v. MEI AH (HK) CO LTD

HCA 677/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 677 OF 2006

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AND

HCA 678/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 678 OF 2006

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AND

HCA 2780/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2780 OF 2006

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AND

HCA 658/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 658 OF 2011

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_________________________

(Consolidated pursuant to the Order of
Mr Registrar K.W. Lung dated 17 July 2014)

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D E C I S I O N

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THE APPLICATIONS

1.  The four actions: HCA677/2006, HCA678/2006, HCA2780/2006 & HCA658/2011 were consolidated pursuant to an Order dated 17 July 2014 by this Court.

2.  There are two applications, one by the plaintiffs and the other by the defendants, both on expert evidence to be adduced by the respective parties.

3.  The plaintiffs’ summons asks for leave to adduce expert evidence at trial and for 60 days to prepare the expert report.  The issues on which expert evidence are required run for two and half pages as set out in a schedule attached to the summons.  (“the plaintiff’s summons”)  It is significant that in this summons, the plaintiffs ask this Court to consider appointing a single joint expert.

4.  The defendants’ summons (“the defendant’s summons”) asks for leave to allow their experts to be called to give evidence on forensic accounting and on appraisal and valuation and for directions to prepare the expert reports.

5.  These summonses are taken out pursuant to this Court’s directions at the case management conference that if they are unable to agree on the framed issues on which expert evidence will be required, they should take out the applications for leave to adduce their expert evidence respectively.  They have failed to agree all of the expert evidence issues.

6.  It is apparent that both parties have attempted to come to certain agreement on the issues on which expert evidence should be given, given the fact that both parties agree that expert evidence has to be adduced to assist the trial judge in certain aspects of the matters.  In order to put their argument in proper perspectives, it is desirable to set out the relevant factual background.

THE FACTUAL BACKGROUND

7.  It is not in dispute that the plaintiffs are the assignees of the choses in action of Cyberwork Audio Video Technology Ltd (in compulsory liquidation) (“CW”) against Mei Ah (HK) Ltd. (“MAHK”) and Silver Kent Technology Ltd (“SK”).  In HCA 677/2006, the plaintiff claims against MAHK for HK$29,368,816 due to CW for certain equipment sold by CW to it, for which money had not been paid whereas MAHK defended that the price had been paid by inter-related companies set-offs. In HCA 678/2006, the plaintiff claims against SK for HK$30,334,319, also for certain equipment sold by CW to it whereas SK defended that the price had been paid by inter-related companies set-offs.  In HCA 2780/2006, the plaintiff also claims against SK for HK$4,675,587.37, which SK had admitted liability, as to which SK defended that it had a counterclaim against the plaintiff for HK$673.184.69 net.

THE LIVE ISSUES OF DISPUTE

8.  The plaintiffs have set out the lives issues of dispute for the trial as set out in paragraph 24 of the plaintiffs’ written submissions, which the defendants do not dispute:

a. Whether the MAHK Consideration and the SK Consideration were received by CW?

b. Whether the inter-company related set offs (if existed) constituted preferences of related companies?

c. Whether CW sold its products to MAHK and SK at below cost?

d. Whether the plant and machinery of CW was sold to MAHK and SK at an undervalue?

e. Whether CW was insolvent or nearing insolvency by or in the fourth quarter of 1999 or as at 28 March 2000, 31 March 2000 or 1 April 2000?

f. Whether the Sales Operations were diverted to SK for no consideration?

9.  The plaintiffs have been helpfully set out in their written submissions the disputed issues, which they are unable to agree with the defendants that expert evidence should be adduced as set out below[1]:

Summons	Issue No.	Issue
Ps’ Summons	Issue 4(f)	What, if any, was the impact on CW following the sale of its plant and machinery to MAHK and SK and the leaseback of the same from MAHK and SK to CW, in particular on: CW’s third party creditors, such as Philips as compared to MAHK and SK.
Ps’ Summons	Issue 5(b)	Whether CW was insolvent or nearing insolvency as at 28 March 2000 and 1 April 2000.
Ds’ Summons	Issue 2	Whether the audited accounts of CW and MAHK at all material times show that the consideration for CW’s sale of plant and machinery to MAHK at net book value as recorded in CW’s audited accounts for the year ended 31 March 2000 in the sum of $29,638,816 was settled, and if so how.
Ds’ Summons	Issue 4	Whether the audited accounts of CW and MAHK at all material times show that the consideration for CW’s sale of plant and machinery to SK at net book value as recorded in CW’s audited accounts for the year ended 31 March 2000 in the sum of $30,344,319 was settled, and if so how.

10.  The defendants agree that those issues above are in dispute for this hearing.[2]

11.  It appears that the general legal principles on the admissibility of expert evidence as set out in my previous decision in Leung Siu v Bank of China (Hong Kong) Limited (unrep., HCA 1911/2012, 7 March 2014) are not in dispute.  It will not be necessary to set them out here as the disputes between the parties, in fact, boil down to whether the trial judge will require assistance in the disputed issues.  I shall go straight to those disputed issues.

Plaintiffs’ proposed Issues 4(f)

12.  The defendants seem to be only disputing this part: “CW’s third party creditors, such as Philips as compared to MAHK and SK”.  The defendant’s argument is that the plaintiffs are concerned only with CW’s financial position following the disposal of the assets, not that of CW’s creditors.  In the plaintiffs’ written submissions, there is no explanation why the third party creditors’ position should be compared to MAHK and SK.  Their positions will be governed by the law.  However, this morning Mr. Nip has been able to refer me to the relevant parts of the pleadings where the plaintiffs are alleging that the defendants had transferred CW’s assets to other related companies, which the defendants dispute.  As such, I agree with the plaintiffs that expert evidence should be allowed for the trial.  The plaintiffs’ application is allowed.

Plaintiffs’ proposed Issue 5(b)

13.  The plaintiffs propose “Whether CW was insolvent or nearing insolvency as at 28 March 2000 and 1 April 2000” whereas the defendants propose: (a) by or in the fourth quarter of 1999; and (b) as at 31 March 2000.

14.  As I see it, I am unable to understand why the parties cannot agree on all those four dates as proposed by the plaintiffs and the defendants for the expert evidence on the financial positions of CW as all those dates were pleaded in the Amended Statement of Claim.  I can understand the reasons for the defendants’ objection. They are saying that if the plaintiffs plead that CW was or at the verge of insolvency by the fourth quarter of 1999 or 31 March 2000, it would be naturally remaining to be in the same position as at 28 March 2000 and 1 April 2000.  However, since the plaintiffs are at liberty to plead their cases the way they consider appropriate and this, coupled with the fact that they had pleaded the incidents on the respective dates of 28 March 2000 and 1 April 2000, expert evidence should be allowed for the plaintiffs to prove their cases.  I believe that costs and time will not be increased by a simple conclusion by the expert on those two dates.

15.  I therefore allow the plaintiffs’ application on issue 5(b).

Defendants’ Issues 2 and 4

16.  I am surprised that the parties are arguing over the trial judge’s ability of understanding accounting items in the audited report on a theoretical basis whereas they should have been able to read the relevant audited reports and come to their own conclusions, putting themselves in the position of the trial judge.  Whilst I appreciate that reading the auditors’ reports may sometimes require expert’s assistance, it will be for the defendants to highlight the difficult parts that they consider expert evidence will be necessary for understanding them.  In the evidence and the written submissions before me, the defendants have not been able to tell me the part or parts that require expert evidence to assist the trial judge, who should be assumed to be able to understand the items in the auditors’ reports.  I initially tend to accept the plaintiffs’ argument.  However, the parties have been working closely and cautiously today to anticipate the difficulties that the trial judge may have in the evidence at the trial.  Although I understand that I should not obtain evidence from the bar table, nevertheless, I consider that it is appropriate to give the defendants a final chance to tell me whether the audited accounts that they are going to adduce in the trial are comprehensible to an ordinary person.  I therefore enlisted the assistance from Mr. Chang, counsel for the defendants, who had seen the audited accounts to assist me.  Mr. Chang advised me that he was unable to understand those entries himself.  It is not difficult to understand the situation because the defendants will rely upon the inter-companies transfer accounts, which the plaintiffs dispute.  The expert evidence for these items is therefore necessary.  The defendants’ summons on these issues is allowed.

Single joint expert

17.  The final dispute between the parties is whether a single joint expert should be appointed for the valuation issues.

18.  By consent of the plaintiffs, I shall rely upon the schedule attached to the defendants’ summons for this discussion.

19.  There are seven valuation issues as set out in the schedule attached to the defendant’s summons.  The parties agree that there should be expert evidence on those issues.  They agree to appoint Mr. Simon Sham as the single joint expert on appraisal and valuation for issues 3 and 5.  As to issues 1, 2, 4, 6 & 7, the plaintiffs support Mr. Colum Bancroft as the single joint expert whereas the defendants had already instructed Mr. Frank Yuen as their expert.  They have no objection to appoint their expert as the single joint expert, but this is not agreed by the plaintiffs.  The plaintiffs do not accept Mr. Yuen as the single joint expert, the reason being that Mr. Yuen has been appointed by the defendants and he is no longer impartial.  They prefer Mr. Colum Bancroft as the single joint expert.  The discussion below centres on whether there should be a single joint expert and if so, who should be appointed?

20.  The plaintiffs rely upon O.38, r.4A RHC, which  provides that:

(1) In any action in which any question for an expert witness arises, the Court may, at or before the trial of the action, order 2 or more parties to the action to appoint a single joint expert witness to give evidence on that question.

(2) Where the parties cannot agree on who should be the joint expert witness, the Court may –

(a) select the expert witness from a list prepared or identified by the parties; or

(b) direct that the expert witness be selected in such manner as the Court may direct.

(3) Where an order is made under paragraph (1), the Court may give such directions as it thinks fit with respect to the terms and conditions of the appointment of the joint expert witness, including but not limited to the scope of instructions to be given to the expert witness and the payment of the expert witness’s fees and expenses.

(4) Notwithstanding that a party to the action disagrees with the appointment of a single joint expert witness to give evidence, the Court may, subject to paragraph (6), make an order under paragraph (1) if it is satisfied that it is in the interests of justice to do so after taking into account all the circumstances of the case.

(5) The circumstances that the Court may take into account include but are not limited to –

(a) whether the issues requiring expert evidence can readily be identified in advance;

(b) the nature of those issues and the likely degree of controversy attaching to the expert evidence in question;

(c) the value of the claim and the importance of the issue on which expert evidence is sought, as compared with the cost of employing separate expert witnesses to give evidence;

(d) whether any party has already incurred expenses for instructing an expert who may be asked to give evidence as an expert witness in the case; and

(e) whether any significant difficulties are likely to arise in relation to –

(i) the choosing of the joint expert witness;

(ii) the drawing up of his instructions; or

(iii) the provision to him of the information and other facilities needed to perform his duties.

(6) Where a party to the action disagrees with the appointment of a single joint expert witness to give evidence, the Court shall not make an order under paragraph (1) unless the party has been given a reasonable opportunity to appear before the Court and to show cause why the order should not be made.

21.  Having considered the parties’ submissions, the Court is faced with the following situations:

a. The issues for expert evidence are identified;

b. The plaintiffs submit that “there would be little or no genuine room for debate among skilled and impartial experts”.  They further submit that “Expert opinion, by nature, involves value judgment and is not in itself a reason for parties to call separate experts”.[3]  On the other hand, the defendants submit that “If that were the case there would not have been a joinder of all these issues in the parties’ pleadings.  This is plainly a case where one party is highly unlikely to accept the other party’s assertion on the issues (as discerned from the pleadings), and in turn all the issues are most certain to be “hotly disputed” at trial” and it will “plainly be counter-productive to order a single joint expert, just to find out subsequently that one party does not accept the conclusions set out in the single joint expert report and then seeks leave to call a further report, which would cause waste of time and costs”.[4]

c. It can be seen from HCA 2780/2006 the plaintiffs have, in their Amended Reply, disputed that there had been intra-group company arrangement existed as alleged by the defendant SK in its Defence.[5]

d. I tend to accept the defendants’ argument that there will be hotly contested issues at trial.

e. The defendants have instructed Mr. Frank Yuen as their expert.  They agree to appoint Mr. Frank Yuen as the single joint expert, which the plaintiffs refuse to accept.  I do not consider it is fair to the plaintiffs to order Mr. Frank Yuen as the single joint expert against their wish.

22.  Balancing the above factors, it becomes quite clear that it will be more beneficial to have separate experts for the remaining issues as suggested by the defendants. The cost for appointing Mr. Frank Yuen has been incurred by the defendants.  If a single joint expert is appointed as suggested by the plaintiffs, it is likely that the defendants will continue to have Mr. Frank Yuen as their shadow expert, thus increasing the cost.  The possibility of applications to the court for appointment of another expert apart from the single joint expert is not fanciful, which will increase the costs and time for the trial.

COSTS AND ORDER

23.  As to the costs of the applications and the hearing today, I consider that each side has the reason to take out the summons as directed by this Court for the resolution of their disputes over the issues of expert evidence.  As such, the costs should reasonably be in the cause, with counsel’s certificate for each of the parties.

24.  The Court shall now make an order in terms as follows:

a. Leave to the plaintiffs to include issues 4(f) and 5(b) of their summons for expert evidence;

b. Leave be granted to the parties to call the following experts to give evidence at trial relating to issues 1, 2, 3(a), 4, 5(a) , 6 and 7 in the Schedule to be supplied by the defendants; issue 3(a) starts from “whether estimate realisable value …CW to MAHK”and issue 5(a) starts from “Whether estimated …to CW to SK”with the following directions:-

(1) Plaintiff: Mr Colum Bancroft of Kroll Associates (Asia) Ltd.

(2) Defendants: Mr Frank Yuen of KLC Kennic Lui & Co.

(3) The parties do file and serve written expert report of their experts within 60 days from the date of the order to be made herein.

(4) The experts do within 28 days thereafter meet on a without prejudice basis with a view to agreeing and narrowing down the expert issues(s) to be decided by the court.

(5) The experts do within 28 days thereafter prepare a single joint report which succinctly identifies:-

(i) the issue(s) on which the experts have reached a common opinion and in respect of each issue what that common opinion is; and

(ii) the issue(s) on which the experts have failed to reach a common opinion and their competing views on each of such issue, stating their reasons for disagreement.

c. Mr Simon Sham of Simon Sham Appraisal (CHK) Ltd be appointed as the single joint expert to give evidence at trial relating to issues 3(b) and 5(b) in the Schedule to be supplied by the defendants.  The parties do arrange Mr Sham’s expert report to be filed and served within 60 days from the date of the order to be made herein and shall observe the following directions:

(1) The parties shall prepare joint instructions to be sent to the single joint expert setting out the relevant issues together with copies of the documents necessary for him to prove his opinion.  The joint instructions shall be sent to the single joint expert as soon as he is appointed;

(2) There shall be no unilateral communication between the single joint expert and any party or legal representatives to the proceedings.

(3) Any communications with the single joint expert must be copied simultaneously to the other party.

(4) The single joint expert shall be ready to attend the trial hearing to answer questions that may be raised by the parties or the court relating to his report.

(5) The fees of the single joint expert shall initially be borne by the plaintiffs and the defendants in equal share and will be dealt with as part of the costs of the proceedings in due course.

25.  By consent, costs of this applications, including the costs reserved and for the hearing today be as per paragraph 23 above.