AMCOR PACKAGING(ASIA) PTY LTD v. LI WEI BO

HCA 1351/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1351 OF 2009

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D E C I S I O N

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THE APPLICATION

1.  By summons dated 17 July 2013, the defendant applied for leave under Order 38 rule 36 to adduce expert evidence.

2.  The plaintiff opposes this application.

3.  Mr. A. Hung, counsel acts for the defendant.  Mr. Jean-Paul Wou, counsel acts for the plaintiff.

THE FACT

4.  The plaintiff had applied for summary judgment in 2011.  DHCJ Mayo delivered his judgment dismissing the plaintiff’s application on 1 December 2011.  In his Judgment, the learned Deputy Judge had succinctly set out the relevant facts of this matter, which I gratefully adopt as follows:

1. The plaintiff is a subsidiary company of Amcor Limited, an Australian company, and is a major cigarette packaging company.

2. The defendant was the Chairman and founder of the Vision Grande Group of Companies (“VG Group”) which is also in the cigarette packaging business.

3. Through its holding company Vision Grande Group Holdings Limited (“VGGHL”) it is a listed company in Hong Kong.

4. VGGHL changed its name to AMVIG Holdings Limited (“AMVIG”) on 1 November 2006.

5. The defendant was involved in the cigarette packaging business in the PRC since the 1980s.

6. He conducted the business, inter alia, through four companies.  They were Victory Shenzhen, Nanjing Sanlong, Mattie Hologram and Xian Great Sky (“the four companies”).

7. In 2004 the defendant had some discussions with the plaintiff concerning their investment in VGGHL who were about to make an acquisition in a business in Kunming.

8. For the purposes of this judgment it is not necessary for me to go into great deal concerning the developing business relationship between the plaintiff and the defendant.

9. Suffice it to say that the plaintiff and its associated companies injected a total sum of HK$510,014,000 into companies controlled by the defendant and in return obtained control over these companies.

10. Although the defendant continued to work for the companies the plaintiff was able to vote its own nominees as Directors of the various companies.

11. In April 2006, Mr Billy Chan became Chairman of VGGHOL and shortly after this David Hodge and Peter Downing were appointed Non-Executive Directors of the company.

12. One of the important requirements of the plaintiff when investing in the defendant’s company was to require him [the defendant] to execute a Deed of Undertaking which undertook to pay compensation to the plaintiff if the net profit after taxation (“NPAT”) of the companies did not amount to as much as the figures which were agreed.

13. A formula was negotiated between the parties which was predicated on the premise that there should be a price to earnings ratio of 8.

14. The undertaking upon which the present application is founded was the third such undertaking which was entered into.

5.  The relevant parts of the third undertaking, on which the defendant now relies for its application are as follows:

1. Undertakings

1.1 Profits guarantee

I undertake to Amcor Packaging (Asia) Pty Limited (‘Amcor Packaging’) and each of its affiliates as follows :

(a) If the audited consolidated net profit after tax and minority interests (‘NPAT’) of the AMVIG Group (the ‘2006 & 2007 Profit’) as shown in the audited consolidated accounts of AMVIG for the two years ending 31 December 2006 and 31 December 2007 (the ‘2006 & 2007 Accounts’) is less than HK$320 million, within ten business days after the certification of the 2006 & 2007 Accounts by the Auditors I shall pay to Amcor Packaging or an affiliate nominated by Amcor Packaging an amount in Hong Kong dollars calculated in accordance with sub-paragraphs (b) and (c) below.

(b) The amount to be paid to Amcor Packaging or its affiliate by me in each of 2006 and 2007 pursuant to sub-paragraph (a) above will be determined as follows :

A = 8 x (B-P) x S/C

where

A = the amount to be paid by me to Amcor Packaging or its affiliate;

B  = HK$320 million;

P  = the actual NPAT for 2006 and 2007;

S = the aggregate number of Shares held by Amcor Packaging and its affiliates; and

C = the total issued share capital of AMVIG as at the date on which the calculation described in this sub-paragraph (b) is made.

(c) The following provisions shall apply in respect of the preparation and report of the 2006 & 2007 Accounts:

(i) the 2006 & 2007 Accounts shall confirm to the generally accepted accounting practice, standards and principles of Hong Kong;

(ii) the 2006 & 2007 Accounts shall be issued and certified by the Auditors as soon as possible but no later than four months after the end of the relevant accounting period; and

(iii) unless otherwise agreed in writing by Amcor Packaging and myself, the accounting policies adopted for the preparation of the audited accounts of AMVIG for the year ended 31 December 2004 shall be consistently applied in the preparation of the 2006 & 2007 Accounts for the purpose of calculating the 2006 & 2007 NPAT in accordance with this clause.

THE ISSUE IN DISPUTE

6.  The plaintiff claimed that the 2006 & 2007 Accounts had been delivered to the defendant and there was a shortfall.  Mr. Wou goes further to explain that the said Accounts are contained in page 282 and page 283 of the bundle of documents.  They are part of the 2006 & 2007 Accounts.  But he submits that they are sufficient to satisfy the terms of the third undertaking in support of the plaintiff’s claim.  By applying the formula for the calculation of the amount, the plaintiff now says that the defendant has to pay $539,448,104 to it.

7.  The defendant argued in his Defence that the condition for the alleged liability of the defendant was not satisfied in that there were no audited consolidated accounts of AMVIG for the years 2006 and 2007 as defined in the third undertaking showing the NPAT in question and that the figures asserted in the Statement of Claim were not NPAT shown in the audited accounts as certified by the auditors, but were mere asserted amounts which are disputed.[1]  There are other defences, which are not relevant to this application.[2]

THE PROPOSED QUESTIONS FOR EXPERT EVIDENCE

8.  The proposed questions on which the defendant seeks to adduce expert evidence are as follows:

(i) Whether the audited consolidated accounts of AMVIG Holdings Ltd (“AMVIG”) for 2006 and 2007 (“the 2006 and 2007 Accounts”) show the audited net profits after tax and minority interests (“NPAT”) of the AMVIG Group (“the AMVIG Group”) as defined in Clause 2 of the Deed of Undertaking dated 17^th October 2006, and if so, where the NPAT of each of the companies comprising the AMVIG Group can be seen in the 2006 and 2007 Accounts? (‘Q1’)

(ii) Whether the accounting policies adopted for the preparation of the audited accounts of AMVIG for 2004 were consistently applied in the preparation of the 2006 and 2007 Accounts for the purpose of calculating the NPAT of the AMVIG Group in 2006 and 2007? (‘Q2’)

(iii) What was the nature of the procedures carried out by RSM Nelson Wheeler as set out in the two letters from RSM Nelson Wheeler to AMVIG dated 4^th May 2009 and 18^th May 2009 (collectively “the Letters”) and whether such procedures constituted an audit for AMVIG for 2006 and 2007? (‘Q3’)

(iv) Whether (a) the Letters, (b) the Profit Sharing Schedules in Appendix II to the letter from RSM Nelson Wheeler to AMVIG dated 4^th May 2009 (“the Profit Sharing Schedules”), and/or (c) the Profits Summaries in Appendices II and III to the letter from RSM Nelson Wheeler to AMVIG dated 18^th May 2009 (“the Profits Summaries”), constitute the audited consolidated accounts of AMVIG for 2006 and/or 2007? (‘Q4’)

(v) What is the difference, if any, between the “net profit/(loss) attributable to the equity holders” for each of the companies comprising the AMVIG Group set out in the Profit Sharing Schedules and the Profit Summaries, and the NPAT of each of such companies, in 2006 and 2007? (‘Q5’)

PLAINTIFF’S GROUNDS OF OBJECTION

9.  The plaintiff’s grounds of objection are:

a. The questions are improper;

b. The questions call for answers which are inadmissible for the purpose of section 58 of the Evidence Ordinance, Cap. 8;

c. The proposed expert evidence is not necessary for the fair disposal of the issues in this action; and

d. Such evidence will only serve to confuse issues, waste time and cause unnecessary expenses.[3]

THE APPLICABLE LEGAL PRINCIPLES

10.  Mr. Wou refers to my decision in Lin Man Yuan v Kin Ming Holdings International Ltd & Another HCA216/2008 (unreported, Registrar Lung, 16 September 2013).  However, I consider that the legal principles that I had set out in my Decision in DBS Bank (Hong Kong) Ltd v Sit Pan Jin HCA 382/2009, (unreported Registrar Lung 9 November 2012) at §12 are more appropriate for the discussion in this application:

a. Under Order 38 rule 36 of RHC, unless the parties agree, no expert evidence may be adduced at the trial without leave of court.  See Fung Chun Man v Hospital Authority HCPI 1113/2006 by Bharwaney J on 24 June 2011[4];

b. The court is concerned with proper directions for expert evidence in order not to cause delay and waste of expenses. Faith Bright Development Limited v Ng Kwok Kuen [2010] 5 HKLRD 425 at 430-431;

c. The parties and their legal representatives have a duty to assist the court in formulating the appropriate expert directions and once given, the directions should be strictly adhered to and the experts, in accordance with their overriding duty to the court, must try their best to comply with the directions.  Chok Yick Interior Design & Engineering Co Ltd v Lai Chi Lun t/a Chi Hung Construction Eng Co HCA 1480/2008 by Lam J on 5 May 2010;

d. Where the proposed expert evidence is plainly inadmissible or irrelevant, the court will refuse admission of such evidence. If the court cannot form a clear view on the relevance or the evidence is clearly relevant, it should grant leave for the evidence to be adduced at the trial.  The evidence is relevant if it is helpful to the court in arriving at its decision on one or more of the issues to be resolved.  Wong Hoi Fung v American International Assurance Company (Bermuda) Limited & Shrila Chan [2002] 3 HKLRD 507;

e. When there is a dispute over whether expert evidence should be adduced at trial, the court has to examine the pleadings to determine whether the proposed expert evidence is required in the pleaded case.[5]Yeung Ga Wai v Lau Ming Shum HCA798/2004 delivered on 19 July 2012.

f.  Expert evidence must be confined to the live issues of dispute between the parties, which must be sought from the pleadingsChina Gold Finance Limited v. CIL Holdings Limited & Ors (HCA2900/2001, Mr. Registrar K.W. Lung, 25 September 2012, unreported at para.17-18.

DISCUSSION

The real issue of dispute

11.  It seems that the issue for the defence will, at trial and ultimately, boil down to one major issue, viz. whether the 2006-2007 Accounts as shown in page 282 and 283 of the bundle of documents comply with the terms of the third undertaking.  The defendant disputes those accounts.  As the 2006-2007 Accounts were the audited accounts extracts from the AMVIG Group, the burden will be on the defendant to show they are not the audited accounts in accordance with the third undertaking.  The grounds of objections will be answered by the plaintiff’s auditor, who had certified those accounts.  The defendant’s expert may, of course, be entitled to raise what he had raised in his expert report.  All these issues will be dealt with by the plaintiff’s expert in one go. 

Q3, Q4 and Q5

12.  On this basis, it appears that questions (Q3), (Q4) and (Q5) are irrelevant to the above issues.  They are simply the means to reach the standard for the 2006-2007 Accounts, which were not specified in the third undertaking.  They will, no doubt, muddle the issues of dispute.

Q1 & Q2

13.  As to questions (Q1) and (Q2), the plaintiff argues that they are factual issues and that it is not necessary to have expert evidence on them.[6]  Mr. Wou submits that it is up to the defendant to test the factual evidence at trial rather than seeking to rebut Liu’s and Kam’s accounts by way of expert evidence.[7]

14.  The plaintiff can say that it is a fact that it had produced the 2006 & 2007 Accounts pursuant to the third undertaking.  However, the defendant has raised the technical issues that the said Accounts prepared by AMVIG’s accountant were not in accordance with the generally accepted accounting practices, standards, and principles of Hong Kong (as provided under Clause 1.1C(2) of the third undertaking) and he challenged that the accounts produced by the plaintiff do not amount to those as required under the third undertaking.  The Court has to resolve these issues at the trial.  The defendant’s expert has compiled a report, in which he has made a number of comments on the way the consolidated accounts was prepared.  In particular, he had made query on the two letters of the accountants, on which they had made reference, (report 5.4.1 page 433); the treatment of the Profit Sharing Schedules and Profit Summaries were not an assurance engagement, nor was there an audit performed as provided in clause 1.1(a) and (c) of the third undertaking (5.4.2 at page 433).  He even went further to say that it was not appropriate to conclude and accept that the aggregate of the net profit/(loss) attributable to the equity holders of each of the AMVI Group’s companies was tantamount to “the NPAT of AMVIG Group as shown in the audited consolidated accounts of AMVIG as provided in clause 1.1(a) of the third undertaking.  See §5.4.5 of the report at page 434.

15.  The technical issues as raised by the defendant are by no means factual issues.  They have to be determined by the Court by reference to the opinion of the accountant. As such, unless the defendant is debarred from adducing evidence to challenge the plaintiff’s case, the defendant must be allowed to call an accounting expert to show to the Court that the plaintiff’s accounts do not comply with the third undertaking, thus he is not liable to the plaintiff.  It will be unfair to bar the defendant from adducing expert evidence to challenge the plaintiff’s evidence.

The Rhetorical question – proper directions

16.  Mr. Wou has raised a rhetorical question at paragraph 57 of his submission, viz. if leave was granted, what if the parties’ experts came up with a diametrically opposite views (as they frequently do), how would the Court be assisted by such opinions?

17.  The rhetorical question can be answered by proper directions for expert evidence.  In this case, it is the plaintiff’s case that the 2006 and 2007 Accounts were properly prepared in accordance with the third undertaking, triggering the defendant’s liability to pay the agreed sum.[8] Mr. Wou submits that the Accounts on pages 282 and 283 of the bundle of documents are the evidence for the trial and they are sufficient evidence in support of the plaintiff’s case.  The defendant has raised objection, alleging that the 2006 and 2007 Accounts are not valid because they were not compiled in accordance with the third undertaking.  In the circumstances, the defendant bears the burden of proof of his allegations.  The defendant should be allowed to call expert evidence to challenge the plaintiff’s 2006 and 2007 Accounts and the plaintiff is entitled to answer the challenges.  The direction which I intend to give the parties are as follows:

a. The defendant be at liberty to serve a report prepared by his expert Mr. Yuen Tsz Chun Frank, accountant within 42 days from the date hereof on “Whether the audited consolidated accounts of AMVIG Holdings Ltd (“AMVIG”) for 2006 and 2007 (“the 2006 and 2007 Accounts”) as shown on page 282 and 283 of the bundle of document for this hearing show the audited net profits after tax and minority interests (“NPAT”) of the AMVIG Group (“the AMVIG Group”) as defined in Clause 2 of the Deed of Undertaking dated 17^th October 2006”;

b. The plaintiff be at liberty to serve an expert report in response thereto within 28 days thereafter;

c. The defendant’s account shall be at liberty to serve a report in reply within 28 days thereafter;

d. Liberty to apply.

18.  Mr. Wou proposes that the expert report should be on the assumption that the plaintiff can produce part of the 2006 & 2007 Accounts for the expert’s report.  I do not agree because this will restrict the expert’s view.  This issue, in fact, may be an issue of argument for the trial as well.  The Court, in my view, should not decide this issue at this stage.

19.  Mr. Hung submits that directions should be given along the questions he has proposed.  I also disagree because those questions go to the way the 2006 and 2007 Accounts should be prepared.  At trial, the Court is not concerned with the way in which the 2006 and 2007 Accounts should be prepared, it can be prepared in different ways.  It will only be concerned with whether the said Accounts comply with the terms of the third undertaking.

20.  I decide to adopt those directions above for the experts.

COSTS

21.  As to the costs of this application and the hearing today, each party asks for costs.  The defendant says that leave has been given to him to call expert evidence.  The costs should follow the event.  The plaintiff submits that the Court has given directions not in accordance with those as proposed by the defendant, so the defendant has failed.  Having assessed the argument today, I will say that the defendant has succeeded persuading me that expert evidence should be given to him on the 2006 and 2007 Accounts, which the plaintiff says that they are only factual and no expert evidence should be allowed.  However, it is clear that the whole exercise is to sort out the scope of expert evidence and what proper directions should be given for expert evidence.  I therefore decide that the defendant should have the costs of the application and for today.  But he should not have the full costs because he has not succeeded fully.  I think it will be just to order the plaintiff to pay 40% of the costs of the application and today’s hearing.  The remaining 60% of the costs should be in the cause as this is as if for me to give proper expert directions in the Case Management Conference.  The costs will be summarily assessed under Order 62 rule 9A RHC.  See China Gold Finance Ltd case.  The schedule of costs from the defendant amount to $254,200, which are contested by the plaintiff as being excessive.  With the consent of the defendant, I have made reference to the plaintiff’s schedule of costs.  On a broad-brush approach, I consider the appropriate costs for the application and this hearing, including the costs reserved, should be $150,000, 40% of which is $60,000 be paid by the plaintiff to the defendant within 14 days from the date hereof, the remaining $90,000 shall be costs in the cause.

ORDER

22.  I shall now make an order in terms as follows:

a. Leave be given to the parties to adduce expert evidence at trial in terms as per paragraph 17 supra;

b. The costs shall be as per paragraph 21.

 

 

(K.W. Lung) Registrar, High Court