Hung Kwai Hung t/a Hong Kee Electroplating Factory v. Director of Lands

Crown Lands Resumption
Reference No. 16 of 1995

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HEADNOTE

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Property law - Crown Lands Resumption - Electroplating Workshop - Business Losses - Valuation of Goodwill - Valuation of Plant and Machinery - Crown Lands Resumption Ordinance, Cap. 124,s. 10(2)(d)

Ground floor premises rented for electroplating workshop resumed by the Crown. The applicant proprietor of the workshop claims, inter alia, losses of goodwill at $1.95 million, loss of profits at $0.56 million and loss of plant and machinery at $0.77 million.

Held: (1) In accordance with s. 10(2)(d) of the Crown Lands Resumption Ordinance, the applicant is entitled to compensation that would restore him to the business position where it would be had there been no resumption, i.e. an amount of compensation so as to restore the applicant to the position where he was in at the time of resumption. (2) Relying on the trading accounts of the business, cross-checked by analysis of the wages and salary cost, goodwill valued at $640,000 and loss of profits determined at $482,000. (3) On the evidence, assessment by the Respondent's expert on major items of the machinery rejected for it is based on insufficient knowledge of the real design of the machinery. Compensation under this head determined at 485,316 million. (4) After adding the value of fixtures and fittings at $963,000 and other items allowed, total compensation determined at $2.80 million.

C.L.R. 16 of 1995

Machinery, Equipment, Tools and Chemicals

IN THE LANDS TRIBUNAL OF HONG KONG

Crown Lands Resumption Reference No. 16 of 1995

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JUDGMENT

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The Applicant is the sole proprietor of a workshop known as Hong Kee Electroplating Factory ("the business") at rented premises known as No. 6, Ground Floor, Sui Lun Street, Ma Tau Kok ("the subject premises"). The business was mainly concerned with the electroplating of tiny metal parts. The subject premises were resumed by the Crown pursuant to section 3 of the Crown Lands Resumption Ordinance, Cap. 124 ("the Ordinance") under a Notice of Resumption dated 26th June 1992, published in Volume CXXXIV Hong Kong Government Gazette on 3rd July 1992 as G.N. No.2264 of 1992 and reverted to the Crown on 3rd October, 1992. Nonetheless, the Applicant was allowed to carry on the business at the subject premises rent free until April 1994 when the Applicant was evicted. There upon, it is conceded by the Respondent, there was total extinguishment of the business.

2. Despite advice given by several members of the Tribunal at various stages, the Applicant does not engage legal representatives or valuers of any speciality to help him to prepare his case. Instead, he authorises Mr. CHIU Chi-wo as his representative. The Tribunal has also repeatedly emphasised in open court that the burden was on the Applicant to prove each and every element of his claim. During the trial, Mr. CHIU was given ample opportunities to adduce evidence and to canvass more effectively for the Applicant's case.

3. It is common ground that the Applicant is entitled to compensation for business loss calculated under section 10(2)(d) of the Ordinance as -

"the amount of loss or damage to a business conducted by a claimant at the date of resumption on the land resumed or in any building erected thereon, due to the removal of the business from that land or building as a result of resumption ."

In practical terms, the Applicant is entitled to reimbursement that would restore him to the business position where it would be had there been no resumption. During the course of trial, Mr. CHIU on behalf of the Applicant alleged the following business losses :-

4. The Respondent's assessment of the Applicant's loss was revised several times during the course of these proceedings. Eventually, as apparent from final submission, the Respondent contends that the compensation due to the Applicant should be as follows :-

5. Before we proceed further, we should mention that the subject premises were part of a major resumption of more than one hundred properties for the Hong Kong Housing Society's Urban Improvement Scheme ("the Scheme"). In addition to Sui Lun Street, the Scheme site extended to Wang Cheung Street, Ma Tau Kok Road, Pak Tai Street, San Shan Road and Pau Chung Street in Ma Tau Kok. The present case is one of nearly thirty applications by business operators affected by the Scheme for compensation who felt unable to accept the Crown's offer for settlement.

6. We now consider each of the items of claim under separate headings.

Goodwill

7. The approach for determining goodwill we apply here is the same as we have adopted for related cases. First, we endeavour to ascertain the normal profit trends of the business before resumption. Conceivably, the reported profits of the business, the rental value of the premises at which the business is conducted or the wages and salary costs of the business may be used as basis for this purpose because each of them may somewhat relate to the profitability of the business. Once the annual profit trends of the business has been worked out, it must be translated by multiplication to the anticipated future life of the business, had the business premises not been resumed. Then the product is discounted to take into account the fact that the business operator will have a sum representing capitalised profits immediately available for investment or other use.

8. The business in this case did not trade on goods or materials. According to Mr. CHIU who gave evidence for the Applicant, the business depended on steady work orders for electroplating tiny electrode contacts for small electronic gadgets. Mr. CHIU produced trading accounts of the business with bank statements in support as Exhibit A5. He added that some receipts of the business were in cash and not reflected in the bank statements. Mr. CHIU suggests using the trading accounts for the year 1991 to determine the goodwill of the business because then the business was not affected by the resumption. He took $650,000 as annual profits and, using a multiplier of 3, obtained a figure of $1,950,000 as goodwill. However, we note from the accounts in Exhibit A5 that the alleged profits for the year August 1991 to July 1992 was $505,370 only. We further note from the Notice of Assessment for profits Tax for the year 1992-93 that the business reported profits of $158,324.

9. Mr. Clarke, expert for the Respondent, says at p.7 of his report Exhibit R4 that the annual profit figure of $505,370 for 1991 is wrong because it is arrived at by adding back the proprietor's personal salary. Instead, he suggests in pp.5-8 of Exhibit R4 that valuation be based on (1) the amount agreed as compensation for loss of goodwill for four other businesses of similar type also affected by the Scheme or, (2) the average wage level of a salaried employee increased by 40% or, (3) the taxable profits of $158,324 for 1992-93. In all three cases, Mr. Clarke would use a multiplier of 3. We have no difficulty in rejecting the first method suggested by Mr. Clarke. There may be vast differences between businesses of the same type. For certain Mr. Clarke does not have information relating to the type of service or product the "comparables" were providing. The trade names of the "comparables" suggest that three of them were not even in the electroplating business. As to calculating goodwill by the average salary level of a statistical employee, we have explained in earlier cases such as WONG Sau Hing, LEE Wing Tau, LI Sai Kuen and LEE Sai Ho trading as Shing Kee Metal Dealer v. Director of Lands, CLR No. 20 of 1994 and TSANG Ling-chu trading as Wrench Engineering Co. v. Director of Lands, CLR No.23 of 1994 that this approach is not fair and appropriate where a business has several or more employees. We still hold this view.

10. Because the resumption notice was gazetted in July 1992, we have every reason to suspect that the taxable profits of the business for the year 1992-93 do not reflect the true profitability of the business. This leaves only the accounts for the period from August 1991 to July 1992 for reference. We believe the criticism regarding the annual profit figure of $505,370 for that period is based on a misunderstanding. That figure is not calculated by adding back the personal salary of the proprietor. What has been added back are drawings which should rightly be counted as part of the profits of the business. Nonetheless, we do not accept the Applicant's figure because it does not take into account depreciation for machinery, equipment, fixtures and fittings. It is appropriate to make at least a 10% discount for depreciation for machinery and equipment costing $771,201 and fixtures and fittings costing $1,070,000. This reduces the annual profit figure to $(505,370 - 77,120 - 107,000) = $321,250

11. Alternatively, as we have used in earlier related cases, another guide is the wages and salary cost of the business. During the period from August 1991 to July 1992, the monthly wages and salary cost of the business was $22,000. Mr. CHIU says that the workers were not entitled to year end bonus. So, our calculation of the annual profit trends of the business by the wages and salary cost method would be $22,000 x 12 x 1.2 = $316,800 per annum. This corroborates the adjusted annual profits figure of $321,250 obtained from the accounting method. In the circumstances, we take the round figure of $320,000 as annual profit trends. We would adopt a multiplier of 2 for the Applicant's tenancy had less than two years to run at the time of resumption.

12. Accordingly, we determine the goodwill of the business at $0.32 million x 2 = $640,000.

Loss of Profits

13. We have no reason to doubt the Notice of Assessment for Profits Tax for the year 1992-93 that the business reported profits of $158,324 for that year. Strangely, we have no claim for loss of profits for 1993-94 although Mr. CHIU did say the business suffered losses ever since the resumption notice was gazetted. In this respect, Mr. Clarke rightly uses a multiplier of 3 to in effect cover loss of profits for the year 1993-94. In the premises, loss of profits should be $320,000 - $158,000 = $162,000 for 1992-93 and $320,000 for 1993-94.

14. Accordingly, we determine compensation for loss of profits at $162,000 + $320,000 = $482,000.

Profit Rent

15. Before the profit rent can be calculated, the full market rent of the subject premises has to be ascertained. Mr. Clarke for the Respondent suggests a unit rate of $218 per square metre and about one-tenth for the yard. See pp. 12-13 of his expert report Exhibit R4. In WONG Sau Hing, LEE Wing Tau, LI Sai Kuen and LEE Sai Ho trading as Shing Kee Metal Dealer v. Director of Lands, CLR No.20 of 1994, for the Ground Floor of No. 5 Sui Lun Street, we adopted a unit rate of $280 per square metre and one-eighth for the yard. Since No. 6 Sui Lun Street was directly opposite No. 5 Sui Lun Street, we find the rates suggested by the Respondent's expert unjustifiably low and would adopt the rate of $280 per square metre for the assessment of the full market rent of the subject premises. At the time of resumption, the Applicant's tenancy had an unexpired term of 17 months.

16. In the premises, we determine the profit rent at $104,000 calculated as follows:-

Machinery and equipment

17. The business had two electroplating lines and miscellaneous machinery, equipment, tools and chemical materials. In September, 1993, officers of the Lands Department made an inventory record of the machinery, equipment, tools and chemical materials held by the business at that time. There are altogether 18 items of them in all; see the list in Exhibit R5 and a faired list in pp. 6-7 in Exhibit R1 and Exhibit R2. The inventory is not disputed by the parties. The Applicant claims for losses suffered as a result of forced sale of these items for a gross sum of $33,000 by auction in April 1994. Since the machinery, equipment, tools and chemical materials were disposed of in April 1994, the Applicant is entitled to compensation being the value to him at the time of sales less the auction proceeds he has received. In our view, the value to the applicant in April 1994 is the price paid by the Applicant at various times previously to obtain the machinery, equipment, tools and raw materials stock less depreciation for wear and tear. Alternatively, the value should be the cost to obtain from the open market the same quantity and quality the Applicant had in April 1994. In either case, it is the replacement value.

18. Mr. Shadbolt of Chesterton Petty for the Respondent assessed the value of the machinery, equipment, tools and chemical materials at $309,710. Moreover, Mr. Clarke says that no compensation is payable for the one light goods vehicle in the inventory list because the Applicant should have sold it in the second hand market before the auction. The compensation figure should therefore be revised to $234,110 less the adjusted auction proceeds of $24,945. We are not sure how much more the light goods vehicle would fetch in the second hand market. In any event, we believe the Applicant, like many business operators in the Scheme, was rightly or wrongly led to believe that he could only dispose of his machinery and equipment through public auction. We do not think he should be penalised for that. Hence we include the light goods vehicle for compensation.

19. The valuation of the machinery and equipment of the business by Mr. Shadbolt is, in our view, clearly faulty. It soon became apparent in his evidence that Mr. Shadbolt does not know the electroplating business. Without knowledge of the sort of articles the business customarily processed, Mr. Shadbolt obtained quotations for general electroplating lines with ordinary bore holes for the drum to hold the articles to be electroplated. In fact, the business required drums with fine bore holes which must, of course, be more expensive. Also, the quotations Mr. Shadbolt relies upon relate to equipment made with standard stainless steel whereas the business specially ordered electroplating lines made of more resistant steel to withold strong acid solutions. Mr. Shadbolt purported to ascertain the second hand market value of the machinery and equipment of the business. He then used such values as part of his reference in the valuation exercise. In fact, there is no second hand market for electroplating machines, as Mr. Shadbolt admitted in a later part of his evidence. In view of all of the above, we find the valuation by Mr. Shadbolt unreliable. We also find the auction price not of assistance in the special circumstances of this case.

20. We adopt Mr. Shadbolt's view that nearly all the machinery and equipment of the business had a useful life of 15 years and 10% of their purchase cost as residuary value. Applying standard depreciation factors as used by Mr. Shadbolt to the purchase cost of items 1-11 and 13-15 and adopting his valuation of items 12 and 16-18, we obtain a total value of $518,316 as per the schedule attached hereto.

21. In the premises, we place the value of the machinery, equipment, tools and chemical materials of the business at $518,316 and determine compensation payable to the Applicant for loss due to forced sale of the same at $(518,316 - 33,000) = $485,316.

Fixtures and Fittings

22. The Applicant claims compensation for $1,070,000 being the cost of the fixtures and fittings in the subject premises. This is accepted by Mr. Clarke but he recommends a discount of 10% for depreciation. We accept the expert's opinion and determine compensation for fixtures and fittings at $963,000.

Miscellaneous Items

23. The Applicant further claims transportation fees for auction at $72,000 auction exhibition ground and security charges at $28,000 and auctioneers' charges at $13,224.80. The claims for auction exhibition ground and security charges are not supported by receipts. The claim for transportation and auctioneers' charges is supported by receipts as shown in Exhibit A4. The Respondent does not accept the amounts claimed for transportation fees and auction exhibition ground and security charges. Mr. Clarke in his report at p.10 of Exhibit R4 says that the cost for removal and transportation, assuming one vehicle and three workers for two days, should be $40,000. Taking into account the bulk and nature of the machinery and equipment to be dismantled and moved, we have no reason to doubt the claim for $72,000 for transportation charges supported by receipt. We gather from evidence in related cases that the auction exhibition ground and security charges at $28,000 are in fact an apportionment of a much larger amount which all the business operators affected by the Scheme and had to auction their goods had to share. We have no reason to doubt this and would allow the amount as claimed. We also accept the auctioneers' charges at $13,224.80.

24. The Applicant's claim of $100,000 as expenses for looking for premises with a view to relocating the business is neither supported by documents nor otherwise sufficiently justified. It must be dismissed.

25. In summary, compensation for the following items is justified :-

The Order

28. Accordingly, we determine compensation for the Applicant at $2,800,000. Leave is reserved to apply for the rate of interest, if not agreed, to be determined under section 17(3A) of the Ordinance. There is an order nisi that the Respondent shall pay the Applicant's expenses incurred in prosecuting his claim which we assess at $9,000 to be made absolute unless application is made, within 21 days form the date of handing down of this judgment, to the contrary. Liberty to apply is also reserved for ancillary and consequential matters.