馮慶及秦好愛(以萬安膠輪公司的名營業) v. 地政總署署長

LDLR 3 OF 2006

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Lands Resumption Application No. 3 of 2006

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J  U  D  G  M  E  N  T

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Background

1.   This is an application for compensation under the Lands Resumption Ordinance, Cap. 124 (“the Ordinance”).  There was no dispute on the Applicants’ entitlement to compensation.  Prior to the hearing, the Applicants have settled with the Respondent their claims on the value of the land taken.  The outstanding claims relate to (i) the loss of goodwill (under section 10(2)(d) of the Ordinance) and (ii) severance payments (under section 10(2)(e)(ii) of the Ordinance) to Mr. Fung Kin Wah and Mr. Fung Kin Ming, the two sons/employees of the Applicants’ business on the resumed property.  The parties agreed that these were all disputes of facts.

2.  According to the copy of business registration document produced, one of the Applicants, Mr. Fung Hing began his business since 1964.  The business name was amended in 1980’s to Man On Rubber Tyre Co. (“Man On”) (the other Applicant being Madam Chun Ho Oi, wife of Mr. Fung Hing).  In 2004, the business of Man On was totally extinguished, which was in turn caused by the resumption of the Applicants’ property known as Shop 7, Ground Floor, On Yip Building, No. 185 Fuk Wing Street, Sham Shui Po, Kowloon, Hong Kong including cockloft thereon (the Property).

The issues in dispute

3.  It was not in dispute that the loss of goodwill of the business of Man On should be assessed on the basis of total extinguishment.  In calculating the loss of goodwill, the experts agreed on the methodology, being the product of the adjusted historic yearly profit of the business and a Years’ Purchase (“YP”) multiplier, which in turn is dependent on the discounting rate and the number of years Man On could be expected to remain on the Property if there were no resumption.  The experts also agreed to use the discounting rate of 20% but they differed on the number of years Man On could carry on its business on the Property.  They also differed on the estimation of the normal historic yearly profit of Man On.

4.   The experts disputed on whether the Applicants’ two sons Mr. Fung Kin Wah and Mr. Fung Kin Ming, had been, during their respective periods of their employment with Man On, dwelled in the small dwelling as Mr. Fung Hing.  Also, there were disputes as to the quantum of the last month’s salary of Mr. Fung Kin Wah and Mr. Fung Kin Ming.

Differences between the parties

5.   The parties have managed to narrow down their differences during the hearing.  At the closing submissions, the Applicants sought a compensation for loss of goodwill and severance payments of $1,332,000 whilst the Respondent’s correspondent figure was $630,000.

The assessment of the net yearly profits of Man On

6.   The Applicants, based on the opinion of their valuation expert Mr. Tony T.N. Chan, suggested that in calculating the loss of goodwill, the multiplicand should be the last year’s profit of Man On whilst the Respondent, based on the opinion of Mr. Patrick W.C. Lai adopted the average profit of the last 3 years’ accounts of Man On.

7.  In the accounts presented to the Inland Revenue by the Applicants, the expenses included the staff messing.  Mr. Lai contended that it should not be allowed as an item of expenses.  In addition, Mr. Lai pointed out that the MPF contribution at 5% of the staff salaries as well as depreciation at $3,500 a year should be added back as items of expenses in arriving at the adjusted historic net profits for the purpose of computing the loss of goodwill.  At the final submissions, there was no longer any disagreement as to the treatment of these 3 items of expenses.

8.   I therefore adopt the agreed adjustments of the parties, which are also fair and reasonable, in arriving at the net yearly profits of Man On, which are as follows:

Year	Adjusted net profit	Percentage increase over previous year
1999/00	$167,130	N/A
2000/01	$178,229	+6.64%
2001/02	$215,797	+21.08%
2002/03	$234,700	+8.76%

The normal annual profit of Man On

9.   What loss an applicant could be compensated was described by the Lands Tribunal in U.K. as “the loss of ability to derive a future profit out of the particular premises from which he has been dispossessed” in Reynolds v. Manchester City Council [1981] 257 EG 939 at 941.  In that case, the Tribunal went on to set out that, “because of the lack of any external check on the figure finally agreed at under this head of claim, the assessment of loss is inherently a difficult task.”  The Tribunal adopted an approach adopted by valuers that was similar to the one sometimes employed when assessing the value of a business changing hands in the open market.  The calculations of that approach, consisted of 3 stages, namely, firstly, the ascertainment of a figure of historic profit; secondly, the adjustment of this historic profit by making certain deductions such as the profit rent and an allowance for interest on the capital employed in the business and thirdly, the capitalization of the adjusted annual profit by applying a multiplier in terms of years’ purchase.  This approach was applied in the Court of Appeal’s decision in Ng Yuen Kang trading as Wing Lee Metal Company v. Secretary for Transport, CACV 4095/2001 (unreported, judgment dated 16 April 2003, on appeal from LDMR 27/2000).  In the present case, I agree with the parties that the same 3-stage approach should be used.

10.  Mr. Chan giving evidence for the Applicant opined that it would be appropriate to use the last year’s actual profit as to represent the historic profit of Man On.  In support of this, he cited the case of Chan Chaw-man, Ching Suk-ming and Chan Suet-fu trading as Kam Yuen Sea Food Hot Pots v. Director of Lands, LDLR 1/1995 (unreported, Land’s Tribunal judgment dated 20 January 1996) in which it was held at paragraph that, “ in view of the steady growing annual profit trend, we do not think it is fair to take an average figure.  The latest 1993/94 figure of $908,882 is a good starting point…”

11.  On the other hand, Mr. Lai said that “it is essential that the annual net profits adopted should be representative of the normal operation of the business” and that the Tribunal should not depart from the usual approach of adopting the average of the three previous years’ trading profits.  He also added that the increase in the adjusted net profits in the present case was nowhere comparable to the magnitude of growth in the Kam Yuen case cited by the Applicants.  In addition, Mr. Lai said that it was not reasonable in the actual accounts of the Applicants that the ratio of staff salaries to net sales decrease whilst the net sales of the business increased during the last 3 years of operation.  After applying a uniform ratio of staff salaries to net sales (at about 12.8%) to the profits figures of Man On in the last 3 years, Mr. Lai calculated that if his alleged proportional increase in staff salaries were factored into the profits, the yearly profit increase in the last year of trading would be reduced considerably, from 8.76% to only about 3.7%.  This supported his opinion that the average of the last 3 years’ profits should be preferred.

12.  I disagree with Mr. Lai’s opinion.  Firstly, although the magnitude of the growth in profits in the present case was not the same as in the case of Kam Yuen, I find that it was also correct to say that for Man On, there was a “steady growing profit trend” that warrants the use of the last year’s profit instead of averaging the last 3 years’ profits.   Secondly, I do not agree with Mr. Lai that the ratio of staff salaries to net profit must be a rigid figure.  Although the ratio differs from year to year, I find that they fall within a very narrow range (between 12.8% and 12.3 %).  Otherwise, it would be supporting another argument, already rejected by the Lands Tribunal and upheld by the Court of Appeal in Ng Yuen Kang case that the Tribunal should resort to what was known as “salary and wages” approach” in assessing the loss of goodwill.

13.  In the present case, I therefore decide in favour of the Applicant and adopt the last year’s adjusted net profit of $234,700 (i.e. year 2002/2003) as the basis for assessing the loss of goodwill

The number of years that Man On could continue its business without the resumption

14.  Mr. Fung Hing was 76 years old at the date of reversion of 7 June 2003.  The parties agreed that for the purpose of computing the goodwill, the relevant date should be taken as the date of cessation of the business of Man On.  The date was 16 March 2004, when Mr. Fung Hing was evicted by force from the Property by the Bailiff.  Mr. Tony T.N. Chan opined that Mr. Fung Hing could operate the business of Man On for 9 more years (i.e. to the age of about 86 years old) if not for the resumption.  He asked this Tribunal to have regard to the physical appearance and behaviour of Mr. Fung Hing when giving evidence in the Tribunal when deliberating on this matter.

15.  On the other hand, the Respondent’s valuation expert Mr. Patrick W.C. Lai gave opinion that it would already be generous on the part of the Respondent to assume that Mr. Fung Hing could work for another 5 years (i.e. to the age of 82 years old) without the resumption.  Mr. Lai opined that this already stretched the limit of the working life of an elderly proprietor such as Mr. Fung Hing as the business of Man On by its nature still required considerable physical stamina.  Mr. Lai added that when undertaking the valuation at the relevant date of 9 March 2004 (for the purpose of assessing the goodwill), one should disregard the benefit of hindsight as suggested by Mr. Chan.

16.  Having regard to all the circumstances of this case including the different opinion of the two experts, I am of the view that it is reasonable and indeed generous on the part of the Respondent to accept that Mr. Fung Hing could be expected to work for 5 more years until he is about 82 years old if there were no resumption.  I therefore adopt the Respondent’s estimated number of years instead of the Applicants’ figure.  Using the agreed discounting rate of 20%, the YP of 5 years will give a figure of about 3, which will be used below in the computation of the goodwill.

17.  Hence, I compute that the loss of goodwill shall be the product of the last year’s net profit after adjustments of MPF and depreciation, i.e. $234,700 and the YP multiplier of 3, giving a sum of $704,100.

Severance payments

18.  The Respondent opposed to award the severance payments to Mr. Fung Kin Wah and Mr. Fung King Ming, the 2 sons and employees of Mr. Fung Hing because the Applicants, through their surveyor Mr. Chan replied to the Lands Department on 19 May 2005 that they, together with his daughter, the third employee Miss Pang Wai Chu “are living together” with Mr. Fung Hing at the address of Flat E, 11/F., Capital Building, No. 89 Un Chau Street, Sham Shui Po, Kowloon (“Flat E on 11/F”).  Mr. Chan gave evidence that before his writing to the Lands Department in response to the latter’s queries, he had explained the matter to Mr. Fung Hing and had asked him for residential proof but was instructed to give such a reply.  

19.  The Respondent submits that it is trite law that any claimant such as the Applicants should be compensated with the severance payments lawfully payable to his employees under section 31G of the Employment Ordinance, but not with any excess amount whether that has actually been paid out or not: Director of Public Works v. Dr. Renald Ching and Dr. Marie Feng [1978] HKLTLR 320 at 339. 

20.  The Respondent submits that although the Applicants were allowed to produce various additional documents during the hearing, they still failed to address the Respondent’s objection in proving, as alleged by the Applicants, that (1) the Applicants moved out from Flat E on 11/F to Flat C on 10/F in 1993; and (2) Mr. Fung Kin Ming moved out from Flat E on 11/F (of the same building) in 1990.  Instead, the Applicants only relied on the oral evidence of Mr. Fung Hing in support of their case.   

21.  According to section 4(2)(b) of the Employment Ordinance, the provisions of the Ordinance including those relating to severance payment does not apply “to a person who is a member of the family of the proprietor of the business in which he is employed and who dwells in the same dwelling as the proprietor”.  Hence, the Respondent submits that the said clear wordings of the Ordinance apply to exclude application of the severance payments for Mr. Fung Kin Wah and Mr. Fung Kin Ming.  

22.  The Applicants submit that this Tribunal should accept the evidence of Mr. Fung Hing, who is a reliable witness.  Mr. Fung Hing also produced various documents to support of the Applicants’ case, including copies of land searches of various properties dwelled by Mr. Fung Hing and his two sons, as well as other documents relating to these properties.

23.  I agree with the Respondent that the documents relating to these properties with the exception of one, a copy of tax return of Mr. Fung Kin Wah, do not lend support to the Applicants’ case directly.  However, having considered all the evidence, I accept Mr. Fung Hing’s evidence because (1) having regard to the size of Flat E on 11/F (the address of Mr. Fung and his 2 sons as reported to the Lands Department by Mr. Chan), which is only about 500 sq. ft. in gross floor area, and that of another property, Flat C on 10/F in the same building, and (2) the family’s ownership of the various properties at various dates, it is more probable than not that Mr. Fung and his 2 sons were not living together (and with their respective families) at Flat E on 11/F since the purchase of another flat at Flat C on 10/F in 1993.  Also, the actual occupation and living condition of members of the three Fungs’ families (with Mr. Fung Hing as head of the extended family) at various properties at various dates were consistent with the dates of the purchases (and sales, if applicable) of these properties.

24.  I also accept the suggested explanation by counsel for the Applicants that Mr. Fung Hing, when asked the question of the location of dwelling by Mr. Tony T.N. Chan, might have misunderstood the meaning of the question.

25.  Similarly, I do not find that the possession of the keys by Mr. Fung Hing of Mr. Fung King Wah’s flat at Flat E on 11/F or that the 2 families living on Flat E on 11/F and Flat C on 10/F had a very close relationship of eating and doing laundry together would suggest that they dwelled in the same dwelling.  The important criterion of a dwelling place is the place where one sleeps regularly over-night. 

26.  In conclusion, I find, on balance of probabilities, that at the relevant date of cessation of the business of Man On and before that, (i) while Mr. Fung Kin Wah has continued to dwell at Flat E on 11/F, (ii) Mr. Fung Hing together with his wife and their daughter have moved one floor downwards to Flat C on 10/F since its purchase in 1993, and (iii) Mr. Fung Kin Ming lived at a separate dwelling at various locations since moving out from the building.

The last month’s salaries of Mr. Fung Kin Wah and Mr. Fung Kin Ming

27.  Mr. Fung Hing gave evidence that the last month’s salary of either Mr. Fung Kin Wah or Mr. Fung Kin Ming was the same, at $21,000.  However, there was no documentary proof of such payments.  Therefore, the Respondent did not accept this figure as the last month’s salary of these two employees.  They would only accept the average monthly sum of the two employees’ “Salary & Allowance” as shown in the copy of profit & loss account for the year 2002/2003 produced by the Applicants to the Inland Revenue Department.

28.  In the absence of any other proof of payment, I do not accept the evidence of Mr. Fung Hing in his statement of the last month’s salaries of his two sons/employees, as they are much higher than the average of “Salary & Allowance” as shown in their accounts submitted to the Inland Revenue Department for the year 2002/2003 and are also inconsistent with the previous trend of “Salary & Allowance” shown in the previous years’ accounts.

29.  In the circumstances, based on figures shown in the accounts, I calculate the compensation for the item of severance payment made by Mr. Fung Hing to the two eligible employees in the total sum of $180,914, a break-down of which is as follows: -

Mr. Fung Kin Wah: $14,625 x 11 x 2/3 = $107,250

Mr. Fung Kin Ming: $9,208 x 12 x 2/3 = $73,664

Conclusion

30.  In light of the above findings, I make the following orders: -

(1)    The Respondent do pay the Applicants the sum of $885,014 as the total compensation for the total extinguishment of the business on the Property including the loss of goodwill of $704,100 and the severance payments of $180,914;

(2)    The matters of professional fees, interest and costs be adjourned to a date to be fixed, with liberty to apply for consequential and ancillary matters.