TAM SHUK YIN ANNY v. CHOI KWOK CHAN AND OTHERS

FACV No. 3 of 2010

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 3 OF 2010 (CIVIL)

(ON APPEAL FROM CACV NO. 105 OF 2008)

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Between:

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J U D G M E N T

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Mr Justice Bokhary PJ :

1.  I agree with the judgment of Mr Justice Ribeiro PJ.

Mr Justice Chan PJ :

2.  I agree with the judgment of Mr Justice Ribeiro PJ.

Mr Justice Ribeiro PJ :

3.  In proceedings brought by the respondent as petitioner under section 168A of the Companies Ordinance,[1] Kwan J (as Kwan JA then was) found that the 1st respondent (the 1^st appellant in this appeal) had conducted the affairs of the relevant companies in a manner unfairly prejudicial to the petitioner’s interests and made a series of orders granting relief.[2] 

4.  This appeal concerns one aspect of such relief, namely, an order that the 1st respondent should pay to the petitioner interest amounting to some $26.2 million.  The Court of Appeal,[3] dismissed the respondents’ appeal but “amended” the aforesaid order with the result, according to the 1st respondent, that the amount of interest payable was increased to the sum of $29.45 million.  It is the petitioner’s entitlement to such or any interest that is in issue on this appeal.  While the petitioner does not seek to recover the higher amount[4] based on the Court of Appeal’s order, she seeks to uphold the award.

The background facts

5.  The protagonists consist of two married couples: the petitioner and her husband on the one hand and the 1st respondent and his wife (the 2nd respondent) on the other.  They had for many years jointly run primary schools and kindergartens on a commercial basis.  In 1997, those activities (in so far as presently relevant) were conducted through three operating companies and one land-owning company referred to below, with the petitioner and the 1st respondent each holding 50% of the shares in each such company.

6.  The petitioner managed two kindergartens which can conveniently be referred to by their respective addresses.  The first, at 14 York Road in Kowloon Tong (“No 14”) was operated by Active Team International Limited (“Active Team”).  The second, situated at Nos 8 and 10 York Road (“Nos 8 and 10”), was operated by Advance Wise Development Limited (“Advance Wise”).  Both kindergartens were in leased premises.

7.  The respondents managed two primary schools. The first, at 49 Cumberland Road, again in Kowloon Tong (“No 49”), was also operated by Advance Wise.  The second, located at 57 Cumberland Road (“No 57”) was operated by Wise Apex Enterprises Limited (“Wise Apex”). Richmond Properties and Trading Company Limited (“Richmond”), was the registered owner of the land on which Nos 49 and 57 were situated and was owned by the petitioner and the respondents in equal shares.  Advance Wise and Wise Apex were to pay rent to Richmond for their use of Nos 49 and 57.

8.  Unfortunately, the parties fell out and, from 1997 onwards, their joint venture was largely deadlocked.  The petitioner continued to run the kindergartens and the 1st respondent continued to manage the primary schools although, with increasing neglect on his part, the primary school part of the business deteriorated until No 49 ceased to operate as a school in July 2004.  Rent which should have been paid by Advance Wise and Wise Apex to Richmond for the premises used by Nos 49 and 57 was left unpaid; no dividends were distributed by the operating companies even though they had substantial accumulated profits; and in her petition issued on 17 September 2004, the petitioner listed a catalogue of complaints as instances of unfairly prejudicial conduct on the 1st respondent’s part.

The relief granted by Kwan J

9.  In a comprehensive and careful judgment, Kwan J found most of those complaints established and held that unfairly prejudicial conduct on the 1st respondent’s part had clearly been proved.  Her Ladyship sought to extricate the parties from their deadlocked joint venture by making “buy-out” orders in relation to the operating companies’ shares and in respect of Richmond’s two properties.  The petitioner was to purchase the 1st respondent’s shares in Active Team and Advance Wise and the 1st respondent, the petitioner’s shares in Wise Apex.  The petitioner and the respondents were respectively to purchase from Richmond its properties at No 49 and No 57 Cumberland Road.  Orders were also made to compensate the petitioner for the consequences of certain aspects of the 1st respondent’s unfairly prejudicial conduct.

10.  We are primarily concerned with the property buy-out orders.  In relation thereto, the combined effect of Kwan J’s orders dated 14 June 2007 (“the 2007 order”) and 5 March 2008 (“the 2008 order”) was as follows:

(a)  The two properties were to be valued as at 17 September 2004 (the date of the petition) by an independent valuer[5] and treated as having been sold at valuation to the respective parties with completion occurring on that date.

(b)  As from 18 September 2004, the properties were to be treated as belonging to the respective parties.  Thus, as from that date, rent payable by Advance Wise for the premises used by No 49 was credited to the petitioner and not to Richmond.[6]  Similarly, as from that date, rent payable by Wise Apex for use of the No 57 premises was credited to the 1st respondent.[7]

(c)   Richmond continued to be entitled to the unpaid rent for periods prior to 17 September 2004 and Kwan J ordered Advance Wise,[8] Wise Apex[9] and the 1st respondent[10] to pay to Richmond the rent found due.  She also ordered the 1st respondent to pay interest to Richmond and to reimburse the two operating companies for interest payable by them to Richmond in respect of such overdue rent.[11]

(d)  Valuations subsequently carried out on 31 July 2008 fixed the price for the petitioner’s acquisition of No 49 as at 17 September 2004 at $66.56 million.  The price for the respondents’ acquisition of No 57 was similarly fixed at $68.22 million.

11.  Pausing at this point, the aforesaid orders resulted in Richmond being credited, as at 17 September 2004, with overdue rent and interest thereon, as well as the purchase price of the properties at Nos 49 and 57 Cumberland Road, in return for a deemed transfer of the properties to the petitioner and the respondents on the same day. 

12.  Payment by the parties for each of the properties was by way of set-off since Kwan J’s orders provided for the immediate distribution by Richmond of its net distributable profits to them.[12]  By paragraph 6 of her Ladyship’s 2008 order, it was made clear that such distributable profits included the net proceeds of the sale of Nos 49 and 57 Cumberland Road and the sums recovered by Richmond from the 1st respondent, Advance Wise and Wise Apex.  In other words, Richmond, having been credited with $66.56 million and $68.22 million for Nos 49 and 57 Cumberland Road respectively plus overdue rent and interest, was ordered to distribute half of the total amount credited to each of the petitioner and the 1st respondent.  The distributed amounts were therefore available to fund their acquisition of the respective properties (leaving each with a surplus).

The controversial orders

13.  It is against that background that the orders being challenged have to be viewed.  On 5 March 2008, Kwan J ordered that:

“The 1st respondent do pay interest on the petitioner’s share of the net proceeds arising from the sale of No 49 and No 57 Cumberland Road with interest to run from 17 September 2004 to the date hereof at the rate of 1% over the prime rate of HSBC and thereafter at the prevailing judgment rate until payment.” (“the interest order”)

14.  Although the interest order is not explicit as to the identity of the recipient, the passage from Kwan J’s judgment cited in the paragraph which follows makes it clear that the petitioner is its intended beneficiary.  As previously indicated, the amount of interest payable thereunder comes to about $26.2 million.

15.  In her judgment dated 5 March 2008, Kwan J explained the basis of the interest order as follows:

“The loss of interest from the proceeds of sale, which was delayed owing to the respondents’ opposition of the petition and resistance of repeated buy-out offers, is a separate loss for which the petitioner should be compensated.”[13]

Her Ladyship evidently considered the respondents to have delayed the petitioner’s receipt of the proceeds of sale and made the interest order as a means of compensating her for being kept out of her money.

16.  With respect, the interest order gives rise to certain fundamental problems. 

(a)   First, the proceeds of sale were payable to Richmond, the owner of the properties, and not to the petitioner.  Indeed, the petitioner was a purchaser who had the obligation to pay to Richmond the price of 49 Cumberland Road.  The petitioner, never having been entitled to receive the proceeds of sale, could never have been kept out of the same. 

(b)  Secondly, the order was for interest to run from 17 September 2004.  However, as we have seen, as from 18 September 2004, the petitioner was being credited with the rent payable by Advance Wise for No 49’s use of the property.  The petitioner was therefore treated as entitled to receive a return on the property which she is deemed to have acquired on 17 September 2004.  On that basis, it is hard to see what loss she was being compensated for by the award of interest during the post-17 September 2004 period.

(c)   Thirdly, there was simply no delay in payment of the purchase price for the properties either by the respondents or the petitioner and thus no basis for charging interest.  As previously noted, payment was by way of set-off.  As 50% shareholders in Richmond, the petitioner and the respondents were, pursuant to paragraph 6 of the 2008 order, entitled to receive an equal share of Richmond’s accumulated distributable profits, including the net proceeds of sale.  Setting off that entitlement funded their respective acquisitions.  As the set-off was deemed to take effect on 17 September 2004, the same day sale of the property was deemed to have been completed, there was no delay in payment of the purchase price. 

17.  In the Court of Appeal, Rogers VP evidently recognized that there were difficulties with the interest order.  He considered, however, that an amendment to the interest order suggested by Mr Bartlett (then appearing for the petitioner) would “defuse the point”.  He directed that the interest order should be varied to read as follows:[14]

“(10)  The 1st respondent do pay interest on the petitioner’s share of the distributable profits of Richmond after taking into account the net proceeds arising from the sale of No 49 and No 57 Cumberland Road assuming a sale of such properties from 17 September 2004 with interest to run from 17 September 2004 to the date hereof at the rate of 1% over prime rate of HSBC and thereafter at the prevailing judgment rate until payment.” (“the revised order”)

18.  As indicated above, the respondents submit that this increases the interest payable by more than $3 million, taking it up to the sum of $29.45 million.[15]  This is so since, as we have seen, Richmond had available for distribution not merely the notional proceeds of the property sales, but also accumulated profits totalling some $32 million.  The revised order therefore involves an interest calculation based on an enlarged principal amount.

19.  With respect, the revised order provides no sounder a basis for awarding interest.  The main change it effects is to charge the interest on:

“the Petitioner’s share of the distributable profits of Richmond after taking into account the net proceeds arising from the sale of No 49 and No 57 Cumberland Road assuming a sale of such properties from 17 September 2004”

instead of on:

“the petitioner’s share of the net proceeds arising from the sale of No 49 and No 57 Cumberland Road”

as ordered by Kwan J.

20.  This was no doubt designed to meet the problem posed by the petitioner’s lack of any entitlement to the sale proceeds.  The revised order therefore shifts its focus to the petitioner’s entitlement, as a 50% shareholder, to a half share of Richmond’s distributable profits (as provided for by paragraph 6 of the 2008 order) and awards interest on that half share.   However, the fundamental difficulties remain.

21.  The premise of the revised order is self-evidently that the petitioner has been kept out – by the 1st respondent – of her share of Richmond’s distributable profits which she should have received on 17 September 2004, so that the 1st respondent should compensate her by paying interest on that amount starting from that date. 

22.  That premise cannot be sustained.  As we have seen, Kwan J’s orders treated the parties’ acquisition of the properties to have occurred on 17 September 2004, funded by setting off their respective entitlements to Richmond’s profits ordered to be distributed.  The petitioner was therefore credited on 17 September 2004 with her share of those distributable profits, enabling her to utilise $66.56 million thereof as the purchase monies for the property at 49 Cumberland Road.  She must accordingly be taken to have received her share of the distribution on 17 September 2004. No justification exists for awarding her any interest on such sum to run as from that date.  Moreover, as previously noted, as from 18 September 2004, the petitioner was credited with rental payments from Advance Wise in respect of No 49, thereby earning a return on the property she had acquired. 

23.  Moreover, the provision in the revised order making the 1st respondent liable to pay interest “until payment” cannot be given any sensible meaning.  Those words can only mean “until payment of the petitioner’s share of the distributable profits of Richmond”.  But as we have seen, she was effectively paid her share and duly applied most of it to fund purchase of the property in question on 17 September 2004.  After that date, there was no debt due to the petitioner, whether from the 1st respondent or Richmond, on which interest ought to be charged “until payment”.

24.  Mr Anderson Chow SC (who did not appear below) sought to argue on the petitioner’s behalf that although couched in terms of awards of interest, the interest order and the revised order should not be viewed as such but are justifiable as a form of “proxy” compensation for the 1st respondent having delayed the parties’ eventual extrication from the venture.  He submitted in particular that the 1st respondent had kept the petitioner out of using the premises at No 49 in the period after 17 September 2004 and that the fact that she became entitled to receive rent from Advance Wise (in place of Richmond) as from that date was not in truth compensation since, having acquired Advance Wise pursuant to the buy-out order made by Kwan J, the petitioner was effectively paying herself such rent.

25.  I cannot accept that the impugned orders can be justified on that basis.  Kwan J made a series of other orders designed to compensate for payment delays and the consequences of unfairly prejudicial conduct on the 1st respondent’s part.  Thus, she ordered him to bear the cost of interest payments on all the overdue rent[16] and to reimburse, with interest, the operating companies in respect of the net debit balance on his current account with those companies.[17]  He was also required to pay interest to the petitioner on the sum of $11.8 million or so receivable by her on the ultimate distribution of the operating companies’ profits.[18] 

26.  More particularly, her Ladyship made specific provision with a view to compensating the petitioner for having been deprived by the 1st respondent of the use of No 49, recuperating from the 1st respondent rent payable by Advance Wise.  Having considered in detail the 1st respondent’s conduct and the exchange of correspondence between the parties from 14 September 2004 to December 2005, Kwan J held that his conduct was unfairly prejudicial[19] and granted relief which she explained as follows:

“Advance Wise remained as the tenant of Richmond at No 49 after the school was suspended. I have found the 1^st respondent’s conduct unreasonable in declining to put the premises to any proper commercial use for the benefit of Advance Wise and Richmond. It would be appropriate to order the 1^st respondent to reimburse Advance Wise for the rental the latter would have to pay to Richmond. However, I would not order such payment to run from the suspension of the school at No 49 in July 2004. I would allow for the lapse of a reasonable period of time before the 1^st respondent should be made liable. Taking into account the exchange of correspondence between the parties, as mentioned earlier, I order the 1^st respondent to make reimbursement of rent to Advance Wise from 1 January 2006.”

27.  Plainly, Kwan J thought that the reasonable period of time in question should cover the period up to 31 December 2005.  She therefore made an initial order in the following terms:

“The 1^st Respondent do reimburse Advance Wise for the rental of No 49 ... from 1 January 2006 until such time as this Court may further determine ... at the rate of HK$120,000.00 per month.”[20]

28.  When her Ladyship came to determine the duration of the period of reimbursement, she considered competing submissions as to the appropriate end date taking into account when possession was delivered to the petitioner, the time needed for renovation works and the term of the lease which the petitioner had had to take on No 10 York Road instead of being able to utilise the premises at No 49.  She ordered in consequence that:

“The 1st respondent do reimburse Advance Wise for the rental of No 49 ... from 1^st January 2006 until expiry of the lease of No 10 York Road, ie, 5^th September 2008, at the rate of HK$120,000 per month.”

29.  The Judge’s reasoning and the orders for re-imbursement show that she duly considered the extent to which the 1st respondent should be ordered to compensate the petitioner for delaying her access to the premises at No 49.  During the period extending from 1 January 2006 to 5 September 2008 Advance Wise was reimbursed by the 1st respondent for the rent which Advance Wise had to pay to the petitioner, falsifying the argument that the petitioner was merely paying herself such rent.  In being credited with such rent she was obviously receiving a return on her property at No 49 at the 1st respondent’s expense.

30.  In reality, Mr Chow’s argument was that such compensation did not go far enough since it did not cover the entire period beginning from 18 September 2004.  I see no merit in that argument.  The Judge carefully calibrated the relief granted to the facts she found concerning the giving of access to No 49.  But even if there were any substance in the proposition that the rental reimbursement ordered was insufficient, that was a matter which the petitioner ought to have raised on appeal to the Court of Appeal.  That she did not do.  The present suggestion that orders for payment of interest which cannot be sustained on their own terms can somehow be justified as a “proxy” form of compensation to make good the allegedly insufficient compensation relating to the use of No 49 cannot be entertained. There is in any event no conceivable basis for accepting that an award in the sum of $26.2 million arrived at by an interest calculation can somehow be regarded as the appropriate sum of compensation for delayed access to No 49.

Conclusion

31.  For the foregoing reasons, it is my view that no justification exists for either the interest order or the revised order.  I would accordingly dispose of the appeal by making the following orders, namely:

(a)   That the appeal be allowed;

(b)  That paragraph 10 of Kwan J’s order dated 5 March 2008 and the order of the Court of Appeal dated 3 June 2009 be set aside; and

(c)   That there be an order nisi that the costs of this appeal and of the appeal to the Court of Appeal be paid by the petitioner to the 1^st and 2^nd respondents, such order to stand as an order absolute unless written submissions in support of some different order as to costs are lodged with the Registrar within 14 days from the date of this judgment.

 

Mr Justice Mortimer NPJ :

32.  I agree with the judgment of Mr Justice Ribeiro PJ.

Lord Walker of Gestingthorpe NPJ :

33.  I agree with the judgment of Mr Justice Ribeiro PJ.

Mr Justice Bokhary PJ :

34.  By the unanimous decision of the Court, the appeal is allowed in the terms set out in the concluding paragraph of Mr Justice Ribeiro PJ’s judgment.