TANG, RAYMOND v. EARLS HORIZON LTD

HCA 1433/2021

[2025] HKCFI 1577

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1433 OF 2021

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J U D G M E N T

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1.  The Plaintiff is suing the Defendant under a Sale and Purchase Agreement (“SPA”) of the shares in SKP Medical Group Limited (“Company”). The Plaintiff was the seller and the Defendant the purchaser.

2.  In gist, the Plaintiff alleged that the Company had achieved the minimum profit (“Minimum Profit”) guaranteed under the SPA, but the Defendant had failed to pay a 30% of the excess profit (“Excess”). Further, the Plaintiff is entitled to exercise a put option requiring the Defendant to purchase 20% more of the shares from the Plaintiff.

3.  The Defendant denied, on a proper casting of the accounts, that the Minimum Profit had been achieved. Further, the Defendant alleged that Plaintiff had committed several events of default (“EOD”), and the Defendant is entitled to exercise certain rights (including sale back) under the Shareholders’ Agreement (“SHA”).

4.  The Plaintiff is praying for the following reliefs:

(1)  An order for specific performance that the Defendant do purchase from the Plaintiff 20% of the issued share capital of Company as requested in the Stage 2 Put Notice pursuant to clauses 8.1, 8.2(b), 8.3 and 8.4 of the SPA by reason that the Company had achieved a profit in the financial years FY 2019 and FY 2020 which was over and above of the Minimum Profit of HK$8,000,000 under clause 13.1 of the SPA;

(2)  Further or alternative, damages in addition to or in lieu of specific performance; or

(3)  The sum of HK$1,081,774.8 being 30% of the Excess or damages to be assessed.

5.  The Defendant is counterclaiming the following reliefs:

(1)  Rectification of clause 13.1 of the SPA (in that FY 2019 and FY 2020, properly construed, means the period upon completion of the SPA from 1 August 2018 to 30 June 2020);

(2)  A Declaration that there were EOD under clause 15.1 of the SHA and that the Defendant is entitled to exercise its under clauses 15.2 to 15.5 of the SHA;

(3)  The sum of HK$14,628,550 (being 10 times the shortfall of the Minimum Profit) or damages to be assessed.

Background

6.  The Plaintiff is a practicing physiotherapist and the founder and shareholder and a director of the Company which carried on the business of physiotherapy services in Hong Kong. There were a number of subsidiary companies corresponding to the number of individual clinics run by the Company.

7.  The Defendant is a subsidiary of UMP Healthcare Holdings Limited (“UMP Holdings”), a company listed in Hong Kong and engaged in providing healthcare services. The Defendant purchased from the Plaintiff 70% of shares in the Company.

8.  On 25 May 2018, the Plaintiff and UMP Holding signed the final Indicative Term Sheet, which included the Profit Guarantee and Profit Guarantee Shortfall Compensation by the Plaintiff, payment of the Excess of Minimum Profit by the Defendant by the Defendant, Stage 2 Put-Option by Plaintiff, and Non-Compete provision. Those terms were reflected in the SPA and SHA.

9.  On 27 June 2018, the Plaintiff and the Defendant entered into the SPA. The salient terms of the SPA include:

“7.2 Indebtedness and contingent liability

(a) The Seller shall procure that on or before Closing all indebtedness or other liability owing by any Group Company immediately before Closing (unless otherwise expressly disclosed to and approved by the Purchaser on or before the Closing) to any person (including any shareholders/affiliates of a Group Company before the Reorganisation and any affiliates of the Seller’s Group) is or has been satisfied in full together with any interest accursing on it up to Closing.”

“8. Stage 2 Put Option

8.1 In the event that the Group Companies achieve an audited consolidated net profit after tax attributable to equity shareholders of at least HKD 4,000,000.00 during financial year ending 30 June 2020 (FY 2020), the Seller may (within 30 days from the completion of the Group Companies’ consolidated audited accounts for FY2020) at his sole discretion give written notice (Stage 2 Put Notice) to the Purchaser to require the Purchaser to purchase, pursuant to the terms under this clause 8, Shares in the Company representing 20% of the total issued share capital of the Company legally and beneficially owned by the Seller as at the date of the Stage 2 Put Notice (Stage 2 Put Shares) for a consideration of HKD 8,000,000.00 (the Stage 2 Consideration), so that upon completion of such purchase, the Purchaser will hold 90% of the total issued share capital of the Company and the Seller will hold 10% of the total issued capital of the Company.”

“13. Profit Guarantee

13.1 The Seller irrevocably and unconditionally guarantees in favour of the Purchaser that Group Companies shall achieve in aggregate a minimum of HKD 8,000,000.00 in audited consolidated net profit after tax attributable to equity shareholders during FY2019 and FY2020 combined (Minimum Profit).

13.2 In the event that the aggregate audited consolidated net profits after tax attributable to equity shareholders of the Group Companies combined for FY2019 and FY2020 are below the Minimum Profit (the difference being a Shortfall):

(a) the Seller shall pay to the Purchaser within two months after finalisation of the FY2020 consolidated accounts of the Group Companies an amount that is equal to the Shortfall multiplied by 10; and

(b) the parties agrees that payment as stipulated in clause 13.2(a) above is provided in consideration of the Purchaser’s undertaking in clause 13.3, and such amount represents a genuine pre-estimate of Loss that the Purchaser is likely to suffer as a result of the Group Companies failing to achieve the Minimum Profit, and any payment made in accordance with clause 13.2(a) shall not limit the Purchaser’s other rights and remedies for the Seller’s breach of this agreement.

13.3 In the event that the Group Companies’ aggregate audited consolidated net profits after tax attributable to equity shareholders combined for FY2019 and FY2020 is above the Minimum Profit (the difference being an Excess), the Purchaser shall pay to the Seller within two months after finalisation of the FY2020 consolidated accounts of the Group Companies an amount that is equal to 30% of the Excess.”

10.  Also on 27 June 2018, the Plaintiff, the Defendant and the Company entered into the SHA. The salient provisions of the SPA include:

“3. Business

3.1 The business of the Company shall be (i) the provision of physiotherapy services in Hong Kong; (ii) any other ancillary business in Hong Kong that are incidental to the provision of physiotherapy services; and (iii) any other business activities as the Shareholders may agree pursuant to the resolution, if any, passed in the Shareholders’ meeting from time to time ((i) to (iii) above, together, the “Business”). The business of the Company shall be under the overall management of the Board which shall be responsible for determining the overall policies and objectives of the Company.

3.2 Each of the Parties shall use its best endeavours to ensure that the Business of the Company shall be conducted on sound commercial profit making principles and in accordance with all Applicable Laws.”

“6. General Manager and Remuneration

6.1 So long as Mr. Tang remains a shareholder of the Company, Mr. Tang shall continue his office as a director and serve as the General Manager of the Company and each of the Company’s subsidiaries until his removal from the office in accordance with this Agreement, or the memorandum and articles of association of the Company, or otherwise in accordance with the decisions of the board of director of such company…

6.2 The Board will delegate the authority to Mr. Tang to perform day-to-day operations, including (i) the overall business & operational performance of the Company, as well as setting clinical and service standards; (ii) the recruitment and removal of physiotherapists, other medical professionals and administrative staff of the Company and its subsidiaries as well as the determination of their remunerations with reference to the comparable group in the market; (iii) the acquisition and purchase of tools and equipment relevant to the business operations of the Company. In addition, the General Manager shall implement the resolutions as approved by the Board and the Shareholders (where applicable).

…

6.4 Mr. Tang agrees that for so long as he remains a shareholder of the Company, and for a period of 24 months after he ceases to be a shareholder of the Company (the Coverage Period), Mr. Tang and his connected person (as per definition in the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited) will not establish, acquire or be employed by any business entity (i) in Hong Kong or (ii) in any other country or region in which the Company has business activities, in either case, that is engaged in any activities which are competitive with the business of providing physiotherapy services and any business activities reasonably related thereto.”

“8. Undertakings

…

8.8 The Shareholders acknowledge and confirm that they will perform this Agreement in a spirit of mutual co-operation, trust and confidence.”

“15. Events of Default

15.1 If any of the following occurs in respect of a Shareholder or (with respect to Clause 15.1.8 a direct or indirect holding company of which the Shareholder is a direct or indirect subsidiary, it is an event of default (“EOD”) as regards that Shareholder (the “Defaulting Shareholder”):

15.1.1 Material breach: the Defaulting Shareholder commits a material breach of its obligations under this Agreement and, if the breach is capable of remedy, fails to remedy the breach within twenty (20) Business Days of being required in writing to do so by the other Shareholder (the “Non Defaulting Shareholder”).

…

15.2 EOD Notice

15.2.1 Within six (6) months of the Non-defaulting Shareholder becoming aware that an EOD has occurred, the Non-defaulting Shareholder shall be entitled to serve a notice to this effect (“EOD Notice”) on the Defaulting Shareholder and the Company.

…

15.3 Expert

15.3.1 As soon as practical after the service of the EOD Notice, the non-defaulting shareholder shall appoint:

15.3.1.1 an independent accounting firm (the “Expert”) to determine the value of the Shares.

…

15.5 Option to buy or sell

The Non-defaulting Shareholder has (an independent) right, within thirty (30) days after receiving notification of the Fair Value determined by the Expert (the “Default Option Period”), to serve a notice (a “Default Notice”) on the Defaulting Shareholder (with a copy to the Company) requiring the Defaulting Shareholder either:

15.5.1 to sell all of the Shares held by the Defaulting Shareholder to the Non-defaulting Shareholder at a price per Share equal to (i) where the EOD falls under Clause 15.1.2 to 15.1.6 or any event occurs which has an analogous effect to any of the events referred to in Clause 15.1.1 to 15.1.6 (within the meaning of Clause 15.1.8, the Fair Value; and (ii) where the EOD falls under Clause 15.1.1, 15.1.7, or any event occurs which has an analogous effect to any of the events referred to in 15.1.1 or 15.1.7 (within the meaning of Clause 15.1.8, ninety-five percent (95%) of the Fair Value; or

15.5.2 to purchase the Shares held by the Non-defaulting Shareholder at a price per Share equal to the Fair Value.”

11.  And under the Definitions section of the SHA:

“Listing Rules” means the Rules Governing the Listing of Securities on the Stock Exchange.”

12.  According to the Listing Rules, a “connected person” is an associate of a director or substantial shareholder, and an “associate” of a connected person include a brother (Rule 14A.07(1) and (4), 14A.12(2)(a)).

13.  The parties intended to complete the deal by 30 June 2018. The Plaintiff was required to provide documents under due diligence. However, it was only on 23 July 2018 that all the documents were provided.

14.  On 23 July 2018, the Plaintiff signed a Supplemental Agreement confirming there was a breach of clause 7.2(a) of the SPA in that as of that date, there was still indebtedness owed by the Company to the Plaintiff (later ascertained to be HK$5,380,974) not satisfied in full, and the Plaintiff provided an indemnity to the Defendant for such purpose. The agreement was not signed by the Defendant.

“1. Indebtedness and Contingent Liability

1.1 The Parties confirm that, according to the due diligence review, inspection and investigation conducted by the Purchaser pursuant to clause 4 of the Original Agreement, the indebtedness and liabilities owning by the Group Company, among others, amounts due to directors of the Group Company, have not been satisfied in full on or before the Closing and the Seller is failure in fulfilling and satisfying its obligations under clause 7.2(a) of the Original Agreement.”

15.  On 24 July 2018, completion or closing (“Closing”) took place and the Plaintiff transferred 70% of the entire issued share capital of the Company to the Defendant upon completion of the sale.

16.  On 27 July 2018, Kenny Au, a co-founder of the Company and a business partner of the Plaintiff was appointed to the board of the Company. Three representatives of the Defendant were appointed as Directors of the Company.

17.  Kenny worked at the Queen’s Road Central (“QRC”) clinic of the Company. The Plaintiff’s brother Alan also worked at the Sai Kung (“SK”) clinic.

18.  The Plaintiff remained a director of the Company until 16 November 2020.

Plaintiff’s case

19.  The Plaintiff averred that the Company and its subsidiaries had achieved an aggregate audited consolidated net profit after tax of HK$11,605,916, being HK$7,539,004 for FY 2019 and HK$4,066,912 for FY 2020, which exceeded the Minimum Profit of HK$8,000,000 guaranteed under clause 13.1 of the SPA. Notwithstanding that, the Defendant failed to pay 30% of the Excess under clause 13.3 of the SPA within two months.

20.  On 29 June 2021, the Plaintiff served the Stage 2 Put Notice requiring the Defendant to purchase a further 20% of the issued share capital of the Company from the Plaintiff at HK$8,000,000 under clause 8.1 of the SPA. This request was not acceded to by the Defendant.

Defendant’s case

21.  The starting point of the Defendant’s case is that the Minimum Profit guaranteed under the SPA has not been achieved. Also, there was also an issue as to what period FY 2019 and FY 2020 covered by reason of late completion of the SPA.

22.  The Defendant accepted that as stated on the face of the audited consolidated accounts of the Company for the year ending 30 June 2020, the profit from 1 July 2018 to 30 June 2019 was HK$7,539,004, and the profit from 1 July 2019 to 30 June 2020 was HK$4,066,912, totaling HK$11,605,916.

23.  However, the Defendant averred that it was the common intention of the parties that Closing was the watershed between the old business under the Plaintiff alone, and the new business after the sale.

24.  Due to late production of documents by the Plaintiff, Closing was postponed one month. Hence, the relevant period (i.e. FY 2019 and FY 2020) for the Minimum Profit guarantee should run from 1 August 2018 to 30 June 2020 instead of 1 July 2018 to 30 June 2020 originally intended.

25.  As a fall back, the Court is invited to rectify clause 13.1 of the SPA such that FY 2019 and FY 2020 do reflect the period 1 August 2018 to 30 June 2020.

26.  Separately and more importantly, it was agreed under clause 7.2 of the SHA that “the Seller would procure that on or before Closing all indebtedness or other liability owing by any Group Company immediately before Closing… to any person (including any shareholders)… is or has been satisfied in full up to Closing.

27.  In other words, the common intention between the parties was that as of Closing, the Company should not have any or indebtedness, and it would not owe anyone (including the Plaintiff) any money. There should be a clean break of the Company before and after Closing.

28.  The profit and loss account for FY 2019 included “other net profit” of HK$5,380,974 being the waiver by the Plaintiff of an amount due to a director (i.e. the Plaintiff) by the Company.

29.  Miss So, counsel for the Defendant, submitted that such waiver ought to have been made before Closing, and any waiver made after Closing ought not be treated as profit of the Company after Closing.

30.  In any event, such waiver had nothing to do with the actual business income of the Company, and ought not be included as profit earned for the purpose of the Minimum Profit guarantee.

31.  As at 23 July 2018 (the date before Closing), the accounts of the Company were not yet sorted out. Hence, the Plaintiff had signed the Supplemental Agreement to confirm that he had not complied with clause 7.2 of the SPA and provided an indemnity. On that basis, the parties proceeded to closing despite of indebtedness by the Company to the Plaintiff had not been cleared.

32.  On 29 June 2021, UMP Holdings sought compensation from the Plaintiff for the 10 times the shortfall between the actual profit of the Company and the profit guarantee of HK$8,000,000 under clause 13.2 of the SPA. The sum was HK$14,628,550.

33.  Apart from the shortfall of Minimum Profit, there is also the issue of when the period of FY 2019 and FY 2020 shall start and end for the Minimum Profit guarantee.

34.  Miss Jacquen Kwok, director and co-CEO of UMP Holdings gave evidence. Miss Kwok did not negotiate with the Plaintiff and the deal was negotiated by Mandy Ma who was not called.

35.  Be that as it may, Miss Kwok said it was common practice that profit guarantee period run from the date of closing to the year end date of the company concerned. The parties originally intended Closing to be on 30 June 2018, hence FY 2019 and FY 2020 would encompass two calendar years. Miss Kwok was asked what if Closing took place at the end of August 2018 instead of July 2018? She said parties would have negotiated the new term.

36.  The Defendant further averred that several EOD had been arisen by reason of the Plaintiff’s acts and conduct:

I.  Inflation of the revenue of the Company

37.  On 3 November 2020 and 28 December 2020, two sums of HK$413,000 and HK$334,000 totaling HK$747,000 were deposited into the Company’s bank account at the instigation of the Plaintiff.

38.  On 25 January 2021, Mandy Ma, Company Secretary of UMP Holdings, emailed the Plaintiff asking for details of such unknown deposits.

39.  On 28 January 2021, the Plaintiff replied that the deposit in November was made by Alan as he found the cash in the safe of the Sai Kung clinic, and the December deposit was made by Kenny as he found the cash in his locker in the QRC clinic when he was clearing his belongings on his last day of work. Although the deposits were made in November and December 2020 (i.e. outside the Profit Guarantee period), the Plaintiff asserted that the monies were attributable to the Company’s profit for FY 2019 and FY 2020 (i.e. within the Profit Guarantee Period).

40.  At the board meeting of the Company on 18 June 2021, the Plaintiff sought to include the deposits as income under the Profit Guarantee, but he was out-voted. Thereupon, the Plaintiff changed tack and claimed that the monies actually belonged to him, and caused the monies to be returned to him.

41.  The Defendant alleged that the Plaintiff was trying to inflate the Minimum Profit. There was a material breach of the SHA (clause 15.1) of the duty of best endeavours in conducting the Company’s business under sound commercial profit making principle according with the law (clause 3.2) and the duty of mutual trust and confidence (clause 8.8).

42.  There was another sum of HK$85,000 which the Defendant alleged had been improperly included in the income of the Company. The Defendant alleged that the sales record at the QRC clinic was doctored by Kenny, by manually altering the written record and tempering with the computer. The Defendant relied mainly on the witness statement to the Police by Miss Cheung Siu Ping, receptionist at the QRC clinic.

II.  Failure to carry out day-to-day operations of the Company

43.  In early July 2020, the Plaintiff moved to Canada, where he had become a resident in 2013. He returned to Hong Kong for 1 to 2 weeks every 3 to 4 months. He worked as a part-time delivery worker in Canada.

44.  The Defendant averred that the Plaintiff was required to “perform day-today operations” under clause 6.2 of the SHA, which should include the management, recruitment and dismissal of therapists. The Plaintiff was in breach of performing day-today operations of the Company.

III.  Breach of the non-compete clause

45.  In December 2020, Kenny, Alan and another employee of the Company established a competing physiotherapy business of TST Physiotherapy Limited in undermining the business of the Company in breach of clause 6.4 of the SHA.

46.  It was stipulated in clause 6.4 of the SHA that so long as the Plaintiff remained a shareholder of the Company, the Plaintiff and his connected person will not establish, acquire or be employed by any business in Hong Kong engaging in any activities which are competitive with the business of providing physiotherapy business.

47.  Under the Listing Rules of the Hong Kong Stock Exchange, a “connected person” includes an “associate”, which in turn includes a brother of a shareholder and director. Hence, Alan is a connected person of the Plaintiff. There is an attempted argument on the issue of whether the Plaintiff is a substantial shareholder under the Listing Rules, and the matter will be dealt with later.

48.  On 15 December 2021, by reason of the above three EOD of material breaches, the Defendant issued an EOD Notice pursuant to clauses 15.1 and 15.2 of the SHA.

49.  In the present action, the Defendant is only praying for a declaration that the EOD are engaged, whereby the Defendant may invoke the mechanism under the SHA (including valuation of the shares and compulsory buy-back of the shares by the Plaintiff).

Analysis

50.  The Plaintiff has raised various points for the first time on closing submissions, such as promissory estoppel, substantial shareholder and exemption of a connected person under the Listing Rules, and whether the waiver was intended to be part of the Minimum Profit. Miss So submitted that unpleaded arguments could not be allowed in closing submissions (see Kwok Chin Wing v 21 Holdings Ltd (2013) 16 HKCFAR 663, per Ma CJ at [21], [23] & [26]). Also, previous undiscovered evidence could not be adduced.

51.  The Plaintiff was represented by counsel at pleadings stage. Points in issue should have been framed well before the trial let alone in closing submissions. They were merely last stitch attempt against the submissions by Miss So. I shall not allow them to be raised, and the Plaintiff’s case is confined to those covered by evidence in the trial.

52.  The Plaintiff submitted that under clause 13.1 of the SPA, the Minimum Profit of HK$8,000,000 was stipulated as:

“audited consolidated net profit after tax attributable to equity shareholders during FY2019 and FY2020 combined.”

53.  The Plaintiff submitted that the profit figures he relied on were exactly those taken from the audited consolidated Profit and Loss Account of the Company, and there was no reason for the Defendant to exclude the waiver of the debt due to him by the Company from calculating the Minimum Profit, or to start only from after Closing with the shorter period of 23 months from 1 August 2018 to 30 June 2020.

54.  I shall deal with the waiver of the debt owed by the Company to the Plaintiff first. In law context is everything. The context of the Minimum Profit must be in the context of the SPA and in particular, clause 7.2(a) that:

“7.2 Indebtedness and contingent liability

(a) The Seller shall procure that on or before Closing all indebtedness or other liability owing by any Group Company immediately before Closing (unless otherwise expressly disclosed to and approved by the Purchaser on or before the Closing) to any person (including any shareholders/affiliates of a Group Company before the Reorganisation and any affiliates of the Seller’s Group) is or has been satisfied in full together with any interest accursing on it up to Closing.”

55.  Under cross-examination, the Plaintiff agreed that all indebtedness by the Company including indebtedness to a director (i.e. himself) must be paid off before Closing, and any waiver be made before Closing. He also agreed that the state of affairs of the Company should “start from zero” after the completion of the SPA. Although the Plaintiff seems to have retracted somewhat in closing submissions, those remain his admissions under cross-examination.

56.  The Plaintiff tried to explain away the Supplemental Agreement by saying it was not signed by the Defendant and it did not contain any figures. Of course there were no figures as the accounts had not been sorted out. But the principle is clear and admittedly that the waiver should have been made before Closing. Although the Supplemental Agreement was not signed by the Defendant, the fact that the Plaintiff had signed it showed the acknowledgment by him.

57.  The Plaintiff was also cross-examined on some WhatsApp messages and emails, and it was put to him that he never denied or retorted the allegation that the Minimum Profit was not achieved but said he only wished it was achieved, indicating that he well knew it was not achieved. The Plaintiff said he was dealing with the matter casually then. In any case, by reason of the matters stated above, there is really no need to delve into the nuances in the WhatsApp messages, etc.

58.  Hence, I hold that the “other net profit” in FY 2019 which was constituted by the waiver by the Plaintiff of an amount due to him by the Company of HK$5,380,974 must be excluded from the Minimum Profit for the purpose of the Profit Guarantee.

59.  As to the relevant period of FY 2019 and FY 2020, as I have already made the finding that only the profit generated after Closing should be reckoned for the Minimum Profit guaranteed, hence it should start from the watershed of 1 August 2018.

60.  While Miss So agreed with the commencement should be 1 August 2018, she submitted that the end should remain 30 June 2020 which was the year end date for the Company in 2020. FY 2019 and FY 2020 were not defined under the SPA or SHA. The support was from Miss Kwok there is a common practice on profit guarantee.

61.  Again, the matter must be looked at in the context of the Minimum Profit under clause 7.2(a) of the SHA, and not the context of financial reporting generally.

62.  The original intention of the parties was that Closing should take place on 30 June 2018 and FY 2019 should start from 1 July 2018. While Miss Kwok, co-CEO of UMP Holdings said the common practice for the profit guarantee period should run from closing to the company’s year end, she admitted that there was no agreement on it. Further, Miss Kwok said if closing were further delayed, say to August 2018, then the parties would have to re-negotiate it. That means her formula of the company’s next year end is not absolute. Mandy who took part in the negotiation was not called, and Miss Kwok did not take part in the negotiation directly and was only giving evidence of what she thought and alleged to be a common practice.

63.  As I see it, the original intention was for the profit guarantee period to run to for two calendar years. As Closing was postponed for a month, likewise should be the profit guarantee period, so that the Plaintiff and the Company is given the full two year period to reckon the profits.

64.  At the hearing, I have asked Miss So to recast the profits for 24 months. The net profit re-cast for such relevant period was HK$6,537,145. However, as I look at the table submitted and listened to the recording of the proceedings, the period was the 24 months from 1 July 2018 to 30 June 2020 rather than 1 August 2018 to 31 July 2020. It is unfortunate that the matter was overlooked then.

65.  Although it is extremely unlikely that the Minimum Profit will be met with the extra month, the matter is still relevant on the quantum of compensation of 10 times the Shortfall.

66.  For the simple and limited issue of the quantum of compensation of the Shortfall, I shall invite written submissions from the parties on the relevant profits for the period from 1 August 2018 to 31 July 2020 before I made the finding on the quantum of compensation by the Plaintiff to the Defendant under clause 13.2(a) of the SPA. That shall not be a complicated matter as the figures should be readily available from the audited accounts of the Company. However, if need be, the recast figures could be certified by the auditors who signed off the audited accounts.

67.  Both sides have prayed for assessment of damages as an alternative to the different sums claimed under clause 13.2 of the SPA, but no evidence on assessment have adduced. Of course the Plaintiff is not entitled to any compensation. Be that as it may, the present exercise is limited to clarifying the Shortfall and is not extended to any assessment of general damages at all.

68.  Turning to the EOD, the Plaintiff was cross-examined on them and he sought to give his explanations.

69.  On the unknown deposits from the QRC and SK clinics, the Plaintiff said that before September 2020, Kenny and Alan used to go to the other clinics to collect cash payments by the customers for banking.

70.  At times, Kenny and Alan did not had time to do so within time, hence, they would keep cash of about HK$300,000 at their locker or safe in their respective clinic for deposit to the Company’s bank account first, then to be reimbursed when the cash proceeds were collected.

71.  Miss So submitted that the Plaintiff had given three different versions of explanations and he was utterly incredible. Firstly, on the contemporaneous emails when first queried by Mandy Ma in January 2021, he asserted that the monies belonged to the Company. Secondly, the Plaintiff said in his witness statement that when Kenny and Alan told him they found the money, they (including himself) did not know whether the money belonged to the Company. He told them to deposit the money into the Company first, and if it was found that the money actually belonged to him, that could be dealt with later. Then there was his evidence that Kenny and Alan habitually kept cash in their clinics in case they did not have time to collect the case proceeds from the other clinics. Apart from the inconsistencies, the evidence was simply not credible.

72.  I find that the Plaintiff’s evidence of habitually keeping such large amount of cash at the clinics incredible, because if it were actually so, it should have occurred to the three of them when the cash were discovered and query was raised by Mandy, as the amounts were substantial and the practice peculiar, and also if habitual, it would not have escaped their minds at all. Hence, the only reasonable inference was that they were trying to salvage the Minimum Profit guaranteed retrospectively.

73.  As to the other allegation of doctoring the sales record and the computer system, the Defendant relied mainly on the witness statement by the receptionist Miss Cheung to the Police. The police case was closed and there was no investigation report on it. Miss Cheung was not called and there was no forensic computer evidence. In view of the serious nature of the allegation, I do not think it is sufficient just to rely on hearsay evidence, and I place no weight on it.

74.  On the abdication of day-to-day operation of the Company, the Plaintiff agreed that physiotherapy is a personal professional service, and the personal attributes and qualities of the therapists are important to the operations and profits of the Company. However, he disagreed that he could not perform day-to-day operations while being away in Canada.

75.  This question also depends on the nature and extent of the management and supervision. The Plaintiff was away from Hong Kong in Canada for substantial periods as opposed to temporary absence somewhere within travelling distance such as the Greater Bay Area. Further, at around the same time, Kenny and Alan were leaving the Company to start up another practice of physiotherapy. The fact that the Plaintiff was engaging in part-time delivery work in Canada is also telling of his mind to leave the sold business behind.

76.  The matter must also be seen in the context that the parties have agreed to use their best endeavours for the profit making of the Company after the sale (clause 3.2 of the SHA), and to perform the SHA in the spirit of mutual cooperation, trust and confidence. What the Plaintiff and also what Kenny and Alan had done as to the non-compete clause could not have been anything but in contradiction of such spirit mentioned.

77.  On the non-compete clause, the Plaintiff first said he had no knowledge, then said there was in his view no competition, and also Alan is not a physiotherapist.

78.  The Plaintiff tried to refer to the exemption provisions under the Listing Rules in closing submissions. As mentioned, the issue was never pleaded nor discovered before and should not be entertained.

79.  Miss So submitted that only the definition of “connected person” had been adopted in the SHA, not any exemption for other purposes. The Listing Rules is just a mechanism of incorporating the definitions of “connected person” and “associate”, which include a brother of a director and shareholder. Once the definition is engaged, the non-compete clause is breached. I agree. Hence, EOD the non-complete clause is also triggered.

80.  As mentioned before, the Defendant is only asking for a declaration that EOD were engaged. That declaration is to issue. Whatever entails might have to sorted in another episode, if necessary.

Conclusion

81.  In the event, I find that there is a Shortfall of the Minimum Profit under clause 13 of the SPA, and there are EOD by the Plaintiff as alleged entitling the Defendant to resort to the remedies under clause 15 of the SHA.

82.  For the purpose of the profit for FY 2019 and FY 2020 as from 1 August 2018 to 31 July 2020 as mentioned in [64] to [66] above, the written submissions by the Defendant shall be made within 4 weeks from this Judgment (and hopefully before for earlier conclusion of the matter), and submissions by the Plaintiff, if any, be made within 6 weeks afterwards, as he may now be residing in Canada. The figure for the compensation of 10 times the Shortfall shall await such submissions, and it will be inserted in the Order of this Judgment to be drawn up.

Costs

83.  I shall order costs nisi on an indemnity basis to be paid by the Plaintiff to the Defendant on both the main action and the counterclaim, to be made absolute in 28 days after the final Order is drawn up, and such costs to be taxed if not agreed.