Hongda Containers Ltd. v. The Secretary for Transport

LDMR 7 of 2000

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Miscellaneous Reference No. LDMR 7 of 2000

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Date of Judgment: 4 June 2002

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J U D G M E N T

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Backgrounds:

1. The Applicant, Hongda Container Ltd. (in short form "HCL") was a limited company operating at all material time a business of container storage, repair and maintenance on land held under tenancy agreement. The land on which the Applicant operated its business was situated in Tin Shui Wai, Yuen Long in the New Territories and has the following demarcation descriptions: DD124 Lot Nos.636BRP, 641RP, 643, 644RP, 691RP, 695, 701-706, 718A, 719A, 745, DD126 Lot No. 26SDB DD 127 Lot No. 26B (hereinafter referred to as "the site"). The site had an area of roughly 69,000 sq. m.

2. For the purpose of construction of the West Rail, the Government resumed a portion of land within the site (hereinafter known as "the resumed land"). Pursuant to a gazette notice of resumption no. 4958 dated 15th October 1998, the resumed land was notionally resumed and reverted to the Government on 16th January 1999. The resumed land was a stripe of land covering an area of about 12,850 sq. m. and running diagonally across the site. This represented about 18.62% of the total site area of about 69,000 sq. m. It was the Applicant's case that the resumption had a fatal impact on its business. Its clients were losing confidence in its capacity to meet their demands. It could not secure new clients to patronize its service. In the end, the Applicant had to cease business on 31st July 1999. The Applicant put in a claim under Section 34 of the Railways Ordinance (Cap. 519, Laws of Hong Kong) for compensation in respect of business disturbance and loss caused by the said resumption. The Applicant maintained that such loss should be assessed on total extinguishment basis for it was reasonable for the Applicant to terminate its business given the resumption and the surrounding circumstances as at that time. Although it was common ground that after 31st July 1999, another company named Hongda Terminal (HK) Ltd. (in short form "HTL") was used to carry on with the business used to be run by the Applicant, the Applicant contended that this fact did not affect its present claim because HTL was a different company and hence was a different legal entity. Alternatively, argued the Applicant, even if this Tribunal were of the view that HTL was the alter ego of the Applicant, HTL's business did cease in October 2001. This proved that the business was no longer viable as a result of the resumption.

3. The Respondent, the Secretary for Transport contented that the resumption did not have the devastating effect as contended for by the Applicant. Therefore, it was unreasonable for the Applicant to cease business on 31st July 1999. The Respondent's case was that the business of the Applicant did not cease but was continued by HTL. The subsequent cessation of business by HTL in October 2001 has little or no bearing in the present compensation claim for a lot of intervening factors had come into play between the date of resumption in January 1999 and October 2001. By October 2001, contended the Respondent, it could no longer be asserted that the cessation of HTL's business was caused by the resumption.

4. Another line taken by the Respondent was that the Applicant had been fully aware of the risk of the Respondent's plan in resuming the stripe of land in question before it moved to the site in July 1998 and continued with its business there since then. As the Applicant was equipped with this knowledge, no compensation, be it assessed on total extinguishment basis or otherwise, should be awarded to the Applicant.

5. The two preliminary issues to be determined by the Tribunal at this stage of the proceedings are:

(i) Whether the compensation payable to the Applicant is to be assessed on a total extinguishment basis? And

(ii) If so, what is the profitability of the Applicant had there been no resumption?

It is obvious that whether the Tribunal need to go into the second issue depends very much on our answer to the question posed in the first issue.

Evidence in the case:

6. By consent, the parties had produced 4 bundles (i.e. Bundles A to D) containing documentary evidence in this case. In the course of their witnesses giving evidence, the Applicant had produced 6 pieces of documentary exhibits (A1 to A6) while the Respondent had produced 12 pieces (R1 to R12). Altogether, the Applicant had called 7 witnesses and the Respondent had called only one. The first two witnesses called by the Applicant were Mr. Simon LAU Shek-tat ("AW1") and Mr. John LAU Shek-yau ("AW2"). They were brothers and were respectively the de facto owners of HCL and HTL. With consent of the parties, these two witnesses gave their evidence in Cantonese in court but their respective witness statements appearing in the exhibit bundles were in English.

7. When AW1 gave evidence, he adopted the contents of his two witness statements from page 93 to page 111 in Bundle A as his evidence in chief. In the statements, he mainly told the Tribunal how he started off his own empty container depot business in 1997 after he had left his long held job as a logistic director of the Wide Shine Terminal Co. Ltd. (in short form, "WST"). WST, which previously occupied the site and other sites elsewhere, was doing the same business as HCL but with a bigger turnover. The de facto owner of WST was AW2, his elder brother. After a substantial interest in WST was sold to others, another company Sakoma Ltd. ("Sakoma") took over the site as well as the business of WST. However, in early 1998, Sakoma moved its business to the newly developed River Trade Terminal in Tuen Mun thus vacating the site. When AW1 left WST, he started off his business on another site in Lau Fau Shan that he hired from Pronto Star Limited (in short form "PSL"), a land agent for various landlords in the New Territories. After Sakoma had vacated the site, HCL hired the site from the respective agents and carried on its business on the site from 9th July 1998 onwards. He used the same company secretary working for AW2 to help him with the corporate matters. That company secretary had used a shelf company to run his business. As for the accounts of HCL, he left it to his accountant to prepare them. He only had a rough idea as to how his company was doing financially because he was an operational man and mainly paid attention to the operational side of his business. At paragraph 14 of his statement shown in page 100 of Bundle A, he said HCL was suffering from a substantial loss in business in February and March 1999 as a result of the effect of the resumption. Hence, in April 1999, he had decided to terminate the business of HCL and he invited AW2, his elder brother to take over his business. In his evidence given in the hearing, AW1 told us that although HTL formally took over the business from 1st August 1999 onwards, AW2 had been making business decisions and using his influence in HCL's business as early as May and June 1999. AW1 explained that it was necessary to form HTL to run the business after 31st July 1999 because an abrupt cessation of business of HCL would affect his trucking business as well as AW2's business as a forwarding agent. AW1 said he held 10% share interest in HTL. AW1 also agreed that most of the staffs employed by HTL were those working for HCL previously. He also agreed that those customers who had been patronizing HCL previously had continued to patronize HTL after 31st July 1999.

8. In terms of knowledge of the Government's resumption plan, AW1 said he had first learned about this in October 1998 when some of his clients had raised this with him. It was not until he had had a meeting with the Kowloon-Canton Railway Corporation ("KCRC") personnel, did he learn about the exact portion of land on the site due to be resumed by the KCRC and hence the impact of the resumption. In brief, the resumption would dissect the site into two halves and that he was only allowed to use two access points underneath the elevated tracks of the West Rail to move the containers within the two halves. However, those access points were too narrow for a front loader to get through with a container over 10 metres. Those front loaders were only certified to operate within a height restriction of 13 metres but with a 5-metre added on safety margin. This made the front loaders 1 meter beyond the 17 metres height restriction imposed on those access points. The resumption had reduced the flexibility in the deployment of those front loaders and the maximization of use of the container depot. The resumption had also reduced the capacity of one of the two container maintenance workshops by more than one half. All these factors made the operation of the depot more difficult and an economical scale of operation could no longer be maintained. AW1 also denied ever having seen any of the two letters (Exhibits R1 and R2) dated respectively on 14th October 1997 and 20th October 1998. Messrs. Ng, Tam, Ko & Chan, Solicitors, purportedly acting for the then occupier of the site, sent both letters to the relevant authorities. The first letter had an enclosed plan showing the strip of land subsequently resumed by the Government and the counter proposal put forward by the firm. The counter proposal moved the resumed stripe of land to the southeastern edge of the site thus causing less disturbance to the depot's operation.

9. AW2 was the elder brother of AW1. He had also adopted the contents of his two statements appearing in pages 135 to 143 of Bundle A. In essence, AW2's evidence related to different areas as summarized in the paragraphs that follows.

10. Firstly, AW2 explained that he formed HTL to take over the business of HCL because of what AW1 had told him in April 1999. AW1 told him that he (AW1) had lost all the capital he put in to run HCL and the other shareholders could not inject further capital into the business. AW2 decided to step in and keep the business going because two major shipping companies (i.e. Hanjin and NSCSA) that had dealings with his forwarding agent business had used the services of HCL. If the empty depot business failed abruptly, his trade reputation in the forwarding agent business as well as AW1's reputation in the container trucking business might be adversely affected. HTL was formed to run the depot business at a reduced scale. According to AW2, he had never hoped to expand the business of HTL due to the limitation of the site induced by the resumption. He said the accounts showed that he had lost $1.9 million in the first five months of HTL's business. His loss had escalated to $4.5 million by 31st December 2000. Eventually, he had to wind up his business of HTL in October 2001.

11. AW2 denied the suggestion that he was trying to side step the two-year trade restrictive covenant contained in his deal with Hutchison Whampoa Ltd. ("Hutchison") relating to the sale of WST by asking AW1 to set up HCL in 1997. AW2 maintained that after the final stage of the sale of his business interest in WST to Hutchison, he decided not to engage himself in the empty depot trade again even though he had been very successful in running such business. It was because no clients would like to patronize his depot in future for they knew that AW2 had already sold their container storage contracts together with AW2's business to third party companies twice before --- i.e., first to Jardine Pacific Ltd. in 1989 and then to Hutchison in 1997.

12. Concerning his knowledge about the resumption, AW2 said that he had only learned that for the first time in about April 1998 and that was from AW1. Like AW1, he also denied knowing a solicitor's firm by the name of Messrs. NG, TAM, KO & CHAN Solicitors - the author of exhibits R1 and R2.

13. On the organization and capital structure of HTL, AW2 said he left that to his company secretary and he only gave broad instructions. He knew that amongst the directors of the Board of HTL, four were British Virgin Island Companies under his control while two were his friends who were residents in Mainland China. In order to impress others that HTL was financially sound, he told his company secretary to incorporate HTL in such a manner so that HTL appeared to have a paid-up capital of 30 million Hong Kong dollars. However, in fact HTL was running with a 4 million dollars loan from him. AW2 denied that this would mislead those who had dealings with HTL for they would know that HTL was a company of his.

14. When AW2 was cross-examined on why it appeared on the record that one Janecast Services Ltd. ("Janecast") - also a company incorporated in the British Virgin Island and held by AW2 - had paid HCL about 2 million dollars for the equipment it acquired there from but had sold equipment to HTL at 6 million dollars, AW2 said he did not know the subject matters of the transactions off handedly. However, he said that the Respondent could not eliminate the possibility that Janecast had acquired other equipment elsewhere and sold those as well to HTL. Hence, a difference of 4 million dollars in the prices of the two sales could not by itself suggest that Janecast had made a profit in this amount. He also put forward an explanation as to why he did not allow HTL to make the purchases from HCL directly. According to AW2, it was because of some trust scheme that he had set up for his family members.

15. On the operation side of HTL, AW2 said that that was mainly left to AW1, a 10 % shareholder of HTL and those staffs whom he had managed to take over from HCL. In order to keep the business of HTL viable, he had solicited the continuing support of those main shipping companies like Hanjin and container leasing companies like Triton. After one or two months of the HTL's coming into operation, he had also begun to have other clients storing loaded refrigerated containers. Although these measures did bring in further income for the business, this could not change the business' doomed fate brought about by the resumption.

16. As for the overall view of the empty container depot trade, AW2 said that all the proprietors in the trade had been able to run the business at a profit in the last few years. This was because the demand for such service was keen since the volume of container throughput in Hong Kong had been growing. He also disagreed with Mr. Frank LO, the expert for the Respondent in his opinion of how the operation in logistic service would affect the growth or otherwise in the business of the empty container depot. When it was suggested to him by the counsel for the Respondent that there were other container depots that were affected by the resumption in a similar manner but they still could keep on running, AW2 replied that he got no sufficient information to figure out the reason but it was probable that there were other accesses for those dissected sites.

17. AW2 was recalled on 10th October 2001 after AW6 had finished giving evidence. His evidence then was on the winding up of the business of HTL in August and September 2001. It was clear in his evidence that the site was cleared and all the remaining containers had been removed to other depots by 30th September 2001. He had also submitted various photos showing the status of the site by 9th October, 2001 (Exhibits A5 (1) to (26)) and a set of computer print outs to show the container storage figures in HTL between January, 2001 and October, 2001(Exhibit A6). When counsel for the Respondent put a set of photos (Exhibit R7) to him suggesting that HTL had been storing containers more than he had asserted, he denied the same.

18. The third witness for the Applicant ("AW3") was Mr. CHEUNG Sai-wa, the accountant who had submitted a total of 4 accountant's reports for our consideration. In all these reports, AW3 made certain assessments on the profitability of the Applicant's business on the assumption that if no resumption were to take place. The other objective of these reports was to assess the loss suffered by the business because of the resumption. As confirmed by AW3 in his evidence given in the hearing, his role was not that of an auditor. Hence, he had simply accepted the truthfulness of the information and accounting documents supplied to him and made his assessments there from.

19. The fourth witness for the Applicant ("AW4") was Mr. CHIANG Tandon Lai, Stanley. He was the Chairman of the Lok Ma Chau China-Hong Kong Freight Association since 1997. The Association was a trade association of container depot operators and transportation companies in the district of Lok Ma Chau. According to this witness, the empty container storage depot operated by HCL on the site was the largest one in Hong Kong. As such, the depot could maintain an economy of scale in its operation before the resumption took place. Yet, after the resumption, AW4 was of the view that "the survival of the operation as a container depot on the unredeemed area of the TSW (meaning Tin Shui Wai) Depot site is minimal." (page 202 of Bundle A). As for the prediction of general growth of the industry, AW4 took an optimistic view at least for the near future.

20. The fifth witness for the Applicant ("AW5") was Mr. NG Wai-kwong. He was the chairman of the New Territories Cargo Transport Association Ltd since 1990. Amongst his business was the empty container storage depot trade. AW2 was one of his ex-business associates. His evidence was that it had been the customary practice of the trade that the sitting tenant would have no difficulty in getting a 2-year tenancy renewal upon the expiry of the same. Most of the operators hence had operated on the same site for over 10 years

21. The sixth witness for the Applicant ("AW6") was Mr. WAN Siu-on. He was a director of marketing for Central Asia of the Triton Limited. Triton was in the business of the international container leasing trade. His evidence was that he had come to know AW1 in the latter's capacity as the logistic director of WST when Triton was patronizing that company. When his company knew that AW1 started his business of HCL and used the site to provide storage for empty containers, his company used HCL as one of the three major depots in storing the company's empty containers. Amongst the three companies, HCL was given a larger portion of Triton's containers in Hong Kong for storage. However, after his company had heard the rumour about the Government's land resumption plan on HCL's site, his company decided to send fewer containers to HCL for the worry of possible adverse effect brought about by the resumption on the site. His company had also sent a letter to HCL raising query on this issue in May 1999. Nevertheless, this witness confirmed that after HTL had taken over the business in August 1999, his company continued to use HTL as one of its 3 major depots. When AW6 was asked why Triton had in fact sent more containers to HCL even after the company had heard about the rumour, AW6 explained that the storage figure relied heavily on the fact of how many containers his company had in Hong Kong at a particular point of time. However, this in turn depended very much on the seasonal factors and the demand of containers in the shipping industry. While a growth of throughput in Hong Kong might increase the demand of repositioning of empty containers to Hong Kong thus requiring supports of empty depot facilities, a lower demand for leasing containers might not necessarily affect such depots adversely because there would then be a higher idling rate for containers left in Hong Kong. This might in turn benefit an empty container storage depot's business. His understanding was that his company sent fewer containers to HCL and later to HTL after his company had learnt about the impending resumption. AW6 confirmed that his main concern was that his customers were satisfied with the service provided by HCL. In fact, he had never heard of any complaint made by his customers against the quality of service rendered by HCL.

22. The seventh witness for the Applicant ("AW7") was Mr. WONG Chi-cheong, William. He was a director of logistic for Hong Kong and South China Region of the APL Co. Pte Ltd. ("APL"). APL was a shipping company that used to have an average of 3,000 twenty-foot-container-units ("TEUs") of empty containers in Hong Kong at any given day. According to this witness, in the peak season from December of each year to January next year, the maximum TEUs of empty containers his company had in Hong Kong could reach as high as 7,000 to 8,000 per day. His company had used WST before and his company was originally interested in using HCL too. Hence, AW1 was invited to submit his tender for APL's consideration. However, APL rejected HCL's tender in the first round of the 2-round-selection process because APL did not have confidence in HCL's capacity in handling their containers during the peak season. It was because APL knew that the Government would be resuming part of the land on HCL's site and that might reduce HCL's capacity by one half for storage of containers. AW7 also gave evidence to the effect that during the low season for shipping business, for example in March and April each year, the demand for empty container storage depots would be increased since the shipping company would be looking for space to store its surplus empty containers. On the other hand, the increase of export figure in the shipping trade might not necessarily benefit the empty storage depots since the empty containers would be reloaded more quickly and then shipped out of Hong Kong. The demand for empty containers storage depots might be decreased as a result. Nevertheless, according to AW7, the business of outside empty container storage depots generally showed a growing trend in the past 5 years. Yet, there was also a trend for depot operators relocating their business to Mainland China.

23. The only witness who testified for the Respondent was Mr. Frank LO ("RW1"). Mr. LO was put forward by the Respondent as an expert witness giving opinion evidence on the general characteristics of the Hong Kong container depot business, its seasonal trends and its prospects of development in Hong Kong. The Applicant challenged the expertise of this witness in giving evidence on the Hong Kong container trade. After hearing the evidence given by RW1 in the voir dire held to examine his expertise, we allowed him to give expert evidence on the subject matter because we were satisfied that given RW1's past experience gathered from his work, and given the international nature of the container transportation trade, RW1 was in possession of sufficient expertise to assist us in understanding the case before us.

24. In giving evidence, RW1 adopted the contents of his statements appearing in pages 329 to 340 in Bundle A and pages 1 to 11 in Bundle D (the supplemental report bundle). On the general characteristics of the Hong Kong empty container depot trade, RW1 took the view that it was the relationship between the operators and the shipping or containers leasing companies that matter most. Relatively speaking, the operators were not so much tied to the land on which they ran their business. Most of the depots were run on land leased under a 2-years tenancy. In order to establish and maintain the mutual trust between a depot operator and the clients he served, most of the depots only had 2 to 3 major customers, each of which would either be a big shipping or leasing company. These 2 to 3 major customers' containers would make up to 70 % of the depot operator's business. For this reason, it would not be likely that HCL could secure contracts from other big clients since it had already got Triton and Hanjin as its major clients.

25. As for the seasonal trend of the depot trade, RW1 said that the increase in throughput of containers via Hong Kong did not boost up the demand for empty container depot facilities proportionally. In Hong Kong, very often there was trade imbalance as a result of which the number of TEUs exported would exceed the number of TEUs imported. Empty containers would therefore have to be repositioned back to Hong Kong to meet the deficit. The container leasing companies and the shipping companies would normally be keeping a working pool of empty containers in Hong Kong to meet the demand. Hence, during the high season, say in July, August and September of each year when the demand for empty containers to meet the exporting requirement was keen, the business for storage depots would be bad since most of the empty containers would be loaded and shipped out of Hong Kong. On the other hand, when the business for the exporting trade became less active, say in the first and the fourth quarter of each year, empty containers could not be loaded and sent away as quickly as they used to be; hence, business for the storage depots would improve temporarily.

26. On the development prospect of the trade, RW1 said that it was not optimistic because Hong Kong had a general shortage in land supply. Yet, competitors in Hong Kong's neighborhood such as Shenzhen and other areas in the Guangdong province virtually had unlimited supply of land as well as lower labour cost. There were already signs of Hong Kong operators shifting their operation to Mainland China. RW1 had also quoted the Chairman's statement of Mr. Chang Yun Chung made on 27th April, 2002 in the Annual Report of the Singamas Container Holdings Limited, a listed company, to support this observation. RW1 was cross-examined on the contents of the Final Report on Study on Port Back-up Facilities & Land Requirements published by the Hong Kong Port and Maritime Board (Exhibit R8). When asked why even though the Report had already taken the China factor into account, it still envisaged a shortage of land supply for empty container depots in Hong Kong in the coming years (in 2 of the 3 cases), RW1 said he found the middle case scenario to be the more probable one. He also agreed that in determining the prospects of the trade, lots of factors would be involved. The figurer on containers throughput in Hong Kong was only one such factor to be considered and that this figurer could not be used to predict the growth of the empty container depot trade proportionally.

Whether there had been a termination of business of HCL

27. In the Respondent's final submission, Mr. Miu drew our attention to a passage of Lord Nicholls' speech in the case of Director of Buildings & Land v. Shun Fung Ironworks Ltd. [1995] 2 HKLR 501at 508. He said that according to the test formulated by Lord Nicholls, HCL's business did not terminate by 31st July 1999 for the same business was taken over by HTL the very next day. Mr. Miu purportedly drew further support from another decision of this Tribunal, namely, the Fung Tin Sang Trading as Dragon Trading Company v. The Secretary for Transport (unreported, reference LDMR 30 of 2000) case as the authority to say that this Tribunal was prepared to hold that in that case, there had been no termination of business where the Applicant's brother, who was also the manager hired by the Applicants started off a new partnership business in the vicinity doing the same trade as that of the Applicant.

28. We found ourselves in disagreement with Mr. Miu on this contention. Our reading of the Shun Fung case suggested that the test formulated by Lord Nicholls was only meant for examining a case where a proprietor of a business who, having closed down his business at a site affected by a resumption scheme, started another business elsewhere. Hence, the test was for determining whether that particular proprietor had in fact terminated his business on the affected site and started a different business elsewhere (in which case assessment of compensation would be made on the basis of total extinguishment) or whether he had continued running that same business at a different location (in which case assessment would be made on the basis of relocating that business). On the other hand, the Lands Tribunal in the Dragon Trading Company case did not go so far as to say that because the Applicant's brother had started off a partnership business in the same trade as that of the Applicant, there had been no termination of business on the part of the Applicant. Rather, the Tribunal was just saying that because it had found that the Applicant's witnesses were not creditable witnesses, the Applicant had failed to discharge the onus of proof that he had taken reasonable steps to find an alternative site to continue his business. Hence, the Applicant's claim for disturbance loss to be assessed on a total extinguishment basis failed. The fact that the Applicant had taken steps to mitigate his loss was of course one of the 3 elements that an Applicant had to prove by evidence before his claim could succeed.

29. In the present case before us, there was no dispute that HCL had ceased its business in the empty container depot trade. The business of HCL was taken over by HTL, which was a different company with different shareholders but with largely the same staff members, same customers, same equipments and same mode of operation. In our judgment, unless and until it could be proved that the establishment of HTL was a fraudulent scheme of operation with the intention to defraud the Authority for compensation, it would not be up to us to find that HCL had continued its business in the name of HTL. Although we noticed that there had been dubious transactions in the way as to how certain equipment changed hands, we did not think that there was sufficient evidence to prove fraud perpetrated by the Applicant. However, it was still up to the Applicant to introduce evidence up to the required standard to prove that it had acted reasonably --- just like any other reasonable men in his position would have done.

The Cause for the Termination of Business of HCL

30. In our judgment, the three conditions spelt out by Lord Nicholls in the Shun Fung case [1995] 2 HKLR 501 at 506 were fundamental elements, which an Applicant had to prove by evidence in this tribunal before he could make out his case for compensation successfully. These conditions were:

(i) There must be a causal connection between the resumption or acquisition and the loss in question.

(ii) To qualify for compensation, the loss must not be too remote.

(iii) The law expects those who claim recompense to behave reasonably. If a reasonable person in the position of the claimant would have taken steps to eliminate or reduce the loss, and the claimant failed to do so, he cannot fairly expect to be compensated for the loss or the unreasonable part of it.

31. In order to decide on the nature and the cause of loss suffered by the HCL during its rather short lived operation, it was necessary to examine how the resumption had affected HCL financially and physically.

32. On the financial side of HCL's business, we could see the trading results of HCL from 1st July 1997 to 30 June 1998 and those from 1st July 1998 to 31st December 1999. Also enclosed in the accountant's report appearing from pages 224 to 313 of Bundle A were the two audited accounts of HCL for the respective years ended 31st December 1998 and 31st December 1999. We noted that those accounts were not complied by AW3 himself but he was just given those accounts together with other documents. He then used those accounts to prepare the accountant's report for the purpose of making the present claim by making a comparison between the projected profits with the actual figures achieved. We also noticed that the Respondent had repeatedly raised queries on the authenticity and accuracy of those accounts. However, the accountant who worked out those accounts from raw data was never called and the Applicant's case could only be rested on such footings.

33. From the evidence of AW1, he maintained that by March or April 1999, he had already suffered loss of $15,000,000 because of the adverse impact introduced by the resumption on the site. AW1 had exhausted his financial means and no other shareholder was willing to inject further capital into the business. Hence, he sought help from AW2 who confirmed his intention to take over the site in May 1999. However, apart from the fact that HCL had lost out in its tender for the contract from APL the impact of which was yet to be seen, we found that AW1's assertion could not get any support from those accounts which he had given to AW3.

Analysis of HCL's Accounts

(i) Whether the Applicant from April 1999 began to suffer losses at about $0.5M per month?

34. AW1 in his witness statement (page 100 of Bundle A) made on 1st September 2000 said, "It can be seen from the accounts of the Applicant that the Applicant started to generate a monthly turnover of about $3,000,000 and a net profit in the region of $200,000 to $300,000 in March 1999. Under the effect of the Resumption, from April 1999 onwards the Applicant began to suffer losses at about $500,000 per month due to the reduced stock of containers received from its customers." In his supplementary witness statement (page 106 of Bundle A) made on 11th October 2000, AW1 stated that, "In or about April 1999, I approached John and told him that the Applicant was contemplating a closure of business due to the elimination of economy of scales of its operation resulting from the Resumption.... On or about 8th May 1999, the board of directors of the Applicant formally passed a resolution to cease the business of the Applicant effective from 1st August 1999. We then proceeded with the incorporation of HTL. In order to impress the market with the strength and credibility of HTL, we agreed to capitalize it at $30 million although it was in fact operating at a $4 million loan wholly advanced by John. I was short of funds since I had practically lost my paid up capital in the Applicant and was short of fund."

35. In order to determine whether the Applicant started to generate a net profit in the region of $0.20M to $0.30M in March 1999 but began to suffer losses at about $0.50 M per month from April 1999 due to the effects of the resumption (per AW1's statements quoted above), we set out below the financial figures (page 301B of Bundle A) produced by the Applicant:

* M = Million

# We were advised that this item was a one-off premium of $2.5M as takeover charge for the site (page 294 of Bundle A) so this would certainly be a non-recurrent item.

36. Therefore, the Applicant's accounts for the period from July 1998 to April 1999 show a total net loss of about $8.55M. Excluding the one off premium paid in July 1998, the net operating loss for the said period was only $6.05M. Also, we find that the Applicant did not "suffer losses at about $0.50M per month from April 1999 onwards" (AW1's statement at page 110 of Bundle A refers). On the contrary, the Applicant continuously generated net profits in the months from April 1999 to July 1999. In fact, the average net profit for the period from April 1999 to July 1999 (excluding the exceptional item of $5.27M in July 1999 due to the disposal of assets) is about $0.51M. The net profit figures for this period are as follows: -

# Excluding exceptional loss item of $5.27M incurred in July 1999

due to the disposal of assets of HCL upon cessation of business

37. We note that AW1 contemplated to cease the business of HCL in April 1999 although formal decision to cease was resolved by the Board of HCL in early May 1999. Whilst the figures for May, June and July 1999 were not available when the Board in early May 1999 resolved to cease business from 1 August 1999, the figures for April 1999 and the earlier months should already be available to AW1.

(ii) Whether AW1 had practically lost his paid up capital in HCL by April 1999?

38. From the Company records of HCL (summarized in Appendix 2 of the Final Submission by the Respondent) produced by the Applicant, we understand that HCL was originally a company holding a nominal number of shares. Between July 1998 and April 1999, there were only two major allotments of shares (and injection of capital) with AW1 being indirectly the overwhelming majority shareholder:

Date	Allotments to various shareholders
11 July 1998	$11,710,800
5 March 1999	$3,289,200
Total	$15,000,000

39. Since AW1 virtually owned indirectly most if not all of the shares of the HCL, presumably when AW1 said he had "practically" lost his paid up capital in HCL, he should have intended to mean that either he had practically lost his $15 million capital in HCL or HCL had accumulated the claimed loss of $15 million or so, equivalent to all the paid up capital of HCL.

40. We were not given the details of the Capital Accounts of the Applicant as at April 1999. However, since we were told that HCL was set up by AW1 solely for the purpose of operating the depot at the site, and as HCL only accumulated as at the end of April 1999 a total trading loss (including an exceptional item incurred in July 1998) of $8.55M, the net capital of HCL, before taking into depreciation etc., could be taken to be the difference between the originally subscribed capital of $15M and the accumulated trading loss of $8.55M, or $6.45M.

41. We understand from the evidence produced by the Applicant that HCL acquired assets prior to commencement of business. For instance, we were told that in January 1998 (when HCL was still a company with issued capital of $100), HCL purchased 4 CVS empty container loaders from Italy, the invoice of which was about $6,752,000. We note that this purchase price of $6.752M was very close to the approximate net capital of $6.45M estimated in the above paragraph.

42. Therefore, we find that although AW1 said in his statement that he had accumulated a loss of about $15M, the evidence he produced neither support that statement nor an alternative statement that HCL had lost its $15 million capital. In any case, in April 1999, when HCL was still operating, we find it absurd that AW1 would consider including the entire value of the Applicant's valuable and operating asset as something that he had "practically" lost!

(iii) Whether "short of fund" was a pressing and insurmountable problem for AW1 in April 1999 that led to cessation of business of HCL

43. AW1 said in his statement that he was short of fund in April 1999. However, there was no evidence adduced that AW1 was himself short of fund by April 1999. AW1 said that he could not get injection of capital from other minority shareholders. This might be true because from what we have been shown, AW1 was the overwhelming majority shareholder of HCL and there was no evidence as to how much capital the other minority shareholders had contributed to HCL. However, we cannot understand why shortage of fund was the pressing concern to AW1 as at April 1999. From the accounts' summary, we find that from December 1998 to April 1999, HCL was making a total net profit of $2.13M (or an average monthly net profit of $0.43M). The only month during this period when HCL was making a loss was February 1999 and the loss was a mere $0.16M. It might be arguable, as suggested by AW1, whether the average monthly net profit reached the expected level originally envisaged by AW1 when he started the business of HCL in July 1998. Similarly, there might well be differences in opinion as to whether, as suggested by AW1, that the average monthly net profit would never reach the optimal potential level expected by AW1, or whether the average monthly net profit would give sufficient return to AW1 in terms of his total capital investment in HCL. However, it was apparent that HCL required no particularly urgent injection of fund as at April 1999 since there had been with the exception of the month of February 1999, a steady and continuing net inflow of profit from December 1998 onwards.

44. Also, even if AW1's main concern at April 1999, rightly or wrongly, was shortage of fund for HCL, we cannot understand why AW1 did not consider obtaining a loan from any bank, any of the minority shareholders or AW2. Alternatively, AW1 could also consider seeking injection of capital by AW2. Apparently, these possibilities were never considered by AW1 or AW2 when they discussed the problems and the future of HCL allegedly caused by the resumption. However, from the notes to the audited accounts of HCL for the year ending 31/12/1999 (page 265 of Bundle A), we find that there was a note that "Pursuant to a special resolution passed at the Extra-ordinary General Meeting's held on 16th April 1999, the authorized share capital was increased to $20,500,000 by the creation of an additional $5,500,000 share of $1 each ranking pari passu with the existing shares of the company." In addition, we were told that after AW1 and AW2 decided to cease the business of HCL, they also decided to proceed with the incorporation of HTL, which was "in fact operating at a $4 Million loan wholly advanced by John" (per AW1). If AW2 could so readily agree to lend $4M to HTL to enable the latter to continue a similar business of operating an empty container depot on the same site, one might ask why couldn't the same loan be used as the new capital injection to HCL, if HCL required any new inflow of capital. As AW1 admitted in April 1999 that he had lost all his capital in HCL (which, according to our analysis in paragraph 38 above, was not true), it would be much simpler if, for instance, AW1 could assign his interests to AW2 for a nominal or a certain consideration after which AW2 could start to control and operate HCL after the assignment of shares. With this type of arrangement, there would be no disruption of business of HCL and the confidence of the patrons of the site would not have been affected by the "cessation" of HCL. Although HCL was a limited company, from what we have seen, AW1 was essentially the overwhelming majority shareholder and could dictate whatever he decided for HCL.

45. With the benefit of hindsight, we find that the corresponding average net profit figure for the months from May 1999 to July 1999 was $0.71M, if the exceptional loss item of $5.27M incurred in July 1999 due to the disposal of assets upon cessation of business was excluded. This prolonged the continuing, steady trend of making net profits for HCL from December 1998 to April 1999. The total net profit from December 1998 to July 1999 was found to be $3.74M, thus offsetting a large portion of the loss incurred in the first few months of HCL's operation. Summing up, therefore, we find that for any reasonable businessman who owned and controlled HCL in April 1999, there was no urgent need to cease its business on the site entirely and permanently because it was generating a continuing and quite steady stream of net profit since December 1998. If HCL could continue its operation since December 1998 to March 1999, there was apparently no reason that it could not continue in April 1999. It had made a total net profit of $3.74M since December 1998 and hence its liquidity situation should have been much improved since then.

(iv) Actual Performance of HCL- drastic difference between the initial period (July 1998 to November 1998) and the second period (December 1998 to April 1999)

46. The performance of HCL in terms of TEU Days, total income# and net profit/loss are summarized below (page 301B of Bundle A): -

Table 1

# For ease of comparison, the income and profit/(loss) figures in this table and other tables in this Judgment are rounded to the nearest ten thousand dollars.

47. The Applicant submitted that "on or about 15 October 1998, the Applicant's customer knew about the Resumption and started to reduce stock at the Site for fear that the Applicant's business would collapse. The Applicant's business thus suffered huge financial loss as a result. Cessation of the Applicant's business was contemplated." We find that the above quoted actual accounts figures did not support the Applicant's submission. On the contrary, the accounts figures show that the Applicant's submission was incorrect and that AW1's alleged loss suffered by HCL had been grossly exaggerated. We find that the trading volume (in TEU's) increased abruptly from December 1998, which was already about two months after the actual date of gazette of the proposed resumption. Also, the huge financial loss incurred by the Applicant was obviously due to the result of the first five months' trading, most of which were before 15th October 1998, the date of gazette of the proposed resumption, but not due to the result of the reduction or collapse of the Applicant's business subsequent to the gazette notice.

48. HCL managed to stop losing money and turn around after a period of 5 months. This sort of performance was not particularly unusual for any new business. On the other hand, AW1 said that he had expected HCL to turn around and make a profit in 3 months, so the actual performance of 5 months was 2 months beyond his expectations. It might well be that AW1 was himself too optimistic when he first set up his business of HCL. And that of course had nothing to do with the resumption on the site.

49. Taking November/December 1998 as the turnaround point of time for HCL as a business, we have, from the accounts summary shown in page 301B of Bundle A, prepared below a summary of the performance of HCL for the "initial period" (from July 1998 to November 1998) and the "second period" (from December 1998 to April 1999, the month when AW1 decided to cease the business of HCL entirely):

Table 2

50. We notice from the above accounts summary a number of promising results. The total net profits for the second period from December 1998 to April 1999 amounted to about $2.13M, a stark contrast to the total loss (excluding exceptional item) of $8.18M for the initial period from July 1998 to November 1998. Also, the number of TEU Days increased dramatically after November 1998 reaching the peak figure of 11,070 TEU Days in January 1999. The average TEU Days for the second period from December 1998 to April 1999 was about 8,721 TEU Days per month, almost four times the average TEU Days of 2,440 for the initial period. All these eminent turnaround of business performance in terms of TEU Days, total income, gross profit and net profit were achieved, we notice, after the time when AW1 claimed that there was widespread market rumour of resumption (October/1998) and the actual gazette and posting of resumption notice.

51. The comparative results in Table 2 above are obtained if we lump together the figures for the two said periods. Alternatively, if we calculate the percentage for each month of these 2 periods, we also arrive at similar results. We set out below the results of our analysis for each month of the second period, as follows: -

Table 3

52. We find from Table 3 above that for the second period from December 1998 to April 1999, HCL achieved an average gross profit to total income ratio of about 27.40% and an average net profit to total income ratio of about 13.50%. In addition, we find that the average % of general expenses to total income was about 13.9%. We are of the opinion that HCL incurred an exceptionally high level of monthly general expenses, bearing in mind that the only business of HCL was in the running of the depot and there was no other offices or activities apart from the empty container depot business on the site. There was no breakdown of the general expenses so we could not comment any further. However, we find that if the whole or some portions of those general expenses were to be added back to the profit figures, it could have improved the performance of HCL quite considerably.

53. Notwithstanding the exceptionally high level of general expenses, we find that general expenses as a percentage of TEU days decreased dramatically since November 1998 and general expenses as a percentage of total income also decreased generally from December 1998 to April 1999. There was also, in general, improving net profit to income ratios from December 1998 to April 1999.

54. To sum up, from the above analysis, we find that it would be unreasonable for a reasonable businessman who owned and controlled HCL to decide to cease the business of HCL in April 1999 after getting the results of HCL from commencement of business to April 1999. Besides, we particularly notice that even after AW1 had decided to cease the business of HCL in April 1999, the performance of HCL in the following months (i.e. May, June and July 1998) prior to the formal cessation of business on 1st August 1998 continued to show improving results, as follows: -

Table 4

# Excluding the extraordinary loss due to the forced sale of assets to HTL at the end of July 1999 (since this would not be incurred if HCL did not cease business)

55. It was in our opinion uneasy for HCL business to achieve this sort of performance when it was ceasing business. Notwithstanding the winding up of HCL, the business volume in terms of TEU Days remained steady from May 1999 to July 1999. The total net profits for the two periods from December 1998 to April 1999 and May 1999 to July 1999 were rising, at about $0.43M and $0.54M respectively. As a result, the total net profit for these 2 consecutive periods spanning a total 8 months was about $0.98M. Assuming the same profitability margin and expanding the figures to a 12-months period would suggest a total annual net profit of $0.97M x 12/8, or $1.455M. Although the Applicant submitted that after making allowances for depreciation, etc., the total net profit for the said period was far below what was expected by AW1 and HCL, we agree with the Respondent that the main consideration of any reasonable businessman at the time around April 1999, in deciding whether to cease the business of HCL, was to take into account the business performance and the cash flow position. In reaching such a decision as to whether to cease business or not, it is unlikely that a reasonable businessman would take into account the depreciation of assets. The outcome of a cessation would simply mean the losing of a substantial part if not all of the subscribed capital. On the other hand, if the business could go on, there was at least a chance that there could be greater improvement in business performance.

56. In conclusion, although AW1 might have chosen to take a very pessimistic view himself in April 1999, the actual performance of HCL for its short life spanning from the commencement of business in July 1998 to April 1999 convinces us that a reasonable businessman who behaved reasonably would not take such a view as AW1 at that point of time and would not have decided to cease the business of HCL in April 1999.

Physical influence on the site

57. As mentioned earlier, the site in question was about 69,000 sq. m. It could be seen in page 198 of Bundle C that the area resumed from this site was 12,850 sq. m. The resumed portion of the site was about 18.62% of the total area of the same. According to AW1, the resumption of the strip of land across HCL's site seriously hampered the operation of the container depot. Before the resumption, the stacking plan for the containers could be seen in page 11 of Bundle B. After the resumption, the stacking plan for the site was drawn up in the form of Exhibit A1. According to AW1, the effect of the resumption was that, it rendered the northern part of the site less useful because access to and from that part of the depot could only be gained via the two access ways underneath the high rising West Rail structure. These access ways which prescribed a height clearance and a width limit greatly affected the deployment of front loaders to that area as well as the speed of drawing and depositing of containers in that part of the depot. As a result, that part of the depot could only be used on an 'ad hoc' basis. Also affected was the container repairing workshop A, shown in the sketch at Exhibit A1. Because the resumed land and the structures thereon blocked off the access to this workshop A, this workshop had become useless. The repairing work could only then be carried out in workshop B and workshop C shown in the same sketch.

58. In order to achieve a better understanding of the condition of the site after the resumption, we had, together with counsel for the parties, carried out a site visit on 28th March 2001. During our visit, we found that the container depot business ran by HTL appeared to be normal and regular in most if not all aspects. We noticed that the number of containers being store on site was great and that the available storage areas were largely occupied and utilized. We also noticed that the container repair workshop A shown in Exhibit A1 could not be used to carry out repairing work for the containers. It was because the structural beams which separate workshop A with workshop B together with the structures built by the West Rail on the resumed land had effectively blocked all access of containers to and from work shop A. However, workshop B and workshop C appeared to be operating normally. This was so even though part of the site had been deployed by HTL to store loaded refrigerated containers that required more frequent and higher quality maintenance and repairing support. During the visit, we were shown the position of the two accesses through which HTL used to reach the northern part of the depot. While we agreed that it was difficult or might even be impossible for a front loader to carry a container to pass through those accesses, we found in actual operation, the front loaders were not used for transporting containers for great distance within the depot. Rather, it was used for rearranging the stacking positions of individual containers so that containers due to be taken away or deposited might be released or stacked up. The moving of the containers within the site was done by the container trucks tasked to carry the containers there. We also noted that in AW1's evidence, he mentioned at page 70 of the Transcript for the hearing (between T & V) and page 71 of the same set of Transcript (between A &B) that those container trucks were responsible for carrying the containers through the two access points. Our on site observation suggested that there should be no difficulty for a container truck to get through those two access points while carrying with it a container on its trailer. Furthermore, we also remember the evidence given by AW6 saying that he placed much emphasis on the quality of service provided by the depot to his company (Triton)'s clients. So far, he had not received any complaint from his clients against the service provided by HCL or HTL. AW6 said his company had asked his subordinates to place fewer containers in HCL after his company had issued his letter dated 25th May 1999 (page 29 of Bundle B) to AW1 expressing his worry on the impending resumption. However, the analysis on the actual figures shown in the invoices issued by Triton to HCL did not show this trend. On the contrary, according to the evidence of AW2, in the first few months after HTL had taken over the business, there were times when the business was so good that the maximum storage capacity of the depot had been fully utilized. While we bear in mind that the evidence given by other witnesses saying that no other depots in Hong Kong were being operated through access points of a similar sort, we find that the stresses that AW1 and AW2 had put on the adverse effect of the two access points had been grossly exaggerated.

Potential maximum and actual capacity of the site before and after resumption

59. AW1 gave evidence that without the resumption, his expected commercially viable and optimum volume of business for HCL on the whole site was 15,416 TEUs (see his forecast at page 236 of Bundle A). He decided to cease business in April 1999 because he realized that as a result of resumption, this region of capacity would never be achieved. We decide that the test of whether AW1 and the Applicant should cease the business totally was, at the time of reaching his decision, whether a reasonable businessman would reach such a decision. In this regard, we use the actual TEUs achieved by HCL and the potential maximum capacity TEUs of the site before and after the resumption to illustrate the situation of HCL under the different circumstances.

60. AW1 claimed that before the resumption, the subject site was one of the largest empty container depots in Hong Kong. So it must be true that at the notional reversion date in January 1999, there were many other smaller yet commercially viable depot sites in Hong Kong. It follows that a reduction in the land area of the subject depot site per se, in the region of under 20% cannot be the sole reason for the loss of viability of the depot business on the reduced site. The minimum size of such smaller sites is however not apparent from the evidence we have heard.

61. From the Applicant's site plans at page 11 of Bundle B and Exhibit A1, the total number of container bays, average number of stacks of containers and the capacity of the site in the "Before" and "After" situation are respectively summarized below, as follows: -

Table 5

*excluding containers in the workshops

62. We note that none of the witnesses from either side spent any time in commenting or analyzing the above figures. However, after careful study and comparison of the above said sketch plans including the figures shown on the plans, we have reservations to the accuracy of some of the figures. Also, we agree with the counsel for the Respondent that the Applicant did not provide sufficient reasoning for the large difference in the average number of stacks that could be placed on the site in the Before and After situation. The difference is 16% or an average of 1.24 stacks over the entire site. Even if we agree that for the strips near the resumption boundary, the Applicant had to place less number of stacks, we cannot agree that this reduction would lead to an average overall reduction of 1.24 stacks. More importantly, we cannot understand why a reduction in land area of about 18.6% (resumed land of about 12,850 sq. m. against the original area of about 69,000 sq. m.) would eventually lead to an overall reduction in maximum capacity of 54% (i.e. a reduction of 11,590 TEUs, from the original 21,532 TEU in the Before situation to 9,942 TEUs in the After situation). Consequently, we decide to study and compare the layouts of the two plans more thoroughly. Also, we decide to analyze the figures obtained from the two plans as well as the photos produced by the parties and compare these with the actual account results. Our findings are as set out in the paragraphs below.

63. According to the sketch plan at page 11 in Bundle B for the Before situation, the entire site occupied by HCL had the following maximum capacity: -

Table 6

64. Similarly, the maximum capacity in the After situation, based on the sketch plan at Exhibit A1, was as follows: -

Table 7

65. We find that in the sketch plan for the After situation, apart from having a much lower average number of stacks for all zones, the number of bays in most of the zones located on the southern part of the site were less than before. We cannot have a direct comparison of each of the bays in the Before and After situation since no such figures for the corresponding positions were available for some zones in the Before situation, when the site was not bisected yet. However, if we concentrate on the Zones H, K, M and T in the Before situation and compare them with the corresponding zones in the After situation, the figures are as follows: -

Table 8

66. AW1 and AW2 gave evidence that because of the new arrangement to stack loaded and refrigerated containers in the position of Zone I in the After situation, the maximum number of stacks in Zone I could only be 3. We decide, for comparison of capacity purpose, that we should assume that the site in the Before and After situation were for the storage of normal TEU empty containers. We are also not satisfied with the layout of the site in some other positions in the After situation. However, in the absence of detailed dimensioned layout plan for the site, we decide not to postulate other changes. Therefore, in order to calculate a more realistic maximum capacity of the site in the After situation, we decide it appropriate to adopt the following two basic and reasonable assumptions: -

(i) Adopt the same number of bays as shown in the positions marked Zone H, K, M and T in the Before situation.

(ii) Adopt an average stacking height of about 7.5 which equals to 0.29 stack less than that of the average number of stacks in the Before situation. We decide this allowance to be sufficient to reflect the need to have a lower stacking height on the perimeter of the resumed area.

67. On the above basis, we calculate the maximum number of TEUs in the After situation as follows: -

Total number of bays in Zones A, B, F, G, E, Q, R (same as that shown in the plan at Exhibit A1 - see Table 7 above)	1,099
Add-Total number of bays in Zones H, K, M and T (same as that shown in the plan at page 11 of Bundle B-see Table 6 above)	690
	__________
Total number of bays in the reduced site	1,789
Adopt - average numbers of stacks	x 7.5 __________
Maximum capacity of TEUs (excluding workshops)	13,418
Rounded to	13,400

68. We understand that it was recommended design guidelines for the empty container depot trade that the space required for access roads and servicing should be about 50% of the depot area. We shall firstly calculate the optimum space required in the reduced site and then compare that with the actual space that would be available based on the above estimate of the maximum capacity for the reduced site, as follows: -

Area of the site before resumption	69,000 sq. m.
Less: area resumed	12,850 sq. m.
Area of the reduced site	56,150 sq. m.
50 % of the reduced site area	28,075 sq. m.
Compare with the actual space available in the reduced site-
Area of the reduced site	56,150 sq. m.
Less: area occupied by the containers- 1,789 bays x area of 1 TEU (20 ft. x 8 ft.), or, 14.864 sq. m. =	26,592 sq. m.
Remaining space in the reduced site	29,558 sq. m.

69. It appears from the above that on the basis of our estimated maximum capacity for the reduced site in the After situation, the space available for access road and servicing exceeds the optimum 50% rule. We note that in the above calculations we have not taken into account the area occupied by the workshops since we do not have the available area information. As a comparison, we have also checked the corresponding figures for the site in the Before situation, based entirely on the figures provided by the Applicant, as follows: -

Area of the original site before the resumption	69,000 sq. m.
50% of the site area	34,500 sq. m.

Compare with the actual space available in the original site-

Area of the original site	69,000 sq. m.
Less: area occupied by the containers-
2,765 bays x area of 1 TEU, or 14.864 sq. m. =	41,099 sq. m.
Remaining space in the original site	27,901 sq. m.

70. As we can see from the above computation, in the Before situation, the remaining space in the original site available for access road and servicing only amounts to 27,901 sq. m., or about 40% of the original site area. This also supports our observation in paragraph 62 above that the layouts for the Before and After situations produced by the Applicant are not consistent with each other.

71. Adopting our estimated maximum capacity of 13,400 TEUs for the reduced site and the Applicant's estimated maximum capacity of 21,532 TEUs for the original site, we find the ratio of maximum capacity in the After situation to the corresponding figure in the Before situation to be almost 62%. This appears to us a much more reasonable figure than the Applicant's estimated figure of 46% bearing in mind that the reduction in land area was only about 18.62%. Also, using the actual TEUs achieved by the Applicant for the months of May 1999 to July 1999, we find the actual percentage of occupancy of the reduced site in each month to be as follows: -

Table 9

# Actual clearance date was 26 May 1999

72. We find that if 9,942 TEUs was, as suggested by the Applicant, the maximum capacity of the site in the After situation, HCL would then have managed to achieve the following occupancy rates: -

Table 10

# Actual clearance date was 26 May 1999

73. There was no evidence as to the average occupancy level of similar empty container depots in Hong Kong. However, it would be a big surprise to most people if a depot with an occupancy rate of 93% (which was calculated using entirely the Applicant's figures of actual occupancy and maximum capacity) had to close down due to the loss of business viability caused by the resumption. The figures in the above Table 10 also support our finding that the maximum capacity in the After situation as estimated by the Applicant (see Exhibit A1) was unreasonably low. We therefore decide not to rely on that figure.

74. If we carry out a similar analysis based on the Before situation, the percentage occupancy of the site after the posting of gazette notice in October 1998 but before actual clearance in May 1999 are found to be as follows:

Table 11

75. We note that the actual occupancy increased drastically from about 10% in October 1998 to the peak of 51% in January 1999 but fell to 30% in February 1999. The Applicant asserted that this was caused by the resumption. However the actual gazette of the resumption was made in October 1998. If the resumption had shattered the confidence of HCL's clients, it could not have produced the above results. As contended by the Respondent, the changes on the occupancy rates might be due to seasonal fluctuation of demand or other reasons.

Operation of HTL after the resumption

76. The counsel for the Respondent submitted in the Final Submission that "it can been seen from the photos taken by the Respondent in various places in 2001 (PR7) that many containers were stacked 7-high, which is the capacity envisaged in A1. Mr. Lau's assertion that the average stacking height in those places was only 5 cannot be right. The Tribunal is invited to have a closer look at the photos. This also cast doubt as the accuracy of the figures of A6". We note that AW2, when cross-examined on the state of usage of the reduced site by HTL as revealed by the photos marked as Exhibit R7) stated that the volume of business as shown in Photo 1, Photo 4 and Photo 6 of Exhibit R7 was in the region of between 3,000 to 5,000 TEUs. Also, AW2 agreed to extract his figures from the company records and he subsequently produced Exhibit A6, which are set out below: -

77. We have taken the trouble of not only looking closely the photos produced by the parties but have ourselves estimated the number of containers stacked on the site as revealed by the photos. Firstly, we come to conclusion that we agree with the Respondent's observation for the photos that the site was stacked to 7 stacks high with containers at various places (for example, Photo 8 of Exhibit R7), but not to the depth of 5 as asserted by AW-2. Next, we compute the percentage occupancy of the reduced site using the figures from Exhibit A6, and the maximum capacity of the reduced site as estimated by the Tribunal.

Table 12

78. We notice that the actual percentage capacity for the reduced site on 31st August 2001 was about 35%. As a comparison, we also know that in July 1999, HCL did achieve a business volume in the sum of 9,260 TEU Days, which is equated to occupancy of 69% (see Table 9 above). Unfortunately, we do not have a picture for the month of July 1999 and compare that directly with the Photo 6 of Exhibit R7. However, after careful study of the latter photo, we are not satisfied that the percentage usage of the reduced site was as low as 35% on the date of 31st August 2001. Firstly we find that the containers were already stacked to 7 stacks at many positions. Next, we cannot imagine the state of the site if the percentage capacity were to be increased from 35% to say 69%, as was the case in July 1999, which warrants the placing of almost twice the number of containers shown in Photo 6 at Exhibit R7.

79. In the circumstances, we have also counted the number of bays occupied with containers on the reduced site on 31st August 2001, as revealed by Photo 6 of Exhibit R7. Since the northern side of the reduced site occupying the portion of the site as shown in the lower part of the photo is clearer than the southern side of the site, we have estimated the number of bays with occupied containers on that portion. We arrived at a figure of 642 TEUs. We further estimated the average number of stacks to be about 6.5. Therefore, the total number of stacked containers as appeared in the northern part of Photo 6 of Exhibit R7 was estimated to be about 642 TEUs x 6.5, or 4,173 TEUs. According to the information shown on the sketch plan at Exhibit A1 regarding the maximum capacity of the northern part of the reduced site and the assumed maximum number of stacks of 7.5 for the reduced site (see paragraphs 64 and 67 above respectively), we estimated the maximum capacity of this portion of the reduced site to be about 885 x 7.5, or 6638 TEUs. Hence, on the above basis, the percentage occupancy of the northern part of the reduced site as at 31st August 2001 was about 4,173/6638, or 63%. From what we could see from the photo at Exhibit R7, this percentage appears to us to be a much more realistic rate of utilization of the entire reduced site than the figure of 35% (see Table 11 above) that AW2 had advised us and would like us to believe. For these reasons, we find that AW2 was not telling the Tribunal the truth when giving evidence on the occupancy rate of HTL as shown in Exhibit R7.

80. It was not disputed by the Applicant that the business used to be run by HCL on the site did continue to be run by HTL, in fact all the way up to at least August 2001, some 31 months and 27 months from the notional reversion and the actual clearance respectively. We note the Respondent's submission that Triton and Hanjin, two of the major clients of HCL (and its successor, HTL), had continued to patron HCL and HTL regardless of the resumption. The volume of business of Triton and Hanjin, in terms of average TEU Days as respectively summarized in Exhibits R3 and R4, are set out as follows: -

81. Since HTL was not a party in this case, we do not wish to go any deeper into the business of HTL. As for the changes of business volume of HCL prior to its cessation of business on 1st August 1999, we have already covered that earlier in this Judgment. From the above figures, it is suffice to say that the notice of resumption in October 1998 and the actual clearance in May 1999 did not have an adverse impact on the business volume for HCL from Triton or Hanjin. Other than this, we decide to go to consider other important areas of disputes in the next section.

Knowledge of the Resumption:

82. Both AW1 and AW2 denied having any knowledge of the impending resumption until a very late stage. In the case of AW1, he said he had first heard of the rumour about the resumption by West Rail in October 1998 in the market (Transcript, page 41 at G and page 62 at S). By that time, he had no idea that two access points would be left for him to continue with his operation of the containers depot (Transcript, page 148 from E to P). It was only up to mid-March 1999, was he able to see the resumption plan in the Gazette for the first time (Transcript, page 63 at A). Hence, according to AW1, the earliest point of time at which he realized the exact boundaries of the resumed land and the position of the 2 access points thereon was in mid-March 1999. As for AW2, he left WST in June 1997. However, he only learnt about the resumption of a portion of the site in April 1999 from AW1 when AW1 told him the financial difficulties of HCL. Before that, he was not involved in HCL's business and his previous co-directors or employees in WST had never told him anything about the impending resumption. He then restructured HTL to continue with the depot business on the site.

83. As it was not in dispute that the actual site clearance only took place on 26th May 1999, it followed that by the time AW1 had decided to terminate his business of HCL in April 1999, the access points' restriction, if any, had not yet taken any effect on the operation of the depot. Hence, it appeared that the Applicant's case should be that AW1 had been driven to terminate his business in HCL by the rumour, or otherwise called the shadow of resumption rather than by the actual physical resumption. According to our previous analysis on the figures shown in the accounts and the relevant documents, the alleged loss of $15,000,000 by March 1999 can hardly be substantiated. In fact, HCL's business showed that it was making a profit from December 1998. Nevertheless, we understand and agree that if a reasonable proprietor of the business could not tell how much the impending resumption might affect him, he might, having assessed all the circumstances surrounding his business, still decide to wind up his business to avoid meeting the uncertainty. Yet, this was not the Applicant's case. AW1's evidence was that he had seen the said Gazette plan by mid-March 1999. Hence, by that time, he should have known that two access points would be provided by the West Rail for him to continue with his then profit making business. In our judgment, no reasonable businessman in the same position of AW1 would have decided to extinguish his business totally. Hence, on the strength of the foregoing analysis, we answer the first question in the preliminary issue framed in paragraph 5 above in the negative. In other words, we find that on the evidence before us, a reasonable businessman in the position of the Applicant would have continued with his business and claimed compensation on the basis of the loss actually caused by the disturbance resulting from the resumption. Should our analysis stop here, we would be issuing the direction that the Applicant's claim for disturbance loss shall be assessed on the basis of partial extinguishment instead of total extinguishment. However, on the evidence before us, we find on the balance of probability not only that AW1 was having full knowledge of the scheme and the scale of the resumption by the time he had decided to terminate his business in HCL, but also that he was fully aware of the plan of resumption by West Rail as early as the time before he moved his depot from Lau Fu Shan to the site in question.

84. As far as the Applicant's case was concerned, AW1 said in his statement that HCL was formed in 1997 and ran its depot business first in Lau Fu Shan. HCL moved its business to the site in question on 9th July 1998. AW1 said he had first heard of the resumption in the form of market rumours in October 1998 --- i.e. some 3 months after HCL took physical possession of the site. AW1 also denied knowledge of Exhibit R2 --- a letter dated 20th October 1998, which protested on the cancellation of waiver on the site. With that letter, extracts from the relevant Government Gazette (GN1600 in Gazette no. 14 of 1998) and a portion of General Layout Plan No. GTS 200-C-0357 showing the two access points were also enclosed. AW1 said that the owners' land agent, Pronto Star Ltd. had written the letter to the Government without his knowledge.

85. We agreed that whether Exhibit R2 was written under HCL's instruction was not conclusive. While we noticed that the first paragraph specifically said: "We act for Hongda Container Limited, the occupier of the captioned land and refer to your letter (Re. (17) in R.D./PJT/126) dated 30th September, 1998 addressed to the owners thereof.", we also noticed on the second page it was written, "... captioned land has been used as a container yard for more than ten years and the requisite waiver fees have been duly paid by our client." Hence, while the letter's issuing authority alleged to be HCL, HCL could not have been the payer of the waiver fees of the site for more than ten years.

86. However, it must be borne in mind that the building of the West Rail and the plan for resumption for this purpose had been a matter of public notice for a long time. We noted that in page 229 of Bundle C, the Respondent reproduced a copy of the Government Gazette published on 3rd October 1997 showing GN1600 that contained the Notice issued by the Secretary for Transport of his proposed scheme of building a West Rail. References were made to a number of General Layout Plans including the one affecting the site in question; namely "GTS200-C-0357" (the actual reference in the Gazette was "GTS200-C-0351 to GTS200-C-0370"). The general public was given full access to these plans at addresses included in the Gazette. The plan dated 23rd September 1997 could be seen on page 274 of Bundle C that showed both the two access points and the two containers repairing workshops mentioned in the earlier part of this judgment. The Notice by the Secretary for Transport was repeated in GN1629 in the Government Gazette published on 9th October 1997. It was after the publication of these two Notices that a solicitor's letter dated 14th October 1997 together with a plan showing a proposed amendment of alignment on the West Rail (Exhibit R1) was sent to the Chief Engineer of the Highways Department. This solicitor who purportedly acted for the then occupier of the site (by that time, it was either WST or Sakoma) was the same solicitor writing the letter in Exhibit R2 in October 1998. Exhibit R1 clearly showed that any parties affected by the proposed West Rail works could have full access to information on the proposed West Rail Resumption scheme if they cared to make an effort to find out. Then on page 266 of Bundle C, we could see that the Government Gazette dated 9th April 1998 published a more detailed reference to this General Layout Plan as "Provision of access ways to and through existing container yard near Ping Ha Road in Yuen Long is indicated". All these Notices were published before HCL moved into the site on 9th July 1998.

87. Apart from the Notices in the Gazette, such notices together with the plans were also put up on the site on 3rd October 1997. Photographs on page 443 of Bundle C showed that notices were being displayed on the site as at 3rd April 1998. While we knew that AW2 and AW1 respectively left the employ of WST in June and August in 1997, we also knew from the evidence that a large number of HCL's staffs came from WST later renamed as Sakoma. Those staff members were laid off when Sakoma moved to operate its business in the River Trade Terminal. HCL then hired them to operate its business on the same site (AW1's evidence shown on Transcript at page 130 at O & P and page 309 of Bundle C). Those staff members, having worked day in and day out on the site, could not have missed the notices so put up by the Government. There was no way that they could have failed to channel the contents of these Notices to their boss AW1 whom they knew previously as their logistic director in WST. Furthermore, the investment AW1 put into the business of HCL must be in the millions. By whatever standard one adopts, the decision of AW1 in moving his container depot from Lau Fu Shan to the site must have been a very important one. He must have carried out relevant investigation and studies on his moving plan before he implemented the same. With the then general understandings by the public that the Government was going to build the West Rail which would definitely necessitated some resumption of land, one of the areas that AW1 must have looked into must be the degree of impact caused to the site by the then Government's plan of resumption. In the end, we reject what AW1 said in his statements and in his evidence given in the hearing in that he had no knowledge at all of the resumption affecting his site until October 1998. We find that on the evidence before us, it was more likely than not that AW1 has full knowledge on the West Rail's plan in resuming part of the site and the access points to be maintained as shown in the General Layout Plan. One might query if AW1 had full knowledge of the resumption, why he still moved his business to the site. We are not prepared to speculate the reason. However, the evidence before us is that HTL had continued with the depot business by using the 2 access points until August 2001--- some two years and three months after the West Rail assumed the physical possession of the resumed area. It might be that AW1 knew and prepared to run the business under such restrictions when he moved into the site. It might also be that he thought he could persuade the Government to amend the plan so that any adverse effect on the site might by minimized. And lastly but not the least, it might also be that he thought he could claim compensation in the event that the Gazetted resumption plan eventuated. Nevertheless, no matter what had been on the mind of AW1, the risks inherent in his decision to move his depot from Lau Fu Shan to the present site was great and we are sure that no reasonable businessman in the same position of his would do the same.

88. We also envisage that the Applicant may argue against our findings in (1) that no reasonable businessman in the Applicant's position in April 1999 would terminate the business and (2) that no reasonable businessman in the Applicant's position in July 1998 would move his business to the existing site from Lau Fu Shan are inconsistent. We do not think that such findings to be inconsistent with each other because we were referring to a reasonable business in two different situations. The businessman in the first situation was a businessman who had already invested multi-million dollars in the business on the existing site that was already bringing in profits steadily. Hence, he would not terminate his business, as did AW1. The businessman in the second situation was one who was running a steady business of a small depot in Lau Fu Shan that was not threatened by uncertainty. Hence, he would not risk the uncertainty of the shadow and the possible eventuality of resumption by moving that business to the existing site. We see no inconsistency in such findings.

89. On reaching this conclusion of us that AW1 had full knowledge of the Government's plan for resumption even before HCL moved into the site, we now turn to the legal effect of such fact on the Applicant's claim. According to the Respondent (as shown in paragraph 76 of his submission), "If the Tribunal find that... it is more probable than not that they (meaning AW1 and AW2) knew of the resumption earlier than July, 1998, then the Applicant should not be entitled to any compensation at all." We had invited both parties to make submission on the legal basis for such proposition. The Applicant maintained that prior knowledge of the resumption scheme could not deprive the Applicant's right of making a claim for such right of the Applicant was given by the statue itself. Mr. Shum relied on the Million-Add Development Limited and Another v. Secretary for Transport (unreported case reference LT No. 3 of 1994) for this contention. In the Million-Add case, the Lands Tribunal held that an owner of a plot of land affected by resumption could claim compensation, which was increased as a result of his purchases of adjacent plots of land after the resumption notice was gazetted but before the notional reversionary date. The increase of compensation was brought about by the enhanced development value resulted from the amalgamation of the site. The rationale was that the claimant was entitled to compensation to be assessed on the basis of a "no scheme world" under the Pointe Gourde Principle. Thus the then Tribunal explained:

"If between the date of notification and resumption, an owner buys adjoining land, any resulting marriage value, may increase the sum otherwise payable by way of compensation. We hold that any such enhanced value does not arise because of the scheme or the resumption but from the owner's decision to assemble the various lots. The only difference caused by the resumption, is that the increase in value is paid by the Crown, in replacement of the owner's option, to realize the same increase, by selling the assembled lots in the open market, to a purchaser from the private sector." (at page 10 and page 11 of the judgment)

90. The Privy Council in the Shun Fung Ironworks case clearly rejected the proposition that the duty to mitigate loss should extend to the pre-resumption period. When Lord Nicholls (who represented the majority view on this issue) was analyzing on why pre-resumption loss was claimable, His Lordship refused to extend the duty of mitigation to the pre-resumption period (at page 439). The minority view (i.e. Lord Mustill and Lord Slynn) of course held that since "loss and damage could only flow from a resumption after it had occurred" there was no question of duty to mitigate before the land was resumed.

91. On the weight of the authorities before us and on the plain reading of the relevant statutes, we have to admit that the law does not prohibit someone, equipped with the knowledge of possible resumption of a piece of land, to claim compensation by taking up an interest in that piece of land and does suffered loss; provided that he does so before the land is resumed and provided that he does suffer loss as a result. This decision of us goes contrary to the common law defence of volenti non fit injuria in tort but it is consistent with the fundamental principle that there shall be no expropriation without compensation.

92. Lastly, we would like to mention here that there was much evidence tendered by the parties on the prospect of the container depot trade in Hong Kong. In our view, the relevance of such evidence to the issue in this case is very marginal. This is because if the trade has a prosperous future as contented by the Applicant, it would make our finding more convincing for a reasonable business man would not have terminated his business, as did the Applicant.

Conclusions

93. As a result, we hereby issue the direction that the Applicant's claim for disturbance loss shall be assessed on the basis of partial extinguishment instead of total extinguishment. We also direct that the Applicant be allowed to file further statement and/or documentary evidence (e.g. the monthly trading accounts of HCL and HTL) within the next one month or such other time limit as prescribed by us in the event of application to be made by the parties. Should this exercise still fail to assist us in ascertaining the loss suffered by the Applicant on the basis we prescribed, we shall then be bound to assess the compensation on the basis of a global award. We also order that costs be reserved up to this stage of the proceeding.