LEHMAN & CO MANAGEMENT LTD v. EFFISCIENT LTD AND ANOTHER

CACV 180/2015

[2018] HKCA 127

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 180 OF 2015

(ON APPEAL FROM HCCW 377 OF 2010)

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                 AND

(ON APPEAL FROM HCCW 383 OF 2010)

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(Consolidated pursuant to the order of Hon Harris J dated 17 January 2011)

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J U D G M E N T

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Hon Cheung JA:

1.  I agree with the judgment of Barma JA.

Hon Barma JA:

2.  This was an appeal by Lehman & Co Management Ltd (“Lehman Management”) against the order of Harris J dated 9 June 2015, by which he stayed execution of part of his earlier order of 15 November 2011, by which Effiscient Ltd (“Effiscient”) was required to pay to Lehman Management the balance of the purchase price for the court ordered buyout by Effiscient of Lehman Management’s 50% shareholding in LehmanBrown Ltd (“the Company”) by quarterly instalments over a three year period.  As at the date of the order appealed against, there was an outstanding principal balance of US$425,456.04 due from Effiscient.  Execution was stayed until the resolution of proceedings (HCMP 775/2012 and HCA 6/2015) brought by the Company against Mr Edward Lehman and alleged associates of his.

3.  The background to this appeal is somewhat complicated, but can be summarised as follows:

(1)   The Company was incorporated in Hong Kong but carries on business in the Mainland where it provides audit and corporate advisory services.  It had two shareholders, Effiscient and Lehman Management, each holding 50% of its shares.  Effiscient is owned by Mr Russell Brown and his wife.  Lehman Management is owned by Mrs Karolina Lehman, the wife of Mr Edward Lehman, although its affairs, particularly in relation to the Company were controlled by Mr Lehman.

(2)   Disputes between the two shareholders in the Company (and the Lehmans and the Browns) gave rise to several pieces of litigation.  The main litigation (the proceedings out of which this appeal arises) involved cross-petitions by Lehman Management and Effiscient in which each sought to buy out the other’s shares in the Company, or alternatively sought orders for the winding up of the Company on the just and equitable ground.

(3)   The issue of liability arising from the cross-petitions was determined by the judge in his judgment of 15 November 2011.  He dismissed Lehman Management’s petition, and made the buyout order on Effiscient’s cross-petition.  He stood over questions of remedies (relating to the valuation of the Company and the price at which Effiscient should buy out Lehman Management, and a claim for damages brought by Effiscient against Lehman Management under the petition) for later determination.  By paragraph 11 of his order, the judge directed that Effiscient should be entitled to set off against the purchase price any damages it was awarded for unfairly prejudicial conduct, damages that Effiscient might be awarded against Mr Lehman in separate defamation proceedings, and the costs of the petition proceedings; and by paragraph 12 of the order, the judge ordered that that balance should be paid in quarterly instalments over a period of three years.

(4)   After a hearing to deal with the quantum issues, by a further judgment dated 28 November 2012, the judge assessed the value of Lehman Management’s share in the Company at US$1,400,000, and awarded damages of US$716,055 to Effiscient.

(5)   Lehman Management appealed against both the liability and quantum decisions.  By a judgment dated 13 March 2013 this court (differently constituted) upheld the judgment on liability, but varied the remedies judgment, essentially by reversing the order for damages in favour of Effiscient, on the ground that the loss, so far as Effiscient was concerned, was reflective of the Company’s loss, and hence not recoverable by Effiscient, but by the Company.  The set off in respect of the defamation damages was also disallowed.  Finally, interest was awarded to Lehman Management on the net amount payable to it, at judgment rate from the date of the liability judgment.

(6)   On 16 January 2015, the judge made an order by which Effiscient’s costs of the petition and cross-petition were fixed, for the purposes of the set off with the purchase price of Lehman Management’s share in the Company, at US$889,452.76, leaving a balance payable to Lehman Management of US$510,547.24, and requiring that balance to be paid by 12 equal instalments plus interest commencing on 31 January 2015.

(7)   Meanwhile, the Company having in 2012 commenced trade mark proceedings (HCA 775/2012) against Mr Lehman, Mrs Lehman and two companies associated with them, on 2 January 2015, it commenced an action against Mr Lehman (HCA 6/2015) for breach of his duties as its director.  Also on 2 January 2015, Effiscient applied by summons for a stay of execution of its obligation to pay the balance of the purchase price under the buyout order, pending the resolution of these two actions.  The judge acceded to the application by making the order now under appeal.

4.  Effiscient’s argument was that it had a prima facie claim for damages against Mr Lehman in the recently issued proceedings, which, having regard to the judge’s assessment of essentially the same damages in the petition proceedings (which was overturned on the basis that it was reflective loss which was properly claimable by the Company rather than Effiscient) was likely to exceed the remaining balance of the purchase price payable to Lehman Management.  The trademark claim would only add to such damages.  Thus, said Effiscient, it would be just to stay execution so that it did not have to pay the balance of the purchase price until these other claims were dealt with, at which time all the payments in both directions could be settled against each other.

5.  The judge accepted that where (as here) the parties to the proceedings were not the same (the price for the share in the Company was payable to Lehman Management, whereas the damages claim in the recent action was against Mr Lehman, and in the trademark action against Mr Lehman, Mrs Lehman and two companies owned by her), the authorities established that for a stay to be ordered, it had to be demonstrated that there was ultimate common ownership of the entities involved, on each side.  However, the judge pointed out that Mr Lehman had said in his evidence in the liability part of the trial in the petition proceedings that he regarded himself as the owner of the Company, so that Lehman Management was his nominee, a position which the judge regarded as being the reality of the situation.  The judge therefore considered that it was open to him to grant the stay sought, provided that it would otherwise be appropriate to do so.  Having considered the claims being brought against Mr Lehman, having noted that his assessment of the likely losses from Mr Lehman’s alleged breaches of fiduciary duty was not adversely commented on (so far as their quantum was concerned) in the Court of Appeal’s earlier judgment, and having regard to the fact that Mr Lehman and Lehman Management were both based outside Hong Kong, the judge concluded that it would, in the circumstances, be appropriate to grant the stay.

6.  Lehman Management now appeal against the order granting the stay.  Mr Barlow SC, who did not appear for Lehman Management below, submitted that the judge had erred in three main respects, any one of which would call for his decision to be reversed.  Mr Barlow’s arguments were:

(1)   The judge had no jurisdiction to grant a stay, as the order which it was sought to stay was an order, not of the judge, but of the Court of Appeal.  The argument here was that as the Court of Appeal had by its earlier judgment varied the judge’s order, the whole of that order, as varied, should be regarded as an order of the Court of Appeal, in respect of which only the Court of Appeal could grant a stay.  In other words, the judge had no power to order a stay of what was no longer his order, but that of the Court of Appeal.

(2)   The authorities established that where the parties were not the same, a stay should only be granted where the parties on each side were under common beneficial ownership, which was not the case here.  While the petition proceedings were between Effiscient and Lehman Management, which had been found to be beneficially owned by Mrs Lehman, the trademark and fiduciary duty claims relied upon as providing the basis for a set off in respect of the outstanding purchase price were between the Company and Mr Lehman.  While Effiscient and the Company might be ultimately commonly owned, Lehman Management was not ultimately owned by Mr Lehman, but by his wife.

(3)   Finally, it was suggested that in any event, Effiscient had not demonstrated to the necessary standard that it had good claims against Mr Lehman, or that the quantum of those claims would be sufficient to overtop the outstanding balance of the purchase price for the shares in the Company.

7.  At the outset of the appeal, we indicated to the parties that even if a stay were in principle to be granted, we would be likely to vary the order at least to the extent of imposing conditions on the grant of the stay, which would include some form of payment into court and an obligation to proceed reasonably promptly with the trademark and fiduciary duty proceedings.  We invited the parties to take instructions on whether this approach might be one on which they could agree.  Mr Bleach, for Effiscient, indicated that his client would be prepared to pay the balance of the purchase price due, together with accrued interest, into court in accordance with the schedule contained in the order in the petition proceedings.  Mr Barlow and those instructing him were unable to contact their client in the time available, and so were unable to agree.  We therefore proceeded to hear argument on the appeal.

8.  Having heard the parties, I am satisfied that the judge was right to grant the stay applied for, although I would vary his order in the manner I indicate below to provide for payment into court of the sums due (with accrued interest) in accordance with the schedule contained in the order.  I would also grant liberty to Lehman Management to apply for payment out of those sums in the event that the trademark and fiduciary duty claims are not proceeded with reasonably expeditiously.  I explain below my reasons for coming to this conclusion, and rejecting the arguments of Mr Barlow against the grant of the stay.

9.  As to Mr Barlow’s first argument, I think that it was open to Effiscient to make its application in the first instance to the judge, rather than to this court. Although this court varied the judge’s order made after the trial, it did not touch upon that part of the order that provided for the payment of the purchase price for Lehman Management’s share in the Company.  All that the Court of Appeal judgment did was to set aside parts of the judge’s order in the court below, leaving the rest of it intact.  In those circumstances, it seems to me that it was both sensible and appropriate for the application for a stay to be made initially to the judge.  I do not think that there was any jurisdictional impediment to the judge hearing and determining the application in the first place, and no authority was cited by Mr Barlow suggesting that there was.

10.  As to Mr Barlow’s second point, I would agree with Mr Barlow (as did the judge with his predecessor) that in order for a stay to be granted where there is no identity of parties, there should be some ultimate common ownership interest on both sides of the “equation”.  This was the position in the cases cited to us in which such a stay was granted, including Inveresk plc v Tullis Russell Papermakers Ltd (2010) SC (UKSC) 106, Canada Enterprises Corporation Ltd v MacNab Distilleries Ltd [1987] 1 WLR 813 and Dao Heng Bank Ltd v BIS Consultant Services Ltd [1989] 1 HKC 87.  In each case, the relationship was either that of parent and subsidiary company, or shareholder and company. Here, Mr Barlow says, there is no such common ownership situation, as Lehman Management, to whom the purchase price is owed, is beneficially owned by Mrs Lehman, whereas any liability that might be owed to the Company under the pending proceedings would be owed by Mr Lehman, her husband.

11.  Mr Bleach submitted that the test was one that need not involve ownership and economic interests, contending that the language used in the authorities was much more general, with the emphasis being on the nature of the relationship between the parties rather than ownership as such. With respect, this does not take matters very far.  It would still be necessary to consider what sort of relationship might justify the imposition of a stay where there is a cross-claim by a different party, related in some way to the party under the liability sought to be stayed.  Mr Bleach’s fall-back position was that the relevant relationship was control rather than ownership, relying on the reference to “control” in some of the cases.

12.  In my view, the relevant relationship is one that involves some form of common ownership. I take this view because at the end of the day, when one is considering the imposition of a stay where the parties on one side of the relationship are not the same, what one contemplates is some form of ultimate multipartite “set-off”.  In order for such a “set-off” to be justified, it seems to me that it would be necessary for some common ownership interest to be involved.  In the case of a parent and wholly owned subsidiary company, or a company and its sole beneficial shareholder, although the two entities are separate legal persons, they may be regarded as economically aligned, or in the same ultimate ownership.  The ultimate “set off” would then involve a situation where one was considering amounts due to and from the same ultimate owners.  The position might well be different where a parent and subsidiary company had differently constituted shareholders.  In the latter case, the courts would, I think, be much more cautious, as the economic interest in the competing claims would lie with different persons (or a different combination of persons).  To my mind, mere control without this element of common economic ownership would not suffice to justify the exercise of the power to stay execution of a judgment in this way.

13.  In the present case, it does not seem to have been seriously disputed that Lehman Management is beneficially owned by Mrs Lehman, whereas the claims that the Company advances in the trademark and fiduciary duty actions are against Mr Lehman.  In saying this, I have not overlooked the fact that Mrs Lehman and two other of her companies are also defendants to the trademark action.  However, there is relatively little information as to their involvement in those claims, and also a lack of available material as to the likely value of those claims against them.  The damages assessed by the judge in the Quantum Judgment in respect of breaches of fiduciary duty by Mr Lehman did not identify any particular aspects as being referable to issues relating to the trademarks.  In those circumstances, the trademark action should, I think, be given relatively little weight in considering whether or not a stay of the payment obligation in respect of the Company’s shares should be ordered.

14.  However, as the judge observed, in the course of the trial, Mr Lehman, who is legally qualified, did give evidence to the effect that he regarded himself as the beneficial owner of Lehman Management’s share in the Company – that evidence is summarised at paragraphs 60 and 61 of the Court of Appeal’s judgment.  In the light of this evidence, I think it was open to the judge to take the view that this represented the reality of the situation.  In other words, although Lehman Management was owned by Mrs Lehman, it held its share in the Company as nominee for Mr Lehman, who (as the evidence at the trial showed) exercised control over Lehman Management in relation to that share, how it was dealt with, and how the shareholder rights in the Company represented by it were exercised.  In such circumstances, it is well arguable that the share for which the purchase price was to be paid was actually beneficially owned by Mr Lehman, and the purchase price, when paid, would similarly belong beneficially to Mr Lehman. Although this is a slightly different scenario to that which has arisen in the authorities (where the relationship lies in the ownership structure of the relevant parties), it seems to me that it is relevantly the same in principle, in that the ultimate beneficiary of the payment of the purchase price is likely to be Mr Lehman, against whom the cross-claims are brought.

15.  It therefore seems to me that it was open to the judge to grant a stay of execution notwithstanding that Effiscient has been ordered to pay the price of the share in the Company to Lehman Management, and the claim relied upon to offset that is a claim of the Company against Mr Lehman.

16.  Turning to Mr Barlow’s third point, this can be disposed of briefly.  While, as I have said, I would not place much weight on the trademark action for the purposes of the stay application, it does seem to me that in the light of the judge’s findings as to the alleged breaches of fiduciary duty by Mr Lehman, and the quantification of those damages, in the Liability and Quantum Judgments respectively (neither of which were criticised by the Court of Appeal, which allowed the appeal on the basis that any loss suffered by Effiscient was reflective of the Company’s losses, and as such should be claimed by the Company itself), it cannot be said that the judge erred in the exercise of his discretion to grant a stay by doing so.  I do not think that, in coming to that conclusion, the judge erred in principle, or exercised his discretion in a plainly wrong manner.  On the contrary, I consider that Effiscient has established that the Company has a sufficiently arguable claim against Mr Lehman to justify the granting of a stay of its obligation to pay Lehman Management the purchase price of the share in the Company.

17.  I would therefore uphold the judge’s decision to grant a stay.  However, as I have indicated, this should be subject to a condition that the purchase price be paid into court (although in fairness to the judge, who did not impose such a condition, this was not a suggestion that appears to have been made to him). Although Mr Barlow submitted that the full purchase price should be paid into court at once, I see no reason to depart from the schedule laid down in the order. In the light of the lapse of time since the hearing due to the delay in handing down this judgment, which is very much regretted, I would direct that total amount of the outstanding instalments to date, together with interest accrued thereon, should be paid into court within 42 days, and that thereafter, any other remaining instalments should be paid into court, with accrued interest, on their due dates, as a condition of the stay.  Further, I would afford Lehman Management liberty to apply to lift the stay in the event that the other claims against Mr Lehman are not proceeded with reasonably expeditiously.  Any such application should be made to this court.

18.  For the foregoing reasons, I would vary the judge’s order to the extent indicated in the previous paragraph.  So far as the costs of the appeal are concerned, although the order below has been varied to a limited extent, the variations arose out of this court’s observations, and the substantive arguments by Lehman Management in support of the appeal have all been rejected.  In the circumstances, it seems to me that a reasonable order as to costs would be for Lehman Management to pay Effiscient two thirds of its costs of this appeal, to be taxed on the party and party basis if not agreed, and I would make such a costs order nisi.