LEHMAN & CO. MANAGEMENT LTD v. EFFISCIENT LTD AND ANOTHER

CACV 272/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 272 OF 2011

(ON APPEAL FROM HCCW NOS. 377 AND 383 OF 2010)

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HCCW 377/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 377 OF 2010

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AND

HCCW 383/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 383 OF 2010

________________________

________________________

(Actions consolidated pursuant to the order of
Hon Harris, J dated 17.1.2011)

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J U D G M E N T

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Hon Kwan JA:

1.  On 15 November 2011, Harris J gave judgment (“the Liability Judgment”) after an eight-day trial in October 2011 in two petitions under section 168A of the Companies Ordinance, Cap 32, which had been ordered to be heard together.  He dismissed the petition and granted relief on the cross-petition.  A subsequent hearing was held for the assessment of the value of the petitioner’s share in the company, which he ordered to be sold to the cross-petitioner, and for the assessment of damages payable to the cross-petitioner as a result of unfairly prejudicial conduct of the petitioner.  After a three-day trial in September 2012, the judge gave judgment on 28 November 2012 (“the Remedies Judgment”).  He assessed the value of the petitioner’s share in the company at US$1.4 million and damages payable to the cross-petitioner at US$716,055.

2.  This is an appeal of the petitioner from the Liability Judgment and the Remedies Judgment. There was initial dispute whether the appeal against the Remedies Judgment was properly brought, as when the Notice of Appeal was filed, it was against the Liability Judgment only. When it was approaching the hearing date of the appeal, and by which time the Remedies Judgment had been delivered, the petitioner filed a supplementary Notice of Appeal making very substantial amendments to the grounds of appeal against the Liability Judgment and appealing against the Remedies Judgment as well. The respondent in the appeal contended that separate notices of appeal are required if the orders being the subject of the appeal, though made in the same action, were not made at the same trial or hearing, citing in support of this contention Hong Kong Civil Procedure 2013, vol 1, para 59/3/16.  

3.  Having considered Dixon v Allgood, transcript of English Court of Appeal, 14 April 1999,  it does not appear to us there is any requirement in the rules of court which mandates separate notices of appeal in this situation and we do not think the editorial comment in the Hong Kong Civil Procedure should be followed. We would like to point out that although the appeal against the Remedies Judgment was properly brought, to avoid any problem that may arise regarding the estimated length of hearing, further documents and evidence that would be required with the significant widening of the scope of the appeal, as a matter of good practice, the appellant should not have left the amendment so late and should have sought appropriate directions from the court in advance regarding the conduct of the appeal. We would not hear the appeal unless we are satisfied that the appeal bundles are properly prepared and the hearing time is adequate with the expanded scope of the appeal. However, as all necessary documents appeared to be before us, the hearing time was sufficient, and the respondent’s counsel did not require an adjournment to be able properly to deal with the additional matters to be argued, we proceeded to hear the appeal against the Remedies Judgment as well.

The Liability Judgment and Order

4.  The company that is the subject of the petition and the cross-petition is LehmanBrown Limited (“the Company”), a company incorporated in Hong Kong but carrying on business in Mainland China as a full service accounting firm.  The petitioner, Lehman & Co Management Limited (“Lehman Management”), and the cross-petitioner, Effiscient Limited (“Effiscient”), each owns one of the two issued shares of the Company.  Lehman Management is beneficially owned by Mrs Karolina Lehman, whose husband Mr Edward Lehman exercised de facto control over its affairs, at least in so far as they concerned the Company.  Effiscient is owned by Mr Russell Brown and his wife Mrs Zhou Han Brown.

5.  The judge found that Lehman Management has failed to establish any unfairly prejudicial conduct on the part of Effiscient.  He dismissed the petition with costs to Effiscient.  He found that Effiscient has established unfair prejudice on the part of Lehman Management and is entitled to relief under section 168A.  As Mr Brown is an accountant and has been running the Company since its inception, he held it appropriate to order Lehman Management to sell its one share in the Company to Effiscient.  He ordered a court expert to be appointed to prepare a report on the value of Lehman Management’s share in the Company.  He also held that Effiscient should be awarded damages for the loss suffered as a result of two aspects of unfairly prejudicial behaviour, being:

(1)   the operation of a professional services firm offering accountancy services within the People’s Republic of China by Mr Lehman through his nominee or nominees; and

(2)   misappropriation and infringement of the trademark of the Company’s business name registered in the first instance by Mr Lehman.

6.  The material parts of the order made by the judge in the Liability Judgment (“the Order”) on the valuation of the Company, the assessment of damages and directions on payment provide as follows:

“5. The Court Expert shall report to the Court on the value of the shares in the Company as at the date of the Petitioner’s Petition (“the Valuation Date”).  The Expert Valuation Report shall value the shares in the Company on the basis of the fair market value of the business as at the Valuation Date, but not having regard to the extent to which the Cross-Petitioner may expand and grow the business after the valuation date without the involvement or interference of the Petitioner and/or by Mr Edward Lehman, the Petitioner’s Authorized Representative (“Petitioner’s Authorized Representative”) and/or by the Petitioner’s Beneficial Owner, Ms Karolina Lehman (“Petitioner’s Beneficial Owner”).

6.   The Petitioner shall pay to the Cross-Petitioner damages to be assessed by the Court to reflect the damage suffered by the Cross-Petitioner as a result of the unfairly prejudicial conduct of the Petitioner and/or the Petitioner’s Authorized Representative and/or by the Petitioner’s Beneficial Owner, including but not limited to:

(a)  the accountancy firm, set up, run and operated in competition with the Company by the Petitioner’s Authorized Representative on his own behalf and/or on behalf of the Petitioner, or the Petitioner’s Beneficial Owner;

(b)  the misappropriation and infringement of the Company’s Chinese and Hong Kong trademarks by the Petitioner’s Authorized Representative on his own behalf and/or on behalf of the Petitioner, or the Petitioner’s Beneficial Owner;

7.   The Court Expert shall report to the Court his opinion of the level of damages suffered by the Cross Petitioner as a result of the matters set out in paragraph 6 above in a separate section within the Expert Valuation Report.

…

11. The Cross-Petitioner shall be entitled to set off against the Purchase Price to be paid for the Petitioner’s share in the Company:

(a)  the damages assessed by this Court as arising from the unfairly prejudicial conduct;

(b)  any damages and costs which may be due to the Cross-Petitioner in the defamation proceedings action number HCA 959/2010; and

(c)  any costs which may be due to the Cross-Petitioner as a result of these proceedings.

12. The balance due either from the Petitioner to the Cross-Petitioner, or from the Cross-Petitioner the Petitioner, after the set off set out in paragraph 11 above has been finally determined or agreed, and after the accounting for fees as set out paragraph 9 above, will be paid by the appropriate paying party to the other in quarterly instalments on 30 April, 31 July, 31 October 2012 and 31 January of each year immediately following such final determination or agreement, over a period not exceeding 3 years.

13. The Petitioner shall within 5 clear days of the making of this Order provide to the solicitors for the Cross-Petitioner (Reed Smith Richards Butler) a general proxy in respect of its voting rights in its one share in the Company, such proxy to be irrevocable save with the leave of the Court.”

This appeal

7.  In this appeal, Lehman Management sought to set aside the order dismissing its petition and to overturn the judge’s ruling that it has failed to establish any unfairly prejudicial conduct on Effiscient’s part.  It did not seek to challenge that part of the judgment holding that the complaints of unfair prejudice in the cross-petition are established.  It contended that both sides were at fault and each shareholder had been unfairly prejudiced by the conduct of the other.  It accepted that the judge was correct in ordering Lehman Management to sell its one share in the Company at a price to be determined by the court.  On the basis that some of its complaints of unfairly prejudicial conduct are established, it asked this court to set aside the costs order against it in the petition and cross-petition and substitute this with no order as to costs.  I will call this part of the appeal “the appeal against the unfair prejudice finding in the petition”.

8.  Lehman Management sought to set aside other parts of the Order and they are as follows:

(1)   The latter part of para 5 which reads “but not having regard to the extent to which the Cross-Petitioner may expand and grow the business after the valuation date without the involvement or interference of the Petitioner and/or by Mr Edward Lehman, the Petitioner’s Authorized Representative (“Petitioner’s Authorized Representative”) and/or by the Petitioner’s Beneficial Owner, Ms Karolina Lehman (“Petitioner’s Beneficial Owner”)”.

It was contended that this part of para 5 had prevented the court appointed valuer Mr Kenneth Yeo from valuing the Company as a going concern and using the most appropriate methodology. I will call this “the Valuation Distortion argument”.

(2)   Para 6

It was contended that the court has no jurisdiction to award damages to Effiscient for unfairly prejudicial conduct of Lehman Management, Mr Lehman and/or Mrs Lehman by reason of section 168A(2C) which encapsulates the common law principle against recovery for reflective loss.  It was further argued that it was wrong to order Lehman Management to pay damages for acts of unfair prejudice committed by Mr Lehman.  I will call these “the jurisdiction arguments on damages”.

(3)   Para 11

By this order, Effiscient is allowed to set off against the purchase price to be paid for Lehman Management’s share in the Company (a) the damages assessed in para 6; (b) any damages and costs which may be due to it in a defamation action brought against Mr Lehman in HCA 959/2010; and (c) any costs due to it in these proceedings.  It was argued that no set off should be allowed for items (a) and (c) on the ground that these damages and costs orders should not have been made. In respect of item (b), it was argued that it was wrong to allow set off against Lehman Management owing to lack of mutuality. I will call this “the set-off argument”.

(4)   Paras 12 and 13

It was contended that the judge was wrong to order Lehman Management to provide Effiscient within five days of the Order an irrevocable proxy for the voting rights in its one share in the Company, and he was wrong to order the purchase price be paid by instalments over a period not exceeding three years.  I will call these arguments “the payment order arguments”.

9.  In respect of the Remedies Judgment, Lehman Management attacked the assessment of damages and the valuation of its share in the Company on a number of grounds:

(1)   Various aspects of the judge’s handling of the proceedings

The complaints were: the judge had delegated the assessment of damages to the court appointed valuer; he overruled Lehman Management’s challenge to the admission of the evidence of Mr Yeo; he refused to admit the evidence of Lehman Management’s expert witness, Mr John Lees; he allowed Effiscient to resile from the valuation of the Company’s business by Mr Simon Blade whose report Effiscient had tendered in evidence in the defamation action in HCA 959/2010.

(2)   The assessment of damages should be set aside because Effiscient had not discharged its onus of proving any loss or damage, and the judge had reversed the burden of proof by drawing inferences from certain failures of Lehman Management to suggest the contrary.

(3)   The valuation of Mr Yeo, which was accepted by the judge, should be set aside owing to the Valuation Distortion argument, the failure of Mr Yeo to value the Company as a going concern based on its notional value to a prospective third party purchaser of the Company assessed from its earnings history over the previous three to five years, the failure to include within his valuation the three PRC accounting businesses, and the judge was wrong to disregard the valuation of Mr Blade.

10.  Lastly, it was contended that the judge had wrongly refused to order Effiscient to pay interest on the purchase price.

11.  Lehman Management sought an order that this court should determine the purchase price of its one share in the Company on the correct basis with no order for damages, alternatively that the valuation of the Company be remitted to another judge for re-trial.

12.  I will deal with the arguments raised in this appeal in the following order:

(1) the appeal against the unfair prejudice finding in the petition;

(2) the jurisdiction arguments on damages;

(3) the set-off argument;

(4) various aspects of the judge’s handling of the proceedings;

(5) the assessment of damages;

(6) the Valuation Distortion argument;

(7) other attacks on the valuation;

(8) the payment order arguments; and

(9) interest on the purchase price.

The appeal against the unfair prejudice finding in the petition

13.  The relevant facts which are not in dispute may first be stated as follows.  The business of the Company commenced in 2001.  It had two directors at all times.  Mr Brown was a director at the outset and remains one to this day.  Mr Lehman and his wife chose to nominate a service company, Million Strong International Limited (“Million Strong”), to represent them on the board of directors.  Million Strong was deregistered on 12 November 2010 and ceased to be a director.  On 16 November 2010, Mr Brown appointed his wife to the board.

14.  The judge found that Mr Lehman was clearly not an honest witness.  As for Mrs Lehman, she sided completely with her husband and parroted his story, so the judge did not find her evidence reliable.  By contrast, the judge found Mr Brown straightforward and his recollection of events supported by contemporaneous correspondence.  Where there was a conflict between the evidence of the two men, the judge preferred the evidence of Mr Brown[1].

15.  The judge accepted the evidence of Mr Brown there was an oral agreement between the two men that they should be equal shareholders in the Company and each was to be a director.  It was agreed that Mr Brown would manage the Company on a day to day basis and that Mr Lehman would have no greater right to information and involvement than that which accrued by virtue of the directorship, which he chose to hold through his nominee, Million Strong[2].

16.  On the facts as found by the judge, Lehman Management had access to the Company’s records including its accounting records through Mr Lehman up to the end of 2004[3] and through Mr Scott Garner[4] until mid 2008[5].  Thereafter, Lehman Management did not have access to the Company’s records[6].  Also, at a meeting in 2008 between Mr Brown and Mr Lehman, Mr Brown had agreed that Union Trade Holdings Inc (“Union Trade”), which was a company controlled by Mr Lehman, would be appointed as a director of the Company to represent Mr Lehman in place of Million Strong[7].  Mr Brown then changed his mind about appointing Union Trade as a director and when Million Strong was deregistered in November 2010, a representative of Lehman Management was not appointed as a director in place of Million Strong. Instead, Mr Brown appointed his wife as a director.  This was contrary to the initial oral agreement that each shareholder would be represented on the board[8].

17.  Mr Barlow, SC, who appeared for Lehman Management in this appeal[9] but not below, submitted that on the above facts as found by the judge, the judge should have held as a logical inference that Lehman Management had been unfairly prejudiced by the conduct of Effiscient in that it was deprived of access to the Company’s records from mid 2008 and was excluded from participation as a director in November 2010 contrary to the initial oral agreement between Mr Lehman and Mr Brown.

18.  He pointed out that in section 168A proceedings, any antecedent shareholders agreement would often be pivotal to the assessment of the shareholders’ entitlements.  He submitted that the judge was not prepared to consider evidence of exclusion from access to the Company’s records other than evidence of requests of access for information made through Million Strong, as indicated by the three questions framed by the judge at the stage of closing submissions which went to the issue whether Lehman Management had been wrongly refused access to documents and in particular whether its nominee director Million Strong had requested documents and had been refused[10].  He argued that the judge had overlooked the possibility that both parties may have been unfairly prejudiced when the judge mentioned that what he needed to decide was “which one of them has established that they have been unfairly prejudiced and is entitled to the relief, which they seek”[11].  That there was fault on both sides is not a reason for refusing a buy-out order under section 168A (Grace v Biagioli [2006] 2 BCLC 70 at 98g to 99b, 101a and f).  He said the judge had approached the question of making a compulsory sale order solely by the attribution of fault, without regard to pragmatic considerations in particular which of the two hostile protagonists is better suited to operate the Company.

19.  I do not think these are fair criticisms of the judge.

20.  The judge’s statement that he had to decide which one of the shareholders has established it has been unfairly prejudiced and is entitled to the relief sought must be understood in the context of the allegations made and the relief sought in the petition and cross-petition.  In the petition, Lehman Management sought an order to buy out the interest of Effiscient on the basis it has been unfairly prejudiced by Effiscient’s conduct.  In the cross-petition, Effiscient sought an order to buy out Lehman Management on the basis it has suffered unfair prejudice due to the other’s conduct.  Each was seeking mutually exclusive relief.  There was no suggestion from anyone at the trial that both parties were at fault and have suffered unfair prejudice due to the acts of the other.  The judge had also said this in the course of the closing submissions of counsel:

“Well, I’ve got two petitions. Both of them are unfair prejudice petitions in order to be entitled to the relief that’s sought but the relevant petitioner has to demonstrate that there’s been unfair prejudice.”[12]

21.  The judge had fully considered whether Effiscient was at fault on the allegations of unfair prejudice raised by Lehman Management, which included the complaint of denial of access to the Company’s records and the appointment of Mrs Brown to the board to replace Million Strong contrary to the initial oral agreement that each shareholder would have representation on the board.

22.  The judge found that Mr Lehman had himself largely to blame for the deterioration in the working relationship of the parties from 2008 and thereafter[13].  That was the time when Mr Brown discovered Mr Lehman had established a competing accountancy firm in China[14] and in December 2008 Mr Lehman had demanded payment of a substantial dividend and refused to sign the financial statements of the Company[15].  Also at that time, Mr Lehman orchestrated complaints to the China Trademarks Office about infringement by the Company of the “LehmanBrown” trademarks, which led to raids by members of the Office on the Company’s offices in Beijing, Shanghai, Shenzhen and Guangzhou to inspect documents[16].  The acts of operating an accountancy business in competition with the Company and misappropriating the Company’s trademarks were held to be highly and unfairly prejudicial to Effiscient’s interest in the Company[17].

23.  The judge found on the evidence that the difficulties that arose “seem to have their origin in the heavy handed way [Mr Lehman] chose to approach Mr Brown and his insistence on a degree of involvement with the management of the Company, which was inconsistent with what had originally been agreed”[18] and “the contemporaneous documents demonstrate that when Mr Brown was approached in a sensible way with coherent requests to information he was prepared to accede to them”[19].

24.  It is not correct to say that the judge was prepared to consider exclusion from access to the Company’s records only on the basis whether Million Strong had requested access and was refused, as the judge had held that despite the failure of Lehman Management to assert a right to information through Million Strong, it was not precluded from complaining it was not given all that it was entitled to expect as an equal shareholder with representation on the board[20].  And the judge had clearly considered requests for information made by various representatives of Lehman Management, such as Mr Lehman, Mrs Lehman and Mr Garner[21].

25.  The judge did not accept that the refusal to agree to steps being taken to change the directorship from Million Strong to Union Trade had caused any unfair prejudice during the period to which the complaint was directed, namely, 2008[22].  And when Million Strong was deregistered in November 2010, Mr Brown by this time had had enough of Mr Lehman and what he saw as the latter’s destructive behaviour so he took the opportunity to replace Mr Lehman’s nominee on the board with Mrs Brown[23].

26.  The judge considered the authorities which showed that the court will have regard to a petitioner’s own conduct in deciding whether or not he had been treated unfairly and if a person has by his own poor behaviour caused the conduct of which he complains, such conduct is unlikely to be unfair to him even if it is prejudicial[24].  Although the appointment of Mrs Brown to the board was prejudicial to Lehman Management, the judge accepted the submission of Mr Manzoni, SC, who appeared for Effiscient at the trial and on appeal, that by the time this occurred Mr Lehman’s conduct had become so manifestly inconsistent with the best interests of the Company that appointing someone other than Mr Lehman’s nominee as a director, was justified[25].

27.  I do not think the judge’s conclusion that Lehman Management has not demonstrated it has been unfairly prejudiced by Effiscient’s conduct can be faulted.  The contention that both sides were at fault is not made out.  There is no basis to disturb the holding that the petition should be dismissed and that Lehman Management should pay the costs of Effiscient of the petition and the cross-petition.

The jurisdiction arguments on damages

28.  Under para 6 of the Order, the Judge awarded damages to Effiscient as a result of two of the complaints of unfairly prejudicial conduct which he held to be established: (1) the operation of a professional services firm offering accountancy services in the Mainland in competition with the Company (“the Competing Firm Claim”); and (2) the misappropriation and infringement of the trademark of the Company’s name (“the Trademark Claim”)[26].

29.  I will first deal with a pleading point raised by Mr Barlow.  He pointed out that a claim for damages has not been made in the prayer of the cross-petition or in the amended points of defence and counterclaim served by Effiscient.  He submitted this is not in compliance with Order 9 rule 2(1) of the Rules of the High Court, which stipulates that “every petition must include a concise statement of the nature of the claim made or the relief or remedy required in the proceedings begun thereby.”  In Re Antigen Laboratories Ltd [1951] 1 All E R 110, Roxburgh J said a petitioner seeking relief under the equivalent to our section 168A “ought to state in the prayer of the petition in clear terms the general nature of the relief sought… .  The prayer … must … contain enough to leave no doubt what the petitioner desires the court to do.”

30.  I do not think the pleading point is a good one for a number of reasons.

31.  Firstly, the factual allegations giving rise to the acts of unfair prejudice concerning the Competing Firm Claim and the Trademark Claim have been pleaded in the cross-petition and the amended points of defence and counterclaim.  As the factual allegations pleaded are also relevant to the jurisdictional objections which will be discussed, I set out the relevant parts of the cross-petition[27] in full:

“30. Since 2004, the following conduct of [Lehman Management] and/or Lehman has been seriously unfair and prejudicial to both [Effiscient] and to the Company: -

…

(iv) operated an accounting business in the PRC since about 2005 which is in direct competition with the Company (and which [Lehman, Lee & Xu; (“LLX”)[28]] advertises and/or provides a link to on its own website);

(v) instructed senior employees of the Company to perform tasks not for the benefit of the Company, but for the benefit of Lehman’s own competing accounting business;

(vi) misappropriated and infringed the LehmanBrown trademark of the Company (which was applied for in the PRC on behalf of the Company by Lehman, but which Lehman registered in his own name before transferring the LehmanBrown trademark to Home & Garden Limited (“Home and Garden”) (a company understood to be owned and controlled by his wife, Karolina) despite Lehman’s reassurances and promises that the LehmanBrown trademark would be returned to the Company and despite Lehman signing a letter[29] whereby he irrevocably agreed that he would assign the LehmanBrown trademark to the Company upon registration;

…

31. The conduct of [Lehman Management] and/or Lehman is unfairly prejudicial to the interests of [Effiscient] and the Company generally for the following reasons: -

…

(iv) the operation of a competing accounting business in the PRC since 2005 (which was advertised on the website of LLX under the name “LehmanBrown” and now “LehmanBowen”) has meant that the Company has lost accounting work and business which has been diverted (at the instigation of Lehman) to this director [sic] competitor;

(v) the misappropriation, wrongful transfer and repeated infringement of the LehmanBrown trademark of the Company means that the Company does not have rights over its own name/trademark and exposes the Company to third party liability;

…

32. The unfairly prejudicial conduct of [Lehman Management] and/or Lehman has inter alia had the following results: -

…

(2) the Company has lost business and clients;

…

(5) the Company’s reputation has been damaged;

…

(7) the Company’s financial position has been declined; …”.

32.  It is pertinent to note also the following parts of the amended points of defence and counterclaim:

“33. In 2003, Lehman set up a competing accountancy practice in the PRC, originally under the name of “Lehman & Co.” (“Competing Firm”) …

34. It is understood that the Competing Firm changed its name to “Lehman Tax & Accounting” sometime during 2008. Lehman and/or LLX have been referring and continue to refer accounting and tax business to the Competing Firm, instead of to the Company. Lehman and/or the Competing Firm also ‘poached’ two former staff members of the Company to work for the Competing Firm.

…

36. During about October 2008, Brown became aware that Garner was heading up the management of the Competing Firm … Further, Garner was Lehman’s former representative to the Company … and had been given a considerable level of information with regard to the Company and its business, including its clients and customers, structure, services, marketing, human resources etc. … [Effiscient] asserts that Lehman was making use of the Company’s own confidential and/or proprietary information for the purposes of his rival accountancy practice in the Competing Firm.

37. Between 2008 and 2010, Brown became aware that Lehman and/or the Competing Firm were engaged in various activities in an attempt to pass the Competing Firm off as the Company …

38. [Effiscient] avers that since 2005, Lehman has operated an accounting business in the PRC which is in direct competition with the Company and which has sought to ‘poach’ the business and clients of the Company at every opportunity. Lehman’s competing accountancy practice has caused confusion in the market place and is run in a deliberate attempt to damage the business of the Company.

…

43. On or about 8 May 2009, the Company received a letter from LLX on behalf of Home & Garden alleging infringement of Trademarks by the Company. … Further, between December 2008 and March 2009, Lehman and Karolina arranged raids on the Company’s Shanghai, Shenzhen, Guangzhou and Beijing offices by the local Administration of Industry and Commerce (AIC).

…

45. In 2007, Lehman also registered the “LehmanBrown” Trademark in Hong Kong in the name of “Union Trade Holdings Inc.” (“Union Trade”). Union Trade is a BVI company which is understood to be owned and controlled by Lehman and/or Karolina. The registration of the “LehmanBrown” Trademark in Hong Kong was carried out by LLX and again, this was done without the knowledge or consent of the Company or Brown.”

33.  Secondly, although the prayers in the cross-petition and the amended points of defence and counterclaim did not expressly claim damages, attached to the opening submission served by Effiscient at the trial was a draft order, para 6 of which sought an order that Lehman Management should pay to Effiscient damages to be assessed as a result of unfairly prejudicial conduct of Lehman Management, and/or its authorised representative Mr Lehman, and/or its beneficial owner Mrs Lehman.  And among the unfairly prejudicial conduct listed in para 6 was the setting up of an accountancy firm in competition with the Company and the misappropriation and infringement of the Company’s Chinese and Hong Kong trademarks.  This draft order in a slightly amended form was attached to the closing submission served by Effiscient at the trial.  Hence, notice was given to Lehman Management in clear terms of the nature of the relief sought by Effiscient, even though Effiscient did not apply to amend the prayers by adding a claim for damages.

34.  Thirdly, former counsel who appeared for Lehman Management at the trial also adopted the same approach.  Annexed to his closing submission was a draft order seeking among other relief an order that Effiscient should pay to Lehman Management damages to be assessed to reflect the damage suffered as a result of unfairly prejudicial conduct.

35.  Fourthly, the judge took up the pleading point at the trial when Mr Manzoni addressed him on para 6 of the draft order.  He was satisfied that the claim for damages could be covered by “such further or other Order(s) and/or direction(s) as this Honourable Court may deem fit” in the prayers, no doubt because notice of a claim for damages had been given earlier.

36.  I turn to consider a weightier objection that the judge had no jurisdiction to make this order for damages due to section 168A(2C), which encapsulates the common law principle against recovery for reflective loss.  This matter was not raised before the judge by any party and he did not consider it when he awarded damages to Effiscient.

37.  The relevant statutory provisions read as follows:

“168A. Alternative remedy to winding up in cases of unfair prejudice

…

(2) If on any petition under subsection (1) the court is of opinion that the specified corporation’s affairs are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of some part of the members (including the member who presented the petition), whether or not such conduct consists of an isolated act or a series of acts -

…

(b) the court may order payment by any person of such damages and interest on those damages as the court may think fit to any members (including the member who presented the petition) of the specified corporation, whose interests have been unfairly prejudiced by the act or conduct.

…

(2C) For the avoidance of doubt, the damages that may be ordered by the court under subsections (2)(b) and (2B) does not entitle a member, past member or then member of a specified corporation to recover by way of damages any loss that is solely reflective of the loss suffered by the specified corporation which only the specified corporation is entitled to recover under the common law.”

38.  For a summary of the relevant principles at common law on the recoverability of damages by a shareholder and by a company, I refer to the speech of Lord Bingham of Cornhill in Johnson v Gore Wood & Co [2002] 2 AC 1 at 35F to 36A:

“(1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder’s shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company’s assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss. … (2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding. … (3) Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other. …”.

39.  One then applies the law to the Competing Firm Claim and the Trademark Claim, to see whether the award of damages would contravene the principle of reflective loss.

40.  I will deal with the Trademark Claim first.  The relevant findings of the judge are as follows.  There was an agreement between Mr Lehman and Mr Brown that the Company would register its trademark LehmanBrown.  However, Mr Lehman applied for registration of the trademark in his own name.  He then signed an undertaking to the Company dated 16 November 2001 by which he irrevocably agreed that when the trademark was registered, he would assign the trademark to the Company or its nominee.  In breach of this undertaking to the Company, Mr Lehman misappropriated the trademark by transferring it to his wife’s company, Home & Garden[30].

41.  Mr Manzoni submitted that the Company cannot sue on the original agreement, which was made between Mr Lehman and Mr Brown personally.  Even so, the Company would clearly have a claim against Mr Lehman on the irrevocable undertaking given to it by Mr Lehman.  Mr Manzoni then argued on Mr Lehman’s case, the written undertaking was a forgery and of no effect, so the Company’s claim is bound to fail on Mr Lehman’s case and evidence, and there would not be any contravention of the reflective loss principle as the Company would not have a claim.

42.  I reject these arguments.  Mr Lehman gave evidence before the judge that the signature on the undertaking was not signed by him and suggested it was computer generated[31].  His evidence was rejected by the judge, who found that he did sign the undertaking[32].  Further, as Mr Barlow pointed out, the Company has in fact brought proceedings in HCMP 775/2012[33] against Mr and Mrs Lehman, Home & Garden and Union Trade, claiming declarations that the LehmanBrown Trademarks registered in Hong Kong are invalid, that the LehmanBrown Trademarks registered in Mainland China were misappropriated by the defendants in accordance with the findings in the Liability Judgment, that the defendants infringed the Company’s trademarks, and claiming damages or an enquiry as to damages in respect of the defendants’ acts of infringement of the trademarks.

43.  It was not suggested by Mr Manzoni that any loss suffered by Mr Brown or Effiscient as a result of the unfairly prejudicial conduct in the Trademark Claim is separate and distinct from the loss suffered by the Company due to the misappropriation and infringement of the trademarks.  It is clear from the exercise of the assessment of damages in the Remedies Judgment that the court was looking at the loss and damage caused to the Company.

44.  I am satisfied that the award of damages in the Trademark Claim must be set aside on the jurisdictional ground that it contravenes section 168A(2C).

45.  I turn to the Competing Firm Claim.  Unlike the Trademark Claim, no action arising out of the Competing Firm Claim has been brought by the Company as yet.  Mr Barlow did not wish to advocate a case that the Company might have a cause of action in the Competing Firm Claim as that would provide ammunition for a writ from the Company.  Mr Manzoni contended that the Company would not have a cause of action in the Competing Firm Claim, hence there would be no contravention of section 168A(2C).  He referred us to Shaker v Al-Bedrawi & Ors [2003] Ch 350 at para 83, in which Peter Gibson LJ had this to say:

“As the Prudential principle[34] is an exclusionary rule denying a claimant what otherwise would be his right to sue, the onus must be on the defendants to establish its applicability. Further, it would not be right to bar the claimant’s action unless the defendants can establish not merely that the company has a claim to recover a loss reflected by the profit, but that such claim is available on the facts.”

46.  Hence, the onus is on Lehman Management to establish that there is a remedy available to the Company in respect of the Competing Firm Claim both on the facts and on the law.  Mr Manzoni contended that the judge did not make relevant findings on the evidence as the question of reflective loss was not raised below, and this court must be slow to reach any findings of its own on the evidence as Mr Lehman has “blown hot and cold about his status as a director”[35] and was seen as a thoroughly dishonest witness.

47.  Since this challenge goes to the jurisdiction of the court to award damages in respect of the Competing Firm Claim, this court would need to form a view if the Company would have a claim here, regardless of the positions taken by the parties.  I will examine the evidence before the judge and the findings he made, to see if a view could be taken one way or other.

48.  The relevant evidence and findings are set out in these parts of the Liability Judgment:

“122. In cross-examination Mr Lehman accepted that he had established a competing accountancy firm in the Mainland after his relationship with Mr Brown broke down; something, which he had denied in his witness statement. Effiscient says that this is objectionable for 2 reasons. First, that in so far as Mr Lehman considered himself a director of the Company it was clearly inconsistent with his fiduciary duties. Secondly, it was inconsistent with the agreement made at the outset in which Mr Brown says it was clearly agreed and understood that neither party would compete with the other.

123. Mr Lehman has blown hot and cold about his status as a director. When it suited him he expected to be treated as a director. When accusations were made that he was in breach of his fiduciary duties he responded that he was not a director. This is consistent with his explanation that he wanted a corporate nominee appointed as Lehman Management’s representative director in order to distance himself from liabilities he might otherwise be under. This does not reflect well on Mr Lehman’s sense of corporate governance. More importantly it does not seem to me to make any difference. Million Strong was Mr Lehman’s nominee and for these purposes his alter ego. Mr Lehman described himself as a “shadow director”. If Mr Lehman acted in a way inconsistent with a director’s fiduciary duties, which he manifestly did, it seems to me that he cannot avoid the conclusion that Effiscient was unfairly prejudiced merely because he chose to distance himself from the Company by causing his nominee to be appointed director.

124. I also accept Mr Brown’s evidence that he agreed with Mr Lehman that neither party could compete with the other once LehmanBrown was established. This is what one would have expected.

125. Mr Manzoni spent some time in cross-examination demonstrating that not only had Mr Lehman established a competing business, but he had gone about it in a way calculated to direct prospective clients of LehmanBrown to firms controlled by him. I say “firms” because Mr Lehman used various different firms to offer accounting services overtime: Lehman & Co., Lehman Tax and Accounting and LehmanBowen. His modus operandi included using the same meta names and metatags for the LehmanBowen site (LehmanBowen being a name obviously calculated to sound like LehmanBrown) as appeared on the Company’s site and giving the LehmanBowen site the address lehmanBrown.biz. The Company’s web address is LehmanBrown.com. The links on the LLX web site, which are described as to the Company were, in fact, to LehmanBowen.

126. These acts were highly, and very obviously, prejudicial to Effiscient’s interest in the Company.”

49.  Mr Manzoni submitted that the judge had found in para 124 there was an agreement between Mr Lehman and Mr Brown personally that the two would not compete with each other once the Company was set up.  The Company cannot recover damages in respect of breach of that agreement. I would have no quarrel with this.

50.  Mr Manzoni further submitted that Mr Lehman had refused to accept he owed fiduciary duties to the Company and the judge did not make any finding on this. I do not agree with this.

51.  On a fair reading of the above extract, I am satisfied that the judge had found in favour of Effiscient in respect of both arguments it advanced in para 122, namely, that the establishment of a competing accountancy firm was inconsistent with Mr Lehman’s fiduciary duties as a director of the Company; and that it was inconsistent with his agreement with Mr Brown that neither would compete with the other once the Company was set up[36].  In para 123, the judge held the fact that Mr Lehman has “blown hot and cold about his status as a director” “does not seem … to make any difference”, as Million Strong, which was nominated a director of the Company by Mr and Mrs Lehman, was for these purposes Mr Lehman’s alter ego.  The judge found that Mr Lehman “manifestly did” act “in a way inconsistent with a director’s fiduciary duties”.  In para 124, the judge “also” accepted Mr Brown’s evidence on the agreement not to compete.

52.  Further support for the above reading can be found in these exchanges the judge had with counsel during the closing submissions:

“Mr Manzoni: What we say is, one, Mr Lehman in fact wasn’t a director; as a matter of fact he was quite clearly the person behind the director.

Court: Yes.

Mr Manzoni: And we accorded him the courtesies as if he were a director …

Court: A director, yes,

Mr Manzoni: … to that extent, save that what we didn’t do, we wouldn’t accept that he was in fact a shadow director …

Court: Yes, but for all …

Mr Manzoni: … although to some extent it could in our interests to do so because he then owes fiduciary duties but …

Court: Yes. But for all practical purposes he was treated as if he was a director.

Mr Manzoni: Yes, I think that’s right.” [37]

“Mr Allman-Brown: There’s no anti-competition term in the arrangement between Mr Lehman and Mr Brown. So where does it[38] come from? Where does this liability arise from? …

Court: Well, I suppose it depends on what I find, one, they agree, and whether or not I take the view that Mr Lehman was a director. Obviously if it wasn’t agreed there should be no competition and he wasn’t a director then I suppose it might be a little difficult to find a legal basis for hanging this particular claim on.”[39]

“Mr Allman-Brown: … I’d just like to remind your Lordship that you have said throughout that Mr Lehman was not a director …

Court: Well, he clearly wasn’t a de jure director. I don’t think there can be any argument about that.”[40]

53.  We were also taken to relevant parts of the evidence of Mr Lehman:

“Court: … The relevant complaint, Mr Lehman, is that effectively, you’re trying to compete with the company which is the subject of this case and you just told me you are, so that in a way disposes of that issue, I suppose.

A. Yes, I mean, things had broken down in such a way. I mean, there is no dispute that they set up a competing accounting firm in Hong Kong to siphon off money. We then set up a competing firm in the Mainland and we said we were LehmanBrown. Our understanding, my understanding of the shareholders’ agreement was I was indeed the director. I was indeed the 50% shareholder. That was Brown’s understanding and we’ll see it later when it comes out, but this trademark ownership …

Court: No, no, you weren’t a director.

A. Sorry?

Court: You weren’t a director. You, through a company, were a shareholder.

A. No, I understand, but I’m saying that was our shareholder agreement. That was what it was in my head. That’s why even when I, we sued for winding up, it was because I wasn’t paid my director’s fees, my director’s share, my director’s fees. I believed I was indeed a director. Brown, in turn, believed he was director. …”[41]

“Q. What you’re seeking to do is to divert business that might have gone to the company into your own competing accountancy firm.

A. No. It -- really not. I mean, I’m trying to make money in an accounting practice that I run. I can’t get money out of an accounting practice that I own 50 per cent of, and that I thought I was director of, and so I’m trying to get money for that company. I had to send referrals somewhere that I get for accounting business.”[42]

“Q. … So do you consider yourself to be a director of the business or not, Mr Lehman?

A. I do. This was the continuing, ongoing struggle that the original agreement was -- is that I was the director, Brown was the director, and we were both 50 per cent shareholders and this goes back and forth all …

Q. Yes.

A. You know, over the years.

Q. If that’s right, why did you set out in this e-mail that you were not a director, if your view is that you are, in fact, a director?

A. Because there’s a shadow director.

…

Court: So maybe it would be a good time to clarify this. When you use the term “shadow director”, what do you mean?

A. Okay, you know, the -- we run a corporate services practice here and handle it for a lot of different people. I mean, it’s -- the role is -- of the director is merely perfunctory. It’s to do whatever it is that we ask them to do, instruct them to do.

…

Court: You’re using the term “shadow director”. Now, what do you understand generally to be a shadow director?

A. The person who’s instructing the director.

Court: Why did you decide you did not want to be a director of the company?

A. You know, in the pre-2000, in the 9-11 world, I mean, it was just more advantageous to have nominee director, nominee shareholders, and that’s the way we had operated in the past. I mean, and that was just -- if people look in the corporate records and they’re not sure, you know, I mean, it’s something that’s available to you, to be able to not drag you into bad publicity or other kind of things when things happen, and …

…

Court: You see, that answer -- “avoid getting dragged into bad publicity” -- rather suggests you want to try and hide the fact that you’re a director. Now, is that effectively what you’re saying?

A. I think that when setting up a business that’s a competing business with a law firm and we’re trying to give some seriousness to a new business that’s being set up, and being involved in the practice of law on a day-to-day basis, I didn’t think it was prudent to have me listed in a corporate registry as a director, and that’s why we selected a nominee director. I mean, there’s nothing untoward about that. I mean, there’s nothing -- I mean, it’s just something we elected to do. It’s good corporate practices. I mean, it’s …

Court: Well, why is it good corporate practice?

A. Well, if you are indeed sued, then they have to go through a number of layers to be able to, you know, to be able to -- you ring-fence your liability.

…

Court: … Was one of the reasons you didn’t want to be named as a director that you wanted so far as possible to avoid it being suggested that you owed fiduciary duties to the company?

A. No. I mean, I was trying to give it as much credibility in the beginning, that it wasn’t just two guys, Russell Brown and Ed Lehman, that there was -- it was more substantial than that.”[43]

54.  Mr Manzoni reiterated his stance before us that Mr Lehman was not a shadow director as defined in section 2 of the Companies Ordinance in that by the statutory definition, this means “a person in accordance with whose directions or instructions the directors or a majority of the directors of the company are accustomed to act.”  As a matter of law, Mr Lehman was not a shadow director within the statutory definition as the other director, Mr Brown, was certainly not acting on his instructions, nor was there a majority of the directors accustomed to act on his instructions.  I do not think the judge had found in para 123 that Mr Lehman was a shadow director within the statutory definition.  What the judge said was that Mr Lehman “described himself as a ‘shadow director’”, having clarified with Mr Lehman in the course of his testimony what his understanding of this term was.

55.  Of the three kinds of directors – de jure, de facto and shadow directors – Mr Lehman was clearly not a de jure director or shadow director.  But there was sufficient evidence to find he was a de facto director, and that was how the judge saw it.  In his evidence, Mr Lehman said it was his understanding that according to the initial shareholders’ agreement, he was a director of the Company and he held the belief he was a director.  He explained that a nominee director was appointed to distance himself from liabilities he might otherwise be under.  The judge found that Million Strong was his nominee and for these purposes his alter ego.  As the judge had observed in the exchanges with counsel, “for all practical purposes [Mr Lehman] was treated as if he was a director”.  He was therefore a person who claims to act and purports to act as a director, although not validly appointed as such.

56.  Indeed, on the evidence accepted by the judge in para 125, it would be surprising, to say the least, if the Company were to have no claim for the loss it suffered in the various wrongful acts perpetrated by Mr Lehman and the firms controlled by him, in diverting business enquiries from the Company to the competing firms by using names calculated to sound like the Company’s, in giving links on the LLX website to the website of a competing firm by a confusingly similar name instead of to the Company’s website.  Quite apart from breach of fiduciary duties as a director, and leaving aside other allegations of Effiscient in the pleadings for which no findings were made by the judge (such as other acts of passing off the competing firms as the Company, making use of confidential information of the Company), it seems to me the Company may also have a claim based on the tort of unlawful means conspiracy in that there would appear to be deliberate interference with the Company’s interest by the unlawful means of passing off and breach of the agreement between Mr Lehman and Mr Brown not to compete with each other once the Company was set up.

57.  For the above reasons, I am of the view that the Company does have a claim to recover damages on the law and on the facts in respect of the Competing Firm Claim.  As in the Trademark Claim, there was no suggestion that the loss suffered by Effiscient on account of the unfairly prejudicial act in the Competing Firm Claim is separate and distinct from the loss of the Company.

58.  Mr Manzoni submitted that the judge had addressed damages in a way which avoids the risk of reflective loss.  He contended that it would have been possible to order Effiscient to pay a lower price in buying out Lehman Management’s share in the Company, so as to reflect some element of compensation for the unfairly prejudicial conduct that caused Effiscient’s share to be reduced in value.  But the judge adopted another approach and took the actual value of the Company as at the date the petition was presented, and then made an assessment of the effect of the unfairly prejudicial conduct on the value of the shares, and awarded that by way of damages, to be set off against the purchase price.  I do not think this argument would overcome the difficulty that the award of damages was made without jurisdiction in the first place.

59.  I hold that the court has no jurisdiction to award damages to Effiscient in respect of the Competing Firm Claim and the award of the judge for this claim must be set aside on this basis.

60.  As I have upheld the objection on reflective loss, it is not strictly necessary to consider the other objection raised by Mr Barlow, namely that it was wrong to order Lehman Management to pay damages to Effiscient for acts of unfair prejudice committed by Mr Lehman.  In view of the arguments made to us, I propose to deal with this succinctly.  This was again a point not taken below. In the judgment[44], the judge awarded damages to Effiscient for the loss suffered as a result of the unfairly prejudicial acts of Mr Lehman.  In the Order, Lehman Management was ordered to pay damages to Effiscient as a result of the unfairly prejudicial conduct of Lehman Management and/or Lehman Management’s authorised representative being Mr Lehman and/or Lehman Management’s beneficial owner being Mrs Lehman.  What the judge said in the judgment may be just a shorthand way of what was expressed fully in the Order.  In any event, it was Mr Lehman’s evidence that he saw himself as a shareholder of the Company and Lehman Management was merely a nominee[45].  The judge found that Mr Lehman exercised de facto control over the affairs of Lehman Management in so far as they concerned the Company[46].  As Mr Lehman had said, in diverting business that might have gone to the Company to his own competing firm, it was because “[he is] trying to make money in an accounting practice that [he runs].  [He] can’t get money out of an accounting practice that [he owns] 50 per cent of, and that [he] thought [he] was director of, and so [he’s] trying to get money for that company.”[47]

61.  I am inclined to agree with Mr Manzoni that the court was entitled to look at all of the conduct of Lehman Management’s authorised representative and its beneficial owner in the affairs of the Company in considering whether unfair prejudice was caused to Effiscient and order Lehman Management to pay damages where unfair prejudice was established, and that the court would not be constrained in the exercise of its powers under this jurisdiction by the use of a nominee entity.  In deciding that in the circumstances, Lehman Management should be held responsible for the acts of Mr Lehman, the court was not disregarding the separate legal entity of Lehman Management, nor would it be necessary to pierce its corporate veil for this purpose, as suggested by Mr Barlow.

The set-off argument

62.  Attack was made to para 11 of the Order which allowed Effiscient to set off against the purchase price for Lehman Management’s share in the Company (a) the damages for unfairly prejudicial conduct in para 6; (b) any damages and costs due to Effiscient in the defamation action against Mr Lehman; and (c) any costs due to Effiscient in these proceedings.  As I have come to the view the award of damages in para 6 should be set aside, it follows that item (a) should be set aside.  I see no basis to set aside item (c) and Mr Barlow had not advanced any substantive reason for doing so.  That leaves item (b), which is yet another new point not taken below.

63.  The defamation action was brought by Mr Brown, Mrs Brown and Effiscient against Mr Lehman. Lehman Management is not a party to that action.  Mr Barlow submitted damages in that action awarded to Effiscient against Mr Lehman cannot be set off against the purchase price due from Effiscient to Lehman Management for lack of mutuality, in that the two debts or demands were not between the same parties, citing Re Finbo Engineering Co Ltd [1998] 2 HKC 480 at 487A to D.

64.  This is a valid objection.  Mr Manzoni cited R & H Electrical Ltd & Anr v Haden Bill Electrical Ltd & Ors [1995] BCC 958 at 968C to H in support of his proposition that in the context of a section 168A petition, the court is entitled to take a broad view of what can be seen as the interests of a member for the purpose of assessing whether his interests have been unfairly prejudiced and would have less regard to separate legal personalities.  That case was not concerned with any question of set-off.  I do not think it would provide support for Mr Manzoni’s contention a set-off could be ordered here despite the lack of mutuality.

65.  I would set aside para 11(b) of the Order as it was made in excess of the jurisdiction of the court.

Various aspects of the judge’s handling of the proceedings

66.  Mr Barlow raised a number of complaints of the judge’s handling of the trial on remedies.

67.  He contended that the judge had delegated the assessment of damages to the court appointed valuer, Mr Yeo.  There is nothing in this complaint.  By para 7 of the Order, the judge appointed a valuer to report to the court his opinion of the level of damages suffered by Effiscient as a result of the unfairly prejudicial conduct set out in para 6.  There was no delegation as contended by counsel, as the judge had reserved to himself the right to decide on the appropriate level of damages, having regard to all the evidence adduced before the court.

68.  Mr Barlow challenged the admission of Mr Yeo’s evidence for non-compliance with Order 38 of the Rules of the High Court in that Mr Yeo did not give a statement of truth in his report, nor had he made a declaration that his report complied with the expert witness Code of Conduct.  Mr Barlow accepted these omissions might be corrected by Mr Yeo when he went into the witness box[48].  And Mr Yeo did provide a declaration of expert on the first day of the remedies trial.  This challenge was rightly dismissed by the judge.

69.  Mr Barlow complained that the judge had refused to admit the evidence of Lehman Management’s expert, Mr Lees.  This was a case management decision the judge was fully entitled to make in the exercise of his discretion.  The judge had explained his reasons for this in the Remedies Judgment[49].  At the case management conference on 19 June 2012, the judge had given comprehensive directions for the further conduct of the remedies trial commencing on 25 September 2012 on the acceptance of former counsel for Lehman Management that he would not seek leave to call expert evidence.  It was only after Lehman Management changed counsel for the remedies trial that it issued a summons on 14 September returnable on 19 September seeking leave to file expert evidence but without adducing a comprehensive report from the expert it intended to rely on.  The report of Mr Lees was not provided to Effiscient until the late afternoon the day before the remedies trial.  There could hardly be any justification for Lehman Management to complain that its late application to adduce the report was refused by the judge.  As the judge had said, the different view taken by Mr Barlow on the need to call expert evidence was not a reason to allow the remedies trial to be derailed.

70.  A further complaint of Mr Barlow was that the judge had allowed Effiscient to resile from the valuation of the Company’s business by Mr Blade, whose report Effiscient had tendered in the defamation action.  An issue in that action is the diminution in the value of Effiscient’s shareholding in the Company as a result of Mr Lehman’s defamatory statements.  Mr Blade produced an expert report addressing that issue and he valued the Company as at 11 September 2010 at between US$11.4 million and US$15.2 million.  In contrast, Mr Yeo valued the Company as at 17 September 2010 and his valuation was US$2.8 million.  Mr Barlow argued it was unconscionable and inequitable to allow Effiscient to resile from its own expert’s valuation of the share value.

71.  I agree with Mr Manzoni that this complaint is misplaced.  The judge had dealt with this in the Remedies Judgment[50].  The valuation Mr Barlow referred to was Mr Blade’s assessment of the value of the Company on the assumption that its business had not been damaged by the defamatory statements and projections as to future income were considered.  Hence, inevitably the valuation in those circumstances is likely to be higher.  Mr Blade had also assessed the Company in its actual state at US$5.4 million, so the difference between his valuation of the Company damaged by the defamatory statements and Mr Yeo’s valuation is not as stark as suggested by counsel.  The judge had not refused to exercise his jurisdiction under section 168A in an equitable manner.  His approach was to consider Mr Yeo’s evidence on its merits.  I do not think that can be faulted. There is nothing in the contention that the judge was wrong to disregard the valuation of Mr Blade.

The assessment of damages

72.  Mr Barlow argued that the assessment of damages should be set aside and be replaced with an award of nominal damages because Effiscient had not discharged its onus of proving any loss or damage.  He also contended the judge had reversed the burden of proof by drawing inferences from certain failures of Lehman Management to suggest the contrary.

73.  It is not strictly necessary to address these arguments, as I have come to the view that the award of damages in the Order should be set aside.  I propose to deal with them by simply expressing my concurrence with the judge[51].  As a matter of practicality, Effiscient cannot identify with precision what damage flowed from which particular act complained of.  It had adduced all the evidence available to it relating to the decline in profits between 2008 and 2010.  The judge was satisfied some substantial loss had been incurred, and did the best he could to assess damages on the available evidence.  At no stage did he reverse the burden of proof as suggested by Mr Barlow.

The Valuation Distortion argument

74.  This was an argument Mr Barlow raised before the judge, but it was rejected.  His argument ran as follows.

75.  Mr Yeo set out the three traditional valuation methodologies in his valuation report – the income approach, the market approach and the asset-based approach.  He stated[52] that he had utilised only the market approach and the asset-based approach due to the following specific instructions in para 5 of the Order:

“To value the shares in the Company on the basis of the fair market value of the business as at the Valuation Date, but not having regard to the extent to which the Cross-Petitioner may expand and grow the business after the valuation date without the involvement or interference of the Petitioner and/or by Mr Edward Lehman the Petitioner’s Authorized Representative (“Petitioner’s Authorized Representative”) and/or by the Petitioner’s Beneficial Owner, Ms Karolina Lehman (“Petitioner’s Beneficial Owner”).”

76.  Mr Barlow submitted that the latter part of para 5, commencing with the words “but not having regard to”, is a distortion of the valuation principles.  Mr Yeo was constrained by its terms not to use the income approach and was prevented from valuing the Company’s business as a going concern with the valuation including the value of its future trading prospects.  This was contrary to principle that the choice of an appropriate basis of valuation must be fair to both parties, and that adopting the break up or liquidation basis of valuation on the net asset approach where the purchaser intends to continue to carry on the business of the company as a going concern would give a windfall to the purchaser at the expense of the seller (CVC v Demarco Almeida [2002] 2 BCLC 108 at paras [37] and [38]).

77.  Mr Yeo had explained further his understanding of para 5 of the Order in these parts of his evidence:

“Court: The order that was made, as I understand it, provided for a fair market valuation at the date of the petition but not taking into account any further growth in the company. So you value the company on the basis that it – this is my understanding of it. We will see what Mr Yeo understands it to mean – that the value at a particular date on the basis it doesn’t grow, it basically continues much as it is. Now, was that how you understood it, Mr Yeo?

A. That is correct, your Honour. My scope was to value the company at a particular date. It did not mean that it wasn’t going to continue as a going concern, that it wasn’t going to make profits. As at that point of date, that was my scope and that was what I did.

…

Q. So Mr Yeo, the informed third party buyer, who would buy it if it was a company that could not grow beyond the valuation date?

A. But that’s not what the valuation is saying. I used the market approach, which implies there is a prospect for the company … without relying on specific profit forecast of the company, so it’s a different approach.

Q. Consider your definition of fair market value, why would any informed buyer buy a company that was incapable of growing from its lowest profitability achieved in 2010?

A. Sorry, counsel, I don’t understand you. My job was to value the company at a certain date and, it’s on the basis of a going concern, and I have already explained the market approach does take into account future profitability of the company.

…

A. I’m not saying it’s not going to grow. I’m saying I’m just disregarding a specific forecast.

Court: He did not say that the person who purchases it can’t grow it. Mr Barlow.

Mr Barlow: Yes, but my Lord, it’s that hypothetical purchaser that is the reference point.

Court: Yes, but it’s not excluding what he does. So what I think Mr Yeo is saying is that somebody thinks it’s worth paying a particular price for this company because they think they can then do something with it, which justifies the payment of that price. I don’t have any difficulty understanding that. Now, it may well be that the price ends up being lower than it might otherwise have been if Mr Yeo had valued it without the qualification that was included, but that’s a different issue isn’t it, the fact that the qualification was included?”[53]

78.  In the light of this evidence, the judge rejected Mr Barlow’s suggestion that Mr Yeo had misunderstood the Order and had not approached his task correctly.  He explained his reasoning as follows in the Remedies Judgment[54]:

“21. … The qualification to paragraph 5 excluded any growth prospects attributable to the owners of Effiscient’s prospective contribution to its growth. It did not exclude any other matter which suggested there might be growth in business and which a valuer might think it appropriate to take into account. Mr Yeo in cross-examination stated that this was his understanding of paragraph 5. Mr Barlow SC did not suggest anything in this regard that should have been taken into account, but had not been. Indeed the criticism itself contains within it a misunderstanding of the valuation methodology that Mr Yeo had adopted, which by its nature includes what the market perceives as being the growth prospects of the relevant business. This takes me to the next of [Lehman Management’s] criticisms of the report, namely, the use of a P/E ratio and an asset value approach, rather than an income approach to valuation.

22. As Mr Yeo had explained in his Report there are various methods of approaching the valuation of any company. In the present case he used a market approach with the asset based approach as a cross-check and they produced consistent results. The former requires the valuer to identify a company or companies comparable to the company to be valued for which P/E ratios are available. Generally, such information is only available in respect of publicly listed companies. The P/E ratio is then applied to the earnings of the subject company to arrive at a valuation.

23. The Company is a private company carrying on an accounting business. Mr Barlow SC criticised the use of the market approach as the companies Mr Yeo had used, which are identified in Appendix VI to his Report, are publicly listed companies who are conducting larger businesses in different parts of the World to the Company. I accept that this inevitably impacts on the reliability of the methodology and that it may be that it is arguable that an income approach would be more reliable. However, in order to determine this it would be necessary to have an alternative valuation using the income method and then to consider whether the variables used in the income method valuation introduced a greater or lesser degree of imprecision than the market approach. Of course I do not have an alternative valuation and as the market approach is, as I understand it, used for valuing private companies on occasions I cannot see any reason for concluding that Mr Yeo’s valuation is, by virtue of the methodologies used, so unreliable that the Court should not accept it.”

79.  I agree with the judge that Mr Barlow had misunderstood the methodology used by Mr Yeo when he asserted that Mr Yeo did not value the Company on the basis of a going concern.  As Mr Yeo had explained, in adopting the market approach he did take into account the future profitability of the Company, as it is implicit in the market approach that there is a growth prospect for the company.  What Mr Yeo did not do was to rely on specific profit forecast for the Company.  As for the qualification in para 5 of the Order, this had only excluded the growth prospects attributable to the efforts of Mr Brown after he has taken over the business from Mr Lehman and is free from the latter’s interference, thereby relieving Effiscient from having to pay a premium for that growth factor.  That qualification did not exclude any other matter which a valuer should take into consideration to arrive at a fair valuation and has not contravened any principle that the choice of an appropriate basis of valuation must be fair to both parties.

80.  The judge has given cogent reasons why in the circumstances Mr Yeo’s valuation methodology should be accepted. I see no basis to find fault with his reasoning.

Other attacks on the valuation

81.  Mr Barlow made two further attacks on the valuation, one was dealt with by the judge and the other was not.

82.  The criticism dealt with by the judge relates to the calculation of EBITDA contained in Appendix IV to Mr Yeo’s report.  Mr Yeo calculated this by reference to figures in the audited financial statement of the Company for the 2010 financial year, which was the financial year within which the valuation date fell.  Mr Barlow criticised this as unfairly selecting the isolated result of one year only, instead of taking the three to five year average.  Furthermore, selecting the result of the 2010 financial year had produced an artificially low EBITDA, as the financial results for that year were very poor.

83.  The judge rejected the above criticism for the following reasons[55]:

“24. … Mr Barlow SC suggested to Mr Yeo that he should have taken an average of the last 3 or 5 years figures, which would have produced a higher EBITDA and thus a higher valuation. Mr Yeo did not accept this criticism. He said that the P/E ratios he included in Appendix VI to his Report were calculated by reference to the EBITDA for the financial year 2010 and that consistency required the EBITDA of the Company to be calculated on the same basis, which I accept as a matter of methodology is logical. I accept, however, that a fair valuation may in some cases require some adjustments to the figure for earnings to be used to calculate EBITDA for the company to be valued, because the market approach assumes that the P/E ratio is applied to maintainable earnings and it may be that the figures for one particular year are anomalous. Mr Barlow SC’s criticism amounts to saying that this is so in the present case. However, he had not demonstrated why that is the case.

25. The financial statements record a steady decline in profit from 2008 to 2010. Anybody thinking of purchasing the Company would be concerned by this and without a sensible explanation for this deterioration would be highly unlikely to accept a valuation based on an average of the EBITDA, as Mr Barlow SC proposes, for the previous 3 or 5 years. Lehman has not suggested any reason why the Company’s income dropped so significantly and why the income for 2010 should not be assumed to be its maintainable income. If it wanted to argue that the figures for 2010 were anomalous it should have filed some evidence to demonstrate this as my directions[56] gave it the opportunity to do. The only explanation for the deterioration in earnings that has been advanced was the evidence at the trial on liability which demonstrated that it was Mr Lehman’s conscious attempts to damage the reputation of Mr Brown, disrupt the Company’s activities, compete with it and infringe its trademarks that were the cause of the decline in earnings. This necessarily would have damaged the value of the Company.

26. I can see no reason why Mr Yeo should have assumed that the decline in income did not reflect a decline in the business of the Company and thus a decline in its value.  Similarly I can see no reason why, in the absence of an explanation from [Lehman Management] for the declining earnings and profitability, the Court should, as Mr Barlow SC invited me to do, adjust Mr Yeo’s calculation by averaging the EBITDA over a number of years and treating the Company as being worth more than the figures for 2010 suggest it is worth.”

84.  I agree entirely with the judge’s reasoning.

85.  The other criticism raised by Mr Barlow, which was not addressed in the Remedies Judgment, relates to three companies in Hong Kong and the Mainland controlled by the Company (“the three CPAs”) in which the Company does not have any equity ownership.  The three CPAs were included in the consolidated management accounts for the LehmanBrown group of companies for the financial years 2008 to 2010 but not in the audited consolidated financial statements of the Company, which comprised just the results of the Company and a wholly foreign owned enterprise in the Mainland (“the WFOE”).  Mr Yeo decided not to include the three CPAs in his valuation of the Company, as there was no documentary evidence that Lehman Management’s interest in the Company extended to other entities apart from the WFOE[57].  Mr Barlow submitted this was wrong as the earnings of the three CPAs had all accrued to the Company.  Further, this was inconsistent with the methodology adopted by Mr Yeo in his damages assessment, which was based on the financial results of the Company including the three CPAs for 2008 to 2010.

86.  There is nothing in this criticism.  The three CPAs were excluded in Mr Yeo’s valuation because there was no legal relationship between them and the Company[58].  More importantly, it would have made no difference to the valuation even if they were included.  The financial relationship between the three CPAs and the Company was explained in full in a letter of the Company to Mr Yeo dated 25 September 2012 and in Mr Yeo’s evidence in chief[59].  I am satisfied that the consolidation of the three CPAs would not make any material difference to the valuation of the Company’s shares.  In fact, as Mr Yeo had explained, if the results of the three CPAs were consolidated with the Company and the WFOE, this would give a lower valuation than the valuation he had arrived at relying on just the audited consolidated financial statements of the Company and the WFOE.

The payment order arguments

87.  These arguments were directed at paras 12 and 13 of the Order.  Mr Barlow contended it was wrong not to require Effiscient to pay the purchase price forthwith contemporaneously with the share transfer and instead allow payment by instalments over three years.  Further, it was inappropriate to order Lehman Management, as the unpaid vendor compelled to sell its share in the Company, to provide to Effiscient within five days of the Order an irrevocable proxy (not revocable save with the leave of the court) in respect of the voting rights attached to the share.

88.  The judge made these orders in the exercise of discretion.  For the appeal court to intervene, it must be established that he had erred in fact or in law or in disregard of principle, or had taken into account irrelevant matters, or had failed to take into account relevant matters, or was plainly wrong.  Lehman Management has not established any of the above.  There is no basis to intervene.

89.  We would mention one matter regarding the mechanism of payment by instalments in para 12.  Owing to para 11 of the Order which provides for setting off of three items, it might not be apparent at the time of the liability trial or even the remedies trial if any amount would be due to Lehman Management on the purchase price after all the items were set off.  In view of what was said in the earlier parts of this judgment, and as two very substantial items for setting off in paras 11(a) and (b) are to be set aside, what remains to be set off against the purchase price of US$1.4 million is the costs due to Effiscient as a result of the petition proceedings.  It is likely that there would be an amount due to Lehman Management.  Under para 12 of the Order, the quarterly instalment payments, which were to commence from 30 April 2012, would not take effect until the amount to be set off has been finally determined or agreed, and after accounting for the fees of the court expert provided for in para 9 of the Order.  As taxation of the costs and the fees of the court expert would take time, Lehman Management may wish to seek interim payment under the provision of liberty to apply in para 14 of the Order.

Interest on the purchase price

90.  The former counsel of Lehman Management did not seek interest at the liability trial.  Mr Barlow did so at the remedies trial but no interest was ordered by the judge, nor was this dealt with in the Remedies Judgment.  He cited Re Golden Bright Ltd [2007] 1 HKC 89 at paras 36 to 39 and contended that interest on the purchase price should be awarded and that it should run from the valuation date (17 September 2010) until the date of the Liability Judgment (15 November 2011) at 1% above the HSBC prime rate prevailing during this period.  He also sought interest thereafter at the judgment rate until the date of payment.  The interest sought by Mr Barlow may be divided into two parts.

91.  It is important to note that the first part of the interest sought as supported by the case he cited was not awarded qua interest.  As explained by Le Pichon J (as she then was) in Re Tai Lap Investment Co Ltd [1999] 1 HKLRD 384 at 402J to 403A, this interest factor was used “as a proxy to measure the increment in the value of the petitioner’s investment in the company appropriate to reflect the fact that the respondent’s interests had the use of the petitioner’s investment since the date of the petition, that being the valuation date.”  This followed from a quotation from the judgment of the trial judge Von Doussa J in Dynasty Party Ltd & Ors v Coombs, cited with approval by the Federal Court of Australia in (1996) 138 ALR 64 at 85, which read as follows:

“To arrive at a fair value to be paid now by valuing the shareholding at some date in the past and by adding to that value an allowance for the fact that the shareholder has been kept out of the enjoyment of that value in the meantime, to borrow the words of Lord Denning[60], is to give to the oppressed shareholder what is in effect money compensation for the injury done to [the shareholder]: but I see no objection to this. The section gives a large discretion to the court and it is well exercised in making an oppressor make compensation to those who have suffered at his hands.”

92.  To the same effect was the observation of Thomas J in Rankine v Rankine (1995) 18 ACSR 725 at 730, that the interest factor was allowed in Coombs as the value of the applicant’s shareholding to arrive at a fair price at which his shares should now be purchased.  And the purpose in doing so was to give monetary compensation for the injury done to the oppressed minority shareholder for not participating in the benefits enjoyed by the majority in the company as a consequence of the oppression (Dynasty Party Ltd & Ors v Coombs, at 86).

93.  Thus understood, on the findings of the judge in the petition and the cross-petition, I am unable to see any justification for allowing an interest factor on the purchase price in the present case to give compensation to Lehman Management for any injury done to it for not participating in the benefits of the Company when it was excluded after the presentation of its petition, which was dismissed.

94.  In holding that an order for the equivalent of interest on the purchase price payable is not beyond the powers of the court under the equivalent to our section 168A, Robert Walker LJ (as he then was) said in Profinance Trust v Gladstone [2002] 1 BCLC 141 at para [32] that it is “a power which should be exercised with great caution”, and “if a petitioner seeking an order for the purchase of his shares contends (either as his only claim or in the alternative) that they should be valued at a relatively early date but then augmented by the equivalent of interest, he must put forward that claim clearly and persuade the court by evidence that it is the only way, or the best way, to a fair result”.  It should not be made as “a last-minute afterthought”.  Attention was drawn to these words in Re Golden Bright Ltd at para 44.

95.  Here, the judge had ordered the company to be valued at a relatively early date, namely, the date of the presentation of the petition, not when the buy-out order was made when the purchase price would be payable.  To claim interest on the purchase price from a date prior to the buy-out order, it is incumbent on Lehman Management to make out a proper basis for this, such as compensation for injury of the kind considered in Re Tai Lap Investment Co Ltd and the Australian cases referred to.  No proper basis was put forward by Mr Barlow for the exercise of discretion to award interest on the purchase price from the date of the petition to the Liability Judgment.  I would decline to award interest in this respect.

96.  The second part of the interest sought on the purchase price is from the date of the Liability Judgment until payment at the judgment rate.  This is a claim for interest on the judgment debt.  I see no reason not to award interest on the usual basis, save that the amount on which interest is payable should not be the entire purchase price but the net sum payable to Lehman Management after the costs are to be set off.

Conclusion and costs

97.  I would allow the appeal of Lehman Management to a limited extent in that I would set aside paras 6, 7, 11(a) and (b) of the Order, and the assessment of damages made by the judge in the Remedies Judgment.  I would award interest to Lehman Management on the net sum payable on the purchase price of its share after setting off the costs due to Effiscient as a result of the proceedings in HCCW 377/2010 and HCCW 383/2010, at the prevailing judgment rate from the date of the Liability Judgment until payment. The costs due to Effiscient in HCCW 377/2010 and HCCW 383/2010 to be set off would include interest at the prevailing judgment rate, to run from the date when the costs were awarded, namely the date of the Liability Judgment and the date of the Remedies Judgment.

98.  The setting aside of the award of damages would have consequence on the costs below in two respects.  Firstly, in para 9 of the Order, the judge ordered that the fees of the court expert are to be borne equally by Lehman Management and Effiscient.  The court expert carried out the valuation of the Company and reported to the court his opinion of the level of damages suffered by Effiscient as a result of the unfairly prejudicial acts.  The latter part of the work undertaken by Mr Yeo could be regarded as wasted.  Secondly, the order as to costs of the remedies trial in Effiscient’s favour may also need to be revisited as part of the proceedings was concerned with the assessment of damages which is now set aside.

99.  As we have not heard submissions on these matters, I think it best to direct the parties to provide written submissions on them after the handing down of this judgment for these aspects of costs in para 98 to be dealt with on paper, as well as the costs of this appeal.  I would direct Lehman Management to provide submissions within 14 days of this judgment and Effiscient to do so within 14 days thereafter.

Hon Chu JA:

100.  I agree with the judgment of Kwan JA and the orders proposed.

Hon Barma JA:

101.  I agree with the judgment of Kwan JA.