DEACON TE-KEN CHIU v. RONALD LI-KAI CHU AND OTHERS

cacv 118/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 118 of 2006

(on appeal from HCMP NO. 1071 of 1990)

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REASONS FOR JUDGMENT

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Hon Rogers Acting CJHC:

1.  This was an appeal from a judgment of Yam J given on 28 February 2006.  At the conclusion of the hearing of this appeal, this appeal was dismissed with reasons to be given in writing which we now do.

Background

2.  This matter arose in the course of working out a settlement which had been reached in a shareholders’ dispute.  The petitioner owned 48% of the company concerned and the first respondent also owned 48%; the remaining two respondents each held of 1% of the company.  The proceedings had been commenced in 1990 and in 1993 there was an agreement by way of a Tomlin order (“the order”).  The effect of that order was that the petitioner would sell his 48% shareholdings to the respondents at a valuation which would be made.  Paragraph 1 of the schedule to the order provided that a firm of accountants would be at appointed:

“…to make and present in writing in the form of a report so soon as may be practicable a speaking independent valuation (‘the Valuation’) of the fair value of the Petitioner’s shares (‘the Shares’) in Fan Ling Theatre Ltd (‘the Company’).  Such a valuation shall be the current market value.”

3.  As might be imagined, the effective asset of the company was a cinema theatre in Fanling.  Under paragraph 1 of the schedule to the order the terms of instructions to the accountants were set out and it is of particular note that it is stated:

“Valuation, be at liberty to take into account: --

(i)   the value of the land (including its redevelopment value) and other assets owned by the Company; and

(ii)  the value of the Company as a going concern.”

4.  Further down it is provided that:

“(d) That, in the event of the independent accountants requiring, for the purpose of the Valuation, to take into account the value of the land owned by the Company, the parties shall forthwith give joint instructions to (the name of company deleted as the company named in the order was not instructed) or such other firm of independent and professionally qualified surveyors as the parties may agree to appoint to make and present in writing in the form of a report a speaking independent valuation of the current fair market value of such land as aforesaid (‘the Land Valuation’).”

5.  Paragraphs 3 and 4 of the schedule set out that the parties are to be at liberty to raise objections to the valuation or any part or parts thereof and that they could do so by taking out an inter partes summons returnable before a judge of the High Court for the purpose of determining the validity of such objection.

6.  Quite simply, the valuation of the cinema premises was made by a firm of chartered surveyors (“the chartered surveyors”).  The valuation that was put on the premises, which was said to be at open market value, was $3 million for a site area which was 6780 ft.².  That gave a figure of something in the region of $442 per ft.².  In reaching that valuation the chartered surveyors referred to Special Condition 3 and 4 to which the premises were subject.  Special Condition 3 reads:

“The lot and the building erected thereon shall be used as and for the purposes of a Cinema or Theatre only; provided however, that part or parts of the ground floor of the building may be used as and for the purposes of such shop or shops as may, together with the type and nature of business to be conducted therein, be approved by the District Commissioner, New Territories.”

7.  The fact that the special condition 4 prevented the lot from being used for industrial purposes or having a factory building erected thereon would, seemingly in these circumstances, provide little, if any, further restriction.

8.  It suffices to say that the chartered surveyor’s valuation was on the basis of the value of the theatre as a going concern in its present state.  The photographs of the cinema demonstrate that it is by no means in modern and immaculate condition, perhaps, not surprisingly in view of the fact that it is now more than 40 years old.  Despite that it is located in an apparently central part of Fanling.

9.  The petitioner took immediate exception to this valuation because it was said that it had not taken into account the open market value.  Clearly redevelopment of the site was a possibility and the valuation of this site, at a level which was similar to that of agricultural land, was virtually absurd.

10.  When the matter first came before the judge he gave the respondents an opportunity to explain how the $3 million figure had been arrived at.  He directed that the chartered surveyors should come back with a calculation in detail as to how they reached that figure.  The chartered surveyor then used that opportunity to indicate that there might be “Hope Value (to be placed over and above the OMV of the Property)” which they estimated to be in the sum of $650,000 based on 1/10 of the redevelopment value of the commercial/residential development which they went on to say “(which is considered to be an appropriate sum in the Open Market)”.  In those circumstances the chartered surveyor appears to have used the opportunity to increase his valuation by that sum of $650,000.  That was not an exercise which the judge had asked the chartered surveyor to perform.

11.  The judge came to the conclusion that he could not accept the $3 million figure and he acceded to the petitioner’s request and ordered that the report which had been prepared by the chartered surveyors should not be regarded as the Land Valuation under the Schedule of the order.  He also ordered that a new valuation be conducted by a new valuer, to be agreed between the parties, or, in default to be appointed by the president of the Hong Kong International Arbitration Centre.  In reaching his judgment the judge said at paragraph 6:

“I do agree that the (chatered survyor) report has totally ignored the redevelopment value; although, because of the restriction, it is difficult to assess the redevelopment value.  But Hope Value is a reality which most surveyors adopted and, usually, it is between 10 to 20 per cent.  (The chatered survyor), apparently after the last hearing, they had adopted the lower figure of 10 per cent and added to it.  I think, all in all, I agree with Mr Lam that it is not appropriate to accept  (the chatered survyor)’s report partially and ask another valuer to develop from the figure of three million and just give an opinion of the Hope Value.

For the aforesaid reason, I do not accept that three million is an acceptable figure, even with their further explanation in the further report.  I therefore accede to the request of the petitioner and order in terms of the application with costs to the petitioner.”

12.  On this appeal an attempt was made to file further evidence in the form of a report by a further firm of valuers.  The respondents put before this court a report which had been made but with the figures scored over in ink.  This evidence was not permitted to be adduced.  Quite apart from the fact that it would not seem to comply with the well-known rules as to the admission of further evidence on appeal 2 matters require observation.  The first is that in putting forward this evidence Mr Mui, who appeared on behalf of the respondents, said, at the same time, that he did not accept part of the report.  In this respect, this court made it clear that either the report was put forward in full or not at all.  This court would not permit evidence to be adduced on appeal which was partially challenged by those putting it forward.  Secondly, and probably equally as important, the valuation figures contained in the report had, as already observed, been scored over.  In the files presented by the solicitors for the purpose of the court hearing it was impossible to read those figures.  But in the copy of the report exhibited to the affirmation those figures can be seen through the scoring.  They indicate a figure very much closer valuation to the figure of $11 million put forward by the valuer who had been instructed by the petitioner, whose valuation was so heavily criticised by the respondents.  It was wholly inappropriate to seek to put forward a copy of the valuation without the valuation figures.  It was all the more inappropriate to seek to delete the valuation figures in circumstances which could amount to very little short of giving the court a misleading impression by hiding relevant facts.

13.  Thereafter, Mr Mui did little more than try to rehearse the arguments which had already been ventilated in the court below and soundly rejected by the judge.  In my view, the matter is in a very short compass.  The valuation that had to be made was of the open market value.  The valuation which was performed was not that.  The valuation had, in effect, to put a value on the cinema premises in the condition in which it stood if it had been put on the open market.  To put it more descriptively, the figure that was required was an estimate of what a property developer or other person would be prepared to pay for the lot and not the amount of compensation which could be expected if there was to be a resumption of land by the Government.  The valuation that the judge said was to be rejected failed to consider the most important aspects and the judge rightly made the order.

Hon Burrell J:

14.  I agree.

Hon Chung J:

15.  I agree.