LEE NG LOUISE v. SILVER BELL UNIFORM LTD AND ANOTHER

HCCW478/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 478 OF 2008

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BETWEEN

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D E C I S I O N

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1.  On 9 March 2011 I handed down judgment after trial of this action. In paragraph 25 of the judgment I directed the following:

(1) The Petitioner shall file and serve its proposed terms of order within seven clear days of the date of handing down this judgment;

(2) The 1st Respondent shall file and serve any comments it has on the terms of the order within five clear days thereafter.

2.  The parties have been unable to agree the terms of the order and the matter has come back before me.  The following matters are in issue:

(a) The valuation date;

(b) whether interest on the price of the Petitioner’s shares should be awarded;

(c) whether there should be a discount reflecting the Petitioner’s minority interest in the company;

(d) whether there should be any discount for alleged breaches by the Petitioner of her duties as a director between about August 2008 and her resignation in June 2009;

(e) the apportionment of the costs of the valuation.

Valuation Date

3.  The Petitioner submits that the valuation date should be the date of the petition, namely 13 October 2008.  The 2nd Respondent submits it should be the date of the order or the date of the valuation itself.

4.  It is now well established that whilst in practice valuation is commonly ordered at the date of the order or the valuation, the correct approach to determining at what date valuation should take place is to have regard to what is fair on the facts of the particular case: Profinance Trust SA v Gladstone [2002] 1 BCLC 141; Re London School of Electronics Ltd. [1986] Ch 211, in particular 224A-C.

5.  In my view, in this particular case the appropriate date for valuation is the date of the petition.  It follows from my judgment that the 2nd Respondent should have agreed to buy the Petitioner’s shares when it became clear she was not happy about the appointment of Mr David Shen as the new managing director and made it clear that she wished to sell her shares and leave the company.  This was by about 10 June 2008 at the latest and approximately four months before the petition was issued.

6.  It seems to me that the valuation should reflect the state of the business at about the time the Petitioner should have been able to exit the company.

Interest

7.  Mr Fong argues that the Petitioner should have interest from the date of the petition to compensate her for not having received payment for her shares when they should have been bought by the 2nd Respondent.  He says this is fair, not only because she has not received any dividends or salary since she left the company, but also to reflect the fact that she has not received or not had use of the sums she should have been paid if the 2nd Respondent had purchased the shares in the middle of 2008.

8.  Mr Remedios argues that the court should not make any order for interest in the present case.  He points out that the court does not have the power to award interest in such cases, either pursuant to its equitable jurisdiction or section 48 of the High Court Ordinance.  He accepts that the court may make an order for interest pursuant to section 168A itself but, he argues, the circumstances in which it will do so are limited.

9.  Mr Remedios referred me to the decision of the English Court of Appeal in Profinance Trust SA v Gladstone supra, and in particular, paragraphs 29 to 32 of the judgment of Robert Walker LJ, as he then was, which are as follows:

“29. We do not read that as stating the general proposition that the court never award the equivalent of pre-judgment interest under s 461(1), though Jacob J’s blunt comment, ‘And indeed he is entitled to and owner of the shares until the sale goes through’, gives a good reason why the court should normally be slow to make such an order. In our view Jacob J rightly saw the scope of his discretion as restricted by the order of Lloyd J, just as Nourse J in re Bird Precision Bellows had rightly seen his discretion as restricted by the consent order of Vinelott J. (We will come back to Miss Newman’s separate submission that the deputy judge’s discretion was similarly restricted by the parties’ agreement to limit the issues of this case.)

30. We have described the issue of quasi-interest as logically anterior to the exercise of discretion as to the choice of the valuation date. But in practice the two cannot be completely separated, because the circumstances in which it may be fair for the court to take an early valuation date (or in which it is simply not possible to take a more recent date) may also be highly relevant to the petitioner’s claim for the equivalent of interest. If (to take an extreme example) a majority shareholder had used his control to misappropriate a company’s staff, customers and goodwill so as to make the company’s shares virtually worthless by the time of the hearing, the only fair valuation date may be the date of presentation of the petition (and there will probably also be a notional adjustment to allow for the misappropriation, a course specifically approved, in relation to s 210 of the Companies Act 1948, by the House of Lords in Scottish Co-operative Wholesale Society Ltd v Meyer [1958] 3 All ER 66, [1959] AC 324, considered further below). But in the meantime the petitioner has (in an extreme case of that sort) been receiving no benefit of any sort from his membership of the company, either in the form of dividends, or in the form of director’s remuneration, or otherwise. He has been locked into an investment which has been made worthless as a result of the majority shareholder’s oppression. It would be different if he had been continuing to receive a stream of dividends and director’s remuneration and his complaint was limited to excessive remuneration and benefits enjoyed by the majority shareholder. In the latter case there would be obvious force in Jacob J’s observation that he should not be entitled to interest or the equivalent of interest so long as he owns the shares. But in a case of that sort there would probably be no good reason to select an early valuation date anyway.

31. In our judgment, the deputy judge was right in his view that an order for the equivalent of interest is not beyond the powers of the court under s 461(1). The court has repeatedly emphasised the width of the discretion conferred by that subsection, which is not limited to the particular powers enumerated in subs (2). The House of Lords has (in relation to the court’s closely comparable powers under s 210 of the Companies Act 1948) approved the making of adjustments in the valuation process which mean that the court is actually valuing shares, not as they are, but as they would have been if events had followed a different course; and that practice is regularly followed by the court in orders under s 461(1). In these circumstances a denial of the court’s power to award the equivalent of interest would come close to straining at a gnat.

32. It is however a power which should be exercised with great caution. Miss Newman has rightly drawn attention to the need for lawyers to be able to advise their clients as to the likely range of outcomes of s 459 proceedings, in order to encourage compromise in an area in which litigation can be cripplingly expensive. If a petitioner seeking an order for the purchase of his shares contends (either as his only claim or in the alternative) they that 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 a last-minute afterthought (as it may have been, to some extent, in Re Bird Precision Bellows and Re Planet Organic). Unless a petitioner is asking for no more than simple interest at a normal rate he should also put before the court evidence on which the court can decide what amount (if any) to allow. The exercise which the deputy judge undertook, as described in the last paragraph of his judgment, does not appear to have had a solid evidential basis.”

10.  In the present case, the petition does not put forward a particular date for valuation of the Petitioner’s shares or seek interest.  No evidence has been led addressing why a particular valuation date is appropriate and, in particular, why an early date for valuation, augmented by interest, is fair and appropriate.

11.  The claim for interest in the present case is literally an afterthought as Mr Fong acknowledged that it did not occur to him to advance such a claim until after he had filed his written submissions for this hearing.  I do not think it is appropriate in the present case to award interest.  I would add the following comment:  it is important that practitioners, when formulating claims under section 168A, or defences to such claims, give thought at the outset of the proceedings to questions such as valuation dates, interest, whether the valuation should be discounted to reflect a minority interest or any other matter that may be relevant to the valuation process.  It is, unfortunately, all too common for this not to happen and for the process of formulating the order for valuation and the valuation process itself be complicated by the failure to adduce relevant evidence.

Discount for Minority Interest

12.  Generally, if a minority member has been forced out of a company which is in the nature of a quasi-partnership by the unfairly prejudicial conduct of another member, no discount will be ordered to reflect his minority interest:  CVC/Opportunity Equity Partners Ltd and another v Demarco Almeida [2002] 2 BCLC 108; O’Neill v Phillips [1999] 1 WLR 1092; Re Bird Precision Bellows Ltd [1984] 3 All ER 444: Irvine v Irvine (No. 2) [2007] 1 BCLC 445.

13.  I have not found that the present case is one of quasi-partnership.  My principal finding was that it had been agreed at the time of the establishment of the company that if either shareholder wished to sell their shares, the other would buy them out.  It seems to me that in the present case there is no reason why the price to be paid by the 2nd Respondent should be any different to the price that it would have had to have paid had it agreed when first requested to buy the Petitioner’s shares.  In my view, this would have been the price of the Petitioner’s minority interest.  I will not, therefore, order that the Petitioner’s shares should be valued without a discount for minority interest.

Discount to reflect Petitioner’s alleged breach of duties as a director

14.  Mr Remedios argues that what he says were the Petitioner’s breaches of director’s fiduciary duties involving approaches to clients and employees, in the final quarter of 2008 and 2009 up to her resignation as a director, should be taken into account and an appropriate discount made to reflect their impact on the value of the company. I disagree.

15.  First, it was accepted during the trial by Mr Remedios that these allegations were not relevant to the matter I had to decide and, as a result, there was very little cross-examination of the witnesses in relation to them.  It is too late to resurrect these allegations now.  Secondly, it does not seem to me that they are, in any event, relevant.

16.  If the 2nd Respondent had done what it should have done and agreed to buy the Petitioner’s shares, she would have been able to resign as a director and an employee by the final quarter of 2008 and would have been free to compete with the company.  Insofar as her competing with the company from the final quarter of 2008 onward has impacted on the value of the company, it does not, therefore, seem to me to be relevant to the valuation of her shares.

Costs of valuation

17.  It seems to me appropriate in the present case that the costs of the valuation should be split equally.

Terms of the order

18.  I make the following order:

(1) The 2nd Respondent do purchase within 14 days of the date of valuation the 4,000 ordinary shares (out of 10,000 ordinary shares) for HK$1 each in the capital of Silver Bell Uniform Limited (“the Company”) presently registered in the name of the Petitioner, at a price to be fixed by such valuer (“the Valuer”) in a certified public accountant as may within 14 days from the date of this order be agreed upon by the Petitioner and the 2nd Respondent, or failing such agreement, as may be appointed by the President for the time being of the Hong Kong Institute of Certified Public Accountants, upon the application of either party with or without the consent of the other;

(2) The valuer be directed to value the Petitioner’s shares on the following basis:

(a) the price shall be the value of the shares determined by reference to the assets, profitability and future prospects of the company as at the date of the petition, being 13 October 2008;

(b) the Petitioner and the Respondents do provide to the valuer all books, accounts and documents of the company relevant to the valuation of the Petitioner’s shares within 14 days from the date of the appointment of the valuer and any other documents the valuer subsequently requests;

(c) the Petitioner and the 2nd Respondent shall have the right to make submissions to the valuer in such form as may be determined by the valuer.

(3) The cost of the valuer’s valuation shall be borne equally by the Petitioner and the 2nd Respondent.

(4) In the event of the 2nd Respondent failing to complete the purchase within the time above specified, the company shall be wound up.

(5) The 2nd Respondent shall pay the costs of the Petitioner and of the 1st Respondent, including all costs reserved, such costs to be taxed if not agreed on a party-to-party basis.

(Submissions by counsel re stay application)

19.  I will include in the order general liberty to apply.