LEHMAN & CO MANAGEMENT LTD v. EFFISCIENT LTD AND ANOTHER

HCCW377/2010

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

HCCW383/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 383 of 2010

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JUDGMENT ON QUANTUM

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Introduction

1.  On 15 November 2011 I handed down judgment in this matter dismissing the Petitioner’s, Lehman & Co Management Limited (“Lehman”), petition and allowing the Cross-Petitioner’s, Effiscient Limited (“Effiscient”), cross-petition on terms the relevant parts of which are as follows:

“3. The Petitioner shall sell its one share in LehmanBrown Limited (“Company”) (representing a 50% shareholding in the Company) to the Cross-Petitioner at a price to be determined by this court (“the Purchase Price”), absent any agreement between the Parties.

4. The Court shall within 21 days of this Order appoint a Hong Kong qualified accountant (“Court Expert”) to prepare a report upon the value of the Petitioner’s share in the Company (“Expert Valuation Report”).

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.

8. The Court Expert shall deliver the Expert Valuation Report to the Court within 3 months of the date of this Order or such other date as the Court shall order.

….

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.”

2.  Pursuant to the order the Parties nominated their preferred Court appointed expert.  On 5 December 2012 I appointed Mr Kenneth Yeo of BDO Financial Services Limited (“BDO”) as the Court appointed expert.  On 20 December 2011 Mr Yeo wrote to the Parties on his Firm’s letter heading summarising the basis on which he understood BDO were to be engaged as the Court appointed expert.  Amongst other things the letter dealt with fees and asked both Parties to sign the letter agreeing to the terms contained in it.  Howse William Bowers signed the letter of engagement on behalf of the Effiscient without comment on 24 January 2012. 

3.  Between 27 December 2011 and 8 February 2012 BDO sent six emails either directly to Miller Peart, Lehman’s solicitors, or copied to them seeking information to assist them in the preparation of the report.  They also made three unsuccessful telephone calls to John Fisher of Miller Peart.  Miller Peart finally replied on 17 February 2012.  Their letter provided no useful information.  Instead it requested an opportunity to meet and suggested that Mr Yeo seek an extension of time for completion of his Report.

4.  A meeting was arranged for 22 February 2012.  On the date of the meeting Miller Peart sent another letter pointing out correctly that the letter of engagement assumed wrongly that the expert was BDO and commented, in my view correctly, that it was for the Court to determine what fees the expert was to be paid.  Following the meeting Mr Yeo wrote to Miller Peart on 24 February and, it appears from the terms of the letter, probably before he received Miller Peart’s letter of 22 February.  Mr Yeo’s letter deals with various matters.  It records that Lehman did not wish to sign the engagement letter on the grounds that the Court had appointed Mr Yeo as expert.  It records that Miller Peart had requested sight of all documents provided to him on behalf of Effiscient.  In the letter Mr Yeo repeated the request that Lehman sign the letter of engagement and declined to provide documents unless this was done.  I detect in the tone of the letter a feeling, perhaps understandable, that Miller Peart were simply being obstructive, but be that as it may I do not think that it was an appropriate response.  It was, of course, open to Mr Yeo to make a proposal for the terms of his engagement for the Parties agreement and if they agreed his proposal the Court would no doubt have required the Parties to act in accordance with the agreement.  However, if one Party declined to do so it was a matter for Mr Yeo to take up with the Court if he was dissatisfied with the situation.  He explained in his cross‑examination at trial that BDO’s internal rules required him to have their terms of engagement signed and I accept that this was the case, but whatever BDO’s internal rules may provide once appointment by the Court has been accepted the terms of engagement becomes a matter between the Court and the expert.

5.  On 29 February 2012 Squire Sanders wrote on behalf of Mr Yeo seeking an extension of time of 2 months for service of his Report, which I granted.  Unfortunately, although Squire Sanders’s fee note records them having spent over 19 hours advising in connection with this application and reading the relevant correspondence they do not appear to have advised Mr Yeo that the Report he served should be in his name and comply with Order 38 of the Rules of the High Court.  This is apparent from the form of the report, which was in due course filed and which is dated 13 April 2012. The report, although signed by Mr Yeo, was expressed to be BDO’s report and was not in the form required by Order 38.  This was pointed out by Miller Peart in a letter dated 15 May 2012.  In the penultimate paragraph of that letter they refer to their client instructing its own expert in due course.  Squire Sanders replied for Mr Yeo on 22 May 2012 stating that Miller Peart’s complaints against Mr Yeo were without basis.

6.  By May the trial of quantum had been fixed for 25-27 September 2012 and on 17 May I directed that a case management conference take place on 19 June 2012.  I directed that the Parties file their proposed draft directions and explanatory submissions 3 clear days prior to the case management conference.  The draft directions filed on behalf of Lehman sought, amongst other things, leave to adduce expert evidence within 28 days orders.  At the case management conference I asked Mr Allman-Brown, who appeared for Lehman, in respect of what matters they wished to adduce expert evidence.  I was told that they wished to be able to put to Mr Yeo the contents of an expert’s report produced by Mr Brett Shadbolt, which had been filed by Mr Lehman in another set of proceedings dealing with the value of the Company.  Lehman did not, however, intend to call Mr Shadbolt, to give evidence at the trial in September.  Effiscient accepted that Lehman could do this and Mr Allman-Brown accepted that in the circumstances it was not necessary for Lehman to be given leave to call expert evidence.  I made the following comprehensive directions for the further conduct of the proceedings:

“1. The Parties shall exchange lists of all documents provided to the court appointed expert by 4:30 pm on 3 July 2012;

2. Either party shall request copies of any documents referred to in the list of documents, which it requires by 4:30 pm on 10 July 2012;

3. Documents requested pursuant to paragraph 2 shall be provided within 12 clear days of receipt of the request;

4. The Parties shall serve on each other a list of any documents, which they wish to be added to the existing trial bundle by 4:30 pm on 10 August 2012. Such documents shall be added to the bundle regardless of whether or not the other party considers the document necessary or admissible;

5. The Parties shall exchange a list of those matters in the court appointed expert’s report, which are in dispute along with a brief explanation of the reason for the dispute by 4:30 pm on 10 August 2012. The document shall be copied to the court appointed expert;

6. The Parties may serve witness statement addressing any factual issue relevant to the valuation of the shares pursuant to paragraph 5 of the order dated 15 November 2011 and the assessment of damages pursuant to paragraph 6 of the said order. The witness statements shall be served and filed by 4:30 pm on 24 August 2012;

7. The Parties may serve witness statements in reply to those served pursuant to paragraph 5. Reply witness statements shall be served and filed by 4:30 pm on 7 September 2012;

8. The witness statements shall stand as evidence in chief unless otherwise directed;

9. Copies of the witness statements shall be provided to the court appointed expert at the time as they are served. The court appointed expert shall file and serve a report commenting on whether or not anything that he has read in the list of disputed matters or the witness statements alter his opinion and if so how by 4:30 pm on 21 September 2012;

10. The Cross-Petitioner shall serve any additional trial bundles by 4:30 pm on 12 September 2012. The hearing bundles references to any documents referred to in the expert report or additional witness statements shall be noted in the right hand margin of the report or statement;

11. The Cross-Petitioner shall serve its written opening submissions by 4:30 pm on 14 September 2012;

12. The Petitioner shall serve its written opening submissions by 4:30 pm on 19 September 2012;

13. Any application to issue a subpoena in this action is to be determined by the trial judge.”

7.  It will be noted that direction 5 required the Parties to exchange lists on 10 August 2012 of those matters in the Report with which they took issue and a brief explanation of why they did so.  The intention was to identify what issues had to be resolved at the trial, to ensure that such further evidence of fact as either Party chose to adduce focused on these issues and for Mr Yeo to be informed in advance of what matters he should prepare to deal with at the trial.

8.  On 10 August Howse Williams Bowers wrote to Miller Peart informing them that Effiscient accepted the Report in its entirety.  Miller Peart sought an extension of time of 7 days to comply with paragraphs 4 and 5 of my order.  Howse Williams Bowers agreed to this.  Miller Peart did not serve a list of the matters in dispute on 17 August.  On 30 August they wrote seeking leave to file an affidavit dealing with matters relevant to valuation which had not been drawn to Mr Yeo’s attention.  I directed that such an application should be made after the affidavit in question had been prepared. 

9.  Lehman issued a summons on 14 September returnable on 19 September seeking leave to file what was described as a witness statement from an accountant Mr Anthony Kam.  The “witness statement” was exhibited to an affirmation made by Paul King of Miller Peart, however, it was not a witness statement at all, but rather a short expert’s report.  At the hearing on 19 September Lehman was represented by Mr Barrie Barlow SC, who had only recently been instructed in this matter.  He explained that Lehman wanted leave to file expert evidence and that this would be in the form of a more comprehensive report than the erroneously entitled document produced by Mr Kam.  I told Mr Barlow SC I would not grant leave for any further evidence to be filed without seeing the final version of the report Lehman wished to rely on.  I was told that this would not be ready before the first day of the trial, namely, the following Tuesday 25 September 2012.

10.  Late in the afternoon of 24 September 2012 Miller Peart circulated a report prepared by John Lees and at the commencement of the trial Mr Barlow SC applied for leave to adduce it.  Mr Barlow SC tried to circumvent the obvious difficulties posed by the lateness of production of the report by the following argument.  Order 40 rule 6 provides that “Where a court expert is appointed in a cause or matter, any party may on giving to the other parties a reasonable time before the trial notice of his intention to do so, call on expert witness to give evidence on the question reported on by the court expert….”.  Mr Barlow SC submitted that by virtue of the defects in the report dated 13 April Mr Yeo could not properly be said to have served a report at all and that, therefore, Lehman had a right under the rule to call an expert to deal with the matters, which Mr Yeo addressed in the corrected version of the report, which had recently been circulated by him.  There was some debate as to whether the use of the word “may” in the rule meant that Order 40 rule 6 gave the Court a discretion to allow evidence to be adduced, as Mr Charles Manzoni SC, who appeared for Effiscient argued, in which case Mr Manzoni SC invited me not to exercise the discretion given the lateness of production of Mr Lees’s report.  I agreed with Mr Barlow SC that “may” in this context was permissive and that a party had a right to adduce its own expert evidence if reasonable notice was given.  However, it seemed to me entirely artificial to proceed on the basis that the 13 April Report was not “evidence on the question reported on by the court expert”.  As is obvious from the narrative of events explained earlier in this judgment it is clear that both Parties understood the report to be intended to be Mr Yeo’s report and proceeded on this basis.  In the circumstances Lehman had clearly failed to give notice of its intention to adduce its own evidence within a reasonable time.

11.  Effiscient understandably objected to the application, which if granted would have required an adjournment of the trial for it to consider Mr Lees’s report and decide if it wished to call expert evidence.  Lehman’s excuse for not dealing with the matter promptly was that the solicitor handling the matter had left Miller Peart at short notice.  This seems to me to be no excuse at all.  The question of Lehman calling its own expert evidence had apparently been considered before the case management conference on 19 June.  It would appear that when Mr Barlow SC was instructed he took a different view to Mr Allman‑Brown on the need to call expert evidence.  Whilst I can understand why Mr Barlow SC took a different view this was not a reason to allow the trial to be derailed particularly as the Court had by its directions of 19 June attempted to ensure that this kind of problem did not arise.  In these circumstances it seemed to me that there was no justification for allowing Lehman to call Mr Lees and I rejected the application.

12.  Another highly unsatisfactory feature of the matter was Lehman’s failure to serve a list of the matters in Mr Yeo’s report with which it disagreed.  On 21 September 2012 Mr Barlow SC served very short outline submissions indicating in general terms matters with which Lehman took issue, but this gave the Court, Effiscient and Mr Yeo very limited information about what the ambit of dispute at trial was to be.  It made focused pre-reading before trial very difficult.

Valuation of the Company

13.  At the trial Lehman’s position was this.  It did not accept Mr Yeo’s valuation and took a number of points in relation to it, which I will address later.  Mr Barlow SC also argued that Effiscient’s wholesale adoption of Mr Yeo’s report was “inequitable and unconscionable” for the following reasons.

14.  I have already mentioned that at the 19 June case management conference I was told that Lehman wished to rely on a report produced by Mr Shadbolt in another set of proceedings.  This is HCA 959 of 2010 between Russell Brown, his wife Zhou Han Brown and Effiscient, the Plaintiffs, and Mr Edward Lehman.  The Plaintiffs in HCA 959 of 2010 are suing Mr Lehman for defamation.  I understand that an issue in those proceedings is the diminution in the value of Effiscient’s shareholding in the Company as a result of Mr Lehman’s defamatory statements.  Both the Plaintiffs and Mr Lehman have filed experts’ reports addressing this issue.  The Plaintiff’s expert is Mr Simon Blade.  Mr Lehman’s expert is Mr Shadbolt.

15.  In his Report Mr Blade has valued the Company as at 11 September 2010 at between US$11,400,000 and US$15,200,000.  Mr Yeo has valued the Company at 17 September 2010.  His valuation is US$2,800,000.  Mr Barlow SC argued that it was unconscionable for Effiscient to be supporting Mr Yeo’s valuation in the present case in which what is being determined is how much it should have to pay for Lehman’s 50% equity interest in the Company whilst at the same time advancing a claim for damages based on a dramatically higher valuation in the defamation proceedings.  Mr Barlow SC characterised the relief that was sought in the present proceedings by Effiscient as equitable and submitted that it could not be a proper exercise of the Court’s equitable jurisdiction to order the sale of Lehman’s shares at a valuation which was inconsistent with Effiscient’s case in the defamation action.  I do not agree that the Court is being asked to exercise an equitable jurisdiction.  It is being asked to exercise a jurisdiction conferred by statute, but I accept that the Court should exercise any jurisdiction in an equitable manner.

16.  I also accept that there appears to be an inconsistency between the 2 valuations.  I would, however, note that the difference is not as stark as Mr Barlow SC suggests.  The valuation Mr Barlow SC refers to is Mr Blade’s assessment of the value of the Company on the assumption its business had not been damaged by Mr Lehman’s defamatory comments. Mr Blade assessed the value of the Company in its actual state at US$5,400,000. 

17.  One would not, of course, expect Effiscient to be able to acquire Lehman’s shares at a price calculated by reference to a low valuation of the Company and to obtain an award of damages for the diminution in the value of Effiscient’s interest in the Company based on a much higher valuation.  It does not, however, follow that Mr Yeo is wrong or that the correct way to resolve the inconsistencies is to proceed, as Mr Barlow SC invited me to do, on the basis that Mr Blade’s valuation should be treated as the lowest figure that the Court should adopt as the Company’s value in these proceedings.  It seems to me that the correct way to proceed is to consider Mr Yeo’s evidence on its merits.  The consequence may be that Effiscient is restricted by the position it has adopted in these proceedings and my findings in this judgment from arguing for a higher value of the Company in the defamation proceedings.  That is not a matter with which I need be concerned.

18.  Mr Yeo has valued the Company using a market approach and an asset based approach.  The former he describes as follows:

“Market Approach

The Market Approach is a valuation technique predicated upon the principle of substitution.  The essence of this approach is to consider companies in the same general industry as the subject company to provide valuation guidelines.  Comparisons are then made between the subject Company and the guideline companies whose stocks are actively traded. Valuation multiples for such companies are determined and analyzed. Additionally, valuation multiples indicated in comparable guideline merger and acquisition transactions may also be considered.”

19.  This method involves identifying an appropriate price/earnings ratio (“P/E ratio”) and applying it to earnings: normally EBITDA.  The asset based approach he describes as follows:

“Asset-Based Approach (“Net Asset” or “Cost” Approach)

Also known as the Cost Approach, the Asset-Based approach indicates the fair market value based on adjusting Company asset and liability balances to their fair market value equivalents.  This approach is based on the identification, valuation, and summation of the Company’s underlying assets, both tangible and intangible.”

20.  Mr Yeo explains that he has not adopted an income approach to the valuation because of the terms of paragraph 5 of the order, which reads:

“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”).”

21.  This was criticised by Mr Barlow SC who suggested that this indicated that Mr Yeo had misunderstood the order and as a result Mr Yeo had not approached his task correctly.  I disagree.  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’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.

24.  Mr Barlow SC also criticised Mr Yeo’s calculation.  He made 2 particular criticisms.  The first concerned the calculation of EBITDA contained in Appendix IV to his Report.  Mr Yeo has calculated the EBITDA to be used for the valuation by reference to figures in the audited financial statement for the 2010 financial year, which is the financial year within which the valuation date falls.  The criticism of this was that it produced an artificially low EBITDA because the financial results for that year were very poor; a reflection, says Effiscient, of the damage done to the Company’s business by Mr Lehman’s conduct during this period, which is described in my judgment on liability and, in so far as his defamatory statements are concerned, forms the subject matter of the defamation action.  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 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 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. 

27.  The second complaint concerned the assessment of the discount for lack of marketability.  The criticism focused on the fact that the discount was derived from an SEC study and that it was not a reliable guide to the discount to be applied to a Company.  Mr Yeo accepted in cross-examination that the determination of the discount required a degree of judgment and that the study was only a guide.  However, I did not understand Mr Barlow SC to be suggesting that it was an inappropriate for a discount for lack of marketability to be applied and he did not dispute Mr Yeo’s evidence in cross‑examination about this.

28.  In conclusion I accept Mr Yeo’s valuation of the Company at the valuation date and the value of Lehman’s interest in it, namely, US$2,800,000 and US$1,400,000 respectively. 

Damages

29.  Paragraphs 6 and 7 of the Order, which are quoted earlier in this judgment, directs Mr Yeo to report to the Court his opinion of the level of damages suffered by Effiscient as a consequence of the matters referred to in paragraph 6.  This is the only evidence that I have concerning the damage caused by the 2 matters referred to in paragraph 6, namely, Mr Lehman causing an accounting firm to be set up which competed with the Company and the damages done by misappropriation and infringement of the Company’s Mainland and Hong Kong trademarks.

30.  Mr Yeo’s approach to quantifying the damages caused by the Company is this.  First he has considered the changes in the Company’s revenue growth between 2008 and 2010.  Between the date of its incorporation and 2007 the Company had significantly outperformed the average rate of growth in the market.  Mr Yeo, therefore, considers it reasonable to assume that between 2008 and 2010 the Company would have been able to achieve the average rate of growth of the market for accounting services, but for the adverse impact of the matters referred to in paragraph 6 of the order.  He has taken an average year on year rate of growth for 2008 to 2010 of 24%, the average rate of growth in the market for that period, and calculated that but for the adverse impact of the matters referred to in paragraph 6 the net profit of the Company would have been US$5,942,000.

31.  He has then considered alternative ways of assessing the impact of the matters referred to in paragraph 6.  The first is the loss of instructions from clients.  I note that he states in his Report that the management of the Company could not identify any clients who had been lost.  Mr Yeo then took the revenue generated by clients in 2008, who did not give revenue generating instructions in 2009 and 2010 and calculated what loss of income was caused on the assumption that but for the matters referred to in paragraph 6 they would have given instructions that would have generated the same level of income.  The variance is US$987,000.

32.  Mr Yeo also considered comparing historical budgets against audited financial performance, but decided that this method was too imprecise to be of any value.

33.  Mr Yeo’s conclusion was that the damage caused to the Company by the matters referred to in paragraph 6 of the order was somewhere between US$987,000 and US$5,942,000.  This range of figures suggests that it is difficult to assess with any certainty what level of damages has been suffered by Effiscient.  Another way of approaching the adverse financial impact on the Company of Lehman’s conduct is to compare the profitability before and after the conduct commenced.  What is apparent from the audited income statements is that a net profit after tax of US$1,269,000 was made in 2007 and that an average net profit after tax of US$213,000 was made for each of the 3 subsequent years culminating in 2010.  The difference for 3 years is US$3,168,000.  If one does the same calculation using the figures for 2006 (US$1,137,000) as the baseline the difference is US$2,772,000.

34.  In his Report (page 17) Mr Yeo records that he has been told by the Company’s management that the decline in revenue during the relevant 3 years was not only attributable to the matters referred to in paragraph 6 of the order.  It was also attributable to the defamatory statements (the financial affect of which is to be assessed in HCA 959 of 2010), other factors arising from the shareholders’ dispute and the effects of the 2008 financial crisis. He has made an allowance of 50% for these other effects. 

35.  No reason has been suggested by Effiscient to think that the decline in profitability between 2008 and 2010 was not to a significant extent attributable to conduct for which Lehman is responsible. 

36.  Mr Barlow SC’s submissions in respect of the claim for damages were succinctly put in his written closing submissions, which it is convenient to quote:

“6.1 We contend that the cut-off date for the assessment of damages should be the Valuation Date – since that date marks the end of the quasi-partnership of the shareholders (after which they should have been free to compete).

6.2 On the available admissible evidence, the loss and damage to Effiscient was likely to have been minimal – see:-

(a) Mr Blade’s valuation of the Non-Defamation value of the Company on 11 September 2010.

(b) the Company’s own statements – e g: the BDO Report:

“According to discussions with Management, we understand that the loss in revenue suffered by the Company is also due to a combination of other factors, other than the Damages, including the defamation accusations, other shareholder disputes and the macro-effects of the decline in the global financial markets.”

“Management was unable to identify the customers that have ceased business with the Company due to the Damages.”

(c) the LML records of the net profits of the competing business.

6.3 That realisation probably prompted Mr Brown’s suggestion to Mr Yeo to estimate the possible damages using valuation hypotheses.

6.4 Mr Yeo, the novice expert, acceded to that suggestion. His wholly hypothetical and conjectural “assessment” is inadmissible as evidence; contradictory of his valuation of the Company; and (simply put) useless.

6.5 The LML records of the competing business evidence a loss of RMB35,380.66 (viz RMB86,861.38 – 16,100.06 (2011) = 70,761.32 ÷ 2 = 35,380.66).

6.6 There is no other admissible evidence of any actual loss caused by LML’s unfairly prejudicial behaviour.”

37.  The non-defamation value reached by Mr Blade to which Mr Barlow SC refers was in the range of US$11,400,000 to US$15,200,000.  However, Mr Blade’s defamation value is in the range of US$4,500,000 to US$6,300,000, which is consistent with various factors, including defamation, depressing the value of the Company’s business.

38.  I think that there is a limited amount of value that can be read into Lehman Management Limited’s own profitability during the material period.  Its own profitability does not necessarily reflect the extent to which its activities affected the Company’s business.  I also note that Lehman has not suggested any reason unconnected with its actions which account for the striking reduction in the Company’s profits between 2008 and 2010. 

39.  The burden is, of course, on Effiscient’s to prove the damage that it claims.  Its approach is this.  A decline in business is a natural consequence of the matters referred to in paragraph 6 of the order.  The decline in profits during the period 2008 to 2010 is consistent with this.  It accepts that it cannot identify with any precision what damage flowed from any particular act, but says that this is simply a consequence of the nature of the acts and their consequence.  However, it submits that the fact that assessing the amount of damage caused is difficult is not a reason to award nominal or no damages as Lehman contends.

40.  The problem of certainty in assessing damages is addressed in McGregor on Damages, 18^th ed, 8-001 to 8-002:

“A claimant claiming damages must prove his case. To justify an award of substantial damages he must satisfy the court both as to the fact of damage and as to its amount.[1] If he satisfies the court on neither, his action will fail, or at the most he will be awarded nominal damages where a right has been infringed.[2] If the fact of damage is shown but no evidence is given as to its amount so that it is virtually impossible to assess damages, this will generally permit only an award of nominal damages; this situation is illustrated by the old cases of Dixon v Deveridge[3] and Twyman v Knowles.[4]

On the other hand, where it is clear that some substantial loss has been incurred, the fact that an assessment is difficult because of the nature of the damage is no reason for awarding no damages or merely nominal damages. As Vaughan Williams LJ put it in Chaplin v Hicks,[5] the leading case on the issue of certainty: “The fact that damages cannot be assessed with certainty does not relieve the wrongdoer of the necessity of paying damages.”[6] Indeed if absolute certainty were required as to the precise amount of loss that the claimant had suffered, no damages would be recovered at all in the great number of cases. This is particularly true since so much of damages claimed are in respect of prospective, and therefore necessarily contingent, loss. Of course, as Devlin J said in Biggin v Permanite[7]: “Where precise evidence is obtainable, the court naturally expects to have it, [but] where it is not, the court must do the best it can.” Generally, therefore, although it remains true to say that “difficulty of proof does not dispense with the necessity of proof”,[8] the standard demanded can seldom be that of certainty. Even if it is said that the damage must be proved with reasonable certainty, the word “reasonable” is really the controlling one, and the standard of proof only demands evidence from which the existence of damage can be reasonably inferred and which provides adequate data[9] for calculating its amount. The clearest statement of the position is that of Bowen LJ in Ratcliffe v Evans[10]where he said:

“In all actions accordingly on the case where the damage actually done is the gist of the action, the character of the acts themselves which produce the damage, and the circumstances under which these acts are done, must regulate the degree of certainty and particularly with which the damage done ought to be stated and proved.  As much certainty and particularly must be insisted on, both in pleading and proof of damage, as is reasonable, having regard to the circumstances and to the nature of the acts themselves by which the damage is done.  To insist upon less would be to relax old and intelligible principles.  To insist upon more would be the vainest pedantry.”

41.  In my view what this illustrates is that in a case such as the present one the Court should require the available evidence of loss to be adduced.  If the Court is satisfied that this has taken place it should work with what it has to arrive at, what it is satisfied on the balance of probabilities, is a reasonable assessment of the damage caused.  It seems to me that as a matter of practicality that means that where the evidence is imprecise and there is a degree of uncertainty about the extent of the loss that has been caused the Court should err on the side of caution.

42.  I am satisfied that in the present case Effiscient has adduced all the relevant evidence available to it in the form of the documents and information given to Mr Yeo.  As is apparent from Mr Barlow SC’s submissions Lehman has not suggested to the contrary.  It has not been suggested by Lehman that the matters referred to in paragraph 6 of the order did not contribute substantially to the decline in profits between 2008 and 2010.  What is unclear is the extent to which those profits would have grown.  In my view it is probable that the Company would have maintained at least the level of profits achieved in 2007 in the following 3 years.  I therefore assess damages on this basis.  An adjustment needs to be made to reflect the fact that the defamatory statements, 2008 financial crisis and other aspects of the shareholder’s dispute would also have contributed to this reduction.  I accept Mr Yeo’s assessment that a reduction of 50% needs to be made to take this into account.  On this basis the damages are: US$(3,168,000 – 3,168,000 x 105/1095[11])/2 x 50% = US$716,055.

Conclusion

43.  I assess the value of Lehman’s shares as at 17 September 2010 at US$1,400,000.  I assess the damages payable by Lehman to Effiscient at US$716,055.  I make an order nisi that the costs of the proceedings since 9 November 2001 to the date hereof be paid by Lehman to Effiscient.  If any party wishes to challenge that order they should write to the Court within 7 clear days of the handing down of this judgment.

[1] Senate Electrical Wholesalers Ltd v Alcatel Submarine Networks Ltd [1999] 2 Lloyd’s Rep 423 CA, illustrates, in a very complex case, the failure of a claimant to prove the relevance of the quantum of damages for which it was contending, namely, that the true value of the business sold was to be calculated by applying a profits/earnings ratio to the difference between warranted and actual profit: see at 430-431.

[2] For nominal damages of this variety see paras 10-001 to 10-003, below.

[3] (1825) 2 C & P 109; facts at para 10-005, below.

[4] (1853) 13 CB 222: facts at para 10-005, below.

[5] [1911] 2 KB 786 CA: facts at para 8-031, below.

[6] [1911] 2 KB 786 CA at 792. The statement was restricted to contract, but it applies equally to tort.

[7] [1951] 1 KB 422 at 438.

[8] Aerial Advertising Co v Batchelors Peas [1938] 2 All ER 788 at 796, per Atkinson J.

[9] Ashcroft v Curtin [1971] 1 WLR 1731 CA, is, however, an illustration of a claimant’s failure to provide adequate data: facts at para 35-081, fn 334, below.

[10] [1892] 2 QB 524 CA at 532-533.

[11] This adjustment takes into account the fact that the damages claimable are those incurred up 17 September 2010 not the end of the 2010 financial year on 31 December 2010.