SHE WAI HUNG v. JULIANO LIM AND OTHERS

HCMP 6472/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 6472 OF 2001

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D E C I S I O N

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The orders made in 2004

1.  On 27 February 2004, I gave judgment for the petitioner in a petition under section 168A of the Companies Ordinance, Cap. 32 and made these orders to give relief under that provision:

(1)	the 1st respondent do purchase the 4,000 ordinary shares of HK$1.00 each in the capital of [Golden Bright Limited, “the Company”] presently registered in the name of the petitioner at a price to be fixed by such valuer (“the valuer”) being a certified public accountant, as may within 14 days hereof be agreed upon by the petitioner and the 1st respondent, or failing such agreement as may be appointed by the president for the time being of the Hong Kong Society of Accountants upon the application of either party with or without the consent of the other;
(2)	the valuer is hereby directed to value the petitioner’s shares by reference to the assets, profitability and future prospects of the Company as at 18 May 1997 and without discount for the fact that the petitioner’s shareholding is a minority holding and on the footing that adjustment is to be made to the purchase price to take into account the shortfall in the petitioner’s contribution to the loan capital being HK$496,671.25; and
(3)	there be liberty to all parties to apply for directions as to the payment of the purchase price and generally.

2.  There is no appeal from the judgment.

The appointment of the valuer

3.  Subsequent to the orders in February 2004, as there was no agreement between the parties on the valuer to be appointed, the petitioner’s solicitors applied to the Hong Kong Society of Accountants, as it was then called.  Three firms were selected at random by the Society in March 2004.  The petitioner’s solicitors approached each of them in turn and each had refused to take up appointment.  After making approaches to a number of other firms of certified public accountants, the petitioner’s solicitors eventually found one that was willing to accept appointment.  This was Messrs.  Alliott Tsoi & Co.

4.  In February 2005, the petitioner’s solicitors wrote to the Society, by then known as the Hong Kong Institute of Certified Public Accountants (“HKICPA”), asking HKICPA to appoint Messrs. Alliott Tsoi & Co. as the valuer.  HKICPA declined to do so in the absence of consent of the 1^st respondent’s solicitors and informed the petitioner’s solicitors it has changed its policy on handling requests for its president to appoint firms of certified public accountants to perform the professional service of valuing shares in a commercial dispute.  Under the present policy, each party will be asked to send to the president a list of at least five firms that they consider suitable for the appointment and the president will select in his discretion any common name on the two lists.  If there is no common name, he will have a complete discretion as to which firm to appoint.  If any party is unable to furnish a list of five firms, the president will make a random selection of three firms from the database of HKICPA, according to the criteria to be agreed between the two parties as to the length of establishment of the firm, the size of the practice, and that none of the partners or directors of the practice has been subject to sanctions imposed by HKICPA through disciplinary proceedings.

5.  Given the difficulty they had encountered in securing a firm willing to take up appointment, the petitioner’s solicitors did not think it feasible to nominate five firms pursuant to the new policy.  They had no co-operation from the 1^st respondent on the criteria to be agreed for the random selection of three firms from the database of HKICPA.  The 1^st respondent’s solicitors did not give any reply to the letter of HKICPA in February 2005 or attempt to negotiate with the petitioner’s solicitors on the nomination of any firm.

6.  To break the impasse, in December 2005, the petitioner’s solicitors applied by letter to the court to restore the matter for directions.  At the hearing on 16 February 2006, they sought an order that Messrs. Alliott Tsoi & Co. be appointed as the valuer under paragraph 1 of the orders made on 27 February 2004.  The 1^st respondent’s solicitor informed the court he would agree to appoint Messrs. Alliott Tsoi & Co.  Accordingly, an order was made for their appointment.

7.  Messrs. Alliott Tsoi & Co. were appointed as the single independent expert under the powers of the court in Order 40 rule 1(1) of the Rules of the High Court to conduct an out-of-court valuation of the petitioner’s shares in the Company pursuant to the orders made on 27 February 2004.  At the hearing on 16 February 2006, the parties did not seek further directions on the conduct of the valuation, such as the valuer’s access to relevant documents and information from the parties, the parties’ access to documents and information that would have a bearing on the value of the shares, and permission to the parties to make submissions to the valuer in such form as determined by the valuer.  I was content to leave it to the parties to liaise with the valuer on such matters, trusting that if difficulty should arise, they would bring it to the attention of the court and seek appropriate directions under the general liberty to apply provision made earlier.

8.  My trust would seem to have been misplaced.

9.  On 13 April 2006, Messrs. Alliott Tsoi & Co. provided to both parties a valuer’s report of the petitioner’s shares in the Company.  Under the “sources of information” in their report, it was stated that at their request, the petitioner’s solicitors have written to the 1^st respondent’s solicitors requesting for inspection of book of accounts and the request had not been acceded to.  Owing to this, they only relied on the following in giving the valuation: the judgment in these proceedings in February 2004; the management accounts prepared by the management of the Company for various periods; and various exhibits provided by the petitioner’s solicitors.

The orders sought in the present hearing

10.  On 20 April 2006, the petitioner’s solicitors wrote to the court enclosing a copy of the valuer’s report and seeking a hearing for these orders to be made:

(1)	the petitioner’s shares in the Company be valued at HK$5,081,662.88 (“the Purchase Price”; after taking into account the shortfall in the petitioner’s contribution to the loan capital being HK$496,671.25) as at 18 May 1997;
(2)	the 1st respondent do pay interest to the petitioner on the Purchase Price at 10% per annum from 18 May 1997 to the date of payment; and
(3)	the costs of and occasioned by the application be to the petitioner to be taxed if not agreed.

11.  In the draft order submitted by the petitioner’s counsel, an additional direction is sought that in the event the 1^st respondent fails to execute within 14 days thereof the bought and sold notes, instruments of transfer and all other necessary documents as purchaser in respect of the petitioner’s shares, the Registrar of the High Court shall execute such documents for the 1^st respondent pursuant to section 25A of the High Court Ordinance, Cap. 4.

12.  The letter to the court dated 20 April 2006 was copied to the 1^st respondent’s solicitors.  The petitioner’s solicitors also wrote to the 1^st respondent’s solicitors on the same day asking if the latter would have any objection to the proposed orders.  The matter was set down for hearing on 28 June 2006.

13.  There was no response from the 1^st respondent to the valuer’s report, the letter of the petitioner’s solicitors, or the proposed orders sought until two days before the hearing, when the 1^st respondent caused two affidavits to be filed.  One was from his personal assistant Lam Bik Chu (“Miss Lam”), the other was from Lau Tsun Lawrence (“Lawrence Lau”), a certified public accountant engaged by him.

14.  Miss Lam deposed that she is responsible for the accounts of the Company and to the best of her recollection, Messrs. Alliott Tsoi & Co. have not contacted her for production of books of accounts of the Company for valuation purpose.  She produced letters both dated 27 February 2006 from the petitioner’s solicitors to Messrs. Francis S. L. Yan & Co., certified public accountants, and to the 1^st respondent’s solicitors, seeking inspection of books of account.  The former replied that they are not retained to render services as the accountant of the Company and are not in possession of any books of accounts and suggested the petitioner’s solicitors should approach the Company directly.  The latter replied that as the petitioner is no longer a director of the Company, he is not entitled to inspect the books of accounts.

15.  Miss Lam further deposed that the purpose for inspecting the books of account was not specified in any of the letters of the petitioner’s solicitors.  Although factually correct, this is disingenuous.  The letters of the petitioner’s solicitors to the 1^st respondent’s solicitors bore the caption of the present proceedings and were sent not long after the order appointing the valuer was made.  The only outstanding matters in these proceedings are the valuation of the petitioner’s shares and the payment of the purchase price.  The 1^st respondent’s solicitors should have little doubt as to the purpose of inspection of the books of account.

16.  According to evidence filed on behalf of the petitioner, the management account for the period ended 31 May 1997 was faxed by Miss Lam to the petitioner on 13 March 1998.  This management account was an important source of information for the valuation given, and was criticised by Lawrence Lau as containing “obvious errors”.  As the person responsible for the accounts of the Company, Miss Lam made no comment about the management account.  She also made no mention what other relevant documents or information are in the possession of the Company, but have not been considered by Messrs. Alliott Tsoi & Co.

17.  Lawrence Lau exhibited to his affidavit an opinion he prepared on the valuer’s report.  He made these criticisms in the opinion:

(1)	the information in the valuer’s report seemed to have come from the petitioner unilaterally;
(2)	there were no disclosures in the management accounts of accounting policies, shareholders and directors’ interests in the Company, and there was no auditing of the financial statements;
(3)	there were obvious errors in the management account for the period ended 31 May 1997, such as the failure to make provision on the depreciation of land and building, the failure to adopt the lower cost of market value, the failure to disclose the basis of estimation of the value of stock;
(4)	the shareholder’s loan of HK$6,596,797.75 in the draft Accountant’s Report prepared by Messrs. Francis S. L. Yan & Co as at 28 February 1997 should be verified and considered in the estimation of the share price of the Company;
(5)	the income approach to valuation is a suitable method as the Company had not yet diverted its business on 18 May 1997; at least, it should be considered as an alternative method for the purpose of comparison with the asset approach; and
(6)	the market approach to valuation should also be considered as an alternative method for the purpose of comparison.

18.  It was only when the petitioner’s solicitors were served with the submissions of counsel for the 1^st respondent the day before the hearing that they were apprised of the 1^st respondent’s intentions.  Mr. Wong King submitted on behalf of the 1^st respondent that the valuer’s report should be set aside on the grounds of bias and/or collusion with the petitioner and material mistakes, and that Messrs. Alliott Tsoi & Co. should be removed as the valuer and a new valuer be appointed to replace them.  The petitioner was taken by surprise, as the 1^st respondent has had the valuer’s report for over two months without giving any indication that he would challenge the valuation.

The challenge to the valuer’s report

19.  Mr. Wong initially relied on Donnett, William Edward v. Cheung Cheung-shui & Ors. [1988] 2 HKLR 454, in which Macdougall J followed the decision of Nourse J in Burgess v. Purchase & Sons (Farms) Ltd. [1983] Ch 216 at 225 in drawing a distinction between a ‘speaking’ valuation and a ‘non-speaking’ valuation; the former being a valuation in which reasons and analysis are given for the determination arrived at, and there is wider scope for impugning such a valuation as opposed to a non-speaking one.  It was held in Donnett that for a speaking valuation, it would be proper for the court to interfere where there are errors of principle.

20.  This distinction between a speaking valuation and a non-speaking one in Burgess was disapproved of by the English Court of Appeal in Jones & Ors. v. Sherwood Computer Services plc [1992] 1 WLR 277.  Subsequent Hong Kong decisions, such as Dlugash v. Mayers [1997] 2 HKC 814, have accepted the correctness of Jones v. Sherwood.  Faced with these decisions cited by Mr. Paul Lam for the petitioner, Mr. Wong changed tack and submitted that there are three grounds to challenge the valuer’s report:

(1)	there was actual bias and collusion of Messrs. Alliott Tsoi & Co.;
(2)	they had departed from their instructions in material aspects in that the valuation was not made in accordance with the orders on 27 February 2004; and
(3)	the manner in which the valuation was made was not just a breach of natural justice, there was some degree of egregiousness in that there was incompetence and negligence.

21.  These submissions of Mr. Wong seem to me opportunistic, they were apparently made to dovetail with various dicta in the cases cited by the other side.  They do not stand up to scrutiny.

22.  The allegation of bias and collusion was made on the basis that Messrs. Alliott Tsoi & Co. had only contacted the petitioner and the petitioner’s solicitors and had not contacted the 1^st respondent directly for any information required by them to prepare the report.  It was submitted that it was unreasonable for them not to verify with the 1^st respondent the information provided solely by the petitioner, and that it must be inferred from this unreasonable conduct there was collusion between the petitioner and the valuer.

23.  I agree with Mr. Lam that a serious allegation like this should not have been made against a professional man on flimsy grounds.  The valuer had requested the petitioner’s solicitors to write to the 1^st respondent’s solicitors seeking inspection of books of account.  As stated earlier, in turning down the request of the petitioner’s solicitors, the 1^st respondent’s solicitors should have little doubt as to the apparent purpose of the request.  The 1^st respondent did nothing at all to provide the valuer with any relevant information and documents in his possession and has advanced no reason why he had not done so.  In these circumstances, I do not find it unreasonable for Messrs. Alliott Tsoi & Co. not to contact the 1^st respondent again themselves.

24.  As for the allegation that it was unreasonable for the valuer not to verify the information provided by the petitioner by some kind of due diligence exercise, it was explained in the valuer’s report why the management account for the period ended 31 May 1997 was regarded as the best information available to the valuer in the circumstances.  That part of the valuer’s report (section 5) has not been refuted by the affirmation of Miss Lam.  I do not consider the view taken by the valuer as unreasonable.  Miss Lam, who was and is responsible for the accounts of the Company, made no comment on the truth or accuracy of the management account in her affirmation filed in this application.  She did not produce or identify any additional document or information that would have a bearing on the information in the management account.

25.  I decline to infer there was any bias or collusion between the petitioner and the valuer.

26.  In Macro v Thompson (No. 3) [1997] 2 BCLC 36 at 65G, Robert Walker J considered the test for partiality in the context of a decision reached by an expert valuer who is not an arbitrator performing a quasi-judicial function.  He was of the view that “it is actual partiality, rather than the appearance of partiality, that is the crucial test.” I bear in mind that the expert appointed in the present case is not an expert appointed under contractual provisions to conduct an out-of-court valuation, unlike Macro v Thompson or Dlugash v. Mayers. Nevertheless, I do not think the court-appointed expert is acting as an arbitrator here, so partiality in this context would probably require “actual bias or a real danger of injustice resulting from the alleged bias and not just conflicts of interest or apparent lack of independence” (Dlugash v. Mayers, supra. at 823C to D; Kendall on Expert Determination, 3^rd ed., para. 15.4.4).  If I should be wrong about the test for partiality for a court-appointed expert, so that the appearance of partiality from an objective standpoint is sufficient to challenge his determination, I would still have come to the view that the reasonable apprehension of bias test is not satisfied in this situation.

27.  I turn to the allegation of departure from instructions.  Mr. Wong pointed out that by the order on 27 February 2004, the valuer was directed to “value the petitioner’s shares by reference to the assets, profitability and future prospects of [the Company] as at 18 May 1997”.  The valuer had only adopted the asset approach in arriving at the valuation.  He submitted that this was a departure from the instructions in the court order, as the income approach and the market approach are relevant to the “profitability and future prospects” of the Company.

28.  I reject this submission without hesitation.  The terms of the order on 27 February 2004 were recited in section 2 of the valuer’s report.  The author was plainly aware of the instructions given.  There is nothing to indicate that the valuer had not followed instructions.  The phrase “the assets, profitability and future prospects” is the standard formula and refers to features that would generally be considered in assessing the fair value of shares.  The use of this phrase is not to tie the hands of the valuer in adopting one or more of the methodologies of valuation.  The valuer had explained why the asset approach was used.  The views of the expert engaged by the 1^st respondent on the applicability or otherwise of some other approach are not relevant.

29.  The last allegation is incompetence and negligence in valuing the shares.  This would seem to be a variation and repetition of the earlier allegation on bias in that the valuer was accused of relying on unverified information provided by one side.  Reliance was also placed on the “obvious” errors in the management account as stated in the opinion of Lawrence Lau.  I reject the allegation of incompetence and negligence.

Orders on the application to challenge the valuer’s report

30.  As the grounds to challenge the valuer’s report are not made out, I decline to set aside the valuer’s report or to remove the valuer and appoint another in their place.

31.  I would not make an order to implement the valuer’s report at this stage, as I regard what had transpired after the appointment order was made unsatisfactory, even though this was attributed to a large extent to the 1^st respondent’s own action or omission.  It lies ill in the mouth of the 1^st respondent to complain that the valuer had only taken into account the materials provided by the petitioner, when he had chosen not to co-operate and provide any documents or information in his possession.  Nevertheless, the valuer should be put in a position to make a proper assessment based on all relevant and available information, if any such further information were indeed available.  Unlike the situation of an out-of-court valuation under contractual provisions where the parties have agreed to be bound by the valuation and the expert’s determination can be challenged only on limited grounds (see Jones v. Sherwood), the court does have more flexible powers to regulate the procedure where an independent expert is appointed under Order 40 rule 1(1).  Jordan v. Norfolk County Council [1994] 1 WLR 1353 provided an example in which the court saw fit to review its order concerning a court-appointed expert.

32.  Under Order 40 rule 2(2), the court may direct the court expert to make a further or supplemental report.  I will direct the valuer to do so, after he has considered any further documents or information that may be provided by the 1^st respondent and any submission that may be made by the parties.

33.  I give the following directions:

(1)	the 1st respondent may provide to the valuer all books, accounts and documents of the Company relevant to the valuation of the petitioner’s shares within 21 days hereof;
(2)	the petitioner shall have the same right of access to any documents provided by the 1st respondent under paragraph (1) hereof;
(3)	leave to the 1st respondent and the petitioner to make submission in writing to the valuer within 21 days of the provision of any documents by the 1st respondent under paragraph (1) hereof and a copy of any submission made to the valuer is to be served on the other party at the same time;
(4)	leave to the 1st respondent and the petitioner to make further submission in writing to the valuer, in answer to any submission served by the other party under paragraph (3) hereof within 7 days of service of the same; and
(5)	the valuer is to provide a further report to the court within 21 days of service of any submission made under paragraph (4) hereof or within 28 days of service of any submission made under paragraph (3), as the case may be.

34.  As there has been much delay in these proceedings, I would expect all parties to comply with these directions strictly.

If interest should be awarded on the purchase price

35.  The petitioner seeks an order that the 1^st respondent should pay interest on the purchase price.  As extensive arguments have been addressed to me at this hearing, and I have already determined the date of valuation when judgment was given in February 2004, I see no reason to defer ruling on this question (as Mr. Wong has asked me to do, contending this is somehow premature) even though I am not making any order for the payment of the purchase price at present (not for the reasons advanced by Mr. Wong).

36.  Mr. Lam cited a line of cases in which the courts here have awarded interest on the purchase price on making an order for the purchase of shares under section 168A (Re Tai Lap Investment Co. Ltd. [1999] 1 HKLRD 384 at 402F to 403B; Re Gauss Electronics Co. Ltd. and East Point Investment Ltd., HCCW Nos. 145 and 146 of 1999, 8 December 1999, Deputy Judge Woolley, pages 18 to 21; Re Sharpart Co. Ltd., HCCW No. 858 of 1999, 15 November 2000, Chu J, page 21; and Wong Man Yin v. Law Lam Wai& Ors. [2001] 3 HKLRD 720 at 726E to G).  Interest awarded in this situation is not qua interest, it is 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”, Re Tai Lap Investment, supra. at 402J, the date of the petition being the valuation date in that case.  The interest factor is added to the value of the petitioner’s shareholding to arrive at a fair price which should be paid for his shares, to give monetary compensation for the injury done to the petitioner.

37.  Mr. Wong did not dispute the discretionary power of the court to award interest upon making an order for the purchase of shares.  He contended that this power should not be exercised in the present case for the following reasons.  The matter of interest on the purchase price was not raised by the petitioner’s counsel in his closing submission at the trial.  Further, the orders made on 27 February 2004 clearly provided that the 1^st respondent is to purchase the petitioner’s shares “at a price to be fixed by such valuer”.  Unlike the consent order in Re Gauss Electronics, as a matter of construction of the orders in the present case, there is no room to contend that the price which the 1^st respondent must pay to acquire the shares could comprise the value of the shares determined by the valuer plus any interest he is ordered to pay.  Lastly, the liberty to apply provision in the orders made cannot be invoked, as the terms of the orders are clear and there is no need for a further direction for payment of interest to facilitate the working out of the orders.

38.  I am in agreement with the submission of Mr. Lam that the court does have power to award interest in this situation, whether under the slip rule to cover an accidental slip or omission of counsel (Hong Kong Civil Procedure 2006, Vol. 1, para. 20/11/1), or under the provision in the orders made on 27 February 2004 giving liberty to apply “for directions as to the payment of the purchase price and generally”.  I see no reason why the terms of the orders should be so restrictively construed, as contended by Mr. Wong.

39.  I rule that interest should be awarded on the purchase price, following the line of cases cited by Mr. Lam, and for the reasons that follow.

The appropriate period and rate of interest

40.  The remaining question is the appropriate period for which interest should be awarded and at what rate.  The petitioner seeks an order that interest should run from the date of valuation, being 18 May 1997, to the date of payment, at the rate of 10% per annum.

41.  In the cases cited by Mr. Lam, interest was awarded from the date of the petition, that being the date of the valuation.  I agree with him as the date of valuation was 18 May 1997, being a date prior to the presentation of the petition and before the occurrence of the unfairly prejudicial acts, for the reasons given in paragraph 66 of my judgment on 27 February 2004, interest awarded on the purchase price should run from 18 May 1997.  This is an extreme case of the sort considered in Profinance Trust v. Gladstone [2002] 1 BCLC 141 at para. [30], unlike the situations in Re Planet Organic Ltd. [2000] 1 BCLC 366 (in which the valuation date was the date of the judgment, see also the discussion in Profinance Trust, supra. at paras [29] and [30]), Re Apollo Cleaning Services Ltd. [1999] BCC 786 (where a current valuation date was adopted and the continued profitability of the company was reflected in the valuation), or Re Clearsprings (Management) Ltd. [2003] EWHC 2516 Ch (where the valuation date was fixed as close as possible to the actual sale and the court declined to award interest on the basis there was nothing out of the ordinary).  As I have found, the business of the Company had been diverted to another entity since May 1997, the Company had formally ceased business since March 1999, and the value of the petitioner’s shares had been vitally affected for some time by the altered status of the Company when the petition came to be presented in December 2001.  During all this period, as a result of the unfairly prejudicial acts of the 1^st respondent, the petitioner has been receiving no benefit of any kind from his membership of the Company, and has been locked into an investment which has been made virtually worthless well before the petition was presented.  It would be appropriate to exercise my discretion under section 168A(2) to award interest and to order interest to run from 18 May 1997.

42.  In Re Tai Lap Investment, Re Gauss Electronics and Re Sharpart, interest was awarded at 10% per annum.  In Wong Man Yin, the court awarded 1% over the prima rate of the Hong Kong and Shanghai Banking Corporation from the date of valuation to the date of the order for directions on the valuation of shares and thereafter at the judgment rate, having regard to the fact that “there has been a rapid decline in interest rates, and a flat rate here would not accordingly be appropriate” (supra. at 726F to G).

43.  I am concerned with a period stretching back to 1997, where there have been considerable fluctuations in the interest rate over the years.  Even though interest on the purchase price is not awarded qua interest, but as “quasi-interest” by way of compensation to the petitioner for being kept out of the money in addition to the purchase price of the shares, I do not think a flat rate of 10% per annum would be appropriate.  I note that in Re Taipao Resins Chemical Co. Ltd. [2000] 116 HKCU 1, in which judgment was given on 13 March 2000, interest was awarded at the rate of 7% per annum only, having regard to the prevailing interest rates since the date of valuation in August 1998.  I would adopt the approach in Wong Man Yin on the appropriate rate of interest.

44.  Lastly, I wish to draw attention to the words of the English Court of Appeal in Profinance Trust, supra. at para. [32].  The claim for interest on the purchase price should not be “a last-minute afterthought”, as the power to award interest “should be exercised with great caution”.  “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.”

Order on the application for the award of interest

45.  I order interest to be awarded on the value of the petitioner’s shares fixed by the valuer, to run from the date of valuation being 18 May 1997 to 27 February 2004 being the date on which the order for purchase was made, at the rate of 1% over the prima rate of the Hong Kong and Shanghai Banking Corporation prevailing during this period, and thereafter at the prevailing judgment rate.

Order on costs

46.  I also make an order nisi that the costs of the valuation of the petitioner’s shares, including the costs of the application on 28 June 2006, are to be borne by the 1^st respondent as part of the costs of these proceedings, which I have awarded to the petitioner in February 2004.