SHE WAI HUNG v. JULIANO LIM AND OTHERS

CACV 411/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 411 OF 2007

(ON APPEAL FROM HCMP 6472 OF 2001)

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J U D G M E N T

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Hon. Yuen JA:

1.  This is the Petitioner’s appeal from an order of Kwan J made on 26 November 2007 that the 1^st Respondent do purchase the Petitioner’s shares in the 3^rd Respondent company Golden Bright Ltd 金信發有限公司 (“the Company”) at $2,730,453.45 net (with interest), a valuation which the Petitioner considers inadequate. 

S.168A application

2.  In 2001 the Petitioner had issued proceedings in the Companies Court under s.168A Companies Ordinance that the 1^st Respondent and the 2^nd Respondent (the 1^st Respondent’s son) be ordered to purchase his 40% share in the Company.

Kwan J’s 2004 order

3.  On 27 February 2004 after a 5-day hearing Kwan J ordered the 1^st Respondent to purchase the Petitioner’s shares in the Company at a price to be fixed by a valuer, with a direction that the valuer was to value the shares by reference to the assets, profitability and future prospects of the Company as at 18 May 1997 (the day before the Petitioner resigned as a director of the Company). 

Valuer’s Report

4.  A firm of accountants was appointed to be the valuer and it subsequently provided a valuation report. To cut a long story short, as a result of the 1^st Respondent’s challenge to the valuation report, the parties found themselves before the court again. 

Kwan J’s 2006  orders

5.  On 21 September 2006, Kwan J declined to find any bias or collusion between the Petitioner and the valuer, or that the valuer had departed from instructions, or that it had been incompetent or negligent, but found that the valuation had been performed on incomplete materials.  Accordingly the judge gave directions to the valuer to make a further or supplemental report after consideration of further materials and submissions.  The judge also ordered that the 1^st Respondent should pay interest on the purchase price of the shares when the valuation exercise was completed.

6.  After judgment was handed down however, the valuer informed the parties that it did not wish to continue and in November 2006 Kwan J gave further directions for the valuation to be carried out by the court.  Directions were given for the hearing, including directions on accounting experts to be called by the parties. 

Valuation hearing

7.  In August 2007 the parties duly appeared before Kwan J for the valuation hearing which took 4 days.  Both parties instructed accounting experts who provided reports. 

8.  The Petitioner’s expert was Miss Brenda Mak.  The 1^st Respondent’s expert was Mr Cheung Yuk Ming.  Miss Mak provided 4 reports and Mr Cheung 2 reports. Miss Mak’s opinion was that the value of the Petitioner’s shares was nearly $17.7 million.  Mr Cheung’s opinion was that the shares were worth nothing.  Essentially Miss Mak based her opinion on the Company’s  management accounts whereas Mr Cheung based his opinion on the Company’s audited financial statements.   

9.  Both experts gave oral testimony and were cross-examined by the parties’ respective counsel.  In the course of the hearing, Miss Mak and Mr Cheung each submitted 2 further reports, so that Miss Mak provided a total of 6 reports and Mr Cheung, 4 reports.       

Kwan J’s 2007 order

10.  On 26 November 2007 Kwan J handed down a 40-page judgment.  The judge found that the Petitioner’s 40% shares were worth $3,227,124.70 and after setting off a sum owed by the Petitioner, ordered the 1^st Respondent to purchase the Petitioner’s shares at the net price of $2,730,453.45 (with interest from 18 May 1997 at the rate of prime + 1%).  The Petitioner was also awarded the costs of the hearing.

Appeal

11.  Initially both parties wished to appeal the 2007 order.  The 1^st Respondent lodged a Notice of Appeal and the Petitioner lodged a Respondent’s Notice.

12.  However on 1 February 2008 the 1^st Respondent applied to withdraw his notice of appeal.  An order in terms was made by Tang V-P on the same day.  That leaves the Petitioner’s Respondent’s Notice.

13.  Although a number of grounds had been raised originally, the Petitioner has confirmed that there is now only 1 issue, which is this: for what period could the Company’s subsidiary continue to operate its business on the mainland?

14.  To understand the Petitioner’s arguments, I will briefly summarize the background of the business on the mainland, details having been set out in Kwan J’s judgments. 

Factual history

15.  The 1^st Respondent (and his family) and the Petitioner (through a company called Consensus Industrial Co Ltd (“Consensus”)) were originally the owners of a Hong Kong company called Gold Loop Electro-plating & Metal Finishing Co Ltd 金順金屬表面處理有限公司 (“Gold Loop”), the 1^st Respondent and his family holding 90% and Consensus 10%.

November 92 agreement

16.  On 10 November 1992, Gold Loop entered into an agreement (“the November 92 agreement”) with the Shenzhen Baoan External Trading Company to set up a joint-venture whereby Kwai Chung Gold Loop Spectacles Processing Factory 葵涌金順眼鏡加工廠 (“the Factory”) was to operate a business of electro-plating spectacle frames.  In 1993, a factory building was constructed and in 1994 the Factory started production.

1993 transactions and end-result

17.  Meanwhile, in 1993, there was a series of transactions with the end-result that

-  the Petitioner disposed of all his interest (via Consensus) in Gold Loop to the 1^st Respondent and his family, but

-  a new company (the Company) was incorporated, with the Petitioner holding 40% and the 1^st Respondent and his family 60%, and

-  the Factory became a wholly-owned subsidiary of the Company. 

As a result, the Petitioner relinquished his interest in Gold Loop, and Gold Loop relinquished its interest in the Factory.  The only connection between Gold Loop and the Factory was that the 1^st Respondent had shares in both.

Operation of the Factory

18.  As I mentioned earlier, the Hong Kong party entitled to operate the Factory under the November 92 agreement was Gold Loop.  But after 1993, it was the Company which operated the Factory and in 1996, this was officially recognized by the authorities in Shenzhen (the Shenzhen Longgang Economic Development Bureau).

Right to operate the Factory

19.  Under the November 92 agreement, Gold Loop (and subsequently the Company) was given the right to operate the Factory for 5 years.  This was subsequently extended for a further period of 10 years to 10 November 2007.  (In fact however the Company’s business dwindled after the Petitioner left in May 1997 and it ceased business altogether on 31 March 1999).     

20.  At the appeal hearing, the Petitioner said that the right to operate the Factory was similar to business registration in Hong Kong, but involved the authorities imposing various conditions such as the employment of workers, their terms of employment, etc.

Right to use land

21.  It is important to note that this right to operate the Factory was different from the right to use the land on which the Factory stood.  The use of the land was covered by a separate agreement (rather like a Government lease in Hong Kong).  As the judge pointed out, this written agreement was dated 16 July 1992 and made between a Mainland party寶安縣葵涌鎮官湖村經濟合作社 and Gold Loop whereby Gold Loop was granted the right to use the land for 50 years, expiring on 15 July 2042: para. 81 of the 2007 judgment.  As at the valuation date it still had an unexpired term of 45 years and 2 months. 

Issue on appeal

22.  This forms the crux of the Petitioner’s appeal.  He submits that the judge was wrong in valuing his shares on the basis that the right to operate the Factory was limited to 10 November 2007 when the land use rights would not expire for a further period of 35 years after that date.

Discussion

23.  I do not accept that argument.  It was common ground that the right to operate the Factory expired on 10 November 2007.  It was not proved that the Company had the right to extend it for as long as the Factory could use the land.  If that was the Petitioner’s case, it should have been asserted and proved before the judge.  But that was not done. 

24.  Instead what happened was this: Miss Mak at first projected the Company’s profits based on a useful life of 10 years, which was in turn premised on the unexpired term of the right to use the land for 46 years from the valuation date: para. 31(6) of the 2007 judgment.  However after her attention was drawn to the fact that the right to operate the Factory expired on 10 November 2007, Miss Mak then adjusted her data, and in her 5^th report dated 1 August 2007 reduced her projection of profits – now based on the Company having a useful life of only 3 years: para. 32 of the 2007 judgment.

25.  So it is clear that at the hearing the Petitioner did not seek to assert that the Company would have the right to operate the Factory for as long as the Factory could use the land.  Quite to the contrary, by adjusting the data in her 5^th report his expert Miss Mak accepted that the Company’s right to operate the Factory expired on 10 November 2007. 

26.  After undertaking a detailed and careful evaluation of the experts’ widely- disparate evidence, the judge considered it appropriate to use a combination of approaches and to apply a percentage weighting to them.  The judge’s approach is not challenged on any other grounds in this appeal. 

Terminated sale and purchase agreement

27.  As a matter of completeness however, I would mention that in the course of his submissions, the Petitioner referred on a number of occasions to the fact that in May 1997 the 1st Respondent had agreed to purchase his shares in the Company on the basis that the net asset value of the Company was $10 million.  However after payment of the deposit, the 1^st Respondent did not proceed with the purchase and both parties regarded the agreement as having been terminated.  In 1999 the Petitioner commenced an action (HCA5969/1999) against the 1^st Respondent for damages for breach of the agreement but this was not proceeded with.  Instead he elected to institute proceedings in the Companies Court in 2001 for relief under s.168A of the Companies Ordinance.  Accordingly the sale and purchase price is not binding on the parties, and it can only be regarded as part of the relevant factual background, of which Kwan J was well aware: see paras. 21-22, 35 of the 2004 judgment and paras.5(7) - (8) of the 2007 judgment. 

Order

28.  For the reasons set out in this judgment, I would dismiss the appeal.  The parties having agreed that the costs of the appeal should follow the event, I would order that the Petitioner should pay the 1^st Respondent’s costs, to be taxed if not agreed.

Hon. Chu J:

29.  I agree.