YIP KWAI CHOR v. KING FUNG CONSTRUCTION WORK CO LTD AND ANOTHER

HCMP 375/2005
(Formerly HCCW 829/2004)

in the high court of the

hong kong special administrative region

court of FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 375 OF 2005

(FORMERLY COMPANIES WINDING-UP NO. hccw 829 of 2004)

______________________

______________________

HCA 2183/2004

in the high court of the

hong kong special administrative region

court of FIRST INSTANCE

ACTION NO. 2183 of 2004

______________________

______________________

______________________

D E C I S I O N

______________________

1.  On 12 December 2006, I gave judgment in these proceedings.  I have made findings in respect of the matters in dispute between the parties.  I invited the parties to make further submissions on the form of orders to be made and consequential directions to be given. 

2.  Mr. Yip on the one hand, and Mr. Lau and the Company on the other have respectively submitted their proposed orders and directions.  I have heard oral submissions from Mr. Yip and also from Mr. Yau (the latter acting for Mr. Lau and the Company).  I now give my ruling on the relief to be granted in these proceedings.  I propose to adopt the nomenclature used in the Judgment.

Date of Valuation of Shares

3.  The Petition was presented on 29 July 2004.  Mr. Yau accepted that the date for the purpose of valuing the shares should normally be the date of the petition.  Indeed, as Le Pichon J. (as she then was) said in Re Tai Lap Investment Co. Ltd. [1999] 1 HKLRD 384 at 399:

“	Prima facie, the petition date is a convenient date, that being the point in time when the petitioner crystallized his position in claiming to be entitled to cease association with or participation in the company.”

4.  As Mr. Yau submitted, that the adoption of the petition date as the relevant date is not immutable.  As Kwan J. said in She Wai Hung v. Juliano Lim and others, unrep. HCMP 6472/2001 (27 February 2004), at paragraph 66:

“	The overriding requirement is that the valuation of shares should be fair on the facts of the particular case.”

5.  Mr. Yau argued that fairness in the present case required that the value of Mr. Yip’s shares should be determined as at an earlier date, that is, 31 October 2003.  The main reason advanced was that owing to a number of matters which Mr. Yau characterized as breach of fiduciary duties owing by Mr. Yip to the Company, Mr. Lau would have been justified in terminating the quasi-partnership with Mr. Yip at the end of October 2003.  In Mr. Lau’s word, he would have no hesitation to “say good-bye” to Mr. Yip as a partner in business.

6.  Mr. Yau first relied on my finding in the Judgment that as a result of the arrangement between the Company and Sing Yip in respect of the 2 projects at Kam Chin Village and Hang Hau, Sing Yip undertook the works at the sites on its own account (see paragraph 54).  A successful claim was made, however, by a supplier (namely, Hop Chung Scaffolding Company Limited) against the Company for outstanding hiring charges in respect of materials and equipment used by Sing Yip on those sites.  The claim resulted in a judgment against the Company.  It was argued that as it was Sing Yip and not the Company which should be responsible for the outstanding charges, by failing to procure Sing Yip to discharge the liability towards Hop Chung, Mr. Yip had exposed the Company to the claim in disregard of his duties as a director of the Company.

7.  Another complaint was in relation to the outstanding sum of $3,247,828 owed by Sing Yip to the Company (see paragraph 189 of the Judgment).  It was similarly argued that Mr. Yip had a duty, which he disregarded, of procuring Sing Yip to repay that sum.  It was further said that if, despite Mr. Yip’s promise of repayment, it had been known to Mr. Lau that Sing Yip would deny liability of the sum and had no intention of making repayment, he would have terminated his business relationship with Mr. Yip.

8.  I see several difficulties with this argument.  First, the monetary liability was that of Sing Yip, not a personal liability of Mr. Yip.  Secondly, Mr. Lau’s complaint is not that Mr. Yip should not have allowed himself to be put in a position of conflict by being involved in both Sing Yip and the Company.  His complaint is that, while accepting Mr. Yip’s involvement in both companies, Mr. Yip was nevertheless under a duty to the Company to see to it that Sing Yip discharged its contractual obligations towards the Company.  I have considerable reservation as to the soundness of the argument, both as to the scope of the duty, and as to its alleged breach.  But it is perhaps inadvisable for me to express a concluded view on the issue because, as Mr. Lau has mentioned in his affirmation, this is the subject of an intended action which he and the Company will commence against Mr. Yip.

9.  On the assumption that Mr. Yip were indeed in breach of his duties as aforesaid, I am not sure what steps Mr. Lau said he could have taken which would have enabled him to say “good-bye” to Mr. Yip and terminated the relationship.  Although described as a quasi-partnership, legally the parties were (and still are) shareholders in the Company.  It would not be legally possible to dissolve the relationship by applying such notions as “acceptance of repudiation” in the same way as a termination of relationship between parties to a contract: see paragraph 20 of Mr. Lau’s 17^th Affirmation.  If Mr. Lau had meant to say that he would have either offered to purchase Mr. Yip’s shares or petitioned to wind up the Company so as to put an end to the relationship with Mr. Yip, then as a matter of fact and history he had done neither of such things.  I do not think Mr. Lau is entitled to say that, in retrospect, it was unfair to him for the relationship to have continued beyond October 2003 on the basis that he could have put an end to it, when he in fact did not.

10.  Mr. Yau also relied on the fact that Mr. Yip had absented himself from Hong Kong for a substantial period of time from 22 October 2003.  On behalf of Mr. Lau, he applied to reopen the issue as to the reason of Mr. Yip’s detention on the Mainland by seeking to introduce into evidence a copy of the judgment of the Guangdong Province Dongguan City People’s Court which, he said, was only obtained recently by Mr. Lau.  With reference to the judgment, Mr. Yau sought to argue that not only was the explanation given at the trial by Mr. Yip as to his detention untrue, it showed that his detention was actually due to his own fault by misconducting himself in front of the public security officers.  The ensuing inability to attend to the projects is another instance of the breach of his director’s duties.

11.  I have already rejected the application for introducing fresh evidence and reopening the issue, and I do not propose to repeat the reasons here.  In any event, for the reasons given in paragraph 9 above, I do not see how the breach, even if established (which in my view, is not), could have assisted Mr. Yau’s argument.

12.  I would mention in this connection that no argument has been advanced to the effect that Mr. Yip could or should have presented his petition at an earlier time.  It has not been established from the available materials that Mr. Yip has intentionally delayed the seeking of relief because of a desire to take advantage of the wrongdoer’s effort in rendering the Company’s business profitable.

13.  For the foregoing reasons, I am not satisfied that there are good grounds for displacing the petition date as the date for the valuation of Mr. Yip’s shares.  I would accordingly hold that the shares should be valued as of 29 July 2004.

The Valuer

14.  Mr. Yau argued that a registered quantity surveyor experienced in estimating the profits and costs of construction work, including formwork, should be appointed as valuer.  Mr. Yau emphasized that the valuer in the present case would be hampered in his task by the absence of proper documentation to support the accounts.  He said the expertise of a quantity surveyor would enable him to better understand the value of the work done and the materials used, and the margin of the profits typically generated in projects of the kind undertaken by the Company.  It was argued that he would be able to give a more realistic view of the Company’s profits and hence, the value of the shares.

15.  Mr. Yip said a certified public accountant is to be preferred.

16.  The task of the valuer is to determine the valuation of the shares, which involves not only considering the projection of profits or loss of the Company’s projects, but also analysis and interpretation of the Company’s accounts; valuation of potential or pending claims by or against the Company, and so on.  I think a professional accountant experienced in assets valuation will be better suited to these tasks than a registered quantity surveyor.  Whilst Mr. Yau’s concern over the lack of proper documentation is justified, the perceived difficulty may to some extent be addressed by allowing the accountant to consult a registered quantity surveyor as and when necessary to do so.

Prospect of Profits

17.  Mr. Yip asked that the prospect of the Company in making profits after the date of valuation should also be taken into account.  Mr. Yau disagreed, arguing that Mr. Yip had demonstrated by his conduct that he did not deserve to share in the future profits of the Company.  In addition to the above-mentioned matters allegedly constituting breach of fiduciary duties, Mr. Yau also relied on Mr. Yip’s statement made in the course of the proceedings that he would like to see the Company being wound up.

18.  At the date of the valuation, the Company was a going concern.  The ability of the Company in generating future profits must be a relevant element in determining the true worth of the Company, and it must be right that such prospect (or the lack of it) should be reflected in the value of the shares.  In terms of valuation generally, it may well be that the prospect of profits will be diminished as a result of a change of personnel in the management or when the co-operation of some key figures in the Company could no longer be assured.  But these are matters for the valuer and different questions altogether.  I am not attracted to the argument that the proper basis for valuation should somehow be distorted by broad notions of fairness.  Nor do I see any legal basis for leaving out of account factors which are otherwise relevant for valuation of the shares.

Discount for Future Profits

19.  In the Judgment, I have found that Mr. Yip was entitled to 50% of the profits of the Company notwithstanding his shareholding was only 30%.  Mr. Yau argued that the profit-sharing ratio should not apply to profits arising after the valuation date.  I do not agree.  There is nothing in the evidence to suggest that the agreement on equal profit sharing was confined to the projects at hand at the time.  If the valuer comes to a favourable view as to the prospect of future profits, the value of the shares should properly reflect the fact that Mr. Yip would be entitled to share half of them.

Expenses

20.  In the proposed orders and directions submitted by Mr. Lau, he sought a specific order that the valuer should bring into the Company’s account any sums which Mr. Lau is able to establish as loans to the Company or disbursements made on its behalf.  This direction should be given, Mr. Yau said, notwithstanding my findings that Mr. Lau had failed to account for the funds he had received from the 24 cheques.

21.  I do not think a specific order needs to be made in the terms sought, not because I disagree with it but I find it unnecessary to do so.  In the process of valuation, not only will the valuer have to assess the value of the assets, he will also need to ascertain the true extent of the liability of the Company.  Any liability, whether owed to Mr. Lau or any other creditor, will need to be taken into account on satisfactory proof.  I therefore do not believe it is necessary to make the order sought in this regard.

Interest

22.  I would follow the case of She Wai Hugn v. Juliano Lim and others, unrep. HCMP 6472/2001 (21 September 2006) and the authorities referred to in paragraph 36 of that Decision, in holding that interest should be awarded on the purchase price of the shares.

Orders

23.  I will make the following orders in HCMP No. 375 of 2005 :

(1)	The 2nd Respondent do purchase the 3,000 ordinary shares of $1.00 each in the capital of the 1st Respondent presently registered in the name of the Petitioner (“the Petitioner’s Shares”) 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 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 (“HKICPA”) 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 1st Respondent as at 29 July 2004 (being the date of the Petition) and without discount for the fact that the Petitioner’s shareholding is a minority holding;
(3)	In valuing the Petitioner’s Shares, the Valuer is directed to take the following matters into account:
	i.	the Petitioner was entitled to share 50% of the profits of the 1st Respondent;
	ii.	the 2nd Respondent shall repay the 1st Respondent a sum of $13,759,670 belonging to the 1st Respondent;
	iii.	the 2nd Respondent shall repay the 1st Respondent all sums which the 1st Respondent would have received under the West Kowloon Contract but for the 2nd Respondent’s wrongful diversion less any amount which the 2nd Respondent is able to establish with proper documentation as expenses properly incurred in relation to that project;
(4)	The 2nd Respondent do provide to the Valuer all books, accounts and documents of the 1st Respondent relevant to the valuation of the Petitioner’s Shares within 14 days from the date of the appointment of the Valuer;
(5)	The Petitioner shall have the same right of access to any documents provided by the 2nd Respondent under paragraph 4 hereof;
(6)	For the purpose of carrying out the valuation, the Valuer shall be entitled to receive representations in writing from both Mr. Yip and Mr. Lau provided that each side should have full notice of the other’s representations;
(7)	Interest to be awarded on the value of the Petitioner’s Shares fixed by the Valuer, to run from the date of valuation being 29 July 2004 to 12 December 2006, at the rate of 1% over the best lending rate of HSBC prevailing during this period, and thereafter at the prevailing judgment rate;
(8)	Subject to (9) below, the 2nd Respondent do pay the Petitioner the value of the Petitioner’s Shares together with interest thereon within 14 days from the publication of the valuation by the Valuer for the purchase of the Petitioner’s Shares;
(9)	There be liberty to the 2nd Respondent to apply for further orders or directions relating to the payment of the purchase price not later than 14 days after the publication of the valuation by the Valuer;
(10)	The 2nd Respondent do pay the Petitioner the costs of these proceedings including any costs reserved and the costs of this application;
(11)	There be an order nisi that the costs of the valuation of the Petitioner’s Shares be borne by the 2nd Respondent with liberty to the 2nd Respondent to apply to vary the said order nisi not later than 14 days after the publication of the valuation by the Valuer;
(12)	There be liberty to all parties to apply for further orders and directions generally.

24.  I will make the following orders in HCA No .2183 of 2004:

(1)	The 2nd Defendant, Sing Yip Construction Engineering Ltd., do pay the sum of $3,247,828 to the Plaintiff, King Fung Construction Work Co. Ltd. together with interest on the said sum at the rate of 1% over the best lending rate of HSBC prevailing from time to time from the date of the Writ to 12 December 2006 and thereafter at Judgment rate;
(2)	The Plaintiff’s claim against the 1st Defendant be dismissed;
(3)	There be an order nisi that the costs of the Plaintiff be borne by the 2nd Defendant;
(4)	There be an order nisi that the costs of the 1st Defendant be borne by the Plaintiff.