DAVID KONG v. PINE GROWTH MANUFACTURING CO LTD AND OTHERS

HCCW321/2006
& HCCW322/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 321 OF 2006

___________________

___________________

_______________

R U L I N G

_______________

1.  I think, in principle, that it is undesirable for the court to have to reopen, time and again, orders that have been made because the parties cannot agree on particular aspects of them. I also have doubts as to whether or not I actually have jurisdiction to amend the orders that I have made, because the matters that are now raised are matters that either were raised or could have been raised at the previous hearing.

2.  In any event, in the circumstances of the case, I am disinclined to amend the order that I made on the last occasion.  As far as the form of the engagement letter is concerned, there is no reason to suppose that it was not originally put forward in a form that was drafted by the proposed valuers, FTI Consulting, without input from any party as far as the terms of the engagement letter were concerned. 

3.  The only additional costs that might be incurred (and which might arguably be avoided if the proposed amendment to the engagement letter is included) is in respect of one set of valuations which have already been procured previously, so that there might be a certain amount of wasted expenditure in having to get further valuations if the engagement letter were to be understood as requiring this.  This relates to machinery in Zhanjiang, in respect of which there are already existing valuations submitted by each party.  However, even if one were to leave the engagement letter in its original form, I do not see that the valuers would be bound to get a third set of valuations at this late stage, some four years down the road, in respect of that particular machinery.  On the other hand, if there are other assets that require to be valued in respect of which there are no existing independent valuations, then it seems to me that if the valuers have determined to approach the matter on the basis of a net asset valuation basis, they would need to have valuations, as they have proposed in the original form of appointment letter. 

4.  In this respect, if they themselves have within their organisation the in-house capability to provide valuations, there is no reason why their in-house valuer should not tender for the valuation process along with any other tenderers.  If their tender happens to be the most economical, then that is the one that will be accepted.  On the other hand, if other external valuers are able to deal with the matter more economically, there is no reason why that should not happen.

5.  Thus, having regard to the view that I take of the obligations of the valuer under the relevant paragraph of the letter of engagement, it seems to me that there is no need to amend the letter of engagement further so as to give rise to the potential for a situation in which the valuer might choose, for reasons best known to itself, not to obtain a valuation at all, which I do not think can have been their intention.

6.  So for that reason, I am not inclined, as a matter of substance, quite apart from my disinclination to revisit my order, to make the amendment sought in relation to the first point raised by Mr Coleman.

7.  As far as the second point raised by Mr Coleman is concerned, the parties now appear to be ad idem, that the extent of the inspection that the Petitioner may have of documents provided to the valuers by the Respondents is to be limited in the way that is indicated in the consent order made in 2007. 

8.  In those circumstances, I do not think it is strictly necessary to make any amendment to paragraph 4 either.

9.  In the circumstances, I do not think that it is necessary to make any change to the order that was made on 10 November and I decline to do so.  The consequence is that Mr Coleman’s summonses will simply be dismissed. 

(Submissions on Petitioner’s summons)

10.  As far as Mr Carolan’s summons is concerned, I will simply direct that the Respondents sign the engagement letter within three days.

(Submissions on costs)

11.  I think having regard to the fact that the order was made and was not complied with and it has been necessary to have this hearing to clarify matters, I think the appropriate order to make would be that the Petitioner’s costs of these applications should be paid by the Respondents.  However, I am not going to order that they be paid on any enhanced basis.  Thus, they will be paid on the party and party basis, to be taxed if not agreed.

HCCW321/2006

& HCCW322/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 321 OF 2006

___________________

___________________

_______________

D E C I S I O N

_______________

1.  This application arises out of a settlement of proceedings that was reached some years ago.  In the proceedings, the petitioner sought orders under section 168A and 177(1)(f) of the Companies Ordinance in relation to the two companies that are the subject of these petitions alleging unfair prejudicial conduct against his interests by the respondents.

2.  The matters did not go to trial because prior to that stage being reached, the parties were able to agree that the matter should be compromised on the basis of a Tomlin order by which the respondents agreed to buy out the interest of the petitioner in the two companies concerned on the basis of a valuation to be conducted by valuers to be appointed for that purpose.

3.  Although this happened upwards of some four years ago, regrettably, as from the court’s experience happens from time to time, there have been difficulties in relation to the valuation.  In this case, the difficulties have resulted in an impasse being reached between the valuers on the one hand and at least the respondents on the other, as to the manner in which the valuation should be carried on and payment of their fees, causing a general breakdown in the relationship between them.

4.  I do not, at this stage, propose to embark on any sort of examination of those matters.  Those are matters which may be relevant to one aspect of the application that is before me today, but it is one which I have decided should be dealt with at a later stage.  However, the effect of this breakdown in the relationship between the valuers on the one side and the parties, or at least one of them, on the other, is that the valuation by the appointed valuers, who were Messrs Grant Thornton (now known as JBPB), is not going to be completed.

5.  In these circumstances, a new valuer has to be appointed and indeed it appears that the respondents, in about April this year, suggested that Messrs Baker Tilly should be appointed in place of Grant Thornton in order to carry out or complete the valuation exercise.  Baker Tilly, as a matter of history, was in fact the candidate that had been proposed for the role of such valuer by the respondents themselves at the time when the Tomlin order was entered into.

6.  The petitioner agreed to this suggestion.  However, for various reasons which it may be relevant to consider in due course but not today, this did not happen immediately.  Instead, the respondents suggested that it would be desirable first to retrieve documentation from Grant Thornton so as to provide it to Baker Tilly.  For various reasons, that has not been possible.

7.  In the result, the petitioner took out this application seeking the appointment of Messrs FTI Consulting (Hong Kong) Limited (“FTI”) to be the valuers in place of Grant Thornton.  He also seeks in this application directions for the further conduct of the valuation which I understand from Mr Carolan to be directed principally at ensuring that documentation that was provided to Grant Thornton is provided to the new valuers to be appointed at a reasonably early date so that their valuation can be carried out with as little further delay as possible.

8.  A third matter that is the subject of the summons that was issued by the petitioner on 13 October this year, is to seek an order that the costs of this application be borne by the respondents, it being the petitioner’s case that the need for this application to be made has been brought about by the respondents unwillingness to co-operate and act in a co-operative or sensible manner in relation to the difficulty that has now arisen.

9.  In his skeleton argument filed in support of this application, Mr Carolan has suggested that those costs should be ordered to be paid on an enhanced basis - on the indemnity costs basis - to reflect the court’s disapproval, which he says the court should express, at the way in which this matter has been dealt with by the respondents.

10.  Although the application was taken out on 13 October, no evidence was filed by the respondents until shortly before 9.30 this morning.  More accurately, that evidence was not filed but it was produced to the court and to the petitioners shortly before the court sat this morning at 9.30.  Faced with that situation, I adjourned the matter until 3.00 this afternoon so as to afford Mr Carolan and myself an opportunity to read the material that had been provided.  We have now done so.

11.  For the purposes of today, I am satisfied that it is desirable to make the orders in relation to the appointment of a valuer and to give directions as to the provision of documents to that valuer today if at all possible.  This is to avoid further delay to an already lamentably delayed valuation being produced.

12.  The questions that arise are, first, as to the identity of the valuer and, second, as to the directions to be given to them.  So far as the identity of the valuer is concerned, the petitioners have indicated that they propose the appointment of FTI.  In their evidence, they explain that FTI is, in fact, a successor company of Baker Tilly, the valuers originally proposed by the respondents.  The evidence that I have seen indicates that this is indeed the case.

13.  The respondents, however, now object to the appointment of FTI and propose instead that either Messrs PricewaterhouseCoopers (“PwC”) or Messrs Ernst & Young (“EY”) should be appointed as valuers instead.  This suggestion was made only in the affirmation of Mr Chan, who is the respondent in one of the proceedings, which was produced this morning.

14.  Mr Yeung, who appears today for the respondents, provided a skeleton argument at about lunchtime, in which he set out various matters.  The first paragraph of that skeleton indicates that the respondents do not oppose directions being given for the appointment of a replacement valuer and asserts that the respondents are anxious for a valuer to be appointed as soon as possible.  They say that the issue is who a suitable candidate might be and whether the valuation work should be conducted afresh, or from scratch, or by taking advantage of such work as has been done by Grant Thornton as may be available to them. 

15.  On the first issue, paragraph 11 of the skeleton argument (paragraphs 2 to 9 deal principally with some aspects of the alleged delay in the matter and whether or not this was the fault of the respondents which, as I have said, is not a matter I propose to go into today) indicates that, in the view of the respondents, PwC or EY are obviously more suitable candidates to act as replacement valuer.

16.  First, it is said that because PwC and EY belong to what is colloquially known as ‘the big four’ - the four largest accounting practices worldwide – they are for that reason to be obviously more reliable and reputable than FTI which, it is suggested, may not even be a firm of certified public accountants.  Second, and, according to Mr Yeung more importantly, PwC and EY are prepared not to conduct the valuation work from scratch and are therefore, it is said, in a position to complete it more expediently. 

17.  Dealing with the first point, it is undoubtedly correct that PwC and EY are accountancy firms that belong to the big four.  That is not, however, to say that other firms would not be equally capable of carrying out the work of producing a valuation of the companies.  I would also note that so far as PwC at least is concerned, it would not be PricewaterhouseCoopers, the big four accounting firm itself, that would be carrying out the work but one of its associated companies through which work relating to forensic accounting and valuation exercises is carried out.

18.  The material before me indicates that FTI is part of an organisation that has a substantial worldwide practice, albeit perhaps not quite as substantial as that of either PwC or EY, and that FTI is the company in that group or that organisation which carries out valuation and forensic accounting work.  There are other companies in the group, including a company called FTI Consulting Asia Limited, which appears to be on the Official Receiver’s panel A of appointment-takers for insolvency and winding-up work. 

19.  It appears to me that it is not at all unusual for firms of accountants and insolvency practitioners to structure their businesses in such a way that different functions are carried out by different companies within their umbrella organisation.  I therefore do not think that the fact that FTI is a company with a somewhat limited amount of paid-up capital is a relevant matter for the court to take into account against their being appointed.  What is more important is the ability of the firm to provide the services required and the identity and experience of the persons who will be carrying out the work in question. 

20.  So far as FTI is concerned, the material that I have before me indicates that FTI is staffed or run by practitioners from two well-known insolvency and forensic accounting and accounting firms, formerly known as Ferrier Hodgson and Baker Tilly.  The person signing the draft engagement letter put forward by FTI is Mr Simon Blade.  He is certainly someone who is known in Hong Kong to have acted as a liquidator and to have provided services along the lines of forensic accounting and valuation services. 

21.  In my view, there is nothing to suggest that FTI would not be able to conduct the valuation exercise as efficiently, expeditiously and economically as either PwC or EY.  I bear in mind also that Messrs Baker Tilly (FTI’s predecessor firm) were, in the first place, the proposed valuer put forward by the respondents.  It seems to me to lie ill in the mouth of the respondents to now suggest that this firm, which they themselves put forward, and which is in effect the same entity as they put forward some four years ago, is somehow no longer suited to provide the services that are now required.

22.  Apart from this, it seems to me that looking at the proposals that have been put forward, there is not a great deal of difference between them, save that FTI have proposed that they are prepared to charge a fee on a capped fee basis for the entire piece of work.  This is something that counts to a small extent in favour of their appointment since it provides a modicum of certainty as to the costs that will be involved.  Their proposed capped fee is HK$800,000.  This is the same as the estimate provided by PwC and about 9 per cent lower than the estimate that has been put forward by EY.

23.  Moving on to the second point, it was originally contended by Mr Yeung that, in contrast to FTI, EY and PwC were prepared to take advantage of whatever work had been done by Grant Thornton and, so it was suggested, would be able to complete the work perhaps more speedily and perhaps at less cost than would be the case if FTI were appointed. 

24.  However, that appears to be a misconception on Mr Yeung’s part as it is quite clear from FTI’s proposed engagement letter and the covering letter accompanying it, that they too would be prepared to take advantage of such work as has already been done by Messrs Grant Thornton.  That work seems to consist primarily of a draft valuation of the companies on a net book value basis based on the book value or historic costs of various assets in the books. 

25.  There is some dispute as to whether or not this is an appropriate basis for valuation, it being, in particular, the petitioner’s case that the appropriate basis for valuation would not be net book value but a fair value, taking into account the fair value of the assets recorded in the books of the company as at the date at which the valuation is to be carried out.  That, again, is not something that it seems to me that I need to determine or consider today. 

26.  What is important is that the valuer who is appointed is, first of all, willing to have regard to such work as has been done by Messrs Grant Thornton which is available to them in order to minimise, so far as possible, the time and expense of the valuation exercise, although at the same time, it must be understood that if (as I propose to do) a new valuer is appointed, the work product and the valuation that is to be produced will have to be the product of that valuer, exercising its own professional judgment.  It would not, in my view, be appropriate for the valuer to uncritically adopt work done by another valuer, but it would of course be open to it to have regard to that work if it felt, exercising its professional judgment, that it were appropriate to do so.

27.  FTI have, as have PwC and EY, indicated that they are prepared to look at the work done so far to the extent that it is made available to them, and to the extent that this results in the work being completed in a shorter time than might otherwise have been the case and their time spent therefore being less, that the fees charged would be reduced accordingly to reflect the actual time spent if the time spent, when applied to their hourly rates, produced a figure of less than the estimate. 

28.  In other words, FTI, like PwC and EY, would be amenable to passing on any savings that might accrue as a result of being able to have regard to the work that has been done by Grant Thornton so far.

29.  In those circumstances, it does not seem to me that the second point that is taken by Mr Yeung is in fact a point of substance.  In fairness to Mr Yeung, when this was pointed out to him in the course of argument, he did not press it. 

30.  This therefore means that the only point that is being made relates to the status of PwC and EY as members of the big four, but that is not a determinative matter.  There are a number of firms that specialise in valuation and forensic accountancy and insolvency work, all of which are, in the court’s experience, competent, and there is no reason to think that FTI will not be as competent as PwC or EY.

31.  In those circumstances, I do not think that the grounds put forward for objecting to the appointment of FTI have any real substance and I therefore think that the appropriate course would be to appoint FTI to be the valuers for the purpose of the valuation referred to in the Tomlin order in place of Grant Thornton.

32.  Turning now to the question of directions to be given concerning documentation to be provided to them, there was initially some confusion, not least on my part, as to what documentation was actually available in terms of documentation that had been supplied previously to Grant Thornton by the two parties. 

33.  However, following clarification by Mr Yeung, it appears that the position is this.  Both parties have provided documentation to Grant Thornton over the period during which Grant Thornton had been acting as valuers.  The petitioner appears to have kept a full set of copies of the documentation that he provided to Grant Thornton along with a full set of copies of such documents as were provided by the respondents to Grant Thornton, insofar as he was provided a copy of them (not all documents provided to Grant Thornton were copies to the petitioner).

34.  The petitioner, therefore, is in a position to make available a further set of such copies to FTI within a reasonably short period of time.

35.  From the point of view of the respondents, however, the position appears to be slightly different.  It appears that the documentation provided by the respondents to Grant Thornton can be divided into two broad categories.  First, copies of hard copy documents maintained by the respondent companies and their associated or subsidiary companies in various parts of the mainland which were sought by Grant Thornton for the purpose of the valuation exercise.

36.  As I understand it, the respondents have a list, or have a record of the documents that were provided but do not necessarily have a full set of copies of what was provided.  They may have some copies but not, it seems, a full set, so that a number of the documents, copies of which were provided to Grant Thornton, exist only in their original form in their original locations.

37.  In addition, certain documents were provided in soft copy format.  These were mainly various accounting documents and cash flow statements, some of which may not have existed as such at the time that the order was made but which were created by the respondents based on, presumably, underlying documentation for the time period in question, being created at the request of Grant Thornton.

38.  Such soft copies which had been provided to Grant Thornton, I understand to still reside on various computers or servers maintained by the respondents, although they may not all reside in one place. It is also not clear whether any of these documents, or copies of these soft documents, have been made available to the petitioners.

39.  The position, therefore, is that while it will be probably relatively straightforward and a relatively quick task for the petitioners to produce a set of copies of the documents that they handed over to Grant Thornton, the respondents may not be in a position to do so quite as quickly.  Mr Carolan suggested that a period of three weeks should be afforded to the respondents to enable them to produce a fresh set of such documents for the benefit of FTI.

40.  Mr Yeung, having taken instructions, suggested that a period of four weeks was needed.  In the overall scheme of things, I do not think that the additional delay that will be caused by accommodating the request made by Mr Yeung will make any real difference to the timing of the delivery of the report and, in those circumstances, I would accede to the request that a period of four weeks be set, rather than three weeks. 

41.  I would therefore direct that each party should provide to Messrs FTI Consulting (Hong Kong) Limited a full set of the documents which they provided to Grant Thornton during the time when Grant Thornton was acting as the valuer appointed by the court, within 28 days from today.

42.  A further question has arisen as to whether or not a set of copies should either be provided by each party to the other, or whether each party should be entitled to inspect and take copies of such documents in the possession of the valuer.  In the event, I think both parties are content that the other side should have access to, for the purpose of inspection and taking copies, such documents in the possession of the valuer. 

43.  It seems to me that that would be a sensible approach given that, first, it will result, presumably, in less cost to the party seeking to obtain copies in that it will be able to acquire the copies or make the copies itself without having to go through the offices of the other side’s legal representatives; and secondly, it will also have the benefit of being less disruptive to each of the parties in that it will not be necessary to have the other party coming onto its premises to inspect such documentation and take copies thereof.

44.  I therefore would direct that each party is to be at liberty to seek and obtain copies of any documentation provided by the other party to the valuers pursuant to my earlier direction.  I do not propose to put any time limits in respect of that.  That will be a matter for the parties to decide with the valuer, and to do so in a manner that will be compatible with enabling the valuers to carry on their work as expeditiously as possible.

45.  So for the reasons that I have given, I shall appoint FTI to be the valuers in place of Grant Thornton and I shall give the directions that I have indicated. 

46.  In the event that FTI should consider it necessary to seek further information or documentation from either party, that will be a matter for them.  If there is any difficulty in relation to that, then that is a matter that may have to be referred back to the court if necessary. 

47.  However, I would express the hope that it will not be necessary to do so because it seems to me that this valuation has already been substantially delayed and it must be in the interests of all parties for it to be concluded as quickly as possible.  With that in mind, I would hope that the valuers will make the best use that they can of the information available and limit such further requests for information to matters which they consider to be truly critical to their ability to produce a valuation that will fairly value the shares of the companies that are to be transferred.

HCCW321/2006
& HCCW322/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 321 OF 2006

___________________

___________________

HCCW322/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 322 OF 2006

  ____________________

____________________

____________________

D E C I S I O N

____________________

1. This application arises in the context of two petitions which were presented by Mr David Kong, the petitioner, on 24 June 2006 in respect of two companies in which he is a shareholder.  The companies are Pine Growth Manufacturing Company Limited which is the 1st respondent in HCCW321 of 2006 and Pine Development Limited which is the 1st respondent in HCCW322 of 2006.

2. Mr Kong holds 30 per cent of the issued shares of Pine Growth and 33 per cent of the issued shares of Pine Development.  The other shareholders in the two companies are members of the Chan family.  In the case of Pine Growth, 70 per cent of its shares are beneficially owned by Mr Chan Kin who I am told is the patriarch of the Chan family.  In Pine Development, the remaining 67 per cent of the shareholding is owned by Mr Charles Chan.

3. The directors of Pine Growth are Mr Chan Kin; Mr Charles Chan, who is the son of Mr Chan Kin; and James Chan, the brother of Charles Chan, along with Mr Kong.  The same persons, with the exception of Mr Chan Kin, are directors of Pine Development. 

4. Petitions having been presented on 24 June 2006, an application came before the court for the appointment of receivers or provisional liquidators in relation to the companies in December 2006.  However, in the event, the outcome of that application was that on 18 December 2006, the parties agreed to settle their disputes under the petitions.  As a result, they entered into a Tomlin Order, in effect, which provided for Mr Kong's shares to be sold to the respondents other than the companies on the basis of a valuation that was to take place.  The valuation was to be done by reference to the value of the companies on a going-concern basis without any discount, I think, for the fact that Mr Kong was a minority shareholder. 

5. The valuer to be appointed to carry out this valuation was to be a certified public accountant.  The valuer was directed by the terms that were agreed to take certain matters into account.  He was to be given access to the books and records of Pine Growth, Pine Development and a number of other companies and entities for the purpose of doing the valuation  Kong and his advisers were also to be given access to and to be permitted to take notes or make copies of books and records, whether in hard or soft copy, for the purpose of making representations to the valuer which both sides were entitled to do.  There was also a term relating to the obtaining of the release of Mr Kong from guarantees which he had given in respect of debts of the companies.  This is not surprising since it is natural that he would not wish to be under any further liability in respect of the debts of the companies after he ceased to be a shareholder of them. 

6. Since then, however, the working-out of the terms of settlement and their implementation has been bedevilled by difficulties and delays which has resulted in a number of applications to the court.  One such application was the one which came before me on 1 August 2007.  On that occasion, I gave certain further directions with a view to progressing the matter.  Those directions related both to the appointment of valuers and in relation to the inspection of documents by Mr Kong. 

7. Unfortunately, those directions have not resulted in much progress being made.  Parties appear to have reached an impasse in relation to the appointment of valuers and there have also been, it seems, further difficulties in relation to inspection and also in relation to the release of the petitioner from the guarantees that he has given. 

8. I shall deal first with the question of the appointment of valuers.  The matter now comes before me on two sets of two sets, the first set having been issued by Mr Kong and the second set by the respondents, each seeking the appointment of valuers.  Mr Kong seeks the appointment of Messrs Grant Thornton, whereas the Chans seek the appointment of Messrs Baker Tilley.  But so far as this issue is concerned - that of the appointment of valuers - the position is essentially the same in relation to both petitions and I shall therefore deal with them as if they were one matter. 

9. In the order of 1 August 2007, it was ordered that the respondent should co-operate with the petitioner to appoint Grant Thornton as valuer for the purposes of the valuation to be carried out under the terms of the Tomlin Order.  The order, however, went on to provide that if Grant Thornton should refuse accept appointment on terms acceptable to both parties, the parties should then seek to appoint Baker Tilley as the valuer.

10. There was, shortly after the hearing on 1 August, some dispute as to the precise terms in which this particular order should be made.  Initially, at the end of the hearing before me, it was left to counsel to try to sort out an agreed form of words.  This does not, however, seem to have happened.  In the event, what seems to have happened is that the petitioner's side put forward a draft for the court's consideration.  On becoming aware of this, the respondents responded, making certain comments and suggestions as to the appropriate wording to be adopted. 

11. One particular matter that was suggested by the respondents was the addition of the phrase "on terms acceptable to both parties" which I have just referred to, in the context of the appointment of the valuers.  Although the petitioner, I think, initially agreed to the inclusion of this phrase, he later sought in correspondence with the respondents in the court to withdraw his agreement to it.  The matter then fell to me to make a ruling and I ruled that the term should be included. 

12. Mr Scott, who has appeared today for the petitioner has sought to characterise this term as giving, in effect, a veto to the respondents over the appointment of Grant Thornton.  But, with respect, I do not think that this is an entirely accurate characterisation of the term.  I think that the relevant paragraph on my order of 1 August 2007 has to be construed as a whole.  Read as a whole, it requires the parties to co-operate, initially, at least in the first place, in the appointment of Grant Thornton.  I think that this imports a need to make genuine efforts to do so and to act reasonably in seeking Grant Thornton's appointment. 

13. However, it is also for the parties, as made clear by the following sentence in which reference is made to the possibility arising that Grant Thornton may not be prepared to accept appointment on terms acceptable to both parties, that the parties must try to agree the terms on which Grant Thornton should be appointed and it seems to me that provided that the terms which one or other party seeks to put forward are reasonable ones, they should be accommodated.  So understood, the order provides a measure of protection to both parties so that neither is forced to proceed with a valuation by a valuer on terms to which he has reasonable objection. 

14. In the event, the way in which matters developed was as follows:  Grant Thornton were invited to discuss the proposed appointment with the parties and to make a preliminary inspection of the documents relating to the company accounts with a view to providing a quotation.  This seems to have taken place reasonably soon after 1 August 2007 hearing.  By 10 September 2007, Grant Thornton had produced a draft fee proposal for discussion purposes.  It was clear from the document and the proposal itself that is was a draft for discussion purposes.  It was also made clear in the draft proposal that Grant Thornton would only be in a position to provide a firm proposal after an inspection of the underlying documents, books and records of the companies and other entities concerned. 

15. Notwithstanding this tentative and qualified nature of the proposal, an attendance note from the petitioner's solicitors dated 13 September 2007 appears to record that the petitioner had "accepted the proposal".  Nothing, however, was heard from the respondents.  A number of reminders were sent and eventually, on 17 October 2007, the respondents' solicitors wrote to those representing the petitioner saying that they were considering an appeal in relation to the 1 August 2007 order and felt that the appointment of the valuer should be put on hold until that matter was resolved. 

16. In the event, however, within a few weeks it was decided that no appeal would be proceeded with after all and, in November 2007, arrangements were made for Grant Thornton to inspect documents at the companies' offices.  However, shortly before that inspection was to take place, the petitioner decided to give notice of his intention to inspect the companies' books and records at the same time.  A consequence was that the inspection that should have taken place by Grant Thornton was delayed for some two weeks.  Each side blames the other for the delay.  However, as the delay was only of some two weeks, I do not regard it as particularly substantial and I do not think it necessary at this point for me to resolve the question of who was to blame for it. 

17. In January, Grant Thornton came up with a revised proposal in which they suggested that the fees would, in fact, be in the region of HK$1.2 million in addition to which there would be a charge for all disbursements that they incurred.  No cap was offered in respect of either the fees or the disbursements.  Again, this was accepted quite promptly by the petitioner.  The solicitors again pressed the respondents to respond to it.  After two reminders, the respondents gave their answer on 12 February 2008.  While accepting that there was no objection in principle to Grant Thornton's appointment on the grounds of competence or integrity, they made the point that the quotation had been increased by what appeared to be a fairly substantial amount.  It had increased by some 50 per cent from the lower ground of the initial rough quotation and by 20 per cent, $200,000.00, from the upper bound of that quotation. 

18. They suggested that, in the circumstances, it might make sense to obtain a further quotation from an alternative party.  They suggested, given that Baker Tilley was the second choice of valuer that the parties had identified in the order of 1 August 2007, that they should approach Baker Tilley for a quotation.  The petitioner's response was that he was not prepared to wait what might for what might be several more months before another quotation was provided and urged that the respondents agree to the Grant Thornton proposal.  This the respondents were not prepared to do.  They said, therefore, that they would ask Baker Tilley to provide a quotation and would invite them to inspect the documents that had been inspected by Grant Thornton before doing so.  But it is fair to note that the petitioners were invited to attend the proposed meeting and inspection by Baker Tilley but they chose not to do so.  It is also, I think, relevant to note that the respondent indicated, when indicating that they would be approaching Baker Tilley, that they accepted that if no quotation was obtained from Baker Tilley, I think it was within seven days, a reasonably short space of time in the circumstances, they would accept Grant Thornton as the valuers and would go ahead and now confirm that appointment. 

19. As it happened, Baker Tilley were able to and did provide a quotation within seven days.  It was substantially lower than the latest quotation from Grant Thornton.  The offer was to do essentially the same work at a fee of HK$800,000.00 which represented a cap on their fees.  More accurately, they agreed to produce the valuation required on a time-cost basis with an overall cap of $800,000.00 in respect of both their fees and their disbursements. 

20. The time that it was expected that would be necessary to produce the valuation was the same as the shortest estimate on the part of Grant Thornton.  It was slightly shorter than the outside range of the time estimate that had been given by Grant Thornton.  That was six to eight weeks, whereas Baker Tilley indicated that they anticipated that a valuation could be produced within six weeks.  Not surprisingly perhaps, the respondent suggested that in the light of the substantially lower fees that were proposed to be charged by Baker Tilley, the parties should simply appoint Baker Tilley as the valuer for the purposes of the valuation exercise. 

21. The petitioner did not respond at once, but responded a couple of weeks later expressing various concerns about Baker Tilley.  The concerns appear to have related principally to the fact that a senior partner of Baker Tilley had been charged with a criminal offence.  It has to be said, however, that this related to matters that had taken place back in 2004.  It is not entirely clear when the petitioner is said to have become aware of this fact but, in any event, the partner concerned was eventually acquitted and is also no longer a partner of Baker Tilley, as I understand it.  There were also some reservations expressed by Mr David Webb, a well-known corporate activist, who had expressed some concerns about the audit by Baker Tilley of the accounts of certain companies which were their clients for audit purposes. 

22. The petitioner also went back to Grant Thornton to inquire whether they could improve their quotation.  It is not clear whether this was made known to the respondents but it does not appear to have been.  It was also not clear from the initial correspondence whether or not Grant Thornton had been provided with the quotation prepared by Baker Tilley, although I am told in Mr Coleman's submissions, that they were. 

23. As it happens, Grant Thornton came back with an improved proposal and proposed to charge HK$1 million by way of fee, which they said would be the cap, although their fees would, of course, be charged in the usual way on a time-cost basis and if the time spent resulted in a lower figure, then a lower figure would be charged.  Their hourly rates were, however, rather higher than those of persons of similar seniority within Baker Tilley.  It is also fair to point out that the proposed fee of $1 million as an outside cap was subject to a qualification in that if it turned out that a substantially lower time was required than had been anticipated, or if it took considerably longer than had been anticipated to obtain the information necessary, it might be necessary to increase the fee beyond the cap.  The cap of, apparently, HK$22,000.00 was also proposed in respect of the disbursements although the precise status of this cap is a little clear having regard to the terms of the quotation requested. 

24. The respondent remained of the view that the parties should use Baker Tilley as the valuer on the grounds that they were still cheaper than the proposal by Grant Thornton.  The petitioner, for his part, insisted on Grant Thornton.  This resulted in the petitioner issuing the two summonses which he has issued which are now before me.  As I have noted, the respondents responded with summonses of their own, calling for the appointment of Baker Tilley and it is said for the petitioners that it is not reasonable to reject the latest offer by Grant Thornton having regard to the fact that the difference in price is, as they put it, "only HK$200,000.00 which makes a difference of HK$100,000.00 to each party" and they say that if it is necessary, they are prepared to pay the excess over 50 per cent of the fees that would be charged by Baker Tilley.

25. Before the hearing, there were also some suggestions from both sides about the possibility of appointing other valuers instead.  These originated, I think, from the petitioner but, in the event, they have not been pressed for by either party today principally on the basis that this would lead to further delay. 

26. In considering this aspect of the matter, I think it necessary first to have regard to the terms of the order.  I have already indicated my interpretation of it.  I have to say that I do not think that the way in which the parties have approached this matter indicates that either party has actually followed the appropriate course of conduct.  It seems to me that what should have happened was as follows:  I say first that while it was certainly envisaged that Grant Thornton should be appointed as a first choice of valuer, it was equally made clear in the order that the terms on which they were appointed had to be acceptable to both parties.  I would have though it obvious that one of the principal terms which would be of concern to the parties would be the question of cost. 

27. It was therefore necessary for the parties to have some idea as to what sort of costs they were prepared to pay in respect of the valuation.  To do this, it might well have been necessary for them to obtain quotations from a number of valuers with a view to seeing what the effective market rate was for the production of a valuation in a situation such as this.  It appears that a number of estimates have been obtained by the petitioner from other firms, principally, I think, PriceWaterhouse Coopers and, I think, Deloittes, which are rather more than those of Grant Thornton.  But, as Mr Coleman rightly observed, both of those firms are members of what is popularly known as "the big four" accounting practices who tend to charge rather higher fees for their services.  The choice of valuers in this case and the suggested choice of valuers in the event that neither of these two - Grant Thornton or Baker Tilley - were appointed, was for firms of qualified valuers, certified public accountants outside of "the big four".

28. In the circumstances, it seems to me that it was therefore reasonable for the respondent to suggest that a quotation should be obtained from Baker Tilley.  Having obtained such a quotation and having observed the, at that stage, substantial difference in the prices for the services that were quoted as between the two, it seems to me that it would have been open and perhaps sensible for the parties to have gone back to Grant Thornton informing them of the amount on the Baker Tilley quotation and asking them whether they would be prepared to match it and accept appointment on those terms.  This does not seem to have been done. 

29. I do not know whether they would have accepted.  They might; they might not.  The fact that they have put forward a quotation in a higher sum than that by Baker Tilley, even if it was on the basis of having seen the Baker Tilley quotation, does not indicate that is necessarily their last word on the matter.  If the parties were to approach them on the basis that they are prepared to appoint them on terms that are the same as those that are offered by Baker Tilley, then it may be that Grant Thornton would decide to accept the appointment.  Whether or not they do so would be a matter for them. 

30. If they chose not to do so, then, under the terms of the order, the appointment should have been offered to Baker Tilley who, one assumes, would accept.  I do not think that the respondents can be criticised as being unreasonable or being desirous of obtaining a valuation for the purposes of the settlement exercise at the lowest reasonable cost. 

31. As for the allegation that has been made that the respondents have been seeking to put obstacles in the way of valuation of the valuation proceeding at every opportunity, I do not think that the criticism is one that is entirely fair.  I accept, however, that the respondents would appear to have been guilty of some quite substantial delay in the initial period.  In particular, they failed to respond to the first quotation by Grant Thornton in September until mid-October and they again failed to respond to the revised quotation for a period of about one month between January and February this year.  They have, therefore, been responsible for delay of some two to three months. 

32. But that said, once they did respond to the second quotation, it does seem to me that they proceeded reasonably quickly to obtain a quotation from Baker Tilley and, what is more, indicated that if Baker Tilley were not in a position to provide such quotation within a relatively short timeframe, they would accept the appointment of Grant Thornton.  Thereafter, such further delay as has occurred seems to me to have been a result of both parties, the petitioner no less the respondents digging in their heels.  This is particularly unfortunate because it seems to me that if the matter had been approached in a spirit of greater co-operation, it may have been that a valuation would by now have been produced at less cost than has, in fact, been incurred as a result of these proceedings. 

33. I should also deal with the two other objections that have been voiced to the appointment of Baker Tilley.  I do not think that either of them are well-founded.  I do not think that the concern about the involvement of the ex-partner of Baker Tilley in criminal proceedings is a valid one and nor is that based on the concerns expressed by Mr Webb.

34. As far as the criminal proceedings are concerned, as I have observed, they are matters that happened in 2004.  The partner in question was acquitted and is no longer a partner of Baker Tilley.  As for the other matters, it seems to me that Baker Tilley is an organisation of reasonably substantial size and whoever is elected to be the valuer for the purposes of this project is likely to be a partner of Baker Tilley who has no involvement with any of the matters in respect of which some concerns would be expressed.  There should be no difficulty if Baker Tilley do come to be appointed at the end of the day in ensuring that whoever signs off on the valuation is someone who has no blemishes on his record so far as either of the parties are concerned. 

35. As far as the other point that was taken that the Baker Tilley entity that provided the quotation did not call itself Baker Tilley, Certified Public Accountants, but was a limited company whose name suggests that it provides corporate recovery or corporate restructuring services, it seems to me that, at the end of the day, the question of the initial order requires that the valuation be carried out by a certified public accountant.  It seems to me that as long as a member of Baker Tilley or of Grant Thornton, as the case may be, who is in fact a certified public accountant provides a valuation that is required, that requirement will be met.  I, therefore, do not think that this objection is a valid ground for ruling Baker Tilley out of the candidacy for position of valuer, they having been expressly chosen by both the parties in the course of the hearing on 1 August 2007. 

36. It will be apparent from what I have said that the appropriate course that I think should take place is for Grant Thornton to be offered the appointment on terms that are identical to those that have been tendered by Baker Tilley.  If Grant Thornton declined to accept on that basis, then the appointment should be offered to Baker Tilley.  If Baker Tilley should also, for whatever reason, decline to accept the appointment then, no doubt, the matter will have to come back before the court but I very much hope that this will not be necessary. 

37. In the circumstances, it follows that I would not propose to make an order in terms precisely of either parties' applications in this matter.

38. I turn now to the question of discovery or, rather, inspection of the books and records of the various companies which are to feature in the valuation exercise.  It is clear that there has been some hold-up in relation to the inspection and provision of documentation.  The principle reason for this appears to have been an unwillingness or inability on the part of the parties to agree a sensible procedure for carrying out the inspection and for obtaining the necessary copies. 

39. So far as the question of inspection is concerned, it seems to me that terms of the earlier orders are quite clear.  The petitioner is entitled, with the assistance of his advisers, to inspect the documents and, for this purpose, he is to be given access to the information recorded in electronic forms on computers and systems of the companies concerned.  It is fair to say that the alternative is for the petitioner to provide such copies whether in hard or soft form at an early stage.  It seems to me that it will not be possible to avoid altogether the need for some inspection by the petitioner because the petitioner will wish reasonably to be satisfied that what he is provided with is, in fact, everything to which he is entitled under the terms of the order.  It is therefore necessary for that inspection to take place and to be completed and for that to be done as soon as possible.  Once that is done, the question of how copies are provided is really a mechanical question which the parties can deal with but, for their guidance, I would say this:  it is understandable that the respondents may have some concerns about allowing the petitioner to physically make copies from their computer systems.  While that is a reasonable concern, it does seem to me that the solution is to provide soft copies of documents identified by the petitioner in the course of his inspection by their being copied onto compact disks or digital versatile disks. 

40. The only question that arises is as to the cost of doing so.  It seems to me that just as the respondent would have been entitled to charge reasonable photocopying charges which the petitioner appears to accept at the rate of $1.00 per page copied, in the same way, the respondents should be entitled to a reasonable amount for the service of providing soft copies on DVD of the relevant documents. 

41. The dispute as to this seems to turn on the difference between the physical cost and the DVD and what I would have to say is a relatively nominal sum of $200.00 to cover part of the costs of providing the service of copying.  In the same way as the charge of HK$1.00 per page for photocopying does not represent the cost of the physical paper on which the copies are made, that also includes an element for the overheads or upkeep on the photocopying machines and the time of the persons involved in making the photocopies, it seems to me that the sum of HK$200.00 for one DVD which is likely to be sufficient to hold, one would hope, all of the documents so far required to be copied for the benefit of the petitioner, seems to be a reasonable amount to pay even if it is necessary to have two DVDs because the cost in question is likely to be far less than the cost of obtaining the same documents in hard-copy form by photocopying. 

42. It has to be said that the correspondence indicates that although certain questions that were raised by the respondents as to the precise documents that were required to be copied and as to the format in which the copies were desired by the petitioner, do not seem to have been answered by the petitioner. 

43. It seems to me that this may be due to the fact that the parties' relationship is such that the breakdown has been such that neither party is willing to trust the other.  That may be so but the fact is that the order for this settlement that has been agreed between the parties to be put into effect in order to enable the matter to be brought to a close in a way which hopefully will satisfy both parties, it is necessary for the parties to co-operate and be sensible in their approach to all of these issues. 

44. In this regard, it seems to me that the legal advisers of the parties bear in equal responsibility for making sure that their clients are given advice that is both sensible and responsible.

45. In relation, therefore, to the question of discover, it does not seem to me that it is necessary to make a separate order.  What is needed is for the existing orders to be carried out.  I see no reason why that should not be done as a matter of priority.  While I accept that the respondent has a business to run and that his company is in operation, it does seem to me that the question of provision of documentation is a matter that can be dealt with reasonably quickly, particularly if it is dealt with in soft-copy form and I would expect that there should be very little further delay in enabling such inspection which is to take place and the provision of copies that are required as a result of such inspection. 

46. It is always open, of course, to the petitioner to serve copies of the relevant orders on the respondents with penal notices attached and if there are further difficulties in relation to inspection and provision of copies, if the circumstances are such as to warrant it, appropriate proceedings for enforcement may be brought. 

47. I deal finally with the question of the guarantees and it seems to me that the position in relation to the guarantees is, at the end of the day, not similar to that in relation to inspection and provision of documents. 

48. The relevant term of the Tomlin order that related the question of the guarantees did call for the parties to cooperate.  It also required the respondents to procure, in effect, in co-operation with the petitioner, the release of the petitioner from the guarantees which he had provided in relation to the debts of the companies and entities concerned. 

49. In practical terms, it seems that we are now dealing only with one set of guarantees issued in favour of the HongKong & Shanghai Banking Corporation.  It seems to me that both parties should have been in touch with the bank, not just to find out the terms of the guarantees, but also to find out what needed to be done to enable Mr Kong to be released from them.  This does not yet appear to have been done by either party.  While it is entirely reasonable for Mr Scott to say that this is something that the respondent should have done, it seems to me that it just as much the case that this is something that Mr Kong should have done by asking the bank what needed to be done and what they would be looking for from the respondents in order to enable him to be released from his guarantees.  It may be that the bank will say that that was a matter that they would not discuss with the respondents rather than Mr Kong but at least if Mr Kong had asked, he would have been in a position to tell the respondents that this was what the bank said and the ball would then be very firmly in their court. 

50. It seems to me as far as the HongKong Bank guarantees are concerned, the appropriate solution would probably be for the parties to write jointly through their solicitors to HongKong Bank to enquire what HongKong Bank would require in order to release Mr Kong unconditionally from his guarantees whether in terms of substitute security or any other requirements that might be called for by the bank.  If the question was one of providing subsequent security, having found that out, it seems to me that the obligation would then be on the respondents in compliance with the relevant paragraph in the Tomlin Order to take steps to ensure that this was done and thereby to procure the release of Mr Kong from the guarantees.  But, as I say, since at this stage it seems to me that both parties could have done something more in this respect, I do not propose to make an order as to this other than to leave it to the parties to take steps to carry that part of the Tomlin Order into effect. 

51. Having indicated the way forward, it seems to me that there is no reason why that should not be done in a matter of days or perhaps, at the outside, a week or so while the respective solicitors liaise as to the terms of the letter to be sent to the HongKong & Shanghai Banking Corporation.

52. Finally, I would say that while the petitioner may well be understandably frustrated about the apparent lack of progress in the achievement of the valuation and clean break which he had, no doubt, hoped to achieve as a result of the settlement on 18 December 2006, it does seem to me that not all of the fault for the delay can be put at the door of the respondent.  Some fault, no doubt, does lie with the respondent but it seems to me that the petitioner must also bear a portion of the responsibility. 

53. As I have observed, the difficulties that have beset this case are mainly due to the unfortunate breakdown in the relationship between the parties but the fact is that as the parties have resolved, by their settlement, to try to deal with that breakdown by going their separate ways, it seems to me that they would be better advised to try to co-operate to enable that to be done than to fight about every single point that could conceivably be fought over in the process of doing so. 

HCCW 321/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING UP PROCEEDINGS NO. 321 OF 2006

_________________________

_________________________

_________________________

Coram : Before Master J. Wong in Chambers

_______________________

REVIEW OF TAXATION

_______________________

Review

1. There are two applications for review of taxation before me.

Background

2. On 24 June 2006, the Applicant commenced the present winding up proceedings against the 2 subject companies on just and equitable grounds.  They were opposed.  The matter were later complicated as the 2nd and 3rd Respondents took out applications of striking out as well as validation orders.  In turn, the Applicant asked for an appointment of provisional liquidators.

3. Fortunately, the whole dispute was eventually resolved by a buying out of the shares of the Applicant by the 2nd and 3rd Respondents, leaving the question of costs to be argued.  By a decision of 18 December 2007, Barma J. ruled in favour of the Applicant and awarded him costs of the 2 proceedings, to be taxed on a party-and-party basis, if not agreed.

4. Substantive taxation of the 2 bills came before me on 15 October and 20 November 2007.  The Respondents were not satisfied with some of my rulings.

(a)     The hourly rates of a partner and a solicitor acting for the Applicant, as well as

(b)     A few items of Counsel fees allowed by me.

5. I heard the reviews of taxation on 29 January 2008.  Mr. M. Cheng of Messrs. C.L. Chow & Macksion Chan represented the 2nd and 3rd Respondents and Mr. D. Law of LCD acted for the Applicant.  Having heard from the parties, I reserved my decision to be handed down.  I now do so.

Decision

6. Upon thoughts, I am not persuaded that I should be reviewing any of my decision in taxation.  The review is therefore dismissed.

Hourly rate of AH

7. Mr. Alfred Hau (“Mr. Hau”) was and is the partner of the firm of solicitors acting for the Applicant.  He was admitted in 1989 and enjoyed a post qualification experience of over 17 years when he handled the present proceedings.  At the taxation, I allowed him to charge at $4,000 per hour throughout the bills.  Mr. Cheng told me that it was too much and suggested a reduction of $500.  He said that Counsel had been brought into the matter from the very beginning of the proceedings, assisting in settling letters and virtually all affirmations.  Further, Mr. Hau showed no expertise herein.

8. In assessing the hourly rate of a solicitor in taxation, I ask myself to bear in mind the principles as stated in paragraph 62/App/22 at page 1001 of HKCP 2008.  The following factors were and are noted by me.

Hourly rate of EC

9. Ms. Eva Chan Bing Wah (“Ms. Chan”) was one of the solicitors handling the proceedings for the Applicant.  She was admitted in 2005, and so, she belonged to the category of “newly admitted” solicitor under the said Law Society Circular.  Usually, she is entitled to an hour rate of $2,000 under taxation.  In the present case, she claimed $2,500 and I allowed the same.  Mr. Cheng sought to reduce it to $2,000.

10. I still consider that $2,500 per hour is appropriate in this particular situation.  In so doing, I was and am aware that $500 was added to Ms. Chan on top of her rate usually allowed by this Court.

11. Briefly, as a matter of fact, Mr. Hau ran his case by teamwork, he and Ms. Chan.  Throughout the Bills, very often, he and Ms. Chan charged for the same items.  I took the view that such costs could not be recovered by party-and-party taxation. I taxed off over 90% of the time claimed by Ms. Chan under the Bill, leaving only 2 scattered hours in the Bills.  On these occasions, Ms. Chan was on her own dealing with correspondences documents and so forth without any supervision.  With greater responsibility on each of these attendances, I believed that it should justify an uplifting of Ms. Chan’s hourly rate to the next category of “2-4 years”.

Counsel fee

12. Mr. Cheng objected my allowance of Counsel’s assistance in researching, advising over phone and conference as well attending with client taking instructions.  They are contained in the list of objection, numbered 4, 5, 9, 10, 11 and 39.  To cut short the long story, it was submitted that these matters were within the competence of the solicitor Mr. Hau.  Further or alternatively, the time charged by Counsel was excessive.

13. However, with respect to Mr. Cheng, other than the above general propositions, he provided no particulars to persuade me to change my mind.  Upon reviewing the relevant attendance notes, conference notes as well as documents settled by Counsel, I remain of the view that Mr. Hau only looked to Counsel at appropriate junctures.  As to Counsel fee, it is trite law that once this Court has agreed that the involvement of Counsel falls within the “necessary or proper” test, the quantum thereof should only be disturbed if they were excessive and unreasonable (paragraph 22/App/28A at page 1002, HKCP 2008).  In this respect, Mr. Cheng has not been able to persuade to think otherwise.

14. At the hearing of the review, in relation to the said objection no. 4, Mr. Cheng raised a new point that there was no communication between solicitor and counsel when the fee was levied.  In this respect, Counsel’s fee note and other contemporaneous documents were produced to me during taxation, the new observation of Mr. Cheng is insufficient to ask me to accept that this particular item on the counsel fee note is not a genuine one.

Research on law by the solicitor

15. In the original bill, Mr. Hau asked 6 items for conducting legal research, totaling 8 hours.  I dealt with them one after the other by going through the copies of research done and considered by him.  I did not tax off anything on the 1st item, but deducted the 2nd one completely.  I further reduced quite some substantial time on the remaining 4 items by more than half.  In the present review, Mr. Cheng asked me to tax off the 1st item completely.  I decline to do so.

Costs

16. I have not heard from the parties on the question of costs.  However, it appears that there is no reason to depart from the general rule.  I therefore order that the 2nd and 3rd Respondents shall bear the costs of the Applicant in the 2 reviews of taxation, to be summarily assessed by me with 30 minutes reserved, failing agreement within 21 days from the date hereof.

Mr. M. Cheng of Messrs. C.L. Chow & Macksion Chan represented the Respondents.

Mr. D. Law (Law Costs Draftsman) and Mr. Alfred Hau of Messrs. Hau, Lau, Li & Yeung for the Petitioner.