CHU CHUNG MING AND ANOTHER v. LAM WAI DAN AND OTHERS

HCCW 377/2011

[2023] HKCFI 2539

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 377 OF 2011

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BETWEEN

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JUDGMENT

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Introduction

1.  This is the adjourned hearing of para 2 of the Petitioners’ summons dated 5 August 2022 (“Summons”). Para 2 of the Summons reads:

“The purchase price payable by the 1^st and 2^nd Respondents to the Petitioners to purchase the Petitioners’ shares in the 3^rd Respondent shall carry interest at:

(a) judgment rate from 22^nd December, 2014, being the date the 1^st and 2^nd Respondents were ordered to buy the shares of the Petitioners, to the date of payment; or

(b) such rate and for such period as this Honourable Court may deem fit”.

2.  A brief history of the proceedings, for the present purpose, is as follows.

3.  On 22 December 2014, this Court handed down its Judgment on liability (“Main Judgment”) and ordered the Respondents[1] to buy out the Petitioners’ 50% interest in the 3rd Respondent ie the Company in question under the then s 168A of Companies Ordinance, Cap 32 (“Buy Out Order”).

4.  On 8 October 2015, this Court ordered the parties (“Appointment Order”) to jointly appoint an independent professional valuer, being a certified public accountant, or failing agreement as may be appointed by the president of the Hong Kong Institute of Certified Public Accountants (“Institute”) upon the application of either party with or without the consent of the other, to value the fair market price of the Petitioners’ shares in the Company. In the Appointment Order, the date of the valuation was set at 8 October 2015 (“Valuation Date”). This court also ordered the parties to jointly appoint an independent surveyor for the purpose of determining the fair market value of all immovable property of the Company ie the Land and the Shop in question (“Properties”) as at the Valuation Date.

5.  Subsequently, the parties 2016 KPMG who issued a revised draft valuation report on 18 November 2021 (“Draft”). At p 13 of the Draft, KPMG set out the valuation summary of the Company. At p 18 of the Draft, KPMG recognized and followed this Court’s direction that there should be no minority shareholding discount. However, they opined that “when valuing private companies, it is important to take into account a marketability discount to reflect the fact that there is no ready market for them.” Ultimately, KPMG selected a discount of 10% for the lack of marketability of the Petitioners’ equity interest.

6.  In the Draft, KPMG assessed the fair market price of the Petitioners’ shares in the Company at HK$18.4 million. That figure remained the same in KPMG’s Final report dated 9 January 2023.

7.  The Petitioners disagreed with KPMG on the 10% marketability discount.

8.  By para 1 of the Summons, the Petitioners sought an Order disallowing the marketability discount by KPMG. By an Order of this court dated 29 November 2022 (“2022 Order”), para 1 of the Summons was dismissed with costs to the Respondents. Para 2 of the Summons was adjourned to a date to be fixed. Hence, the present hearing.

9.  Shortly after the 2022 Order, on 6 December 2022, the Respondents paid HK$18.4 million to the Petitioners as the purchase price of the Petitioners’ shares in the Company.

10.  At the present hearing, the Respondents do not dispute that they should pay interest on the purchase price. The remaining disputes boil down to:

a. The commencement date from which interest started to accrue: the Petitioners submit it should run from the Judgment Date (22 December 2014), whereas the Respondents submit the Valuation Date (8 October 2015) is more appropriate (“Issue 1”);

b. The applicable interest rate: the Petitioners submit it should be at the judgment rate, whereas the Respondents submit it should be at the commercial rate ie prime plus 1% per annum (“Issue 2”);

c. the 3 periods during which interest should be disallowed on the ground of undue delay by the Petitioners: the Petitioners submit there should not be any disallowance of interest whereas the Respondents submit interest should be disallowed in whole or in part for the 3 periods in which the Petitioners have caused undue delay to the valuation process (“Issue 3”).

Deliberation

Issues 1 and 2

11.  The purpose of a buy-out Order is not to reward the Petitioners or to penalize the Respondents but to provide a fair compensation to the Petitioners for selling their shares in the Company so as to effect a clean break.

12.  In valuing a company for the purposes of ascertaining the price to be paid for shares to be acquired by one party from another ordered in a petition based on unfair prejudice, the overriding consideration is fairness as between the parties. The statutory framework of the remedies for unfair prejudice confers on the court a wide discretion to do what is considered fair and equitable between the parties in all the circumstances of the case, in order to put right and cure for the future the unfair prejudice which the petitioner has suffered at the hands of the other shareholders of the company: Re New Century Iatrical Inv. Management Ltd [2020] 3 HKLRD 464 at [29] - [30].

13.  Since the court has a wide discretion to do what is considered fair and equitable between the parties in all the circumstances of the case, the same overriding consideration as to fairness between the parties should apply not just in relation to the valuation of the Company, but to all aspects of a buy-out Order including the formula for the calculation and payment of interest on the purchase price. It is also trite that generally an award of interest is within the discretion of the Court.

14.  According to the draft Order provided by Mr Lo to this court at the hearing, in gist, the Petitioners are seeking interest at Judgment rate from 22 December 2014 ie date of the Buy Out Order to 6 December 2022 ie the date of payment of the purchase price by the Respondents. On the Petitioners’ calculation, the amount of interest comes to over HK$11.7 million. Mr Yuen does not dispute interest should cease to run after 6 December 2022, for obvious reasons. But he submits interest should only commence to run from the valuation date ie 8 October 2015.

15.  In support of his position, Mr Lo refers this court to the Court of Appeal decision of Re LehmanBrown Ltd unrep. CACV 272 of 2011, Kwan, Chu and Barma JJA, 13 March 2013. Since Mr Lo heavily relies on Re LehmanBrown Ltd in relation to Issues 1 and 2, this court shall examine that case in some detail.

16.  The background of that case can be found at [1], [2], [5] and [6] as follows:

“1. On 15 November 2011, Harris J gave judgment (“the Liability Judgment”) after an eight-day trial in October 2011 in two petitions under section 168A of the Companies Ordinance, Cap 32, which had been ordered to be heard together. He dismissed the petition and granted relief on the cross-petition. A subsequent hearing was held for the assessment of the value of the petitioner’s share in the company, which he ordered to be sold to the cross-petitioner, and for the assessment of damages payable to the cross-petitioner as a result of unfairly prejudicial conduct of the petitioner. After a three-day trial in September 2012, the judge gave judgment on 28 November 2012 (“the Remedies Judgment”). He assessed the value of the petitioner’s share in the company at US$1.4 million and damages payable to the cross-petitioner at US$716,055.

2. This is an appeal of the petitioner from the Liability Judgment and the Remedies Judgment…

…

5. The judge found that Lehman Management has failed to establish any unfairly prejudicial conduct on the part of Effiscient. He dismissed the petition with costs to Effiscient. He found that Effiscient has established unfair prejudice on the part of Lehman Management and is entitled to relief under section 168A. As Mr Brown is an accountant and has been running the Company since its inception, he held it appropriate to order Lehman Management to sell its one share in the Company to Effiscient. He ordered a court expert to be appointed to prepare a report on the value of Lehman Management’s share in the Company…

6. The material parts of the order made by the judge in the Liability Judgment (“the Order”) on the valuation of the Company, the assessment of damages and directions on payment provide as follows:

‘5. The Court Expert shall report to the Court on the value of the shares in the Company as at the date of the Petitioner’s Petition (“the Valuation Date”). The Expert Valuation Report shall value the shares in the Company on the basis of the fair market value of the business as at the Valuation Date…’” (emphasis added)

17.  At [97] of the Judgment, Kwan JA (as she then was) concluded that interest to Lehman Management on the net sum payable on the purchase price of its share[2] at the prevailing judgment rate from the date of the Liability Judgment until payment. This court has little doubt that the learned Judge had a rationale in mind when she ordered interest should commence to run at the prevailing judgment rate from the date of the Liability Judgment which was before the purchase price was assessed at US$1.4 million on 28 November 2012. However, it does not appear from the Judgment itself that the same had been seriously argued before the Court of Appeal. As one shall see later, Kwan VP took a different view on the applicability of Judgment rate in the subsequent decision of Re New Century Iatrical Inv. Management Ltd.

18.  This court shall deal with the rate of interest first.

19.  As stated by DHCJ Eugene Fung SC in Wan Chi Hing v Strong Master Corporation Ltd unrep, HCA 1554 of 2013, 8 December 2015 at [19(2)], a matter of principle, post-judgment interest is a penal rate imposed where a judgment for a quantified sum has not been paid. It is charged at a rate determined periodically by the Chief Justice by order, at a rate significantly higher than commercial rates of interest, designed to encourage prompt satisfaction of judgment debts: see Ming An Insurance Co (HK) Ltd v Ritz-Carlton Ltd (No 2) (2009) 12 HKCFAR 158 at §65 (Ribeiro PJ). The purpose of post-judgment interest is not to compensate a successful party, but to encourage the paying party to honour a money judgment as soon as possible: see Man Ping Nam v Man Fong Hang (No 2) (2007) 10 HKCFAR 140 at §23 (Ribeiro PJ).

20.  While Wan Chi Hing is an ordinary writ action in which an ascertained judgment sum was awarded to the plaintiff, this court cannot see the difference in principle between that case and the present one regarding the penal nature of adopting the judgment rate for post-judgment interest after a judgment sum has been quantified.

21.  In Re New Century Iatrical Inv. Management Ltd unrep, HCMP 3353 of 2014, G Lam J (as he then was), 26 April 2018, an unfair prejudicial case, the learned Judge ordered the 2nd to 4th respondents to sell to the petitioner all of their shares in Company at a price to be determined by a valuer or joint valuers. The date of valuation was set at the date of the Judgment in which the Judge made a buy out Order. As far as interest is concerned, the learned Judge ordered the petitioner to pay the respondents interest on the price of the shares from the date of the Judgment until the determination of the price at the rate of 1% above prime per annum, and thereafter at judgment rate until payment. The appeal against G Lam J’s decision was dismissed on appeal.

22.  It can be seen that G Lam J’s award of interest at judgment rate only after the determination of the purchase price is in line with the rationale identified by DHCJ Eugene Fung SC in Wan Chi Hing of encouraging the paying party to honour a money judgment as soon as possible.

23.  In the present case, the purchase price was only finally fixed at the time of the Final Report of KPMG dated 9 January 2023. In this court’s view, awarding judgment rate before there was a finally ascertained sum for payment is contrary to principle and does not serve the purpose of encouraging the paying party to honour a money judgment as soon as possible.

24.  For the above reasons, this court agrees with Mr Yuen that the appropriate interest rate should be the commercial rate ie prime plus 1%.

25.  Regarding the date from which interest should commence, the choice is between the date of the Buy Out Order or the Valuation Date.

26.  In support of his position, Mr Lo refers this court to the Court of Appeal decision in Re New Century Iatrical Inv. Management Ltd.

27.  The Judgment of G Lam J (as he then was) in the first instance has already been summarized above. In dismissing the appeal against the learned Judge’s decision, Kwan VP said this at [58]:

“The [trial Judge’s] award of interest on the price of the shares is from the date of judgment until the determination of the price at 1% above prime per annum and thereafter at judgment rate until payment. In other words, the award is not in respect of the pre-judgment period or what has been characterized as “quasi-interest” (ie not awarded qua interest), which serves as a proxy to measure the increment in value of the outgoing shareholder’s investment in the company and in an appropriate case to reflect the fact that the remaining shareholder has had the use of the other’s investment since the valuation date (Re Lehmanbrown Ltd, CACV 272/2011, 13 March 2013, at §§90 to 96; Vitaly Orlov v Magnus Leonard Roth & Anr at §398). The judge’s award of interest to run from the date of judgment is on the usual basis and wholly unexceptional. There is no basis to interfere with his discretion in this respect.” (emphasis added)

28.  For the present purpose, this court is only concerned with the commencement date of the accrual of interest. There is no issue in relation to pre-judgment interest as such. As far as the commencement date is concerned, both the trial Judge and the Court of Appeal in Re New Century Iatrical Inv. Management Ltd were ad idem: it should be the date of the Judgment ie the date of the buy out Order.

29.  Mr Yuen submits to this court that there is no authority that interest should commence to run earlier than the date of valuation. In this court’s view, that is neither here nor there. The date of valuation is at the discretion of the trial Judge, which may be the date of the petition, as in the case of Re Tai Lap Investment Co Ltd [1999] 1 HKLRD 384, or the date of the buy out Order, as in the case of Re New Century Iatrical Inv. Management Ltd., or a date after the buy out Order, as in the present case. As G Lam J put it in Re New Century Iatrical Inv. Management Ltd at [130], regarding the date of valuation, the overriding principle is that it should yield a fair value. To this end it is generally desirable that the shares to be sold should be valued as nearly as possible to the actual date of sale. Thus a useful starting point is the date of the buy-out order or the date of the valuation.

30.  Rather, it is Mr Yuen who is unable to refer this court to any authority for the proposition that the commencement date of interest should always or at least normally be the date of valuation and the rationale of it.

31.  In this court’s view, as at the Buy Out Order, the Petitioners are entitled to be paid the purchase price. It is just as a matter of practicalities that the purchase price cannot be ascertained until sometime later. If so, as a matter of principle, the Petitioners should be awarded interest as from the date of the Buy Out Order even though the sum has yet to be ascertained. In other words, the Petitioners’ entitlement to a sum of money as the purchase price of their shares has been crystallised as at the date of the Buy Out Order, in which case, their entitlement to interest should also commence from that date.

Issue 3

32.  In Lo Yuk Sui v Fubon Bank (HK) Ltd [2017] 2 HKLRD 477, this court explained the relevant principles in disallowing interest on the ground of undue delay as follows:

“39. The relevant principles are set out by Au J in Hong Kong Electric Co Ltd v Commissioner of Rating and Valuation, unrep; LDGA No 224 of 2004; LDRA No 358 of 2004; 12 April 2010 at [19]:

‘…it is trite that interest can be disallowed if the claimant is guilty of delay:

(1) As said by Watkins LJ in Birkett v Hayes [1982] 1 WLR 816 at 825:

‘It is … wrong that interest should run during a time which can properly be called unjustifiable delay after the date of the writ. During that time the plaintiff will have been kept out of the sum awarded to him by his own fault. The fact that the defendants have had the use of the sum during that time is no good reason for excusing that fault and allowing interest to run during that time.’ (emphasis added)

(2)These principles are further stated by Jackson J in Claymore Services Ltd v Nautilus Properties Ltd [2007] BLR 452 at 460:

‘(1) Where a claimant has delayed unreasonably in commencing or prosecuting proceedings, the court may exercise its discretion either to disallow interest for a period or to reduce the rate of interest.

(2) In exercising that discretion the court must take a realistic view of delay. In the case of business disputes, litigation is for all parties an unwelcome distraction from their proper business. It is not reasonable to expect any party to take every litigious step at the first possible moment, or to concentrate on litigation to the exclusion of all else. Delay should only be characterised as unreasonable for present purposes when, after making due allowance for the circumstances, it can be seen that the claimant has neglected or declined to pursue his claim for a significant period.

(3) When determining what disallowance or reduction of interest should be made to mark a period of unreasonable delay, the court should bear in mind that the defendant has had the use of the money during that period of delay.’”(emphasised added)

33.  The aforesaid principles in Lo Yuk Sui v Fubon Bank (HK) Ltd are accepted and adopted by both Mr Lo and Mr Yuen.

34.  Mr Yuen for the Respondents has identified 3 periods in which interest should be disallowed. They are set out in detail in paras 29 to 45 of his skeleton and shall not be repeated here.

Phase 1 - 15 July to 23 November 2013

35.  The gist of Mr Yuen’s submission is that during that period, the Petitioners have dragged their feet regarding the appointment of the valuer.

36.  When one looks at the available correspondence during that period, what happened was this:

a. On 26 April 2016, the Institute informed the parties the names of the 3 CPA firms nominated by the president of the Institute for appointment as the valuer.

b. On 15 July 2016, the Petitioners’ solicitors informed the Respondents’ solicitors that all 3 CPA firms had declined to accept appointment as the valuer in this case. The Petitioners’ solicitors therefore proposed, in order to save parties’ time and costs, the appointment of a partner of Deloitte to be the valuer.

c. On 21 July 2016, the Respondents’ solicitors, in response, suggested that the Respondents would request the Institute to nominate 3 other valuers. There is however no evidence that the Respondents had followed up on their own suggestion, even though they were free to do so under the terms of the Appointment Order.

37.  From the Respondents’ chronology of Events regarding delay, the next event was the Petitioners’ summons dated 14 September 2016 for the appointment by each of the Petitioners and the Respondents of a professional valuer of their choice and that any disputes between the Petitioners’ valuer and the Respondents’ valuer shall be brought before this court for adjudication.

38.  By an Order dated 23 November 2016, the Petitioners’ summons was dismissed. Instead, this Court directed that the parties shall within 15 days from this Order jointly appoint an independent professional valuer, being a certified public accountant, or failing agreement as may be appointed by the president of the Institute upon the application of either party with or without the consent of the other, to value the fair market price of the Petitioners’ shares in the Company.

39.  On such evidence, this court is unable to accept the Respondents’ submission that the Petitioners have dragged their feet regarding the appointment of the independent valuer such as to cause undue delay to the proceedings.

40.  By letters dated 18 and 29 December 2015 respectively, the parties had agreed to the random selection procedure suggested by the Institute in the nomination of 3 CPA practices from the Institute’s database. This random procedure had the disadvantage of selecting nominees who for reason of resources, expertise or otherwise could not or would not accept the appointment, as happened in the present case. It was therefore not unreasonable for the Petitioners, in the interest of time, to suggest the appointment of a partner of Deloitte to be the independent valuer. At least, Deloitte would not have resources or expertise problems. In fact, Deloitte was one of the candidates nominated by the Institute in their letter dated 23 December 2016. It was up to the Respondents to agree or disagree with the Petitioners’ suggestion or come up with their own suggestion. In case no agreement could be reached, the only alternative was to make use of the mechanism in the Appointment Order of seeking an appointment by the president of the Institute by adhering to the Random Selection Procedure or opting for the alternative ie the List System, as explained in the Institute’s letter dated 19 May 2015. Either party could have but had failed to do that. If there was delay, the Respondents conduct was also a cause of the delay.

Phase 2 – 6 November 2019 to 14 January 2021

41.  Regarding this phase, the Respondents’ case is this.

42.  By late 2019, there were various disputes between the parties, the most important one of which was whether the illegal structures located on the Land owned by the Company should be valued. Initially on 6 November 2019, the Petitioners asked for the appointment of another building surveyor to assist GCA (the appointed valuation surveyor) and such request was maintained in subsequent correspondence. Then, on 25 February 2020, the Petitioners took a complete U-turn and no longer requested such additional appointment. Hence, the Petitioners had wasted some 4 months in arguing whether such additional appointment was necessary.

43.  This court has looked into the correspondence.

44.  There was indeed some discussion as to whether all the building structures on the Land were “authorized” and how they should be valued, if at all.

a. In the email on 6 November 2019 from the Petitioners only said they “agree to appoint building surveyor asap”. It is unclear with whom the Petitioners agreed with.

b. In the email on 21 November 2019, GCA also agreed to appoint a building surveyor “to verify the legality of the buildings and structures on Land asap.”

c. In the email dated 11 December 2019, the Respondents’ solicitors suggested that there was no need to appoint another surveyor to determine the issue of whether structures erected on the Land were authorized or not.

d. By an email dated 18 December 2019 from Jeff Liu of GCA to the parties, GCA’s position was stated as thus:

“Agreed to appoint a building surveyor to verify the legality of the buildings and structures on the land asap…. As to verify the legality of the buildings and structures is not the expertise of GCA, GCA is not in the right position to conduct such exercise. We would suggest the Petitioners and the Respondents to confirm to appoint a Building Surveyor, who has relevant expertise, to conduct such exercise.” (emphasis added)

e. By the email dated 25 February 2020, the Petitioners indicated their latest position as follows:

“…we are of the view that Greater China can assume that all the building structures covered by the short term waiver were legal as at the valuation date and will be [sic] continue to be so for valuation purpose. Therefore, it is not necessary to appoint another building surveyor to determine the legality of the structures.”

45.  It would appear to this court that up to 25 February 2020, GCA was unsure and both parties were unable to agree on how to go about valuing the Land and the structures on it, in light of the uncertainty about the legality or otherwise of the structures. There is thus no basis for the Respondents to accuse the Petitioners of having unreasonably wasted 4 months in arguing whether such additional appointment was necessary. Every interested party had contributed to the delay.

46.  Thereafter, correspondence ensued between the parties, GCA and KPMG again on whether illegal structures should be included in the valuation process. GCA expressed the “prudent”[3] or “conservative”[4] view that they should not but in case of disagreement, requested clarification from this court.

47.  On 14 January 2021, the Petitioners issued a summons seeking in para 1 thereof an Order that for purpose of valuation of the Land pursuant to the Order dated 8 October 2015, the Valuer and the Surveyor should include the value of all structures on the Land as at the Valuation Date.

48.  By Order dated 27 April 2021 of DHCJ MK Liu, the Deputy Judge granted an Order in terms of para 1 of the said summons, with the rider at para 2 of the Order that in assessing the value of those structures, the risk of enforcement actions by the Building Authority, if any, should be taken into account. The Deputy Judge then made no order as to costs concerning para 1 of the said summons.

49.  It thus can be seen that the Petitioners were justified in not accepted GCA’s “prudent” or “conservative” view that illegal structures should not be included in the valuation process. On the contrary, they heeded the advice of GCA to seek and eventually obtained a clarification from the Court that all structures, illegal or otherwise, should be included in the valuation process.

50.  It is true that in the email from KPMG dated 14 August 2020, it was said that the Petitioners’ solicitors were preparing to make an application to Court on that issue and other unrelated issues. But on the available evidence, the Respondents are unable to show that the delay of about 5 months from August 2020 to January 2021 constituted unreasonable and undue delay on the part of the Petitioners. This court stresses again that it is in the interest of both parties who are free to take whatever steps to expedite the valuation process. If the Respondents considered the taking out of the summons on 14 January 2021 to be undue delay, why could they not have taken out a summons to seek clarification from the court earlier?

51.  For these reasons, this court does not accept that there was such undue and unjustified delay on the part of the Petitioners during Phase 2 so as to deprive them of interest in that period.

Phase 3 - 7 February to 29 November 2022

52.  Regarding this phase, the Respondents’ case is fairly straightforward.

53.  KPMG issued the Draft dated 18 November 2021 in which they adopted a marketability discount of 10%. The rationale for adopting it was explained in the Draft.

54.  Since their email dated 7 February 2022, the Petitioners had been objecting to the adoption of marketability discount in the valuation process. By emails dated 11 March and 26 May 2022, KPMG explained in greater detail the importance of adopting marketability discount for shares in a private company which had no ready market for them. This is really basic and is well known to inter alia practitioners of companies law.

55.  By their email dated 8 July 2022, the Petitioners indicated that:

“Since the parties cannot reach agreement on the issue of marketability discount, we are in the course of preparing an application to court to seek clarification on the issue.

We are of the view that the final report shall be prepared after the court has given its direction on the matter.”

56.  By their email dated 27 July 2022, the Petitioners advised that they would take out an application to this court for direction soon and that pending the court’s direction, they would not agree to the issuance of the final valuation report.

57.  The impasse among the parties resulted in the Petitioners issuing the Summons on 5 August 2022 seeking an Order inter alia disallowing the marketability discount by KPMG. In the 2022 Judgment, that part of the Summons was dismissed. At paras 31 to 33 of that Judgment, this court concluded as thus:

“31. To conclude, this court has directed the parties to jointly appoint a single independent professional valuer to value the fair market price of the Petitioners’ shares in the Company. It is up to KPMG to apply their professional expertise to conduct the valuation. What the present application boils down to is that the Petitioners are dissatisfied with the methodology of KPMG in applying a marketability discount and asks this court to disallow KPMG from doing so. Mr Lo is unable to refer this Court to any authorities which support the present application save for the general principles stated by Kwan VP in Re New Century Iatrical Inv Management Ltd at [29] - [30] which emphasize that the overriding consideration is fairness as between the parties. Given that KPMG is jointly appointed by the parties and they therefore should be taken to accept that the firm have the requisite expertise to conduct the valuation, this court cannot see any unfairness as between the parties in deferring to KPMG’s chosen methodology.

32. In Chan Luen Yan and Ors v Chan Tin Chai and Ors unrep, HCCW 211 of 2007, 3 July 2013, Ng J at para 23, this Court laid down the principle governing challenges to the valuation of a single joint valuer as follows:

‘…I would hold that, on a matter of opinion (as opposed to fact or law), unless patent errors can be demonstrated on the face of the report, the court should be very slow to intervene with the chosen expert’s determination solely on the ground that one party has subsequently found and engaged another expert who holds a different opinion…’

33. The opinion referred to in that passage refers to the opinion of the chosen valuer. The principle, which is not disputed by Mr Lo, applies to a case where the challenge is backed up by the opinion of another expert. It should apply a fortiori to the present case where the Petitioners’ challenge is not so backed up. Applying that principle to the present case, this Court cannot find any patent errors on the face of the Draft, and for that reason also, this Court is not minded to grant the present application.” (emphasis added)

58.  It seems to this court that the Petitioners’ insistence in disallowing the marketability discount and effectively demanding KPMG not to issue the final valuation report was unreasonable and has caused undue delay to the finalisation of the valuation process, even after making due allowance for the circumstances of this case. This court therefore agrees with Mr Yuen that interest should not accrue during Phase 3 ie from 7 February to 29 November 2022.

Disposition and costs order nisi

59.  In the premises, this court hereby orders that the purchase price payable by the 1st and 2ndRespondents to the Petitioners shall carry interest at the rate of prime plus 1% from 22 December 2014 to 6 December 2022, save that no interest is payable from 7 February to 29 November 2022.

60.  Since both the Petitioners and the 1st and 2ndRespondents are only partly successful in this application, a fair Order for costs is that the parties shall bear their own costs of and occasioned by paragraph 2 of the Summons, certificate for counsel.

Mr Tommy Lo, instructed by M/s Jimmie K.S. Wong & Partners, for the 1st and 2nd Petitioners

Mr Ross M.Y. Yuen and Mr Mui Hoi Tat, instructed by M/s Ng, Au Yeung & Partners, for 1st and 2nd Respondents

HCCW 377/2011

[2022] HKCFI 3609

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 377 OF 2011

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J U D G M E N T

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1.  This is the ruling of the Court on para 1 of the Petitioners’ summons dated 5 August 2022. Para 1 of the summons reads:

“For purpose of compiling the valuation report pursuant to the Order dated 8^th October, 2015, the Valuer shall not apply any marketability discount when valuing the shares of the 3^rd Respondent.”

2.  In gist, the Petitioners are asking the Court to intervene and overrule the Valuer’s professional opinion in adopting the marketability discount for the purpose of valuation.

3.  The summons is supported by the 12^th affirmation of the 1^st Petitioner Chu Chung Ming (“Chu 12”).

4.  A brief history of the proceedings, for the present purpose, is as follows.

5.  On 22 December 2014, this Court ordered the Respondents to buy out the Petitioners’ 50% interest in the 3^rd Respondent ie the Company in question under the then s 168A of Companies Ordinance, Cap 32.

6.  On 8 October 2015, this Court ordered the appointment of a joint independent professional valuer, being a certified public accountant, to value the fair market price of the Petitioners’ shares in the Company with consequential directions, including inter alia that “there shall not be any minority shareholding discount”. The disallowance of minority shareholding discount in the context of a buy-out Order in relation to a quasi-partnership company is well-established: Re Yung Kee Holdings Ltd unrep, HCCW154 of 2010, Harris J, 31 October 2012 at [165].

7.  Subsequently, the parties have jointly appointed KPMG who issued a revised draft valuation report on 18 November 2021 (“Draft”).

8.  At p 13 of the Draft, KPMG set out the valuation summary of the Company as at 31 March 2015. In this Court’s Order dated 8 October 2015, the date of the valuation should be the date of the Order, which is the prima facie starting point: Re New Century Iatrical Inv Management Ltd [2020] 3 HKLRD 464 at [32]. This aspect of the valuation is not the subject of the present application but, unless the parties consider there is no material difference between the valuations as at the 2 different dates, they or their advisers should consider whether or not to point that out to KPMG before finalizing the Draft.

9.  At p 18 of the Draft, KPMG clearly recognized and followed this Court’s direction that there should be no minority shareholding discount. However, they opined that “when valuing private companies, it is important to take into account a marketability discount to reflect the fact that there is no ready market for them.”

10.  At p 25 of the Draft, KPMG further elaborated on the concept of marketability discount.

11.  Ultimately, KPMG selected a discount of 10% for the lack of marketability of the Petitioners’ equity interest.

12.  The issue of marketability discount has been the subject of discussion in correspondence between the Petitioners and KPMG: see items 55 to 59 of the Agreed Chronology. In an email dated 26 May 2022 from KPMG to the Petitioners’ solicitors, KPMG elaborated on the reasons for adopting the marketability discount in this case. The reasons included (i) the Company being a private one, its shares would not be openly traded and certain time and cost are required to process the transaction; (ii) even when the underlying assets of the Company ie a plot of farmland and a shop, as opposed to the Company’s shares, are being marketed for sale, the same concept applies as if the Company’s shares are being marketed for sale; (iii) since the plot of farmland is not as frequently traded as compared to residential or commercial properties, a discount should also be applied by reason of the lack of marketability of this type of assets.

13.  In Chu 12, Mr Chu has stated his or his adviser’s grounds of opposition to the marketability discount. Regrettably, Chu 12 contains mostly bare assertions, misreading of the Draft and other misstatements.

14.  First, at paras 14 to 17, Mr Chu said:

“14. The practical outcome of the aforesaid judicial resolution of the parties’ disputes is that the Respondents would enjoy the entirety of the Company and its assets.

15. There is no basis to apply a discount to reflect any liquidity issues that the Respondents may face in future should they subsequently elect to sell those shares.

16. To penalize the Petitioners for difficulties the Respondents might face in future when they decide to sell those shares (due to the fact that they are private company shares) is unreasonable and unjustified.

17. I have been advised and I verily believe that the Order ought not be interpreted to have such effect.”

15.  In this court’s view, para 14 is self-evident but is irrelevant to the issue at hand. In every case when there is a buy-out Order under s 168A, the same outcome will result from the execution of the Order. The purpose of the buy-out Order is not to reward the Respondents or to penalize the Petitioners but to provide a fair compensation to the Petitioners for selling their shares in the Company so as to effect a clean break. In this context, the overriding consideration is fairness as between the parties: Re New Century Iatrical Inv Management Ltd at [29] - [30].

16.  Paras 15 to 17 are all bare assertions of the Petitioners’ or their legal adviser and they do not at all follow from para 14. In particular, there is no question that the adoption of the marketability discount being a penalty to the Petitioners - the rationale of it has been stated clearly in the Draft and in the email from KPMG dated 26 May 2022.

17.  Second, at paras 18 to 19, 22 to 24, Mr Chu said:

“18. The Court in the Order directed, inter alia, that a surveyor be appointed to make a valuation of the Land and the Shop of the Company.

19. It is clear that the basis of the valuation of the shares would be premised upon the net value of the underlying assets ie upon an asset-based valuation.

…

22. The net asset value of the Land and Shop owned by the Company was duly determined by the surveyor in a report compiled by them (“the GCA Report”).

23. After taking into account the GCA Report and making adjustments pursuant to the Order to reach a valuation, there is NO basis to apply a discount to REFLECT THE FACT THAT THE SUBJECT SHARES are shares in a private company (as distinguished from shares in a listed company) and hence “there is no ready market” for them…

24. That the subject shares are shareholdings of a private company has always been crystal clear to the parties and to the Court at all material times.”

18.  Para 19 is misleading. While it is clear, and is accepted by the Petitioners, that KPMG has rightly taken into account the value of the Company’s underlying assets, that is not the same as a valuation premised only upon the value of the underlying assets ie the farmland and a shop. Otherwise, there would be no need for KPMG to conduct a valuation - all that the parties need would be the GCA Report.

19.  Para 23 is a bare assertion - the basis of applying the marketability discount has been made clear to the Petitioners. Para 24 is neither here nor there.

20.  Third, at para 25, Mr Chu said:

“25. If a “marketability discount” is applicable (which is not admitted), it would in any event have been off-set by a “control premium”. See page 25 of the Revised Draft Valuation Report.”

21.  That statement is incorrect. In fact, what KPMG actually stated at p 25 of the Draft is that “minority discount”, not “marketability discount”, is a mirror image of control premium which is an amount that a buyer is usually willing to pay over the current market price of a company in order to acquire a controlling share in that company.

22.  Fourth, at paras 27 to 29 and 31, Mr Chu said:

“27. The Valuer recognized at page 27 of the Revised Draft Valuation Report that the studies of marketability discount may not be relevant for our present case. See 3^rd paragraph at the right column under the heading “Implication”.

28. The 5^th paragraph at the right column under the heading “Implication” stated that “The selected discount for lack of marketability of 10% mainly reflect the time and transaction cost required for the shareholders to realise the assets in the market.

29. There is no issue of selling the underlying assets of the Company to third parties in our present case. Applying a discount to “reflect” on any future time and/or transaction cost is unreasonable and unjustified.

…

31. Conveyance of the Land and the Shop of the Company (should the Respondents wish to sell them off in future) ought not be hugely costly or time-consuming. In any event, they do not concern the Petitioners. They are irrelevant for purposes of the valuation under the Order.”

23.  Para 27 is a mis-description of what KPMG stated in the Draft at p 27. What KPMG actually said was that “the above studies of marketability discount may not be relevant in this case.” The above studies were concerned with the differences between the prices of shares prior to IPOs and the actual IPO prices. Of course, the studies may not be relevant to this case which has nothing to do with any proposed IPO of the Company’s shares.

24.  Paras 29 and 31 are just bare assertions.

25.  Lastly, at paras 32 to 35 under the sub-heading “No Discount for non-controlling interest”, Mr Chu said:

“32. The Valuer stated in para 8 at page 15 of the Revised Draft Valuation Report that ‘when valuing non-controlling interests in private companies, it is important to take into account a marketability discount to reflect that there is no ready market for them.’

33. It is also stated in the said para 8 that ‘…a marketability discount, ie discount for lack of control, of 10% is applied on the FMP of 50%...’.

34. The Court is aware that the subject shares constituted 50% of the capital of the Company and hence NOT a controlling interest.

35. Therefore, in light of the above First to Fifth Points and the fact that the Court knew that the subject shares are 50% of the capital of a private company, the Order should be interpreted to mean that NO discount ought to be applied to cover lack of marketability.”

26.  In this court’s view, a fair reading of the Draft as a whole shows that KPMG is keenly aware of this Court’s Order that there should be no minority shareholding discount or discount for non-controlling interest. How that can be translated to mean no discount ought to be applied to cover lack of marketability is wholly unclear.

27.  With respect, the skeleton arguments of the Petitioners are not much better. They are largely a repetition of the grounds stated in Chu 12.

28.  In particular, for the 2^nd Ground set out in the skeleton arguments, this court cannot see how it can undermine the rationale of the marketability discount explained by KPMG and made known to the Petitioners. It is true that the Respondents can elect to sell all 100% of the shares in the Company in future, but the issue here is what was the value of the Petitioners’ 50% shareholding in the Company as at the valuation date.

29.  Para 13 under the 2^nd Ground is just another bare assertion and is contrary to the opinion of KPMG that even when the underlying assets of the Company are being marketed for sale, the same concept applies as if the Company’s shares are being marketed for sale.

30.  As for the 7^th Ground in which Mr Lo simply cites a paragraph from Re Yung Kee Holdings Ltd, the short answer is that the paragraph was dealing with minority discount, not marketability discount, as rightly pointed out by Mr Yuen.

31.  To conclude, this court has directed the parties to jointly appoint a single independent professional valuer to value the fair market price of the Petitioners’ shares in the Company. It is up to KPMG to apply their professional expertise to conduct the valuation. What the present application boils down to is that the Petitioners are dissatisfied with the methodology of KPMG in applying a marketability discount and asks this court to disallow KPMG from doing so. Mr Lo is unable to refer this Court to any authorities which support the present application save for the general principles stated by Kwan VP in Re New Century Iatrical Inv Management Ltd at [29] - [30] which emphasize that the overriding consideration is fairness as between the parties. Given that KPMG is jointly appointed by the parties and they therefore should be taken to accept that the firm have the requisite expertise to conduct the valuation, this court cannot see any unfairness as between the parties in deferring to KPMG’s chosen methodology.

32.  In Chan Luen Yan and Ors v Chan Tin Chai and Ors, unrep, HCCW 211 of 2007, 3 July 2013, Ng J at para 23, this Court laid down the principle governing challenges to the valuation of a single joint valuer as follows:

“…I would hold that, on a matter of opinion (as opposed to fact or law), unless patent errors can be demonstrated on the face of the report, the court should be very slow to intervene with the chosen expert’s determination solely on the ground that one party has subsequently found and engaged another expert who holds a different opinion…”

33.  The opinion referred to in that passage refers to the opinion of the chosen valuer. The principle, which is not disputed by Mr Lo, applies to a case where the challenge is backed up by the opinion of another expert. It should apply a fortiori to the present case where the Petitioners’ challenge is not so backed up. Applying that principle to the present case, this Court cannot find any patent errors on the face of the Draft, and for that reason also, this Court is not minded to grant the present application.

34.  Lastly, at the hearing, Mr Lo submits his main point is that in terms of fairness, KPMG should not apply the marketability discount. For reasons stated above, this Court cannot accept Mr Lo’s submissions.

35.  In the circumstances, this Court is of the view that the present application is unmeritorious and should be dismissed. There shall be an Order that para 1 of the Petitioners’ summons dated 5 August 2022 be dismissed.

Mr Tommy Lo, instructed by Jimmie K S Wong & Partners for the 1^st and 2^nd Petitioners

Mr Ross M Y Yuen and Mr Mui Hot Tat, instructed by Ng, Au Yeung & Partners for the 1^st and 2^nd Respondents

HCCW 377/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 377 OF 2011

____________

____________

_________________________

J U D G M E N T

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A.Introduction

1. The parties to this action are family members. The 1^st Petitioner (“Chu”) and the 2^nd Petitioner (“Kit Hang”) are husband and wife. The 1^st Respondent (“Wai Dan”) and the 2^nd Respondent (“Chan”) are also husband and wife. Kit Hang is the younger sister of Wai Dan.

2. The 3^rd Respondent (“Company”) was incorporated under the laws of Hong Kong in September 1995. It has 4 issued shares. Each of the parties holds one share. Each of them is its director. According to its financial statements, the Company’s principal activity is property holding.

3. It is unfortunate that the Petitioners and the Respondents have fallen out with each other. As is common in this type of cases, they blame each other for the breakdown of their relationship. Having heard their oral testimony and observing their demeanor in court, as well as looking at the facts objectively, this court has no doubt that the parties are unable to carry on business together. Given the 50/50 split both at the shareholders and at the Board level, the Company has been in a state of “stalemate” for some time and will remain so in the foreseeable future – for one, they could not even jointly approve the audited accounts for the year ended 31 March 2010 and after. Fortunately for them, the Company’s principal activity is property holding and does not require much day-to-day management and decision making by its directors.

4. On 15 November 2011, the Petitioners presented the Petition seeking an order for the Company to be wound up; alternatively, a buy‑out order under section 168A of the Companies Ordinance (“CO”).

B. Background

5. In the 1980s, Chu and Wai Dan started a partnership business as construction subcontractor. This partnership business was carried on in the name of “Sun Shing Construction Co”. They gradually expanded their business into different aspects of the construction industry including inter alia operating a fleet of vehicles and construction site mobile machines for rent to developers in Hong Kong.

6. In June 1994, Chu and Wai Dan incorporated the partnership business. The company is called Sun Shing Machinery & Construction Company Limited (“Sun Shing Ltd”). Chu and Wai Dan were its only shareholders and directors. Since then, the business further diversified and expanded, other family members i.e. their spouses and younger brothers became involved and several other companies (“Associated Companies”) were set up to carry on the expanded businesses. One of the Associated Companies is called Construction Machinery Technical Training Limited (“CMTTL”) which operates a training center for construction workers (“Training Center”).

7. In September 1995, on the advice of some accountant friends, Chu and Wai Dan set up the Company as the so-called “property arm” of their businesses. The idea was to use the Company to hold properties so as to minimize any financial impact should the business of Sun Shing Ltd. encounter unexpected difficulties. 

8. Over the years, the Company has acquired three plots of land which feature in the evidence ie Lot No. 2270A, Lot No. 2272 and Lot No. 2273 in Demarcation District No.118 in Yuen Long, New Territories (“Lot 2270A”,“Lot 2272”and “Lot 2273” respectively). The aggregate area of the three Lots is approximately 51,800 square feet. The Company has erected two 2-storeyed buildings on Lot 2270A (“Buildings”). The office of the Company (“Office”) as well as the offices of Sun Shing Ltd. and the Associated Companies were at all material times located on the 1^st Floor of one of the Buildings (“Office Building”) while CMTTL operated the Training Center on the Ground Floor. The common address of the offices is known as 1/F, No. 136 Sung Shan New Village, Yuen Long, New Territories, Hong Kong.

9. At all material times, the three Lots were licenced by the Company to Sun Shing Ltd. at a nominal rent of HK$10,000 (“Nominal Rent”). Sun Shing Ltd. used part of the land to park its fleet of vehicles for construction works and as a warehouse. For land not needed for self‑use, Sun Shing Ltd. would sub-licence it out to third parties and keep the licence fees.

10. The Company also owns Shop 12 on G/F, Yee Hong Building, No. 2 on Chun Lane, Yuen Long, N.T (“Shop 12”). It is rented out for income.

11. According to Chu’s testimony at the hearing, the relationship between the Petitioners and the Respondents deteriorated rapidly in April 2009 shortly after the funeral of Wai Dan and Kit Hang’s father, so much so that Chu and Wai Dan began discussion on how to split up the assets of all their companies and go their separate ways. Details of their discussion are irrelevant for the present purpose – suffice it to say that no agreement was reached between the parties. In October 2009, Chu commenced winding up proceedings in HCCW 605 of 2009 with Wai Dan and Sun Shing Ltd. as the 1^st and 2^nd respondents.  Eventually, in 2011, they settled the proceedings on terms for Wai Dan to buy out Chu’s share in Sun Shing Ltd.  A Consent Order to that effect was granted in March 2011. Since then, the respondents have become the sole shareholders and directors of Sun Shing Ltd.

12. As stated earlier, on 15 November 2011, the Petitioners presented the present Petition.

C.  Preliminary Observations

13. Before I proceed to examine the Petitioners’ complaints in detail, I would make a number of preliminary observations.

14. First, in order to provide a basis for the court to exercise its discretion under section 168A, it is necessary for the Petitioners to demonstrate that the Respondents have conducted the affairs of the Company in a manner which is objectively unfair to the Petitioners and in a way that is prejudicial to them or to the shareholders generally.  Unfairness and prejudice are distinct concepts and both must be established in order to obtain relief under that section: Beatrice Tsang & Anr v Yeung Man Loong Maxly & Ors unrep.; HCCW 49, 49B, 50-52 of 2006 & HCCW 130‑133 of 2007; 21 December 2007; Barma J (as he then was) at [83]; Re Yung Kee Holdings Ltd. [2014] 2 HKLRD 313 at [105].

15. Second, having regard to the history of the business cooperation between Chu and Wai Dan as equal partners since the early 1980s and the close family relationship between the parties, given the equal shareholding and directorship between the two in Sun Shing Ltd. since 1994 and the similarly equal shareholding and directorship between the two couples in the Company since 1995, it is futile for the Respondents to deny that the Company is a quasi-partnership based upon mutual trust and confidence and with a common understanding that some viz Chu and Wai Dan, if not all, shareholders/directors are entitled to participate in the management of the Company. In this regard, it is telling that during his cross‑examination on Day 3 of the trial, Wai Dan frankly accepted that he regarded Chu as his partner in the Company, and hence his numerous attempts to consult Chu on the fire prevention works referred to below.

16. The applicable statement of the law was expounded by Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 at 379E-G as follows:

“It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. Certainly the fact that a company is small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence – this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be “sleeping” members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members’ interest in the company – so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.”  (emphasis added)

17. It follows from the foregoing that the court can wind up the Company on the just and equitable ground on the basis of a complete breakdown in trust and confidence between the parties or on the basis of a deadlock between the parties which is incapable of being resolved so that they cannot carry on managing the Company jointly: Beatrice Tsang & Anr v Yeung Man Loong Maxly & Ors supra at [85].

18. Third, although, according to the last audited financial statements approved by the parties i.e. those for the year ended 31 March 2009, the Company’s current liabilities far exceeded its cash in bank and other current assets, it is not seriously in dispute that the value of the Company’s fixed assets ie the three Lots and Shop 12 referred to in paragraphs 8 and 10 above was understated in the statements and that the properties, if sold in the open market, will be more than enough to settle the Company’s liabilities. According to a valuation report dated 18 April 2011 (“Valuation Report”), as at 31 March 2011, the market value of Lot 2270A as agricultural land was HK$5.7 million while with the benefit of short term waiver for the Training Center with ancillary facilities would be over HK$14.2 million. The market value of Shop 12 was HK$6.4 million.

19. Both sides indicated to this court at the hearing that their preference was for a buy-out order under section 168A rather than winding up the Company. Further, each side indicated to this court that they preferred to buy out the other, albeit it is fair to say that Chu was open‑minded about selling to the Respondents – when asked by this court towards the end of his testimony, he said if the other side offered a reasonable price, he could sell his shares to them.

20. In view of the foregoing, and bearing in mind that a winding up order is a remedy of last resort, I shall concentrate on whether a case under section 168A is made out before proceeding to deal with the alternative of winding up the Company.

D.  The Petitioners’ Complaints

21. Based on the Amended Petition and Amended Points of Claim, the Petitioners’ complaints of unfair prejudice can be summarized as follows:

(1)  Physical assault of Kit Hang by Chan on 7 July 2009 in the Office Building while Kit Hang was trying to bring some documents for Chu’s perusal (“7 July Incident”).

(2)  Exclusion of the Petitioners from the Company’s management (“Exclusion”). This complaint consists of a number of elements, including in particular Wai Dan’s failure to give the Petitioners ready access to Company documents and his refusal to allow Chu to enter the Office Building to inspect them on 30 September 2011 (“30 September Incident”).

(3)  Procuring the Company to engage contractors to carry out fire prevention works on its land at the exaggerated costs of HK$1.9 million without obtaining the Petitioners’ prior approval (“Fire Prevention Works”).

(4)  The Respondents’ refusal after March 2011 to alter the previous arrangement whereby the Company charged Sun Shing Ltd. only the Nominal Rent for the use of the three Lots (“Nominal Rent Issue”). The complaint is that, since Sun Shing Ltd. is wholly-owned by the Respondents, any special concession previously given by the Company to Sun Shing Ltd. would only benefit the Respondents and is unfair to the Petitioners.

E.  7 July Incident

22. The 7 July Incident is rather briefly described in Chu’s evidence in this way.

23. On 7 July 2009, while Chu was on the Ground Floor of the Office Building, Kit Hang ran down from the First Floor with two document files, cried for help and said she was attacked by Chan while on the 1^st Floor. Chu asked his son to call the police. Kit Hang looked terrified and cried.

24. After the police investigation, Chan was charged with and pleaded guilty to one count of common assault.  She was convicted accordingly and was discharged on condition of a sum of $2,000 for 12 months – “not to commit or attempt to commit any offence involving violence or threat of violence”.

25. Since that incident, Kit Hang has not gone back to the Office to avoid confrontation with the Respondents and out of concern for personal safety. Chu at first insisted in going back to the Office to sign cheques and generally look after the business. But he also stopped going back to the Office since September 2009 allegedly for the same reason. In October 2009, he instituted winding up proceedings HCCW 605 of 2009.

26. This episode of physical violence is not in dispute. Nor is the criminal conviction. In my view, it is more probable than not that this episode is a manifestation of the breakdown of relationship between the parties, although it cannot be denied that it would likely also contribute to the further deterioration of their relationship.

27. Nonetheless, this episode cannot be regarded as conduct relating to the affairs of the Company for a number of reasons. First, although the episode took place within the Office Building and notwithstanding the plea at paragraph 56(e) of the Amended Points of Claim, there is no direct evidence that it was prompted by any desire to deter the Petitioners from going back to the Office or participating in the Company’s affairs. Kit Hang herself did not give evidence at the hearing. Nor did Chan. Second, on the evidence, the two documents files carried by Kit Hang were not the Company’s files, but files relating to one of the Associated Companies. It is difficult to draw any inference as to what prompted the episode either. For all I know, it could have been a personal matter between Kit Hang and Chan. Or it could have related to the affairs of that Associated Company. Third, apart from a bare assertion by Chu that Kit Hang and himself stopped going to the Office for fear of personal safety, it is difficult for this court to accept the 7 July Incident had that effect - there was no direct evidence that Kit Hang suffered any injuries, and the episode certainly did not deter Chu from going to the Office until September 2009. Nor did it deter him from trying to get into the Office Building on 30 September 2011. It seems to this court a more plausible explanation for the Petitioners’ behaviour was that by then the parties did not see each other eye to eye and Chu was contemplating litigation which he did commence in October 2009. I would reject Chu’s assertion as unbelievable.

28. In these circumstances, I shall ignore the 7 July Incident for the purpose of section 168A.

F.  Exclusion

29. While the Petitioners’ legal advisers have lumped almost all their complaints under this Head, properly analysed, it can be broken down into the following two main components:

(1)   the Respondents’ refusal to alter the bank mandate of the Company regarding signing of cheques despite the Petitioners’ request at a Board meeting in August 2010.

(2)   The Respondents’ refusal to allow the Petitioners full access to the books and records of the Company, principally documents relating to the carrying out of Fire Prevention Works on the Lots, including the 30 September Incident.

F.1.  Bank Mandate

30. This complaint can be dealt with briefly.

31. On the evidence, the Company only has one bank account with DBS Bank and its mandate is that any two directors can sign cheques. Before the breakdown in relationship, the practice has been for Chu and Wai Dan to sign cheques. It was only at the Board meeting on 20 August 2010, a year after the Petitioners had stopped going to the Office in July and September 2009 respectively, that the Petitioners first raised the issue that “All cheques of the Company shall be signed by 3 directors”. No agreement was reached and hence no resolution was passed at that meeting to change the bank mandate. The Respondents only agreed to consider the suggestion. Then nothing happened until almost another year has passed.

32. On 20 July 2011, the Petitioners’ solicitors, Messrs Jimmie K.S. Wong & Partners, wrote to the Respondents’ solicitors, Messrs Henry Wan & Yeung, bringing up the issue again. That letter refers to the Board meeting on 20 August 2010. It reads inter alia:

“We refer to the Directors’ Meeting of the Company held on 20^th August 2010.

…

Our clients also want to ensure that they will be involved in approving cheques of the Company. A proposal was made that all cheques of the Company are to be signed by three directors.

Another alternative is to have two lists of authorized signatories: one comprising our clients and the other yours. Cheques are to be signed by two signatories, one from each list.”

33. The reply from the Respondents’ solicitors was dated 29 August 2011. It said the Respondents were satisfied with the existing arrangement and that it should continue. In other words, they refused to revise the bank mandate.

34. The Petitioners’ case was that the Respondents wanted to operate the bank account without their participation and hence the refusal to alter the mandate.

35. Wai Dan’s explanation for not taking steps to alter the bank mandate was that he thought, mistakenly, the bank mandate was the same as the past practice ie cheques should be signed by Chu and Wai Dan and there was no point in altering the mandate. Consistent with that mistaken belief, he opened an account in his name with Wing Hang Bank in December 2010, as nominee of the Company, to deposit the Company’s rental income from Shop 12 and pay its expenses. This arrangement was disclosed in the reply dated 29 August 2011 from the Respondents’ solicitors.

36. I do not accept Wai Dan’s explanation. Common sense dictates that Chu would not have requested to alter the bank mandate if he believed the Respondents were not able to operate the bank account themselves. Wan Dan should also know that. If he did not, it would have been a simple matter for him to check with the bank to find out what the prevailing mandate was. There was no evidence that he did so after the Petitioners’ request. By the time of the Board meeting on 20 August 2010, the parties were already engaged in litigation in HCCW 605 of 2009. It is reasonable to draw the inference that Wai Dan knew full well what the bank mandate was but did not wish or bother to accede to Chu’s request. Hence, his inaction and continued request to the Petitioners to give him a sound reason for altering the mandate for his consideration. Given that the Petitioners had already made it clear why they wish to alter the bank mandate, it is unclear to this court what further reason was required by Chu.

37. Be that as it may, in my view, this complaint is unfounded. It was the Petitioners’ own choice not to go back to the Office after July/September 2009 to monitor the Company’s business and sign cheques. The bank mandate was the same before or after 20 August 2010 – there was no unilateral alteration of the mandate so that the Petitioners were no longer the Company’s authorized signatories. For this reason, I do not find the Respondents’ failure to alter the bank mandate amounts to exclusion of the Petitioners from participating in the affairs of the Company – no director can claim a right to sign cheques for the Company, even though he is authorized to do so.

38. I further find the complaint rather contrived. The Petitioners’ lack of concern about the signing of cheques until August 2010 and the absence of follow-up action by them after the August 2010 Board meeting for another year fortify this court’s view. According to the last approved financial statements of the Company ie for the year ended 31 March 2009, the Company had a rather modest rental income of HK$210,000 and similarly modest operating expenses of HK$437,727. There is no evidence that the Petitioners were sufficiently concerned about movements in the bank account to even ask for copies of bank statements from the Respondents. If they were genuinely worried that the Respondents might help themselves to the monies in the bank account, that was what they would have done. They did ask for access to the Company’s documents and records generally but their focus at the time was documents pertaining to the Fire Prevention Works, rather than bank records, and only shortly prior to the Petition. Their demand in contemporaneous correspondence has always been to alter the bank mandate. Importantly, there is no evidence or even suggestion that the Respondents have misappropriated funds of the Company such that it was necessary to alter the bank mandate to protect the Company’s interest. 

39. All in all, I do not find this failure on the part of the Respondents unfair or prejudicial to the Petitioners for the purpose of section 168A.

F.2  Access to the documents and records of the Company & 30 September Incident

40. With regard to this sub-Head of complaint, the contemporaneous correspondence reveals the following.

41. By letter dated 20 July 2011 (“20 July Letter”), the Petitioners through their solicitors asked for interalia (i) information on who gave permission for the Fire Prevention Works to be carried out, the identity of the contractor(s) and the costs of such works and (ii) full details of all contracts entered into by the Respondents in the name of the Company without the Petitioners’ approval.

42. The Respondents replied through solicitors by letter dated 29 August 2011. The letter simply gave the names of the two contractors in question and a very brief description of the works they had contracted to do. There was no mention of contract price, when they were payable or whether any invoice had been paid. No documents were enclosed.

43. The Respondents further denied the two contracts for Fire Prevention Works were entered into without the Petitioners’ knowledge or approval, without stating when and how the Petitioners’ approval had been obtained. This denial is intriguing as it is totally inconsistent with the Respondents’ case that they have made numerous attempts to contact Chu to discuss matters relating to Fire Prevention Works but in vain.  To the credit of their counsel, at paragraph 48 of the Respondents’ Closing Submissions, it is accepted that the Fire Prevention Works Contracts have not been approved by the Petitioners, albeit that was entirely due to their neglect of the Company’s affairs.

44. By then, the following documents should have been received by Wai Dan:

A.	Kam Tin Fire Engineering Co Ltd. (“Kam Tin”)	Quotation in the sum of HK$1.2 million	3 March 2011
		Invoices	7 July 2011 8 August 2011
B.	Golden First Investment Co Ltd. (“Golden First”)	Quotation in the sum of HK$700,000	25 February 2011
		Invoices	8 April 2011 6 May 2011 3 June 2011 5 July 2011

45. A number of invoices from the two contractors should also have been received by Wai Dan shortly afterwards in September and October 2011.

46. By letter dated 12 October 2011 (“12 October Letter”), the Petitioners through their solicitors complained that the contracts for Fire Prevention Works were entered into without their approval and the lack of information on the contract price or the amounts paid to the contractors. The Petitioners also complained about the 30 September Incident. According to the letter, Chu tried to get inside the Office Building in order to inspect the documents relating to the Fire Prevention Works. He made the purpose of his visit known to Wai Dan but was nevertheless stopped by him.  Wai Dan said to Chu he should make a written request for inspection of Company documents through solicitors and asked him to leave.

47. The Respondents’ solicitors replied by letter dated 20 October 2011 (“20 October Letter”). In that letter, they disclosed the contract sums payable to the two contractors ie HK$1.2 million and HK$700,000 respectively and that they had already been paid. No supporting documents were disclosed. Further, it was admitted in the letter that on 30 September 2011, Chu did ask for documents relating to the Fire Prevention Works, Wai Dan did tell him to make a written request thorough solicitors and “invite” him to leave the premises. The alleged reasons given in the letter for denying Chu access was that the land had been licenced to Sun Shing Ltd., no prior notice had been given to Sun Shing Ltd. or Wai Dan of this visit, Chu was carrying a video camera attempting to record the operation of Sun Shing Ltd. thereby invading its “privacy” and its commercial secret, and the “intimidating” attitude of Chu. The only reason given for telling Chu to make a request through solicitors correspondence was that it was the Petitioners who had insisted on communicating with the Respondents through solicitors ever since 2010.

48. On 4 November 2011 (“4 November Letter”), the Petitioners through their solicitors again complained that they were denied access to the Office Building to inspect the books and records of the Company. Given that the Company’s registered office was situated on the 1^st Floor of the building, it was unreasonable for Wai Dan to refuse Chu entry into it. They also complained the provision of information by the Respondents with regard to the Fire Prevention Works in a piecemeal fashion. Lastly, they demanded immediate access to all books and records of the Company or else the Respondents should move the books and records to the office of the Company auditors so as to facilitate their inspection.

49. On 18 November 2011 (“18 November Letter”), three days after the Petition, the Respondents’ solicitors replied claiming that the Company’s books and records had already been transferred to the office of the Company auditors and asked the Petitioners to contact the auditors directly for inspection.

50. On Day 3 of the trial, Wai Dan was cross-examined on the reason why he did not provide the quotations and invoices to the Petitioners. He first said he could not find Chu after numerous attempts. He then explained he was busy taking care of his business and might have forgotten to send them to the Petitioners or their solicitors. When further cross‑examined on the reason why he did not allow Chu to inspect the Fire Prevention Works documents on 30 September 2011, Wai Dan admitted that Chu came to the Office Building and asked to inspect them. He gave three reasons for denying Chu access to the building or the documents. First, Chu came with a man and he felt he was not very friendly. Second, at that time, Ngai Sau Wah (“Ngai”) (wife of Lam Wai Tat) was embroiled in litigation with Chu. Since Ngai was working on the 1^st Floor, there might be trouble if he allowed Chu to go upstairs to inspect the documents. Third, he said he had told Chu to ask for inspection through lawyers and he would co-operate.

51. In my view, all the explanations given in the 20 October Letter and by Wai Dan in court were lame excuses.

52. The Petitioners first made a request for information on the Fire Prevention Works through solicitors by the 20 July Letter. Every piece of communication which followed was also by correspondence between solicitors. It seems to this court utterly pointless, other than as a delaying tactic, for Wai Dan to require Chu to make an appointment for inspection through lawyers – all he had to do was to send copies of the documents to (i) the Petitioners’ solicitors or (ii) his own solicitors and tell Chu to inspect them at a mutually convenient time, period.

53. Wai Dan was under legal advice and replied through his solicitors. It is inconceivable that Wai Dan could have given instructions to his solicitors for the preparation of a proper reply without the quotations and invoices in hand. Given that there were only two quotations and only a few invoices, it could not have been too difficult for Wai Dan to locate them personally or by a staff if he had wished to, however busy he might be at the time. In any event, the fact that he was busy was no excuse for denying Chu’s right as a director to inspect Company documents. 

54. Regarding what happened on 30 September 2011, the explanations given were equally lame, if not more.

(1)  First, the registered office of Company (as well as the Associated Companies) had always been and was on the 1^st Floor of the Office Building, notwithstanding the licence granted by the Company to Sun Shing Ltd. The lack of prior notice by Chu was no excuse for Wai Dan to stop a Company director to go to its registered office for a legitimate purpose. The law does not require a company director to give prior notice to all his fellow directors before going to the company’s office.

(2)   Second, the Training Center was on the Ground Floor. Wai Dan could at least have let Chu enter the Office Building and wait on the Ground Floor if he were genuinely concerned about Chu going after Sun Shing Ltd.’s commercial secrets or stirring up trouble even if Ngai was indeed upstairs. Since Chu was one of CMTTL’s shareholders and directors, he was entitled to stay on the premises occupied by CMTTL. While the land had been licenced by the Company to Sun Shing Ltd., CMTTL has been occupying the Ground Floor with the permission of Sun Shing Ltd. for years, and on the evidence, still was on 30 September 2011.

(3)   Third, Wai Dan could easily have brought the requested documents, personally or through a staff, down to the Ground Floor for Chu’s inspection. For no legitimate reason, he did not do so either.

(4)   Fourth, the so-called “intimidating” attitude of Chu is no excuse for denying Chu’s right of inspection as director. If Wai Dan were genuinely concerned about his personal safety, the thing to do was to call the police.

55. While the Respondents claimed in the 18 November Letter that all Company accounts and documents had been sent to the auditors and the Petitioners were free to make an appointment with the auditors for inspection, it would appear that the auditors had only been given the accounting records from 1 April 2009 to 31 March 2010 for the purpose of audit. Documents relating to Fire Prevention Works were unrelated to the financial year ended 31 March 2010 and were not available for inspection.

56. In his affirmation dated 9 July 2012, Wai Dan explained that there was a “misunderstanding” which resulted in the documents for the Fire Prevention Works being returned by the auditors to him (since they did not concern the financial year ended 31 March 2010) and hence not available to the Petitioners when they went to the auditors’ office. On the evidence, Wai Dan did nothing to rectify the situation after discovering this alleged “misunderstanding”. Indeed, the quotations and invoices relating to the Fire Prevention Works were only disclosed to the Petitioners as exhibits in Wai Dan’s affirmations in these proceedings in a piecemeal fashion ie in his affirmations dated 9 July & 23 August 2012 and 30 May 2014.

57. In my view, this complaint by the Petitioners is valid.

58. In Ng Yee Wah v Lam Chun Wah [2012] 4 HKLRD 40, Kwan J (as she then was) summarised the law regarding inspection of documents by directors at [29] as follows:

“(1) The right of a company director to inspect the company’s documents is well established at common law …

(2) The right of inspection flows from the director’s duties to the company and a director does not have to explain why the inspection is sought or demonstrate any particular ground or ‘need to know’ as a basis … Thus, the inaction on the part of the director after grounds for suspicion concerning the company’s affairs have arisen is irrelevant; likewise, the intention of the director to discover misfeasance with the view to seeking relief, or that the desire to find evidence is motivated by vindictiveness …

(3) It is only where it can be proved that the director intends to abuse the confidence in relation to the company’s affairs and to injure the company in a material way that the director’s right of inspection can be interfered with, and such interference can only be effected in circumstances where a restriction on a director’s right can be imposed because of misuse of confidential information leading to damage …

(4)  In view of the proposition in (3), the exercise of a director’s right of inspection is, ‘generally speaking, not a matter of discretion with the Court’ ...”

59. In Tom Ming Chou v Pan Ping-hu Antony & Ors unrep.; HCCW 375/2008; 28 October 2009; at [20], Kwan JA said:

“The right of a director to inspect documents belonging to the company under section 121 and at common law is not in dispute. This right of inspection is essential to the performance of the duties of a director and the court would not interfere with this right unless it could be clearly established that the director intended to abuse the confidence in relation to the company’s affairs and to injure the company in a material way (Re Boldwin Construction Company Limited & Another [2001] 3 HKLRD 430), or that the director intended to use the right to inspect not for the purposes for which the right was conferred but for some other improper purpose (Oxford Legal Group Limited v. Sibbasbridge Services plc and another [2008] 2 BCLC 381; Nicholas Timothy Cornforth Hill v. Alvarez & Marsal Asia Limited [2009] 4 HKLRD 727, paras. 23 and 30).”

60. It is of course true that for relief to be granted under section 168A, the prejudice must be suffered by the Petitioner as a member, albeit this requirement should not be too narrowly or technically construed:  O’Neill v Phillips [1999] 1 WLR 1092 at 1105G‑H ( per Lord Hoffmann). 

61. The right of inspection of a petitioner stems from his position as a director and not as a shareholder. However, if a purpose of the inspection is for him to see if and how his interest as a shareholder has or may have been prejudiced by the respondent, and if the effect of the improper denial of inspection is to prejudice him in connection with his shareholding, then the improper denial of inspection can constitute unfair prejudice for the purpose of section 168A: Tin Chi Ping v Chow Wai Fan & Ors unrep.; HCCW661 of 2006; 14 March 2014; Deputy High Court Judge S Wong SC at [106].

62. In the circumstances of this case, for the Respondents to deny the Petitioners access to Company documents without proper justification and in breach of their legal right is conduct both unfair and prejudicial to them in connection with their shareholding.

G.  Fire Prevention Works

63. As I said earlier, the complaint here is that the Respondents have procured the Company to engage contractors to carry out Fire Prevention Works on its land at the exaggerated costs of HK$1.9 million without the Petitioners’ prior approval. There are thus two components in this complaint: (1) failure on the part of the Respondents to obtain prior approval of the Petitioners; (2) the costs of the works in the total sum of HK$1.9 million were excessive.

G.1  No approval

64. It should be obvious from the discussion in section F.2 above that after Wai Dan had received the quotations from Golden First and Kam Tin in February and March 2011, he made no attempt to seek the approval of the Petitioners before proceeding to confirm the quotations and give the go‑ahead to the contractors on behalf of the Company – he made all sort of excuses for not releasing information about the Fire Prevention Works to the Petitioners even when repeatedly asked since July that year. The Respondents’ case is that it was the Petitioners who had chosen to neglect the Company’s affairs since July/September 2009 when they stopped going back to the Office, and that a petitioner’s disinterest in the company’s affairs may lead to a finding that the other party’s failure to consult him is not unfair: paragraphs 1(1) and 47‑48 of the Respondents’ Closing Submissions.

65. In my view, it is quite unnecessary to decide whether or not the Petitioners have shown sufficient disinterest in the Company’s affairs so as to justify Wai Dan’s omission to consult them about the Golden First and Kam Tin quotations in early 2011 and render such omission “not unfair”. On the undisputed objective facts, the carrying out of the Fire Prevention Works in 2011 was not prejudicial to the interest of the Petitioners. Quite on the contrary, it was beneficial to their interest as it has enhanced the value of the Lots. The reasons are these.

66. The three Lots are agriculture land. Since about 2000, planning permission has been granted by the Town Planning Board (“Board”) to use the Lots as a temporary forklift training center, the last of such permission, prior to the breakdown in relationship between the parties, was given by the Board in a letter dated 21 November 2008. The permission was subject to conditions and was valid until 7 November 2011. For the present purpose, the two relevant conditions were (i) the submission of fire services installation proposal to the satisfaction of the Fire Services Department or the Board by 7 May 2009; and (ii) the implementation of the fire services installation by 7 August 2009.

67. On the undisputed evidence, numerous applications for extension of time to comply with conditions (i) and/or (ii) were made between March 2009 and May 2011 as follows: 

Date of application for extension	Date of approval of extension
24 March 2009	5 May 2009
23 June 2009	4 August 2009
17 September 2009	10 November 2009
16 December 2009	7 January 2010
25 March 2010	5 May 2010
18 June 2010	2 August 2010
22 September 2010	10 November 2010
24 November 2010	7 January 2011
20 January 2011	2 March 2011
22 March 2011	9 May 2011
24 May 2011	13 July 2011

68. The Fire Prevention Works were completed and accepted by the Planning Department on 28 September 2011.  But for the compliance with the conditions, it would be wholly uncertain whether the Board/ Planning Department would continue to grant planning permission to use the Lots as a temporary forklift training center.

69. According to the Valuation Report, the market value of Lot 2270A alone as agricultural land was HK$5.7 million while with the benefit of short term waiver for use as the Training Center with ancillary facilities would be over HK$14 million. Thus, it is reasonably clear that the carrying out of the Fire Prevention Works had the effect of enhancing the value of the Lots. The question is whether the costs of HK$1.9 million were excessive.

G.2  Excessive Costs

70. The evidential basis of the Petitioners’ allegation that HK$1.9 million were excessive is no more than this.

71. First, prior to 7 July 2009, Chu had made inquiries with Wong Yuk Tin (“Mr Wong”) of Kam Tin, the Respondents’ second witness, and was advised that the Fire Prevention Works should at most cost HK$800,000.

72. Second, in February 2014, Chu had made inquiries with another contractor viz Sum Kee. Sum Kee was provided with a photo of the water tank and, on that basis, issued a quotation for building an underground water tank said to be of identical size, shape and volume (30,000 litres) as that built on Lot 2270A in 2011. According to the quotation, the costs of building the water tank added up to only HK$85,000. On the other hand, the sum charged by Golden First for the water tank and related works amounted to HK$480,000.

73. I am not satisfied on the evidence that the costs of the Fire Prevention Works undertaken in 2011 were excessive.

74. As far as the first piece of evidence is concerned, it was firmly denied by Mr Wong, the sole shareholder and director of Kam Tin.  I have carefully considered his testimony and observed his demeanor in court. He answered questions calmly and his response to questions was mostly direct. His credibility was not at all shaken by cross-examination.  I accept his testimony. In any event, what was said by one contractor in 2009 cannot safely be relied upon to challenge the reasonableness of Kam Tin’s detailed written quotation in March 2011.

75. As far as the second piece of evidence is concerned, it is noteworthy that the Petitioners had not seen fit to call the responsible officer of Sum Kee to testify. All that the court was presented with was a one‑page quotation without any further explanation. On the other hand, Mr Wong said in his affirmation that the quotation from Sum Kee was wholly unrealistic. This was because the water tank built by Golden First was largely underground, which meant that they had to dig a gigantic hole to fit it. According to his estimate, the costs of removing the soil dug out would cost about HK$100,000 ie more than Sum Kee’s quotation.  In these circumstances, this court is inclined to prefer the evidence of Mr Wong and reject the suggestion that the sum charged by Golden First was excessive.

H.   Nominal Rent Issue

76. On the undisputed evidence, all along the parties were agreeable to and did agree that the Company would licence the Lots to Sun Shing Ltd. at a monthly fee of HK$10,000. It is also not in dispute that the HK$10,000 licence fee was way below market value. According to the Joint Statement of Experts, the Petitioners’ expert valued the market rental at HK$130,000 as at 1 March 2011 while the Respondents’ expert valued it at HK$48,600. As at 15 November 2011, the figures were HK$135,000 and HK$49,900 respectively. In this respect, Sun Shing Ltd. enjoyed a clear financial advantage at the expense of the Company. Put it in another way, the gain of Sun Shing Ltd. is the loss of the Company.

77. It should be obvious that before the breakdown in relationship between the parties and while Sun Shing Ltd. was owned by Chu and Wai Dan equally, neither party had any reason to quarrel with that arrangement. It should be equally obvious that after March 2011 when Sun Shing Ltd. became wholly-owned by the Respondents, the arrangement would not be acceptable to the Petitioners.

78. According to the contemporaneous documents, the Petitioners first raised this Nominal Rent Issue in the 12 October Letter.  At page 3 of the letter, the Petitioners stated that “they are desirous that the Company should maximize its income from renting/licencing out its land” and that the Company “should endeavor to let or licence out its land at market rate”.

79. In the 20 October Letter in reply, the Respondents expressed their willingness to reconcile with the Petitioners so as to smoothen the operation of the Company. They also proposed to convene a Board meeting in mid‑November with a view to managing the Company jointly.  Nothing was said about the Nominal Rent.

80. The Petitioners responded by the 4 November Letter. They indicated their availability to attend a Board meeting between 28 November and 2December 2011, but required inter alia immediate access to the Company’s books and records.

81. The Respondents did not reply to that letter until 18 November 2011. Meanwhile, on 15 November 2011, the Petitioners instituted the present proceedings.

82. In my judgment, there was no excuse for the Respondents not to respond constructively to the Petitioners’ request for access to the Company’s books and records and address the Nominal Rent Issue forthwith. As I said earlier, it should be obvious to anyone, including the Respondents, that after Sun Shing Ltd. had become wholly-owned by the Respondents, the arrangement of charging Nominal Rent for the Lots would not be acceptable to the Petitioners and must be reviewed. Instead of taking a pro-active step to resolve this issue, they just continued to allow the Company to charge the Nominal Rent. When the Petitioners raised the issue in October, the Respondents simply stalled.

83. In the circumstances of this case, I am satisfied that the Respondents’ conduct was both unfair and prejudicial to the Petitioners’ interest as members of the Company.

I.    Relief under section 168A

84. Given my findings that the Respondents have conducted the affairs of the Company in a manner unfairly prejudicial to the Petitioners as aforesaid, I shall proceed to consider the appropriate relief which should be granted. In this regard, it is well-established that the court has a wide discretion under section 168A to grant any relief with a view to bringing to an end the matter complained of: Tin Chi Ping v Chow Wai Fan & Ors supra at [117].

85. In Re a Company (No.006834 of 1988) ex parte Kremer[1989] BCLC 365 at 368, Hoffmann J (as he then was) said this:

“This is an ordinary case of breakdown in confidence between the parties. In such circumstances, fairness requires that the minority shareholder should not have to maintain his investment in a company managed by the majority with whom he has fallen out. But the unfairness disappears if the minority shareholder is offered a fair price for his shares.”

86. In my view, the same can be said of this case. Although the parties are equal shareholders, at least since September 2009, the Company has been managed by the Respondents. It is not seriously in dispute that it was Wai Dan who dealt with (i) the Planning Department and Fire Services Department in relation to the use of the Lots as a temporary forklift training center and (ii) the indigenous villagers in relation to any matters concerning the Lots. Prima facie, the appropriate relief should be an order for the Respondents to buy out the Petitioners.

87. As Harris J said in Lehman & Co. Management Ltd. v Effiscient Ltd. & Lehmanbrown Ltd.; unrep.; HCCW 377 & 383 of 2010; 15 November 2011; at [40]:

“In exercising its discretion to order a buyout of shares, the court will have regard to which party is actively engaged in the management of the business of the company. This is particularly so where the petitioner is a majority shareholder who is willing and able to buy out the respondent at a fair price: Re a Company (No.006834 of 1988) ex parte Kremer[1989] BCLC 365, at 367‑368; Ronald Li-Kai Chu v Deacon Te-Ken Chiu [1991] 2 HKLRD 572. The parties in the present case have equal shareholdings. However, in my view the principle will generally apply to the case of a significant shareholder who has been managing the business of the company.”

88. In that case, Harris J ordered the petitioner to sell its one share in the company to the 1^st respondent.  This Order was not disturbed on appeal.

89. My view that the appropriate relief should be an order for the Respondents to buy out the Petitioners is fortified by the following factors:

(1)  While Chu indicated in court he was open-minded about selling to the Respondents, buying out the Petitioners’ shares was the only preference of Wai Dan. At the hearing, Wai Dan had expressed his concern that if the Petitioners were to become the sole shareholders of and control the Company, they might not allow him to continue his business on the Lots or the parties would not be able to agree on the market rent to be charged by the Company. Given the hostilities between the parties, Wai Dan’s concern is far from fanciful.

(2)  Even if the Petitioners were willing to sit down and negotiate with the Respondents a proper market rent to be charged by the Company for the use of the Lots, one can foresee that such negotiations will be fraught with difficulties and will likely cause further friction among the parties. If at all possible, this court should mould the relief to be granted in this case which reduces rather than increases the possibility of further conflicts.

90. In my judgment, the most appropriate relief that this court should grant in the present case is an order that the Respondents do purchase and the Petitioners do sell all their shares in the Company at a fair market price. 

J.   Just and Equitable winding up

91. For completeness, in the event I am wrong in concluding that relief should be granted under section 168A, in the exercise of my discretion, I will be inclined to make an order that the Company be wound up on the ground that (i) the Company is a quasi-partnership and there is a complete breakdown in mutual trust and confidence between the parties such that in the foreseeable future they will not be able to manage the Company jointly; (ii) there is deadlock both at the Board and at the shareholders’ levels which is incapable of being resolved: Beatrice Tsang & Anr v Yeung Man Loong Maxly & Ors supra at [85].  

K.   Disposition 

92. There shall be an order that the Respondents do purchase and the Petitioners do sell all their shares in the Company at a fair market price.

93. In the absence of agreement on the fair market price and costs of the proceedings within 28 days from the date hereof, the parties are directed to restore the hearing before this court, with half a day reserved, for

(1)  all outstanding matters which have not been dealt with in their written submissions including interalia the date of valuation, whether interest should be awarded on the value of the Petitioners’ shares and if so at what rate and who should pay for the costs of valuation: Tin Chi Ping v Chow Wai Fan & Ors [ 2014] 4 HKLRD 416;

(2)  directions to be given to facilitate the purchase of the Petitioners’ shares including inter alia the appointment of a suitable valuation expert and consequential directions;

(3)  submissions on costs.

94. The parties are further directed to file and exchange their written submissions together with a draft order which they invite the court to make 7 working days before the restored hearing.

95. In the absence of agreement on costs of the proceedings only, the parties are directed to restore the hearing before this court, with half an hour reserved, for submissions on costs. The parties are further directed to file and exchange their written submissions 3 working days before the restored hearing.

HCCW 377/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 377 OF 2011

____________

______________

D E C I S I O N

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1.  The respondents seek to adduce as evidence parts of a letter read out during mediation of another case. The question is whether or not exceptions to principles governing confidentiality or without prejudice communications apply.

Background

2.  The petitioners are husband and wife and so are the respondents.  The 1^st respondent is the elder brother of the 2^nd petitioner.  All 4 of them are equal shareholders and directors of the 3^rd respondent (“the Company”).

3.  The 1^st petitioner and 1^st respondent used to run a partnership in construction sub-contracting.  In 1994, they incorporated Sun Shing Construction Co Ltd (“Sun Shing”), which took over the partnership.

4.  As the business of Sun Shing flourished, the Company was established as the property arm to hold properties purchased with Sun Shing’s profits. 

5.  The relationship of the petitioners and respondents turned sour in about 2009.  The 1^st petitioner took out HCCW 605 of 2009 to wind up Sun Shing (“the Sun Shing case”) on the just and equitable ground.  The 1^st respondent was a party in that case. 

6.  On 8 February 2011, mediation of the Sun Shing case (“the mediation”) was conducted.  There is no dispute that during the mediation, the 1^st respondent read out a letter (“the letter”) that he had given to the 1^st petitioner on the same day.  The opening paragraph and paragraph 4 thereof (“the 1^st passage” and “2^nd passage” respectively) are relevant to this summons.

7.  In March 2011, as a result of the mediation, the 1^st respondent bought out the 1^st petitioner’s interest in Sun Shing as part of the settlement and the 1^st petitioner resigned as its director.

8.  On 15 November 2011, the petitioners took out this petition for the winding up of the Company on the just and equitable ground.  The Company was described as a quasi-partnership among the parties.  The petitioners aver, among others, that the respondents (i) had denied the petitioners access to the Company’s book and records and had excluded them from management,  in particular, stopping the 1^st petitioner from entering the office building on 30 September 2011; (ii) had committed the Company to contracts for fire prevention works without first obtaining the petitioners’ approval.

9.  The respondents denied the allegations and, in their affirmation in opposition, relied on the letter as part of their defence:

(i)  The 1^st passage: the opening paragraph contained this statement: ‘[鑑]於依照[閣]下年多前提議如双方需联絡時，必[須]經双方律師轉達，兩年了… …’.  It allegedly showed that there had been a prior request from the petitioners for inspection of Company documents to be made through solicitors, but the 1^st petitioner failed to abide by it and attended the office without prior notice on 30 September 2011; and

(ii)  The 2^nd passage: paragraph 4 of the letter allegedly showed that the respondents had informed the petitioners of the need to install fire prevention equipment, the consequence of non-compliance and the quotation.

10.  On 30 January 2012, Harris J directed the parties to file points of pleadings.  The defences in the preceding paragraph appear in paragraphs 40 and 44 of the points of defence.

11.  By the present summons, the petitioners seek to strike out the letter as an exhibit and that part of the 1^st respondent’s affirmation referring to it.  He submits that adducing the letter as evidence violates the principles on confidentiality and without prejudice privilege.  In any case, the matters in the 2 passages can be proved by other means, to which the petitioners have no objection.

12.  Mr Yuen, counsel for the respondents, contends that the 2 passages contained no settlement proposal for the Sun Shing case.  It did not contain admissions (or even statements) by the petitioners in the Sun Shing action or the present case.  Nor did it touch on any issue raised in the Sun Shing action.  The respondents were otherwise willing to cover up other parts of the letter before insertion into the trial bundle.

13.  The issues are, therefore, whether any exceptions to the confidentiality and without prejudice principles apply to the 2 passages. 

The applicable principles governing confidentiality in mediation

14.  Fundamental to mediation is confidentiality.  In S v T (Mediation: Privilege) [2011] 1 HKLRD 534, Rogers VP has this to say:

“2.     It suffices for me to say that I consider that the primary document which is sought to be put in is a without prejudice document to the extent that it was a document designed to achieve some sort of a settlement or resolution of the matter. But other documents which are sought to be put in relate to what was said or not said in the course of mediation and I regard this as fundamentally important.

3.       Mediation has now become part of the process which the court approves of to the extent that parties may even be penalised in costs if they are not prepared to embark upon a mediation process. Fundamental to mediation is confidentiality. Every mediation starts with an agreement between the parties and the mediator that what is said in mediation must be kept confidential and even the process of mediation and the fact that it is embarked upon should be kept, in my view, confidential. It is wholly wrong for any party, of their own motion, to refer to what was said or not said or arose out of mediation, unless and until, a concluded agreement has been reached in the mediation which encompasses what may be disclosed and not disclosed.

4.       It is not a simple question of one party waiving privilege because it is a matter for both parties. I regard this as extremely important because it goes to the root of the mediation process which, as I have said, is now part of the court’s process. Unless this is adhered to the whole mediation system will come to naught and people will use mediation as a tactical advantage and then seek to introduce evidence which has come from an unsuccessful mediation and somehow bring that into court proceedings. That is quite contrary to anything which was envisaged in the process of mediation. This applies just as much to matrimonial and custody proceedings as it does to any other proceedings.”

15.  The Court will only compel disclosure of what was said or not said during the mediation if it is necessary for the fair disposal of the case: Farm Assist Ltd (in liquidation) v The Secretary of State for the Environment, Food and Rural Affairs (No. 2) [2009] EWHC 1102 (TCC),at para 21; Confidentiality, Toulson and Phipps, 2^nd ed, para 17-001.

Application of the confidentiality principles

16.  The mediation agreement contained express terms governing confidentiality:

“11. 參與調解的各人︰

(a) 須把進行調解所產生的所有資料以及與調解有關的所有資料保密，包括達成和解的事實和條款，但不包括將會或已進行調解這個事實，或根據法律規定為實行或執行和解條款而須披露資料的情況；以及

(b)    須承諾在調解各方與調解員之間傳遞的所有資料(不論透過任何方式傳遞)不得用以損害任何一方的法定權益，亦不得向任何法官、仲裁員或任何法律程式或其他正式程式中的其他決策人提交這些資料作為證據或披露這些資料，但根據法律規定須披露資料的情況則作別論。”

17.  The letter formed part of the information used in relation to the mediation and was confidential.  The next question is to see whether any exceptions apply.  Mr Yuen submits:

(1) That “save the interest to preserve confidentiality, no other public interest would be implicated by the disclosure of the [disputed evidence]”;

(2) It is doubtful if the confidentiality principles should apply to the 1^st respondent’s own statements;

(3) That without the 2 passages, the respondents will be left with no evidence to rebut the allegations of the petitioners at the trial.

18.  With regard to point (1), once it is shown that a document was part of the information produced for the purpose of the mediation and there was an agreement (or legal principles) to govern its confidentiality, the burden lies on the respondents to prove that there are other public interests overriding the general principles.  It is always a weighing exercise.  Examples are where a settlement reached was procured by economic duress and the parties agreed to waive the confidentiality: Farm Assist Ltd case; or where the public interest in protecting the interests of a child outweighs the public interest in preserving the confidentiality of attempted conciliation: Re D (Minors) (Conciliation : Disclosure of Information) [1993] Fam 231.

19.  Mr Yuen is unable to point to any other public interest that can override the principles governing the confidentiality preserved in the Sun Shing case.

20.  With regard to point (2), during mediation, parties may talk about things which may be a mixture of opening remarks, accusations, admissions, evidence, assessment of merits, expressions of needs, and others.  How can one distill from the discussion to ascertain which remark influenced which party in deciding whether to settle or not?  The principles for maintaining confidentiality in mediation apply to all communications during the mediation, not only to remarks constituting admissions, or remarks of the other party. 

21.  With regard to point (3), I am unable to agree.  The 1^st passage referred to the arrangement for inspection of documents made in 2010, about a year before the date of the mediation.  The scope of that arrangement is in dispute.  The respondents can certainly prove the arrangement by other means.  In no way can the letter, made months after the arrangement, even be treated as a contemporaneous document.

22.  With regard to the 2^nd passage, Mr Yuen’s submission contradicts the respondents’ own pleaded case in paragraph 44(4) of the points of defence:

“Despite repeatedverbal and oral requests by the 1^st and 2^nd Respondents to confirm the quotations of the installation of the required fire service equipments, the Petitioners refused to response.”

There appeared to be more than one request and they were oral. The 2^nd passage was, at best, record of an oral request.

23.  In any case, the petitioners’ case is that the respondents failed to obtain their approvalto the fire installation works and the price was too high.  The 2^nd passage goes nowhere near to showing that the approval was obtained.

24.  The disclosure sought by the respondents is thus not necessary for the fair disposal of the case: the Farm Assist case.

The applicable principles on without prejudice communications

25.  The ‘without prejudice’ rule is a rule governing the admissibility of evidence and is founded upon the public policy of encouraging litigants to settle their differences rather than resort to litigation.  Parties should not be discouraged by the knowledge that anything that is said in the course of such negotiations (and that includes, of course, as much the failure to reply to an offer as an actual reply) may be used to their prejudice in the course of the proceedings.  They should be encouraged fully and frankly to put their cards on the table.

26.  The rule applies to exclude all negotiations genuinely aimed at settlement whether oral or in writing from being given in evidence. It does not depend on whether the label “without prejudice” was used in the negotiations.

27.  Two different public interests, namely, the public interest in promoting settlements and the public interest in full discovery between parties to litigation are involved.  In general, the without prejudice rule made inadmissible in any subsequent litigation connected with the same subject matter proof of any admissions made with a genuine intention to reach a settlement.  Admissions made to reach settlement with a different party within the same litigation were also inadmissible whether or not settlement was reached with that party.  The general public policy that applied to protect genuine negotiations from being admissible in evidence also applies to protect those negotiations from being disclosed to third parties: Rush & Tompkins Ltdv Greater London Council & anor [1989] AC 1280, 1299 D-H, 1300 G, 1301 C-D.

28.  The without prejudice privilege extends not only to admissions but also to the communications in the whole course: Unilver plc v The Procter & Gamble Co [2000] 1 WLR 2436,at 2448 H to 2449 B, per Rober Walker LJ:

“In those circumstances I consider that this court should, in determining this appeal, give effect to the principles stated in the modern cases, especially Cutt v. Head, Rush & Tompkins Ltd v. Greater London Council and Muller v. Linsley & Mortimer. Whatever difficulties there are in a complete reconciliation of those cases, they make clear that the without prejudice rule is founded partly in public policy and partly in the agreement of the parties. They show that the protection of admissions against interest is the most important practical effect of the rule. But to dissect out identifiable admissions and withhold protection from the rest of without prejudice communications (except for a special reason) would not only create huge practical difficulties but would be contrary to the underlying objective of giving protection to the parties. In the words of Lord Griffiths in the Rush v. Tompkins case [1989] AC 1280, 1300: “to speak freely about all issues in the litigation both factual and legal when seeking compromise and, for the purpose of establishing a basis of compromise, admitting certain facts.” Parties cannot speak freely at a without prejudice meeting if they must constantly monitor every sentence, with lawyers or patent agents sitting at their shoulders as minders.

Lord Griffiths in the Rush v. Tompkins case noted, at p.1300C, and more recent decisions illustrate, that even in situations to which the without prejudice rule undoubtedly applies, the veil imposed by public policy may have to be pulled aside, even so as to disclose admissions, in cases where the protection afforded by the rule has been unequivocally abused.”

29.  The without prejudice rule extends to negotiations concerning earlier proceedings involving an issue which was still unresolved: Ofulue & anor v Bossert [2009] 1 AC 990.

30.  A number of qualifications or exceptions to the without prejudice rule has been set out in Unilver plc v The Procter & Gamble C, above,  at 2444 C–2445 E:

1. When the issue in dispute is whether the without prejudice communications have resulted in a concluded compromise agreement;

2. When the issue is whether an agreement apparently concluded should be set aside on the ground of misrepresentation, fraud or undue influence;

3. Even if there is no concluded compromise, a clear statement which is made by one party to a without prejudice negotiation and on which the other party is intended to act and does in fact act may be admissible as giving rise to estoppel;

4. Where exclusion of the without prejudice communications would act as a cloak for perjury, blackmail or other ‘unambiguous impropriety’ (although this exception would only apply in the clearest cases of abuse of a privileged occasion);

5. To explain delay or apparent acquiescence in an application for striking out for want of prosecution;

6. When an issue is one unconnected with the truth or falsity of anything stated in the negotiations, and as therefore falling outside the principle of public policy protecting without prejudice communications;

7. When an offer was expressly made “without prejudice except as to costs”.  This is based on an express or implied agreement between the parties.

8. In matrimonial cases there has developed what is now a distinct privilege extending to communications received in confidence with a view to matrimonial conciliation.

31.  One can add other examples to this list:

“9. When admission was made of an “independent fact” in no way connected with the merits of the cause: dictum in Rush v Tompkins Ltd v Greater London Council, at page 1330B; Ofulue v Bossert, above.  For example an admission that a document was in the handwriting of one of the parties was received in evidence in Waldridge v Kennison (1794) 1 Esp. 142.

10. A letter that is, in its terms, an assertion of the writer’s rights and does not unequivocally indicate the writer’s willingness to negotiate, is not privileged and is admissible in evidence: Buckinghamshire County Council v Moran [1990] 1 Ch 623, at 634 G, 635 C-D.

11. When a party puts his own conduct in issue, thereby waiving any privilege attached to the without prejudice negotiations.  For example, when the issue is whether a prior settlement constituted a reasonable attempt to mitigate loss in the subsequent action: Muller v Linsley & Mortimer [1996] PNLR 74.”

Application of the principles on without prejudice communications

32.  Mr Yuen relies on the following grounds for admission of the 2 passages as evidence:

(1) They were not admissions;

(2) The passages were in no way connected with the underlying dispute of the Sun Shing case;

(3) There was waiver of privilege by the petitioners;

(4) Exclusion of the 2 passages will act as a cloak for perjury.

33.  With regard to point (1), the letter was clearly written for use at the mediation even on the 1^st respondent’s own case. Although the 1^st and 2^nd passages were not in themselves admissions but self-serving assertions of fact by the defendant, they were covered by the without prejudice principles: Unilver plc v The Procter & Gamble Co referred to in paragraph 28 above.

34.  With regard to point (2), this appears to be exceptions 6 and 9 above.  Note that the Waldridge caseconcerns use of the document, not for the truth of the contents but for a reason wholly extraneous to the contents of the letter.  Lord Griffiths expressly stated that the Waldridge case is:

“an exceptional case [which] should not be allowed to whittle down the protection given to the parties to speak freely about all issues in the litigation both factual and legal when seeking compromise and, for the purpose of establishing a basis of compromise, admitting certain facts.” Rush & Tompkins Ltd v Greater London Council & anor [1989] AC 1280 at 1300 F

35.  Mr Yuen submits that the 2 passages were in no way connected with the underlying dispute of the mediation which concerned beneficial ownership of 50% shares in Sun Shing held by the 1^st petitioner.  They did not concern the dispute over the fire prevention equipment contract and the arrangement for inspection between the parties.  The 1^st respondent did not prepare the letter to facilitate the settlement of the Sun Shing action but simply to put things on record.  The mediation was a rare opportunity for the 1^st respondent to meet face to face with the 1^st petitioner and the 1^st respondent seized it to convey the information contained in the letter to the 1^st petitioner.

36.  The pleadings in the Sun Shing case were not available for consideration.  However, the letter did not, on its face, limit its application in the way described in the preceding paragraph.  Having been read out, it cannot be said that the 2 passages were “independent facts” unconnected with the merits of the cause, whether of the Sun Shing case or the present petition.  Just a brief reading of the points of claim in this case will show that the set up and operation of business in Sun Shing were closely connected to those of the Company.  It is the contents of the 2 passages that the respondents wish to rely on in the present case.  In any case, I repeat my observations in paragraphs 20 and 33 above.

37.  With regard to point (3), presumably this is exception 11. The present case is clearly distinguishable from Muller v Linsley and Mortimer where the plaintiff put his own conduct in issue.  There, not only were the facts of reaching a settlement and its terms relevant, but the without prejudice correspondence formed part of the plaintiff’s case on making reasonable attempts to mitigate loss.

38.  There was no issue raised in the present case in connection with the prior settlement.  The respondents are unable to point to any approval for fire prevention works obtained from the petitioners.  The arrangement over inspection of documents is disputed.  It cannot be right that by simply pleading that the respondents did not seek their approval and excluded them from management that the petitioners could be said to have waived their privilege in the without prejudice discussion.  If the privilege could be so waived, it will apply to every case where mediation is unsuccessful as there will still be pleaded issues to be resolved. 

39.  With regard to point (4), this purports to be exception 4.  Mr Yuen accepts that the exception applies only to the clearest case of abusing the privilege granted to without prejudice communications.

40.  In Savings & Investment Bank Ltd (in liquidation) v Fincken [2004] 1 WLR 667,it was held that although cases of unambiguous impropriety were an exception to the general rule that without prejudice communications were inadmissible in evidence, that exception was not to be applied too readily in view of the public interest in encouraging parties to speak frankly to one another in aid of reaching a settlement; that it was not the mere inconsistency between an admission and a pleaded or stated position, with the mere possibility that such a case or position, if persisted in, might lead to perjury that led to the admitting party losing the protection of the privilege, rather it was the fact that the privilege was itself abused.

41.  The petitioners’ case is that the respondents procured the Company to engage contractors to carry out fire prevention works without first obtaining the approval of the petitioners.  The respondents procured the company to pay $1.9 million for those works when one of the contractors involved indicated to the 1^st petitioner that the works should cost only about $800,000 (paragraph 69 f and g of the points of claim). 

42.  In the points of reply, the petitioners further claim that prior to 7 July 2009, the 1^st petitioner had made enquiries with a contractor and got a quotation of about $800,000, yet the respondents claimed to have incurred costs of $1.9 million on those works. The 1^st respondent purportedly exhibited a copy of the “contract” for the works as exhibit LWD-13 of his affirmation filed on 23 December 2011, but that exhibit was only a quotation and was for $1.2 million only; there was no indication of the extent of works actually carried out.

43.  The pleaded case therefore show that the petitioners were aware of the need for fire prevention works well before the mediation was carried out and that quotations needed to be considered before committing the Company.  They criticized the respondents’ quotation and proof of costs incurred for the works.  Adducing the 2^nd passage as evidence will, at best, go towards showing another reminder from the respondents of the need for the works, the urgency and a quotation, but not the grant of any approval by the petitioners.

44.  The petitioners did not abuse the privilege attached to the without prejudice discussion eg by simply listening to (or reading) the 2^nd passage during the mediation.  There was no fraud or other vitiating conduct on their part.  There is nothing to show that the petitioners intend to or need to perjure to prove their case.  In short, there was no unambiguous impropriety on the part of the petitioners that should justify exclusion of the without prejudice rule.

45.  In summary, none of the grounds relied on by Mr Yuen are sustainable.

Conclusion

46.  The court may depart from the general principles governing confidentiality and without prejudice communications in an appropriate case.  However, there is no other greater public interest involved that can override these principles in the present case.  None of the exceptions apply.  The 2 passages are also not necessary for the fair disposal of this case and their contents can be proved by alternative means.

47.  I therefore order that:

(i) The letter as an exhibit and the relevant paragraphs of the 1^st respondent’s affirmation filed on 23 December 2011 that referred to it be struck out.  There should be an order in terms of paragraphs 1-4 of the summons, save that the reference to the letter dated 4 January 2011 be deleted as suggested by Mr Lo.

(ii) There be an order nisi, that costs follow the event and be to the petitioners, to be summarily assessed on 10 September 2012 at 4:30 pm on the papers without attendance.  The petitioners shall file and serve their statement of costs by 30 August 2012.  The respondents shall file and serve their grounds in opposition by 6 September 2012.

48.  I thank counsel for their assistance.