Dennis Kwok Hon Ming v. Poon Sui Cheong Albert and Others

HCMP 1526/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1526 OF 2013

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MISCELLANEOUS PROCEEDINGS NO 1527 OF 2013

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MISCELLANEOUS PROCEEDINGS NO 1528 OF 2013

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JUDGMENT

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1.I have before me a summons filed on 22 March 2017 seeking (1) leave to appeal from my decision dated 15 March 2017 insofar as is necessary and /or (2) a stay of execution of a judgment dated 14 December 2016 (“the Main Judgment”) and/or my decisions dated 21 February 2017 and/or 15 March 2017 (“the February Decision” and “the March Decision” respectively). (Abbreviations and terminology herein are the same as in the Main Judgment.)

2.I handed down the Main Judgment following a trial of 3 unfair prejudice petitions brought by P in respect of the Companies. By the Main Judgment, I decided:

(a)  By way of first order, that the Majority Shareholders should buy out P’s shares in the Companies at a value to be fixed by the court, with some ancillary directions as to the valuation process.  I directed further submissions if further directions were required for the valuation.

(b)  By way of second order, that the Majority Shareholders should cause the Companies to pay P a manager’s bonus as if he remained manager until the date of the share buy-out.  I ordered that the amounts due to P by way of shareholder loan repayment, and the amount due by P to Top Master, should be taken into account.

(c)  I invited the parties to try to agree appropriate orders to take account of these matters.

(d)  I directed that if the parties considered that further submissions should be made, and further directions or rulings obtained, the parties should inform the court within 28 days.

3.Following written submissions between 11 January 2017 and 10 February 2017, and a direction by me dated 16 January 2017, I handed down the February Decision.  By the February Decision:

(a) I noted that despite the Majority Shareholders’ substantive written submissions to the court, they requested an oral hearing and directions for evidence, but without any indication of why the same would be needed nor what evidence was envisaged.  I accordingly proceeded to determine the issues in respect of which I had submissions insofar as I felt this would help push the process forwards; and I declined to direct an oral hearing or order the filing of evidence at that stage (para 16).

(b) I noted that the parties hoped at that time that the identity of the valuation panel would be agreed shortly and sought no directions in that regard (paras 16, 26).

(c) I determined (at paras 17 – 20) points in issue between the parties in respect of the drawing up of the order to reflect the Main Judgment.

(d) I determined (at paras 21 – 23) points in issue in respect of directions for the valuation, including liability for costs of the valuation and stamp duty.

(e) I directed the parties to finalise a directions order in light of this decision by 3 March 2017, but if they required further directions at that time, they could make written submissions by that date.

4.Following written submissions dated 3 March 2017, I handed down the March Decision.  By the March Decision:

(a) I determined the identity of the valuation panel (paras 9, 19; March Order para 1).

(b) I determined points of issue in respect of finalizing the second order envisaged by the Main Judgment (paras 20 – 26; March Order paras 3 – 5).

Appeals

5.I am informed that an appeal has already been lodged against the Main Judgment (for which no leave was required as that was a final judgment).

6.By the Summons, leave to appeal is sought in respect of the March Decision insofar as necessary. However, the Majority Shareholders’ skeleton submissions seek an indication as to whether the February Decision also requires leave to appeal.  Their submission is that no leave is required on the basis the February (and March) Decisions might have been part of a composite judgment following trial had adequate submissions been made; and no different approach should be taken simply because the composite final judgment was reached in stages.

7.As stated in the Main Judgment at para 249:

“ … I stated at the end of the trial, I considered that I may not have been provided with sufficient factual information to finally determine the remedies in this case. I will identify where my orders are final, and where I need further submissions.”

Paras 254, 258 thereafter contain final orders.  Paras 259, 260 (last sentence), and 264 indicate where further submissions might be needed.

8.In my view, determinations by me relating to the Main Judgment and finalization of its orders are effectively to be regarded as part and parcel of the Main Judgment, from which no leave to appeal is required.  As may be seen from para 258 of the Main Judgment setting out my first order, certain directions relating to the basis of the future valuation were addressed at that time.  However, it was never envisaged that the value of the Shares would be fixed as part of the Main Judgment.  Accordingly, subsequent directions in respect of the future valuation process are not necessarily to be regarded as part and parcel of the Main Judgment.

9.The Amended Notice of Appeal from the February Decision dated 29 March 2017 seeks to appeal from:

(a) the decision that the Majority Shareholders are jointly and severally liable, and

(b) the decision that the Majority Shareholders should bear the costs of the valuation.

10.In my view, no leave to appeal is required for the proposed appeal against the February Decision in respect of the joint and several liability of the Majority Shareholders for unfairly prejudicial conduct against P.  That issue must be relating to and subsumed by the Main Judgment.

11.Insofar as the costs of the valuation process are concerned, I consider that leave is required.

(a) The order relates to the forthcoming valuation process rather than the issue of unfair prejudice covered by the Main Judgment. Prima facie, the decision on that issue is interlocutory, so that leave to appeal therefrom would be required.

(b) The Majority Shareholders do not suggest that Order 59, rule 21(1)(a) is relevant.  (I note their submissions seek an indication in respect of the need for leave to appeal “in the spirit of” Order 59, rule 21(3) rather than “pursuant to” that rule.)

(c) The order to pay costs of the valuation is in reality, in my view, an order in respect of the costs of part of the proceedings.  This costs liability was decided before the costs were incurred and the valuation process completed; this was done on the basis of both parties agreeing they sought a determination on costs at that time.  Normally, one might expect these costs to be determined after the valuation process.

(d) I did not receive any submissions as to how costs orders are to be categorized for leave to appeal purposes.  However, I note that section 14(3) of the High Court Ordinance provides that no appeal shall lie from a costs order without leave.  Accordingly, it seems that leave would be required.

12.If leave to appeal were necessary in respect of the issue of costs of the valuation process, it is important to note that such an appeal would be an attempt to have a second bite of the cherry in order to run arguments which the Majority Shareholders failed to run at first instance.

(a) The Majority Shareholders’ written submissions dated 11 January 2017 at para 9 sought various directions to be made at that time, including (at 9.6) a direction that the valuation costs be borne equally by P and the Majority Shareholders.  There was no elaboration and certainly no submission that allowance be made for any unreasonable conduct by P during the valuation process.  The court’s general discretion as to costs was addressed at Section F (costs) of the same submissions.

(b) P’s responsive written submissions were that the costs of the valuer were part of the whole case and should be borne by the Majority Shareholders only.

(c) Both parties however sought a direction at that time as to the costs of the valuation process.  Neither requested that the issue be adjourned to be addressed after the valuation had been conducted, or that the costs order to be made should take account of the conduct of the valuation process.

(d) Whilst the court could (as Mr Joffe submitted), in the exercise of its discretion, reject all parties’ submissions and decide on an alternative course, it does not seem to me to be a wrong exercise of discretion to choose one of the two alternatives suggested by the parties, where it was agreed that all parties wanted an order as to the costs of valuation at that time.

(e) (In any event, it is to be hoped that the directions as to valuation made pursuant to the March Decision will prevent either side from unnecessarily delaying or escalating the costs involved in the valuation process.  Should the same be necessary, the Valuer or the parties can no doubt apply to the court for directions.)

13.The proposed appeal against the March Decision in respect of the determination of the identity of the valuation panel, as set out in the Notice of Appeal dated 21 March 2017, is in my view an interlocutory rather than final decision.

(a) It is related entirely to the next stage of the proceedings which is the price to be fixed by the court for P’s shares in the Companies.  The Majority Shareholders and P (having failed to reach agreement between 21 February and 3 March 2017) asked the court to determine the identity of the valuation panel, putting forward different candidates and making written submissions, as a preliminary step to preparation for the future final decision of the court as to the price of P’s shares.

(b) The identity of the independent valuation expert is not a matter going to the root of the case on unfair prejudice.

14.Further, the decision as to identity of the valuation panel is not the determination of substantive rights between the parties. I do not consider that the intended appeal from this aspect of the March Decision falls within Order 59, rule 21(1)(a).

15.Accordingly, leave to appeal is required.

16.On the basis that leave to appeal is required from the relevant part of the March Decision, then leave to appeal on the basis set out in the Notice of Appeal dated 21 March 2017 is refused for the following reasons.

(a) By written submissions dated 3 March 2017, the Majority Shareholders and P addressed various matters upon which they sought the court’s directions (on paper), including directions as to the valuation process.

(b) In particular, both parties requested that the court determine the identity of a single expert or panel of experts for valuing the Shares.

(c) Both parties made written submissions which contained not pure submissions but also (and in my view, understandably) a factual update as to the parties’ discussions in respect of the identity of valuers, largely contained in correspondence.  Both parties attached inter-party correspondence to their submissions.  The Majority Shareholders annexed correspondence which included the quotations and/or details of experience of Cullen, Savills, and Knight Frank.  P further attached the proposals from Deloitte, Colliers, and EY.

(d) Both parties’ submissions requested a determination by the court as to the identity of the valuers, referring to the differences between the proposed experts and why one or other should be preferred or not, by reference to their cost or expertise.

(e) By a letter from the Majority Shareholders’ solicitors F Zimmern & Co to the court dated 8 March 2017, complaint was made that P’s submissions dated 3 March 2017 had gone beyond the order of the court and had in particular made reference to extrinsic evidence relating to the valuers and other matters.  They further asserted that particular sections of P’s submissions were misleading (without indicating in what way), and asserted it would be unfair to allow P to rely on these materials without giving the Majority Shareholders a right to respond.  They requested to be allowed to file reply submissions within 7 days, alternatively for the court to disregard the attachments provided by P and related submissions.

(f) P’s solicitors M C A, Lai & Co responded to that letter on 9 March 2017.

(g) I refer to paragraphs 4 to 5 of the March Decision.

(h) In support of their application for leave to appeal the March Decision, the Majority Shareholders suggest at para 16 of their skeleton submissions that the February Decision had rejected the Majority Shareholders’ request to file evidence in respect of the identification of the valuers and that this was why they had not sought to file evidence in respect of the same by 3 March 2017.  This is disingenuous and is not accepted as a genuine reason for why the Majority Shareholders did not seek to provide factual evidence before 3 March 2017.

(i) At the time of the February Decision, the parties had informed the court they hoped to agree the identity of the valuers and needed no direction on that issue.  They had asked to file evidence generally, without saying in respect of what issue, and as that time there appeared to be no relevant issue of fact, the request was refused.

(ii) There was, at no material time before the Majority Shareholders filed their written submissions of 3 March 2017, any application to adduce evidence in respect of the identification of the valuers, let alone a refusal.

(iii) In any event, the Majority Shareholders did put factual matters before the court in their written submissions of 3 March 2017; so their objection to P doing the same without formal evidence seemed odd, and a delaying tactic.

(i)  I was prepared to proceed in March on the basis of the inter-party correspondence and expert proposals put before me, notwithstanding they were not formally in evidence, as they appeared to be self-explanatory with no suggestion of lack of authenticity.

(j)  At the hearing of this Summons, Mr Joffe made it plain that the Majority Shareholders accept that the documents which were put before the court by P (relating to the valuers and their proposals) were indeed the documents under discussion between the parties, and the subject of the parties’ submissions.  The complaint was that P’s summary of those documents was inaccurate.

(k)  In those circumstances, although the documents (or some of the documents) considered for the purposes of the relevant March Decision were not formally in evidence, there is no suggestion that the documents considered by the court were not relevant, or that relevant documents were not considered.

17.Para 1 of the Summons is dismissed with costs.

Stay of Execution

18.The applicable legal principles are set out in Star Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84, para 9.

19.I will first address the grounds set out in the Amended Notice of Appeal dated 21 March 2017 in respect of the Main Judgment.

20.In light of the Main Judgment paras 35 to 43, I do not accept Grounds 1 to 3 (interlinked and relating to the construction of the Shareholders’ Agreement and the shareholders’ obligation thereunder in respect of Non-Core Land sales) to have a strong likelihood of success.  Construction of the Shareholders’ Agreement is a matter of law and I would at most accept these grounds to be arguable.

21.Mr Joffe volunteered that Grounds 4 to 6 were arguable rather than strong, in his submission.

22.Grounds 4 and 5 relate to the construction of the Shareholders’ Agreement relating to the Managers’ tenure and remuneration.  In light of the Main Judgment paras 46 to 51, I do not accept Grounds 4 and 5 to have a strong likelihood of success.  I would at most accept these grounds to be arguable.

23.Ground 6 relates to whether or not the Majority Shareholders established mismanagement by P which justified his removal as Manager.  The question of mismanagement is a matter of fact.  At trial there was a limited question of law as to whether removal from management could be justified on the basis of conduct unknown at the time of removal but discovered thereafter.  However, this point of law was not relevant insofar as the issue was the truth of the Majority Shareholders’ stated reasons for removing P, not whether or not removal was objectively justified.  In light of the Main Judgment paras 162 – 163, 174 – 176, (and to a lesser extent paras 224 – 226), I do not accept Ground 6 to have a strong likelihood of success.  I would at most accept the asserted error of law to be arguable.

24.Ground 7 relates to the basis of valuation ordered in the Main Judgment.  There are 6 separate arguments pleaded in support.  I regard only one of them (at para 7.4) as reasonably arguable.  I make the following observations in respect of the others.

(a)  Para 257 of the Main Judgment is merely an obiter observation.

(b)  The directions given in para 258 of the Main Judgment were for the purpose of valuing P’s shares in the Companies on a fair basis; not for valuing the Shares of the Majority Shareholders, nor for the purpose of addressing the actual creditor status of the Majority Shareholders vis-à-vis the Companies.

(c)  Para 263 of the Main Judgment dismisses P’s claim for repayment of the shareholder loan in order to avoid double recovery.  The suggestion of the Majority Shareholders now in their appeal that P could recover his shareholder loans from the Companies, despite an order for buy-out of his Shares on a basis that the shareholder loans are taken into account, is in my view fanciful.  Mr Joffe did not explain why the extended res judicata principles in Henderson v Henderson and Yat Tung would not apply, although he conceded they may be relevant.

(d)  For the reasons given in para 256 of the Main Judgment, I do not regard it as arguable that the Companies are insolvent in light of the shareholder loans plus accrued interest.

25.As to Para 7.4 of the Amended Notice of Appeal:

(a)  I regard it as strongly arguable that if one pretends the shareholder loans were paid when they should have been, then that would be on the basis that the Shui Hau lands were sold when they should have been.  Accordingly, the valuation of P’s shares should be on that basis ie without including the current (no doubt, increased) value of the Shui Hau lands.  This submission was not made to me before the Main Judgment.  However, Mr Joffe points out that an error of law is a matter which can be corrected on appeal notwithstanding it was not argued below.

(b)  If such a ground were to succeed, then that would presumably have the impact of lowering the value of P’s shares to reflect the difference between the Shui Hau lands at the date of buy‑out and in September 1997.  There is no submission as to what that difference in value would be.

26.Ground 8 of the appeal from the Main Judgment is in respect of the holding that P’s shares should be valued on an undiscounted basis.  The Notice of Appeal asserts that, as a matter of law, whether or not the valuation should be ordered on an undiscounted basis turns on whether or not there is a quasi-partnership relationship.  This is not a submission made by the Majority Shareholders at any time during the trial.

(a)  In their opening submissions, in oral submissions, and in written closing submissions, counsel for the Majority Shareholders submitted forcefully and without qualification, (where P was not legally represented), that P’s allegation of quasi-partnership added nothing to P’s case.  Mr Joffe (who did not appear at the trial and was unaware of the earlier submissions before the hearing of the Summons) now submits that such earlier submissions should be understood as relating only to the allegation of unfair prejudice, and not to the issue of valuation.

(b)  P’s closing submissions of 13 September 2016 expressly sought valuation on an undiscounted basis.  The Majority Shareholders did not make any legal submissions in this respect in any of their written closing submissions of 12 September 2016, or their Supplemental Closing Submissions (which responded to matters in P’s closing submissions of 13 September 2016), nor in their oral closing submissions on 15 September 2016.

(c)  I accept that it is (at least) strongly arguable as a matter of law that minority shares which are the subject of a buy-out order on an unfair prejudice petition otherwise than in a quasi‑partnership situation should generally be valued on a discounted basis to reflect the minority interest, save in exceptional circumstances (on the basis of Irvine v Irvine (No 2) [2007] 1 BCLC 445, para 11; Re Hercules Holdings Ltd HCCW 152/2008 (unreported, 17 November 2010) para 67; Re Silver Bell Uniform Ltd (HCCW 478/2008 (unreported, 13 May 2011) paras 12 – 13).

(d)  However, I am not persuaded that this point of law can properly be argued on appeal when not argued at first instance, where there was no consideration at trial of whether or not there were, in fact, exceptional circumstances to justify an undiscounted basis of valuation.  This is especially so where P was a litigant in person at trial, and the Majority Shareholders did not make the legal submission; and, indeed, appeared to assert the contrary by submitting that quasi-partnership added nothing to P’s case.

(e)  Accordingly, I do not consider this ground of appeal to be strong; and I have serious reservations as to whether it is arguable.

27.In summary, I consider that the only ground of appeal which is strong is that set out in para 7.4 of the Amended Notice of Appeal in respect of the Main Judgment.  If that ground were to succeed, then the valuation of P’s Shares would be lower.  Where the offers made for the Shui Hau lands in 1997 were in the region of HK$15 million (Main Judgment paras 67(b), 71), then the best estimate I am able to make of the impact of this ground of appeal on the valuation of P’s shares is that it would be roughly proportionate to his shareholding (10.714% — Main Judgment para 13), ie approximately HK$1.5 million.

28.On the basis I do not consider that there is a strong appeal in support of setting aside the buy-out order (so as to justify staying execution of the same), I turn then to consider whether there are additional reasons justifying a stay.

29.The Majority Shareholders have relied on:

(a)  P’s inability to pay legal costs, the costs of the valuation exercise and any sum paid to buy out P’s shares.

(b)  The serious deleterious effect of failing to grant a stay, by virtue of the wasted time, effort and cost of proceeding with the valuation exercise.

30.I am not satisfied that P will be unable to pay or repay the Majority Shareholders the costs and/or buy-out sum for which he would be liable if the appeal were successful in setting aside the buy-out order, whether before or after the buy-out is executed.

(a)  The Majority Shareholders argue that on the basis that P has failed to repay the HK$1.1 million owed to Top Master; P has refused to provide information as to his financial position; that he does not own the apartment in which he resides; and the fact that he did not have legal representation at trial; it should be inferred that P would not have the finances to repay the Majority Shareholders for the Shares.

(b)  P responds that:

(i)   If the appeal succeeds after buy-out:
P would have the funds paid for the Shares.  He has offered to secure part of the paid proceeds pending the appeal, and that this is a matter which can be addressed by court order at the same time as the price of P’s Shares is quantified and prior to payment to P.

(ii)   If the appeal succeeds before buy-out occurs:
P will have the Shares which are valuable; and that although the value of the Shares is unknown, the valuation from Vigers in January 2016 was that the Land assets were at that time valued at HK$163 million (Main Judgment para 239).

(c)  The Majority Shareholders respond (with some justification) that, quite apart from the fact there is no evidence of value of the Shares, as distinct from the Land assets, the Shares may not be readily realizable.

(d)  It seems to me that if the Majority Shareholders’ appeal is successful in setting aside the buy-out order, then P will be in the position of being a creditor of the Companies in respect of shareholder loans plus interest.  Although such loans with interest may exceed the value of the Land assets, the shareholders will be able to recover their loans plus interest to the extent that the Companies’ assets allow.  On a rough basis, using the 2016 Land valuation, the shareholders should be able to recover HK$163 million less realization costs in proportion to their shareholding.  Mr Joffe estimated approximately $150 million.  P’s asset (in the form of the shareholder loan claim) would be valued at approximately HK$15 million on that basis.

(e)  By contrast, Mr Joffe submitted that the costs which would be wasted if there was no stay could be roughly quantified as approximately HK$1.15 million in costs of the valuation panel, and approximately $1 – 1.5 million in what he described as input costs for the valuation including legal and own valuer expenses, ie approximately HK$2.5 million.  Mr Joffe submitted that if the appeal were successful and there were no stay, then in addition to those costs, P would be responsible for the Majority Shareholders’ legal costs up to and including appeal of approximately HK$4 million, and P’s own costs.

(f)  In light of these estimated figures, it appears that if the appeal were successful before execution of the buy-out, then P would have sufficient assets in the form of shareholder loan to repay the Majority Shareholders; and if the appeal were successful after execution of the buy-out, subject to terms to protect the proceeds of sale in P’s hands pending determination of the appeal, then P would have sufficient assets to repay the Majority Shareholders.

31.The Majority Shareholders’ submissions as to serious deleterious effect if there is no stay are based on (1) the wasted costs of the valuation exercise should the buy-out order be overturned (estimated at about HK$2.5 million) and (2) the wasted time and effort required for the valuation exercise. Wasted costs, time and effort are clearly to be avoided if possible.  However, the position here is that if the appeal is not successful then the valuation is necessary, and further delay is to be avoided because (1) it is clearly better for the valuation exercise to be conducted as close as possible to the date at which the value is to be ascertained and (2) the problems between the Majority Shareholders and P (which I consider to have been unfairly prejudicial conduct against P) commenced approximately 20 years ago.  As to the wasted costs, if P wishes to push ahead with the valuation which then turns out to be wasted in light of a successful appeal, then he bears the risk of the wasted costs; and I am not persuaded he could not pay those costs as I have addressed above. As to the wasted time and effort, that is a function of litigation — for example, it may well be that P has to expend wasted time and effort on the appeals (if he is ultimately successful), but that would not be a basis for preventing the appeals.

32.It follows that I am not satisfied that the appeal(s) would be rendered nugatory if I do not grant a stay of execution.  The applications for stay at para 2 of the Summons are dismissed with costs.

The petitioner appeared in person (in all cases)

Mr Victor Joffe, leading Mr Justin Ho and Mr Tom Ng, instructed by F Zimmern & Co, for the 1^st – 4^th, 6^th – 8^th respondents (in all cases)

The 5^th respondent appeared in person (in all cases)