Callwin International Electric Co Ltd and Another v. Director of Engineering Development

LDMT00003/1984

Property law - compulsory resumption of business for Mass Transit Railway purposes - whether business totally extinguished - resumed owner's duty to mitigate loss - valuation of goodwill - whether public auction proceeds on sale of stock adequate - obligation of owner to make severance payments to employees - Held: 1. Business totally extinguished. 2. Duty to mitigate largely discharged. 3. Severance payments properly made and amounts reasonable. 4. Compensation of $5,315,912.30 awarded - Section 18 Mass Transit Railway (Land Resumption and Related Provisions) Ordinance, Cap. 276; Sections 4, 10 and 12 Crown Lands Resumption Ordinance, Cap. 124; Part VA Employment Ordinance, Cap. 57.

IN THE LANDS TRIBUNAL OF HONG KONG

Mass Transit Reference No. 3 of 1984

TRIBUNAL: His Honour Judge Cruden, Presiding Officer and M.W. Phillips, Esq., Member.

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JUDGMENT

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1. The applicants claim compensation pursuant to Section 18 of the Mass Transit Railway (Land Resumption and Related Provisions) Ordinance, Cap. 276 arising from the resumption by the Crown of No. 497 Hennessy Road, Hong Kong. Notice of the resumption was published on 14th January 1983 in No. 2 Volume CXXV 'Hong-Kong Gazette' as G.N 160. In terms of that notice the property was resumed and reverted to the Crown on 14th February 1983.

2. The 1st applicant was the tenant of the ground and mezzanine floor of No. 497 Hennessy Road under a written tenancy agreement for a period of 3 years from the 14th day of October 1982 together with a right of renewal for a further period of 3 years. However, the electrical appliance business conducted at these subject premises was carried on by the 2nd Applicant.

3. In evidence it emerged that while the 1st Applicant was incorporated on 25th August 1981, before the tenancy agreement was entered into, the 2nd Applicant was not incorporated until later namely on 22nd October 1982. We were informed that it was solely because the 2nd Applicant was not then incorporated that the tenancy was granted to the lst Applicant. The shares in each Company were held equally by Mr. Lam Man Kwong and Mr. Cheung Wing Yam both of whom were also the only directors. We are satisfied that the 1st Applicant entered into the tenancy agreement as trustee of the yet to be incorporated 2nd Applicant. After incorporation we appreciate that there was no formal adoption of the tenancy agreement by the 2nd Applicant as beneficiary and that copies of the appropriate resolutions passed by both applicants, which were produced in evidence, merely declare that the 2nd Applicant was allowed the exclusive use of the subject premises for its own business.

4. However, the effect of the evidence is that the 2nd Applicant was in beneficial and exclusive occupation of the subject premises. We are also aware that the 1st Applicant was authorised by the 2nd Applicant in writing to negotiate the settlement of the present claim on behalf of the 2nd Applicant. This authority merely created the 1st Applicant the agent of the 2nd Applicant. On the evidence we are satisfied that the 2nd Applicant is entitled to the whole of any monies to be awarded in this application by way of compensation. The claim of the 1st Applicant is accordingly dismissed.

5. The 2nd Applicant Callwin Electric Company Limited (hereinafter called "CEC") carried on business at the subject premises from 22nd October 1982 dealing in electrical appliances and related goods. These electrical appliances and other goods were displayed on the ground floor and the mezzanine floor where they could be inspected and purchased by customers. The main office was on the mezzanine floor. In addition a roof area at the rear of the mezzanine floor had been converted into a storage area. Another area marked "Flat Roof", shown along one side of the mezzanine floor on the plan annexed to the tenancy agreement; had been incorporated into the mezzanine floor area.

6. Before the tenancy was entered into Mr. Lam and Mr. Cheung had carried out research into premises in prime locations in Nathan Road and in Hennessy Road. They ascertained that the pedestrian traffic count past the subject premises was 200 persons per minute. This confirmed their view that the subject premises were situated in a prime retail locality and was a major factor in leading them to obtain a tenancy of the subject promises.

7. There was some conflict in the evidence initially whether the business carried on by CEC was both wholesale and retail. The various kinds of wholesale and retail sales, particularly in Hong Kong, often renders that customary division unhelpful and at times even misleading. We are satisfied that CEC did not carry on any wholesale business but that its entire business was retail. However, it is equally well established that the retail business was based on two major kinds of retail customers. First, there were members of the general public who passed the subject premises and elected to enter and view then perhaps make purchases. These purchases would generally be of relatively few items selected from the wide variety of goods displayed for sale on both the ground and mezzanine floors. The second kind of customers were referred to CEC by Luen Fat Hong Marketing Development Ltd. (hereinafter called "LFH"). These customers were mainly visitors to Hong Kong from China although some came from elsewhere in South East Asia. They arrived at the subject premises in groups sometimes of 5 or 6 persons. From 22nd of October 1982 until CEC ceased business in March 1983 about 30 groups visited the subject premises and made purchases.

8. This second group of customers originally merely inspected the various electrical appliances generally and apparently were attracted to the relatively cheap International brand pocket radios which were suitable for use in China. Later groups arrived specifically seeking radios of this particular type and brand. The practice of some of these customers, after inspecting the goods displayed at CEC, was to leave to check similar goods and prices at the several nearby electrical appliance shops in Causeway Bay and then return to complete purchases. The purchases finally made were of relatively large numbers of radios and other goods. These customers required credit terms but CEC was unable to extend credit for the sums or periods required. To enable these sales to be effected an arrangement was made with LFH for LFH to make payment to CEC of the total purchases made by these customers. Presumably LFH then recovered payment from the various groups of the sums owed by members of these groups individually. During the hearing these sales were described as "bulk retail sales" as distinct from the "individual retail sales" made to members of the passing public. At times these bulk retail sales were also called "wholesale" transactions by various witnesses. However, it does not particularly matter what nomenclature is used provided the actual nature of the transactions is fully appreciated.

9. During its initial months CEC was highly successful and enjoyed a large turnover. This turnover was materially assisted by the bulk sales although the cash flow generated by the individual cash sales to members of the public was also important. The subject premises had minimal storage facilities. Apart from having adequate stock available to enable the high turnover to be maintained Mr. Lam stated that adequate stock was also important if the potential for summer months trading in larger items such as air conditioners and refrigerators was to be fully realised. In fact CEC stored substantial stock away from the subject premises at the following premises:-

10. At one stage the respondent suggested that CEC also carried on business at No. 454 Hennessy Road, 6th Floor, which was the registered office of International Electric Co. (hereinafter called "IEC"). Mr. Cheung Wing Yam, a shareholder and director of CEC, was the sole proprietor of IEC. Mr. Cheung carried on the business of IEC, which appeared to be a wholesaler in the strict meaning of that term, from that office at No. 454 Hennessy Road. Mr. Lam in evidence denied the suggestion that any part of the business of CEC was carried on at No. 454 Hennessy Road stating that it was only used at one stage for the storage of a small amount of stationery owned by CEC. We accept his evidence.

11. The evidence adduced by CEC was that all of its business with both individual and bulk customers was carried on at the subject premises. No sales or other business with purchasers was carried on at any of the godowns or elsewhere. There was no evidence adduced by either party that any sales by CEC to any of its customers were effected at any place other than the subject premises.

12. The background to the resumption of No. 497 is unusual to the extent that it was not originally included in the railway area plan which identified properties which were liable to be resumed in conjunction with the construction of the Mass Transit Railway Island Line. In fact it was almost adjacent to a proposed Mass Transit station concourse. However, during the underground construction of the Island Line in the vicinity of the subject premises the structure of No. 497 Hennessy Road and some neighbouring buildings was unintentionally affected. Railway Area Plan No. 12A published by the respondent on 13th December 1982 identified the subject property as being liable to become dangerous. On 18th December 1982 the respondent informed CEC in writing of the intention to resume. Later, as earlier recorded, formal notice was published in the "Hong Kong Gazette" on 14th January 1983. The subject property was resumed on 14th February 1983. Vacant possession was given by CEC to the respondent on 31st March 1983 which was the date agreed to by the parties.

13. CEC continued carrying on business at the subject premises after receiving informal notice of the intention to resume on 18th December 1982. After making oral enquiries of business friends Mr. Lam and Mr. Cheung were uncertain how to proceed but formed the view that the resumption would wholly extinguish the existing business. At this stage they were in close consultation with the respondent's officers. The evidence indicates that it was in fact one of the respondent's officers who suggested to CEC that J. Wilburn & Associates, Chartered Surveyors and Auctioneers, should be consulted with a view to holding an auction to facilitate the disposal of the business and the handing over of vacant possession to the respondent by the deadline of 31st March 1983. Mr. Lam stated that he had never heard of J. Wilburn & Associates until that firm was suggested by the respondent's officers.

14. On 3rd February 1983 CEC instructed J. Wilburn & Associates to auction the whole of its stock. In accordance with those instructions J. Wilburn & Associates at its premises at No. 500 Hennessy Road conducted a public auction on 31st March 1983. At the public auction the whole of the stock of CEC was sold. This included the stock at the subject premises and also the stock stored at the godowns. The cost price of the stock sold was $5,145,738. The gross auction sale price was $1,410,000 which represents a return of 27% on cost price. After deduction of auction expenses the net sum received by CEC was $1,294,300 which is a net return of 25% of the cost price.

15. CEC also stated that 3 of its employees were employed under written contracts of employment and that it was obliged to pay severance pay to those employees. When the subject premises were leased $846,231.60 had been spent on decoration and the provision of fixtures which also had been lost as a result of the resumption. In addition CEC had been deprived of the possession of the premises for the residue of the tenancy agreement namely the period from 14th February 1983 to 13th October 1988.

16. When CEC filed its present application with the Lands Tribunal on 21st June 1984 it particularised its claim for compensation totalling $9,447,451.30 as follows:

17. At the beginning of the hearing Counsel for CEC indicated that the profit rent claim was not being pursued. In addition Counsel for both parties indicated that agreement had been reached on the fixtures claim. The parties agreed that for loss of fixtures the respondent would pay the sum of $772,712.30. This leaves remaining the claims for goodwill, stock and severance pay which are in dispute.

18. The assessment of loss of both goodwill and stock depends in part whether the business of CEC which was extinguished because of the resumption comprises the whole business or only part. CEC asserts the whole business was extinguished. The respondent disputes that claim. The respondent alleges that the business may be divided into that portion based on customers making individual cash purchases and that portion based on bulk sales for which payment was made by LFH. CEC claims loss of stock in relation to all its stock whether situate at the subject premises or stored at the various godowns. Similarly, its claim for loss of goodwill is based on the total sales of the business and the total resulting net profit.

19. On the other hand the respondent only recognises stock losses in respect of stock situate at the subject premises as in the respondent's view the other stored stock was solely necessary for bulk sales. The respondent also contested the inclusion of some stock items on other grounds which we will consider later. Following the same approach in relation to goodwill, the respondent further asserted that goodwill should only be calculated on the profitability of the individual cash sales after the exclusion of the bulk sales.

20. Before going on to consider these two claims it is first necessary to determine whether the resumption extinguished the whole of the business or whether the bulk sales portion could have been continued elsewhere. As a matter of fact CEC carried on one business at one retail outlet without any distinction between bulk and non-bulk sales. All sales were treated in the same manner. The accounts of CEC do not include any separate analysis of these two types of transactions. Nor is there any apportionment in the accounts of rent or other outgoings as between one type of transaction and the other. If an attempt is to be made to distinguish between these two types of transactions for goodwill purposes then any analysis or apportionment must necessarily be hypothetical. Whether stock can be segregated will depend on the nature of the stock stored compared with the nature of the stock purchased by the two types of customers.

21. CEC maintained that not only was the sale of all its goods carried on at the subject premises but that those sales as part of the one indivisible existing business, were necessarily carried out at those premises. The respondent stated that the sales, paid for solely by LFH, were principally of the same type and brand of radio, so display premises at a prime retail location were unnecessary. In the respondent's view the bulk sales part of the business could have been carried on at inexpensive premises elsewhere. At various stages of the hearing it was even suggested that the existing godowns would have been adequate locations from which to effect such sales; at other stages it was suggested that office premises preferably with an attached display room, would also have enabled that part of the business to have been continued at its existing level.

22. We are satisfied that on security, access and location grounds alone the godowns would not have been available to CEC in the additional role of display locations for customers to enable bulk sales to be effected. We recognise that if the bulk sales were wholesale transactions in the strict sense to only one purchaser that an office with modest ancillary display facilities would have been adequate. For that wholesale type of business expensive ground floor premises in a prime retail site would certainly have been unnecessary. However, in reality the bulk sales were different not only on degree but in kind to such wholesale sales. Payment for the bulk purchases was made solely by LFH but those purchases were not made solely by LFH or by any one person. In fact over 30 separate groups with each group containing several persons, visited the subject premises over less than 4 months to make the purchases.

23. At least initially the purchasers did not call at the subject premises with pre-determined orders although that occurred subsequently no doubt after news of the earlier purchases became well known to later groups. Further, members of those groups did not always purchase immediately or automatically. Mr. Lam stated that some left the subject premises to check prices and alternative goods at some of the numerous other retail electrical shops at other nearby ground floor locations. The desirability of displaying goods for bulk sale in such a retail area is also indicated by the fact that the previous bulk purchase customers are now purchasing similar items from the Malayan Electrical Company which is a similar kind of retail ground floor shop in the same prime retail locality in Causeway Bay.

24. There were suggestions at one stage that items for bulk sale were segregated and displayed only on the mezzanine floor while non-bulk sales were restricted to the ground floor. After hearing all the evidence it is clear that there was no such segregation of goods or customers. Goods were commonly displayed to all customers. If there was any division of articles is related not to the type of purchaser but to the type of article. Small articles were mainly displayed on the ground floor and larger articles on the mezzanine floor. On this basis the small radios which comprised most of the bulk sales were, contrary to the general thrust of the respondent's submissions, displayed on the ground floor.

25. We are satisfied that the business was conducted with purchasers exclusively at the subject premises and the retail nature and prime site location of those premises was of material importance in effecting bulk sales. For not only was it desirable to display articles in a convenient location but it was important to be near similar retail electrical shops to which bulk purchasers could easily and quickly walk to check models and prices. CEC considered that the resumption had the effect of extinguishing the whole business. The respondent maintained that the resumption extinguished only the non-bulk sales portion of the business. If CEC had elected to relocate and attempted to carry on only the non-bulk sales portion of the business, we are satisfied that for that business that merely godowns or office together with minimal display facilities, would have been inadequate. For the evidence establishes that a retail outlet in a relatively prime site location was necessary to facilitate making those bulk sales.

26. Against that background is compensation to be assessed on the basis that the whole business was extinguished by the resumption? The law of compensation obliges a resumed owner who has suffered loss by a resumption to take reasonable steps to mitigate that loss. The resumed owners duty to mitigate is basically the same as the duty in tort placed on a person, who suffers damage as a consequence of another's negligence, to mitigate his loss. Depending on the circumstances, the resumed owner's duty to mitigate may include the obligation to relocate and carry on all or part of the resumed business elsewhere. The law is well settled that the financial resources of the resumed owner are relevant to whether a decision not to relocate is reasonable. Counsel for CEC submitted that even if CEC had wished to relocate it did not have the financial resources to move and re-establish business elsewhere.

27. The recent establishment expenses of CEC are of some help in considering probable relocation costs. Installation costs were $846,231.60. Liability for rent under the tenancy agreement was $67,000 per month. At the commencement of the tenancy a deposit by way of security of $201,000 was paid although in the present circumstances probably all or most of that sum would have been refunded by the landlord. CEC was in reality a small 2 person company with a paid up capital of $300,000. The large turnover it developed on this small capital was largely due to the attractive credit terms extended by suppliers; the favourable cash flow generated by customers cash payments; and the unsecured advances made by the directors. A turnover of more than $4,000,000 was achieved in the first 4 months of trading.

28. When the business at the subject premises was extinguished by the resumption that cash flow was also extinguished. The continuing credit terms from suppliers was dependant in part on continuing sales and the preservation of a good financial reputation. The return from the public auction of only 27% of cost price for stock produced insufficient funds from that source to meet current debts due to suppliers. A successful relocation would have required the prompt payment of those debtor suppliers accounts as well as funds to set up new premises and pay the new rent.

29. In many resumption cases a resumed owner who wishes to relocate is assisted to do so by an advance of compensation or an early settlement of the compensation claim. Where there is not an advance payment there may be an admission by the Crown of part of the claim which will enable a resumed owner to arrange temporary finance on the security of that admission. The present application was unusual in that no formal offer was at any stage made by the respondent. The fact that no offer was made is recorded in the report of Mr. Paul Tse, Senior Treasury Accountant, at page 12 of his report filed by the respondent under Rule 18. During the hearing Counsel for the respondent confirmed that no offer had been made. The only payment made was $108,290 offered by the respondent on 18th February 1983 as an ex-gratia payment towards removal expenses and accepted by CEC. That relatively small sum was offered by the respondent on 18th February 1983 and accepted by CEC as removal and not relocation expenses.

30. Whether a resumed owner ceases business on a resumption or elects to relocate and continue business is a decision to be made by the owner. The law only requires as part of the duty to mitigate that whatever that decision it must in the circumstances be reasonable. In many cases it will equally be reasonable either to cease or relocate. In those circumstances the resumed owner is free to adopt either option without being liable to being attacked for failing to discharge any duty to mitigate.

31. Was it reasonable on the ground of limited financial resources for CEC to decide not to relocate? A small limited liability company such as CEC, which for many purposes is little different to a two person partnership, is often dependent, at least for brief seasonal periods, on temporary unsecured advances from shareholders. In its first months of trading CEC clearly relied on such advances. Does the Company's duty to mitigate include the obligation of a director or shareholder in his personal capacity to advance money to assist in relocation where the Company's own resources are inadequate? Here the difference between a partnership and a limited liability company is significant. In Bede Distributors Ltd. v. Newcastle-upon-Tyne Corporation (1973) 26 P. & C.R. 298 the English Lands Tribunal held that there was no such obligation. The Tribunal held that it was not unreasonable for a company without liquidity to go into liquidation instead of removing its business, even though it would have been possible for one of the directors to obtain money in the open market in his personal capacity.

32. This conclusion inevitably follows from the separate legal personality of a limited liability company unless it is considered that this is an exceptional case where the corporate veil should be lifted. We agree with the English approach that this is not such an exceptional case. The duty to mitigate, as a matter of law, is therefore clearly a duty imposed on the Company and not on its shareholders or officers in their individual capacities. The English Lands Tribunal was strengthened in arriving at its conclusion by a consideration of the position in tort referred to by the House of Lords in Liesbosch Dredger v. Edison (1933) A.C. 449. The evidence was neutral whether the shareholders of CEC may have had the personal resources to finance relocation. However, even if it is assumed that they had the personal resources to relocate, that fact would have been irrelevant so far as the Company's duty to mitigate was concerned. We are concerned only with the Company's resources and not with its shareholder's resources.

33. In many cases not only inadequate financial resources but other factors will make a resumed owner's decision whether to relocate extremely difficult. These varied difficulties should not be glossed over or underestimated in determining after the event whether a decision not to relocate was reasonable. The equivalent position in England is complicated by the statutory notice to treat and different statutory provisions and earlier by the now rejected view that relocation expenses before notice were not recoverable. However, the general statements in Corfield and Carnwarth's 'Compulsory Acquisition and Compensation' are helpful in considering the position in Hong Kong. The difficulties which may face a resumed owner and which are relevant to the reasonableness of his actions are referred to at page 352:

"The fact is that in many cases it is likely to take much longer to find and equip alternative premises than is likely to be available between notice to treat and the date on which the acquiring authority require possession. In such cases a claimant is in a dilemna. "

34. That particular dilemna referred to has largely been removed by the Court of Appeal's decision in Prasad v. Wolverhampton Borough Council (1983) 2 W.L.R. 946 that pre-notice disturbance losses are recoverable. However, in any resumption an owner faces the practical dilemna caused by the dislocation or total extinguishment of his business. In referring to the difficulties an owner may have to face, Corfield and Carnwath invoke the language of tort. That analogy is particularly relevant for the duty to mitigate is basically the same in a claim for compensation arising from a compulsory acquisition as in an action for damages founded in negligence.

35. Although the analogy should not be pushed too far, for we appreciate that an owner whose property rights are unexpectedly affected by operation of the Government's compulsory acquisition powers, will usually still have more time to consider alternatives and a better opportunity to mitigate, than a person injured or placed at risk due to another's failure to discharge a tortious duty of care.

36. Action by an injured party which may fully discharge a duty to mitigate in tort may not be adequate mitigating steps in response to the compulsory acquisition of property. 'Salmond and Heuston on the Law of Torts' (18th Edn.) 487 describes the duty to mitigate in tort in these terms:-

"Where the plaintiff is perplexed or agitated or deceived by being exposed to danger by the wrongful act of the defendant, it is sufficient if he shows as much judgment and self-control in attempting to avoid that danger as may reasonably be expected of him in the circumstances. Although the reasonable man is cool and collected and remembers to take precautions for his own safety even in an emergency, what is done or omitted to be done in "the agony of the moment" cannot fairly be treated as negligence, unless the plaintiff's trade or calling is such that a certain degree of aptitude for dealing with dangerous situations may be expected of him. The courts do not demand of the plaintiff the care of a superman, but only that of a man of ordinary nerve and presence of mind. "

So too on a resumption, a resumed owner's conduct is not to be judged by the standards of the astute and still less by the outstanding businessman but simply by an ordinary businessman faced with the unanticipated type of emergency resumption which occurred in this case. Pressures on an owner in a resumption may come from several different directions. The pressure caused by the unexpected disruption of the business; financial concern at the outcome; staff worries; the concern of suppliers and creditors; the desire of the resuming authority that vacant possession should not be delayed. Usual resumption pressures were increased in this resumption for it was not part of the long planned and tolerably well known general resumption programme of the Mass Transit Railway.  For as we have already observed this resumption only arose at very short notice because of the respondent's opinion that the subject building was likely to become dangerous.

37. In this unanticipated emergency situation the notice to CEC of the resumption was shorter than it might otherwise have been and the pressure on CEC to find other premises much greater. In such circumstances it would be strongly arguable that a decision not to relocate but to wind up the business was reasonable. If any doubt were to exist on that issue we would have to go on to consider whether the financial position of CEC made its decision not to relocate reasonable. We confirm that the financial difficulties arose directly from the resumption which interrupted the existing cash flow and resulted in the proceeds from auction being far less than the cost price of the goods sold. The respondent made no offer of compensation to assist CEC during this crucial period. In addition, suppliers were taking action through their solicitors against CEC; other suppliers were concerned about the future honouring of post-dated cheques; some cheques were already being dishonoured. The credit and trading reputation of CEC was seriously harmed perhaps oven irreparably.

38. The cumulative effect of all these factor leads us to find that the decision not to relocate and carry on the whole or part of the business elsewhere was reasonable. We may therefore now proceed to consider the claims for loss of goodwill and loss of stock on the basis that the business of CEC was wholly extinguished by the resumption.

39. In assessing compensation for goodwill, we are concerned with the loss of potential business suffered by CEC during the residue of the lease after resumption rather than with current market value. This arises from the relevant statutory provisions which accord with common law principles. Item 1 of Part I of the First Schedule to the Mass Transit Railway (Land Resumption and Related Provisions) Ordinance requires compensation to be assessed as if the present application were a claim under the Crown Lands Resumption Ordinance, Cap. 124. Section 10(2)(d) of the latter Ordinance, which covers disturbance claims such as goodwill, requires that such compensation shall be determined on the basis of loss or damage to the business of CEC due to its removal from the subject premises as a result of the resumption.

40. The basis of determining such actual loss or damage to CEC may be contrasted with the different statutory basis for determining compensation for any land resumed. Where land is resumed its value, in accordance with Section 12(d), must be determined on the basis of open market value.

41. We are aware that the position in England is not identical but the similar distinction which also exists there is succintly summarised in Corfield & Carnwaths' 'Compulsory Acquisition and Compensation' 357:

"As far as compensation for loss of goodwill is concerned, it must be emphasised that it is not the market value of the claimant's local connection that has to be ascertained, but the quantum of loss suffered by him having to sacrifice potential business arising from an established business or practice. "

42. Goodwill is the value of that element of profitability which arises from either one of two factors or a combination of both. Those factors are first, the specific business connections in respect of the resumed premises and secondly, those due to the personality of the owner. In some cases a resumption may only affect or extinguish the former species of goodwill. The personal goodwill of the owner may only be partially affected or not affected at all if the business can promptly be relocated to a suitable new site. In this resumption the site or location goodwill has been wholly extinguished. Further we are satisfied that the cumulative effect of the very short period to consider relocation; the interruption of cash flows; the forced auction sale; and the failure of the respondent to make any interim cash offer of compensation; has also destroyed the owner's personal goodwill. Accordingly, we hold that CEC is entitled to compensation for total loss of goodwill.

43. Any assessment of goodwill includes an element of arbitrariness for it involves projections into the future often on the basis of minimal information on even existing factors. The employment of scientific method should tend to improve the soundness of the ultimate assessment. However, in most cases it will merely narrow the range within which a realistic assessment may be made. In making a final assessment within that range experience and at times even intuition will be of importance.

44. There are several different methods of valuing goodwill and each has its advantages and disadvantages. Some methods are more appropriate for certain cases than others. The selection of a particular method will often depend on the factual situation. At times it may be helpful to use more than one method so that each may be a check on the goodwill figure arrived at by the other. This is a complex area of valuation. One of the most clear and comprehensive expositions of the various valuation alternatives, in assessing goodwill on a compulsory resumption, is to be found in Rost and Collins ‘Land Valuation and Compensation in Australia' (2nd Edn.) 511.

45. A common accountancy approach referred to by witnesses called by both parties is to calculate the average annual profit of the business on the basis of the past 3 years profit and multiply that average by the appropriate years purchase. In the present case the parties agreed that for any calculation on that basis it would be assumed that CEC would exercise its option to renew under the tenancy agreement. The parties were therefore prepared to assume that CEC would have been entitled to have remained in possession of the subject premises until 13th October 1988. Any expectancy or even probability of CEC remaining in possession after the expiration of the 6 year duration of the tenancy agreement beyond 13th October 1988 may not, of course, be taken into account - Section 12(c) Crown Lands Resumption Ordinance, Cap. 124.

46. In approaching the assessment of goodwill we are also aware that in a number of cases the English Lands Tribunal has held that the better approach is not to multiply average profits by an arbitrary number of years purchase but to select a multiplier on a personal injuries basis. A multiplier selected on that basis takes into account, contingencies such as future business risks, any proven potential for increased profits as well as subjective factors which in the experience of the assessor may be relevant.

47. We were referred to Director of Public Works v. Leung Sze (1977) H.K.L.T. 158 in which the final calculation caused Counsel for CEC and a number of witnesses some concern. In that case goodwill was determined by multiplying the net profit by one-third of the residue of the lease after making a deduction for profit rent, premium and interest on capital. The Tribunal, at page 168, cited with approval the statement in ‘Leach on Disturbance on Compulsory Purchase’ (3rd Edn.) 80 that it is reasonable that appropriate deduction should be made from average profit for interest on capital. The basis of that deduction is that the owners of the business could have invested the same capital in a relatively non-risk investment such as a bank fixed deposit. In that event, without taking the equivalent risk, they could have earned current interest rates on that capital. The Lands Tribunal allowed a deduction of 5% which no doubt reflected 1976 interest rates. The interest on capital deduction accords with principle and was accepted by both parties subject to an increase to current interest rates.

48. The difficulty Director of Public Works v. Leung Sze creates is that the Lands Tribunal then went on to apply interest to "tangible assets" and not to capital. The tangible assets were listed as stock, fittings and fixtures. The business was conducted on a small scale by a sole proprietor with rudimentary accounts. The report does not refer to any fixed liabilities. On the particular facts it may be that the items listed as tangible assets were considered to represent, in kind, the capital of the business. If that is so it is possible to reconcile the decision with established goodwill principles although the reference to tangible assets instead of capital is unfortunate.

49. In a larger business where liabilities as well as assets exist, the substitution of tangible assets for capital would not only be misleading but would result in the miscalculation of goodwill. Tangible assets may be contrasted with intangible assets. Tangible assets include cash, stock, fittings and furniture. Intangible assets include goodwill. However, neither species of assets is relevant to the deduction of interest for the purpose of assessing goodwill. In a goodwill calculation interest should only be calculated on capital.

50. Where a business is carried on by a limited liability company capital for this purpose will represent the shareholder's investment in the Company. This will at least include the paid up capital. Where undistributed profits have been retained they will usually need to be added to paid up capital. In at least small companies the accounts may show that shareholders have made substantial unsecured advances to the Company. Where these are of a temporary or short term nature they should not be included. However, where the evidence establishes that such advances form a permanent part of the Company's accounts they should be included.

51. The calculation of interest must be based on the shareholders relatively permanent investment of funds in the Company. At times this will be wider than the strict accountancy meaning of capital. Shareholders may quite properly elect not to allocate their total investment in a Company to share capital. To facilitate the easier withdrawal of part of their investment or for self-protection in the event of liquidation or for other reasons they may prefer that part of their investment should be advanced by way of unsecured loan rather than as share capital. If after establishment the need for additional funds is shown they may similarly elect to allow the Company to retain some of the profit undistributed.

52. All these possibilities and others must be borne in mind when the Company's accounts are analysed for the purpose of determining the capital sum on which interest is to be calculated. In most cases the value of tangible assets will not be relevant in determining that sum. If Director of Public Works v. Leung Sze is to the contrary then, with respect, we do not propose to follow its approach. The proper approach in the present application is to calculate interest on capital - in the wider sense - actually invested and not on tangible assets.

53. We have had the advantage of separate goodwill calculations by four different persons. Mr. S.B. Chow, F.C.C.A., F.H.K.S., C.P.A., Chartered Accountant and Mr. James Wilburn F.R.I.C.S gave evidence on goodwill for CEC. For the respondent Mr. Alexis Yam, A.I.C.C.O., Chartered Accountant gave evidence. Mr. Yam is a Senior Treasury Accountant who arrived from Canada 2 years ago. However, when the claim first arose it was considered for the respondent by Mr. Paul Tse F.C.C.A., Chartered Accountant who is also a Senior Treasury Accountant. Mr. Tse went on to complete a lengthy report which was filed with the Tribunal under Rule 18 on 8th August 1984. Later Mr. Tse went to Australia and had not returned by the date of hearing. At a late stage Mr. Yam was requested to prepare a report which was filed under Rule 18 on 20th November 1984. Mr. Yam's report referred to Mr. Tse's report, part of which he accepted and other parts of which he rejected. At the commencement of the hearing Counsel for both parties agreed that those parts of Mr. Tse's filed report from paragraphs 1 to 9 (inclusive) would, by consent, be admitted as evidence. To that extent Mr. Tse's report is before us.

54. Mr. Wilburn followed the approach of the Tribunal in Director of Public Works v. Leung Sze subject to the important adjustment that he calculated interest on capital and not on tangible assets. After adopting a figure of $775,712.30 for capital he allowed 10% for interest on capital. He then applied a years purchase of 1.88 to arrive at a goodwill figure of $1,900,000.

55. Mr. Chow is the auditor of CEC and is in private practice on his own account. Mr. Chow stated that there were several different recognised ways of valuing goodwill. In the present case he considered the "super profits" method the most appropriate. Goodwill is measured by super profits, which are the excess of average profits of the business, above normal profits. He calculated the net profit of CEC before staff bonus and taxation and then made a deduction for seasonal fluctuations as he considered the actual profit was earned during one of the two best selling periods of the year. He next deducted the value of staff bonuses for those 3 members of the staff who were the only employees contractually entitled to bonuses. After deducting taxation he arrived at an annual profit of $630,411.

56. A subjective element in that calculation was the deduction for seasonal fluctuation. The remainder of his calculation was also highly subjective. Mr. Chow did not handle the accounts of similar businesses to CEC. He therefore made enquiries from other accountants and his investigations satisifed him that the normal return of profit per annum on capital for this type of business was 25%. On the business capital of $695,941 being paid up capital plus undistributed profit, normal profits at 25% would have been $171,985. After deducting those normal profits from actual profits, Mr. Chow arrived at super profits of $456,426. He calculated the present value of an annuity of $456,426 at 9.5% over a period of 2.8 years to arrive at a goodwill figure of $1,080,513. This represents a years purchase of 2.35.

57. Mr. Tse calculated goodwill on a strict literal application of Director of Public Works v. Leung Sze. Interest was therefore calculated on the much larger value of tangible assets of $7,346,791. On the basis of one-third of the net profits over the unexpired term he arrived at a goodwill figure for the whole business of $456,532. However, in his opinion because of the high risk element relating to bulk sales a purchaser would not have been willing to pay any goodwill. Counsel for CEC pointed out that if Mr. Tse's deduction for interest had been based on capital of $695,941 and not on tangible assets of $7,346,791 his goodwill calculation would have been $1,800,000.

58. Mr. Yam's primary calculation related only to non-bulk sales in accordance with the respondent's submission that the bulk sales were not affected by the resumption. On that notional division of the business he found that the non-bulk sales were made at a loss and therefore he would not allow any goodwill. However, during the hearing he went on to calculate goodwill on the whole business. He followed the accountancy approach of Mr. Wilburn except that he used a different capital sum. To Mr. Chow's capital of $695,941 he added shareholders loans of $1,097,834 to arrive at a capital figure of $1,793,775. This produced a goodwill assessment of $1,240,306. Counsel for CEC pointed out that if Mr. Yam had adopted Mr. Chow's capital figure he would have arrived at $1,600,000 for goodwill.

59. Mr. Wilburn, Mr. Chow and Mr. Yam were cross-examined at length on their goodwill calculations. Mr. Wilburn confirmed that unlike Mr. Chow he did not make any seasonal adjustment when calculating an annual profit on the basis of the 4 months of actual trading. He agreed that as those 4 months covered the Christmas-New Year trading period, he would in the case of an ordinary established business, make an adjustment similar to Mr. Chow's. However, in this case he stated CEC were only in their first 4 months of trading and would still be working up their business. So it was not a typical good season's trading. In addition, Mass Transit Railway works in the vicinity of the subject premises had affected pedestrian traffic flows and made the area temporarily less attractive for shopping. These two adverse factors, in his opinion, would counterbalance any need for a seasonal adjustment.

60. Mr. Chow agreed that a business in its first months would still be in the process of establishment and that its turnover could be expected to be less than for the same period in future years. However, he had not allowed for that fact. Counsel for CEC pointed out that if no adjustment for seasonal fluctuations had been made Mr. Chow, under his super profits method, would have arrived at goodwill of $1,800,000.

61. Mr. Chow agreed with Mr. Yam's statement of general principle that where shareholders advances are relatively permanent they should be included in capital. The difficulty which arises in this case is one of fact. Were the unsecured advances relatively permanent or merely temporary? Mr. Yam's opinion, based solely on the accounts, was that CEC appeared to be undercapitalised and would need those advances indefinitely. Mr. Chow stated that the advances were not by way of loan but were merely the balance day position, of the shareholders current accounts, which were always fluctuating as a result of payments and withdrawals. Mr. Yam is a chartered accountant with considerable experience in Canada and was an impressive witness. He was unable to state positively that the shareholders advances would be long term but considered that was an inference that could be made from the accounts. Mr. Chow is the auditor of CEC and we have his emphatic statement to the contrary. Both are credible witnesses.

62. On this issue, as with so many others, the difficulty is increased due to the short period of trading before resumption. If the resumption had not occurred or had taken place later, the true nature of the shareholders account would have been clearer. There is evidence which suggests that the advances would have been either long term or CEC would have had to arrange similar amounts from elsewhere. On the other hand, it is not unusual during the establishment period of a new business, for owners to have to make temporary advances which do not need to be continued once cash flow improves and the business becomes established. Faced with these evidential difficulties, we are not satisfied on the balance of probabilities, that these prima facie shareholders advances, are sufficiently permanent that they should be treated as capital.

63. In considering the different methods adopted we find that the super profits method was not appropriate in this case. This method is better suited to measuring goodwill of businesses which have a much longer trading history which itself will provide direct evidence of additional profits accumulated by past performance. Here there was no such history on which to rely. Under the super profits method goodwill is assessed by capitalising super profits after charging the business with management costs and all other expenditure as well as a charge representing a reasonable return upon the full amount of capital invested. In adopting this method the rate of return should be appropriate to the particular type of business being assessed. Mr. Chow was unable because of inadequate material to carry out a proper analysis and was obliged after enquiries to other accountants to select an ordinary profit figure of 25%. It is not clear if any deduction was made for management costs which should be allowed under the super profits method. On the other hand, we are satisfied that the super profits calculation on the particular facts of this case should not have included the deduction for seasonal fluctuation for the reasons advanced by Mr. Wilburn.

64. We have already held that the whole business, which comprised both individual retail and bulk retail sales, was extinguished by the resumption. We accept that it would be unreal to attempt to segregate those two types of sales in order to establish two separate businesses when in fact only one business existed. However, when it comes to assess goodwill it remains necessary to consider the peculiar characteristics of the actual business. The reality is that the actual business was carried on with minimal capital but was able to trade without any liquidity problems because of the excellent credit arrangements which CEC had been successful in obtaining. The risk of those arrangements continuing is a relevant factor to be taken into account in any goodwill assessment. The risk of CEC maintaining in the future the lucrative custom of the bulk purchasers is similarly relevant.

65. We have had the assistance of 4 different goodwill calculations. The valuation methods have been varied but not been exhaustive. We accept that elements of each calculation were reasonable in the light of the facts and hypotheses on which they were based. If the adjustments to the calculations urged on us by Counsel for CEC, were made we recognise that all the calculations would exceed $1,500,000. Several of those adjustments would necessarily follow from our findings of fact. Others were more doubtful.

66. On the other hand, when we come to consider future contingencies during the period for which we are obliged to project, we are satisfied that none of those adjusted calculations would give sufficient weight to the degree of risk to CEC itself, in carrying on this briefly established particular business in the future. Unlike some elements of a goodwill calculation that degree of risk cannot be precisely quantified. However, on the evidence an allowance for that very real risk must be made. This is an area where the Tribunal, after considering the whole of the evidence, including the expert opinions of the relevant witnesses, is obliged to adopt a robust approach. In determining goodwill on that basis we find as a fact that its value on the date of resumption was $1,200,000. As the business was wholly extinguished it follows that CEC is entitled to recover the full amount of its loss, namely $1,200,000. We would emphasise that we have arrived at this sum on the basis of the limited evidence and special circumstances of this application. Our conclusion cannot therefore be relied on for guidance, still less as a precedent, for any future goodwill determinations.

67. Moving on to loss of stock, CEC claimed $3,851,438 while the respondent at the hearing admitted liability for $288,635. The agreed adjusted gross stock price was $5,145,738. Different deductions from that gross sum resulted in the parties reaching their final net sums of $3,851,438 and $288,635 respectively. CEC arrived at its final figure by deducting from the gross stock figure of $5,145,738 the net auction proceeds of $1,294,300 to produce the net stock loss claimed of $3,851,438.

68. The respondent's approach was founded on a division of the business between individual and bulk sales and its contention that all the stock stored away from the subject premises was solely for bulk sales. In the respondent's view the latter stock could have continued to be sold by CEC without any interruption caused by the resumption. That stock did not, according to the respondent, have to be auctioned. On this basis only the stock at the subject premises having a cost price of $1,973,361 had to be auctioned. From that sum the respondent maintained certain deductions had to be made.

69. The first deduction made by the respondent was $1,156,700 being the total of two purchases from Cenheu Enterprises Ltd. of $189,130 and $967,570 respectively. CEC claimed that these purchases were made in terms of a written sales contract dated 1st December 1982. It was only subsequently on 18th December 1982 that CEC was advised and even then only informally, of the possibility of its premises being resumed. Formal notification was published later on 14th January 1983. The original sales contract which was in Chinese was dated 1st December 1982. The original Chinese contract and the English translation were produced. The contract was obviously drafted by the parties without professional advice.

70. The written contents of the translation contain ambiguities which can affect its interpretation. No attack was made on the translation and that is the document we must consider. Under the contract Cenheu Enterprises Ltd. were obliged to supply CEC with up to 200 television units each month for a period of 1 year from 1st December 1982. The contract was subject to the condition that the first 3 months to 28th February 1983 was a trial period at the end of which both parties had the option to terminate the contract. This option was negatively expressed in the terms "If both parties see fit, this contract continues to be valid after the initial three months. ".

71. Two questions of interpretation arise. First, did CEC have the right at anytime during the first 3 months to terminate the contract or could it only do so at the expiration of that 3 month period. We are well satisfied that the option to terminate only arose at the end of those 3 months. During that first 3 months the contract was, in effect, unconditional. Secondly, was CEC obliged to accept up to 200 television sets each month if they were supplied or was only a contractual obligation imposed on Cenheu Enterprises Ltd. to supply up to 200 television sets? Was there any contractual obligation on CEC, even during the first 3 months, to accept any television sets? We recognise that it is arguable on the basis of paragraph (1) of the translation that CEC was under no obligation to accept. For paragraph (1) morely provides:

However, the words immediately before paragraph (1) include an agreement on the part of CEC to the supply of those television sets. Whether that agreement by CEC amounted to a contractual obligation to accept up to 200 television sets supplied in any month by Cenheu Enterprises Ltd. may not be free from doubt.

72. What is clear from the evidence is that CEC considered it was under such an obligation. Mr. Lam himself certainly believed CEC was under that obligation and his action in February 1983 in approaching Cenheu Enterprises Ltd. in an attempt to stop delivery even before 28th February 1983 is further evidence of his understanding of the position. It is clear that CEC had the contractual right to terminate the contract on 28th February 1983 and under its mitigation duty was obliged to exercise that right.

73. The difficulty which arises relates to television sets delivered during February 1983. In the circumstances we hold that it was reasonable for Mr. Lam to accept a final 200 television sets during February 1983. Evidence of the supply of the television sets is provided by the invoice for $189,130 from Cenheu Enterprises Ltd. dated 3.3.83 for the supply of 110 television sets ordered on 10th February 1983 and the invoice for $967,570 dated 4.3.83 for the supply of 603 television sets. Mr. Lam stated that the particular models included in the first invoice were ordered in terms of the 1st December 1982 contract on 10th February 1983 and the models included in the second invoice shortly thereafter. All these television sets were therefore ordered before 28th February 1983.

74. The more important issue is when were the television sets delivered? Mr. Lam in confirming that all 713 television sets were received stated that delivery of the first 110 television sets commenced in the middle of February 1983 and that the balance were delivered shortly thereafter. This evidence did not extend to any precise dates and was of a general nature. However, it was not directly challenged and on the evidence we are prepared to find that all 713 television sets were delivered during February 1983. There was no evidence why the invoices were dated later, namely on 3rd and 4th March 1983. However, these invoices each expressly refer to delivery notes. The fact that the delivery notes were in existence by the time the invoices were completed is not inconsistent with deliveries being completed in February 1983. The contract provided for 60 days credit on all purchases which may also be one explanation for the apparent late preparation of the invoices. There was a further credit limit of $200,000 if CEC bought television sets for a value in excess of that sum.

75. These findings of fact in favour of CEC are, of course, limited to the delivery of a maximum of 200 television sets each month. During February 1983 being the final supply month, 713 television sets were supplied. CEC should only have accepted 200 television sets and was under a duty to reject the balance of 513 television sets. We therefore in part uphold the respondent's objection to all 713 television sets being included in the stock list. We hold that only 200 television sets should have been included. We allow the 110 television sets amounting to $189,130 included in the prior invoice.

76. We are obliged to select 90 television sets from the latter invoice to make up 200 television sets. This will necessarily be an arbitrary selection for the unit price of the 603 television sets in that latter invoice varies. The range of units prices before discounts was from $1,570 to $2,440. After considering that range we will allow 90 television sets at a total price of $150,000. After deducting that sum from the second invoice of $967,570 we arrive at $817,570 as the value of the television sets which should have been rejected. The deduction of the latter sum from the gross stock figure of $5,145,738 produces an adjusted gross stock figure of $4,328,168.

77. We are unable to make a simple deduction of the net auction proceeds from the adjusted gross stock figure to arrive at the net stock figure. For the television sets which we have held should have been rejected, were included in the stock sold at auction and therefore are reflected in the auction proceeds. In fairness to CEC the auction price of the 513 television sets, less their share of the commission, should be deducted from the auction proceeds before that sum, in turn, is deducted from the adjusted gross stock figure. However, all the stock was sold at auction as one lot so there are no actual separate auction prices for the 513 television sets or indeed for any of the television sets sold. A further complication is that the respondent has questioned whether the prices obtained at auction were adequate. We will consider the latter issue subsequently.

78. Assuming for the moment but without deciding, that those auction prices were adequate, all we can do is to make a notional apportionment. The parties accepted as a matter of fact that the actual gross proceeds amounted to 27% on cost price although the precise percentage was 27.4% on cost. In round figures 27.4% of the adjusted gross stock figure of $4,328,168 amounts to $1,186,000. From that latter sum auctioneer's commission and charges have to be deducted. Commission at 7½% on the net auction proceeds, which excludes the 513 television sets, is $88,950. We infer in favour of CEC that the auction printing, advertising and security guard charges would have remained materially unchanged had the 513 television sets not been included in the auction. No portion of thon the date of ese charges will therefore be applied to the 513 television sets. The commission together with the auction charges to be deducted from the net stock figure amount to $98,900. If the latter figure is deducted from the apportioned auction figure of $1,186,000 the resulting sum of $1,087,100 represents the net auction proceeds. If that sum is deducted from the adjusted gross stock figure of $4,328,168 it produces in round figures a net stock loss on auction of $3,240,000.

79. The respondent was also not prepared to accept those items of stock represented by LFH's invoice dated 16th November 1982 for $124,929 and from SEC Electric Co. Ltd. dated 15th November 1982 for $91,118.20. The respondent submitted that these invoices comprised goods which were available for bulk sales. This submission was based on the attempted division by the respondent of the business into two parts which we have already rejected. After considering these invoices we are satisfied that stock of that value existed and was owned by CEC on the date of resumption. We hold that it also comprised part of the assets of the business which were extinguished by the resumption. Accordingly the value of the stock in these two invoices is properly included in the gross stock figure.

80. We must now consider the respondent's submission that the gross auction proceeds were inadequate. Before the hearing the respondent in its initial Rule 18 documents had questioned the genuineness of the auction. At the commencement of the hearing Counsel for the respondent withdrew any such suggestion. Further paragraph 10 of Mr. Tse's report was excluded from those portions of his report which were admitted by consent. At the hearing the respondent agreed that the public auction of all the items listed in the conditions of auction took place and that it produced net proceeds of $1,294,300. The respondent's complaint was that because of the limited advertising and manner in which the auction was held better prices should have been obtained. Those prices should, on the respondent's evidence, have reached 50% of cost price.

81. A considerable number of witnesses were called on this issue. CEC in order, called Mr. Brian Lewis, Mr. C.K. Wan and Mr. Wilburn. Mr. Lewis holds the degree of Bachelor of Science (Estate Management) and is an Associate of the Royal Institution of Chartered Surveyors. He is employed by J. Wilburn and Associates. Mr. Lewis was the member of J. Wilburn and Associates who first dealt with CEC when they approached his firm to handle the auction. Mr. Lewis was responsible for obtaining the stock lists of the goods to be auctioned and for liaising with Mr. D. Andrews, the respondent's Estate Surveyor. As a result the respondent before the auction had full knowledge of the auction details and also had the opportunity to check the stock lists. Mr. Lewis has been involved both in England and Hong Kong with stock and chattel valuations and auctions in liquidations and has also been involved in about 4 similar auctions of stock by businesses whose premises have been resumed for Mass Transit Railway purposes. He stated that the urgency of this resumption required the auction to be completed and vacant possession handed to the respondent by 31st March 1983. The instructions from CEC were received on 3rd February 1983.

82. Mr. Lewis handed over the preparation of the actual lots for auction to Mr. Wan then employed by J. Wilburn & Associates as auctioneer. Mr. Lewis stated that for auctions of this kind a return of 20% to 30% on cost was reasonable. In his opinion to receive more than 30% it would be necessary to sell the business as a going concern. Mr. Lewis said that he had never known as high a return as 50% to have been achieved. He pointed out that the auction of an adjoining resumed shop's stock comprising ladies shoes and handbags had returned 22.5%. Under cross-examination Mr. Lewis stated that the 27% return was under normal conditions reasonable and in the rushed circumstances of this auction was very good.

83. Mr. C.K. Wan confirmed he prepared the auction lots from the stock lists given to him by Mr. Lewis. The preparation of the auction was subject to the pressure of the 31st March 1983 deadline. Notice of the auction was published in the "Wah Kiu Yet Po" on 29th, 30th and 31st March 1983. In addition telephone calls were made to electrical dealers appearing in the Hong Kong Telephone Directory Yellow Pages. Conditions and particulars of auction were sent to any interested parties contacted by telephone. Mr. Wan stated that over 100 persons attended the auction and bidding was brisk. He stated that the stock was sold as one lot although it was divided into 4 lots in the conditions and particulars of sale. He explained that this division corresponded with the 4 different locations of the stock. The stock was sold in about 20 minutes. In his opinion a higher price may have been obtained if the stock had been broken down into 20 or 30 lots. However, he stated that time did not allow that alternative to be followed and that even if it were there would have been the risk of some unsold lots remaining after auction. Under the one lot auction system the buyer was obliged to take all the stock on sale. In his opinion the return of 27% was good.

84. Mr. Wilburn considered that the return was most satisfactory. He emphasised the need for speed but seemed to place undue importance on the convenience and of the time a buyer needed to take delivery. On the facts it was only the stock at the resumed site which was subject to pressure of time. Delivery of the stock stored at the godowns was of no great urgency subject to payment of storage charges.

85. As against this evidence the respondent relied on Mr. Yam's opinion that 50% should have been obtained. Mr. Yam agreed that his figure of 50% was not based on any factual evidence or other analysis but was purely opinion. He agreed that in his 2 years living in Hong Kong he had no experience of auctions. Neither Mr. Andrews, who had direct knowledge of the auction arrangements at the time, or Mr. Tse who shortly thereafter was highly critical of them, were called by the respondent.

86. The auction was certainly conducted with speed and with minimal advertising. In considering the respondent's submissions we take into account all the background factors. These include that CEC had no experience of auctions and was referred by the respondent's officers to the auctioneer. CEC left all the auctioneering arrangements including advertising to the auctioneers. The auctioneers are an established and experienced firm with particular experience in holding auctions of this kind on a resumption. The auction was held under greater time pressure than on a normal resumption. The evidence as to price, particularly that of Mr. Lewis, was that the return of 27% would have been reasonable even if the auction had been held under more normal circumstances.

87. In the light of all that evidence we find that the return of 27% on cost was reasonable. In achieving that return we are satisfied that in the circumstances of this resumption CEC, apart from its earlier failure to reject the final 513 television sets, properly discharged its duty to mitigate the stock loss. Accordingly we determine compensation for loss of stock, in accordance with our earlier calculations, at $3,240,000.

88. Finally we turn to consider the claim for severance pay of $103,200. This claim arose from 6 months severance pay paid to three employees who were employed under 3 year written contracts. The evidence was that after negotiations each of these employees had accepted severance pay equal to 6 months of their respective salaries. In the respondent's Rule 18 documents Mr. Tse had not accepted this claim on the ground that under the Employment Ordinance, Cap. 57 an employee had to be employed for 2 years before he was entitled to a claim for severance pay and these 3 employees had only been employed for 4 months. At the hearing Counsel for the respondent expressly withdrew that objection and accepted that the statutory right to severance arose for those monthly employees who would otherwise have had no right to severance pay. The respondent recognised that employees under a 3 year contract whose employment was terminated after 4 months had a contractual right to severance pay quite independently of any statutory right that might arise under the Employment Ordinance. The respondent's witness Mr. Yam further agreed that in such a case severance pay equal to 6 months salary was reasonable. However, as he could not find evidence of payment he was unable to state that payment had been made. We are satisfied on the evidence that liability for severance pay as claimed existed and that CEC is entitled to reimbursement. The sum of $103,200 as claimed is awarded.

89. In the result we determine that the compensation payable to CEC is $5,315,912.30 made up as follows:

90. The Lands Tribunal is empowered under Section 26 to direct that interest be paid on that sum and has a discretion to fix the date from which any interest is payable. We are satisfied that interest should be awarded. The usual practice is to award interest from the date of the resumption which in this application was 14th February 1983. However, CEC only claimed interest from 31st March 1983 being the date beyond the date of resumption to which the respondent allowed CEC to remain in possession. The respondent submitted that interest should only be paid from the date of the claim which was 23rd May 1983. We are satisfied that in the special circumstances of this application that the date of resumption is not the appropriate date but that interest should be paid from 31st March 1983. Interest from that date until the date of payment is therefore awarded in accordance with Section 26.

91. CEC is entitled to costs in accordance with the Supreme Court scale to be taxed if not agreed. There will also be a Certificate for Counsel. Leave to apply in respect of any consequential matters is reserved.

DATED this 17th day of December 1984.

Representation:

Mr. William Lane instructed by Rowdget W. Young & Co. for the applicants.

Mr. S.H. Franklin, Senior Crown Counsel, for the respondent.