Tam Shuk Yin Anny v. Choi Kwok Chan and Others

HCMP 2399/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2399 OF 2004

____________

____________

BETWEEN

____________

Before: Hon Kwan J in Chambers

Date of Hearing: 27 June 2008

Date of Decision: 27 June 2008

_____________

D E C I S I O N

_____________

1.This is an application to determine the appointment of an independent expert to value the shares of three companies for the buy-out orders I made in petitions presented under section 168A of the Companies Ordinance, Cap. 32, pursuant to a judgment handed down on 14 June 2007, the directions for valuation in an order sealed on 15 January 2008, and further directions made on 5 March 2008.

2.Essentially, I directed the parties to exchange a list of names, quotations and CVs of not more than two firms of certified public accountants on each side, and if they fail to agree on the choice of the valuer, the appointment be made at the complete discretion of the court.

3.It is provided in the directions that the CPA firms nominated should have no connection whatsoever with any of the relevant parties or their accountants, that they should have been established for at least five years, and none of them have been subject to sanctions imposed in disciplinary proceedings by their professional body.

4.The petitioner and the respondents have not been able to agree on the valuer.

5.Four names were put forward.  I shall not name them in this decision.  It seems the choice here is really between the petitioner’s first choice and the respondents’ first choice.  I shall refer to them as the petitioner’s candidate and the respondents’ candidate.

6.The price quoted by the petitioner’s candidate is HK$330,000.00 exclusive of disbursements.  The respondents’ candidate quoted HK$300,000.00 exclusive of disbursements in his final quotation.

7.But as the respondents’ solicitors have stated in correspondence, whilst the fee issue is a consideration, the suitability of the candidate is a more important factor to be considered.

8.Mr Hingorani submitted on behalf of the petitioner that the way the respondents’ candidate went about in submitting his quotation does not inspire confidence.

9.HK$405,000.00 was quoted initially in mid February 2008, on the basis of 150 to 200 hours of work at a maximum of HK$135,000.00 for each company, “according to the information provided”.  Within two weeks, it was revised to HK$540,00.00, on the basis that the valuation was to be carried out for four companies, again, “according to the information provided”.  This was wrong, as only the shares of three companies were required to be valued under the judgment.  There is no explanation why such an error was made.

10.In mid March 2008, the respondents’ candidate reverted back to the initial price quoted of HK$405,000.00 for three companies.  This was after the petitioner had exchanged the quotation of her candidate with the respondents.  On 19 April 2008, the respondents’ solicitors wrote to the petitioner’s solicitors stating that the fee quoted was the maximum charge and the respondents’ candidate “is quite prepared to reduce it if the matters turn out to require lesser time”.

11.On 22 May 2008, which was after the parties have obtained a hearing date to determine the appointment of a valuer, the respondents’ solicitors enclosed a further revised quotation of their candidate stating that “according to the information provided and [the firm of the respondents’ candidate] estimated the number of hours spent by [their] professional staffs”, they confirmed that the professional fee for valuation of each company will be HK$100,000.00 and the total for three companies will be HK$300,000.00

12.This is a reduction of 26% from the original quotation.

13.There is no suggestion any new information has been provided to the respondents’ candidate.  The latest revised quotation begs the question why he did not or could not have come up with a more accurate estimate of the time spent and the work required to be done in the first place.

14.Mr Hingorani submitted on behalf of the petitioner that the latest revised quotation was just to beat the quotation of the petitioner’s candidate, otherwise it would be difficult to explain why the respondents’ candidate should make an unsolicited substantial reduction to his quotation.  Mr Hingorani said this gave rise to concerns on the petitioner’s part if the independence and impartiality of the respondents’ candidate might be compromised, and whether the reduced fee would be at the expense of the quality of the work to be carried out.

15.It seems to me these are legitimate concerns.  The respondents have not been above board in disclosing the communication they had with their candidate causing the latter to reduce his quotation by a quarter of the initial fee.

16.I turn to consider other matters raised by the petitioner why her candidate should be preferred.

17.The petitioner’s candidate comes from a medium sized accountancy firm, established in 1976.  It has more than 10 qualified accountants and over 60 staff working in Hong Kong and China.  The firm provides auditing, taxation and corporate services to over 1,000 clients in Hong Kong and China.  It is a member firm of Nexia International, a worldwide network of independent accounting and consulting firms.  The firm has experienced in conducting share valuations, including share valuation for litigation for seven companies, share valuation for disposal purpose for two companies, due diligence for merger and acquisition in three instances, and statutory annual audit of private and subsidised schools including kindergarten, nursery, primary and secondary schools and disable schools for 23 schools.  The last matter is of particular relevance, as the only business of the three subject companies is to operate various kindergartens and schools.

18.The individual nominated by the petitioner from this firm to take up the assignment joined his firm in 1988 and became a partner in 2001.  He has over 17 years’ experience in statutory auditing, taxation and business advisory in various local and international CPA firms.  His working experience includes statutory audits in subsidised and private schools and he was accepted as an expert witness in a High Court case, the action number of which was in 2002.

19.In comparison, the respondents’ candidate comes from a small sized firm established in 1995 with five qualified accountants and 20 staff.  The firm also has experience in share valuation.  According to its major clients’ list for share valuation purposes, it has conducted five such valuations, of which three were for acquisition purpose.

20.The individual nominated by the respondents from this firm to take up the appointment obtained his qualification of a CPA in 1983 and commenced practice as such in Hong Kong in 1995.  He had given an expert report in a case in the High Court in 1997.

21.The respondents’ candidate sent an undated letter to the respondents’ solicitors stating that his firm had within the last five years performed audit assignments for three primary schools and 10 kindergartens and subsidised children gardens.  All these establishments, except for one of the primary schools, have the same individual as school supervisor and the kindergartens and children gardens operated under a single charity.

22.The petitioner has produced the profile of kindergartens published by the Education Bureau for various years.  Three of the kindergartens mentioned in the said letter would appear to have ceased operation before the five-year period.  Mr Hingorani queried how it could be right that the firm of the respondents’ candidate could have audited the accounts for these three kindergartens within the last five years.  At the very least, there is a lack of care in providing information.  I note there are three spelling errors in the names of these schools in the letter signed by the respondents’ candidate.

23.Although both candidates come from firms with experience in statutory audit for schools, the schools audited by the firm of the respondents’ candidate are non-profit making or aided schools.  I am given to understand that non-profit making schools are restricted in the application of their funds towards the attainment of their stated objects and are not allowed to distribute income and assets among their members.  They have to follow the guidelines of the Education Bureau on various aspects of school teaching and administration.  The schools operated by the three subject companies are private, independent, profit-making schools.  I am inclined to agree with Mr Hingorani that the auditing experience of non-profit making or aided schools would not be of great assistance here.

24.On the basis of the above matters, I am inclined to think that the petitioner’s candidate would have an edge over the respondents’ candidate and should be chosen, in the absence of good reason to the contrary.

25.The respondents’ counsel, Mr Dennis Law, contended that the matters raised by the petitioner should not be regarded as matters in favour of appointing her candidate.

26.Firstly, he contended that the experience in performing statutory audit for schools, although a consideration in choosing the valuer in this instance, is not a material factor.  The valuer would only be concerned with the financial and accounting aspects of the schools.  It does not matter at all that the business of the subject companies was to operate schools, the valuer would just apply the general rules in valuing the shares of a business operation.  I disagree with this.  The valuation of shares is not a mechanical exercise.  Previous audit experience of similar business undertakings would give the valuer a feel for the business operation and assist him in selecting a methodology with proper adjustment to arrive at a just and fair value.

27.Secondly, it was argued that the size of the firm from which the individual comes is irrelevant.  I disagree with this as well.  The petitioner’s candidate would appear to have access to better support, more resources and global connections not available to the respondents’ candidate.  I cannot see how this should be irrelevant.

28.Thirdly, it was contended that as the petitioner’s candidate is the China partner of his firm, he is specialised in China practice, the time he may devote to work in Hong Kong would be limited and his knowledge and experience in relation to local business and market may be out of date.  This seems to me to be surmise.  The petitioner’s candidate has working experience in both Hong Kong and China.  There is nothing to indicate that his experience is solely or substantially related to China practice or that his local working experience is out of date.  In the fee quotation sent by his firm, it was stated that if instructed, the firm “will assign a team of professional accountants to carry out the works specified above under the close supervision of a partner of this firm and anticipate to be able to complete the works within 30 days of receipt of all relevant information”.

29.None of the reasons advanced by the respondents are valid reasons for not preferring the petitioner’s candidate.

30.I make an order that the petitioner’s candidate be appointed as the valuer to carry out the out-of-court valuation of the three companies.

31.Mr Law submitted that the costs incurred in correspondence between solicitors in seeking to agree on a valuer should be regarded as part of the costs of valuation and I should not order the respondents to pay the petitioner’s costs in this respect.

32.I accept his submission.  I will use 28 April 2008 as a cut-off date.  I make no order as to costs for the costs incurred by the petitioner’s solicitors in finding a candidate and liaising with the necessary parties before 28 April 2008.

33.For the costs incurred after 28 April 2008 including the hearing of today, Mr Hingorani sought an order that the respondents should pay the petitioner’s costs forthwith.

34.Mr Law resisted this and submitted that no order should be made and that the costs should be regarded as part of the valuation exercise.  This is not a realistic submission.  The respondents have insisted on a candidate that the court has declined to appoint.  The application would not be necessitated but for the respondents’ opposition and I have ruled against the grounds advanced by the respondents.  Costs should follow the event in the usual way.

35.I order the respondents to pay the petitioner forthwith the costs of and occasioned by the application to appoint a valuer incurred after 28 April 2008.

Mr Jeevan Hingorani, instructed by Messrs J. Chan, Yip, So & Partner, for the Petitioner

Mr Dennis Law and Mr Lawrence Cheung, instructed by Messrs Howell & Co., for the 1^st and 2^nd Respondents