Lehman & Co. Management Ltd v. Effiscient Ltd and Another
Read the full judgment text of CACV 272/2011 on BabelCite. This Court of Appeal judgment was delivered on 13 March 2013.
1. On 15 November 2011, Harris J gave judgment (“the Liability Judgment”) after an eight-day trial in October 2011 in two petitions under section 168A of the Companies Ordinance, Cap 32, which had been ordered to be heard together. He dismissed the petition and granted relief on the cross-petition. A subsequent hearing was held for the assessment of the value of the petitioner’s share in the company, which he ordered to be sold to the cross-petitioner, and for the assessment of damages payable
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CACV 272/2011 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 272 OF 2011 (ON APPEAL FROM HCCW NOS. 377 AND 383 OF 2010) ________________________ HCCW 377/2010 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES (WINDING-UP) NO. 377 OF 2010 ________________________
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________________________ AND HCCW 383/2010 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES (WINDING-UP) NO. 383 OF 2010 ________________________
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________________________ (Actions consolidated pursuant to the order of
________________________ J U D G M E N T ________________________ Hon Kwan JA: 1.On 15 November 2011, Harris J gave judgment (“the Liability Judgment”) after an eight-day trial in October 2011 in two petitions under section 168A of the Companies Ordinance, Cap 32, which had been ordered to be heard together. He dismissed the petition and granted relief on the cross-petition. A subsequent hearing was held for the assessment of the value of the petitioner’s share in the company, which he ordered to be sold to the cross-petitioner, and for the assessment of damages payable to the cross-petitioner as a result of unfairly prejudicial conduct of the petitioner. After a three-day trial in September 2012, the judge gave judgment on 28 November 2012 (“the Remedies Judgment”). He assessed the value of the petitioner’s share in the company at US$1.4 million and damages payable to the cross-petitioner at US$716,055. 2.This is an appeal of the petitioner from the Liability Judgment and the Remedies Judgment. There was initial dispute whether the appeal against the Remedies Judgment was properly brought, as when the Notice of Appeal was filed, it was against the Liability Judgment only. When it was approaching the hearing date of the appeal, and by which time the Remedies Judgment had been delivered, the petitioner filed a supplementary Notice of Appeal making very substantial amendments to the grounds of appeal against the Liability Judgment and appealing against the Remedies Judgment as well. The respondent in the appeal contended that separate notices of appeal are required if the orders being the subject of the appeal, though made in the same action, were not made at the same trial or hearing, citing in support of this contention Hong Kong Civil Procedure 2013, vol 1, para 59/3/16. 3.Having considered Dixon v Allgood, transcript of English Court of Appeal, 14 April 1999, it does not appear to us there is any requirement in the rules of court which mandates separate notices of appeal in this situation and we do not think the editorial comment in the Hong Kong Civil Procedure should be followed. We would like to point out that although the appeal against the Remedies Judgment was properly brought, to avoid any problem that may arise regarding the estimated length of hearing, further documents and evidence that would be required with the significant widening of the scope of the appeal, as a matter of good practice, the appellant should not have left the amendment so late and should have sought appropriate directions from the court in advance regarding the conduct of the appeal. We would not hear the appeal unless we are satisfied that the appeal bundles are properly prepared and the hearing time is adequate with the expanded scope of the appeal. However, as all necessary documents appeared to be before us, the hearing time was sufficient, and the respondent’s counsel did not require an adjournment to be able properly to deal with the additional matters to be argued, we proceeded to hear the appeal against the Remedies Judgment as well. The Liability Judgment and Order 4.The company that is the subject of the petition and the cross-petition is LehmanBrown Limited (“the Company”), a company incorporated in Hong Kong but carrying on business in Mainland China as a full service accounting firm. The petitioner, Lehman & Co Management Limited (“Lehman Management”), and the cross-petitioner, Effiscient Limited (“Effiscient”), each owns one of the two issued shares of the Company. Lehman Management is beneficially owned by Mrs Karolina Lehman, whose husband Mr Edward Lehman exercised de facto control over its affairs, at least in so far as they concerned the Company. Effiscient is owned by Mr Russell Brown and his wife Mrs Zhou Han Brown. 5.The judge found that Lehman Management has failed to establish any unfairly prejudicial conduct on the part of Effiscient. He dismissed the petition with costs to Effiscient. He found that Effiscient has established unfair prejudice on the part of Lehman Management and is entitled to relief under section 168A. As Mr Brown is an accountant and has been running the Company since its inception, he held it appropriate to order Lehman Management to sell its one share in the Company to Effiscient. He ordered a court expert to be appointed to prepare a report on the value of Lehman Management’s share in the Company. He also held that Effiscient should be awarded damages for the loss suffered as a result of two aspects of unfairly prejudicial behaviour, being:
6.The material parts of the order made by the judge in the Liability Judgment (“the Order”) on the valuation of the Company, the assessment of damages and directions on payment provide as follows:
This appeal 7.In this appeal, Lehman Management sought to set aside the order dismissing its petition and to overturn the judge’s ruling that it has failed to establish any unfairly prejudicial conduct on Effiscient’s part. It did not seek to challenge that part of the judgment holding that the complaints of unfair prejudice in the cross-petition are established. It contended that both sides were at fault and each shareholder had been unfairly prejudiced by the conduct of the other. It accepted that the judge was correct in ordering Lehman Management to sell its one share in the Company at a price to be determined by the court. On the basis that some of its complaints of unfairly prejudicial conduct are established, it asked this court to set aside the costs order against it in the petition and cross-petition and substitute this with no order as to costs. I will call this part of the appeal “the appeal against the unfair prejudice finding in the petition”. 8.Lehman Management sought to set aside other parts of the Order and they are as follows:
9.In respect of the Remedies Judgment, Lehman Management attacked the assessment of damages and the valuation of its share in the Company on a number of grounds:
10.Lastly, it was contended that the judge had wrongly refused to order Effiscient to pay interest on the purchase price. 11.Lehman Management sought an order that this court should determine the purchase price of its one share in the Company on the correct basis with no order for damages, alternatively that the valuation of the Company be remitted to another judge for re-trial. 12.I will deal with the arguments raised in this appeal in the following order:
The appeal against the unfair prejudice finding in the petition 13.The relevant facts which are not in dispute may first be stated as follows. The business of the Company commenced in 2001. It had two directors at all times. Mr Brown was a director at the outset and remains one to this day. Mr Lehman and his wife chose to nominate a service company, Million Strong International Limited (“Million Strong”), to represent them on the board of directors. Million Strong was deregistered on 12 November 2010 and ceased to be a director. On 16 November 2010, Mr Brown appointed his wife to the board. 14.The judge found that Mr Lehman was clearly not an honest witness. As for Mrs Lehman, she sided completely with her husband and parroted his story, so the judge did not find her evidence reliable. By contrast, the judge found Mr Brown straightforward and his recollection of events supported by contemporaneous correspondence. Where there was a conflict between the evidence of the two men, the judge preferred the evidence of Mr Brown[1]. 15.The judge accepted the evidence of Mr Brown there was an oral agreement between the two men that they should be equal shareholders in the Company and each was to be a director. It was agreed that Mr Brown would manage the Company on a day to day basis and that Mr Lehman would have no greater right to information and involvement than that which accrued by virtue of the directorship, which he chose to hold through his nominee, Million Strong[2]. 16.On the facts as found by the judge, Lehman Management had access to the Company’s records including its accounting records through Mr Lehman up to the end of 2004[3] and through Mr Scott Garner[4] until mid 2008[5]. Thereafter, Lehman Management did not have access to the Company’s records[6]. Also, at a meeting in 2008 between Mr Brown and Mr Lehman, Mr Brown had agreed that Union Trade Holdings Inc (“Union Trade”), which was a company controlled by Mr Lehman, would be appointed as a director of the Company to represent Mr Lehman in place of Million Strong[7]. Mr Brown then changed his mind about appointing Union Trade as a director and when Million Strong was deregistered in November 2010, a representative of Lehman Management was not appointed as a director in place of Million Strong. Instead, Mr Brown appointed his wife as a director. This was contrary to the initial oral agreement that each shareholder would be represented on the board[8]. 17.Mr Barlow, SC, who appeared for Lehman Management in this appeal[9] but not below, submitted that on the above facts as found by the judge, the judge should have held as a logical inference that Lehman Management had been unfairly prejudiced by the conduct of Effiscient in that it was deprived of access to the Company’s records from mid 2008 and was excluded from participation as a director in November 2010 contrary to the initial oral agreement between Mr Lehman and Mr Brown. 18.He pointed out that in section 168A proceedings, any antecedent shareholders agreement would often be pivotal to the assessment of the shareholders’ entitlements. He submitted that the judge was not prepared to consider evidence of exclusion from access to the Company’s records other than evidence of requests of access for information made through Million Strong, as indicated by the three questions framed by the judge at the stage of closing submissions which went to the issue whether Lehman Management had been wrongly refused access to documents and in particular whether its nominee director Million Strong had requested documents and had been refused[10]. He argued that the judge had overlooked the possibility that both parties may have been unfairly prejudiced when the judge mentioned that what he needed to decide was “which one of them has established that they have been unfairly prejudiced and is entitled to the relief, which they seek”[11]. That there was fault on both sides is not a reason for refusing a buy-out order under section 168A (Grace v Biagioli [2006] 2 BCLC 70 at 98g to 99b, 101a and f). He said the judge had approached the question of making a compulsory sale order solely by the attribution of fault, without regard to pragmatic considerations in particular which of the two hostile protagonists is better suited to operate the Company. 19.I do not think these are fair criticisms of the judge. 20.The judge’s statement that he had to decide which one of the shareholders has established it has been unfairly prejudiced and is entitled to the relief sought must be understood in the context of the allegations made and the relief sought in the petition and cross-petition. In the petition, Lehman Management sought an order to buy out the interest of Effiscient on the basis it has been unfairly prejudiced by Effiscient’s conduct. In the cross-petition, Effiscient sought an order to buy out Lehman Management on the basis it has suffered unfair prejudice due to the other’s conduct. Each was seeking mutually exclusive relief. There was no suggestion from anyone at the trial that both parties were at fault and have suffered unfair prejudice due to the acts of the other. The judge had also said this in the course of the closing submissions of counsel:
21.The judge had fully considered whether Effiscient was at fault on the allegations of unfair prejudice raised by Lehman Management, which included the complaint of denial of access to the Company’s records and the appointment of Mrs Brown to the board to replace Million Strong contrary to the initial oral agreement that each shareholder would have representation on the board. 22.The judge found that Mr Lehman had himself largely to blame for the deterioration in the working relationship of the parties from 2008 and thereafter[13]. That was the time when Mr Brown discovered Mr Lehman had established a competing accountancy firm in China[14] and in December 2008 Mr Lehman had demanded payment of a substantial dividend and refused to sign the financial statements of the Company[15]. Also at that time, Mr Lehman orchestrated complaints to the China Trademarks Office about infringement by the Company of the “LehmanBrown” trademarks, which led to raids by members of the Office on the Company’s offices in Beijing, Shanghai, Shenzhen and Guangzhou to inspect documents[16]. The acts of operating an accountancy business in competition with the Company and misappropriating the Company’s trademarks were held to be highly and unfairly prejudicial to Effiscient’s interest in the Company[17]. 23.The judge found on the evidence that the difficulties that arose “seem to have their origin in the heavy handed way [Mr Lehman] chose to approach Mr Brown and his insistence on a degree of involvement with the management of the Company, which was inconsistent with what had originally been agreed”[18] and “the contemporaneous documents demonstrate that when Mr Brown was approached in a sensible way with coherent requests to information he was prepared to accede to them”[19]. 24.It is not correct to say that the judge was prepared to consider exclusion from access to the Company’s records only on the basis whether Million Strong had requested access and was refused, as the judge had held that despite the failure of Lehman Management to assert a right to information through Million Strong, it was not precluded from complaining it was not given all that it was entitled to expect as an equal shareholder with representation on the board[20]. And the judge had clearly considered requests for information made by various representatives of Lehman Management, such as Mr Lehman, Mrs Lehman and Mr Garner[21]. 25.The judge did not accept that the refusal to agree to steps being taken to change the directorship from Million Strong to Union Trade had caused any unfair prejudice during the period to which the complaint was directed, namely, 2008[22]. And when Million Strong was deregistered in November 2010, Mr Brown by this time had had enough of Mr Lehman and what he saw as the latter’s destructive behaviour so he took the opportunity to replace Mr Lehman’s nominee on the board with Mrs Brown[23]. 26.The judge considered the authorities which showed that the court will have regard to a petitioner’s own conduct in deciding whether or not he had been treated unfairly and if a person has by his own poor behaviour caused the conduct of which he complains, such conduct is unlikely to be unfair to him even if it is prejudicial[24]. Although the appointment of Mrs Brown to the board was prejudicial to Lehman Management, the judge accepted the submission of Mr Manzoni, SC, who appeared for Effiscient at the trial and on appeal, that by the time this occurred Mr Lehman’s conduct had become so manifestly inconsistent with the best interests of the Company that appointing someone other than Mr Lehman’s nominee as a director, was justified[25]. 27.I do not think the judge’s conclusion that Lehman Management has not demonstrated it has been unfairly prejudiced by Effiscient’s conduct can be faulted. The contention that both sides were at fault is not made out. There is no basis to disturb the holding that the petition should be dismissed and that Lehman Management should pay the costs of Effiscient of the petition and the cross-petition. The jurisdiction arguments on damages 28.Under para 6 of the Order, the Judge awarded damages to Effiscient as a result of two of the complaints of unfairly prejudicial conduct which he held to be established: (1) the operation of a professional services firm offering accountancy services in the Mainland in competition with the Company (“the Competing Firm Claim”); and (2) the misappropriation and infringement of the trademark of the Company’s name (“the Trademark Claim”)[26]. 29.I will first deal with a pleading point raised by Mr Barlow. He pointed out that a claim for damages has not been made in the prayer of the cross-petition or in the amended points of defence and counterclaim served by Effiscient. He submitted this is not in compliance with Order 9 rule 2(1) of the Rules of the High Court, which stipulates that “every petition must include a concise statement of the nature of the claim made or the relief or remedy required in the proceedings begun thereby.” In Re Antigen Laboratories Ltd [1951] 1 All E R 110, Roxburgh J said a petitioner seeking relief under the equivalent to our section 168A “ought to state in the prayer of the petition in clear terms the general nature of the relief sought… . The prayer … must … contain enough to leave no doubt what the petitioner desires the court to do.” 30.I do not think the pleading point is a good one for a number of reasons. 31.Firstly, the factual allegations giving rise to the acts of unfair prejudice concerning the Competing Firm Claim and the Trademark Claim have been pleaded in the cross-petition and the amended points of defence and counterclaim. As the factual allegations pleaded are also relevant to the jurisdictional objections which will be discussed, I set out the relevant parts of the cross-petition[27] in full:
32.It is pertinent to note also the following parts of the amended points of defence and counterclaim:
33.Secondly, although the prayers in the cross-petition and the amended points of defence and counterclaim did not expressly claim damages, attached to the opening submission served by Effiscient at the trial was a draft order, para 6 of which sought an order that Lehman Management should pay to Effiscient damages to be assessed as a result of unfairly prejudicial conduct of Lehman Management, and/or its authorised representative Mr Lehman, and/or its beneficial owner Mrs Lehman. And among the unfairly prejudicial conduct listed in para 6 was the setting up of an accountancy firm in competition with the Company and the misappropriation and infringement of the Company’s Chinese and Hong Kong trademarks. This draft order in a slightly amended form was attached to the closing submission served by Effiscient at the trial. Hence, notice was given to Lehman Management in clear terms of the nature of the relief sought by Effiscient, even though Effiscient did not apply to amend the prayers by adding a claim for damages. 34.Thirdly, former counsel who appeared for Lehman Management at the trial also adopted the same approach. Annexed to his closing submission was a draft order seeking among other relief an order that Effiscient should pay to Lehman Management damages to be assessed to reflect the damage suffered as a result of unfairly prejudicial conduct. 35.Fourthly, the judge took up the pleading point at the trial when Mr Manzoni addressed him on para 6 of the draft order. He was satisfied that the claim for damages could be covered by “such further or other Order(s) and/or direction(s) as this Honourable Court may deem fit” in the prayers, no doubt because notice of a claim for damages had been given earlier. 36.I turn to consider a weightier objection that the judge had no jurisdiction to make this order for damages due to section 168A(2C), which encapsulates the common law principle against recovery for reflective loss. This matter was not raised before the judge by any party and he did not consider it when he awarded damages to Effiscient. 37.The relevant statutory provisions read as follows:
38.For a summary of the relevant principles at common law on the recoverability of damages by a shareholder and by a company, I refer to the speech of Lord Bingham of Cornhill in Johnson v Gore Wood & Co [2002] 2 AC 1 at 35F to 36A:
39.One then applies the law to the Competing Firm Claim and the Trademark Claim, to see whether the award of damages would contravene the principle of reflective loss. 40.I will deal with the Trademark Claim first. The relevant findings of the judge are as follows. There was an agreement between Mr Lehman and Mr Brown that the Company would register its trademark LehmanBrown. However, Mr Lehman applied for registration of the trademark in his own name. He then signed an undertaking to the Company dated 16 November 2001 by which he irrevocably agreed that when the trademark was registered, he would assign the trademark to the Company or its nominee. In breach of this undertaking to the Company, Mr Lehman misappropriated the trademark by transferring it to his wife’s company, Home & Garden[30]. 41.Mr Manzoni submitted that the Company cannot sue on the original agreement, which was made between Mr Lehman and Mr Brown personally. Even so, the Company would clearly have a claim against Mr Lehman on the irrevocable undertaking given to it by Mr Lehman. Mr Manzoni then argued on Mr Lehman’s case, the written undertaking was a forgery and of no effect, so the Company’s claim is bound to fail on Mr Lehman’s case and evidence, and there would not be any contravention of the reflective loss principle as the Company would not have a claim. 42.I reject these arguments. Mr Lehman gave evidence before the judge that the signature on the undertaking was not signed by him and suggested it was computer generated[31]. His evidence was rejected by the judge, who found that he did sign the undertaking[32]. Further, as Mr Barlow pointed out, the Company has in fact brought proceedings in HCMP 775/2012[33] against Mr and Mrs Lehman, Home & Garden and Union Trade, claiming declarations that the LehmanBrown Trademarks registered in Hong Kong are invalid, that the LehmanBrown Trademarks registered in Mainland China were misappropriated by the defendants in accordance with the findings in the Liability Judgment, that the defendants infringed the Company’s trademarks, and claiming damages or an enquiry as to damages in respect of the defendants’ acts of infringement of the trademarks. 43.It was not suggested by Mr Manzoni that any loss suffered by Mr Brown or Effiscient as a result of the unfairly prejudicial conduct in the Trademark Claim is separate and distinct from the loss suffered by the Company due to the misappropriation and infringement of the trademarks. It is clear from the exercise of the assessment of damages in the Remedies Judgment that the court was looking at the loss and damage caused to the Company. 44.I am satisfied that the award of damages in the Trademark Claim must be set aside on the jurisdictional ground that it contravenes section 168A(2C). 45.I turn to the Competing Firm Claim. Unlike the Trademark Claim, no action arising out of the Competing Firm Claim has been brought by the Company as yet. Mr Barlow did not wish to advocate a case that the Company might have a cause of action in the Competing Firm Claim as that would provide ammunition for a writ from the Company. Mr Manzoni contended that the Company would not have a cause of action in the Competing Firm Claim, hence there would be no contravention of section 168A(2C). He referred us to Shaker v Al-Bedrawi & Ors [2003] Ch 350 at para 83, in which Peter Gibson LJ had this to say:
46.Hence, the onus is on Lehman Management to establish that there is a remedy available to the Company in respect of the Competing Firm Claim both on the facts and on the law. Mr Manzoni contended that the judge did not make relevant findings on the evidence as the question of reflective loss was not raised below, and this court must be slow to reach any findings of its own on the evidence as Mr Lehman has “blown hot and cold about his status as a director”[35] and was seen as a thoroughly dishonest witness. 47.Since this challenge goes to the jurisdiction of the court to award damages in respect of the Competing Firm Claim, this court would need to form a view if the Company would have a claim here, regardless of the positions taken by the parties. I will examine the evidence before the judge and the findings he made, to see if a view could be taken one way or other. 48.The relevant evidence and findings are set out in these parts of the Liability Judgment:
49.Mr Manzoni submitted that the judge had found in para 124 there was an agreement between Mr Lehman and Mr Brown personally that the two would not compete with each other once the Company was set up. The Company cannot recover damages in respect of breach of that agreement. I would have no quarrel with this. 50.Mr Manzoni further submitted that Mr Lehman had refused to accept he owed fiduciary duties to the Company and the judge did not make any finding on this. I do not agree with this. 51.On a fair reading of the above extract, I am satisfied that the judge had found in favour of Effiscient in respect of both arguments it advanced in para 122, namely, that the establishment of a competing accountancy firm was inconsistent with Mr Lehman’s fiduciary duties as a director of the Company; and that it was inconsistent with his agreement with Mr Brown that neither would compete with the other once the Company was set up[36]. In para 123, the judge held the fact that Mr Lehman has “blown hot and cold about his status as a director” “does not seem … to make any difference”, as Million Strong, which was nominated a director of the Company by Mr and Mrs Lehman, was for these purposes Mr Lehman’s alter ego. The judge found that Mr Lehman “manifestly did” act “in a way inconsistent with a director’s fiduciary duties”. In para 124, the judge “also” accepted Mr Brown’s evidence on the agreement not to compete. 52.Further support for the above reading can be found in these exchanges the judge had with counsel during the closing submissions:
53.We were also taken to relevant parts of the evidence of Mr Lehman:
54.Mr Manzoni reiterated his stance before us that Mr Lehman was not a shadow director as defined in section 2 of the Companies Ordinance in that by the statutory definition, this means “a person in accordance with whose directions or instructions the directors or a majority of the directors of the company are accustomed to act.” As a matter of law, Mr Lehman was not a shadow director within the statutory definition as the other director, Mr Brown, was certainly not acting on his instructions, nor was there a majority of the directors accustomed to act on his instructions. I do not think the judge had found in para 123 that Mr Lehman was a shadow director within the statutory definition. What the judge said was that Mr Lehman “described himself as a ‘shadow director’”, having clarified with Mr Lehman in the course of his testimony what his understanding of this term was. 55.Of the three kinds of directors – de jure, de facto and shadow directors – Mr Lehman was clearly not a de jure director or shadow director. But there was sufficient evidence to find he was a de facto director, and that was how the judge saw it. In his evidence, Mr Lehman said it was his understanding that according to the initial shareholders’ agreement, he was a director of the Company and he held the belief he was a director. He explained that a nominee director was appointed to distance himself from liabilities he might otherwise be under. The judge found that Million Strong was his nominee and for these purposes his alter ego. As the judge had observed in the exchanges with counsel, “for all practical purposes [Mr Lehman] was treated as if he was a director”. He was therefore a person who claims to act and purports to act as a director, although not validly appointed as such. 56.Indeed, on the evidence accepted by the judge in para 125, it would be surprising, to say the least, if the Company were to have no claim for the loss it suffered in the various wrongful acts perpetrated by Mr Lehman and the firms controlled by him, in diverting business enquiries from the Company to the competing firms by using names calculated to sound like the Company’s, in giving links on the LLX website to the website of a competing firm by a confusingly similar name instead of to the Company’s website. Quite apart from breach of fiduciary duties as a director, and leaving aside other allegations of Effiscient in the pleadings for which no findings were made by the judge (such as other acts of passing off the competing firms as the Company, making use of confidential information of the Company), it seems to me the Company may also have a claim based on the tort of unlawful means conspiracy in that there would appear to be deliberate interference with the Company’s interest by the unlawful means of passing off and breach of the agreement between Mr Lehman and Mr Brown not to compete with each other once the Company was set up. 57.For the above reasons, I am of the view that the Company does have a claim to recover damages on the law and on the facts in respect of the Competing Firm Claim. As in the Trademark Claim, there was no suggestion that the loss suffered by Effiscient on account of the unfairly prejudicial act in the Competing Firm Claim is separate and distinct from the loss of the Company. 58.Mr Manzoni submitted that the judge had addressed damages in a way which avoids the risk of reflective loss. He contended that it would have been possible to order Effiscient to pay a lower price in buying out Lehman Management’s share in the Company, so as to reflect some element of compensation for the unfairly prejudicial conduct that caused Effiscient’s share to be reduced in value. But the judge adopted another approach and took the actual value of the Company as at the date the petition was presented, and then made an assessment of the effect of the unfairly prejudicial conduct on the value of the shares, and awarded that by way of damages, to be set off against the purchase price. I do not think this argument would overcome the difficulty that the award of damages was made without jurisdiction in the first place. 59.I hold that the court has no jurisdiction to award damages to Effiscient in respect of the Competing Firm Claim and the award of the judge for this claim must be set aside on this basis. 60.As I have upheld the objection on reflective loss, it is not strictly necessary to consider the other objection raised by Mr Barlow, namely that it was wrong to order Lehman Management to pay damages to Effiscient for acts of unfair prejudice committed by Mr Lehman. In view of the arguments made to us, I propose to deal with this succinctly. This was again a point not taken below. In the judgment[44], the judge awarded damages to Effiscient for the loss suffered as a result of the unfairly prejudicial acts of Mr Lehman. In the Order, Lehman Management was ordered to pay damages to Effiscient as a result of the unfairly prejudicial conduct of Lehman Management and/or Lehman Management’s authorised representative being Mr Lehman and/or Lehman Management’s beneficial owner being Mrs Lehman. What the judge said in the judgment may be just a shorthand way of what was expressed fully in the Order. In any event, it was Mr Lehman’s evidence that he saw himself as a shareholder of the Company and Lehman Management was merely a nominee[45]. The judge found that Mr Lehman exercised de facto control over the affairs of Lehman Management in so far as they concerned the Company[46]. As Mr Lehman had said, in diverting business that might have gone to the Company to his own competing firm, it was because “[he is] trying to make money in an accounting practice that [he runs]. [He] can’t get money out of an accounting practice that [he owns] 50 per cent of, and that [he] thought [he] was director of, and so [he’s] trying to get money for that company.”[47] 61.I am inclined to agree with Mr Manzoni that the court was entitled to look at all of the conduct of Lehman Management’s authorised representative and its beneficial owner in the affairs of the Company in considering whether unfair prejudice was caused to Effiscient and order Lehman Management to pay damages where unfair prejudice was established, and that the court would not be constrained in the exercise of its powers under this jurisdiction by the use of a nominee entity. In deciding that in the circumstances, Lehman Management should be held responsible for the acts of Mr Lehman, the court was not disregarding the separate legal entity of Lehman Management, nor would it be necessary to pierce its corporate veil for this purpose, as suggested by Mr Barlow. The set-off argument 62.Attack was made to para 11 of the Order which allowed Effiscient to set off against the purchase price for Lehman Management’s share in the Company (a) the damages for unfairly prejudicial conduct in para 6; (b) any damages and costs due to Effiscient in the defamation action against Mr Lehman; and (c) any costs due to Effiscient in these proceedings. As I have come to the view the award of damages in para 6 should be set aside, it follows that item (a) should be set aside. I see no basis to set aside item (c) and Mr Barlow had not advanced any substantive reason for doing so. That leaves item (b), which is yet another new point not taken below. 63.The defamation action was brought by Mr Brown, Mrs Brown and Effiscient against Mr Lehman. Lehman Management is not a party to that action. Mr Barlow submitted damages in that action awarded to Effiscient against Mr Lehman cannot be set off against the purchase price due from Effiscient to Lehman Management for lack of mutuality, in that the two debts or demands were not between the same parties, citing Re Finbo Engineering Co Ltd [1998] 2 HKC 480 at 487A to D. 64.This is a valid objection. Mr Manzoni cited R & H Electrical Ltd & Anr v Haden Bill Electrical Ltd & Ors [1995] BCC 958 at 968C to H in support of his proposition that in the context of a section 168A petition, the court is entitled to take a broad view of what can be seen as the interests of a member for the purpose of assessing whether his interests have been unfairly prejudiced and would have less regard to separate legal personalities. That case was not concerned with any question of set-off. I do not think it would provide support for Mr Manzoni’s contention a set-off could be ordered here despite the lack of mutuality. 65.I would set aside para 11(b) of the Order as it was made in excess of the jurisdiction of the court. Various aspects of the judge’s handling of the proceedings 66.Mr Barlow raised a number of complaints of the judge’s handling of the trial on remedies. 67.He contended that the judge had delegated the assessment of damages to the court appointed valuer, Mr Yeo. There is nothing in this complaint. By para 7 of the Order, the judge appointed a valuer to report to the court his opinion of the level of damages suffered by Effiscient as a result of the unfairly prejudicial conduct set out in para 6. There was no delegation as contended by counsel, as the judge had reserved to himself the right to decide on the appropriate level of damages, having regard to all the evidence adduced before the court. 68.Mr Barlow challenged the admission of Mr Yeo’s evidence for non-compliance with Order 38 of the Rules of the High Court in that Mr Yeo did not give a statement of truth in his report, nor had he made a declaration that his report complied with the expert witness Code of Conduct. Mr Barlow accepted these omissions might be corrected by Mr Yeo when he went into the witness box[48]. And Mr Yeo did provide a declaration of expert on the first day of the remedies trial. This challenge was rightly dismissed by the judge. 69.Mr Barlow complained that the judge had refused to admit the evidence of Lehman Management’s expert, Mr Lees. This was a case management decision the judge was fully entitled to make in the exercise of his discretion. The judge had explained his reasons for this in the Remedies Judgment[49]. At the case management conference on 19 June 2012, the judge had given comprehensive directions for the further conduct of the remedies trial commencing on 25 September 2012 on the acceptance of former counsel for Lehman Management that he would not seek leave to call expert evidence. It was only after Lehman Management changed counsel for the remedies trial that it issued a summons on 14 September returnable on 19 September seeking leave to file expert evidence but without adducing a comprehensive report from the expert it intended to rely on. The report of Mr Lees was not provided to Effiscient until the late afternoon the day before the remedies trial. There could hardly be any justification for Lehman Management to complain that its late application to adduce the report was refused by the judge. As the judge had said, the different view taken by Mr Barlow on the need to call expert evidence was not a reason to allow the remedies trial to be derailed. 70.A further complaint of Mr Barlow was that the judge had allowed Effiscient to resile from the valuation of the Company’s business by Mr Blade, whose report Effiscient had tendered in the defamation action. An issue in that action is the diminution in the value of Effiscient’s shareholding in the Company as a result of Mr Lehman’s defamatory statements. Mr Blade produced an expert report addressing that issue and he valued the Company as at 11 September 2010 at between US$11.4 million and US$15.2 million. In contrast, Mr Yeo valued the Company as at 17 September 2010 and his valuation was US$2.8 million. Mr Barlow argued it was unconscionable and inequitable to allow Effiscient to resile from its own expert’s valuation of the share value. 71.I agree with Mr Manzoni that this complaint is misplaced. The judge had dealt with this in the Remedies Judgment[50]. The valuation Mr Barlow referred to was Mr Blade’s assessment of the value of the Company on the assumption that its business had not been damaged by the defamatory statements and projections as to future income were considered. Hence, inevitably the valuation in those circumstances is likely to be higher. Mr Blade had also assessed the Company in its actual state at US$5.4 million, so the difference between his valuation of the Company damaged by the defamatory statements and Mr Yeo’s valuation is not as stark as suggested by counsel. The judge had not refused to exercise his jurisdiction under section 168A in an equitable manner. His approach was to consider Mr Yeo’s evidence on its merits. I do not think that can be faulted. There is nothing in the contention that the judge was wrong to disregard the valuation of Mr Blade. The assessment of damages 72.Mr Barlow argued that the assessment of damages should be set aside and be replaced with an award of nominal damages because Effiscient had not discharged its onus of proving any loss or damage. He also contended the judge had reversed the burden of proof by drawing inferences from certain failures of Lehman Management to suggest the contrary. 73.It is not strictly necessary to address these arguments, as I have come to the view that the award of damages in the Order should be set aside. I propose to deal with them by simply expressing my concurrence with the judge[51]. As a matter of practicality, Effiscient cannot identify with precision what damage flowed from which particular act complained of. It had adduced all the evidence available to it relating to the decline in profits between 2008 and 2010. The judge was satisfied some substantial loss had been incurred, and did the best he could to assess damages on the available evidence. At no stage did he reverse the burden of proof as suggested by Mr Barlow. The Valuation Distortion argument 74.This was an argument Mr Barlow raised before the judge, but it was rejected. His argument ran as follows. 75.Mr Yeo set out the three traditional valuation methodologies in his valuation report – the income approach, the market approach and the asset-based approach. He stated[52] that he had utilised only the market approach and the asset-based approach due to the following specific instructions in para 5 of the Order:
76.Mr Barlow submitted that the latter part of para 5, commencing with the words “but not having regard to”, is a distortion of the valuation principles. Mr Yeo was constrained by its terms not to use the income approach and was prevented from valuing the Company’s business as a going concern with the valuation including the value of its future trading prospects. This was contrary to principle that the choice of an appropriate basis of valuation must be fair to both parties, and that adopting the break up or liquidation basis of valuation on the net asset approach where the purchaser intends to continue to carry on the business of the company as a going concern would give a windfall to the purchaser at the expense of the seller (CVC v Demarco Almeida [2002] 2 BCLC 108 at paras [37] and [38]). 77.Mr Yeo had explained further his understanding of para 5 of the Order in these parts of his evidence:
78.In the light of this evidence, the judge rejected Mr Barlow’s suggestion that Mr Yeo had misunderstood the Order and had not approached his task correctly. He explained his reasoning as follows in the Remedies Judgment[54]:
79.I agree with the judge that Mr Barlow had misunderstood the methodology used by Mr Yeo when he asserted that Mr Yeo did not value the Company on the basis of a going concern. As Mr Yeo had explained, in adopting the market approach he did take into account the future profitability of the Company, as it is implicit in the market approach that there is a growth prospect for the company. What Mr Yeo did not do was to rely on specific profit forecast for the Company. As for the qualification in para 5 of the Order, this had only excluded the growth prospects attributable to the efforts of Mr Brown after he has taken over the business from Mr Lehman and is free from the latter’s interference, thereby relieving Effiscient from having to pay a premium for that growth factor. That qualification did not exclude any other matter which a valuer should take into consideration to arrive at a fair valuation and has not contravened any principle that the choice of an appropriate basis of valuation must be fair to both parties. 80.The judge has given cogent reasons why in the circumstances Mr Yeo’s valuation methodology should be accepted. I see no basis to find fault with his reasoning. Other attacks on the valuation 81.Mr Barlow made two further attacks on the valuation, one was dealt with by the judge and the other was not. 82.The criticism dealt with by the judge relates to the calculation of EBITDA contained in Appendix IV to Mr Yeo’s report. Mr Yeo calculated this by reference to figures in the audited financial statement of the Company for the 2010 financial year, which was the financial year within which the valuation date fell. Mr Barlow criticised this as unfairly selecting the isolated result of one year only, instead of taking the three to five year average. Furthermore, selecting the result of the 2010 financial year had produced an artificially low EBITDA, as the financial results for that year were very poor. 83.The judge rejected the above criticism for the following reasons[55]:
84.I agree entirely with the judge’s reasoning. 85.The other criticism raised by Mr Barlow, which was not addressed in the Remedies Judgment, relates to three companies in Hong Kong and the Mainland controlled by the Company (“the three CPAs”) in which the Company does not have any equity ownership. The three CPAs were included in the consolidated management accounts for the LehmanBrown group of companies for the financial years 2008 to 2010 but not in the audited consolidated financial statements of the Company, which comprised just the results of the Company and a wholly foreign owned enterprise in the Mainland (“the WFOE”). Mr Yeo decided not to include the three CPAs in his valuation of the Company, as there was no documentary evidence that Lehman Management’s interest in the Company extended to other entities apart from the WFOE[57]. Mr Barlow submitted this was wrong as the earnings of the three CPAs had all accrued to the Company. Further, this was inconsistent with the methodology adopted by Mr Yeo in his damages assessment, which was based on the financial results of the Company including the three CPAs for 2008 to 2010. 86.There is nothing in this criticism. The three CPAs were excluded in Mr Yeo’s valuation because there was no legal relationship between them and the Company[58]. More importantly, it would have made no difference to the valuation even if they were included. The financial relationship between the three CPAs and the Company was explained in full in a letter of the Company to Mr Yeo dated 25 September 2012 and in Mr Yeo’s evidence in chief[59]. I am satisfied that the consolidation of the three CPAs would not make any material difference to the valuation of the Company’s shares. In fact, as Mr Yeo had explained, if the results of the three CPAs were consolidated with the Company and the WFOE, this would give a lower valuation than the valuation he had arrived at relying on just the audited consolidated financial statements of the Company and the WFOE. The payment order arguments 87.These arguments were directed at paras 12 and 13 of the Order. Mr Barlow contended it was wrong not to require Effiscient to pay the purchase price forthwith contemporaneously with the share transfer and instead allow payment by instalments over three years. Further, it was inappropriate to order Lehman Management, as the unpaid vendor compelled to sell its share in the Company, to provide to Effiscient within five days of the Order an irrevocable proxy (not revocable save with the leave of the court) in respect of the voting rights attached to the share. 88.The judge made these orders in the exercise of discretion. For the appeal court to intervene, it must be established that he had erred in fact or in law or in disregard of principle, or had taken into account irrelevant matters, or had failed to take into account relevant matters, or was plainly wrong. Lehman Management has not established any of the above. There is no basis to intervene. 89.We would mention one matter regarding the mechanism of payment by instalments in para 12. Owing to para 11 of the Order which provides for setting off of three items, it might not be apparent at the time of the liability trial or even the remedies trial if any amount would be due to Lehman Management on the purchase price after all the items were set off. In view of what was said in the earlier parts of this judgment, and as two very substantial items for setting off in paras 11(a) and (b) are to be set aside, what remains to be set off against the purchase price of US$1.4 million is the costs due to Effiscient as a result of the petition proceedings. It is likely that there would be an amount due to Lehman Management. Under para 12 of the Order, the quarterly instalment payments, which were to commence from 30 April 2012, would not take effect until the amount to be set off has been finally determined or agreed, and after accounting for the fees of the court expert provided for in para 9 of the Order. As taxation of the costs and the fees of the court expert would take time, Lehman Management may wish to seek interim payment under the provision of liberty to apply in para 14 of the Order. Interest on the purchase price 90.The former counsel of Lehman Management did not seek interest at the liability trial. Mr Barlow did so at the remedies trial but no interest was ordered by the judge, nor was this dealt with in the Remedies Judgment. He cited Re Golden Bright Ltd [2007] 1 HKC 89 at paras 36 to 39 and contended that interest on the purchase price should be awarded and that it should run from the valuation date (17 September 2010) until the date of the Liability Judgment (15 November 2011) at 1% above the HSBC prime rate prevailing during this period. He also sought interest thereafter at the judgment rate until the date of payment. The interest sought by Mr Barlow may be divided into two parts. 91.It is important to note that the first part of the interest sought as supported by the case he cited was not awarded qua interest. As explained by Le Pichon J (as she then was) in Re Tai Lap Investment Co Ltd [1999] 1 HKLRD 384 at 402J to 403A, this interest factor was used “as a proxy to measure the increment in the value of the petitioner’s investment in the company appropriate to reflect the fact that the respondent’s interests had the use of the petitioner’s investment since the date of the petition, that being the valuation date.” This followed from a quotation from the judgment of the trial judge Von Doussa J in Dynasty Party Ltd & Ors v Coombs, cited with approval by the Federal Court of Australia in (1996) 138 ALR 64 at 85, which read as follows:
92.To the same effect was the observation of Thomas J in Rankine v Rankine (1995) 18 ACSR 725 at 730, that the interest factor was allowed in Coombs as the value of the applicant’s shareholding to arrive at a fair price at which his shares should now be purchased. And the purpose in doing so was to give monetary compensation for the injury done to the oppressed minority shareholder for not participating in the benefits enjoyed by the majority in the company as a consequence of the oppression (Dynasty Party Ltd & Ors v Coombs, at 86). 93.Thus understood, on the findings of the judge in the petition and the cross-petition, I am unable to see any justification for allowing an interest factor on the purchase price in the present case to give compensation to Lehman Management for any injury done to it for not participating in the benefits of the Company when it was excluded after the presentation of its petition, which was dismissed. 94.In holding that an order for the equivalent of interest on the purchase price payable is not beyond the powers of the court under the equivalent to our section 168A, Robert Walker LJ (as he then was) said in Profinance Trust v Gladstone [2002] 1 BCLC 141 at para [32] that it is “a power which should be exercised with great caution”, and “if a petitioner seeking an order for the purchase of his shares contends (either as his only claim or in the alternative) that they should be valued at a relatively early date but then augmented by the equivalent of interest, he must put forward that claim clearly and persuade the court by evidence that it is the only way, or the best way, to a fair result”. It should not be made as “a last-minute afterthought”. Attention was drawn to these words in Re Golden Bright Ltd at para 44. 95.Here, the judge had ordered the company to be valued at a relatively early date, namely, the date of the presentation of the petition, not when the buy-out order was made when the purchase price would be payable. To claim interest on the purchase price from a date prior to the buy-out order, it is incumbent on Lehman Management to make out a proper basis for this, such as compensation for injury of the kind considered in Re Tai Lap Investment Co Ltd and the Australian cases referred to. No proper basis was put forward by Mr Barlow for the exercise of discretion to award interest on the purchase price from the date of the petition to the Liability Judgment. I would decline to award interest in this respect. 96.The second part of the interest sought on the purchase price is from the date of the Liability Judgment until payment at the judgment rate. This is a claim for interest on the judgment debt. I see no reason not to award interest on the usual basis, save that the amount on which interest is payable should not be the entire purchase price but the net sum payable to Lehman Management after the costs are to be set off. Conclusion and costs 97.I would allow the appeal of Lehman Management to a limited extent in that I would set aside paras 6, 7, 11(a) and (b) of the Order, and the assessment of damages made by the judge in the Remedies Judgment. I would award interest to Lehman Management on the net sum payable on the purchase price of its share after setting off the costs due to Effiscient as a result of the proceedings in HCCW 377/2010 and HCCW 383/2010, at the prevailing judgment rate from the date of the Liability Judgment until payment. The costs due to Effiscient in HCCW 377/2010 and HCCW 383/2010 to be set off would include interest at the prevailing judgment rate, to run from the date when the costs were awarded, namely the date of the Liability Judgment and the date of the Remedies Judgment. 98.The setting aside of the award of damages would have consequence on the costs below in two respects. Firstly, in para 9 of the Order, the judge ordered that the fees of the court expert are to be borne equally by Lehman Management and Effiscient. The court expert carried out the valuation of the Company and reported to the court his opinion of the level of damages suffered by Effiscient as a result of the unfairly prejudicial acts. The latter part of the work undertaken by Mr Yeo could be regarded as wasted. Secondly, the order as to costs of the remedies trial in Effiscient’s favour may also need to be revisited as part of the proceedings was concerned with the assessment of damages which is now set aside. 99.As we have not heard submissions on these matters, I think it best to direct the parties to provide written submissions on them after the handing down of this judgment for these aspects of costs in para 98 to be dealt with on paper, as well as the costs of this appeal. I would direct Lehman Management to provide submissions within 14 days of this judgment and Effiscient to do so within 14 days thereafter. Hon Chu JA: 100.I agree with the judgment of Kwan JA and the orders proposed. Hon Barma JA: 101.I agree with the judgment of Kwan JA.
Mr Barrie Barlow SC & Mr Chan Pat Lun, instructed by Miller & Peart, for the Petitioner/Appellant Mr Charles Manzoni SC, instructed by Howse Williams Bowers, for the Cross-Petitioner/1st Respondent [1] The Liability Judgment, paras 53 and 54 [2] The Liability Judgment, paras 62 and 68 [3] The Liability Judgment, paras 72, 76 and 88 [4] An American attorney working for a Mainland law firm, Lehman, Lee & Xu, of which Mr Lehman is a founding partner [5] The Liability Judgment, paras 80 to 81 and 83. [6] The Liability Judgment, paras 87 and 88 [7] The Liability Judgment, paras 105, 107 [8] The Liability Judgment, paras 107 to 109 [9] With Mr Chan Pat Lun [10] The Liability Judgment, paras 45 and 46 [11] The Liability Judgment, para 18 [12] Transcript of the liability trial (13 October 2011), page 541 line G [13] The Liability Judgment, paras 87 and 88 [14] The Liability Judgment, paras 87, 122, 125 and 126 [15] The Liability Judgment, paras 15 and 131 [16] The Liability Judgment, paras 48 and 130 [17] The Liability Judgment, paras 126, 130 and 133 [18] The Liability Judgment, paras 88 and 112 [19] The Liability Judgment, para 88 [20] The Liability Judgment, para 69 [21] The Liability Judgment, paras70 to 88 [22] The Liability Judgment, paras 107 and 108 [23] The Liability Judgment, para 109 [24] The Liability Judgment, para 110, citing Mears v Re Mears & Co (Holdings) Ltd [2002] 2 BCLC 1 [25] The Liability Judgment, para 111 [26] Although para 6 provides that the damages awarded are to reflect the damage suffered by Effiscient “including but not limited to” the Competing Firm Claim and the Trademark Claim, it is clear from the Liability Judgment para 137 that the judge has in fact restricted the damages awarded to those two heads of claim. [27] Identical paragraphs are contained in the amended points of defence and counterclaim [28] See footnote 4 [29] The letter of undertaking dated 16 November 2001 mentioned in the Liability Judgment paras 127 to 129 [30] The Liability Judgment, paras 127 to 130 [31] The Liability Judgment, para 127 [32] The Liability Judgment, para 129 [33] The originating summons was issued on 20 April 2012, after the Liability Judgment [34] The principle that “A cannot, as a general rule, bring an action against B to recover damages or secure other relief on behalf of C for an injury done by B to C” (Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] 204 at 210) [35] The Liability Judgment, para 123 [36] See also the closing written submissions of Effiscient at the trial, para 50 [37] Transcript of the liability trial (13 October 2011), page 531 lines K to S [38] Effiscient’s claim for damages as a result of the accountancy firm operated in competition with the Company [39] Transcript of the liability trial (13 October 2011), page 547 lines K to O [40] Transcript of the liability trial (13 October 2011), page 548 lines C to E [41] Transcript of the liability trial (4 October 2011), page115 line Q to page 116 line F [42] Transcript of the liability trial (4 October 2011), page120 lines H to J [43] Transcript of the liability trial (4 October 2011), page124 line K to page 126 line N [44] The Liability Judgment, para 137 [45] Transcript of the liability trial (4 October 2011), page150 line L and page 125 line N; see also page 115 line U to 116 line A and transcript of the liability trial (3 October 2011), page 64 lines C to D [46] The Liability Judgment, para 1 [47] Transcript of the liability trial (4 October 2011), page120 lines I to J [48] Transcript of the remedies trial (25 September 2012), page 16 lines Q to R [49] The Remedies Judgment, paras 6, 7, 9 to 11 [50] The Remedies Judgment, paras 15 to 17 [51] The Remedies Judgment, paras 39 to 42 [52] Page 11 of the report; see also the Remedies Judgment, paras 18 to 20 [53] Transcript of the remedies trial (25 September 2012), page 55 line F to page 56 line I [54] The Remedies Judgment, paras 21 to 23 [55] The Remedies Judgment, paras 24 to 26 [56] At the case management conference on 19 June 2012 [57] Page 10 of Mr Yeo’s report [58] Transcript of the remedies trial (25 September 2012), page 59 lines O to P, page 93 lines P to Q [59] Transcript of the remedies trial (25 September 2012), page 39 line T to page 42 line F [60] In Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324 at 369 Please refer to FAMV36/2013 for the relevant appeal(s) to the Court of Final Appeal. |
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