Oriental Generation Ltd and Others v. Ngo Kui Sing and Others

LDCS 4000/2013

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

APPLICATION NO. LDCS 4000 OF 2013

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BETWEEN

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D E C I S I O N

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1.This is the hearing of a third batch of interlocutory applications comprising 9 summonses, this time taken out by the applicants, against 9 respondents, namely, R22, R40, R44, R33, R34, R39, R41, R42 and R43. The 3 summonses against the first 3 named respondents were issued on 12 December 2014 whereas the remaining 6 against the other 6 named respondents on 15 December 2014. 

2.Shortly before this decision, this tribunal handed down 2 decisions on 2 rounds of interlocutory applications taken out by some of these respondents. The first was handed down on 19 January 2015 dismissing R40’s discovery summons for various court and re-zoning documents (“discovery decision”). The second was on 3 February 2015 directing production of two further expert reports requested by R40 and dismissing a staying summons by R22, R33 and R34 (“expert/staying decision”).

3.By the present 9 summonses the applicants seek specific discovery of documents by requiring each of the named respondents to make an affidavit stating whether certain categories of documents are or have at any time been in its/his/her possession, custody or power, and produce them for inspection. The applicants also seek to administer interrogatories on the named respondents. The applicants say the requested documents and interrogatories relate to the question of whether the 9 car parking spaces (“CPSs”) at Kai Tak Mansion (“KTM”) were sold by R22 during 2012-2014 at arm’s length and whether a mortgage of another 18 CPSs are genuine. They also consider a warning letter issued by the Lands Department (“LD”) relevant and necessary.

Brief Background

4.R22 has since November 1988 been the registered owners of 84 out of 100 CPSs at KTM. The CPSs were bought for generating rental incomes and apparently were for long term investment[1]. It appears that as early as 2007, there was an attempt by KTM’s owners to redevelop the site. It was apparent in 2010 that such attempt failed. There were then serious disputes among some owners. Since then R22 alleged that it had been badly and unfairly treated by some of the majority owners.

5.At around the same time and in July 2010, the applicants kick-started the redevelopment process by acquiring a substantial proportion of units of KTM. It was not in dispute that since May 2012, R22 had started to sell its first CPS. Between May 2012 and June 2014, a total of 9 CPSs were sold. The applicants consider the transaction prices unusually high because they are at as much as a few times the Existing Use Value (“EUV”) assessed by their valuation expert. On the other hand the transaction prices tally with the EUV assessed by the respondents. The applicants say the intention behind is apparent - if the tribunal is minded to grant a compulsory sale order, R22 will be in a better position to argue a much higher Redevelopment Values (“RDV”) for its CPSs. The applicants therefore say the transactions at unusually high prices are to window-address the EUV for gaining benefits in the applicants’ present compulsory sales application.

6.A majority of the CPSs are covered and referred to as “covered garages”. There are conditions in the Government lease providing that CPSs are restricted for parking of private cars of KTM residents only, and are prohibited for use other than as aforesaid. However, there was evidence that some of these covered CPSs had been used in breach of the lease condition. Even according to Mr Keith Siu, the valuation expert engaged by Li, Wong, Lam & W I Cheung, solicitors for the R22, R33 and R34 (“Rs”), some of them are installed with lighting, water supply and metallic gates[2]. Mr Siu adopted an investment method for valuation. Mr Charles Chan, the applicants’ expert disagrees. 

7.According to the information disclosed, the EUV assessed by the parties’ experts differs substantially. Even according to the average price for each CPS valued by the applicants’ expert, each is only $625,000[3]. The parties’ EUV valuations together with the transaction prices are set out below for ease of discussion:

CPS No.	Date of Agreement (R)	Transaction Price ($)	Market Value assessed by applicants[4] (1/12/2012) ($)	Market Value assessed by respondents[5] (1/12/2012) ($)
28	30/05/2012 (R33)	1,760,000	510,000	1,269,000
29	20/12/2013 (R42)	1,920,000	260,000	1,540,000
30	20/12/2013 (R43)	1,920,000	510,000	1,540,000
35	06/09/2012 (R34)	1,780,000	510,000	1,540,000
36	11/06/2014 (R44)	1,900,000	260,000	1,540,000
37	12/12/2013 (R44)	1,900,000	510,000	1,540,000
49	04/11/2013 (R40)	1,890,000	510,000	1,406,000
100	07/06/2013 (R39)	1,988,000	410,000	420,000
66	15/09/2014 (R46)	1,730,000	410,000	420,000

8.In addition, by a mortgage dated 11 December 2012[6], one Shih Ying (“Shih”), R22 together with its 2 directors Lo Lo Ming (“Lo”) and Law Siu Lung (“Law”) as borrowers raised a loan of US$7 million from R41 (a BVI company) on the securities of properties provided by each of the borrowers (“Mortgage’). R22 put in as securities 18 CPSs in KTM (different from the 9 CPSs sold)[7]. Lo provided a landed property in Thailand as security. The applicants have instructed Thailand lawyers and surveyors to investigate into the Thailand security and for advice. It is found out that the lot number of the Thailand lot does not refer to land but a highway. The title deed number is found to be non-existent. The security is therefore untraceable or non-existent in Thailand. The remaining securities were found worth only around US$1.6 million according to the applicants’ expert[8]. It was considered suspicious by the applicants as to how the borrowers (including R22) managed to obtain a loan of US$7 on the strength of known assets worth only US$1.6 million. Queries and requests for particulars were raised to the relevant parties. R22 replied by saying that the request was irrelevant while there was simply no response from other respondents including the borrower R41.

9.The gist of Mr Mok’s submission is this. If a transaction were made between an applicant and a minority owner, the applicant is always in a position to confirm to the tribunal, in case of dispute, that the offer being one with redevelopment in mind. The transaction price therefore must have reflected the RDV, not merely EUV. Now the transactions are made between minorities. Although the valuation expert instructed by Rs has not relied on the aforesaid transactions as comparables in computing EUV, the EUV eventually arrived at by him are closed to the sale prices. In addition, the relevant respondents refused to confirm anything. The applicants suspect that the relevant respondents are trying to inflate the sales prices and dress them up as market EUV relying on Rs’ report. The Mortgage is of a similar pattern creating an impression the CPSs are very valuable securities. Mr. Mok submits that the applicants are therefore entitled to have the requested information in order to know whether the transactions are arm’s length ones. The information is useful for cross-examining Rs’ expert who has adopted a definition of market value being price obtained in an arm’s length deal between a willing buyer and willing seller[9]. Mr. Mok submits EUV should take into no account of any redevelopment according to the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“LCSRO”) and knowing the background will enable the tribunal to assess the EUV.

Discovery Sought

10.The 9 summons were issued against R22 as vendors of the 9 CPSs, R41 as the lender under the Mortgage and 7 purchasers of the aforesaid 8 CPSs (except CPS No. 66 against R46 whose address was in Indonesia and against whom an order for substituted service has not been granted when the 9 summonses were issued). Documents and interrogatories are sought can be categorized according to the following:

i)  Transactions relating to the sale of the aforesaid CPSs;

ii)  The Mortgage entered into between, among other parties, R22 and R41; and

iii)  A letter dated 26 January 2010 issued to R22 by the Lands Department. 

11.Mr. Mok submits that the documents requested and interrogatories to be administered relate to the background circumstances. The documents and information sought are those which would have existed under normal circumstances if the sales and Mortgage were usual transactions at arm’s length. The aforesaid LD letter is direct evidence showing the extent of breach of the lease conditions by R22.  

Sale and Purchase of the 9 CPSs

12.As regards the sale and purchase of the aforesaid 8 CPSs (i.e. all except CPS No. 66), the specific discovery sought against R22 as vendors, R40 (CPS No. 49), R44 (CPS Nos. 36 & 37), R42 (CPS No. 29), R43 (CPS No. 30), R39 (CPS No. 100), R33 (CPS No. 28) and R34 (CPS No. 35) as purchasers concern the followings categories of documents:

i)  Evidence of payment of deposit/balance of purchase price including cheques, receipts, payment slips, bank statements etc;

ii)  Pre-sale valuation reports/advice;

iii)  Evidence of marketing efforts on selling/knowing about sale such as estate agent agreements, newspaper advertisements etc; and

iv)  Provisional agreement signed.

13.The interrogatories sought concern basically the same matters as discovery to cover situations when no written documents are said to have existed.

The Mortgage of another 18 CPSs

14.In relation to the Mortgage, the specific discovery sought against R22 as borrower and R41 as lender concerns the following categories of documents:

i)  Evidence of funds from R41 to R22 including cheques, receipts, payment slips, bank statements etc;

ii)  Valuation report(s) of the 18 CPSs; and

iii)  Agreement between R41 and R22 together with the other borrowers on the maximum which R22 can utilize out of the US$7 million loan on the security of the said 18 CPSs.

15.The interrogatories sought, again, concern basically the same matters as discovery to cover situations when no written documents are said to have existed. Further interrogatories which the applicants consider relevant include:

i)  Whether R41 is in the business of extending loans when the Mortgage was entered into;

ii)  How R41 is approached by and agreed with R22 on the Mortgage; and

iii)  The relationship between R41 and R22 and the 3 other borrowers.

The Lands Department Letter of 26 January 2010

16.The applicants also sought discovery of the aforesaid letter from R22. It was shown in the Lands Register of the CPSs owned by R22 two letters warning it of breaches of Government lease conditions and threatening re-entry. Both letters referred to an earlier letter of 26 January 2010 issued by LD.  It is submitted by Mr. Mok that this letter is relevant to the question of whether R22’s valuation expert is entitled to assess the EUV of the covered CPSs according to the historical rental when they were used in breach of the Government lease conditions.

The Oppositions

17.R39, R41 R42 and R43 show no appearance. The remaining 5 respondents are represented by 3 teams of lawyers, with Mr. Bernard Mak of counsel representing R22 (vendor), R33 and R34 (purchasers of CPS Nos. 28 & 35), Mr. Hui of counsel for R40 (purchaser of CPS No. 49) and Mr. Alrick Mak of Simon C.W. Yung & Co for R44 (purchaser of CPS Nos. 36 & 37).  

18.Although the parties did not make oral submission on the law governing specific discovery and interrogatories, the tribunal considers, after reading their written submission and the cases[10] referred to, there being no quarrel between them on the applicable legal principles. Apart from relevance, necessity for disposing fairly of the cause or matter or for saving costs remains a key consideration for whether to grant an order in respect of both types of application.

19.Mr Bernard Mak’s opposing submission on behalf of the Rs  can be summarized in the followings broad grounds:

i)  Neither party’ expert has relied on the alleged 9 so-called “suspicious transactions” in compiling the EUV. There is also no apparent dispute in EUV quantification for each of the 18 CPSs charged under the Mortgage and CPS Nos. 66 and 100 (these 2 forming parts of the 9 sales). Whether or not such transactions were genuine is therefore a non-issue;

ii)  The mere fact that the purchase price of a property is higher than its assessed value do not necessarily support a suspicion that such transaction not genuine. There can be numerous reasons for a purchaser to purchase at a consideration he/she considers acceptable, and after all, it is entirely a commercial decision;

iii)  The difference in the valuation between the 2 experts lies in the valuation method adopted: investment method by Mr Siu and direct comparison method by Mr Chan. It is a matter to be decided at trial without having to decide whether the transaction were conducted at arm’s length;

iv)  The evidence does not support the Mortgage being entered into for creating a false appearance that the transaction was genuine. Even if it were, since the values of the securities were not taken into account in the valuation, it is a non-issue. The allegation of missing securities is a red herring;

v)  The production of the LD letter is unnecessary because other letters registered against the CPSs will be sufficient to establish breaches of lease conditions without further reference to this letter; and

vi)  The application was made simply too late.

20.Mr. Hui adopts Mr. Bernard Mak’s submission in support of R40’s opposition. In addition, after the issue of the relevant summons, R40 has voluntarily disclosed its completion letter together with 3 split cheques, and confirmed the said cheques have been duly presented and paid. No other documents were disclosed.

21.Mr. Alrick Mak for R44 also adopts Mr. Bernard Mak’s submissions except he makes further elaboration on the issue of delay by relying on Tsui Koon Wah wherein Stone J refused interrogatories when made 10 weeks before trial[11]. He further submitted it was a fishing exercise with a view to turn non-issues into issues.

Discussion

22.As set out in paragraphs 11 to 13 of my expert/staying decision of 3 February 2015, it is reasonable to presume R40 purchased the relevant CPS with full knowledge of the present application under the LCSRO. Although the LCSRO application was made on 21 February 2013 and the registration thereof with the Land Registry only on 30 July 2013, the redevelopment of KTM was promoted and in fact put into action in as early as 2007[12]. At least by 2010 there had already been an unsuccessful tender exercise initiated by joint effort of KTM owners. Accordingly, it is reasonable to assume, at least provisionally before cross-examination of witnesses at trial, R22 as owners of the majority of CPSs in KTM is fully aware of the potential prices that its CPSs can fetch in the event of redevelopment. Since the earliest sale of the 9 CPSs in question took place on 30 May 2012, it will be a reasonable inference that redevelopment potential, or at least part thereof, has already factored in the sale prices.

23.There is no positive affirmation from R22 and any of the purchasers as to whether the transaction prices reflect RDV or part thereof. Neither is there express confirmation that they are without regards to RDV. They contend by stating that there are various reasons for paying the prices they did without being explicit on this point. In fact at the hearing, Mr. Mok has raised the same question to his adversaries, but has been tactfully avoided by Mr. Bernard Mak. Now each transaction was at a price a few times of that assessed by the applicants’ expert. R22 further relies on a report with EUV assessed more or less at the same level as the transaction prices. In the circumstances, the applicants’ concern that R22 and the related purchasers are advancing a case that the transaction prices only reflect EUV without regards to any redevelopment potential is not without basis. It is, in the tribunal’s judgment, a legitimate and more than reasonable concern.

24.The same legitimate concern is also applicable to the Mortgage. Neither R22 (a borrower as well a mortgagor) nor R41 (the lender) have filed rebutting evidence in response to the applicants’ investigation result. Although it is not apparent what useful purpose the Mortgage serves if it was a sham, the transaction, with the Thailand property non-existent, appears dubious. Mr. Mok of counsel submits that R22 is conducting itself in a pattern for its unarticulated purpose with a view to dressing up an arms’ length transaction. Prima facie, doubts have been created as to the genuineness of the Mortgage. Question of what values have been attached to the 18 CPSs, if the Mortgage is a genuine one, arises. Whether it will be relied on as support for an EUV valued by R22’s expert is a real concern.

25.Accordingly, whether these transactions are genuine and/or at arm’s length are relevant to the issue of EUV. The information sought to be discovered is direct evidence which helps answer the nature of the transactions and whether RDV has been taken on board when the transactions took place. It also impacts directly on the reliability of the respective approach adopted by the parties’ valuation experts whose opinions have produced diametrically different valuations for most of the CPSs.

26.By reasons of the above, the fact that no experts have adopted the sale transactions as comparables in compiling their EUV is no defence to the question of relevance discussed above. Whether the transactions are at arms’ length and whether the relevant parties are acting independently and dealing with each other in a commercial context will help assess which methodology will come to a valuation more reliable and closed to reality.

27.As regards the quantifications of the 18 CPSs for the Mortgage being the same for the 2 experts[13], the fact that 2 similar CPSs sold at as high as $1.73 million and $1.988 million[14] raises the immediate questions of how then R22 will be able to fetch such unusually high price, and whether R22 would be relying on these prices to support a higher EUV. Since neither R22 nor R41 have made their position known, it will only be fair to the applicants to know the background of the Mortgage in order to meet their (and also other respondents’) case at trial.  

28.Turning to the LD letter, according to another letter of LD dated 15 April 2010[15], it was stated that the breaches of lease conditions referred to in a letter of 26 January 2010 (“January letter”) had not been remedied. Further, the “forbearance fee” requested in the January letter had also not been settled. The Government therefore requested R22 to purge the breaches failing which the Government would exercise its right of re-entry to vest R22’s rights in KTM in the Financial Secretary Incorporated (“FSI”) under the Government Rights (Re-entry and Vesting Remedies) Ordinance, Cap 126 (“GRO”).

29.Further, according to another letter of the LD of 23 July 2010[16], it appears all 84 CPSs owned by R22 were then involved in the breach of lease conditions, including using the CPSs for storage, car-repairing, parking of trucks and vans. The breaches, according to this letter, had not been remedied. This letter refers to a number of letters, including the January letter. Apparently the January letter is the first of the series of letters concerning the enforcement action by the Government. The Government had informed R22 that action was being taken to vest the relevant CPSs in the FSI under the GRO.

30.By another letter[17] of 18 May 2011 issued by LD, it was stated that R22 had already purged its breaches. It is apparent from this letter that the Government has the determination to exercise its right of re-entry in the event of subsequent breaches. It is the applicants’ case, which has not been rebutted, that thereafter R22 has never rented out any of its CPSs[18].

31.In the circumstances, the January letter is highly relevant. Apart from stating the extent of breaches of all the CPSs when the Government first inspected the premises, it sets out the “forbearance fee” charged by the Government. This will be highly relevant to the assessment of rental income of the CPSs when they were used in breach of lease conditions, or alternatively, the level of income when the use conforms to the land grant. It may shed light on why no forbearance fee was paid and/or why there being no renting out thereafter. It definitely will help assess the suitability or otherwise of adopting the direct comparison method or the investment method in the valuation.

32.By reasons of above, the tribunal considers the oppositions of the aforesaid respondents ungrounded. The documents requested and the questions to be administered highly relevant as their disclosure may assist the applicants’ case or help challenge or even destroy the respondents’ apparent case on EUV. These documents are normally expected to exist if the transactions are genuine, at arms’ length or between unrelated parties. These documents are expected to be in the possession, custody or power of the parties asked for production. Further, this tribunal is of the view that disclosure of the requested documents or the answers to the interrogatories are very likely to shed light on issues relating to EUV and the suitability of methodology adopted by the parties’ expert and thus their disclosure are necessary for the disposal fairly of the issues of the LCSRO application and probably will cut short the length of trial, thus saving costs.

33.If deprived of the documents/answers to interrogatories, the applicants may not be able to prepare properly its case before trial as the requested information can only be extracted during cross-examination when it is the respondents’ turn to give evidence. By then the applicants have already finished their case. They therefore suffer a disadvantage by not being able to use the necessary information to cross-examine the respondents and their expert(s), until the same is extracted at cross-examination.

34.Mr. Mok submits that the applicants suffer a further disadvantage in that the respondents are entitled to use the transaction prices as open market values to cross-examine the applicants’ expert. Without the requested information, the applicants will not be able, and thus are deprived of a chance, to show that the transactions were not at arms’ length and should be disregarded.

35.The tribunal shares his views. If the requested discovery/interrogatories are rejected, the applicants may suffer double disadvantage as elaborated in the preceding 2 paragraphs. In the tribunal’s judgment, it may amount to irremediable prejudice in the conduct of the applicants’ case, or alternatively may cause undue interruption to the trial if information emerging during cross-examination necessitates an adjournment. These are the situation which the tribunal should try to avoid.

36.Last turning to the issue of delay, no doubts there have been delay in taking out the 9 summonses despite the fact that investigation and requests by letters started as early as June/July 2014[19]. The situation was made worse as the tribunal has to set aside time first for disposal of 2 batches of interlocutory applications taken out by R40 and Rs shortly before the present ones.

37.In any event it is a balancing exercise falling within the discretion of the tribunal. This tribunal notes the tight time frame before trial scheduled to take place on 2 March 2015, and the intervening Chinese New Year holidays. However, the information sought touched on one of the most contentious issues - the EUV of the minorities, and is essential for disposing fairly of many crucial issues. Given the documents are expected to be readily available, no hardship will be expected in their production. If they are non-existent, it is not anticipated there being any difficulties in answering the interrogatories. In the tribunal’s judgment, the affirmations and production of documents can still be made within the below time frame before trial without causing irreparable prejudice.

Conclusion and Orders

38.By reasons of the above, this tribunal grants an order in favour of the applicants against R22, R40, R44, R33, R34, R39, R41, R42 and R43 in terms of the respective summons against each of them, with the following time frame for compliance:

i)  The time for filing and serving of the affidavit or affirmation by the respective respondent referred to in paragraph 1(a) of each summons be on or before noon on 24 February 2015;

ii)  The time for production for inspection of the documents referred to in paragraph 1(b) of each summons be on or before noon 27 February 2015; and

iii)  The time for filing and serving of the affidavit or affirmation as answers to the interrogatories referred to in paragraph 2 of each summons be on or before noon on 24 February 2015.

39.As regards costs, although the applicants are successful in the 9 summonses, this tribunal is entitled to express its dissatisfaction to its delay in application. This tribunal proposes and now makes a costs order nisi that each party is to bear its own costs of the application, such order be made absolute if within 14 days there is no application made to vary the same.

Mr Y C Mok and Mr Jonathan Lee, instructed by Philip T F Wong & Co, for the 1^st to 4^th applicants

MR BERNARD MAK , instructed by Li, Wong, Lam & W I Cheung, for the 22^nd, 33^rd and 34^th respondents

Mr George HUI, instructed by Lui & Law, for the 40^th respondent

Mr Alrick Mak of Simon C W Yung & Co, for the 44^th respondent

The 39^th, 41^st, 42^nd and 43^rd Respondents were not represented and did not appear