Crown Lands Reference No. 18/87
IN THE HONG KONG LANDS TRIBUNAL
SHUN FUNG IRONWORKS LIMITED AND DIRECTOR OF BUILDINGS AND LANDS
SHUN FUNG IRONWORKS LIMITED
DIRECTOR OF BUILDINGS AND LANDS
Coram: Hon. Rhind, J., President and M.W. Hhillips, Esq., Member
Date of delivery of judgment: 29 June 1992
Crown Lands Reference No.18/87
IN THE HONG KONG LANDS TRIBUNAL
Coram: Hon. Rhind, J., President and M.W. Phillips, Esq., Member
Date of delivery of judgment: 29 June 1992
J U D G M E N T
1. For more than three decades now, Hong Kong builders have displayed a voracious appetite for steel bars used in the reinforcementof concrete. Such bars are known as “rebars”. Rebars come in two types. Firstly, there is the mild steel variety, which is normallyround in cross-section. Then there is high-tensile, which is not necessarily round, but can be “deformed” in the sense of being ovalin cross-section, and may be “ribbed” for the better adherence of concrete.
2. High-tensile rebars have made possible the wide floor spans which are a feature of Hong Kong’s high-rise or massive buildings.
3. By the end of the 1970s, consumption of rebars in Hong Kong was approaching the 1 million metric tons per year mark. In the lateryears of that decade, most of that rebar would have been high-tensile. In the 1980s, when, in some years, over a million metric tonsof rebar was used here, 90% or more of it was high-tensile.
4. From 1980 onwards, approximately 70% or more of the rebar used in Hong Kong was imported. Hong Kong, being a free port, allows rebarsto flood in, without let or hindrance. Many of the countries which export rebars to Hong Kong have sheltered their steel industrybehind tariff walls. Any Hong Kong manufacturer of rebar enjoys no protection for his product which has to compete with imports whichcan be dumped on the Hong Kong market for less than their costs to the overseas manufacturer.
5. During the 1970s and 1980s, Hong Kong had two manufacturers of rebar. One of them was Shun Fung Ironworks Ltd (“S.F.I.”), the claimantin the present proceedings, and the other, Siu Wing Steel Ltd (“S.W.S.”). Both of them had their factories located at Junk Bay inan area which was lightly populated, and well suited to industry when the factories were built in the 1960s.
6. In 1981, the news broke that the Hong Kong government (“government”) planned to transform the Junk Bay area into a new satellitetown which, in due course, would house hundreds of thousands of people.
7. It was in November 1981 that SFI received the unwelcome news that its factory site was likely to be resumed by government, so thatthe land could be used for the purposes of the New Town scheme. The period from November 1981 until actual resumption was referredto throughout the case as the “shadow”.
8. Formal notice of resumption was served on SFI on the 30th October 1985, the actual date for the reversion of the land to the governmentbeing 30th July 1986. Although the government formally took possession of the land on the actual resumption date – 30th July 1986- SFI was allowed to continue manufacturing rebars until the 22nd August 1986, and it was not until the 19th January 1987 that SFIfinally vacated the land.
9. As the result of the resumption of its land, SFI has lodged a claim against government under the Crown Lands Resumption Ordinance, Cap. 124, (“the Ordinance”) for a sum, with continuing items, now in excess of HK$1,000,000,000, and still growing, on the basisthat it is entitled to relocate the business carried on at Junk Bay to Shunde County in China where it identified a relocation sitein August 1987. Government disputes that claim, contending that SFI’s right to compensation should be on the basis that its businessat Junk Bay was on or before 19th January 1987 extinguished by the resumption, and the quantum of SFI’s entitlement according togovernment is less than HK$100,000,000.
10. The present proceedings are for the purpose of our determining the correct basis and amount of SFI’s compensation. The rest of thisjudgment sets out the facts, the law, and our conclusions in relation to SFI’s claim.
THE EARLY BEGINNINGS
11. Mr L.Y. Leung founded SFI in 1951, and has remained its Managing Director ever since. The company was started to take over the YingFong Ironworks in Tai Kok Tsui, Kowloon. At that time, Mr L.Y. Leung was aged 28. He had no previous experience of the steel industry,and only thought about getting involved after a friend asked him to look into the accounts of the Ying Fong Ironworks which was thenexperiencing financial difficulty. Mr L.Y. Leung’s business at that time was soap making.
12. The Ying Fong Ironworks was what is known as a “re-roller”, the process on which it was engaged involving the slitting of ships’steel plates and cutting them to an appropriate size, after which the pieces of steel would be heated in a furnace to a point wherethey could be rolled into bars. The rolling was done on a manually operated rolling mill of the type known as “cross-country”. Across country mill is characterised by “loopers” which cause the bar being rolled to make a 180 degree turn while moving from onerow of stands to another, and is to be contrasted with a “straight through” mill where, as the name suggests, all the stands arein the one straight line.
13. The white-hot pieces of steel were passed manually from one part of the cross-country mill to another with the aid of tongs. Thefinished product was a mild steel bar for use by the construction industry. The lengths of bar were somewhat random, depending onthe size of the ships’ plate from which the steel had been cut.
14. Manually operated cross-country mills are labour-intensive, with teams of workmen alternating fifteen minutes work and fifteen minutesrest on what is a dangerous and tiring job.
15. The output of the Ying Fong Ironworks was approximately 200 metric tons of mild steel bars per month.
SFI’s FIRST MINI-MILL
16. A characteristic of Mr L.Y. Leung, revealed by the evidence as a whole, was his consistent striving to improve the efficiency ofhis steel works by modern technology, and to keep increasing capacity.
17. It was not long before SFI went up-market, purchasing a 60,000 sq.ft. lot for itself at Ma Tau Kok at an auction in October 1951.That lot is next to what is now Kai Tak Airport. As well as the lot SFI bought, it also took a permit from the government for theuse of an adjoining piece of land, some 70,000 sq.it. in area (“the permit land”), which gave access to the sea, and also includeda beach which could be used for shipbreaking.
18. On the land which he had bought, Mr L.Y. Leung erected a factory for steel-making and foundry work. In 1953 and 1954 he installed,respectively, a five ton, and a ten ton electric arc furnace for melting scrap steel which would be either cast by teeming into ingotmoulds, or, otherwise, used for foundry purposes. Once removed from the moulds, the ingots were rolled into rebars of various sizes,and also flat and square bars were produced, as demanded by the market at that time.
19. At Ma Tau Kok, SFI continued to use a manually operated, cross-country style rolling mill which it had brought across from the TaiKok Tsui works. In addition, Mr L.Y. Leung, in 1954, installed an automatic rolling mill, made for the most part in his workshops.
At Ma Tau Kok, SFI had created what is known as a “mini-mill”. A mini-mill is characterised by making steel in an electric arc furnacefrom scrap metal. That scrap more likely than not will be locally produced, but it can also be imported.
20. A mini-mill is to be contrasted with an integrated steel works which makes steel from ore, either in a basic-oxygen-furnace or bysome older method such as an open-hearth-furnace. Integrated steel works, on average, use five times as much power as a mini-millto produce a ton of liquid steel, and integrated works cause far more pollution.
21. Other advantages of a mini-mill compared with an integrated steel works are the relatively small site required – an important factorin Hong Kong -, and the much lower capital cost of construction.
22. Further, an integrated works usually has to pay more for transporting its raw material, which is ironore and coke, and its finishedproduct, which will be steel pellets. In contrast, a mini-mill, as we have already indicated, is likely to use local scrap, and islikely to sell its products locally.
23. From its casting process, a mini-mill was formerly likely to have produced ingots, but, nowadays, with more modern technology, billetsare normally produced. Such ingots or billets can then be processed by the mini-mill into rebars or other finished products for localuse. A billet is a slab of steel,. usually square in cross-section, produced by a continuous casting process, of which we will havemuch more to say in due course.
24. As feedstock for his electric arc furnaces, Mr Leung was in part able to rely on the steel recovered when he broke ships. The highpoint in SFI’s activities in that sphere was the breaking of an American aircraft carrier in the 1950’s.
25. While being indispensable for shipbreaking, SFI’s sea access at Ma Tau Kok was also of great importance for receiving scrap and otherraw materials, as well as for despatching finished products.
26. By the late 1950s, SFI was producing something like 14,000 metric tons per annum of round, mild steel rebar for Hong Kong’s buildingindustry. Such well-known buildings as Tak Shing House, Kwong Wah Hospital, and Kai Tak Air Freight Terminal, as well as innumerableothers, were constructed with SFI’s rebars.
27. The foundry business flourished, too. A good customer for pipes manufactured in the foundry was China Light and Power.
28. In addition to making articles for sale, the foundry was also useful to SFI itself in making parts for SFI’s machinery.
29. At the end of the 1950s, SFI occupied a unique position in Hong Kong as the only company capable of performing the whole processof melting and casting steel, followed by rolling into finished products. Its pre-eminence was due to Mr L.Y. Leung’s flair and drive.From knowing nothing about steel-making when the decade opened, he finished it with a solid record of achievement in the form ofthe successful steel works he had built up at Ma Tau Kok.
30. It came as no surprise to Mr L.Y. Leung when the government informed him in 1958 it wanted the permit land back for the purpose ofworks related to Kai Tak Airport. He had, in fact, been expecting that, so had already given thought to the problem of relocation.Without sea frontage, shipbreaking would be out of the question for SFI, and it would no longer be able to barge in scrap and otherraw materials, as well as sending out its finished products. In any event, Mr L.Y. Leung harboured ambitions for a plant with farhigher capacity than could be built on the Ma Tau Kok site, and the new works he had in mind was to be “state of the art”.
31. Fortunately for SFI, it turned out that government was in no great hurry to take back the permit land, and with the friendly co-operationof various government officials, SFI continued its business at Ma Tau Kok while looking for a suitable relocation site.
SFI’s SECOND MINI-MILL
32. It was not until 1962 that Mr L.Y. Leung was able to purchase a suitable site for the mini-mill he had in mind as a replacement forhis works at Ma Tau Kok. What he had been looking out for was a site of suitable dimensions with the important characteristic ofsea frontage and adequate depth of water.
33. The site which Mr L.Y. Leung caused to be purchased by SFI in 1962 was Lot 132 in S.D.5 at Junk Bay. The purchase was made at a publicauction on 12th October that year. That Lot 132 is the subject matter of the present resumption proceedings.
34. What SFI purchased was an area of 387,700 ft for the residue of a term of 99 years, less three days, commencing from the first dayof July 1898. It is common ground that by operation of law, such a lease now extends to the year 2,047.
35. The price SFI paid for the lot was $620,320.00.
36. Under Special Condition IV of the Particulars and Conditions of Sale, the user of the lot was limited to “the purposes of shipbreakingand such other industries operated in conjunction therewith as the District Commissioner, New Territories in his absolute discretionmay permit …” It is common ground that under Special Condition IV, permission was given by or on behalf of the District Commissionerfor the lot to be used “for the operation of steel melting and rolling as an industry operated in conjunction with shipbreaking …”It is common ground, too, that SFI’s rebar-making was within that permitted use.
37. At the time SFI purchased that site, most of it was under the sea. By the conditions of the lease, SFI was required within two yearsto reclaim the parts of the site under the sea, and within four years to erect buildings, costing not less than $387,700.00, exclusive of site formation, foundations, access roads and other ancillary works.
38. Mr L.Y Leung went about developing the Junk Bay site in a very businesslike way.
39. The firm of Gammon was employed for the reclamation which included building a seawall. That seawall would be very helpful for SFI’sshipbreaking activities. A 60 feet-wide road at the rear of the site, required under the conditions of the lease, was blasted outfrom the solid granite found to be there.
40. The reclamation works and the seawall cost in excess of HK$2.25 million.
41. The piling work was also done by Gammon. That piling was done on the basis that, ultimately, the mini-mill at Junk Bay would comprisetwo electric arc furnaces, one continuous-casting machine and two rolling mills. Piling done on that scale affords an illustrationof how Mr L.Y. Leung was always looking ahead with a view to expanding his works’ capacity. Though he intended that the Junk Bayworks would start off with a First Phase of only one E.A.F., one rolling mill and a continuous casting machine, he was already lookingahead to a Second Phase of Expansion when the mini-mill would add a second E.A.F. and a second rolling mill.
42. W.V. Zinn & Co., a firm of consulting engineers with offices in England and Hong Kong, specializing in the design of steel works,was retained by SFI for the structural design of the new factory buildings.
43. The structural steel used in SFI’s new factory buildings was made by Dorman Long Limited, a divison of the British Steel Corporation,which specialised in the production of high quality structural steel.
44. For the layout of the plant and machinery for the new works, Mr L.Y. Leung relied on the experience of himself and the engineershe employed. He saw no advantage in resorting to a specialist for this purpose. SFI had its own Planning Department, made up of SFI’sengineers and top management including Mr L.Y. Leung himself. The Planning Department not only decided upon the lay-out of the plant,but also designed some of the machines, such as rolling mills, which were made, either wholly or partly, in SFI’s foundry at Ma TauKok.
45. By the time Mr L.Y. Leung came to design and build SFI’s new mini-mill at Junk Bay, he not only had over a decade’s experience inrunning the mini-mill at Ma Tau Kok, but had also travelled extensively throughout the world to visit the steel plants of others.The countries on which he concentrated were Austria, the U.K., Italy, the U.S.A. and Japan. Those countries were at the forefrontin mini-mill technology, the leader among them being Italy which had the distinction of being the first to develop the mini-millprocess.
46. Mr L.Y. Leung also caused SFI to subscribe to overseas trade journals as a means of keeping abreast of developments around the worldin relation to mini-mill technology.
47. In the light of what Mr L.Y. Leung had learnt from his reading and from his extensive travels to see other steel works in operation,the plant and machinery he bought for the new factory were, we are satisfied, generally state-of-the-art at the time. we think thatSFI kept itself well informed about the latest hardware available around the world, and was willing to be at the forefront in acquiringnew types of plant and machinery.
THE FIRST PHASE OF SFI’s EXPANSION AT JUNK BAY
48. From Taggliaferri, a leading Italian manufacturer of E.A.F.s, Mr L.Y. Leung bought a modern, 8250 KVA E.A.F. which, we are satisfied, had a nominal capacity to make 22 to 25 metric tons of liquid steel per heat. That had hydraulic controlsand an automatic tilting mechanism for pouring the liquid steel into a casting ladle. That E.A.F. has been referred to as “EAF1″throughout the hearing.
49. In relation to the rolling mill, (“RM1”), which was to be installed in Junk Bay as part of this First Phase of development, we arenot wholly sure of its origin. Parts of it were cast in SFI’s own foundry at Ma Tau Kok, and parts of it were bought from manufacturerswho specialised in making rolling mill equipment. It was an automatic rolling mill, and wholly adequate for SFI’s purposes. Whetherit was state-of-the-art at the time it was made we do not know, but nothing really turns on that for present purposes, although inthe context of valuing SFI’s plant and machinery, the fact that RM1 was home-made is relevant.
50. Where Mr L.Y. Leung really showed his determination to create a mini-mill, as up-to-date as possible at that time, was in his buyinga continuous casting machine for installation at Junk Bay. Continuous casting machines have revolutionised steel making.
51. Making steel ingots as SFI did by the ingot mould method is highly inefficient compared to billets made by concasting.
52. In ingot casting, as practised by SFI, liquid steel was teemed into a batch of forty moulds situated in an ingot casting pit. Ifthings went well, all of the ingots would be of the same size, but, sometimes, there might be a blockage in the runner-bricks resultingin under-sized ingots, and consequent wastage. Once the moulds were filled, any surplus liquid steel would be returned to the E.A.F.,and, in due course, would have to be re-heated.
53. Stripping the ingots from the moulds was labour intensive. If, as was normally the case, SFI wished to roll rebars of different diametersand lengths from its ingots, a great deal of wastage was likely to occur when the rebar was cropped to size. If the bar end was longenough, it could be rerolled, which entails the bar end having to go through a re-heat furnace once again, and, on the rerolling,there will still probably be surplus bar again on cropping. Bar ends which are too short for rerolling have to be treated as scrapfor re-feeding the E.A.F.
54. Yield from scrap to ingot was likely to be about 82%, and from ingot to finished rebar about 85% giving an overall yield of approximately72%. This can be seen from what we have described as the “Tribunal’s Table” at the end of our Section I, entitled “SFI’s REBAR MAKINGCAPACITY”. That shows the yields SFI was getting from such ingot moulding as it still did at Junk Bay in the period covered by SFI’sFinancial Years 1978/9 to 1981/2.
55. In the continuous casting process, liquid steel is poured from the casting ladle into the continuous casting machine’s tundish, whichis basically a funnel from which the liquid steel gravitates to an appropriately shaped copper mould (square in cross-section), aroundwhich cooling water is circulated, causing a solid skin of steel to form around a core of what is still liquid steel. The mould oscillatesto prevent that skin attaching to the mould. The solidifying steel attaches itself to a length of steel inside the mould known asa “dummy bar”. (In due course we will touch upon “sequence casting” which obviates the need for the “dummy bar” after the first ladleof steel has been cast). The dummy bar, together with the solidifying steel, is withdrawn from the bottom of the mould by rollers,with water continuing to spray for completing the solidification. The strand of steel following the dummy bar exits the casting machine,at which point it will be cut by an automatic shear to the length required. The length of steel thus cut is known as a “billet”.
56. The operator of the concast knows from a table what length of billet is required to produce a rebar of a particular length and diameter,so he will set the shear accordingly.
57. Whereas the yield of scrap to ingot is, as we have said, in the region of 82%, the yield expected from scrap to billet from a competentlyrun continuous casting machine will be over 86%.
58. The superiority of the continuous casting process does not end with the casting. The shearing length selected for the billet willbe such that, on rolling, there will be minimal wastage from cropping. A yield of 92% or better can be expected at the billet torebar stage, compared with the 85% we mentioned earlier for ingots to rebar.
59. On the assumption of a billet yield of 86% from scrap, and a finished rebar yield of 92% from billet, one finishes up with an overallyield of 81% which compares very favourably with the scrap to finished rebar yield of about 72% using the ingot mould process.
60. The yields we have mentioned in relation to concasting have been for the purpose of illustrating the improvement which can be expectedfrom that process compared to using ingot-moulds, and, in fact, there was agreement that, with time, SFI’s overall yield scrap tofinished rebar would not have been less than 80%.
61. Although Mr L.Y. Leung’s instincts were completely right in prompting him to invest in a continuous casting machine for his FirstPhase of development at Junk Bay as a way of remaining competitive in relation to overseas rebar producers who dumped their productson Hong Kong’s free-market, the sad fact is that SFI was never able to produce any billets from its first continuous casting machineinstalled in 1967. There was no problem assembling the machine : Mr Ho, one of SFI’s qualified mechanical engineers, was able todo that. Mr Ho also built a cooling tower to provide the cool water necessary to prevent the continuous casting machine over-heating.
62. If it overheats, it is liable to explode. A continuous casting machine, which is designed to cast liquid steel at a temperature inexcess of 1,500 Centigrade, is, undoubtedly, a dangerous and frightening piece of equipment for operators who lack experience workingwith it.
63. Testing of that first concast without charging it with any liquid steel showed there was nothing mechanically wrong with it. No attemptwas ever made to run that concast loaded, so that it never produced a single billet.
64. Had that concast been made to work properly, it should have been able to produce ten tons of billets per hour from the single strandwith which it was originally equipped, but there was also the potential for adding a second strand which would have doubled its capacity: see Mr Roy Leung’s 1st Affidavit, Exh. “RL5”, page 12.
65. It was not entirely clear on the evidence why SFI was never able to get that first continuous casting machine into production. MrHo indicated that one of the problems was getting sufficiently clean water for the cooling process. If that was the reason, it wasnever explained on SFI’s behalf why it could not get sufficiently clean water. Mr L.Y. Leung blamed the manufacturer for not helpingSFI to get the machine to work.
66. The testing of the assembled concast machine was done in 1967. Before then, the evidence shows Mr L.Y. Leung led a charmed existencein the sphere of steel making. From modest beginnings as a re-roller at Tai Kok Tsui in 1951, he had gone on to build a successfulmini-mill at Ma Tau Kok with a capacity of about 14,000 metric tons of mild steel per year, and then set himself the task of creatinga state-of-the-art mini-mill of far greater capacity at SFI’s Junk Bay site.
67. All his other plans for Junk Bay proceeded smoothly until he encountered the problems with the first continuous casting machine whichdefeated him and his workforce.
68. Mastery of concasting was to prove a stumbling block to SFI for many years to come. As we will show, it was not until 1981 that SFI’sworkforce started to produce satisfactory results by concasting.
69. By the end of 1967, all of SFI’s plant and equipment for the First Phase of the Junk Bay works was installed. Besides EAF1, the continuouscasting machine and, RM1 together with its re-heat furnace (“RHF A”), there were two overhead electric cranes for charging the EAF,and a single overhead electric crane for the casting bay. All other necessary ancillary equipment such as cooling beds, run-out tablesand material-handling equipment was also in place.
70. All necessary services such as electricity and water were also provided.
71. For electricity, China Light and Power, at its own expense, had put in an electric sub-station. Water for industrial purposes camefrom a tank which SFI had built on the hillside nearby its site.
72. Most of the rest of the site which was not covered by buildings was available as a scrapyard for SFI. That scrapyard was well-equippedfor shipbreaking and processing scrap for melting. It had all the lorries and mobile cranes it needed for moving scrap around includingthe task of taking it to the scrap baskets in the charging bay. The charging baskets were carried by the charging bay’s cranes tothe E.A.F.
73. With the granting of an occupation permit for its buildings in 1968, SFI was then able to go into production, its machinery (otherthan the continuous casting machine), by then, having been successfully commissioned.
74. From an equipment point of view, SFI had now completed its First Phase at Junk Bay.
75. At this point it is perhaps convenient to take stock of what SFI had achieved at Junk Bay by the time its occupation permit was grantedin 1968. Firstly, it had constructed its formed site with sea frontage bounded by a seawall. Such sea frontage, having, as it did,water of sufficient depth, was ideal for shipbreaking, as well as for the receiving of raw materials and despatch of finished goods.Fuel-oil and drinking water were also delivered to SFI by sea. At the head of the bay nearby, was a beach for SFI to beach any shipsit broke.
76. There was also some access to SFI’s Junk Bay site by road. There was road access from Clear Water Bay Road along Anderson Road andPo Lam Road to the subject site There was also access to Kwun Tong by way of Junk Bay Road which linked up with Po Lam Road. Whilenot marvellous at first, the roads became good enough by 1976 or thereabouts for scrap dealers to bring their wares by lorry to theJunk Bay site. The roads were also good enough for lorries to fetch rebars which had a standard length of twelve metres from thesubject site.
77. All the plant and machinery (apart from the continuous casting machine) was ready by 1968 to go into production. Instead of producingbillets from the continuous casting machine as Mr L.Y. Leung must originally have envisaged, SFI was condemned to carry on the oldfashioned way of ingot casting at Junk Bay until such time as its workforce acquired the special skills needed for concasting.
78. Whereas with the concast, SFI would have had an annual capacity of about 50,000 M/T’s of billets, exclusive reliance on ingot mouldingmeant SFI could produce only about 30,000 M/T’s of ingots yearly. 50,000 M/T’s of billets with a probable rolling yield of 92% orbetter falls to be contrasted with 30,000 M/T’s of ingots with a probable rolling yield of about 85%. Not getting the continuouscasting machine to work frustrated SFI’s plans for a state-of-the-art mini mill.
79. Throughout the time from 1962 when SFI bought the Junk Bay site until 1968 when SFI went into production at Junk Bay on the grantingof its occupation permit, SFI’s existing mini-mill at Ma Tau Kok continued to function, making mild steel rebars, and taking on foundrywork, including making parts for the new mini-mill at Junk Bay. What this amounted to was a phased relocation.
80. Even after the new mill at Junk Bay went into production, the Ma Tau Kok works continued in business. Its activities were run downuntil 1972, when the plant was closed, and all of its activities transferred to the Junk Bay operation.
81. To enable SFI to continue doing foundry work, the 10 ton electric arc furnace was transferred to the Junk Bay works at the time theMa Tau Kok works closed. That transfer was a prelude to the Second Phase of Development Mr L.Y. Leung had in mind for the Junk Bayworks. The foundry equipment was needed to manufacture parts for the Second Phase in the same way it had done for the First.
82. Other machinery transferred to Junk Bay before the Ma Tau Kok works closed included two rolling mills for rerolling the spare lengthsof rebar which were an inevitable by-product of ingot casting. The rerolling mills thus transferred were known as “RM2A” and “RM2B”,and had their own reheat furnace. They were used for rolling bars less than 16mm in diameter.
83. Finance for SFI to develop the SFI site and to complete Phase 1 came from bank borrowings. By 1968, when SFI went into productionat its Junk Bay works, those borrowings amounted to just over HK$22 million (See Exh R18(d)).
84. For the first five years after starting up at Junk Bay, SFI made net losses. As Mr L.Y. Leung explained, it was only to be expectedwhen starting up a new plant. Those net losses were as follow:-
During those years 1968 to 1972, SFI was substantially reducing its borrowings, ending Financial Year 1971/2 with bank loans and overdraftstotalling just over HK$12 million.
THE SECOND PHASE OF SFI’s EXPANSION AT JUNK BAY
85. By 1972, Mr L.Y. Leung was ready to move on to the Second Phase of SFI’s Expansion at Junk Bay. What he had in mind was another E.A.F.(to be known as “EAF3”), with the same capacity as EAF1, namely, at least 22 tons of liquid steel per heat, another rolling milltogether with its own reheat furnace, and a new continuous casting machine.
86. Correctly convinced that a mini-mill hoping for its products to cope with international competition must employ continuous castingtechnology, Mr L.Y. Leung had included in his Second Phase planning an up-to-date continuous casting machine to be of sufficientsize to cast all the liquid steel from EAF1 and EAF3. The foundation already built for the unsuccessful continuous casting machineinstalled in 1967 could serve for the new machine.
87. To assist SFI with the financing of this next phase of its expansion, Mr L.Y. Leung looked for a partner. At the same time, New WorldDevelopment Ltd. (“NWD”), which was then a private company, happened to be in the market for suitable acquisitions as a prelude togetting itself listed as a public company. NWD now engages in a wide range of business activities extending from broadcasting toshipping, but is probably best known as a building developer. At the time of which we speak, namely, 1972, NWD had something of theorder of 9,000,000 square feet of floor space under development. NWD included amongst the subsidaries which it owned or controlled,Hip Hing Limited (“HH”), Vibro (HK) Limited, Tie Yieh Limited and Waking Limited, all of which are in one form or another of theconstruction business.
88. HH (of which NWD owned 55% of the shares) was in the particularly favourable position of receiving from NWD all the constructioncontracts resulting from NWD’s real estate developments.
89. Commencing in the early 1970’s, the trend was already underway in Hong Kong of developing buildings with the large floor spans whichcall for high-tensile rebars. Such high-tensile rebars were, in practice, frequently unavailable in the market in the sizes or quantitiesa construction company needed to get on with a project. A building contractor such as HH, which took on massive building projects,needing as long as two or three years to complete, ideally wanted access to a local mini-mill which could guarantee a supply of high-tensilerebars of the right sizes at a fixed price under a long term forward contract of as much as two to three years duration.
90. The advantages a local mini-mill held over a steel stockist in the eyes of a building contractor in Hong Kong were the flexibilitythe mini-mill could offer, producing the sizes the builder needed on notice as short as two weeks, and the fact that the local mini-millcould schedule the delivery of the rebars to the builder in such a way that minimal space for storage need be taken up on the buildingsite, which, in Hong Kong, is likely to be heavily congested. Often the builder himself would not know what sizes of rebar he requireduntil getting the working-drawings from the architect a few weeks before the rebars had to be used. The building contractor couldthen prepare his bending-schedules, and place his order with the mini-mill for delivery of the actual sizes of rebar required.
91. By contrast, a steel stockist is likely to keep only a limited range of the most popular sizes of rebar for fear of being left withunsold stock, and stockists are in general less flexible about arranging delivery of rebars to building sites. If stockists run outof supplies of rebars of a particular size, the building contractor will have to wait for the next boatload from overseas which mighttake anything up to two months to arrive. The risk of such delay will be alarming to any building contractor working to a dead-line,particularly if penalty clauses can be exercised.
92. Seen from the point of view of a local mini-mill, there is great attraction in having long-term forward-contracts to supply substantialquantities of rebars to a local builder. With close liaison between the local mini-mill and the builder, the mini-mill can programmeits production, with long runs of rebar of a particular size, thus obviating the need for time-consuming roll changes on the rollingmills, and the mini-mill will be in a better position to know what its future requirements of scrap, refractory bricks and othermaterials are likely to be, so that it can order accordingly.
93. A further advantage to SFI from entering into an alliance with NWD sprang from the influence which NWD had with other developersin Hong Kong. On the occasions when NWD entered into a joint venture with another developer, NWD could include a provision that therebars required for the joint venture would come from SFI. Even without anything as formal as a joint venture agreement, NWD couldalways seek to persuade other developers with whom it had good relations to place their rebar orders with SFI once NWD acquired aninterest in it.
94. Henderson Land, for example, was a developer which, from the evidence as a whole, obviously enjoyed a very good relationship withNWD. Henderson Land’s building arm, E. Man Limited, in due course became one of SFI’s best customers for placing the sort of longterm forward contracts for substantial quantities of rebar which SFI welcomed.
95. Other developers with which NWD had good relations were Cheung Kong, Sun Hung Kai, Sino Land and Nam Fung.
96. It was Mr Cheng, the Chairman of NWD, who took the initiative in 1972 in visiting Mr L.Y. Leung for the purpose of discussing whetherarrangements for a linkup between the two companies could be made. From the evidence, it emerged that Mr Cheng made known to Mr L.Y.Leung that NWD was interested in acquiring control of SFI with a view to the NWD Group securing for itself a captive source of locallymade, high-tensile rebars for its future building developments within Hong Kong. At the time, SFI was producing about 30,000 metrictons a year, made up of a mixure of mild and high-tensile rebars.
97. There was a meeting of minds in that Mr L.Y. Leung wanted to increase SFI’s capacity to 100,000 metric tons of ingots or billets.The wish of Mr L.Y. Leung coincided with Mr Cheng’s own idea that he would want SFI to expand if NWD were to take a stake in it.The upshot of their discussion together was that NWD would acquire a 51% interest in SFI on the understanding that Mr L.Y. Leungand his staff would continue to manage SFI, and supply the “know how” for steel making.
98. It was further agreed between Mr Cheng and Mr L.Y. Leung that SFI would increase its steel making capacity to 100,000 metric tonsof rebar per annum, all of which was to be of the high-tensile variety. No particular time scale was explicitly referred to for theattaining of that target. From the evidence as a whole, including an internal SFI directive to its chief mechanical engineer, MrHo, for the new continuous casting machine to be installed by the end of 1975, the probabilities are that both sides contemplatedthat the additional plant and machinery required to produce 100,000 metric tons of high-tensile rebar annually should be in placewithin two or three years of that 1972 meeting between Mr L.Y. Leung and Mr Cheng (see Mr C.M. Ho’s Affidavit 50/1, Exh “HCM-1″,”Working Advice” No.2488 of 25th May 1974).
99. It was no doubt explained by Mr L.Y. Leung to Mr Cheng that SFI would need to invest in another E.A.F., a new roiling mill, and anew continuous casting machine, plus much other ancillary plant and machinery, to be able to reach an annual capacity of 100,000metric tons of high-tensile rebars. Mr Cheng made it clear to Mr L.Y. Leung that NWD would be willing to advance the necessary fundsfor SFI to make the agreed expansion. The arrangement agreed between them was that, whilst NWD would be responsible for the financialmanagement of SFI, Mr L.Y. Leung and his existing management team would continue to be responsible for the day-to-day managementof the company. No mention was made of any limit to the amount of money NWD would be willing to advance to SFI, but there is no disputethat NWD was not offering SFI the equivalent of a blank cheque.
100. A formal agreement (Exh SF135) dated the 15th August 1972 was entered into between Mr L.Y. Leung and NWD. That agreement was to theeffect that in consideration of NWD paying Mr L.Y. Leung the sum of $1.12m and injecting the sum of $5m into SFI, NWD became theowner of 51% of the shares in SFI. There was no mention of the oral agreement between Mr L.Y. Leung and Mr Cheng about NWD’s financingSFI’s expansion. It was not necessary to reduce that sort of oral agreement to writing since Mr L.Y. Leung and Mr Cheng trusted eachother, and were satisfied with their “gentlemen’s agreement” together.
101. Neither did the written agreement spell out that, in essence, the agreement between NWD and SFI was in the nature of a partnership,Mr L.Y. Leung’s contribution to that partnership being his “know-how” in steel making, and NWD’s contribution being its willingnessto fund SFI’s expansion, as well as purchasing a substantial proportion of SFI’s high-tensile rebars under long-term forward contracts.
102. NWD duly got its public listing in November 1972.
103. In its dealings with subsidiary companies in which it had taken a controlling interest, NWD practised what it described as a policyof “hands-off” management. In practice, what that meant for SFI was that Mr L.Y. Leung was left to get on with the day-to-day managementof the company without any interference from NWD. However, on the financial side, any payments made by SFI required the approvalof NWD which had to be a co-signatory on all of SFI’s cheques. This separation of SFI’s day-to-day management from its financialmanagement did not create any problem so long as SFI prospered, but such an arrangement was not likely to work well when, as happened,SFI encountered hard times.
104. It was not only for his own benefit, but, also, for that of his two sons that Mr L.Y. Leung was prompted to push ahead with his plansfor the Second Phase of Expansion of SFI’s Junk Bay mini-mill. As the boys were growing up, their father would often take them toSFI’s steel-works, and, from the evidence as a whole, we do not doubt that, all along, Mr L.Y. Leung, and his two sons, contemplatedthat once the boys had finished their education, they would follow their father’s foot-steps into SFI which they all regarded astheir family business.
105. As the two boys grew up they came to share their father’s passion for steel-making, and we are satisfied that none of them wantedto make his livelihood in any other way.
106. The elder son, Mr Roy Leung, attended Wagner College in the United States in the early 1970’s. The original purpose of Mr L.Y. Leungsending him to the United States was to study engineering of a type which would equip him for a career in the steel industry. Unfortunately,the engineering course proved beyond his capabilities, so he switched to business studies.
107. By 1972, the year when Mf L.Y. Leung started to set about SFI’s Second Phase of Expansion, his two sons had reached the stage intheir lives when they would soon be starting work for S.F.I.
108. During his summer vacation from Wagner College in 1973, Mr Roy Leung was, as it were, apprenticed to his father to learn the practicalside of the business. On graduating the following year (1974), he started working full-time for SFI. His age then was 24. He wasbeing groomed by his father to take over the management of the business. Apart from what he learnt on the job at SFI, Mr Roy Leungtoured mini-mills around the world to see their methods of operation. Mr Len Leung, the younger son, commenced full-time work forSFI in 1973. Having been attached to a large scrap processing company in America for three months to learn the trade, he was putin charge of SFI’s shipbreaking and scrap processing in 1973.
109. For the first three Financial Years of NWD’s controlling SFI, NWD had every reason to be pleased with its investment.
110. For Financial Year 1972/73, SFI’s net profit was $0.815m; in 1973/74 : $6.996m; and in 1974/75 : $2.038m. Those were the last profitsSFI ever actually made.
111. As we have already indicated, Mr L.Y. Leung agreed during his discussions with Mr Cheng in relation to NWD’s taking control of SFIthat SFI would concentrate on producing rebars solely of the high-tensile variety. At the time of agreeing that, we do not thinkthat Mr L.Y. Leung foresaw any great problem for SFI in making all high-tensile steel.
112. High-tensile steel for use in buildings in Hong Kong has to conform with a British Standard by virtue of Regulations made under theBuildings Ordinance. The British Standard in force for high-tensile rebar in 1972 at the time of those discussions was No.4449 of 1968. That BritishStandard specified the chemical composition for rebars, as well as their ability to withstand stress and bending in order to qualifyas high-tensile. As time has gone by, the standard has got progressively higher. After BS4449 of 1968, there was BS4449 of 1978,and the evidence indicated there was yet another version after that.
113. Being able to meet a British Standard was nothing new for Mr L.Y. Leung. We see from document “L.Y.L.1”, exhibited to his affidavit,that the mild steel rebars SFI had been making for years had to meet the requirements of a British Standard. Having succeeded, asfar as we know, in all his steel making endeavours, other than to get the first continuous casting machine to work, Mr L.Y. Leung,in 1972, no doubt, had confidence that SFI would soon be able to deliver on the promise he made on its behalf to Mr Cheng of NWDabout moving over to making rebar which was all to be high-tensile.
114. Already, at the time of the agreement (Exh SF135) between Mr L.Y. Leung and Mr Cheng, SFI did produce some high-tensile rebar conformingwith BS4449, but had not yet got the knack of doing so consistently for high volumes.
115. Knowledge of how to make high-tensile steel to order was not widely disseminated in the early 1970’s, and those possessing it guardedit as a trade secret.
116. Rather than calling in specialists who would have been able to instruct SFI in the ways of mass-producing high-tensile steel, SFIfollowed its usual course of trial and error, hoping to teach itself how to do so.
117. To this end, SFI bought itself a spectrometer. With that, it analysed specimens of high-tensile steel, meeting BS4449, made by othermanufacturers, for the purpose of determining the elements of which it was composed. Ingenious though that reverse-engineering approachwas, it provided no short cut for SFI in its pursuit of the technical knowledge it needed. In fact, it was not to be until the early1980’s that SFI finally mastered the chemistry needed for consistently producing high-tensile steel.
118. Getting the chemistry of high-tensile rebar making right, like getting a continuous-casting machine actually to produce billets,was a field of endeavour which exposed the limitations of the trial and error, do-it-yourself, approach adopted by SFI under theguidance of Mr L.Y. Leung, its Managing Director.
119. To start with, swift progress was made towards implementing the Second Phase of SFI’s Expansion at Junk Bay.
120. In 1973, Mr L.Y. Leung ordered another 22/25 ton nominal capacity E.A.F. from Tagliaferri in Italy. This one had a 12,000 KVA transformerand state-of-the-art controls. It became known as “E.A.F.3”.
121. Installing it at Junk Bay in 1974 can have presented no great problem for SFI, which already had E.A.F.1. Space had been reservedfor E.A.F.3 when the Junk Bay factory had been built in the mid-1960’s, and the necessary piling work had been done for it then.
122. Adding another 40/10 ton electric overhead travelling crane to the casting bay in 1974 would have been a relatively routine taskfor SFI, which already had one 40/10 ton casting crane, besides two 40/10 ton charging cranes. Whilst being immediately useful asa back up, this additional casting crane was also put in with an eye to SFI’s plans for a Third Phase of Expansion at Junk Bay whenSFI intended to introduce sequence-casting.
123. Sequence-casting involves pouring a second ladle of liquid steel into the tundish of a continuous casting machine immediately followingthe first ladle without any interruption. If there is delay between pouring one ladle and the next, a time-consuming procedure ofhaving to re-strand the dummy-bar of the continuous casting machine has to be undertaken.
124. Sequence-casting, however, was not by itself going to increase SFI’s capacity during the Second Phase of Expansion, since the constraintthen was the volume of liquid steel available from the 2 EAFs. The capacity of the 2 EAFs during the Second Phase of Expansion isa topic we explore more fully in our section “SFI’s REBAR-MAKING CAPACITY”. The quantity of liquid steel available for putting through the continuous casting machine could expect no significant increaseuntil FIS introduced water-cooled panels on the EAFs – a step SFI was unlikely to have taken before about 1984 or 1985.
125. Constructing and installing another rolling-mill, together with its re-heat furnace, was the following of a familiar path for SFI.The new rolling-mill became known as “RM3”. It was designed for the larger sizes of rebar – 32mm and 40mm – for which there was agrowing demand in their high-tensile form. The re-heat furnace for feeding RM3 became known as “R.H.F.”C” “. The ordering and thebuilding of RM3 and R.H.F.”C” spanned the 1973 to 1975 period.
126. It was in 1975 that Mr L.Y. Leung started to disengage himself from the day-to-day management of SFI. His elder son, Roy, was appointeda director of SFI that year, and put in charge of the day-to-day running of the company with special responsibility for completingthe Second Phase of Expansion. His work experience at that stage had been his short period of “apprenticeship” to his father in thesummer of 1973, his full-time work with SFI since 1974, and whatever he had learnt on his overseas visits to mini-mills.
127. His age when put in charge of completing the Second Phase of SFI’s Junk Bay Expansion was twenty-five, which, while young for sucha task, was not that much less than his father’s when the latter took over the Ying Fong Ironworks at the age of 28. An advantageenjoyed generally by Mr Roy Leung when he took on these new responsibilities in 1975 was that his father, whom he described as his”master”, was always available for advice on any problems he might encounter in his work, as were also all the engineers and seniorstaff of SFI.
128. Although Mr L.Y. Leung had withdrawn from day-to-day management, he remained Managing Director of SFI in control of overall policy.His two sons kept him abreast of any important business affecting SFI.
129. At the point when Mr Roy Leung took over the Second Phase of SFI’s Junk Bay Expansion in 1975, the only significant item outstandingto complete it was the preparation for, and installation of, a two-strand “Sidercast” – brand continuous casting machine orderedin March 1974 from “Innocenti”, an Italian company.
130. Once working properly, that two-strand continuous casting machine had more than sufficient capacity to produce the billets neededto roll 110,000 metric tons of rebar annually.
131. As usual, SFI looked ahead to yet another phase of expansion : this continuous casting machine could be adapted by the addition oftwo further strands, thus doubling its capacity.
132. Before looking too far down the road, it is necessary first to consider the major challenges in fact facing Mr Roy Leung in 1975.He had to make the new continuous casting machine actually produce billets. He had to master the chemistry necessary for making thosebillets all high-tensile. Those were challenges that no one in SFI had previously surmounted.
133. It was not until October 1978 that SFI got its continuous casting machine into production, the machine having arrived in Hong Kongin early 1977 from Italy. The evidence is not clear on how it came about that a period as long as three years elapsed between theordering of the machine in March 1974 and its delivery in Hong Kong in early 1977. There is a suggestion that some of the delay mighthave been attributable to the manufacturer, but, on the evidence as a whole, it looks as if the explanation for a substantial partof it lay in Mr Roy Leung’s inexperience as a manager. He was prepared to concede that his own learning-curve had a part to playin the slow progress made towards getting the continuous casting machine installed. As he put it, his approach was one of being slow,but sure. That approach made sense for someone so lacking in experience, but we cannot help feeling that a better qualified, moreexperienced manager would have got the continuous casting machine in place considerably faster.
134. Steady but slow progress was made during the period from early 1974 until late 1977 in building the ancillary plant needed to getthe continuous casting machine into production (See Exh SF86). Much of that plant served the purpose of providing sufficient cool,clean water necessary to prevent the continuous casting machine from either exploding, or breaking down. Mr C.M. Ho, SFI’s mechanicalengineer, who had installed the earlier continuous casting machine, was the one put in charge of designing and installing the ancillaryequipment. A list of all the steps taken to order, instal, and commission the new continuous casting machine can be found in ExhSF107.
135. With the start-up of the continuous casting machine, together with an improvement in liquid steel refining assisted by oxygen infiltration,SFI’s plant and machinery was, towards the end of 1978, capable of producing 100,000 metric tons of high-tensile rebar conformingwith BS4449. That was the opinion expressed to us by Mr Willcox, the steel expert called on behalf of government, and we are satisfiedhe was right on that. The further equipment installed by SFI between 1978/9 and 1981/2, while no doubt making SFI’s operations moreefficient and economical, did not increase capacity.
136. To have actually attained that 100,000 M/TS of good product, SFI would have required do adequately trained and experienced managementteam and workforce, possessing the necessary skills for operating a continuous casting machine, fed with liquid steel processed insuch a way as to be fit for making high-tensile billets. In fact, SFI’s management and workforce by 1978 had not progressed muchbeyond the technological level of casting mild steel ingots by teeming into ingot moulds.
137. In our Section I: “SFI’s REBAR-MAKING CAPACITY”, we describe how it would not have been until Financial Year 1984/5 that SFI wouldhave, attained the ability to produce 100,000 metric tons of high-tensile rebar annually. We show there how SFI “marked-time” betweenthe end of 1978, (when the continuous casting machine went into production), and Financial Year 1981/2, with an actual annual productionlevel of high-tensile rebars throughout that period within the range 45,000 to 55,000 metric tons per annum. ‘They were stuck inthat range, so we find, because they could neither master the continuous casting machine, nor had they yet learnt the secrets ofthe chemistry involved in high-tensile steel making.
138. On the plant and machinery side, SFI disputes having completed the Second Phase of its Expansion at Junk Bay before 1982, by when,so SFI contends, its plant and machinery were capable of producing 110,000 metric tons of good product per annum. In addition towhat was in place at the end of 1978, SFI maintains that’ a “Best” shear it bought in 1980 for processing scrap, and “split-shell”charging baskets of increased volume, were essential elements in SFI’s plant and machinery attaining a capacity of 110,000 metrictons of good product annually. The “Best” shear enabled SFI to cut scrap into smaller pieces, meaning that there could be a higherdensity charge into the E.A.F.s. Not only would the charge be of higher density, but also, with the larger “Split-shell” chargingbaskets, a further boost would be given to the volume of scrap SFI could charge each time.
139. In our view, the new “Best” scrap shear and the larger split-shell charging baskets, either singly or collectively, had at most amarginal effect in increasing SFI’s capacity beyond what it had been in 1978. Theoretically, the “Best” shear and enlarged chargingbaskets would have increased SFI’s capacity had SFI been in a position to acquire the sort of scrap which might have benefited frommore shearing. In practice, however, SFI was limited in relation to the scrap it could acquire by two factors. Firstly, SFI, at thebest of times, could only get what was on the market in Hong Kong, and secondly, because of long-standing cash-flow problems, SFI’schoice of scrap was circumscribed by SFI’s being confined to the few sellers of scrap prepared to grant SFI credit. That is a topicon which we enlarge in our Section II: “SCRAP COST”.
140. We think that in the fullness of time, the “Best” shear, and the larger “split-shell” scrap baskets might well have contributed toan increase in SFI’s capacity. That would be likely to occur in the Third Phase of SFI’s Expansion when the capacity of the E.A.F.’swould be increased by water-cooled panels, eliminating the need for refractory bricks to line the E.A.F.s, combined with the arrivalof the happy day when SFI’s cash-flow would have improved to the point where it could buy for cash whatever type of scrap was available,instead of being limited to what credit-granting sellers had on offer.
141. Between November 1980 and May 1981, Danielli of Italy, had rebuilt S.F.I.’s R.H.F.”C” with automatic controls, increasing its capacityfrom 10/12 tons per hour to 14/16 tons per hour, and the same was done for RHF”B” between May and September 1981. SFI’s evidenceis somewhat ambiguous about the effect of rebuilding those EAF’s, and we feel it necessary to make plain our view that the increasein capacity of RHFs “B” and “C” did nothing to increase SFI’S capacity in the Second Phase of Expansion, since, during that phase,the constraint was the volume of liquid steel the E.A.F.’s were capable of producing. Whilst rebuilding of RHFs “B” and “C” was usefulfor the Second Phase of Expansion in that they were more efficient and cheaper to run, saving money on both fuel and labour, thebenefit of their increased capacity would not, however, be garnered until the Third Phase of SFI’s Expansion, For that Third Phase,SFI planned “hot-charging” which involved charging billets hot out of the continuous casting machine into an RHF, saving on fueland leading to a slight improvement in yield, billets to rebars, by reducing scale-loss.
142. Raising the casting-bay overhead crane rails in 1980 was yet another step contemplating higher capacity for SFI’s plant and machineryonce more liquid steel was available from the EAFs. Those raised crane rails were part of a series of equipment alterations madeby SFI looking ahead to the day when there would be an increase in liquid steel, and sequence-casting. The same can be said of themodification of the continuous casting machine’s platform in 1981. That involved cutting away part of the continuous casting machine’splatform to enable ladle manoeuvres for sequence-casting.
143. Again, changing the billet mould sizes from 100 to 110 and 120 sq.mm. in 1982 also assisted sequence-casting by speeding up the rateof flow of liquid steel through the continuous casting machine, as would also the modification of the continuous casting machineby adding a third strand, the preparatory steps for which were also taken in 1982.
144. There is no dispute that SFI took several steps, besides the ones we have explicitly mentioned, to upgrade its plant and machineryduring the Second Phase of Expansion, but none of those measures, the detail of which can be found in Exh “RL14” to Mr Roy Leung’sFirst Affidavit, and in Exh SF86, brought about the effect of pushing SFI’s annual capacity beyond 100,000 metric tons of good product.
145. Generally, the picture presented by Exh “RL14” and exhibit SF86 was one of a mini-mill taking steps to increase its capacity, upgradeits equipment, increase efficiency and reduce costs.
146. Under cross-examination, it was suggested to Mr Roy Leung that no planning could be discerned from the sequence of additions andimprovements he had caused to be made during his management of SFI from 1975 to 1982. However, when Mr Willcox gave evidence forthe government, he conceded that what Mr Roy Leung had done amounted to a planned development, despite there being no formal writtenplan.
147. On the view we take, the steps described in Exhibit SF86 show that Mr Roy Leung was methodically and coherently, albeit somewhatslowly, improving SFI’s plant and equipment as well as increasing its capacity. Like any other rational manufacturer, Mr Roy Leung,in taking the steps he did, was aiming for high capacity, low manufacturing costs, and a product which could be sold at a high price.
148. As we have previously mentioned, our Section I entitled “SFI’s REBAR-MAKING CAPACITY” explains why we consider, in the No-Scheme-World,the plant and machinery installed at Junk Bay had a maximum capacity of 100,000 metric tons of high-tensile rebar prior to FinancialYear 1985/6. From 1985/6 we accept that SFI’s capacity would have been at least 110,000 metric tons of high-tensile rebar, since,by then, we think that SFI would have added water-cooled panels to the EAFs. Once that happened, SFI’s EAFs would have had the capacityto produce the additional liquid steel anticipated in the steps taken by SFI between 1973 and 1982 in preparation for eventual sequence-casting.
149. Lowering of costs was implicit in many of the steps taken by SFI in its Second Phase of Expansion. Automating R.H.F.s “B” and “C”,introducing auto-level controls on the continuous casting machine, converting the semi-automatic rolling mill “2A” into the fully-automaticrolling mill “1A” and doing away with rolling mill “2B”, were all steps designed to decrease costs by reducing labour. Changing fromlabour intensive ingot-moulding to continuous casting combined the attraction of a reduction in SFI’s labour costs while, in addition,leading to a marked improvement in yields.
150. The third prong of SFI’s strategy, namely, a highly priced product, was promoted by SFI’s willingness to produce special lengthsrebars at a higher price than for the standard length, 12 metres bar. An innovation introduced into Hong Kong by SFI was a bar shorterin length than 12 metres. Such special lengths as others offered were invariably above 12 metres in length.
151. For its special lengths, SFI was able to command a premium of some 1 1/2% above the price of standard length bars. That is a topicwe explore in more detail in our Section III: “REBAR PRICE”.
152. As we have already indicated, one of the two factors trapping SFI in the production range of approximately 45,000 to 55,000 metrictons of rebar per annum in the period spanned by Financial Years 1978/9 to 1981/2 was the inability of SFI to get the continuouscasting machine to work efficiently.
153. SFI’s objective was to concast 100% of its liquid steel, with ingot moulding being relegated to a back-up role. However, at the endof Financial Year 1979/80, by when the continuous casting machine had been in operation for approximately 20 months, only about 50%of SFI’s casting was being done through the continuous casting machine. That can be seen from the Tribunal’s Table at the end ofSection I: “SFI’s REBAR-MAKING CAPACITY” under the column “Weight of Billets as % of Gross Output”. From that column, one sees howSFI’s performance on the continuous casting machine remained mediocre until October 1980, which was two years after the machine wasput into production.
154. In the month of October 1980, the actual percentage SFI produced on the continuous casting machine was 55.69%. Starting with November1980, SFI showed a distinct improvement in the proportion of billets to ingots, the figure for that month being 77.34%. After that,the proportion of billets never dropped below the 75% mark (except for the month of July 1981 when the continuous casting machinewas being repaired), and in most months the output of billets was way above 80%. In one month, namely March 1981, it was 94.62%.Unfortunately, the statistics showing how much of SFI’s gross output of ingots and billets was concasted and how much teemed intoingot moulds peter out after September 1981 due to a defect in SFI’s bookkeeping methods.
155. Despite that defect, there are other statistics which lead to the inference that by mid-1981, 86% or more of SFI’s combined outputof billets and ingots was coming from the continuous casting machine. The statistics we have in mind are those in document “RL27”,exhibited in Mr Roy Leung’s First Affidavit. Those, too, are incorporated in the Tribunal’s Table under the column, “Overall Yield%”. The month we pin-point for showing that SFI got 86% or more of its gross output of ingots and billets from the continuous castingmachine is August 1981. With isolated exceptions in June 1983, and February and August 1984, SFI invariably got 86% or better asthe proportion of billets.
156. A good idea of SFI’s improvement in concasting can be gathered from Exh SF92, (as modified by Exh SF191), showing that in each ofthe Financial Years 1978/79, 1979/80 and 1980/81, SFI’S yield from the melting process (i.e. scrap to billet or ingot) was aroundthe 82%-83% mark, whereas from 1981/82 that yield soars to 88% or better. That 5-6% improvement in the melting process was, in ourview, clearly due to SFI’s increasing skill in using the continuous casting machine.
157. A further pointer to SFI’s improvement at concasting by the year 1981/82 is to be found in the figures for the rolling process inthat year. Whereas for the Financial Year 1980/81, SFI’s yield from rolling was 85.64%, for the year 1981/82 it had risen to 89.66%,and for the following year went up to 93.68%. That improvement in rolling yield obviously came about because an ever-increasing proportionof billets, rather than ingots, was being rolled. Billets, cut to size as they are, result in minimal wastage during the rollingprocess, unlike ingots, which are all of the same size, so that, when bars of differing lengths or diameters are rolled, there ishigh wastage.
158. Although this great improvement in SFI’s concasting had occurred in the year 1981/82, that has to be considered in the context ofthe relatively small output of 50,012 metric tons of combined ingots and billets produced that year. We do not think that by theyear 1981/82 SFI was yet so in command of the concasting process it could then produce anywhere near the full capacity of which itsplant and machinery was capable. It still had much distance to travel along its learning-curve on the continuous casting machine.That is a topic to which we will return when we consider what happened to SFI in Financial Year 1981/82 and thereafter. We also dealwith the topic of SFI’s learning-curve in detail in our Section I: “SFI’s REBAR-MAKING CAPACITY”.
159. Besides having to wrestle with the problem of getting the continuous casting machine to produce during the time-span covered, roughly,by Financial Years 1977/8 to 1981/2, Mr Roy Leung at the same time faced the challenge of how consistently to get the chemistry ofhigh-tensile billet and/or ingot-making right. SFI’s yield scrap to billet or ingot was, in part, a function of mastering that chemistry.Once SFI knew how to make high-tensile billets, the rolling of them was no problem. It was in the very nature of billets that theyled to a high yield at the rolling stage.
160. A development occurred in the year 1978 which greatly aided Mr Roy Leung’s efforts to make high-tensile steel : that was the availability,at last, of liquid oxygen in Hong Kong. Mr Roy Leung was instrumental in getting the British Oxygen Company Limited to sell it here.
161. We gathered from the evidence that liquid oxygen performs two useful roles connected with the chemistry of high-tensile steel making(besides a third role in assisting the processing of scrap). Firstly, it can be infiltrated by an oxygen lance into the liquid steelin the E.A.F. for the purpose of separating out impurities. Secondly, it can be used for super-heating. We stand to be correctedover whether the separating out of impurities and super-heating are discrete processes or all part of the same process. Whicheveris correct makes no difference for present purposes.
162. From various witnesses, we learnt about some of the problems posed by the chemistry of high-tensile steel making.
163. It was emphasised to us that if liquid steel is to qualify as high-tensile, it must be very pure and clean. For that state of affairsto happen, the scrap must of good quality, with minimal non-ferrous elements, or contamination by gangue, or impurities such as paint.
164. Getting scrap of the desired quality was a major problem for SFI. A balance has to be struck by a high-tensile steel maker betweenquality and price of scrap used. The steel maker has to aim at scrap of adequate quality but at minimum price.
165. The impression we got about SFI was that no one there had sufficient knowledge to identify optimum quality and price in scrap. MrLen Leung, who was responsible for purchasing all of SFI’s scrap, appears to have had somewhat limited knowledge about scrap forhigh-tensile steel making. When he went to observe the Toshin steel works in Japan in 1979, it came as a revelation to him that scrapcould be separated into 12 categories for high-tensile steel making.
166. No matter how good Mr Len Leung’s knowledge of scrap had been, though, he would still have faced the problem that, at all materialtimes, SFI’s financial illiquidity meant being confined to a handful of dealers prepared to grant credit. He had to take what theyhad on offer.
167. The impression we got was that, as late even as Financial Year 1981/82, no one in SFI really knew whether its lack of success inconsistently getting reasonable yields of high-tensile steel was due to the poor quality of the scrap being used or the lack of expertiseon the part of those actually doing the smelting. The recriminations between SFI’s Scrap Department and Melting Department need neverhave arisen if SFI had called in an expert to assist it in high-tensile steel making, rather than resorting to its trial and errormethods.
168. Another chemistry-related problem in making high-tensile steel is to ensure that the various additives to the liquid steel in theE.A.F. or the casting ladle, in fact get absorbed. The evidence revealed a problem over that in relation to vanadium, an essentialelement for high-tensile steel making the way SFI did it at Junk Bay. That is a problem falling into the “micro-alloying” category.The solution to the particular problem posed by vanadium was offered by Union Carbide Limited which, in 1979, put on the market aproduct called “Nitrovan”. “Nitrovan” combined vanadium with nitrogen in such a way as to overcome the problem of absorption we havejust referred to. SFI counted among the first users of “Nitrovan”.
169. Although by comparison with the manufacture of some alloys, we gathered that high-tensile rebar-making is not considered very “hi-tech”,it struck us it must have been in the nature of a nightmare for a works like SFI, under the leadership of Mr Roy Leung who had notbeen initiated into the secrets of how to do it, but who dared to set out along the path of learning by trial and error.
170. It is hard to be precise on the evidence, but we regard it as reasonable to say that Mr Roy Leung, together with his staff, did succeedsometime during the Financial Year 1981/82 in acquiring mastery over the chemistry of high-tensile steel making.
171. Up to a point, we think Mr Roy Leung was correct in the claim he made before us that by 1982 “everything had come together”. Yes,under his leadership, SFI had learnt how to make liquid steel meeting high-tensile requirements, and had learnt to put it throughthe continuous casting machine to form billets which could then be rolled into rebars with a high yield. However, we cannot accepthis or Mr Medley’s capacity claims, based on the “takeoff-theory” which they, and also Mr L.Y. Leung, advanced.
SFI’ ACTUAL PRODUCTION DURING THE SECOND PHASE OF EXPANSION
172. For present purposes, it is only necessary to look at SFI’s position from Financial Year 1978/9 to 1981/2.
173. As we have already indicated, we have accepted Mr Willcox’s evidence that SFI’s plant and machinery had the capacity to produce 100,000M/T’s of high-tensile rebars yearly from the time SFI commissioned its continuous casting machine in 1978.
174. SFI’s actual production during those years (as shown on the Tribunal’s Table at the end of section I), was as follows :
175. There would have been some curtailment of SFI’s capacity during those years because of SFI’s continuing refurbishment of its plantand machinery. We do not think it necessary for us to make a specific finding on the extent of such reduction of capacity.
176. We do not accept the opinion of Mr Medley, SFI’s steel expert, on the production capacity of the works after allowing for refurbishments,since his opinion presupposes a smaller works’ capacity before refurbishment than Mr Willcox’s estimate, and we preferred Mr Willcox’sopinion.
177. Even on Mr Medley’s estimate of capacity, allowing for refurbishment, SFI produced well below capacity as the following table fromMr Medley on its rolling production shows :-
(The table is based on Mr Medley’s First Report, 30/01 page 17 and Mr Gillett’s First Report 31/01, page 43, with a correction regarding”Production” and “% Capacity Filled” for 1980/81)
SFI’s FINANCIAL POSITION 1975/6 TO 1981/2
178. SFI never made a profit during this period. That can be seen from the following table extracted from Exh. R18(d):
ANAYLSIS OF SHUN FUNG’S PROFITABILITY FROM 1968 TO 1986
179. It can be seen, too, from that extracted material that SFI’s indebtedness started to rise significantly from Financial Year 1979/80with sharp spurts from 1980/1 onwards.
180. Throughout this period of Mr Roy Leung’s stewardship, SFI was, of course, undergoing its Second Phase of Expansion, and the followingextract from Exh. SF55 shows, inter alia, the fixed asset additions SFI was making during that time :-
SHUN FUNG IRONWORKS LIMITED
COMPARISON OF INVESTMENT AGAINST NET PROFIT (LOSS)
181. As revealed by the material extracted from Exh. R18(d), one sees how SFI changed its manner of financing, as from Financial Year1977/78. Before then, SFI had always relied on bank financing, but, with effect from 1977/78 onwards, NWD (or NWD’s financing subsidiary)took over the bulk of SFI’s financing. The reason for this change was that banks were no longer willing to finance SFI as its levelof indebtedness rose. There was no particular significance in NWD taking over SFI’s financing from 1977/78 onwards, since that wasthe oral arrangement contemplated by Mr L.Y. Leung and Mr Cheng in 1972 when they had their discussion leading to the agreement,Exh. SF135, dated 15th August 1972, between Mr L.Y. Leung and NWD.
182. NWD lent to SFI at 1% above Prime, a rate far more favourable than any bank would have allowed, since SFI would have been in no positionto offer adequate security. When we come to consider SFI’s financial position when the Junk Bay works came under the threat of resumption,we will look at the NWD loans again in the context of SFI’s viability.
183. A significant happening occurred at the end of Financial Year 1979/80 when, for the first time, SFI’s liabilities exceeded its assets,with the result that SFI’s auditors qualified SFI’s annual accounts by saying that SFI could only be regarded as a going-concernso long as NWD was prepared not to call in its loans.
184. We accept that the loans were regarded by NWD as long term, and it had no intention of calling them in, since SFI was continuingthe expansion agreed to by Mr Cheng and Mr L.Y. Leung. There can be no doubt, though, that, with the qualification of SFI’s accountsand its mounting trading losses commencing with Financial Year 1979/80, SFI became ever more dependent on NWD. The basic arrangementbetween NWD and Mr L.Y. Leung (together with his two sons) continued to be one of partnership, but the reality was that the moreindebted SFI became, the more NWD was in a position to call the shots.
185. Financial Years 1978/9 and 1979/80 should have been good trading years for SFI, had it not been for the fact that SFI was plaguedby stagnant production while Mr Roy Leung and his staff toiled away at the problems of making high-tensile steel, and getting thecontinuous casting machine to produce a higher proportion of billets. Why Financial Years 1978/79 and 1979/80 should have been goodfor SFI was that the price for high-tensile rebars rose to attractive levels during that time. In Financial Year 1978/79 the averageprice at which SFI sold its high-tensile rebar under long term contracts was $1,557 per metric ton and in 1979/80 rose to $1,898(See Exh.SF216 pages 72 and 73).
186. In 1980/81, the last Financial Year before resumption was threatened, SFI’s net losses leapt to over $28m. All sorts of excuses havebeen advanced on SFI’s behalf seeking to explain its massive losses in 1980/81, but there can be no doubt that SFI was already inbad financial shape before the “shadow” fell. Had SFI’s management possessed the knowledge and experience to push through the SecondPhase of Expansion more expeditiously, rather than linger three years or so, learning how to make high-tensile steel consistently,and how to operate the continuous casting machine efficiently, SFI would have been in a far healthier financial condition when the”shadow” began to loom.
187. Though Financial Year 1981/82 was the actual year (in November) when the “shadow” was first cast, the evidence indicates that SFI’sfinancial results that year remained unaffected by it. That year, SFI recorded massive net losses of over $36m.
188. Besides reduced production associated with disruption while introducing new plant and machinery, or up-grading what it already had,attempts by SFI to explain away those heavy losses include the high interest rate at that time which impacted SFI severely becauseof its high level of debt, and high costs for labour, repairs and maintenance, an element of which was, we accept, due to use oflabour and materials for the Second Phase of Expansion.
189. After Financial Year 1981/82, even in the No-Scheme-World, some of SFI’s manpower would have been redundant due to the completionof the Second Phase of Expansion, and expenditure on Repairs and maintenance would no longer have been inflated by the ExpansionProgramme. However, as there is agreement between the parties over what SFI’s labour costs and costs of repair and maintenance wouldhave been after Financial Year 1981/82 in the No-Scheme-World, it becomes unnecessary to devote any further attention to those items.
190. Another explanation offered on behalf of SFI for its poor financial performance in the years 1980/81 and 1981/82 is the high levelof depreciation at that time sustained by SFI’s plant and machinery, much of which was relatively new. As depreciation is a non-cashitem, it does nothing to explain away SFI’s level of indebtedness to NWD, but would show up as a reduction in the amount of SFI’snet losses.
191. For a more detailed understanding of SFI’s trading position immediately before and after the “shadow” fell in November 1981, recoursecan be made to the report of government’s expert accounting witness, Mr Meocre Li, (Document 42/5A), at p.16, which gives a monthlyanalysis of SFI’s result for the period July 1981 to December 1982. We now reproduce the material relating to the period July 1981to June 1982 :-
SHUN FUNG IRONWORKS, LIMITED
MONTHLY ANALYSIS OF RESULTS
192. Besides being unprofitable for the whole period 1975/6 to 1981/2, SFI also suffered from chronic illiquidity throughout that time.
193. That emerges from the analysis by Mr Meocre Li, in his document 42/05B at page 110 et seq., and page 122, which, by showing SFI’s”Quick Ratio” from 1974/5 onwards, highlights SFI’s shortage of cash in the Scheme-World.
194. The “Quick Ratio” is a liquidity index, showing the ratio between net “quick” current assets (working capital excluding stock) andcurrent liabilities. Stock is excluded from current assets in this measurement because investment in stock must normally be maintainedto permit a company to operate. After deducting the stock from the current assets, one then divides that by the current liabilitiesto arrive at this “Quick Ratio” which measures more immediate solvency.
195. We accepted Mr Li’s evidence that, applying a rule of thumb, SFI’s “Quick Ratio” should have been 1 or better for the company totrade satisfactorily.
196. Instead, the “Quick Ratio” over the period 1975 to 1986 was as follows :-
KEY FINANCIAL RATIOS
KEY FINANCIAL RATIOS
197. The inference to be drawn from SFI’s low “Quick Ratio” is that the company, throughout the period shown, would have had difficultymeeting its current liabilities.
198. Certainly, the evidence as a whole showed that SFI had chronic illiquidity problems from Financial Year 1975/6 onwards. Nowhere wasthis more manifest than in the difficulties SFI experienced in buying scrap. From Mr Len Leung, the Tribunal learnt that, throughoutthe period we are now looking at, SFI all along bought its scrap on credit. This is a topic we examine in detail in our Section II:”SCRAP COST”. SFI’s poor cash-flow, according to Mr Len Leung, had the effect of a constraint on SFI’s choice of scrap as not toomany sellers were prepared to allow SFI credit.
199. Again, in the context of scrap, SFI was not able to purchase any ships for breaking in Financial Year 1978/79 and onwards for thesame reason of lack of ready cash.
200. In a different context, we get a glimpse of how shortage of working capital affected the way Mr Roy Leung conducted SFI’s rebar makingoperations. While he was rebuilding R.H.F.s “B” and “C” in 1980 and 1981, he held back on the level of rebar production as he lackedfunds for doing that and rebuilding the reheat furnaces at the same time.
201. Mr Stewart Leung, the Group General Manager of NWD, with special responsibility for NWD’s subsidiaries including SFI, gave evidencealong the same lines as Mr L.Y. Leung, to the effect that SFI could look to its parent for the funding of its working capital requirements.
202. In the presentation of SFI’s case to the Tribunal, much emphasis was placed on how SFI, in NWD, had this illustrious and wealthyparent. The inference the Tribunal was presumably supposed to draw was that SFI was bathed in its parent’s reflected glory, and thatSFI should be regarded as financially sound, bearing in mind its parent’s vast resources.
203. In the human sphere, some wealthy parents shower money on their off-spring, while others force their children to make their own wayin the world. One should not push those sorts of analogies too far, but something not too dissimilar can sometimes be detected inthe corporate world.
204. As can be gathered from SFI’s “Quick Ratio” Table, NWD stood by throughout the whole period covered by the Table while SFI sufferedcontinuously from lack of adequate working capital. Ultimately, NWD would provide the money for SFI to pay its bills, but meanwhile,SFI suffered a hand-to-mouth existence. Whether this state of affairs was because SFI did not like to ask NWD for money or because,in practice, NWD was unwilling to fund SFI with adequate working capital was not clear from the evidence. Whatever the reason, SFIwas starved of working capital both before and during the “shadow” of resumption. SFI’s capital starvation was not consistent withthe picture of vibrancy those acting for SFI sought to paint for the company in the run-up to the “shadow’s” fall.
205. A major weakness in the management arrangements for SFI was the lack of any effective financial control.
206. NWD in theory had responsibility for SFI’s financial management, but, as NWD lacked know-how on the running of a mini-mill, NWD wasin no position to judge whether SFI was being managed in a cost-efficient way.
207. NWD, in practice, had to leave it to SFI’s management to run SFI’s business in what it hoped would be a financially sound way.
208. Unfortunately, the man actually managing SFI on a day-to-day basis – Mr Roy Leung – did not have a sound grasp of SFI’s cost structure,and he told the Tribunal he was “not so concerned with controlling costs”. For example, he did not know how much electricity SFIconsumed per ton of rebar produced. He did not really understand SFI’s accounts which he described as “a lot of numbers”. Even ifhe had understood them, he still would have lacked vital information on SFI’s cost structure, since the accounts were presented insuch a way that it was not possible to tell whether the price of a consumable had risen or whether more per unit was being consumed.
209. Mr Roy Leung’s limited knowledge of SFI’s cost structure would have been of little consequence if someone else on the productionside assumed responsibility for this, but no one did.
210. It is difficult to see how a manufacturing company can be well managed when those in charge of production do not know the cost structure.
211. With NWD holding financial control but lacking manufacturing know-how as a result of NWD’s “hands off” management policy, and SFI’smanagement team, headed by Mr Roy Leung, having control of production but possessing an imperfect understanding of the costs of production,effective financial management of SFI fell between two stools.
212. SFI, in our opinion, was not well managed from a financial point of view at the time the “shadow” fell, and nothing in the evidencewe heard augured any improvement in the No-Scheme-World, at least until such time as SFI’s cash-flow improved to the point whereSFI could be self-financing.
THE “SHADOW” AND ITS EFFECTS 5TH NOVEMBER 1981 – 19TH JANUARY 1987
A. THE SCHEME-WORLD
213. There is a Chinese proverb pointing out how harsh Fate can be, sometimes even allowing rocks to be hurled at a man who has falleninto a well. Mr L.Y. Leung and his two sons after their long years of trials and tribulations with continuous casting machines andthe chemistry of high-tensile steel must have felt they were getting more than their share of bad luck when, on or about 5th November1981, without warning, they received a letter (Exh.SF94 p.1), announcing the government intended to develop Junk Bay as a New Town,the implication of that for SFI being that it would have to give up its Junk Bay site. We now set out a copy of that letter:
214. At the time of receiving that letter, SFI was in a highly vulnerable position, financially. In the most recent Financial Year, 1980/81,SFI had made a net loss of over $28m. while owing NWD over $54m and banks over $18m. In its long-term contract sales of high-tensilerebar for the month of November 1981, the price per metric ton on average being fetched was only $1,570.57 (See Exh.SFI216, page132). In that month of November 1981, SFI’s output of ingots and billets was 4,577 metric tons, it rolled 5,527 metric tons of rebar,and made deliveries of 4,572 metric tons to purchasers. SFI was, at that time, in the unhappy position of its production costs exceedingthe price it got for its product.
215. On the other hand, however, SFI was close to completing the Second Phase of its Expansion at Junk Bay. All that remained to be donewas to increase the mould sizes on the continuous casting machine from 100mm to 110mm and 120mm which would speed up the concastingprocess, and to replace the refractory bricks in the casting ladle with “Rosaki” bricks which have improved heat-retaining qualities,so that the liquid steel in the ladle will cool less quickly.
216. Those larger moulds and the “Rosaki” bricks were buerought into use by SFI in early 1982. The combined effect of those moulds andthe “Rosaki” bricks was to facilitate casting generally, but, more particularly, they would have an important part to play in theThird Phase of Expansion, contemplated by Mr Roy Leung, who was hoping sometime in the future for an increase in the volume of liquidsteel made by the E.A.F.S, So that seqnce-casting could be carried out
Notes of a Meeting
routinely, with a resultant lift in SFI’s overall production.
217. This sudden threat of resumption was certainly something that Mr L.Y. Leung and his two sons could have done without. It added afresh type of uncertainty to the already existing uncertainty of when SFI was going to reach break-even point from its rebar-makingoperations. Break-even point was a moving target, depending not only on the volume of rebars SFI could make, but also on their saleprice and the scrap price. There is no dispute that SFI could sell whatever rebars it made.
218. The early meeting suggested in the last paragraph of the letter dated 5th November 1981 from government to SFI in fact took placeon the 19th November 1981. As the discussion taking place at that meeting is of significance in showing SFI’s reaction to the threatenedresumption, we now set out opposite a copy of the minute recording the exchanges made. There is no dispute as to the accuracy ofthis minute.
219. The noteworthy points for present purposes covered by that minute were that (i) government had decided the location of SFI’s sitewas such that retention of it by SFI was impossible; (ii) government thought there was no realistic chance of relocating SFI’s shipbreakingactivities within Hong Kong and the prospects for re-siting its steel-making operations here were not very good; (iii) Mr L.Y. Leung,off-the-cuff, thought perphas two to three years’ lead time would be needed to relocate the mini-mill; and (iv) he was concernedthat SFI’s forward contracts, which he described as of about 18 months?duration, might suffer due to uncertainty.
220. Point (iv) is particularly significant. It shows that the crisis SFI was to experience of losing its customers for long term forwardcontracts once news of the “shadow” became wide-spread was not only foreseeable, but actually foreseen, and the prospect of thathappening was communicated to government.
221. That discussion taking place on 19th November 1981, like the letter of 5th November 1981, was on a “without prejudice” basis. Sucha basis was all very well for the government’s side, which was not committing itself to SFI in any way, and, was neither assumingany obligation to proceed with the New Town Scheme, nor, more particularly, to resume SFI’s Junk Bay Lot.
222. This lack of commitment on government’s part, which continued right through until 30th October 1985, when government at last posteda notice of resumption on SFI’s Lot, created practical difficulties for SFI in two respects, on both of which Mr L.Y. Leung had voicedconcern at the meeting with government officials on 19th November 1981.
223. Firstly, the nature of SFI’s business was such that its principal customers for rebars wanted fixed price, long-term, high volume,forward contracts of as much as from two to three years’ duration, since it was not uncommon for major building projects to takethat long. SFI, too, wanted that sort of contract which played a large part in keeping SFI’s order book full, enabling SFI to planlong, efficient production runs without frequent roll-changes, as well as helping SFI plan its purchase of scrap and other consumables.
224. On average over the four Financial Years covering the period up to and including the year the “shadow” settled, (1978/9 to 1981/2),approximately 80% by volume of SFI’s sales were under long-term contracts, the balance being on a cash basis. (See Exh SFI216 pages65 and 66).
225. Both SFI and its contract customers needed to be sure that SFI’s operations at Junk Bay would continue for a sufficient period intothe future, without interruption by resumption, for long-term contractual obligations for the supply of rebar to be honoured. Breachof such obligations could expose SFI’s customers to third-party claims, some of which would involve penalty clauses, and, of course,SFI itself could face massive claims from its own customers for breach of contract.
226. Secondly, planning for relocation was greatly complicated for SFI so long as it did not know whether in fact its land would be resumed.We consider the two to three years estimate mentioned by Mr L.Y. Leung at the meeting of 19th November 1981 with government officialsas the time likely to be required for relocation was reasonable, bearing in mind the nature and complexity of SFI’s business.
227. With the threat of resumption at some indefinite time in the future, SFI was naturally inhibited from committing itself to new long-termforward contracts, since they could be an impediment to taking advantage of any favourable relocation opportunities.
228. As we will in due course describe in more detail, the threat to SFI of resumption at some indefinite time had a paralysing effecton its operations.
229. Towards the end of December 1981′, SFI appointed Jones Lang Wooton, (“J.L.W.”), the international firm of valuers and estate agents,to act for it in negotiations with government concerning the threatened resumption. The individual within J.L.W. appointed to lookafter SFI’s affairs was Mr C.Y. Leung who is not related to the members of the Leung family running SFI.
230. Unsurprisingly, Mr C.Y. Leung from an early stage addressed his mind to the question of the compensation SFI might expect if resumptionof its Lot materialized (See Exh. SF94, page 09). He also persistently sought information on behalf of his client on the topic ofhow “programming for development of the New Town was being refined”, those being the words used by government in its minutes of themeeting of 19th November 1981 (Exh. SF94, page 05).
231. It was not, however, in fact, to be until 12th July 1982 that Mr C.Y. Leung was informed by government concerning any refinementsto its programme.
232. Meanwhile, long before 12th July, 1982, it had become public knowledge that SFI’s Junk Bay site was threatened with resumption. Therewas even an article about it in the March 1982 edition of the Shui On Quarterly, a trade magazine circulated amongst Hong Kong’sbuilding contractors and developers.
233. Once the news got around that SFI’s works might be resumed, SFI found that, generally, its customers were no longer willing to enterinto new long-term forward contracts.
234. We accept Mr Roy Leung’s evidence to the effect that, in or about the first half of 1982, SFI was contacted by many of its customers,enquiring whether it was in a position to honour new long-term forward contracts in the light of the threat of resumption it faced.In reply to such queries, SFI made the truthful answer that, not knowing when it was going to be resumed, it was in no position tosay whether in practice it would be able to honour such contracts. Prospective customers were, generally, unwilling to place anynew long-term contracts with SFI in such circumstances.
235. During the six months July 81 to December 81, SFI entered into long-term contracts to sell 31,148 metric tons of its rebars. Thatworked out as a monthly average of 5,191 metric tons. (See Exh. SFI216, page 132). For the six months January to June 1982, therewere contracts of the same type for 36,678 metric tons – a monthly average of 6,113 metric tons (SFI216, pages 132, 133)
236. After SFI’s best ever month in April 1982, when contracts for 25,212 metric tons of rebars were signed, new contract business startedtapering off, with contracts for 5,335 metric tons in May, 2,878 tons in June, and after that, a relative dearth of orders (SFI216,pages 133-136).
237. It is not easy to pinpoint precisely when SFI started to be deserted by its long-term contract customers. The picture is confusedby lags, which might be of weeks or even months, between SFI and its customer fixing a price, and the actual signing and dating ofthe contract.
238. The impression we get is the abandonment of SFI by the contract customers would have occurred roughly in March to May 1982, by whenSFI’s plight would have been common knowledge.
239. Presumably amongst the first of SFI’s customers to learn of the threat would have been Hip Hing (“H.H.”), through their common parent,NWD.
240. HH had been far and away SFI’s best customer over the years, accounting for approximately half of all the high-tensile rebars SFIsold. We now reproduce a table from Exh SFI216 at page 115, showing what proportion of HH’s purchases came from SFI:-
SHUN FUNG IRONWORKS LTD
ANALYSIS ON STEEL BAR PURCHASES BY
HIP HING CONSTRUCTION CO. LTD.
241. One of the cruellest effects of the “shadow” for SFI was the defection of HH.
242. Unbeknown to SFI, NWD had indicated to HH that the latter should generally stop entering into new long term rebar contracts withSFI because of the threat of resumption. That was a sensible directive for NWD to give HH from a business point of view, since NWDwished to avoid HH becoming a casualty of the misfortune which would be visited on SFI in the event of resumption. HH was told byNWD to set about building up a long-term relationship with a different supplier of high-tensile rebars. As HH preferred to deal witha local producer rather than a stockist, the only alternative to SFI was Siu Wing Steel (“SWS”). SWS, which had been rolling rebarsfrom billets at its Junk Bay works since the 1960’s, and had commenced its own melting operations in 1980, was happy to accept HHas a customer.
243. From a position of not placing any rebar business with SWS before 1982, HH from that year onwards became its good customer, as canbe seen from the following table (Exh SFI216, page 112):
Analysis of Steel Bar Purchases by
Hip Hing Construction Co. Limited
244. That table is based on deliveries. A glance at the documentary evidence relating to contracts (Exh SFI216, pages 142 to 148) showswhat a major customer HH became for SWS’s rebars. For example, in Financial Year 1986/7, HH placed contracts with SWS for 72,648metric tons, and in 1987/8 45,602 metric tons. HH was an extremely valuable customer for a mini-mill.
245. Instead of NWD informing SFI it had told HH to place its rebar contracts elsewhere, NWD made no communication to SFI about this,and the only way SFI discovered it had lost its best customer was when SFI came gradually to the realization that it was no longerreceiving major contracts from HH.
246. There were still occasional contracts for SFI from HH, but not of the same magnitude as before, and the contracts were of relativelyshort duration. After being told by NWD to build up relations with another supplier of rebars because SFI’s works might be resumed,the only contracts HH risked putting SFI’s way were those where default by SFI would not mean any great loss for HH.
247. Faced with the dilemma of whether to enter into long-term forward contracts which it might not be able to honour if resumption camequickly, and which also might pose an obstacle if it found a suitable re-location site, SFI itself made a policy decision in or aboutJune 1982 not to enter into contracts of more than 6 months’ duration for the sale of its rebars. Because of the time taken up innegotiating such contracts, the reality was such contracts were, in effect, of approximately 9 months’ duration, rather than thenominal 6 months referred to in the contract documents. At the same time SFI decided to concentrate on cash sales.
248. We now set out a copy of a minute of what transpired at the meeting on 12th July 1982 held between Mr C.Y. Leung of JLW and variousgovernment officials concerned with the Junk Bay New Town.
“Note of Meeting
At. J.B.D.O., 5 Bowen Road, Hong Kong 12 July 1982
re Shun Fung Ironworks S.D. 5 Lot 132 Junk Bay
1. Mr Leung had asked to be briefed on the present situation subsequent to recent Government decisions on the New Town and earlier discussionshe had had with DLO/SK. He advised that his clients were studying the options which seemed to be open to them.
2. STP briefly outlined recent events, including LDPC’s approval of the ODP and action on the first part of the town. He confirmed thatclearance of the Shun Fung site (and others) would be necessary to achieve this.
3. A firm programme had been set which required a cleared site to be available in December 1985 so that land formation and contingentengineering works commenced in January 1986. Additionally it would almost certainly be necessary to reclaim the sea adjacent to thelot early in 1984 which would imply a two year period without direct sea access.
4. J.B.D.O. was studying how some (albeit less convenient) sea access could be retained for Shun Fung and other companies in asimilar situation – it is currently envisaged that a temporary ‘wharf’ be created on land a few hundred meters south of the presentsite. Details and management arrangements are currently being looked at.
5. In reply to a question from Mr Leung, STP stated and DLO/SK confirmed that Government had looked for possible relocation sites for the industry but had concluded that none could be found thatmet appropriate criteria. Should the company wish to suggest a site Government would, of course, carefully consider it.
6. The general conclusion of the meeting was that there seemed little alternative to the cessation of the company’s present activities.
7. CTP briefly outlined the two options which seemed worthy of further study. One was some form of voluntary surrender and regrant for anappropriate new use. The O.D.P. zoned much of the area including Shun Fung for R.1 but the boundaries of the existing site were notat all appropriate for the new situation. The other option was to resume.
8. In reply to Mr Leung, DLO/SK and CES/LD explained, inter alia, that as the regrant option would be deemed to be voluntary, no compensation would be payable for cessationof industrial activities – valuation would be based on an ‘open site’ basis, with premium for the ‘new’ use assessed on a marketvalue basis.
9. DLO/SK explained that the resumption option would attract compensation based on the terms of the Resumption Ordinance.
10. STP explained the concept of three high density ‘district’ centres for the town and indicated the relationship of the projected R.1 developmentto it. He considered that any development there would need to be subject to carefully considered control parameters to ensure thatthe building massing, access etc. was suitably integrated with the adjacent areas.
11. Responding to Mr Leung, CTP and DLO/SK agreed that the time was now ripe for Government and the industrial companies to commence negotiations and he was invited to consulthis client accordingly.
12. CTP suggested that JBDO would produce an outline ‘brief’ for development of the R.1 land during the next 6 weeks to 2 months and forwardthis to DLO/SK who could base subsequent discussions with Shun Fung on its content if the company indicated interest-in-principlein a change of use.
13. DLO/SK indicated that he would be happy to progress (sic) early discussions with the company on either option mentioned.
14. Mr Leung agreed to consult his clients on these points. Meeting closed 4.00. “
249. On behalf of government, it was strongly urged in the proceedings before us that the programme revealed by paragraph 3 of that minute,to the effect that it would not be until December 1985 that the government would require a clear site from SFI, and that SFI wouldcontinue to enjoy sea-access until early in 1984, demonstrated how unreasonable SFI had been in June 1982, by then putting into effectits policy of not accepting contracts of more than six months’ duration. According to the Crown, there was no reason why, in thelight of what was said at the meeting of 12th July 1982, SFI should not have accepted contracts of at least 18 months’ duration.By jumping the gun in June 1982 with its “six months only” policy, SFI had, itself, been the cause of any loss or damage it suffered,so government’s argument went.
250. We do not agree with government’s argument that SFI was, in effect, the author of its own misfortune. Both before and after the meetingof 12 July 1982, it was, in our view, natural and reasonable for SFI to have a policy of not accepting contracts of more than sixmonths’ duration since SFI needed to avoid contractual commitments which might hinder SFI’s taking up relocation opportunities asand when they arose.
251. To be told in July 1982 that government thought it would need a cleared site by December 1985 meant for SFI that, as it needed 3years to relocate, it would want to start such an exercise at the beginning of 1983, from when it would not want to be burdened byon-going long term contracts. On the other hand, a six months contract made in mid-1982 would not intrude into the time when SFIwould want to start re-locating.
252. In particular, SFI would need to move fast with relocation as it would encounter grave difficulty getting its equipment away onceit lost sea-access.
253. On the face of it, the minute of 12th July 1982 superficially, at least, gives, the impression that government was bending over backwardsto be helpful to SFI, but nothing government said at that meeting addressed SFI’s major concern about whether resumption would, infact, go ahead at all.
254. At a further meeting on 22nd December 1982 between a government representative and Mr C.Y. Leung of JLW, the government side explainedthat there had been a revision of the government’s New Town Programme, so that government would not need SFI’s site before July 1986and the loss of sea frontage would not occur before mid-1989. (See Exh. SF94, p.26). At that meeting, however, government would stillnot commit itself on whether SFI’s land was to be resumed, with Mr C.Y. Leung being told on that occasion no decision as to whetherhis client’s land was to be resumed could be expected until late in 1983.
255. On the view we take, SFI’s operations were blighted from the time in early 1982 when it became public knowledge that SFI’s Junk Baysite was threatened with resumption. After Mr C.Y. Leung’s meeting with government on the 22nd December 1982 failed to bring governmentdown from the fence on whether it was prepared to resume SFI’s Junk Bay site, SFI tried a new tack, getting its solicitors to senda letter, dated 10th February 1983 (Exh. SF94, pp.27-36), which threatened the government with legal action unless it was preparedto commit itself to resuming SFI’s land.
256. Whereas there had been friendly negotiations between SFI and government before SFI’s solicitors’ letter of 10th February 1983, afterthat, government treated SFI coldly, albeit correctly. SFI, through its representatives, continued to press government for a firmdate for resumption, but government, until the actual notice of resumption was posted on SFI’s land on 30th October 1985, refusedto commit itself, pointing out that how SFI chose to conduct its business meanwhile was a matter for SFI to decide for itself.
257. After the meeting of 12th July 1982 between Mr C.Y. Leung and government representatives, but before the next such meeting on 22ndDecember 1982, SFI was required by NWD radically to reduce costs.
258. Even had there been no threat of resumption, and/or no intervention from NWD, it had been contemplated by Mr Roy Leung all alongthat he would make some of SFI’s staff redundant once the Second Phase of Expansion was completed. It had, for example, been in hismind before the threat of resumption that he would lay-off the staff from rolling mills, 2A and B, since there would be no work forthose mills once the continuous casting machine superceded ingot moulding. Rolling mills 2A and B were needed to reroll the off-cutswhich were a feature of rolling rebars from ingots. Billets, being, as they were, cut to the right size for a particular length anddiameter of rebar, there simply was no spare piece of bar for rerolling. He had also contemplated man-power savings with the newDanielli RHFs “B” and “C” which were semi-automatic. Besides saving man-power on particular pieces of equipment, Mr Roy Leung hadalso contemplated that, once the Second Phase of Expansion was completed, the extra men needed generally for that Expansion Programme,would be laid-off.
259. However, under pressure from the Chairman of NWD, Mr Roy Leung was required towards the end of 1982 to make far more drastic cutsin SFI’s work-force than he had originally envisaged taking place when the Second Phase of Expansion was completed.
260. Because of the uncertainty created by the threat of resumption, and the dramatic fall in new long-term forward contracts from themiddle of 1982 onwards, Mr Roy Leung was presented with the choice of totally stopping SFI’s steel-making operations at Junk Bay,or changing to a low cost, low output operation with greatly reduced staff. He opted for the low cost, low staff regime, which meantthat he had to dismiss 185 of SFI’s labourforce, leaving him 125 men, which was just sufficient to operate one shift per day. Thestaff dismissals took place at Chinese New Year, 1983.
261. SFI’s operations at Junk Bay continued with just the one shift until August 1986 when operations ceased. From 1982/3 until then,SFI had both low output and low sales, as can be seen from the following table:
262. In the Scheme-World under the shadow, SFI’s net losses and indebtedness continued to mount as may be seen from the following table:
263. At the time the notice of resumption was posted on the Junk Bay site on 30th October 1985, SFI had no alternative site for re-location.Neither had it such a re-location site on 30th July 1986, when, by virtue of s.5 of the Crown Lands Resumption Ordinance, the Notice of Resumption caused SFI’s Junk Bay site to revert to the Crown. Even when SFI finally vacated the Junk Bay site on 19thJanuary 1987, it still had not found a re-location site.
264. From the evidence as a whole, it is clear that SFI had realized from 1982 onwards that the possibility of re-locating within HongKong was remote. (See Exh.SF138, JLW’s letter of April 26, 1982 from Mr C.Y. Leung to Mr L.Y. Leung, and a letter dated July 14,1982 between the same parties. See also Exh.SF94 p.20, being government’s notes of the meeting 12th July 1982 between Mr C.Y. Leungand various government officials, and Exh.SF94, p.32, being the letter dated 10th February 1982 from SFI’s solicitors, McKenna &Co. to government, acknowledging the unlikelihood of a suitable re-location site within Hong Kong.)
265. Mr Roy Leung, in his evidence, sought to give the impression that he never gave up hope of finding a re-location site within HongKong, but, we are satisfied from the evidence as a whole, he must have known from about 1982 onwards that SFI had no realistic prospectof re-locating within Hong Kong. Even if Mr Roy Leung genuinely had continued to believe that SFI might be re-located within HongKong, we do not think that would be of any significance since the only view which really mattered was NWD’s since they were the majorityshareholder.
266. Apart from getting in Colliers to value the plant and machinery at Junk Bay on or about March 1986, SFI did nothing to prepare itsplant and machinery for a possible re-location until at least after the 22nd August 1986, which was the date SFI was required bygovernment to cease manufacturing activities at Junk Bay. From that date until finally vacating the site on 19th January 1987, SFI,so we gather, started perfunctorily to decommission some of the plant and machinery. As SFI never had a re-location site when vacatingJunk Bay on 19th January 1987, it is easy to see why SFI did so little to prepare the plant and machinery for re-location. AfterSFI vacated on 19th January 1987, the government took over the plant and machinery, auctioning it off in May 1987.
267. We do not doubt that, from the day SFI received government’s letter of 5th November 1981, raising the spectre of resumption, rightthrough until 19th January 1987 when SFI physically left Junk Bay, Mr L.Y. Leung and his two sons consistently wished to stay inthe mini-mill industry by re-locating if they had to leave Junk Bay. The views of Mr L.Y. Leung and his two sons did, however, inour view, carry less and less weight with NWD the longer the Second Phase of Expansion dragged on and the more SFI became indebtedto NWD. When, in 1972, Mr L.Y. Leung sold 51% of the shares in SFI to NWD, it really was a partnership, with NWD and Mr L.Y. Leungbeing more or less on an equal footing. By 1981, however, the reality was that NWD had become, far and away, the dominant partnersince SFI by then was wholly dependant on NWD’s continuing financial support for its survival.
268. One can detect the overwhelming shift of power in NWD’s favour from the way it treated Mr L.Y. Leung and his two sons in relationto HH when, at NWD’s bidding, HH switched its new long-term forward contracts from SFI to SWS. NWD did not even feel it was necessaryto tell SFI what had happened. SFI only found out in the fulness of time when it dawned on SFI it was no longer receiving new forwardlong term contracts from HH. It is inconceivable that NWD would have treated the Leung family in that way had NWD still regardedthem as partners.
269. We consider the evidence shows that, unlike the Leung family, NWD had no qualms once resumption was threatened about taking SFI outof the mini-mill business if that looked to be the most profitable course. Despite Mr Stewart Leung’s protestations to the contrary,we are satisfied that NWD, during the “shadow”, did not at all times regard SFI’s remaining in the mini-mill business as essential.It is clear from the bundle of correspondence, Exh.SF94, that, rather than re-locating the mini-mill, NWD was prepared to deal withgovernment on the footing of a surrender of the Junk Bay site in exchange for land to be used for residential or other purposes notinvolving the running of a mini-mill.
270. The clearest evidence of NWD’s lack of commitment to keeping SFI in the mini-mill business is to be found in the work-papers of PriceWaterhouse, the auditors for both NWD and SFI, in relation to the observation made by Mr Alex Chau, one of NWD’s financial controllers,to a Price Waterhouse auditor in November 1983 that, whatever the outcome of the resumption threatened for SFI, the ironworks wouldbe closed.
271. Mr Stewart Leung, in his evidence, at one point disputed that Mr Alex Chau had any authority to make such an observation, and atanother point, sought to put a harmless gloss on Mr Alex Chau’s remark, by saying all it meant was that, when SFI’s land was resumed,SFI would have to close down its ironworks on the Junk Bay site.
272. In our view, the meaning of Mr Alex Chau’s words could not have been plainer. We gained the impression that Mr Stewart Leung wasblustering when he tried to contend that Mr Alex Chau had no authority to say what he did.
273. At the time Mr Alex Chau spoke, Hong Kong’s economy was undergoing a severe depression, and SFI was still continuing to lose moneyheavily for NWD, with no respite in site. Whilst it was no doubt useful for NWD to have its own captive supply of rebars, we do notthink too much can be made of that point. High-tensile rebars made to a British Specification are basically a commodity, with onesupplier’s rebars being very much the same as another’s. Being able to get special lengths, plus other advantages such as being ableto schedule deliveries from SFI was, no doubt, valuable to NWD, but there has to be a trade-off between convenience and cost. Itwas worth NWD’s while to pay a little extra for its rebars in return for the benefit of a captive supply of them, but above a certainprice, it would make no commercial sense for NWD to keep SFI’s mini-mill going.
274. Although the thinking on the part of NWD’S management in 1983 was to get out of the mini-mill business, regardless of resumption,we are satisfied that NWD had changed its mind by the time resumption actually took place in July 1986. By then, the economic outlookwas no longer so bleak.
275. By 19th January 1987, when SFI finally vacated the Junk Bay site, the economic climate in Hong Kong had, if anything, improved slightlyfrom June 1986, and we are satisfied that, by then, NWD was intent on re-locating SFI’s mini-mill provided government was preparedto finance it with compensation moneys arising from the resumption.
276. From time to time between the initial threat of resumption in November 1981, and SFI’s exodus from Junk Bay in January 1987, variousovertures were made either to NWD or SFI for the purchase of SFI’s plant and machinery or to enter into a joint venture with SFIto move the mini-mill to such places as Indonesia, Taiwan or China, but none of those came to anything.
277. During the period from the threat of resumption till when SFI left Junk Bay, SFI, either by itself, or through the medium of JLW,had looked both in Hong Kong and in neighbouring countries for a re-location site, but in vain.
B. THE NO-SCHEME-WORLD (5th NOVERMBER 1981 to 19th JANUARY 1987)
278. For the reasons we give in our Section I headed, “SFI’s REBAR MAKING CAPACITY” we do not think that the “shadow” of resumption affectedSFI’s output for the Financial Year 1981/82. As there was no effect on output for that year, neither was there any effect on SFI’soperating results or income for that same period. (For the sake of completeness, we draw attention to our not having overlooked thatin Arthur Andersen’s Report 42/05E(ii), Annexure A, Appendix I, showing Past Loss of Profits due to Anticipation of Resumption, thereappears a difference of $0.997 million for the Financial Year 1981/82 between the restated loss of $20.913 million and adjusted lossbefore taxation of $21.910 million. That difference is explained in Arthur Andersen’s Report 42/05A at p.18 as arising from severancepay, and we understand there is no point of contention between the parties over this).
279. We find that for Financial Years 1982/83 to 1986/87, SFI’s output of high-tensile rebars, average delivery prices and scrap pricesyear by year would have been as follows:-
The explanations for those detailed figures will be found under our Sections entitled I : “SFI’s REBAR-MAKING CAPACITY”, II : “SCRAPCOST”, and III : “REBAR PRICE”. The whole picture of SFI’s performance over this period in the No-Scheme-World is to be found inrevised Appendix II Alternative 2 of Arthur Andersen’s Revised Appendices of 18th December 1991. That revised Appendix is based onour findings, as set out in our Section II entitled, “SCRAP COST” that SFI would have bought its scrap on credit until such timeas it was able to switch to cash from its own cash-flow. That revised Appendix II shows that, even without the “shadow”, SFI wouldhave made losses until Financial Year 1986/87.
280. When one considers the huge amounts of money SFI has claimed in the present proceedings, the difference between what we find SFIwould have made in the No-Scheme-World and the Scheme-World for this period is not large, being a mere $13.736 million. The detailsof how that sum is arrived at are to be found in Arthur Andersen’s Alternative 2, Revised Appendix I, of 18th December 1991. Thereis no dispute as to the methodology to be followed for this calculation, the only item of dispute in it being the restated loss (No-Scheme-World)from Appendix II.
281. Thus, SFI was $13.736 million worse off during that period, because of the threat and fact of resumption. With losses of over $20million in each of the years 1981/82, 1982/83 and 1983/84 in the No-Scheme-World, NWD, even in the No-Scheme-World, would still,almost certainly, have “breathed down” Mr Roy Leung’s neck, to use his own expression.
282. It is not inconceivable that, in the No-Scheme-world in those three Financial Years from 1981/82 to 1983/84, NWD would have orderedSFI to stop producing or, at least, to produce less, as a means of reducing losses, but we incline more to the view that, somehowor other, SFI would have muddled through, and been left to produce at the level of output we have already shown. The situation would,however, have been very different from the one which Messrs Medley, Gillet and Best sought to portray of a supposedly “vibrant” producerwith high output, high prices for its rebars, but low prices for its scrap. Even in the No-Scheme-World, as we discern it, SFI wouldhave staggered from one crisis to another because of continuous poor liquidity.
283. A return to the topic of NWD’s loans to SFI is convenient at this point.
284. In our view, there is no scope for doubting that, from the time NWD first started lending SFI money in 1978, until at least 1984,when, under the “shadow'”, SFI’s financial position became critical, both SFI and NWD proceeded on the basis that the loans wereto be interest-bearing. That is plain from paragraphs 91, 94 and 98 of Mr L.Y. Leung’s Affidavit, and paragraphs 9, 22, 23 and 25of Mr Stewart Leung’s First Affidavit. Sometimes loans from shareholders can be treated as capital. An example of that type of situationcan be found in Glover’s Valuation of Unquoted Securities at page 43. Where shareholders make interest-free loans to a company itcan be reasonable, in appropriate circumstances, to treat such loans as capital.
285. Mr Best has sought to argue that NWD’s loans to SFI were capital in nature (See CCS, Sect.6, Vol.2, page 63), since the interestcharged was only Prime plus 1% which was 2% or 3% less than a bank would have charged SFI in the unlikely event of a bank being preparedto lend anything, no matter how high the interest, to a company in such poor financial health as SFI.
286. Although the rate of interest NWD charged SFI was less than a bank, that rate of interest was by no means negligible.
287. SFI’s having to pay NWD interest at all is in our view incompatible with the loans being treated as capital for accounting purposes.
288. We have no wish to be drawn into a sterile, semantic argument on what is and what is not capital. Our only concern is the practicalone that SFI’s accounts for the No-Scheme-World, in the context of SFI’s viability, should not be allowed to show an unfair pictureby disregarding the interest of Prime plus 1% which would, undoubtedly, have continued to accumulate against SFI in NWD’s favour,had it not been for the threat of resumption.
289. On the point of deducting interest on the NWD loans from SFI’s losses for the purpose of the restated Profit and Loss Accounts ofSFI set out in Appendix II, it was common ground this should be done, and the common approach on this is also reflected in each sidesAppendix I and Appendix III.
290. In the No-Scheme-World, the Leung family would have continued to hold 49% of SFI in the same way as they had before the “shadow”.
291. After October 1985 (i.e. after the Notice of Resumption), NWD, in the Scheme World, formally stopped the, accumulation of interestcharges against SFI. As part of the arrangement between NWD and SFI for this interest amnesty, the Leung family transferred their49% holding in SFI to NWD pursuant to an oral agreement for nominal consideration that once a new site for relocation was found andgovernment paid the resumption compensation, SFI would be refinanced, and the Leung family’s 49% holding would be restored to them.
PAST TOSS OF PROFITS DUE TO ANTICIPATION OF RESUMPTION
292. This is a Head of Claim, common to both the relocation and the alternative extinguishment basis, put forward on bahalf of SFI inthe present action.
293. As this Head relates solely to the period uptil 19th January 1987 when SFI physically left its Junk Bay premises, and as we havealready dealt with the facts up to
that point, it is convenient now to see how the law applies to those facts.
294. When we described the factual situation in the Scheme-World during the period from approximately March to June 1982, we indicatedthat we were satisfied it was the threat of resumption coming to light at that time which caused SFI to miss out on long-term forwardcontracts for high-tensile rebar which it might otherwise have expected to receive. Moreover, it is an agreed fact that the threatof resumption faced by SFI was public knowledge from November 1981 onwards. Factually, we are satisfied that the threat of resumptioncaused SFI to lose $13.736 million, which is the difference between what SFI made in the Scheme-World, and what we are satisfiedit would have made in the No-Scheme-World during the period from 5th November 1981 to 19th January 1987. The Table opposite, (fromMr Best’s Revised Appendix I), shows how that sum of $13,736m was calculated.
295. That finding on causation is a matter of impression arising from primary facts, and the usual rules apply, so that the loss or damagemust be the direct, natural and reasonable result or consequence of the removal and not too remote from it : Harvey v. Crawley C.P.N. (1957) 1 Q.B. 485; A & B Taxis Ltd v. Secretary of state,  K.B.D. 328 and; Bailey v. Derby Corp. [19651 1 All E.R. 443.
296. A keenly fought issue of law argued before us was, whether any loss or damage suffered by a claimant as the result of the threatof resumption but before any Notice of Resumption has been served, can give rise to a claim for compensation under the Ordinance.
297. Under Hong Kong law, there is a simple, clear-cut resumption procedure set forth in the Ordinance.
298. Under s.3, the Governor in Council can decide the resumption of any land is required for a public purpose and can order its resumption underthe Ordinance. There is no dispute that the Governor in Council did that on 15th October 1985 in respect of, inter alia, SFI’s JunkBay Lot (see Exh.SF94, p.p.62A and B).
299. Once the Governor in Council has made an order for resumption, a notice that the land is required for a public purpose and will beresumed has to be published in the Gazette as required by s.4(1) of the Ordinance. That was duly done in respect of SFI’s Lot on 21st October 1985 (see Exh.SF94, p.63). The rest of s.4 requires a copy of the notice to be served on the owner or affixed upon the land, stating that the land will be resumed on a particulardate which has to be at least one month after the notice. There is no dispute in this case that SFI was duly given notice on 30thOctober 1985 for its Lot to be resumed on 30th July 1986.
300. By virtue of s.5 of the Ordinance, the Lot reverted to the Crown on 30th July 1986, with SFI’s rights over it ceasing on that date. Once the formerowner’s interest in the land has ceased by virtue of s.5, he is confined by s.9 to a claim brought under the Ordinance against the Crown for loss or damage suffered as the result of the resumption. Such a claimhas to be determined by this Tribunal under s.10 of the Ordinance, on the basis of the loss or damage suffered by the claimant due to the resumption of the land. Subsection (1) ofs.10 asserts the general principle,
301. Subsection (2), in effect, condescends to the particulars of the basis on which compensation is to be determined. We now set outthe parts of subsection (2) relevant to SFI’s Past Loss of Profits claim which we are at present considering :
302. We think it was common ground that this claim of SFI’s for Past Loss of Profits must, if anywhere, fall within the embrace of s.10(2)(d), for it to be sustainable.
303. On behalf of government, a passage from His Honour, Judge Cruden’s book, Land Compensation and Valuation Law in Hong Kong, at page25, was cited to us as follows : “The primary source of compensation and valuation law (in Hong Kong, my parenthesis) is statutory”,and with that we do agree. We also considered that government was correct in its assertion that the ordinary principles of statutoryconstruction should be applied to the Ordinance, and saw no merit in the submission made on SFI’s behalf that we should have recourseto the Treaty of Peking 1898 and the Sino-British Joint Declaration 1984 to help us understand what the Legislature meant in theOrdinance.
304. While the words “loss or damage to a business” in s.10(2)(d) relate to what is normally categorised as “business disturbance” inland compensation law, we certainly endorse what was asserted in D.P.W. v. Leung Sze (1977) HKLTR 158, 162 to the effect that, “the only proper approach is to work directly from the words of section 10(2)(d) withoutany preconceptions as to their extent”. That said, we also recognize that the Ordinance was not drafted in a vacuum, so that theTribunal is entitled to consider how courts in England, Scotland, Australia or, if need be, elsewhere, have interpreted similar language.We think, too, it is proper to bear in mind the maxim from Maxwell’s Interpretation of Statutes, cited by Lord Justice-Clerk Alnessin Venables v Department of Agriculture for Scotland (1932) SC 573, 580 that :
305. In relation to the word “loss” in paragraph (d) of section 10(2) we find ourselves attracted by the approach of Lord Kinnear, inLanarkshire and Dumbarton Railway Company v. Main (1895) 22 R. (Ct. of Sess) 912, that it should embrace the idea of “all loss” (subject, of course, to considerations of remoteness).
Lord Kinnear’s approach has been consistently followed by judges in Scotland, examples being Venables v. Department of Agriculture for Scotland, 1932 S.C. 573; Smith v. Strathclyde Regional Council (1980) 42 P. & C. R. 397, Aberdeen City District Council v. Sim (1982) 264 EG 621, Campbell Douglas & Co. Ltd. v. Hamelton D.C. , Estates Gazette September 10th 1983, this latter case furnishing a particularly good illustration of the workings of a chain ofcause and effect.
306. The approach of the Scottish courts to “loss” in the context of disturbance has now won favour with the Court of Appeal in Englandin Prasad v Wolverhampton Borough Council  1 Ch 333 (at pages 347F, and 349B and C), where the “all” coupled with “loss” was italicised by Stephenson L.J. to give it emphasis.
307. In the same way that we consider it is “all loss” falling within s.10(2)(d) which should be compensated, we think also that “all”should also extend to “damage” in paragraph (d) so that “all loss or damage” (subject to remoteness) is treated as compensatable.
308. Another principle laid down by Lord Kinnear in the same case was that the compensation paid for disturbance should be “full”. Thatprinciple of “full compensation” was followed in the same Scottish cases already mentioned in the context of disturbance, and itagain won favour with the English Court of Appeal in Prasad v. Wolverhampton Borough Council (ante).
309. The notion that a dispossessed owner should be “fully” compensated had already been given its blessing by the House of Lords in West Midland Baptist (Trust) Association v Birmingham Corporation  A.C. 874, 893D albeit in a case involving reinstatement, rather than disturbance.
310. That compensation should be “full” strikes us as irreproachably fair for the purposes of s.10(2)(d) of the Ordinance. Mr Roy Leungtold us how he was led to believe by Mr Akers-Jones in December 1981 that SFI would be “well” compensated, but we do not supposeMr Roy Leung will feel too hard done by if SFI is “fully” compensated.
311. As the case was fought before us, the crucial issue in relation to Past Loss of Profits was the time from which SFI’s losses shouldrun. Government contended loss could not begin to run before the posting of the Notice of Resumption on 30th October 1985, whilstSFI argued for November 1981 when it became public knowledge that SFI’s works was under threat of resumption.
312. In support of 30th October 1985 for what was described in Venables (op.cit) as “the datum line”, government sought to pray in aidthe simple, clear cut nature of the resumption procedure laid down by the Ordinance as an argument in favour of ignoring loss anteriorto the Order made by the Governor in Council under s.3, the date for that being in the present case 15th October 1985.
313. True, as the government pointed out, the simple scheme of the Ordinance offers a sharp contrast to the United Kingdom legislationon the same topic where an elaborate procedure of resolutions, enquiries, and notices of different types has to be followed. Becauseof this complexity of the procedures under United Kingdom legislation, it is not always easy to pin-point the time when compulsoryacquisition has actually occurred there, whereas that can never be a problem under the Ordinance on that score.
314. According to the government’s submission, this Tribunal should not follow UK cases which hold that an owner can be entitled to compensationfor loss or damage caused by the threat, as opposed to the consummation, of compulsory acquisition, since, such cases, while appropriatefor the UK where the procedures leave doubt as to when compulsory acquisition occurred, have no place in Hong Kong’s user-friendlystatutory provision. The UK cases referred to by the government in this context were Venables v. Department of Agriculture for Scotland, Aberdeen v. Sim and Smith v Strathclyde from Scotland, and Prasad v. Wolverhampton in England, all of which we have previously cited.
315. Far be it from us to want to introduce any of the United Kingdom’s legislative complexities into Hong Kong’s admirably straight-forwardresumption process, but, as we see the situation, Hong Kong’s resumption procedures would not change one jot or tittle were we tohold that, in Hong Kong, there can be compensation for loss or damage caused by resumption although that loss or damage occurredbefore the statutory resumption process was set in motion by the order made by the Governor in Council under s.3 of the Ordinance.The Governor in Council will still make his order under s.3; notice as usual will be posted under s.4; ownership of land will, asbefore, revert to the Crown under s.5, and so on.
316. The suggestion from the Crown that the Tribunal’s awarding compensation in resumption proceedings under the Ordinance for loss ordamage which occurred prior to the Governor in Council’s order under s.3 would somehow pre-empt the exercise of his powers underthat section struck us as far-fetched. His powers under that section will remain exactly the same as they have always been, and nopart of the process will change.
317. As part of its endeavour to rebut the suggestion that loss or damage arising from the threat of resumption could be a legitimatepart of a claim brought under the Ordinance, the Crown correctly pointed out in its submission, embodied in its Exhibit R52 at pages8 and 27, that the elements of what might be described as a “cause of action” for loss or damage to a business under s.10(2)(d) are:-
318. Immediately let it be said that SFI fully satisfies both those requirements.
319. Why the Crown wants to break the “cause of action” down into its ingredients is for the sake of pointing out the absence of any referenceto the word “threat” in conjunction with “removal”, and from there goes on to argue that loss or damage due to “the threat of removal”is not actionable.
320. So long as there has been resumption and the removal of a business as the result of it, we see no difficulty in interpreting “removal”,so as to include “the threat” of removal.
321. Even if the point were novel, the Tribunal would harbour no fear it might be trespassing beyond the bounds of what is judiciallypermissible by holding that “removal” in s.10(2)(d) should be construed so as to embrace the threat of removal. Judges develop thelaw “interstitially” in this way all the time. We feel no need to labour so basic a point.
322. In any event, the point is far from novel. As a matter of statutory interpretation, in Prasad v. Wolverhampton Borough Council (1983) 1 Ch 333, the Court of Appeal held that a claimant (Dr Prasad) under threat of compulsory acquisition from his home, which also doubled asa surgery for his medical practice, was entitled to a “disturbance payment” for removal expenses to alternative accommodation underss.37 and 38 of the Land Compensation Act 1973 as “… a person … displaced from any land in consequence of (a) the acquisitionof the land by an authority possessing compulsory purchase powers …”
323. Despite no reference to the word “threat” in either ss.37 or 38 in that Act, the Court of Appeal had no difficulty arriving at theconclusion he was entitled to his
removal expenses as a person displaced by reason of compulsory acquisition, although at the time of incurring those removal expenseshe only faced the threat of compulsory acquisition.
324. We set out ss.37 and 38 in full opposite.
325. For an understanding of the issues in Prasad, those sections can be dissected down to their bare bones as follows:
326. The reason Dr Prasad had to leave his home-cum-surgery was on account of its being in a slum-clearance area. Besides claiming removalexpenses, he also sought compensation for financial loss his medical practice had suffered by reason of his patients having movedaway due to the slum-clearance scheme. He was claiming for “the loss of business suffered … through losing patients when demolitionwas in the air” (p.336H). That part of his claim was under s.38(1)(b) of the Lands Compensation Act which entitles a claimant toa “disturbance payment” … equal to – (b) if he was carrying on a trade or business on that land the loss he will sustain by reasonof the disturbance of that trade or business consequent upon his having to quit the land”.
327. Dr Prasad failed in his claim for loss to his business under s.38(1)(b). That is hardly surprising. More or less the same rules ofstatutory interpretation apply in England as in Hong Kong, and, as we read s.38(1)(b), it clearly applies to future business loss,whilst Dr Prasad was claiming for past business loss. That paragraph (b) applies to future loss can be gathered from the future tense- “… the loss he will sustain …”. How s.38 is concerned with future loss can be gathered from the use of the word “thereafter”in the following passage from Stephenson L.J.’s judgment at page 354F,
In the light of the statutory wording, Dr Prasad’s claim for past business loss was, in our view, unarguable, and it was not argued.
328. Because Dr Prasad failed in his claim for past business loss in the face of a legislative provision dealing only with future businessloss, in no way means that SFI’s claim for Past Loss of Profits based on Hong Kong’s totally different statutory language need fail.
329. Somewhat paradoxically, it is the English Court of Appeal’s ruling on the head of Dr Prasad’s claim relating to removal expensesunder s.38(1)(a) because of displacement in consequence of compulsory acquisition as provided in s.37(1) of the English Act whichhelps lay a foundation for SFI’s head of claim relating to Past Loss of Business Profits under the “shadow”.
330. Where s.37(1) refers to displacement “in consequence of” compulsory acquisition, those words in inverted commas echo the classicwords of causation “consequent on the taking … under statutory powers” used by Lord Denning in Harvey v. Crawley Development Corporation [1957) 1 QB 485, 492, a case involving a claim for disturbance under Rule 6 of s.2 of the Acquisition of Land (Assessment of Compensation) Act, 1919.
331. Section 10(2)(4) of the Ordinance also uses words which unmistakably indicate causation. These words are “due to” and “as a result”.
332. When in Prasad the Court of Appeal held that Dr Prasad’s removal expenses were “in consequence of” compulsory acquisition, although,at the time they were incurred, there was only the threat of compulsory acquisition, they reached that decision on the basis of theScottish authorities previously mentioned, all of which were claims for disturbance under a provision identical to the Rule 6 ofs.2 of the Acquisition of Land etc Act 1919 interpreted in Harvey v. Crawley (ante).
333. All the Scottish cases so far cited used words of causation such as “occasioned by” in relation to what disturbance qualified forcompensation.
334. In Venables (ante), the words of causation used were “occasioned … by reason of …”, with the court there holding that a personcompulsorily dispossessed “should get compensation for all loss occasioned to him by reason of his dispossession”, subject to considerationsof remoteness.
335. The words “by reason of” were also used in Smith v. Strathclyde (ante) to denote causation, so that loss could be claimed as disturbance if “incurred by reason of the compulsory acquisition” subject,as always, to remoteness.
336. In Aberdeen v. Sim (ante) causation was described in terms of losses being “occasioned by dispossession”.
337. The words used in Campbe ell Douglas v Hamelton D.C. (ante) were “caused”, “led to”, and “arose directly from”.
338. Rather than pick some particular datum line such as, for example, the service of a Notice to Treat from when loss caused by compulsoryacquisition would be made to run, the Scottish cases adopted a broader approach of regarding compulsory acquisition as an ongoingprocess. Instead of asking whether loss was before or after any particular event, the Scottish approach has been to ask whether thecompulsory acquisition was the cause of the loss.
339. As explained in Smith v. Strathclyde, compulsory purchase can be regarded as an ongoing process which starts with the scheme behind the compulsory acquisition.
340. On the aspect of remoteness, the Scottish cases and Prasad are all to the same effect that, only loss which directly, naturally,and reasonably flows from the compulsory taking can be the subject of compensation, and loss which is too remote, or caused by theclaimants own independent business decisions, will not qualify.
341. Although this Tribunal is in no way bound by the ruling in Prasad, nor by the Scottish decisions on which it is based, we find theirreasoning compelling and conducive to what we regard as a just outcome when we turn to consider, under s.10(2)(d) of the Ordinance,what “loss or damage” to SFI’s business at its Junk Bay works should be regarded as “due to the removal of the business from thatland or building as the result of the resumption”. We note too, in passing, that Hong Kong Lands’ Tribunal cases have stated obiterthat the Prasad decision has opened the way to award compensation under the Ordinance for business losses occurring before formalsteps have been taken under the Ordinance to initiate resumption. In Lee Chun v. D. of L. (1983) CLR 9/83 and Callwin International Electric Co. Ltd v. D.O.E.D. 17th December 1984 MTR3/84, the facts did not give rise to a situation of business loss occurring before Notice of Resumption.
342. In Chan Kwok Lam v D.B.L. C.R. Ref. No. 1/87, the first week of a period from 1st November 1985 to 31st March 1986 when business loss was incurred was beforethe Notice of Resumption was published in the Government Gazette on 7th November 1985. There was no live issue of whether the losssuffered in that seven day period should be disallowed in the compensation award, all the loss being treated on the same footingas having occurred after the Notice of Resumption.
343. As the point about pre-Notice of Resumption business loss either did not arise or was not addressed in any of those Hong Kong caseswe have not felt able to attach any weight to them.
344. Although the part of Prasad on which we rely, and the Scottish cases which we have cited, did not relate to loss of profits as such,we see no valid reason why, in principle, any different approach should be adopted.
345. On the view we take, the Tribunal is entitled to consider whether, in the light of the facts we have found, SFI’s Past Loss of Profitsis due to the removal of SFI’s business from the Junk Bay works as a result of the resumption.
346. We consider that the resumption in the present case was an ongoing process, commencing with the Scheme for the New Town at Junk Bay.
347. We consider, too, that the removal of SFI’s business from that land was an ongoing process. That removal of the business was a long,drawn-out process in the nature of a slow-asphyxiation for SFI, starting in late 1981 as it became public knowledge that SFI wasunder the “shadow” of resumption. SFI’s new orders started drying up in or about the first half of calendar year 1982 because ofthat public knowledge, and SFI’s business at Junk Bay underwent a removal not only from Junk Bay, but from the face of the earth,because, on the view we take, it was completely extinguished as the result of the resumption.
348. On behalf of the Crown, it was urged upon us that we should, in effect, consider whether SFI’s loss was the “result of the resumption”in isolation from whether it was “due to the removal of the business”.
349. Such an approach in our view would be artificial. The removal and the resumption were concurrent causes of SFI’s Past Loss of Profits,in our opinion.
350. We were invited by the Crown to treat SFI’s Past Loss of Profits as caused by their own business decisions, firstly, in early 1982,not to accept any further long term forward contracts with delivery times in excess of six months, and, secondly, in late 1982/early1983, to dismiss over half their staff with the result that from Chinese New Year 1983 onwards, SFI could only operate one shiftper day.
351. As we see the position, both of those decisions by SFI were directly, naturally and reasonably due to the threat of resumption. Whathappened in SFI’s orders drying up in early 1982 was exactly in fulfilment of the fears over long-term forward contracts expressedby Mr L.Y. Leung at the meeting with government officers on 19th November 1981. Rather than a cause, SFI’s decision not take thoseforward long term contracts was an effect of the losses it started experiencing when new orders stopped coming in.
352. We regard it as reasonable for SFI to have declined to take on long term forward contracts while resumption threatened, and, withoutsuch contracts, it was pointless to keep their staff at full strength.
353. For the government, it was argued that the threat of resumption had been initiated by its letter of 5th November 1981 to SFI, announcingit would be necessary to clear SFI’s Junk Bay site to make way for the New Town, and as that letter, together with all subsequentcorrespondence or discussions between SFI and government, was “Without Prejudice” SFI was deprived of all legal recourse againstgovernment in relation to the “shadow” period.
354. Not too much significance attaches to that letter of 5th November 1981, in our view. It is no more than one piece of evidence amongmany which together gave rise to the public knowledge that SFI’s Junk Bay business was threatened. It is the existence of that publicknowledge which is of significance.
355. Merely by writing the words “Without Prejudice” at the top of a letter or intoning them at the start of a meeting does not absolvegovernment from liability for loss to a business caused by public knowledge of threatened resumption.
356. A policy argument advanced on goverment’s behalf regarding why losses arising before Notice of Resumption should not give rise tocompensation was that government might start feeling inhibited about sharing information with those whose land might be resumed.Both government and the owner under threat might finish up worse off, so the argument ran, if liability might flow from informationexchanged before Notice of Resumption.
357. On the view we take, public policy would be better served by making government face up to the consequences of its conduct affectingland owners who ultimately receive a Notice of Resumption.
358. Judging by SFI’s experiende, the present system is in the nature of a trap for land owners who can be strung along indefinitely.Knowledge on the part of those representing government, in dealing with land owners whose businesses are threatened by a Scheme,that government could be liable for loss caused to a business even prior to the Notice of Resumption should lead to a less cavalierapproach on the government side.
359. Another policy point put forward on behalf of government is that many acts of government can affect people’s financial interestswithout giving rise to a claim for compensation, the preparation of a development plan being cited as an illustration of this.
360. That is an argument we find singularly unattractive, since it is in the nature of saying that two or more wrongs can make a right.Although it is correct that the Legislature has not created a general right of compensation for persons affected by blight, we thinkthat in no way militates against the Ordinance, as a particular piece of legislation, conferring such a right by the particular statutorywords used.
361. In support if its contention that compensation for loss sustained prior to Notice of Resumption should not be the subject of compensation,government sought to rely on the House of Lords case, West Midland Baptist Association v. Birmingham Corporation  AC 874, 896. That was what is known in the UK as a “Rule 5” case for “reasonable cost of reinstatement” of a Baptist Chapel in respect ofwhich a Notice to Treat was served in 1947, when it would have cost #50,025 to rebuild. The acquiring authority did not provide anew site for the chapel until 1958, and, after getting the necessary planning permission, the earliest date by which rebuilding couldreasonably have begun was 1961, by when the rebuilding cost, because of inflation, had risen to #89,575.
362. The House of Lords, rejected the acquiring authority’s contention that the relevant date for the assessment of the cost of reinstatementwas 1947 when the price of rebuilding would have been #50,025, upholding, instead, the chapel owners’ assertion they should be paidthe #89,575 cost of rebuilding in 1961, for, otherwise, the compensation would not fairly have compensated the owners for the lossof their land.
363. The West Midland Baptist case had nothing to do with the issue whether compensation can be awarded for loss occurring before compulsoryacquisition. The whole tenor of the decision is that a dispossessed owner should be fully and fairly compensated, for, otherwise,as Lords Morris said at page 904 E “The word ‘compensation’ would be a mockery if what was paid was something that did not compensate”.
364. The Crown has sought to rely on a part of the speech of Lord Reid at p.890 about how, under the law in England where such items ascosts of removal, loss of profit or other consequential loss are treated as part of the value of the land to the owner, “… thereappears to be no suggestion in the authorities that these elements in the value of the land to the owner must be valued as at thedate of the notice to treat. The actual costs or losses following on actual dispossession (our underlining) have been taken, and that appears to be the accepted practice today with regard to claims under Rule 6″.
365. Rule 6 cases relate to compensation for disturbance which, for the sake of the present argument, we will presume to be the same asa claim for loss or damage under s.10(2)(d) of the Ordinance.
366. We are satisfied that, in context, Lord Reid made the remark about “The actual costs or losses following on actual dispossession…” to illustrate his point that, in an inflationary environment, you should assess compensation at a later time such as dispossession,rather than the earlier time of Notice to Treat. He was in no way addressing the issue of whether loss caused by a threat of compulsoryacquisition can be treated as flowing from that compulsory acquisition for compensation purposes.
367. Prasad (at page 346) took the view that the West Midland Baptist case was not concerned with loss incurred in anticipation of compulsoryacquisition – a view which we share.
368. In support of its proposition that loss cannot be treated as resulting from compulsory acquisition if it occurs before the takingof the first step prescribed by legislation for initiating compulsory purchase, the Crown relies upon Lion Brewing v. Commissioner of Highways  SASR 198 and Christie’s Stone Ouarri v City of Tea Tree Gully  2 SASR 224.
369. In the earlier of those two South Australian cases, which was followed in the later, Hogarth J., at page 208, said that in orderto fall within the State’s compulsory acquisition legislation, “… it is necessary that the damage complained of should arise fromthe acquiring authority’s setting in motion the machinery provided by the Act; otherwise the damage cannot be said to result fromthe acquisition of the subject land, nor from the preliminary steps taken under the Act for the purpose of its acquisition”.
370. That language has echoes of the Lands Tribunal’s Judgment in Bloom (Kosher) & Sons Ltd v. London Borough of Tower Hamlets (1977) 35 P. & C.R. 423, at page 430, “As a matter of causation or remoteness or indeed as a matter of meaningful English language, I cannot accept thata loss is consequent upon an acquisition if it is incurred before there is an acquisition”.
371. Bloom (Kosher) v Tower Hamlets was expressly overruled by Prasad v. Wolverhampton Borough Council.
372. We have already indicated our approval of the Prasad approach which tends in the direction of allowing full compensation for allloss caused by compulsory acquisition, and nothing in either of the two South Australian decisions just referred to causes us toquestion the appropriateness of Prasad as a guide to a fair interpretation of Section 10(2)(d) of the Ordinance.
THE SCHEME-WORLD : 20TH JANUARY 1987, ONWARDS
373. At the time SFI vacated the Junk Bay site on 19th January 1987, it had no site to which it could relocate.
374. From the evidence as a whole, it is clear that SFI had known from about 1982 that there was a strong likelihood it would have toleave Junk Bay to make way for the New Town. From about the same time, it had realised its chances of relocating within Hong Kongwere remote. That can be seen from Mr Roy Leung’s 1st affidavit paragraph 19.2.
375. To suit SFI’s requirements, a relocation site needed the following attributes :-
376. In Hong Kong, the only area possessing the qualities SFI sought was Junk Bay, but, because of the New Town, SFI had been aware fromthe outset it would not be allowed to relocate in that vicinity. It is difficult to pinpoint precisely when SFI realised that, ifit were to relocate at all, it would have to be in China. Certainly, by the time SFI was served with the Notice of Resumption on30th October 1985, it must have realised that China was the only realistic possibility.
377. We do not doubt that not only SFI itself, but, also, on its behalf, NWD and JLW were actively on the lookout in China for such asite from the time of the posting of the Notice of Resumption.
378. Since SFI was forced to cease operations at Junk Bay towards the end of August 1986, it stepped up its effort in China to seek outa suitable site after that.
379. Even if SFI managed to locate a site in China with the physical characteristics we have already described, that did not necessarilymean the site would be all right for SFI, because of the lack of infrastructure in many parts of China. Above all else, it was essentialfor SFI to have an adequate electricity supply. The massive electric power demands of a mini-mill presented a major obstacle to SFI’sfinding a relocation site within China.
380. As we will in due couse show, when SFI, at last, in China found a site with which it felt happy, the electrical supply was such thatthe effect of switching on an electric arc furnace would have been that all other users of the same supply would have experienceda flicker.
381. Our appraisal of the situation is that, as at the 20th January 1987, SFI’s chances of finding a suitable relocation site in Chinawithin, say, two years of that date were no better than even.
382. As events turned out, SFI learnt in August 1987 of a green-field site on the south bank of the Pearl River in Lun Jiao Town, ShundeCounty, Guangdong Province. The site was in fact a rice-paddy field, separated from the river bank by a flood-retaining earth wallof approximately 4 metres in height. The river depth there is sufficient for ship breaking, as well as for loading and unloading.The site is 45,000 sq.m. in area.
383. The whole Pearl River Delta region, including Shunde County, was declared a Special Development Area by the State Council in Beijingin 1985, thus giving foreign investors many financial advantages such as tax-free importing of raw materials and equipment. Relativelyclose to the site is Rongqi Harbour which has a containerized wharf, with both passenger and freight terminals. There is a dailyferry each way between Rongqi and Hong Kong, the voyage taking about 2 1/2 hours. Also near the site, the Super Highway linking HongKong with Guangzhou is to be built.
384. In late 1987, SFI caused a detailed technical feasibility study to be performed by McLellan and Partners Ltd., an English firm ofconsultants to the steel industry. The individual within McLellan’s who carried out that study was Mr Medley, who became SFI’s expertwitness. Mr Medley’s study showed it was feasible to build a mini-mill on that site with a capacity of 110,000 metric tons of high-tensilerebars conforming with British Specification 4449 at a total capital cost of HK$378,333,000. The breakdown of that total cost isas follows :-
CAPITAL COST – SUMMARY
385. The proposed steel plant would have two 22 tons of liquid steel capacity EAFs, powered by 12,000MVA transformers and a continuouscasting machine, all within the same building, with both the EAFs and the continuous casting machine served by a 40 tons electricoverhead travelling crane for carrying scrap baskets and casting ladles.
386. The resulting billets from that continuous casting machine would be up to 120mm square, cut to 6 metre lengths, as feedstock forjust the one RHF which would be in another bay. That RHF would have a capacity of 30 tons per hour. That RHF would feed a singlestraight-through rolling mill for rebar sizes of from 10mm to 40mm diameter. As the EAFs would have transformers of the same power,there would be no problem over sequence casting. There would also be hot-charging from the continuous casting machine to the RHF.Rather than use the more expensive micro-alloying technique practised by SFI at Junk Bay, the rebars, according to the plan for Shunde,would be given the necessary tensile strength to conform with BS4449 by means of the “Tempcore” process which uses the residual rollingheat of a rebar to partially quench its outer section. A rebar produced by the “Tempcore” process can sometimes command a premiumin the market place.
387. Ship breaking facilities were included within Mr medley’s design, and scrap would be carried from the scrap bay by a gantry withan electric overhead magnet crane.
388. A further advantage of the site at Shunde is that Mr Y.T. Cheng, the Chairman of the New World Group comes from that district, andalready has investments in the area, such as a jewellery factory and a cement brick making factory.
389. No doubt, in part, because of Mr Y.T. Cheng’s good relations with local officials in that area, the negotiations by SFI for the newShunde site proceeded rapidly, and an agreement was signed on the 18th December 1987 between SFI and the Lun Jiao Town Economic DevelopmentCompany, granting SFI the use of that 45,000 sq.m. site as a mini-mill for a period of 50 years, at a land use fee of 8 RMB per sq.m.per year, with a maximum increase of 20% in rental cost every 10 years. In practical terms, the agreement amounts to an option grantedto SFI for the purpose of erecting a mini-mill there. Whereas Lun Jiao Town is now bound to allow SFI to build a mini-mill there,SFI is not under any obligation to do so, and, presumably, if SFI does not go ahead with building the mini-mill, it will not haveto pay the land use fee.
390. Whilst the precise juridical nature of the agreement between SFI and Lun Jiao Town is far from clear to us, we do understand thatone feature of it is that SFI will have no saleable interest in the land. That is because the PRC does not recognize private ownershipof land.
391. On the occasion of the signing of that agreement at Shunde, there were present, not only Mr Y.T. Cheng, but, also Mr Lee Shiu-kee,the Chairman of Henderson Land, the parent company of SFI’s second biggest customer, E Man. The presence of Mr Cheng and Mr Lee wasobviously a gesture of their companies’ continuing support for SFI.
392. Besides Mr Medley’s engineering feasibility study, SFI also commissioned an economic feasibility report from DHS. DHS, in their turn,had access to a report by Mr Gillett an economist with McLellan’s, specialising in the steel industry. That report shows that attrend prices in 1987/1988 constant dollars for rebar and scrap put forward by Mr Gillett the return over a 20 year period from thecapital cost of $380m plus $19m for working capital would be 11.94%. That would be on the basis of SFI importing scrap from HongKong to Shunde, and exporting its rebars from Shunde to Hong Kong. We will postpone considering Mr Gillett’s trend prices till wecome to the Sections in this judgment entitled “REBAR PRICES” and “SCRAP COST”.
393. The economic feasibility study of which we have been speaking is to be found as Exh.”RL-69″ to Mr Roy Leung’s 1st Affidavit.
394. In Mr medley’s engineering feasibility study, he had estimated a 2 1/2 year project implementation period spanning the time of theordering of plant and machinery to the time when production would have been ready to commence. Thus, if SFI started ordering thenecessary plant and machinery in January 1988, it would not have been until the beginning of July 1990 that production would havebeen ready to start. For reasons we give in our Section I entitled “SFI’s REBAR MAKING CAPACITY” we think SFI would then have neededa 4 year period from commencing production in July 1990 to building up to full production of 110,000 metric tons per annum in theyear 1993/94.
395. As things stand now, if SFI were to go ahead with the project, theoretically SFI would be able to start ordering plant and machineryin July 1992 at the earliest so that with a two and a half year project implementation period starting then, plus a four year buildup on top of that, SFI would not reach full production of 110,000 M/Ts per annum of rebar until 1999.
396. Since the agreement of December 1987 between Lun Jiao Town and SFI, there have been other developments in China affecting SFI’s position.The Guangdong Provincial Foreign Economic Relations and Trade Commission issued approval for SFI to establish a representative officein Shunde County on 10th August 1988. SFI opened such an office at Lun Jiao Town on the 18th August 1988, with Mr Len Leung appointedChief Representative of SFI in Shunde. He has obtained a work permit for himself and another SFI employee there, and they are tobe permanently based in Shunde. Since July 1988, he has been supervising some minor ship-breaking by a sub-contractor at the Shundesite as the result of an agreement with the China National Metals and Minerals Import and Export Corporation. SFI pays rent justfor the small area of the site used for ship breaking, and, as far as we could understand, it sells the scrap locally.
397. Most importantly of all for SFI, since receiving approval for the establishment of a representative office in Shunde County, SFI,on 18th August 1988, received a Registration Certificate from the Director of the State Administration for Industry and Commercein Beijing, confirming that SFI’s business at Shunde is to have the status of a sole venture. In contrast with the more common jointventure, SFI will avoid the entanglements of that type of arrangement since it will not need a local partner.
398. Within Hong Kong since 20th January 1987, SFI has continued to keep its office open in New World Tower, Central. That office housesthe employees SFI has kept on from the Junk Bay era, with a view to assisting a relocation. Those employees are the top and middlemanagement together with foremen who will train the new work force if SFI relocates. Apart from assisting SFI with its preparationfor the present proceedings, there has been nothing for most of those employees to do. The only ones for whom there has been somework are those on the selling side, since SFI has continued to buy and sell a small quantity of rebars. Without any godowns or storageareas, and because also of poor cash-flow, SFI’s selling activities have been on a small scale. In 1987/88 SFI’s turnover from rebartrading was $5,425,100 and it made a profit of $2,143,660.
399. In order to come up with reasonable prices for which a mini-mill in Hong Kong could be expected to sell its rebars and buy its scrapduring the period from 19th January 1987 onwards, SWS has been used by the Tribunal as a surrogate for SFI. The details of the SWSprices during this period are to be found in our Sections II “SCRAP COST” and III “REBAR PRICE”. Under those headings, we go intothe details of the modifications, where necessary, to adapt SWS’s prices in such a way as to make them appropriate for SFI.
400. We now set out the SWS/HH’s rebar contract and delivery prices, as well as the SWS scrap prices for Financial Years 1986/7, 1987/8and 1988/9.
401. The last SWS/HH rebar contract price we have is $3,100 per metric ton for non-standard, high-tensile rebars, 11 metres in length,and 50mm in diameter, in February 1989. The price of scrap for SWS that month was $750 per M/T.
402. Because of the dispensation accorded to SFI by NWD from the end of October 1985, no interest has accumulated on SFI’s indebtednesssince then. That is in the Scheme-World.
NO-SCHEME-WORLD : 20TH JANUARY 1987, ONWARDS
403. In the No-Scheme-World, SFI would have continued to make 110,000 metric tons of high-tensile rebar per annum, as it had been doingsince Financial Year 1985/86 on our findings. That there might have been increases in SFI’s output beyond 110,000 metric tons inthe No-Scheme-World is a factor we have taken into account in determining an appropriate discount rate for SFI. The details on thisare to be found under our heading ” CAPITALISATION RATE“.
404. SFI’s sales, delivery, and scrap prices in the No-Scheme-World for Financial Years 1986/87 and 1987/88, lifted from our Sectionsentitled “REBAR PRICE” and “SCRAP COST“, are as follows:-
405. For Financial Years 1988/89 and onwards, we have found trend prices of $2,250 for SFI’s sale of rebars, and $595 for its purchasesof scrap. The details of how we arrive at those figures are to be found in our Sections “REBAR PRICE” and “SCRAP COST”. Those trend prices are in 1987/88 constant, (i.e. inflation-proofed), dollars.
406. There was agreement over SFI’s other unit costs of manufacture, including the fact that those costs are to be in 1987/88 constantdollars from 1987/88 onwards.
407. In the No-Scheme-World, SFI would not have enjoyed any amnesty in respect of interest payments to the NWD group, whether of a current,or capitalised, nature. From the cash-flow statement with the accounts at the end of this judgment, it can be seen that SFI, on ourprojections, would not have finished paying off arrears of interest to NWD until Financial Year 1996/7, so there would have beenno dividends for any of SFI’s shareholders before then.
408. By way of general background regarding the period 20th January 1987 and onwards, with which we are, at the moment, concerned, wemention one or two events from this period which loomed large in the evidence and submissions before us. There was a series of boomsand slumps as the case meandered on its way. Until June 1989, Hong Kong’s economy was decidedly buoyant, with much new buildings,both actual and planned, which augured well for those selling rebars.
409. In early June 1989, the economy went into a state of shock as the result of the chilling events which took place in Tienanmen Squareon 4th June. From euphoria, the public mood swung to despair, reflected in plummeting land and share prices. The prospects for buildingand rebars no longer looked so good. One or two months later, however, government announced plans for a new airport and harbour worksinvolving $127 billion. Pessimism over the economy slowly gave way to optimism after that announcement, but there were then alternatingbouts of hope and dejection over the economy, depending on whether it looked as if the proposed new airport and harbour works reallywould go ahead.
410. Prospects for the economy currently look bright, with all indicia pointing towards the new airport and harbour works in fact beingundertaken.
411. A new feature to creep into the economic picture in the past couple of years has been a resurgence of inflation.
412. With the possibility of an infinite number of positive and negative factors affecting Hong Kong’s economic outlook, it is importantnot to get too carried away by the mood of the moment for the purpose of fixing trend prices and a capitalisation rate.
EXTINGUISHMENT OR RELOCATION
413. The claimant contends that, by virtue of either paragraph (d) or (e) of sub-section (2) of s.10 of the Ordinance, read, of couurse,in the context of subsection (1), it is entitled to be compensated on the basis of relocating a business from its former Junk Baysite to its new site at Shunde, resulting from statutory dispossession. We now set out the relevant parts of sub-section (2) of s.10:-
414. We fail to see how paragraph (e) could confer any entitlement on SFI which it does not already enjoy by virtue of paragraph (d).As we understand paragraph (e), its purpose is to confer on non-business claimants some of the rights already enjoyed by businessclaimants under paragraph (d). Hence, we regard paragraph (e) as redundant insofar as the plaintiff’s claim is concerned. Such rightsas SFI has, in the context of relocation or extinguishment, flow from paragraph (d).
415. Government, which did not seek to place any reliance on paragraph (e), submits that compensation for SFI should be awarded on anextinguishment basis.
416. The question that, therefore, falls to be determined by this Tribunal is whether, in terms of paragraph (d), the correct measureof loss or damage to SFI’s business at Junk Bay due to its removal from that land as a result of resumption is on the relocationbasis, as SFI contends, or on the extinguishment basis, as the government would have it.
417. On behalf of SFI, based on the South Australian cases of Commr of Highways v George Eblen Pty Ltd  10 S.A.S.R. 384 and Commr of Highways v. Shipp Bros Pty Ltd  19 S.A.S.R. 215, both of which were heard by Wells, J., the following tests were formulated for determining that question :-
418. Government does not disagree with any of those tests, but seeks to make an overriding point that, as SFI’s business in the No-Scheme-Worldlacked viability, relocation could not be justified. That point about viability, in our view, falls to be considered under SFI’stest No.4 of whether relocation, in all the circumstances, is reasonable.
419. Likewise, a point made by government about SFI not getting an acceptable return on capital, judged by ordinary commercial criteria,can be dealt with under the general rubric of reasonableness.
420. An assertion by government that the factual consequence of resumption was the extinguishment of SFI’s Junk Bay business through government’staking over the site and plant, and all activity ceasing, largely raises the same issues as SFI’s test No.3 of whether SFI’s proposedbusiness at Shunde is the same business or a new one, and that is where we will deal with it.
421. SFI’s test No.l concerning whether it has a bona fide intention to relocate is broad enough to cover the government’s argument thatrelocation should not be allowed, since it is uncertain whether SFI’s plans for Shunde will proceed, and, if they do, it will bethe result of independent business decisions over which the Tribunal has no control.
422. The only separate point made by government, which cannot be squeezed within the four test SFI proposes, is whether, as a matter oflaw, SFI can be awarded a larger amount on the relocation basis than its maximum entitlement for total extinguishment.
423. We will deal, first, with the issue of law raised by that last point of whether the amount of compensation for total extinguishmentimposes a ceiling for relocation awards.
424. The Crown correctly points out that, for what might loosely be described as business disturbance, a claimant, by virtue of s.10(2)(d)is entitled to “the amount of loss or damage to a business …”. Next, the Crown prays in aid a passage from DPW v. Leung .Sze  HKLTLR 158, 162 :
425. It is the contrast between “total loss” and “partial loss” on which the Crown relies to build its argument.
426. Very reasonably, the Crown points out that there is nothing in the Ordinance which “requires the Crown to pay more than the totalvalue of what the Claimants have lost”.
427. Having mentioned the “total value of what the Claimants have lost”, the Crown then goes on to equate that with “total loss”. “Totalloss”, in its turn, fits snugly with the idea of extinguishment. There is the association of ideas with “extinguishment” suggestinga “total loss” in the sense of a total write-off, rather as one might think of, say, a ship which blows up as a “total loss” or totalwrite-off.
428. Apart from popular usage of “total loss” in the context of, say, sunken ships or wrecked cars, the concept of “total loss” callsfor some analysis before hastening to pronounce it means “extinguishment”.
429. When the Crown spoke of “the total value of what the Claimants have lost”, it begged the question of what they have lost.
430. When the passage already quoted from DPW v. L Sze equates “total loss” with extinguishment, it is misleading, in our view, if it is meant to imply compensation can never be awardedat a level higher than for extinguishment.
431. Error has crept into that passage when it refers to “The first and most important question in every claim under s.10(2)(d)” being”whether it is a claim for total loss … or partial loss …”. Probably in most cases, that approach will give you the right answer,but nowhere does s.10(2)(d) refer to “total” or “partial” loss. The Ordinance simply speaks of “loss or damage”.
432. As we see the position, the first and most important question to be decided in every claim under s.10(2)(d) is, “What is the amountof loss or damage naturally and reasonably arising in relation to the claimant’s business due to its removal as the result of theresumption?”
433. There is nothing in s.10(2)(d) which forces the Tribunal into the straight-jacket suggested by the passage from Leunq Sze to which we have referred.
434. Sometimes, the loss or damage arising will be such that it will be reasonable and natural to award compensation. on a relocationbasis, even though the compensation overtops the value of the business as a going-concern. What We have said in the present paragraphconforms with what Mr Carnwath, for the government, said he understood the law to be.
435. While the authorities drawn to our attention support the view that compensation for relocation of a business can, in appropriatecircumstances, be awarded in an amount exceeding the value of the business as a going-concern, they all make it clear that if relocationcompensation is out of proportion to going-concern value that will tend to show that an award on the latter basis would be unreasonable.
436. The following passage from the judgment delivered by Pearson L.J., in Festiniog Pty Co v. C.E.G.B. 13 P. & C.R. 248, 268, correctly summarises the position, in our view :-
437. An equally accurate formulation of the principle is also to be found in Wells, J.’s judgment in Shipp (ante) at page 232 :-
438. Passages to similar effect elsewhere in that judgment can also be found at pages 221 and 237.
439. The extent to which the cost of relocation exceeds the going-concern value will be an important element in the weighing exerciseneeded to determine, in a particular case, whether relocation or extinguishment is the more reasonable course.
440. When we come to the stage of applying the test of whether relocation is reasonable in all the circumstances, we will include a weighingexercise to assist our determination of whether relocation or extinguishment of SFI’s Junk Bay business is the more reasonable’ course.
441. Two of SFI’s suggested tests, namely, bona fide intention to relocate, and identification of a specific site can rapidly be disposedof.
442. No matter what SFI’s or NWD’s intention might have been before the Notice of Resumption, we are satisfied that, ever since then,they have both had a bona fide intention to relocate SFI’s min-mill business subject only to SFI receiving sufficient compensationfrom government to finance this. As we have previously indicated, we did form the opinion that, during the “shadow”, NWD at timeswavered in its resolve to continue SFI’s business, particularly during the economically gloomy days of 1983. We, nonetheless, failto see how government can take any advantage of that, since government’s position is there was no relation between it and SFI orNWD, insofar as resumption was concerned, before service of the Notice of Resumption.
443. We have already indicated how we are satisfied that, SFI, in the No-Scheme-World, would have survived up to and beyond the date ofthe serving of the Notice of Resumption, a date from which we are satisfied both SFI and NWD had a genuine intention to relocate.We are satisfied, too, that if SFI were to be compensated on the relocation basis it would relocate in Shunde.
444. There can be no question that, at Shunde, a specific site has been identified. Whether it was identified in time to entitle SFI torelocate is a question to which we will return when we deal with the reasonableness test’.
445. Attention can now be turned to the test of whether the business SFI proposes to run at Shunde will, in the words o?s.10(2)(d), bethe same as the “… business conducted by a claimant (SFI) at the date of resumption on the land resumed …”
446. In conformity with the lease and the permission given by government to SFI under it, SFI’s business at Junk Bay was, in fact, oneof “ship breaking, steel melting, and rolling in conjunction therewith”.
447. Since August 22nd, 1986, the day on which SFI ceased operations at Junk Bay, it has done no “ship breaking and steel melting androlling in conjunction therewith”. Since August 1988, it has done a small amount of ship breaking through a sub-contractor at Shunde,but not in conjunction with steel melting and rolling. Such ship breaking as SFI has done at Shunde has been in the character ofa scrap merchant, not as a steel maker. SFI sells off all the scrap it makes from its ship breaking activity at Shunde.
448. Apart from selling off its remaining rebars, billets, and other materials at Junk Bay between August 23rd, 1986 and 19th January1987, SFI’s only business activity, apart from being a scrap merchant at Shunde as just described, has been, in effect, as a steelstockist, selling rebars it buys from others. In Financial Year 1986/87, it sold $15,908,069 worth of such rebars, and in 1987/88the total was $5,425,100 worth.
449. The business that SFI is conducting now is simply not the same as that conducted at Junk Bay either at the date of resumption orthe date SFI vacated the site. There would be no continuity between the business conducted at Junk Bay and the business SFI is planningfor Shunde. As we have already indicated, the earliest SFI could now get back into the business of steel making is the beginningof 1995. That means an interval of over eight years without being in the steel-making business.
450. Even without the delays of litigation, there would have been almost a four year gap (i.e. from August 1986, when SFI ceased steelmaking operations at Junk Bay, until SFI went into production with its new plant and machinery in Shunde in July 1990, that latterdate being approximately two and a half years after SFI signed the agreement at Shunde in December 1987. On top of that, there wouldbe a four year build-up to full production.).
451. What SFI plans for Shunde is a business similar to the one it conducted at Junk Bay, but it would not be the same. The de facto extinguishmentof the business SFI had at Junk Bay could not be expressed more clearly than in Mr Best’s words in the following passage :-
452. In other words, SFI itself continues, but not the business it had at Junk Bay.
453. We accept all the points of similarity Mr Widdicombe, for SFI, drew between the Junk Bay and Shunde operations in his opening submissions,transcript pages 340-342. Those points were :-
454. Up to a point, we do agree with Mr Widdicombe about the Shunde operation having the same essential characteristics and proportionsas Junk Bay, but one cannot overlook that there are also fundamental differences, such as Hong Kong having a laissez-faire capitalisticbusiness environment, whereas China operates under a communist system which does not recognize the concept of private ownership ofland.
455. On SFI’s behalf, we had drawn to our attention the observation made by Mr Gordon Wu of Hopewell that places such as Shunde in thePRC will be “the workshop”, while Hong Kong will be “the store front”. That was a perceptive observation, describing what, to a considerableextent, has already come to pass, and recognizing the way things are going. We do not, however, think that in any way helps SFI whichis in the situation of many years’ discontinuity between the business at Junk Bay and the business planned for Shunde.
456. In the context of whether SFI’s business at Junk Bay had been extinguished, a submission was made on SFI’s behalf along the linesthat if any goodwill survived from the Junk Bay business, that would mean the business conducted at Junk Bay had not been extinguished.This line of argument was based on some observations of Wells, J. at page 220 in the South Australian Case of Shipp (ante) to the effect that cessation of operations is not the same thing as the extinguishment of a business, and will not extinguisha business unless the goodwill is inextricably tied to the land. (CCS s.8 Part I, page 19). In the Shipp case, Wells, J. also referred to his earlier judgment in Emerald Quarry Industries Pty Ltd v. Commr Highways  18 S.A.S.R. 438 to the same effect.
457. We do not think that the learned judge in Shipp was trying to lay down some universal proposition, and we are not of the view that the survival of some goodwill from a businessis necessarily incompatible with the extinguishment of that business. It depends on the circumstances. More particularly, the survivalof some goodwill will not of itself make it reasonable for a business to be relocated. It will simply be a factor to be taken intoaccount under reasonableness.
458. Particular reliance was placed by SFI on the following passage from Shipp (at p.220) :-
459. Shipp was not dealing with a situation like SFI’s where a business has ceased operations for several years. In Shipp, the business, a vehicle break-down service, was still operating at the time the court heard the case. Also, in Emerald Quarry, wherethe question of extinguishment or relocation arose, the business – quarrying – was still in operation at the time of trial.
460. Most of the goodwill that SFI enjoys springs, in our view, from its connection with New World, rather than from the business it conductedat Junk Bay.
461. As far as markets are concerned, SFI does not need to rely on its connections from the business at Junk Bay: being controlled byNWD, SFI can sell all the output from Shunde to NWD’s subsidiary, Hip Hing, and to companies like E Man with which NWD has good relations.
462. Mr Roy Leung pointed out some aspects of the goodwill of the Junk Bay business which still survive, namely, the technical know-howof management and staff, as well as its connection with its customers.
463. Another surviving aspect of the goodwill of the Junk Bay business not mentioned by Mr Roy Leung is knowledge of sources of supplyof the materials consumed by a mini-mill.
464. Although SFI’s goodwill is of the “floating” variety, meaning it was not inextricably tied to the Junk Bay site, we do not regardthe business to be set up at Shunde as the same as the one at Junk Bay, because of the plain fact that the Junk Bay business wasdestroyed by January 19th, 1987 at the latest.
465. We now turn our attention to the fourth of SFI’s tests, namely, whether relocation is reasonable.
466. An initial problem raised by this test concerns the time at which one should consider reasonableness in the context of relocation.Three possible times suggest themselves, namely, the actual date of resumption (30th July 1986); the date SFI ceased operations atJunk Bay (22nd August 1986); or the date SFI finally left Junk Bay (19th January 1987).
467. Most probably, the correct date in law to treat oneself as then standing in SFI’s shoes for the purpose of considering the reasonablenessof relocation is the date of resumption (30th July 1986). This is the time Mr Widdicombe opted for in his Opening (Transcript, 343,13) when he said “We say the matter should be judged by the situation we would have been in 1986 …” What has actually happenedin the case, though, has been that both parties have treated the date SFI left Junk Bay (19th January 1987) as the right date forperforming this exercise. That can be seen from the way each side has worked out Appendices XXX to Appendix XXXIV. 1 of Mr Best’sand Mr Li’s respective reports, valuing SFI on a going-concern basis as at 20th January 1987.
468. We do not think, in practice, it makes much difference which of the three possible dates is used, and to avoid a further bout ofcalculations, we accept that 19th January 1987 can be treated as the date at which to determine whether relocation was reasonablefor SFI.
469. Hindsight is permissible for this exercise only to the extent contemplated by the Bwllfa case, namely, that SFI’s earnings from 20thJanuary 1987 onwards are to be those projected in accordance with the agreed No-Scheme-World model. Our No-Scheme-World projectionsare the same as those to be found in Appendix V, as revised at our request in Mr Best’s bundle of Revised Appendices, dated 6th March1992, at page 0019. That latest version of Appendix V is to be found in the Part entitled “Accounts” near the end of this judgment.Apart from the No-Scheme-World projections just mentioned, the Tribunal has to determine whether relocation is reasonable for SFIon the basis of what the Tribunal’s perceptions would have been if it could have placed itself in SFI’s position as at the 19th January1987.
470. As we indicated earlier, we do not consider SFI had a better than even chance as at 19th January 1987 of finding a suitable relocationsite. We do not regard it as reasonable in such circumstances that government should be held liable for ongoing items such as Lossof Profits (Head 5), the Costs of Finding Alternative Accommodation (Head 11), or the salaries and other expenses (Double Overheads,Head 10) of the nineteen personnel retained to assist with relocation, because it happened to turn out that, after all, a suitablesite could be found.
471. We accept that, as a matter of law, it was not essential to SFI’s relocation claim that it had a relocation site at the time of expulsionfrom Junk Bay. It is probably not even essential actually to have such a site at the time the Tribunal makes its assessment. In Ship, for example, we do not think the court would necessarily have rejected the relocation claim, provided it had looked fairly certainat the time of assessment that the claimant there could and would, within a relatively short time, obtain a suitable relocation site.
472. What in our view tends to make SFI’s relocation claim unreasonable is a fatal combination of the de facto cessation of business andthe no-better-than-even chance of a relocation site as at 19th January 1987.
473. A case involving a business, where relocation compensation was allowed for the purpose of moving to a site available at the timeof assessment for a continuing business, despite the absence of such a site at the time of compulsory acquisition is Sydney Ferries Ltd v. Minister  2 R.V.R. 187. Various other cases are cited in C.C.S. 8, Part I, pages 15 to 19 in support of the same proposition, but it is difficult to tellfrom their facts whether they do, in fact, support that proposition. Those cases are Feiglin v. Housing Commission of Victoria [Vol.18] L.G.R.A. 261; Bresgall & Sons Ltd v. Hackney  P.C.R. 442; Simpson v. Stoke-on-Trent  P.C.R. 226; Newton v. Lincoln City Council June 7  E.G. 548; and Rutter v. Manchester corporation  P.C.R. 443.
474. As far as we can make out, there was no live issue in any of those cases about whether, to succeed on a relocation claim, it wasnecessary to have a relocation site both at the date of compulsory acquisition and assessment. It might well have been the situation,too, in some, or even all of those cases, that sites, at all material times, were plentiful, so it need make no difference whetherthe claimant had a relocation site either at the time of compulsory acquisition or assessment.
475. Cases where relocation compensation was refused, on their own particular facts, to a business still continuing at the time of assessment,but with no suitable site to go to are Shipp (ante) and Emerald Ouarry (ante).
476. It is by no means on account of SFI’s relocation claim being novel, with the unique combination of no continuing business and norelocation site as at the date of expulsion from the resumed land, that we are not prepared to make an award on the relocation basis.our reason is that, in SFI’s particular circumstances, compensation on a relocation basis strikes us as unreasonable.
477. Another angle, for the purpose of considering this issue of reasonableness in the context of relocation, is to look at the valueof SFI’s business as a going-concern as at 20th January 1987. There is agreement on the methodology to be adopted for that exercise.SFI’s future earnings-stream up till Financial Year 1998/99, together with the terminal value of its assets then, is to be discountedback to 20th January 1987. The projected future cash-flows making up SFI’s future earnings-stream are a function of our findingsin our Sections entitled, II : “SCRAP COST” and III : “REBAR PRICE“. The value of SFI’s Junk Bay land for this exercise is $23.750m, as shown in our Section V “LAND VALUE“, and, on the plant and machinery at Junk Bay, we place the value $60m, as shown in our Section VI : “PLANT AND MACHINERY“. There is an agreed $26m for SFI’s buildings at Junk Bay. The figure for Working Capital results from our finding that SFI wouldhave bought its scrap for cash in part in Financial Year 1986/7, and, wholly, after 1987/8. The capitalisation rate is 25% real and33% nominal, as described in our Section IV : “CAPITALISATION RATE“.
478. Based on those in-puts, the value of SFI as a going-concern as at 19th January 1987 was $83.425m (say, $84m). (See Table XXXIV fromMr Best’s Bundle of Revised Appendices, dated 6th March 1992, page 0025 as reproduced in our Part : Accounts).
479. The combined value of SFI’s net assets (excluding working capital see RCS 16, page 2, and Mr Carnwath’s Closing Submission T1212,113) as at that same date was $109.750m, (say, $110m) made up as follows :-
(See Table XXXIV.1 from Mr Best’s bundle of Revised Appendices, dated 6th March 1992, at page 0026). As those net assets ($110m) exceedthe value of the business as a going-concern ($84m), there is no goodwill. Here, we have used goodwill in the technical, accountingsense of the excess in value of a business valued as a whole, either on a discounted cash-flow basis or a price/earnings basis, overthe value of its net assets. On this, see Exh SFI219 p.81; Mr Best’s Report 33/08, pages 2, 3, 43 and 44; C.C.S. Sect.9, page 8 etseq.; R.C.S. Sect.2, page 2, and Sect.12, page 1; Cruden (op.cit. p.79); Chilver’s Litigation Support, p.191; Glover’s valuationof Unquoted Securities pages 178 and 180.
480. Glover describes this type of goodwill as, in effect, an “acquisition premium” or “acquisition discount”. Earlier in this judgment,we referred to the other type of goodwill, stemming from a company’s reputation, connection, skills of its management and workforce,etc. On that type of goodwill, see Glover, pages 176, 180 and 188.
481. Although for reasons we gave earlier, we do not, as a matter of law, regard the valuation of a business on a going-concern basisas setting a ceiling for the amount a Tribunal can award for loss or damage on a relocation basis, we do, nonetheless, regard theamount calculated on a going-concern basis as in the nature of a benchmark against which the amount claimed for relocation can bemeasured. If the amount claimed for relocation is too far out of line with the value of the whole business as a going-concern, thatwill tend to suggest that making an award on the relocation basis will be unreasonable.
482. Rather than speak in generalities, we can give a practical example from the case now before us. As we have just indicated, the valueof SFI’s business on a going-concern basis in the No-Scheme-World as at 20th January 1987 was $84m. SFI, for plant and machineryalone, on a relocation basis, claims $181.951m based on 1987 dollar values. If we were to accede (which we do not) to SFI’s claimthat, on a relocation basis, its loss or damage for plant and machinery was $181.951m, we would, by virtue of that Head of Claimalone, regard it as unreasonable to make an award to SFI on the relocation basis, since that figure is out of all proportion to thefigure of $84m for the value of SFI’s whole business as a going-concern.
483. Before moving on to look at SFI’S Heads of Claim on a relocation basis, in detail, for the purpose of afterwards conducting a weighingexercise to see whether the total amount of money arising under them is unreasonably disproportionate to the total claimable on anextinguishment basis, we wish, first of all, to consider the proposition of law, advanced on behalf of SFI, based on Burrows v. Metropolitan Railway, (24th January and 22nd November 1884, Times Law Report), that the owner of compulsorily acquired land on which a business was conductedhas a right to be reinstated, regardless of whether the business was making a loss or not (see CCS, Sect 8, Section I, page 9, para.3.1 and Section II, page 36, para-.9.14).
484. In our view, all that Burrows lays down is that, on its own particular facts, reinstatement was reasonable. We also doubt whetherBurrows would be decided the same way now because of the value for money principle introduced by the Acquisition of Land (Assessmentof Compensation) Act 1919.
485. Elsewhere in its submissions, SFI does acknowledge there is no unqualified right to compensation for relocation, and that reasonablenessis a necessary ingredient. See CCS, Sect 8, Part I, page 29, para.4.28, and Part II, page 31, para.9.5.
486. Unlike in the case before us, no attempt was made in Burrows to consider the going-concern value of the business there, on a No-Scheme-Worldbasis. Burrows was decided on the crude facts that, before compulsory acquisition, the business, although losing money, had hopesof improving. On that basis, the acquiring authority was ordered to compensate the claimant for the increased rent it was obligedto pay on the new premises it had found. Information as to whether that business had, on a going-concern basis in the No-Scheme-World,value in excess of its net tangible assets is simply not in the reports of the case.
487. It may well have been that Burrows was running a business of the type described by Wells, J. in Shipp (ante) p.231 :-
488. In the case before us, SFI was not valued “as a going concern as it now exists”, but on a going-conern basis as it would, in thefuture have been, in the No-Scheme-World.
489. Because SFI has been valued on a No-Scheme-World basis, there need be nothing unfair about weighing the cost of relocation againstthe going-concern value.
490. We how move on to consider the contested Heads of Claim put forward by SFI on the relocation basis.
491. Common to SFI’s claim, both on the extinguishment basis and the relocation basis, is the market value of SFI’S Junk Bay site as atthe date of resumption. AS we have already indicated, our finding as to that value is $23.750m, the details of such finding beingin our Section V, entitled “Land Value”.
492. No one could dispute the appropriateness of making an award under this Head on the extinguishment basis, but we did harbour doubtson whether it is correct, in principle, to include it also on the relocation basis, since SFI is claiming reinstatement.
493. We wondered whether it could be correct that SFI should walk away with compensation for the old, while, at the same time seekingto be paid the costs of adapting the new.
494. Usually, in a reinstatement situation, the acquiring authority compensates the claimant by providing him with a new site in substitutionfor the old. SFI has pointed out that there could not be that type of reinstatement in the present case, since it cannot own theland at Shunde, its only interest in it being to occupy it for 50 years on payment of rent. SFI will not be able directly to disposeof the land in Shunde, although there is nothing to prevent the owners of SFI from selling the company and, thus, indirectly, theland, as happened with Euroasia Dockyard Ltd in relation to Tsing Yi Lot 60 and 70, one of the comparables included in our Land Value,Section V. We incline to the same view as Wells, J. in Emerald Quarry Industries Pty Ltd v. Commr of Highways  18 S.A.S.R. 438, 448 that for valuation purposes, it frequently makes little difference whether land is disposed of directly by assignment or indirectlyby selling the shares of the company owning the land. Courts tend to look at substance rather than form.
495. As the Crown never raised any point about an indirect transfer of the proposed Shunde site, we feel constrained to hold that evenon a reinstatement basis, SFI is entitled to be compensated for the Junk Bay land.
496. The question of value for money does, to some extent, arise in relation to SFI’s claim for the cost of adapting the Shunde site.
497. The cost of Adaptation of the Shunde site, namely, $87.076m is to be found at pages 58 and 59 of Mr Medley’s First Report 30/01.We now reproduce those pages.
“CAPITAL COST – DETAILS
A – Site Preparation and Site Services
(Adaptation of Site)
498. According to the government submission, SFI gets value for money in respect of each and every item instanced as being required foradaptation of the site. Government prays in Service Welding Ltd v. Tyne & Wear C.C. 38 P. & C.R. 352 case in support of its argument.
499. Certainly, SFI will itself have to pay for items 1(a) and (b) relating to deep-fill and piling of the Shunde site. SFI had to carryout not dissimilar works for its Junk Bay site for which it is being compensated. It got value then, and will again get it now forthat type of work.
500. SFI’s argument that it should not even have to pay for items 1(a) and (b) for the reason it will finish up with nothing to sell underthe PRC legal system, which does not have a land ownership concept, is unsound in our view.
501. As SFI gets a personal right to occupy the land for fifty years, we think it does get value for money. The practical effect of thearrangement SFI will enjoy at Shunde is analagous to a non-assignable lease for 50 years under Hong Kong’s legal system. Under thetype of arrangement in HK we have just described, it would be unarguable that SFI did not get value for money in relation to landfill and piling. Common sense dictates a similar conclusion for the Civil Works comprising Heads, 1(a) and (b).
502. On the view we take, SFI gets value for money only in respect of the amount of $10m claimed for deep-fill under para.(a) and $15.96munder para.(b) piling of Item 1 : CIVIL WORKS. The costs of those two totals $25.96m.
503. In respect of all the other items, i.e. Item 1(c), CONTRIBUTION TO THE NEW ROAD; Item 2, WATER SERVICES, Item 3, ELECTRICAL SUPPLY;and Item 4, POLLUTION EQUIPMENT, SFI does not get value for money.
504. Item 1(c), a $1.046m contribution to a 1 1/2 km long new road to the Shunde site, does not correspond with anything SFI had to providefor itself at Junk-Bay. The only road SFI had to finance at Junk Bay was the short stretch immediately abutting the rear of the JunkBay site. All the other roads in the vicinity of the Junk Bay site were public roads for which SFI did not have to pay anything.
505. Item 2, WATER SERVICES, costing $4.709m, does not give value for money to SFI which got its water at Junk Bay by gravity from a tankit had built on the hillside immediately above the Junk Bay site.
506. Regarding Item 3, ELECTRICAL SUPPLY, SFI did not have to pay for its electrical supply at Junk Bay, as China Light and Power, withoutcharge, provided the overhead lines as well as a substation. SFI did not need a voltage compensator at Junk Bay.
507. As there was little, if any, pollution control at Junk Bay, SFI needed no equivalent to Item 4, POLLUTION EQUIPMENT in the form ofarc furnace fume cleaning and the sewage treatment system it must have at Shunde. Thus, the pollution equipment for Shunde does notrepresent value for money to SFI.
508. Authorities drawn to our attention to show how works of the type just mentioned escape the clutch of the money for value principleare as follows : Bresgall & Sons Ltd v. Hackney  P.C.R. 442; Thomas & Sons Ltd v. Greater London Council, April 1  E.G. 991 & 1086; and Appleby Ireland Ltd v. Hampshire C.C. : Estates Gazette, September 30, 1978, p.1183.
509. Thus, $25.960m for deep fill and piling, plus 10%. project management fee and 8% contingency, making a further $2.80368m representvalue for money in the $87.076m for Site Preparation and Site Services, so that the balance of $58,312,320 would be the amount claimableby SFI under the Head of Site Adaptation costs on the relocation basis.
510. That sum of $58,312,320 gets thrown onto the scales for the Relocation/Extinguishment exercise.
511. Head (4) of SFI’s claim on a relocation basis concerns the cost of buying and installing new plant and machinery at Shunde.
512. The full cost for this item would be $227.438 million in 1987/8 dollars (See Mr Medley’s First Report 30/01, pages 60 to 67).
513. SFI is prepared to concede that 20% of that sum represents betterment compared with its plant and machinery at Junk Bay.
514. After deducting 20% for betterment, SFI’s claim under this Head amounts to $181.951 million, made up as follows :
515. According to SFI, the approach the Tribunal should adopt towards its claim on the relocation basis is to be found in Tamplins Brewery Ltd v. Brighton Corp  P.C.R. 746, the effect of which Mr Widdicombe summarises to be as follows :-
516. In Tamplin, the factual situation was a brewery had its bottling plant in a part of Brighton about three miles away from the mainbrewery premises. Brighton Corporation compulsorily acquired the bottling plant comprising land and machinery. The brewery decidedto bring all its operations under the one roof and put in new machinery for bottling in the main brewery premises. Relocating thebottling plant to the main works was “the best and cheapest way of mitigating” (p.754) the brewery’s loss.
517. The head-note of that case reads, “Where resumption cuts away a vital part of a single undertaking the cost of replacing that partis initially the proper measure of compensation”.
518. From there, SFI’s counsel went on to argue that, a fortiori, where resumption destroys the whole of an undertaking, as has happenedat Junk Bay, the cost of replacing the whole of the plant and machinery is initially the proper measure of compensation.
519. That argument is a non-sequitur.
520. Whilst relocating part of a manufacturing enterprise makes sense when it is the cheapest solution, as it was for Tamplin Brewery,the position when the whole of a works has been destroyed, as at Junk Bay, is simply different.
521. In our Section VI, entitled “PLANT AND MACHINERY”, we have found the value of SFI’s plant and machinery to have been worth $60 millionon the agreed Open Market Existing Use basis, as at the date of resumption.
522. Far from being a form of mitigation as in Tamplin, SFI’s proposal of replacing old with new works out as three times more expensive(even after allowing for 20% betterment) than compensating SFI on an extinguishment basis, (comparing $181.951m with $60).
523. The only point of similarity we detect between the Tamplin situation and SFI’s is that both involve plant and machinery.
524. As we see the position, SFI will be getting full value for money if it decides to pay $227.438m for new plant and machinery for Shunde.For the present case, we see no point in the elaborate betterment exercise Mr Medley and Mr Best have jointly devised. Everythingwhich SFI pays out, beyond the $60m we find to have been the value of SFI’s plant and machinery at Junk Bay at the date of resumption,is betterment SFI has to finance for itself.
525. There is the point, too, as we have already noted, that this sum of $181.951m SFI claims for plant and machinery on a relocationbasis, by itself so overtops the value of the Junk Bay business as a going -concern in the No-Scheme-World that it would be unreasonablefor the Tribunal to award compensation on a relocation basis.
526. In case we are wrong about SFI getting value for money in respect of the proposed plant and machinery for Shunde, we agree thereshould be a betterment deduction along the lines of the Medley/Best proposal, but with modifications. We adopt Mr Carnwath’s proposalof stating the principles to be followed and leaving the actual calculation for the accountants to work out. See RCS, Sect 14, page22, para.9.16.
527. We agree with Mr Medley’s initial step of assessing the betterment percentage of the plant he designed for Shunde.
528. The value of the longer life of the new plant should take into account the lives of the old assets at Junk Bay.
529. In our Section VI : “PLANT AND MACHINERY”, the remaining economic lives for the items of the Junk Bay plant with which we dealt donot always coincide with the remaining lives reflected in the individual valuations for the items of plant. This is due to separateallowances for obsolescence, or the adoption of nominal values where the items were virtually obsolete.
530. We therefore set out below the remaining lives reflected in the values adopted for the Junk Bay plant which were not agreed by theparties. These are the remaining lives which should be used in any calculation for betterment using the Medley/Best model. Some ofthese remaining lives can only be approximate. Where this occurs the life is prefaced by the word “say”.
531. E.A.F. 1 (32.09), say, 5 years; E.A.F. 3 (32.10), say, 14 years; The Concast (35.01), 10 years; The Rolling Mills (48.09), say, 5 years; R.H.F.A (41.06) Nil; R.H.F. B (41.05) 15 years; R.H.F. C (38.01) 15 years; Casting Crane (installed 1966) (33.06) 5 years; Casting Crane(33.07) (installed 1974) 13 years; Charging Crane (32.01) (unimproved) 5 years; Charging Crane (32.02) (improved), say, 7 years;Power and Other Distribution (52.04), say, 13 years; Transformer and Switch gear (52.03), say, 13 years.
532. Thus Attachment 1 of Appendix XLIV in Mr Best’s Report 33/06, Appendices, will have to be re-worked. Straight line depreciation shouldbe adopted, as per Exh R55, and Mr Carnwath’s Opening Submission, Transcript Pages 203-206.
533. The quantified value of the longer life of the new and improved efficiencies should simply be deducted from the total capital costof the new Shunde Plant without any of the averaging of the type shown in Annexure 4A Appendix XLIV of July 18th 1990 in Mr Best’s33/06.
534. For the purpose of finding the Net Present Value of the longer life of the new plant and the annual operating savings, the capitalisationrate to be used is 25% real, as per our Section IV : “CAPITALISATION RATE”. See also Mr Carnwath’s Closing Submission, TranscriptPage 1125.
535. Head (5) of SFI’s claim on a relocation basis is for:-
536. As at January 1990, in Exh.SF265A, SFI quantified its claim under (a) at $266.815m, and (b) at $42.968,157.
537. Those figures are on the assumption that SFI would commence its programme for implementing the Shunde project
in January 1990. With a two and a half year project implementation period, production would now commence in July 1992 at the veryearliest, and with the one and a half year build-up assumed by Mr Medley, SFI would reach full production of 110,000 M/T of HT rebarin 1996/97.
538. How the calculation, made on SFI’s behalf, arrives at the figure of $266.815m under Head (5)(a), and $42.968157m under (b) can beseen from Appendices IV and XXXVI, dated 15th November 1989, from Mr Best’s Appendices to his Report 33/06, as reproduced opposite.
539. Heads 5(a) and (b) are what SFI have described as “continuing items” which have to be recalculated to take account of any slippagein the commencement of the Shunde project implementation.
540. Because of the delays of litigation, the commencement date, even in theory, could not now be earlier than July 1992, so that twoand a half more years’ estimated profits to provide for the interval 1990 to mid-1992 would have to be added to Appendix IV of MrBest’s Report 33/06. The total for such Future Loss of Profits would rise to around the $350 million mark. That is so disproportionateto SFI’s value of $84m as a going-concern, in the No-Scheme-World, that it could not conceivably be reasonable to value SFI on arelocation basis, if figures
of such magnitude are correct for post-resumption Loss of Profits.
541. As things turn out, though, we do not agree with any of the figures in Appendix IV of 15th November 1989 from Mr Best’s 33/06.
542. In one respect only, we consider that Appendix IV underestimates the amount due to SFI, since we agree with Mr Willcox’s four yearproduction build-up for Shunde, rather than Mr Medley’s one and a half years.
543. With Mr Willcox’s four year build up and a July 1992 commencement date, SFI would not reach full production till six and a half yearslater, namely January 1999. (See SFI’s Alternative App VI in SFI’s “ALTERNATIVE FUTURE LOSS OF PROFITS CLAIM” inserted at the endof the Appendices part of Mr Best’s 33/06 and now, for convenience, shown opposite.)
544. In SFI’s Appendix IV, whether with Mr Medley’s or with Mr Willcox’s build-up, we disagree with the level of estimated profit broughtin from SFI’s version of Appendix V, and require the substitution of a level of profit based on our findings on SFI’s sale pricefor its rebar and the purchase price of its scrap.
545. We also disagree with Mr Best’s view on the discount rate to be applied in Appendix IV for the purpose of showing the discountedvalue, as at 30th July 1986, of SFI’s Future Losses of Profit Consequential to Relocation. He contends it should be what he describedas a “money rate”, by which we understood him to mean something akin to the Prime rate charged by banks. That “money rate” presupposedSFI’s estimated profit, lifted from Appendix V, was as good as money in the bank for SFI, with no risk it might not make profitsso high as that, or, maybe, even, none at all.
546. We do not agree with Mr Best on that, and can see no difference between the riskiness of SFI’s estimated profits for the Loss ofProfits exercise in Appendix IV, and the discounted cash-flow exercise in Mr Best’s Appendix XXXIV of November 15, 1989 to his Report33/08 where he applied a discount rate (real 13% and nominal 19%) to take account not only of the time value of the cash-flows whichcomprised for the most part SFI’s estimated future profits, as per Appendix V, but also the risk of not receiving them. We considerthe following observation from Wells, J. in Emerald Quarry (ante) to be in point here :
FUTURE LOSS OF PROFITS CONSEQUENTIAL TO RELOCATION
Note: This schedule is the same as page 5 of the Deloitte revised schedules, except that the discount rates used are the ones indicatedpreviously by the Tribunal (Tribunal Document C4 24th October 1991).
547. Having held that the estimated future profits in Appendix IV should be discounted at the same rate as the cash flows in AppendixXXXIV, we declare that rate to be 25% real and 33% nominal, consistent with the findings in our Section IV, entitled, “CAPITALISATIONRATE”.
548. Appendix IV, with our findings incorporated, results in a figure of $64.126m for the net present value, as at the date of resumption,for SFI’s Future Loss of Profits Consequential to Relocation. (See the Appendix opposite, copied from Arthur Andersen’s letter of15th April 1992 to SFI’s solicitors, Lovell White & Durrant.)
549. An alternative basis for SFI’s Future Loss of Profits Claim could be on the assumption there were no delays for litigation. As SFIdid not have its relocation site until December 1987 there would still have been at least a five year interval between leaving JunkBay and completing a one and a half year build-up at Shunde.
550. On the topic of delay brought about by litigation, government is blamed for that by SFI on the ground of strenuously opposing SFI’sclaim, and withholding proper compensation from SFI.
551. It is well established that a defendant who unsuccessfully resists a claim for loss or damage involving repairing or rebuilding aplaintiff’s property will be ordered to pay the cost of such work assessed at prices prevailing at the time of the judgment, ratherthan those prevailing at the time the loss or damage was caused. Dominion Mosaics v. Trafalgar Trucking  The Times 8th March 1989 illustrates that principle at work in a Common Law damages case.
552. By analogy, so we understand SFI to be arguing, government should be required to compensate SFI for the delay suffered, the measureof such damage being SFI’s lost profits throughout the period of delay.
553. Even if the circumstances were otherwise, we harbour doubts whether, in principle, a claim for continuing loss can be entertainedunder the Ordinance, but, in any event, we would not, in practice,. be inclined to compensate SFI for such delay, since, in our view,its claim has been so intemperate that strenuous opposition to it by government was a natural and reasonable response, whether toSFI’s initial claim for $977,266,264 on 10th September 1986 (see Exh.R22, pages 75 to 83), or its present claim which as at January1990 in Exh SF265A it stated to be $884,260,716 on the basis of starting the Shunde project on 1st January 1990 and a 1 1/2 yearbuild-up to full production, and now is well over $1,000,000,000 on the basis of a further 2 1/2 years’ slippage on the Shunde project,and a four year build-up.
554. Head of Claim (10), Double Overheads/Unproductive Overheads which includes Head (12), Transportation Costs, does not call for morethan summary treatment on either the relocation or the extinguishment basis. This item relates to SFI keeping on a corps of its moreimportant personnel, after vacating Junk Bay, with a view to relocating, including training new staff at Shunde. The list of thoseretained by SFI to form this corps is to be found in Exh.66 to Mr Roy Leung’s First Affidavit.
555. Whether on a relocation or on an extinguishment basis, SFI’s claim under this Head starts to run from 20th January 1987, the firstday after SFI vacated Junk Bay. ‘(See CCS s.12 Part VI blue page 4, together with page 8A of the DHS Report 33/05.)
556. As we are of the view that SFI’s business at Junk Bay was extinguished by the 19th January 1987, we are, inevitably, of the viewthat it was pointless for SEI to keep those staff on after that date. We, therefore, disallow Head (10) (including Head (12)) onboth the relocation and extinguishment basis.
557. Likewise, Head (11), included in both the relocation and extinguishment claim as Costs of Finding Alternative Accommodation failsin respect of expenditure incurred after the 19th January 1987. The full amount of the claim is $756,359 (see Exh.SF154). Of thatamount, we only allow $79,730, being the amount SFI paid to Messrs Langdon Every & Seah, costing engineers, who evaluated relocationsites for SFI in 1986/1987. As we gather government does not object to that item, we award it to SFI, but the rest we disallow asit was incurred after SFI’s business at Junk Bay had been extinguished.
558. Head (13), only in the relocation claim, for Publicity Costs for launching the Shunde business, fails along with the relocation claimgenerally.
559. If we are wrong, and it turns out that SFI is entitled to claim on a relocation basis under Head (4) in respect of the Cost of Plantand Machinery New, (subject only to deduction for betterment), under Head (7) for the Cost of Adaptation of the New Site, and underHead (13) for Publicity Costs, then we are satisfied that SFI is in principle entitled to the adjustment for inflation it claimsunder Head (15).
560. We reproduce Head (15) from Exh.SF265(a), showing the amount SFI claimed on the assumption that the programme for relocating at Shundecommenced in January 1990 :-
561. The amount now stands at over $130 million. See Appendix 2 to Arthur Andersen’s letter of 15th April 1992.
562. It is on the authority of the West Midland Baptist (ante) case that we are satisfied SFI is entitled to be compensated for inflation up to the time of this award as a means of preservingthe real value of what SFI would have to spend at Shunde in relation to the items comprised by Heads (4), (7) and (13) of the claimon the relocation basis.
563. As we understand the position, the amount which SFI claims under Head (4) and Head (7) on the relocation basis, as shown in Exh.SF265(a),is based on prices as at December 1987. As things stand at present, we have indicated that July 1992 would be the earliest time intheory SFI would now be able to commence the Shunde project of relocation. For Heads (4) and (7), SFI should be compensated to makegood inflation from December 1987 until July 1992. The Consumer Price Index – All Items, while not being ideal in relation to plantand machinery and civil work, is the best surrogate brought to our attention. That is the index we hold should be used for this inflation-proofingexercise. The exercise should be carried out, using the formula shown at the foot of Exh.SF262.
564. The principle of taking care of inflation up to the time of an award is enshrined in Pickett v. British Rail Engineering Ltd  A.C. 136. Generally, courts disregard post-award inflation on the theory that, through investment of compensation monies, a claimant can protecthimself against inflation. That might be so with long term investments, but we do not think the same applies for relatively shortterm investments. For the plant and machinery, as well as the civil works at Shunde, SFI would have to start disbursing money inaccordance with the project programme in about March 1993. Under Heads (4) and (7) we hold that SFI is to be compensated againstinflation from the time of this award until the end of March 1993 on the assumption that the rate of inflation during that periodwill be the same as that existing on the date of this award. That is a rather rough-and-ready approach, but the fairest we can devisein the circumstances.
565. Concerning Head (13), Publicity Costs, the figure of $622,010 takes into account inflation up till March 1988. If the Shunde projectgoes ahead on the basis we have assumed, SFI would need to expend this money in or about June 1994. SFI is to be compensated forinflation in respect of this Head 13 up to the date of this award on the basis we have already indicated for Heads (4) and (7), butwith a commencement date of March 1988. Post-award inflation is to be again compensated on the same basis as Items (4) and (7), butcontinuing up till June 1994.
566. On behalf of the government, it was argued that there was no reason to award a claimant money to compensate for inflation, sinceinterest, which can be ordered under s.17 of the Ordinance, would serve to compensate for inflation. As argued on behalf of SFI,relying on Pickett v. British Rail (ante), we regard interest on compensation as different from an increase of compensation to make good inflation. Part of Lord Wilberforce’sspeech at page 151 in Pickett makes the point forcefully. We quote:-
(See Claimant’s Relocation Submissions Sect.8, Vol. 3 page 47).
567. We agree with Mr Widdicombe’s way of looking at compensation paid in respect of future inflation, namely, that an owner whose landhas been taken from him against his will is not required to let it go without being compensated for future losses. Those future lossesmake up the owner’s disturbance claim. As in the U.K. under the legislation there, s.10(1) of the Ordinance envisages the owner beingawarded one amount, made up of different elements.
568. Under the U.K. legislation, the owner is treated as if he were being paid the purchase price of his land, and that purchase priceincludes any element for disturbance. Although Hong Kong does not follow the vendor/purchaser analogue, the result here is no different,the owner being paid just the one sum under s.l0(1) for the market value of his land plus whatever additional amounts have been provedfor loss or damage in the nature of disturbance.
569. Having now completed our exercise of examining the relevant Heads of Claim on a relocation basis in the context of reasonablenesswe now move on to look at two other aspects of SFI’s relocation claim from the point of view of reasonableness. Those two aspectsare, firstly, whether the return SFI can be expected to make from the proposed venture in Shunde makes sense commercially, and, secondly,whether, when viewed reasonably, the proposed relocation is viable.
570. On the question whether the proposed relocation is reasonable from the commercial view-point, there is a feasibility study, (seeMr Roy Leung’s First Affidavit, Exhibit “RL69”) made by D.H.S., China.
571. Rather than get drawn into the hornets’ nest opened up by McKenna & Co’s letter of 19th May 1992, we need go no further thanto note that, with SFI’s estimated cost of $397.427m in December 1987 dollars for building the works at Shunde, and our projectionof $34.542 for SFI’s profit per annum in 1987/8 constant dollars, in 1988/9 onwards, SFI’s return, by a rule-of-thumb “pay-back”calculation, works out at approximately 11 1/2 years, which represents a yield of 8.7% (and that is without any provision for workingcapital).
572. In view of our finding of a capitalisation rate of 25% for the purpose of discounting SFI’s projected future cash-flows, a pay-back% of approximately 8.7% points to the lack of reasonable feasibility for the new Shunde works from the commercial point of view.
573. Under cross-examination, Mr Best for SFI agreed that the return shown by the feasibility study from DHS, China was less than an investorwould expect for a China project with its attendant risks, but he went on to point out that his answer was a generalisation, andthat, for NWD, as, controlling shareholder of SFI, it might make sense on account of NWD’s special links with Shunde which mightreduce risk.
574. On the view we take, the projected return on the proposed Shunde mini-mill, as shown by the pay-back method, is too poor for relocationto make reasonable commercial sense in the light of the expected cash-flow. NWD, because of the good relations its Chairman has withhis old home-town, has no qualms about receiving a lower return than considerations of commerce would normally dictate, but that,in our view, does not make it reasonable for government to have to fund such a project. Unless, viewed objectively, relocation atShunde makes good commercial sense, we do not think it would be reasonable to order government to pay compensation to finance sucha relocation. We agree with the submission made on government’s behalf that NWD’s wish to go ahead with the Shunde project, despiteits offering a lower return than normal commercial prudence would indicate is an independent business decision made by NWD which,not being objectively reasonable, should not be regarded as stemming from the resumption.
575. In the context of feasibility and reasonableness, we regard it as significant that NWD has done next to nothing to finance a relocationof SFI to Shunde.
576. SFI can readily explain its failure to attempt relocation on the ground of impecuniosity.
577. However, that is an explanation not available to NWD. As Mr Stewart Leung acknowledged in his evidence, NWD has no problem in financingworthwhile projects.
578. If NWD really believes that having a supply of rebars from its subsidiary, SFI, is an important part of NWD’s corporate strategy,as Mr Stewart Leung claimed, and if, as Mr Stewart Leung indicated, NWD considers SFI’s business prospects will be good if it relocates,we find it surprising that NWD did not simply go ahead and finance SFI’s relocation as soon as the Shunde site was found.
579. According to Mr Stewart Leung, NWD did not adopt that course because there would be a problem about what share the Leung family wouldhave in a relocation done that way, and it was necessary to abide the result of the present resumption proceedings to see first whatthe financial situation of the Leung family would then be.
580. We find Mr Stewart Leung’s purported explanation on this as unconvincing as his answer that he could not remember off-hand why itwas NWD did not provide SFI with sufficient capital under the “shadow” to buy scrap for cash, rather than at the extortionate ratescharged by the dealers ready to grant credit.
581. Our impression of Mr Stewart Leung as a witness was that he trimmed his testimony according to what he thought might help SFI most.
582. While on the topic of Mr Stewart Leung’s credibility, we also mention the cosy picture he painted of his calling together peoplefrom SFI and HH to explain how, as sister companies, they should behave towards each other in the face o?the threat posed by the”shadow”. The only problem with his evidence over that was its being totally at variance with the evidence of Mr Roy Leung whichwas that SFI did not get to know HH was placing its orders for rebars elsewhere until SFI realized that new orders from that sourcehad dried up. Neither did Mr Mui, the manager of HH, mention anything resembling a dialogue between HH and SFI, sponsored by Mr StewartLeung, to arrive at decisions on what HH’s and SFI’s policies should be towards each other with the threat of resumption in the air.Instead, Mr Mui described how he was told by NWD that HH should build up a relationship with another rebar supplier, and HH behavedas directed by NWD, without any suggestion of HH consulting SFI in any way.
583. On the view we take, Mr Stewart Leung’s contention about NWD not wanting to go ahead by financing SFI’s relocation without the Leungfamily first knowing what they would get out of resumption proceedings was another instance of his evasiveness as a witness.
584. As there is clearly a substantial degree of reciprocal trust between the Leung family, and Mr Y.T. Cheng, the Chairman fo NWD, wefind it difficult to believe that either side would have needed the ownership details to be worked out before being willing to goahead with the Shunde project. An indication of how far the Leung family trust NWD is to be found in the Leung family’s willingnessto hand over all their shares in SFI to NWD on or about 1st November 1985.
585. As the Leung family had been dependent on NWD’s goodwill towards SFI since at least the time SFI’s accounts were qualified in 1979/80,we would regard it as strange that the Leung family might start to show cold feet towards cooperating with NWD over a relocationto Shunde.
586. We do not think the Leung family would have hesitated for one moment about relocating to China if NWD had been willing to put upthe money, and we do not think they would have required the ownership details to be sorted out beforehand.
587. The probabilities, as we see the situation, are that NWD has not been willing to put up its own money to finance the relocation,because it has not thought the prospects good enough to justify the $378 million out-lay (in 1987/8 dollars) required. In view ofthe considerable sums of money already pumped into SFI by NWD by the time SFI vacated Junk Bay on the 19th January 1987, and theunattractive price of rebar at that critical time, we think the likelihood is that NWD made a business decision not to relocate becausethe likely returns made it not worthwhile, and we find it hard to believe that the explanation lay in problems over ownership ofthe new venture, as Mr Stewart Leung contends.
588. Talk is cheap, so that it is all too easy for Mr Stewart Leung to come forward at this stage with an all-too-facile explanation forNWD’s lack of action.
589. Such action as NWD and SFI have in fact taken towards relocation is shadow rather than substance, and, while certainly showing theywill be happy to have government finance relocation, indicates, at least in NWD’s case, a reluctance to risk its own money.
590. On the aspect of whether the proposed relocation is reasonably viable, it is instructive to look at SFI’s projected Statement ofCash-Flow, as shown in DHS’s revised appendices of 6th March 1992 (at page 0029). That shows SFI would not have been in a positionto pay any dividends to shareholders before Financial Year 1996/97. It would not be before then that SFI would finish paying offall the bank loans and loans from NWD, including capitalised interest. Thus, even in the No-Scheme-World, SFI would have paid nodividends after Financial Year 1979/75 until Financial Year 1996/97. Those figures, in our view, speak for themselves in showingthat relocation was not a viable proposition from the point of view of either the controlling shareholder, NWD, or the minority shareholders,the Leung family. In reaching that conclusion, we have not overlooked the circumstance of how important SFI was to Mr L.Y. Leung,who had spent most of his working life building up the company, and his two sons who had expected to make their careers with it.
591. In appropriate circumstances, a claimant can be entitled to wait and see how much compensation he is awarded before deciding whetherto go ahead with reinstatement. If the claimant was so justified, the award for rebuilding will be on the basis of costs at the timeof the assessment rather than at the time of the compulsory taking so that the claimant will be spared the ravages of inflation.
592. Eblen (ante) was such a case. As part of a road-widening scheme, Eblen lost part of the land from which he ran a petrol filling station and vehicle showroom. Because of the lost land, he wanted to alterthe lay-out of the buildings on the remainder of the site. Before commencing rebuilding, he brought compensation proceedings on thebasis that he should receive an award sufficient to enable him to carry out the reasonable reinstatement he planned. Throughout thetime following dispossession, he carried on his business on the remainder of his site, as before.
593. There are also common law cases such as Dodd Properties v. Canterbury City Council  1 WLR 433 and Perry v. Sidney Phillips & So  3 All ER 705 to similar effect that an owner of a building need not necessarily carry out repair work at the earliest possible moment to remedydamage caused by a wrong doer, but can delay until he knows the amount of damages the court will award him. Those damages will beawarded on the basis of building costs at the time of the assessment. In neither of those two common law cases did the owner of thedamaged building cease running his business.
594. On the strength inter alia of Eblen and the two common law cases just mentioned, SFI contends it is entitled to await the Tribunal’saward before going ahead with relocation, and that it should be compensated for Loss of Profits pending the Tribunal’s decision.
595. SFI’s situation on the view we take, is entirely different from that contemplated by the Eblen, Dodd Properties, and Perry cases. By the time SFI vacated its Junk Bay site on 19th January 1987, it was already clear that the business it had been carryingon there was extinguished, so the question of loss of profits pending relocation does not arise.
596. It was such a clear case of extinguishment that SFI could not reasonably expect this Tribunal to award it Loss of Profits pendinga decision on the obvious.
597. Wells, J., in Shop (ante), at page 220, rightly, in our view, points out that where the taking of land has the effect of destroying a business, thecompensation payable in respect of that business will generally amount to the value of that business assessed at the date when itbecame apparent the re-establishment of that business as a going-concern was impractical.
598. We are of the view it was apparent on and before 19th January 1987 that SFI’s business at Junk Bay could not be established elsewhereas a going-concern.
599. Based on the foregoing, we now summarize why we do not regard it as reasonable to relocate SFI’s business from Junk Bay to Shunde:-
1. SFI’s business at Junk Bay was in fact destroyed on or before 19th January 1987 so there is no business to relocate.
2. SFI had no better than an even chance of finding a relocation site as at 19th January 1987 when it left Junk Bay.
3. Relocation is not economically feasible by ordinary commercial standards as the return on the investment to set the Shunde worksup is too poor relative to the risks of investing in the P.R.C.
4. Relocation is not economically viable since there would be no profits from which shareholders could receive dividends before 1996/7.
5. Since the value of SFI’s business as at 20th January 1987 on a going-concern basis was only $84m, the relocation cost at $388,928,559(plus tax to be calculated), as shown below, was so disproportionate as to be unreasonable.
600. The higher the compensation payable on a relocation basis, the more disproportionate it becomes to the going-concern value, and,hence, the less reasonable.
601. When weighed together, the various individual points we have identified in the context of reasonableness, lead us overwhelminglyto the conclusion it would be unreasonable to make SFI an award on the relocation basis.
602. The award to SFI, therefore, has to be on the extinguishment basis. Under the various Heads-of Claim on an extinguishment basis,the sums we award are as follows :-
Therefore, the award we make to SFI is $131,030,728.
603. The questions of professional fees, costs and interest on the award have been reserved to a date to be fixed.
604. We now set out a separate section for each of the following major issues with our detailed findings :-