BDO BINDER (a firm) v. THE HONG KONG SOCIETY OF ACCOUNTANTS (a body corporate)

HCAL 15/2000
HCAL 16/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATION LAW LIST

ACTION NO. 15 OF 2000

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J U D G M E N T

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1. In October 1999, the Council of the Hong Kong Society of Accountants ('the HKSA') made a decision pursuant to section 42C of the Professional Accountants Ordinance, Chapter 50 ('the Ordinance') to constitute an Investigation Committee. The Council directed that Committee to investigate the professional conduct of two firms of accountants who had prepared what is called an accountants' report for inclusion in a prospectus issued by a company called GKC Holdings Limited. Also to be investigated was the professional conduct of the firms which had carried out audit work for GKC Holdings and its associate companies between 1 April 1994 and 31 July 1997. This direction was made because apparently such audit work had underpinned much of the material appearing in the accountants' report. The purpose of the investigation was to ascertain and to report to the Council whether a prima facie case existed against the accountants showing that they had offended the provisions of section 34(1)(a) of the Ordinance by reason, for example, of a failure to maintain and apply professional standards in the discharge of their responsibilities.

2. The firms of accountants directly affected by this decision of the HKSA were the 3 firms who together make up the Applicants in this matter. Each of the Applicants has sought, by way of judicial review, an order of certiorari to quash the decision of the HKSA to constitute the Investigation Committee and an order of prohibition to prevent it from making any further decision to constitute such a Committee with the same terms of reference.

A brief history

3. Between 1 April 1994 and 31 March 1996, the firm of Kwan Wong Tan & Fong (the 1st Applicant in case no. 16 of 2000) acted as auditors for a corporation called German Kitchens (China) Ltd ('GKC') and various of its associated companies. For the ensuing financial year; that is, for the year ending 31 March 1997, Deloitte Touche Tohmatsu (the 2nd Applicant in case no. 16 of 2000) and BDO Binder (the Applicant in case no. 15 of 2000) acted together as the auditors.

4. In April 1997, Kwan Wong Tan & Fong merged with Deloitte Touche Tohmatsu and since that time it has effectively been dormant.

5. GKC and its associates carried on business as manufacturers and suppliers of kitchen systems and as suppliers of marble, granite and the like to Hong Kong's building industry. In 1997 the decision was made to seek a listing on the Hong Kong Stock Exchange. Deloitte Touche Tohmatsu and BDO Binder were appointed to prepare the necessary accountants' report. In December 1997 GKC Holdings was successful in obtaining a listing on the Exchange.

6. The GKC Group, however, fell quickly into difficulties. Louis Wong, Registrar of the HKSA, has said that in July 1998 police officers attached to the Commercial Crime Bureau executed search warrants at the offices of the GKC Group for the purpose of investigating alleged acts of fraud. This was followed by a change in senior management and the appointment of a firm of accountants, KPMG, to carry out an independent financial review. KPMG issued its first report in September 1998 and in that report expressed reservations as to the authenticity of a number of contracts allegedly entered into by the Group with suppliers or recipients of materials.

7. In this regard, for example, KPMG's first report read inter alia as follows:

"In view of the complete lack of files relating to these projects and the fact that nearly all of the contractors of the identified Marble and Granite contracts whom we have approached have verbally confirmed no knowledge of the contracts allegedly signed with GK China, we have great reservations as to the existence of any such valid contracts and hence the recoverability of the debts said to be related to them. It would appear to us that the accounting records do not, at least insofar as these contracts are concerned, reflect the actual financial position of the Group [as of 31 July 1998]".

8. If the contracts identified by KPMG were fictitious or sham agreements no moneys could be recovered under them. A month later the directors of GKC - the major operating entity within the Group - resolved to wind up the company on the basis that it was unable to meet its liabilities. Two partners of KPMG were appointed liquidators. Not surprisingly, the matter received a degree of publicity and on 19 January 1999 the Stock Exchange of Hong Kong wrote a letter to the HKSA expressing its concern. In part, the letter read:

Serious concerns on the reliability of the financial information in the listing document of GKC have been raised and have been widely reported in the local press.

The Exchange has grave concerns that subsequent events at GKC have undermined the credibility of the financial information in the accountants' report. As the Society's major functions include maintaining and improving the accounting and auditing standards of its members, the Exchange would ask the Society to look into the matters and take appropriate action, where necessary."

9. So that the allegations could be investigated further and informed advice given to it, the Council of the HKSA referred the matter to an internal committee known as a Professional Standards Monitoring Committee ('the Monitoring Committee'). As will be seen later, this Committee is essentially an advisory body to the Council. It looks into allegations of a failure to meet professional standards and passes its conclusions back to the Council.

10. On 22 January 1999, this Monitoring Committee held a meeting at which it expressed the opinion that it did not feel able to commence its enquiry. It gave 3 reasons for this. They are expressed in the minutes as follows:

1. Although KPMG, who carried out a special review and was subsequently appointed as liquidators of the major subsidiary, were reportedly to have identified contract work-in-progress as the area of concern, there was no public information about the reported suspected misstatements on which the [Monitoring Committee] could base its enquiry with the reporting accountants.

2. Complaining to regulatory bodies was not a normal duty of the liquidators and it was not clear whether the liquidators were able to respond to informal enquiry.

3. It was not clear how KPMG, wearing the hat as the preparer of the special review report, was able to provide any information in this different capacity.

11. The Committee resolved that a report be made to the Council of the HKSA that enquiries should rather be carried out by an Investigation Committee constituted pursuant to section 42C of the Ordinance, the belief being that the matter was one of considerable public interest and warranted rather an investigation by that body.

12. However, the Council at that time was of the view that the Monitoring Committee should persist and, in order to obtain information for it, the HKSA contacted both KPMG and the Stock Exchange. Under cover of a letter dated 11 March 1999, the Stock Exchange sent a copy of KPMG's first report to the HKSA. The letter recorded that the Stock Exchange had received the consent of GKC Holdings to release the report subject to the condition that it was released to the HKSA on a strictly confidential basis. KPMG was also able a little later to release certain extra information to the HKSA.

13. On 22 April 1999, the Monitoring Committee held a meeting with representatives of the Applicants, they being the accounting firms under scrutiny. At that meeting the Applicants were told that the first KPMG report had been obtained but on a confidential basis and, as a result, it could not be shown to the Applicants. This had to be a handicap to a free cross-flow of information between the Committee and the Applicants.

14. At this juncture, it must be emphasised that at all times during the course of the Monitoring Committee's investigation it received the full co-operation of the Applicants. Subject to the prudence expected of any professional firm, it is accepted that the Applicants answered queries to the best of their ability, attended meetings and made discovery of documents. The Applicants have, in fact, described their co-operation with the Committee as being 'exhaustive', involving both expense and the utilisation of valuable time.

15. On 2 July 1999, the Stock Exchange filed a formal complaint with the HKSA on the basis that the Applicants may have been negligent or may have failed to observe or apply the required professional standards in the accountancy work undertaken by them for the GKC Group. When the complaint was received, the HKSA told the Stock Exchange that the Monitoring Committee would soon submit its report and the Council would consider the position after the receipt of that report.

16. In respect of the Monitoring Committee's work, in early August 1999 it held meetings with the liquidators of GKC and was informed that further enquiries indicated that there may have been extensive and systematic management fraud in GKC's contract system. Shortly thereafter the liquidators provided the HKSA with a report - the third KPMG report - which referred to these allegations of systematic fraud. Copies of this report were also sent to the Hong Kong Police Commercial Crime Bureau, the Stock Exchange and the Securities and Futures Commission.

17. On 20 August 1999, the Monitoring Committee approved its report to the Council of the HKSA. In its conclusion to the report, the Committee referred to the liquidators' findings of systematic fraud. The Committee also referred to the representations that had been made by the Applicants:

The auditors advised that since their first year audit of the financial statements GKC and up to the audit in respect of the period ended 31 July 1997, they had decided not to circularise debtors and rely instead on alternative procedures to verify the debtors ... According to the auditors, their decision not to circularise contract debtors was made having had regard to practical considerations (e.g. the anticipated low response rate) and the effectiveness of alternative procedures.

The auditors advised that up to and including the financial period ended 31 July 1997, they did not experience any limitation of scope in the audits of the Group's financial statements. The auditors further advised that as in previous years, audit evidence available in the 1997 audits in respect of the contracts and contract debtors did nto indicate the existence of irregularity or any sign to cause concern. The auditors considered that in the circumstances, they had no reason to doubt the integrity of the information supplied by the client.

18. The report of the Monitoring Committee concluded with the following statement:

In the light of the scale of fraud suggested by the liquidators' findings and the duration of the fraud (occurring since 1995 and possibly earlier), the Committee considers it necessary to address the question why the apparently fictitious contracts were not discovered in audits of GKC's financial statements for 1997 or before. This question could be answered only upon a more thorough knowledge of the audit approach used in auditing the company's contracts, the audit work actually done and the audit findings (this is so particularly given that the non-circularisation of contract debtors now appears to be a critical issue). In the circumstances, the Committee considers that it is not sufficient to answer the question why the auditors did not discover the apparently fictitious contracts only on the basis of the auditors' oral representations.

19. On 7 September 1999, the Council of the HKSA considered the report of the Monitoring Committee. The clear thrust of the report from the Monitoring Committee was that further investigation was required before a fully informed advice could be placed before the Council. However, instead of asking the Monitoring Committee to further pursue its enquiries, the Council resolved that another 'advisory' committee; namely, an Investigation Committee, should be formed, an investigative body which would also submit an advice but which the Council considered to be better able to do so in a satisfactory manner. The minutes of the meeting give the following reasons for the decision:

In the light of the [Monitoring Committee's] report and having taken into consideration all the factors laid before the meeting, members acknowledged the following advantages of referring the case to an Investigation Committee appointed under section 42C of the Professional Accountants Ordinance.

(a) As the Investigation Committee has statutory powers to obtain documents, other information and explanations under section 42D of the [Ordinance], the case could be handled in a more effective and expeditious manner;

(b) The statutory secrecy requirements imposed by section 42G upon the Investigation Committee, Council, the Registrar and any other person assisting the Investigation Committee not discoverable by any person in the event of a law suit; and

(c) Section 42D(3) provides a measure of protection for persons from incurring liabilities to any other person by virtue of their providing information to the Investigation Committee.

20. On 18 October the HKSA advised the Applicants in writing of its decision to appoint an Investigation Committee. The Applicants took strong objection. After working with the Monitoring Committee for so many months, answering questions, providing documents and the like, it appeared no doubt to the Applicants that - for no good reason - the Council was changing horses in mid-stream. Correspondence ensued. In a letter dated 25 November, the Registrar, Louis Wong, wrote to one of the Applicants, Deloitte Touche Tohmatsu, to explain the Council's decision. In part, that letter read:

I acknowledge that the [Monitoring Committee] inquired into the matter and also that information was provided by you to the [Monitoring Committee]. However, the [Monitoring Committee]'s understanding of your audit approach was essentially based upon oral representations from you and a review of selected audit work papers relevant to those representations. The [Monitoring Committee] has not carried out a full scale review of audit work papers.

The Council concluded that a satisfactory conclusion to the matter could not be obtained simply by the voluntary co-operation of your firm. In particular, Council took into account the necessity of obtaining information from third parties and the protection afforded to the production of information pursuant to statutory powers under Part VA of the [Ordinance].

I believe I have covered this point in paragraph 2 above. The [Monitoring Committee] report is not of itself sufficient for Council to come to any conclusion, hence the decision of Council to constitute an Investigation Committee. I stress that, in so doing, the Council has come to no decision on the merits whatsoever.

21. The challenge made by the Applicants is not to the merits of any adverse finding of fact by the HKSA or any of its committees. As Louis Wong made clear in his letter, the Council came to no decision on the factual merits. The Council's decision related to matters of procedure; that is, to the manner in which any further enquiry should now be conducted and it is to that strictly procedural decision that challenge is made. That being said, however, it appears to be the case that the Applicants considered the appointment of an Investigation Committee with a mandate to seek third party assistance to carry with it some form of stigma and amounted to an unfair undermining of their professional reputation.

The statutory framework

22. The HKSA is a body established under the Ordinance to regulate and promote the practice of the accountancy profession in Hong Kong. In this regard, it conducts examinations, represents the views of the profession and safeguards the interests of the profession. It also has the power to entertain complaints concerning accountants, to cause those complaints to be investigated and, where necessary, to exact penalties.

23. Part V of the Ordinance is titled 'Disciplinary Proceedings'. In terms of section 34(1) of that Part, a complaint that an accountant has been negligent or has failed to maintain professional standards must be made to the Registrar who is obliged to submit that complaint (in proper form) to the Council. Should there be no formal complaint by an identified party but should the Registrar nevertheless have reason to believe that conduct of the kind described has taken place, he may himself, in terms of section 34(1A), refer the matter to the Council. In both instances the Council may in its discretion elect to take the matter no further or to refer it to the Disciplinary Panel under which individual Disciplinary Committees may be constituted.

24. These Disciplinary Committees are empowered by the Ordinance to conduct formal hearings and, if complaints are proved, to impose penalties which include removal of the culpable accountant from the register, a fine, a reprimand and payment of costs. Section 36 sets out the powers of these committees in regard to the conduct of proceedings and obtaining of evidence:

(1) For the purposes of proceedings under section 35 a Disciplinary Committee shall have the following powers-

(a) to take evidence on oath;

(b) to summon any person to attend the proceedings to give evidence or produce any document or other thing in his possession and to examine him as a witness;

(c) to admit or exclude the public or any member of the public from the proceedings;

(d) to award to a witness such expenses as, in the opinion of a Disciplinary Committee, he has incurred by reason of his attendance.

25. It will be seen that Disciplinary Committees are, in effect, the supreme disciplinary organs of the HKSA. It is a matter of no small consequence for an accountant to be called before such a committee and therefore of no small consequence for the Council to appoint one. How then is the Council to reach its decision whether to proceed to such disciplinary proceedings or not? It goes without saying that accountancy matters may be of great complexity. Fairness dictates that in such circumstances the Council should be in a position to receive informed, professional advice to enable it to exercise its discretion and in this regard the Council has available to it the two 'advisory' bodies that have been spoken of earlier; namely a Monitoring Committee or an Investigation Committee.

26. A Monitoring Committee appears to be a committee appointed by the Council of the HKSA in terms of section 18(1) of the Ordinance. That section gives to the Council certain specific powers including, in terms of sub-section (1)(m), the power to appoint committees to assist or advise the Council in the exercise of its powers and to 'delegate to such committees such of its powers as it may from time to time determine'. However, if the Monitoring Committee has any standing terms of reference they are not published. It is common cause that the Committee has no power to compel persons - either professional accountants or third parties - to appear before it or to supply information to it. Co-operation is voluntary.

27. Louis Wong, Registrar of the HKSA, has described the function of this committee in the following terms:

"... As its name denotes, the Monitoring Committee is a body charged with reviewing whether accountants in Hong Kong meet the professional standards imposed upon them by the HKSA. By professional standards, I do not mean simply the Statements of Standard Accounting Practice, commonly known as SSAPs, but the whole gamut of ethical, accounting and auditing standards which appear in the HKSA's members' handbook which runs to five volumes".

28. What then are the attributes of an Investigation Committee? In 1994 a number of amendments were made to the Ordinance. One of the more controversial was the establishment (under Part VA of the Ordinance) of a power to constitute an Investigation Committee. The main purpose of this amendment was explained in the Legislative Council in the following terms:

The main purpose of the Bill is to strengthen the Society's self-regulatory framework through the introduction of investigatory powers to be conferred to an Investigation Committee appointed by the council of the Society.

The present system discourages complaints in that a person making a complaint has to be prepared to fully investigate the matter in question, to gather evidence and to present his case at a Disciplinary Committee hearing. If the evidence available is inadequate to support a prima facie case against a professional accountant, the disciplinary proceedings do not come into play and there is no mechanism whereby the Society can compel the professional accountant to respond to enquiries arising therefrom. An investigation is also appropriate where there is a public concern over the professional conduct of a professional accountant, or where a report is made by a regulatory authority against the professional conduct of a professional accountant, but there is lack of evidence in its hands for the council to refer the case to a Disciplinary Committee.

The institution of an Investigation Committee quite separate from its disciplinary machinery, will enable the Society to be pro-active in its regulation of the profession and demonstrate its determination to self-regulate.

29. As to the power to constitute an Investigation Committee, section 42C(2) provides:

(2)(a) Where the Council reasonably suspects or believes that -

(i) a professional accountant has acted in a manner described in section 34(1)(a)(iii);

(ii) subparagraph (iv), (v), (vi), (vii), (viii), (ix) or (x) of section 34(1)(a) applies to a professional accountant or a firm of certified public accountants or public accountants,

the Council may, in its discretion, constitute an Investigation Committee and direct the Committee, having considered the matter, to inform the Council as to whether in its opinion, were such a complaint made against him or it, the professional accountant or firm concerned would have a case to answer.

30. Section 42C(1) provides that where, pursuant to a referral, the Investigation Committee tells the Council that, in its opinion, there is a prima facie case against the accountant, then the Council may in its discretion constitute a Disciplinary Committee and refer the matter to it for final determination.

31. Accordingly, as I understand it, the Investigation Committee is essentially an advisory body. Its function is to advise the Council whether or not, in its opinion, if a complaint was to be made, there would or would not be a prima facie case to support such a complaint.

32. The Investigation Committee is not, however, toothless in the sense that it must rely on the voluntary co-operation of all persons who are asked to assist it. Section 42D of the Ordinance confers certain powers on the Investigation Committee. More particularly, subsection (1)(a) reads:

Any person to whom this paragraph applies, and whom the relevant Investigation Committee reasonably believes to have in his possession or under his control any record or other document which appears to that Committee as containing or being likely to contain information relevant to the proceedings of the Committee, shall subject to subsection (5) -

(i) produce to the Committee or afford to the Committee access to, any record or other document specified by the Committee which is of a class or description so specified and which is in his possession or under his control being in either case a record or other document which is or appears to the Committee to be relevant to the proceedings, within such time and at such place as the Committee may reasonably require;

(ii) if so required by the Committee, give to it or him such explanation or further particulars in respect of anything produced or to which access is given in compliance a requirement under subparagraph (i) as the Committee shall specify;

(iii) give to the Committee all assistance in connection with its proceedings which he is reasonably able to give;

33. Subsection (2) is to be read with subsection (1)(a), qualifying it as follows:

Subsection (1)(a) applies to the professional accountant to whom the Investigation Committee's proceedings relate or to that accountant's employer (if any), any former employer of such accountant and employee or former employees of such accountant.

34. A person is not excused from complying with a requirement of the Investigation Committee on the ground that to do so might tend to incriminate him. But if he claims that an answer might incriminate him then his answer may not be used in subsequent criminal proceedings.

35. In terms of section 42G, all members of the Investigation Committee, the Registrar, the Council and any person delegated to assist the Committee are obliged - on penalty of criminal sanction - to keep all matters secret that may come to their knowledge in the course of the investigation.

36. I have earlier referred to the fact that empowering the HKSA to constitute an Investigation Committee was controversial. This arose from the fact that there was concern expressed within the accountancy profession that, unless employed within narrow confines, the use of the Investigation Committee may be subject to abuse. During the second Reading of the bill in the Legislative Council reassurance was given in the following terms:

"Checks have been built into the provisions of the Bill restricting the powers of the Investigation Committee to prevent abuse of the system. Moreover the Council of the Society will lay down guidelines to define the circumstances under which investigations can be initiated." [my emphasis]

37. These guidelines were published in the official magazine of the HKSA - 'the Hong Kong Accountant' - in early 1995. They read as follows:

"Policy to Circumscribe the Instigation of Investigations

1. Council shall consider the appointment of an Investigation Committee under section 42C in the following circumstances:

a. when a matter concerning the professional conduct or integrity of a professional accountant or a firm of CPAs has attracted public concern or significant public attention; or

b. when the Council receives or becomes aware of a report from a regulatory authority casting doubts on the professional conduct or integrity of a professional accountant or a firm of CPAs; or

c. when the Council receives a report from a Committee appointed by the Council and reasonably suspects that a professional accountant or a firm of CPAs has acted in a manner described in section 34(1); or

d. when the Council receives a complaint against a professional accountant or a firm of CPAs, which gives the Council a reasonable suspicion that the professional accountant or firm has acted in a manner described in section 34(1).

2. Council shall not appoint an Investigation Committee:

a. unless the Council is of the view that in order to conclude the matter satisfactorily, it will require more than the voluntary co-operation of the members concerned; and

b. in circumstances other than those prescribed in 1.a. to d. above, unless there is a unanimous decision of all the members of the Council."

38. An express promise was, therefore, given by the HKSA, a public authority, that an Investigation Committee would only be constituted in accordance with the stated terms of this policy. There is no dispute that in the circumstances a legitimate expectation arose that the policy would be followed and that a failure to do so would be open to correction by this Court. But that, of course, begs two fundamental questions. First, what is the scope and extent of the policy and, second, did the Council on this occasion make its decision in accordance with the policy thereby protecting the Applicants' rights to procedural propriety or did it breach the terms of its own policy by taking into account irrelevant or extraneous matters?

39. Before considering these questions, it is necessary to consider what I may, for convenience, call the Applicants' preliminary argument; namely, the contention that the Council is only empowered to constitute an Investigation Committee when there is reason to suspect dishonourable conduct or practice on the part of a professional accountant.

Limitation of enquiries to matters of dishonourable conduct

40. As I understand it, the contention of the Applicants may be expressed in the following manner. The powers of the HKSA, a body created by statute, are circumscribed by that statute, more particularly by its objects which are described in section 7 of the Ordinance. Section 7, however, only speaks of enquiries in one circumstance; that is, in sub-paragraph (h) where the object is 'to discourage dishonourable conduct and practices by professional accountants and for this purpose to hold enquiries into the conduct of professional accountants'. But in this instance, in setting up its machinery of enquiry, the Council made no allegation of dishonourable conduct or practice. Accordingly, the Council either acted ultra vires or appointed the Committee for a purpose not contemplated by the statute.

41. In my judgment however, the plain language of the Ordinance empowers the Council to constitute an Investigation Committee for a far broader spectrum of reasons than those contained in sub-paragraph (h). Section 42C(2)(a) directs when the Council may constitute a Committee and in this regard it bears restating:

(2)(a) Where the Council reasonably suspects or believes that -

(i) a professional accountant has acted in a manner described in section 34(1)(a)(iii);

(ii) subparagraph (iv), (v), (vi), (vii), (ix) or (x) of section 34(1)(a) applies to a professional accountant or a firm of certified public accountants or public accountants,

the Council may, in its discretion, constitute an Investigation Committee and direct the Committee, having considered the matter, to inform the Council as to whether in its opinion, were such a complaint made against him or it, the professional accountant or firm concerned would have a case to answer.

42. Before constituting a Committee, the Council must therefore reasonably suspect or believe that an accountant has acted in a manner described in section 34(1)(a)(iii); that is, he has falsified documents or made materially untrue statements knowing them to be so. That no doubt can be described as dishonourable conduct. But the section also provides that the Council may constitute a Committee when it reasonably suspects or believes that the conduct described in sub-paragraphs (iv), (v), (vi), (vii), (ix) or (x) of that same section may apply.

43. Those sub-paragraphs include the following:

(iv) has been negligent in the conduct of his profession;

...

(vi) failed or neglected to observe, maintain or otherwise apply a professional standard.

44. In short, section 42C(2)(a) directs that the Council may constitute a Committee for reasons other than dishonourable conduct or practice. It may do so when negligence or a failure to otherwise maintain the standards expected of a professional accountant are suspected.

45. What then of the objects contained in section 7? Yes, sub-paragraph (h) does give jurisdiction to the HKSA to discourage dishonourable conduct and for that purpose to hold enquiries into the conduct of suspected persons. But section 7 also gives to the Society the jurisdiction to 'preserve and maintain' the 'integrity and status' of the profession (sub-paragraph (g)) and the power to 'take such action as the society considers necessary in any matter affecting the professional interests of the accountancy profession' (sub-paragraph (j)). In addition, the Society may do 'all such other things as are incidental or conducive to the attainment' of these objects (sub-paragraph (k)). If the HKSA is to act fairly in the discharge of its responsibilities, for example, to maintain the integrity of the profession in Hong Kong, it must have the ability to conduct enquiries of some sort. How else is it to ascertain the true position? On a reading of section 7 as a whole I am therefore satisfied that, while the HKSA may, in order to discourage dishonourable conduct, hold enquiries, it may also, in order to discharge its other responsibilities, take such lawful action as it deems proper and such action may include the instigation of enquiries or other investigative procedures.

Voluntary co-operation: the meaning and extent of the HKSA's policy

46. The policy published by the HKSA in 1995 to circumscribe the appointment of Investigation Committees pursuant to section 42C of the Ordinance states that the Council shall not appoint a Committee -

"unless the council is of the view that in order to conclude the matter satisfactorily, it will require more than the voluntary co-operation of the members concerned..."

47. The Council of the HKSA says that its decision lay within the parameters of this policy. The Applicants say that it did not.

48. It is Mr McCoy's contention that this portion of the policy statement, on a true construction, gives rise to a legitimate expectation that the Council will only appoint a Committee if it forms the view that it needs to compel the co-operation of an accountant (a member) in order to satisfactorily conclude an enquiry; in short, when voluntary co-operation is absent or insufficient and the Council is left with no choice but to have recourse to the powers of compulsion that are vested in an Investigation Committee.

49. In the present case, it is acknowledged that the Applicants had given (and were prepared to continue giving) their co-operation to the Monitoring Committee. In such circumstances, Mr McCoy has argued that, in deciding to constitute an Investigation Committee despite the full co-operation of the Applicants, the Council defied its own policy and frustrated the legitimate expectations of the Applicants.

50. Mr McCoy has based what I describe as his 'restrictive' interpretation on what he has argued is the clear construction and intent of the Ordinance. I understand his argument to be essentially as follows:

a. The sole function of an Investigation Committee is to inform the Council whether, if a complaint was made, the accountant being investigated would have a case to answer. If the advice is that a prima facie case has been made out then the Council may (in its discretion) refer the matter to a Disciplinary Committee.

b. This limited function of the Investigation Committee is mirrored by its limited powers. Proceedings before a Disciplinary Committee are formal. Severe penalties may be imposed by that Committee. In terms of section 36 of the Ordinance, the Disciplinary Committee has powers to summons both accountants and third parties before it to give evidence and to produce documents; it has power to take evidence on oath and to admit the public to its hearings.

By contrast, in terms of section 42D(2) as read with 42D(1)(a), an Investigation Committee only has power to compel the production of documents and explanatory evidence from accountants and their employers or former employers. The legislature has not seen fit to give it any such powers over third parties other than the employers mentioned.

c. That being the case, the only material advantage that an Investigation Committee has over a purely voluntary mechanism for enquiry (such as a Monitoring Committee) is that it may compel the co-operation of an accountant and his employer or former employer. But if that accountant and his employer or former employer are already giving full co-operation the need for an Investigation Committee falls away. Why? Because its single, material advantage is rendered superfluous.

d. In recognition of this logic, the HKSA made its policy statement that an Investigation Committee would only be appointed when, in order to conclude an enquiry satisfactorily, it would require more than the voluntary co-operation of the accountant concerned; in other words, that any voluntary co-operation (if any) already given was unsatisfactory and it was therefore necessary to now compel that co-operation.

e. If it is not necessary to compel the co-operation of the accountant concerned (or his present or former employer) in order to conclude the matter satisfactorily then the Council of the HKSA cannot, without breaching its own policy, constitute an Investigation Committee.

51. Mr Huggins, however, proposed a more expansive construction of the policy statement. To remain within the parameters of its policy, he has said, the council of the HKSA must form the view either that the accountant (or his employer or former employer) will not co-operate voluntarily and will therefore need to be compelled or that co-operation will also be required from some party other than the accountant and that there is a likelihood that the co-operation of that party will be limited, inhibited, hampered or delayed unless there is a 'statutory' investigation as opposed to a purely 'informal' one.

52. In the factual circumstances of the GKC investigation, he has said that the Council was entitled to conclude that, despite the co-operation of the Applicants, more was required than that co-operation. The co-operation of third parties was also required and experience showed that such co-operation was more likely to be forthcoming in a full and expeditious way if a 'statutory' investigation was constituted to replace the purely voluntary and 'informal' enquiry undertaken by the Monitoring Committee.

53. What then are the principles to be employed in construing the policy? This question was answered by Stock J in the recent case of Ernst & Young v. The Hong Kong Society of Accountants HCAL 139 of 1999. I concur with his summary which reads:

"... it is not necessary or desirable to give a policy statement of this kind a literal construction, or to construe it as a statutory instrument, although it is necessary to bear in mind that it is drawn in the context of, and in relation to, statutory duties on the part of the Council. What should be done is to give a reasonable interpretation that accords with the court's view of what the policy statement must have been intended to mean "bearing in mind [its] authorship, [its] purpose, ... the readership to which [it was] addressed" (a passage I have taken from Jacques v. Amalgamated Union Engineering Workers [1987] 1 All ER 621, 628 - a case with a somewhat different factual context), and the statutory backdrop against which it was drawn. Further, if a construction has been placed upon a policy statement by the decision-maker, then unless the court is driven to say that that construction flies in the face of the ordinary and natural meaning of the words in their true context, the court should not interfere (see R. v. Ministry of Defence Ex p Walker [1999] 1 WLR 1209, 1216 - 1217; and Northavon District Council v. Secretary of State for Environment [1993] JPL 761)."

54. On that basis, I confess that I have difficulty in accepting Mr McCoy's interpretation of the policy statement. It seems to me to artificially restrict the broad intent of its wording. Mr McCoy's meaning could readily have been expressed in wording to the following effect: "The Council shall not appoint an Investigation Committee unless the Council is of the view that the voluntary co-operation of the members concerned has been refused or has not been sufficiently given." But it was not so worded, it was worded more expansively. In my judgment, a plain reading of the wording must also impart the meaning suggested by Mr Huggins; namely, that the Council shall be entitled to appoint an Investigation Committee, even if the co-operation of the members has been tendered, if something more than that co-operation is required to complete the matter satisfactorily; that is, to complete it with expedition and fullness so that an informed advice may be given without undue delay.

55. Mr McCoy argued that the Ordinance did not envisage an Investigation Committee being able to require co-operation from third parties. The construction of the statutory regime pointed in all regards, he said, to the Investigation Committee being a purely internal body concerned only with obtaining evidence from accountants. In support, he contrasted the powers of a Disciplinary Committee to compel the evidence of third parties with the absence of any such power bestowed upon an Investigation Committee. But it appears to me that Mr McCoy has not here compared 'like with like'. A Disciplinary Committee has the power not merely to investigate but to impose penalties. In this regard it sits as a tribunal to decide an issue and, if necessary, render punishment. By contrast, an Investigation Committee can do no more than advise the Council whether, in its opinion, a prima facie case exists against an accountant. The fact, however, that the legislature has not seen fit to bolster its essentially advisory role by giving to it a power of compulsion in respect of third parties does not, in my opinion, mean that an Investigation Committee is prohibited from seeking the voluntary co-operation of third parties to enable it to better fulfil its function of rendering informed, objective advice to the Council.

56. In my judgment, to say that, where an accountant is prepared to give his full co-operation, an Investigation Committee does not therefore differ from a Monitoring Committee or some other 'informal' body is, in my opinion taking too limited a view.

57. An accountant may be prepared to offer his full co-operation but may legitimately be restricted by a fear that disclosure of certain information may constitute a breach of client and accountant confidentiality. In a purely voluntary enquiry that may place a real obstacle in the way of the accountant. I am satisfied however that an Investigation Committee has the power under section 42D(1) to compel the production of documents by the accountant even if such a handicap exists. I am further satisfied that section 42D(3) protects the accountant if he is forced to make such disclosure. Section 42D(3) reads:

"A person who complies with a requirement of an Investigation Committee which is made by virtue of subsection (1) shall not incur any liability to any other person by reason only of the compliance."

58. Whether, as a matter of law an Investigation Committee has jurisdiction to compel an accountant to divulge information regardless of client confidentiality was argued in Ernst & Young v. The Hong Kong Society of Accountants (supra). Stock J held that an Investigation Committee did possess such power, a finding that he confirmed in Deloitte Touche Tomatsu v. The Hong Kong Society of Accountants HCAL 97 of 1999. I agree with those findings and can do no better (by way of my reasons) than cite Stock J's dicta given in Ernst & Young at pages 36 and 37:

"It has been suggested in argument that the appointment of an Investigation Committee does not absolve the professional accountant from the need to obtain his client's consent to the release of documents and information about the client's affairs, so that that suggested benefit is illusory. The argument goes like this: that, by reason of section 34(1)(a)(vii) of the Ordinance, it is a disciplinary offence to fail, without reasonable excuse, to comply with a requirement made under section 42D by an Investigation Committee; but, it is contended, the absence of a client's consent is a reasonable excuse. I think not. "What we are concerned with here is the contractual duty of confidence generally implied though sometimes expressed between a solicitor and client. Such a duty exists not only between a solicitor and client but for example between banker and customer, doctor and patient and accountant and client. Such a duty of confidence is subject to, and overridden by, the duty of any party to that contract to comply with the law of the land. If it is the duty of such a party to a contact, whether at common law or under statute, to disclose in defined circumstances confidential information, then he must do so, and any express contract to the contrary would be illegal and void." (per Diplock LJ in Parry Jones v. Law Society [1969] 1 Ch 1, 9). So it is in the context of section 42 of this Ordinance. The duty of confidentiality between client and accountant is overridden by the power of the Investigation Committee to require the production of documents. Were it otherwise, Part VA of the Ordinance would be significantly denuded of effect. It is not necessary to canvass the type of rare situation in which there might be a reasonable excuse to refuse to comply with an order for production of documents, but client confidentiality is not one of them. Section 42D(3) makes it clear that the accountant who complies with such an order would not thereby incur liability by reason of compliance; and guidance issued by the profession expressly states that members of the Society must disclose information if compelled by law."

59. In Deloitte Touche Tomatsu v. The Hong Kong Society of Accountants Stock J not only confirmed his view but expanded upon it by saying:

"Nothing advanced by Mr McCoy alters the view I then held. Indeed, I now note a provision of the Ordinance which, I believe, further undermines the applicants' submission. That provision is section 42D(5):

"(5) Nothing in this section shall be taken to compel the production by a person of a record or document containing a privileged communication by or to a legal practitioner in that capacity."

Had it ever been contemplated by the legislature that the relationship of confidentiality between client and accountant rendered the accountant immune from a demand by an Investigation Committee to produce documents, this subsection would be otiose. The legislature clearly contemplated protection from disclosure in relation to documents covered by legal professional privilege only."

60. The duty of confidentiality between client and accountant is overridden by the statutory power of the Investigation Committee to require the production of information: that, in my opinion, is a cogent power not vested in an informal body such as a Monitoring Committee.

61. But the distinction does not end there. In terms of section 42G of the Ordinance, all matters coming before an Investigation Committee must be kept secret by all those involved in the functioning of the Committee. In this regard, section 42G reads:

(1) Subject to subsection (2), and except in the performance, or assisting in the performance, of a function under this Part, the Registrar, any member of the Investigation Committee or the Council, any person to whom any of the powers of the Investigation Committee is delegated under section 42E(1) or any person holding any other position who assists any of such persons in the performance of a function under this Part -

(a) shall at all times after his appointment as the Registrar, a member of the Investigation Committee or the Council, a person to whom any of the powers of the Investigation Committee is delegated under section 42E(1) or to such other position, as the case may be, or during or after the performance of or assisting in the performance of such function, preserve and aid in preserving secrecy with regard to any matter coming to his knowledge in the performance or in assisting in the performance of any such function;

(b) shall not at any time communicate any such matter to any other person; and

(c) shall not at any such time suffer or permit any other person to have any access to any record, document or other thing which is in his possession or under his control by virtue of his being or having been so appointed or his having performed or having assisted any other person in the performance of such a function.

62. As to the penalty for contravening the secrecy directions, sub-section (3) reads:

(3) Any person who contravenes subsection (1) commits an offence and is liable on conviction to a fine at level 6 and to imprisonment for 6 months.

63. While no doubt, in a purely voluntary enquiry, evidence would be kept confidential, that, as I understand it, would be a matter of professional ethics not statutory direction.

64. An investigation committee may therefore, by way of summary, be said to possess the following attributes which distinguish it from a Monitoring Committee.

a. It is a statutory body not merely an informal body reliant solely on voluntary co-operation.

b. Even when the goodwill of an accountant is unquestioned it can compel evidence which the accountant would otherwise be prohibited from providing because it would amount to a breach of client and accountant confidentiality.

c. It can compel evidence from employers and former employers, they being third parties who might otherwise have been reluctant to co-operate.

d. Under sanction of criminal penalties, all matters coming before it are subject to stringent rules of secrecy. Co-operation, therefore, especially from third parties, is given a statutory umbrella of confidentiality.

65. But what, if any, are the consequences of these distinctions? The HKSA has imposed upon it a duty of self-regulation. The Ordinance provides a number of tools to enable it to discharge this duty. Different tools are for use in different circumstances. The 'informal' investigative tool is represented by the Monitoring Committee, the 'formal' investigative tool is represented by the Investigation Committee. It is for the Council of the HKSA, in the exercise of its discretion, to decide which tools are most appropriate for different sets of circumstances.

66. In Ernst & Young Stock J spoke of this discretion and again I can do no better than cite from his judgment (commencing at page 30)

"... when genuine circumstances arose which called for an investigation, it was not for the professional accountant or firm to dictate the method of inquiry, or its scope or, in particular, its pace. What was envisaged was that there would be cases in which a question or issue was, by its nature, readily amenable to effective and expeditious resolution by an informal process - and it is all too easy to forget, when deeply immersed in the facts of the particular case, that the range of circumstances that might trigger an inquiry into possible professional default encompasses a very broad spectrum, from the very simple to the very complex. So, on the other hand, there would be cases in which a question or issue would self-evidently not be amenable to effective and suitably expeditious resolution by the informal route. And there would be cases that came before the Council which bore all the hallmarks of a rocky and difficult road. In such cases, even where the Council could not with certainty say how the twists and turns of an investigation might reveal and resolve themselves, the Council might quite reasonably say that it did not believe that an investigation would (even assuming goodwill by the accountants) progress satisfactorily - that is, with the speed or efficiency demanded by the circumstances - unless the formal route were taken. The phrase "in order to conclude the matter satisfactorily" does not in my judgment mean "so that at the end of the day - no matter how long it takes - we will get the answer". It refers to the satisfactory conduct and resolution of the inquiry at hand, and satisfactory conduct includes such actual and perceived progress as is necessary in the particular context. Faced with the decision whether to appoint an Investigation Committee or to go the voluntary road, the Council is necessarily looking to the future and may well be possessed of not a great deal of information. It must then do the best it honestly can. Based on its collective professional experience and taking into account the history of investigations in similar cases, it should be able to assess, without too much ado, the kind of problems that are likely to arise. If such a Council reasonably takes the stance that the case is one that must progress with all due expedition and with such certainty of progress as can reasonably be expected in such a case, the Council then asks itself what it is that is necessary to achieve that aim. If it then sees that the voluntary highway is littered with the real likelihood of difficulties and unnecessary delays, then it is entitled to say that, in the context of that case, the voluntary route is not a satisfactory way of concluding the matter, and that it wishes, therefore, to choose the formal route."

67. The learned judge concluded by saying:

The policy as framed accords with, or at the least allows for, that interpretation. The professional accountant reading this policy statement, and aware of the setting in which it was promulgated and the promise to the public that self-regulation would be proactive, would not, I think, reasonably conclude that in such circumstances the policy required the voluntary route willy-nilly.

68. I too am satisfied that, on an ordinary and natural reading of the policy statement in its true context, the Council was entitled to decide that the Monitoring Committee and the Investigation Committee are different and distinct investigative tools to be employed in different and distinct ways when the circumstances warrant and not solely, as Mr McCoy has submitted, on a consequential basis: the employment of the Investigation Committee only coming into play as a consequence of a refusal of an accountant to co-operate with a Monitoring Committee.

69. As to the practical need from time to time, and in varying circumstances, to secure the co-operation of third parties in order satisfactorily to conclude an investigation, I believe that to be self-evident. The statutory function of an Investigation committee is to inform the Council whether the accountant under scrutiny has a case to answer. I am satisfied that there must be occasions when, in order to give an objective fully informed advice to the Council, more may be required than the bona fide representations of the accountant himself.

Was the decision in this case to appoint an Investigation Committee 'Wednesbury' unreasonable?

70. Mr McCoy has submitted that, even if the Council was correct in its interpretation of the Policy Statement, in the present case, in respect of the Applicants, the decision of the Council was Wednesbury unreasonable in that it took into account matters which it ought not to have taken into account; in short, matters that were irrelevant, extraneous or wrong in law. In his written submissions, Mr McCoy defined these matters in a series of questions.

a. Did the Council of the HKSA take into account irrelevant considerations or behave unreasonably in concluding that a satisfactory conclusion to the matter could not be obtained simply by the voluntary co-operation of the Applicants?

71. It was not disputed that at all material times during the course of the Monitoring Committee enquiry the Applicants were willing to co-operate with that Committee. There is no evidence on the papers that the Council of the HKSA, when it made the decision to constitute an Investigation Committee, thought otherwise. Mr McCoy has submitted, however, that the Council clearly did take into account the need to compel the co-operation of the Applicants and that this is manifest in the first reason given in the minutes for constituting that Committee. The relevant portion of the minutes reads:

In the light of the [Monitoring Committee's] report and having taken into consideration all the factors laid before the meeting, members acknowledged the following advantages of referring the case to an Investigation Committee appointed under section 42C of the Professional Accountants Ordinance.

(a) As the Investigation Committee has statutory powers to obtain documents, other information and explanations under section 42D of the [Ordinance], the case could be handled in a more effective and expeditious manner;

72. With respect, I do not see that the first reason states (or implies) any need to compel the co-operation of the Applicants. Earlier in this judgment, in setting out what I consider to be a number of the defining attributes of an Investigation Committee, I said that, even when the goodwill of an accountant is unquestioned, the Committee has power to compel the production of evidence which the accountant would otherwise be prohibited from providing because it would amount to a breach of client and accountant confidentiality. The statutory powers conferred by section 42D may, therefore, be employed to assist an accountant in avoiding the potential difficulties of breaching that ethical bond. That, in practical terms, I consider to be a benefit both to the Investigation Committee and the accountant and may assist in the 'more effective and expeditious' conclusion of the matter. But was it in this case a relevant consideration?

73. The Monitoring Committee certainly believed that, to satisfactorily conclude the investigation, a more thorough knowledge of the Applicants' audit approach together with a more thorough knowledge of the work actually done and their findings would be required. The Monitoring Committee had not itself conducted an exhaustive survey of all the audit papers. The Committee, in fact, concluded its report by saying:

"In the circumstances, the Committee considers that it is not sufficient to answer the question why the auditors did not discover the apparently fictitious contracts only on the basis of the auditors' oral representations."

74. I take that to mean that something more than the bona fide representations of the Applicants was required in order to come to an objective, informed view: that something more being a study of the audit working papers and, where necessary, information supplied by third parties in order to more objectively and fully explain the nature and quality of the audit work done.

75. In his affirmation of 5 May 2000, Louis Wong, Registrar of the HKSA, spoke of a 'Statement of Professional Ethics' issued by the HKSA as a guide to its members. On the matter of confidentiality the Statement says the following:

'Information acquired in the course of professional work should not be disclosed except where consent has been obtained from the client, employer or other proper source, or where there is a public duty to disclose or where their is a legal or professional right or duty to disclose.'

76. Louis Wong expanded upon this in his affirmation by saying:

'The duty extends to auditors' working papers. Although those working papers belong to the auditors, they contain confidential material relating to a client's affairs. In the absence of compulsion of law, an auditor should not disclose his working papers to a third party without the permission of his client.'

77. With the consent of a client being required before audit working papers may be released, a refusal on the part of a client to consent, would result in the Monitoring Committee being enable to take the matter further. An Investigation Committee on the other hand would have the power to compel production of such papers despite the client's lack of consent.

78. In his affirmation, Louis Wong spoke of difficulties already encountered in this regard, citing as an example the release of the first KPMG report to the HKSA on the basis only of strict confidentiality so that the findings by KPMG could not be put (at least by quoting chapter and verse) to the Applicants, the very people who should be able to comment on them. It has been said on behalf of the Applicants that GKC was now in liquidation and it would be absurd to think that the liquidators would withhold consent. That may be so but there has been no direct evidence of that assertion and what of the other companies in the GKC Group which had not gone into liquidation? Can it be said that the Council acted in an unreasonable fashion in finding that the real likelihood existed that the issue of client and accountant confidentiality might arise? Bearing in mind the fact that the subject of the investigation had grown in complexity and now involved allegations of systematic fraud (which may or may not have extended directly or indirectly into associate companies in the GKC Group) I am unable to find that the Council made an unreasonable finding; that is, a finding so unreasonable that it could not have been reached by a reasonable Council in possession of the same information.

79. Mr McCoy argued that if there was a concern that the availability of audit working papers and the like may hinder the investigation, then, in light of the Applicants' history of full co-operation, the matter should have been referred back to the Monitoring Committee which could then demand delivery up of those papers. Only if that request was refused would the Council be justified in constituting an Investigation Committee. I do not agree. As Stock J said in Ernst & Young in a passage cited earlier in this judgment, if the Council, making use of its collective experience, sees that the voluntary highway is littered with the real likelihood of difficulties and unnecessary delays, it is entitled to say that a voluntary route is not a satisfactory way of concluding the matter and it wishes, therefore, to adopt the formal. I agree that the Council is entitled to rely on what it sees as being a real likelihood. It does not, in these circumstances, have to wait for proof.

b. Did the Council of the HKSA take into account irrelevant considerations or behave unreasonably in taking into account the necessity of obtaining information from third parties?

80. In his letter of 25 November 1999 to Deloitte Touche Tohmatsu (in which he explained the reasoning of the Council) Louis Wong wrote:

I acknowledge that the [Monitoring Committee] inquired into the matter and also that information was provided by you to the [Monitoring Committee]. However, the [Monitoring Committee]'s understanding of your audit approach was essentially based upon oral representations from you and a review of selected audit work papers relevant to those representations. The [Monitoring Committee] has not carried out a full scale review of audit work papers.

The Council concluded that a satisfactory conclusion to the matter could not be obtained simply by the voluntary co-operation of your firm. In particular, Council took into account the necessity of obtaining information from third parties and the protection afforded to the production of information pursuant to statutory powers under Part VA of the [Ordinance]. [my emphasis]

81. Mr McCoy has submitted that, in using the phrase 'in particular', the Registrar was stating that the necessity of obtaining information from third parties was, at the very least, a material consideration of the Council. As I understand it, Mr Huggins has not contested that submission.

82. Mr McCoy argued that, in making the necessity of obtaining information from third parties, one of its material considerations, the Council acted unreasonably. First, he said, the Council misconstrued its own policy; namely, that it would only appoint such a committee when voluntary co-operation had been refused or was insufficient. Second, he said, it had no grounds, on the material before it, for thinking that in this particular case third party co-operation was required or was desirable.

83. I have already given reasons why I reject what I have termed Mr McCoy's 'restrictive' interpretation of the policy. I move, therefore, to Mr McCoy's second reason.

84. In respect of the second reason, Mr McCoy took as his starting point the report by the Monitoring Committee to the Council in which the following was said:

In the light of the scale of fraud suggested by the liquidators' findings and the duration of the fraud (occurring since 1995 and possibly earlier), the Committee considers it necessary to address the question why the apparently fictitious contracts were not discovered in audits of GKC's financial statements for 1997 or before. This question could be answered only upon a more thorough knowledge of the audit approach used in auditing the company's contracts, the audit work actually done and the audit findings (this is so particularly given that the non-circularisation of contract debtors now appears to be a critical issue).

85. The Council, said Mr McCoy, acted on the advice of the Monitoring Committee that what was now required was a 'more thorough knowledge of the audit approach used in auditing the company's contracts, the audit work actually done and the audit findings'. But no third party could possibly provide an Investigation Committee with a more thorough knowledge of the audit approach, the audit work or the audit findings than the Applicants themselves. Nothing placed before the Council, said Mr McCoy, suggested that third party co-operation could (or would) be needed to assist in answering those questions. Accordingly, the Council took into account a wholly irrelevant reason in deciding upon the appointment of an Investigation Committee.

86. Mr McCoy complained that it was not sufficient for the Council, in the circumstances of this case and in light of the Applicants' long co-operation with the Monitoring Committee, to base its decision on generalities. As he expressed it in his written submissions: however much the HKSA could show that the Council was entitled to take into account or could reasonably have taken into account the necessity of obtaining information from third parties, the fact is that, on the evidence placed before it, it had no basis for doing so in this instance.

87. In reply, Mr Huggins argued that the Council had sufficient evidence before it to entitle it reasonably to come to the decision that, in order to conclude the investigation satisfactorily, there was a real likelihood of the need arising for third party co-operation. The decision, of course, related to the likely course that the investigation would take. The Council was therefore looking to future probabilities not past certainties. The Council based its decision on its collective experience of past enquiries of a similarly complex nature read in light of the unique dimensions of this case.

88. For the avoidance of doubt, Mr Huggins said that the Council never believed that an Investigation Committee had the statutory power to compel third party co-operation. But the Council had to decide how best (and most expeditiously) a preliminary investigation could be carried out so that, in light of that investigation and the advice received from its investigative committee, it could then decide where to take the matter. In deciding that question, the Council was entitled, he said, to take the view that an Investigation Committee, because of its particular attributes, would more likely meet with success in soliciting the co-operation of third parties than a Monitoring Committee. That, said Mr Huggins, was a 'perfectly reasonable' consideration to take into account in applying its own stated policy.

89. Who then were these third parties? In this case, said Mr Huggins, the Council was entitled to take into account the real likelihood that a satisfactory conclusion to the enquiry would require the co-operation of all or any one of the following: those partners of KPMG involved in the independent financial reviews of GKC; the liquidators of GKC; the directors and employees of the companies in the GKC Group.

90. Mr McCoy argued that no evidence of value could (in this case) be obtained from persons such as the directors and/or employees of GKC or other companies in the GKC Group. Clearly, however, the Council thought differently and I can find no grounds for finding that such a belief was in any way irrational or perverse. In this regard, Mr Huggins, in his written submissions, said the following which I can do no better than repeat:

The inescapable fact is that an Investigation Committee would be entitled (as would a Monitoring Committee) to approach third parties for their assistance and co-operation - for example:

a. to those partners in KPMG who provided the special reports in this case, and

b. to employees of the various companies in the GKC Group - in particular GKC Holdings Ltd - to ask what they told the Applicants in the course of their audit and what documents they provided to the auditors and what documents they kept from them.

In relation to the latter it would have been important to try to find out from sources other than the auditors what the officers of the company had said to them rather than simply relying on any "oral representations" of the auditors themselves as to what they claimed to have been told:

91. Mr Huggins continued by saying that it would also be helpful for an Investigation Committee to -

approach the officers of the companies concerned in the light of a full and systematic review of all the Applicants' audit work papers rather than do so after simply asking the auditors about specific transactions or aspects of their audit and looking at particular audit work papers which the Applicants chose to produce "in substantiation of" their own oral comments.

92. Accordingly, I am unable to find, in the context of the enquiry that lay ahead - its public importance, its complexity and its breadth of involvement - that the Council acted unreasonably in finding that the enquiry could only be satisfactorily resolved on a 'consideration of all the available information from all relevant quarters (to employ Mr Huggins' phrase). I am of that view even though the Council could not at that time identify with certainty which third parties would need to give their co-operation.

93. I appreciate the frustration of the Applicants in learning that an entirely new investigative committee had been constituted and that, effectively, the enquiry would have to start again. But it is not for this Court to assume the mantle of decision making in place of the Council. It may only interfere if it is satisfied that the Council called to its attention and acted upon irrelevant considerations and to that extent made an unreasonable decision in the Wednesbury sense. But on the evidence before me, whatever sympathy I may have for the frustration of the Applicants, I cannot say that the Council did make such a decision.

c. Did the Council of the HKSA take into account irrelevant considerations or behave unreasonably in taking into account the protection afforded to the production of information to an Investigation Committee?

94. In its minutes of 7 September 1999, the Council acknowledged certain advantages which it believed were possessed by an Investigation Committee. These included (in sub-paragraph (b) of the minutes):

The statutory secrecy requirements imposed by section 42G upon the Investigation Committee, Council, the Registrar and any other person assisting the Investigation Committee not discoverable by any person in the event of a law suit ... [my emphasis]

95. In his letter of 25 November 1999 to Deloitte Touche Tohmatsu, Louis Wong wrote:

"In particular, Council took into account the necessity of obtaining information from third parties and the protection afforded to the production of information pursuant to statutory powers under Part VA of the [Ordinance]." [my emphasis]

96. In a further letter dated 14 January 2000 Louis Wong expanded upon this by saying:

"By protection, I meant that documents produced to an Investigation Committee are arguably not subject to disclosure to a third party on the production of a subpoena in the way that they would be if they came into the hands of the Society by voluntary disclosure ..."

97. In his affirmation of 5 May of this year, Louis Wong said that discovery of documents had been a 'vexed question' in a number of earlier enquiries. The issue, he said, had been raised at a meeting of the Monitoring Committee in September 1998 when it had been decided to obtain legal advice on the issue. That advice was to the effect that if a Monitoring Committee received a subpoena duces tecum it may have to produce the documents requested. However, an Investigation Committee was better protected. The secrecy provisions of section 42G of the Ordinance (applicable to such a Committee) meant that disclosure of documents could not be compelled by subpoena if that subpoena was issued pursuant to civil proceedings. The reason given, was that it would be 'surprising' if a person compelled by criminal sanction to keep matters that came before the Committee secret could be forced to breach that criminal sanction by making discovery of that protected information.

98. Mr McCoy has argued that this advice was plainly wrong and that, accordingly, in taking it into account in reaching its decision to constitute an Investigation Committee, the Council took into account a consideration which was irrelevant and/or wrong in law.

99. Mr McCoy made essentially the same submissions before Stock J in Deloitte Touche Tohmatsu. The judge did not find force in those submissions. While he accepted that the Ordinance did not provide an absolute bar in relation to information in the hands of an Investigation Committee, he went on to say:

"Yet, for practical purposes, the comfort found by the respondent in section 42G against compulsion to disclose documents or to reveal information was not, in my judgment, ill-founded. It seems to me that were a subpoena to be issued to disclose documents generated by an inquiry under section 42D, the grounds for setting aside such a subpoena would in most cases be cogent."

100. The judge was here making it plain that, in his opinion, while the Ordinance did not provide an absolute shield, in most cases there would be cogent grounds for a court, in the exercise of its discretion, to set aside a subpoena. The judge explained his reasoning by saying:

"Section 42G(3) makes it a criminal offence for any member of the Council or the Investigation Committee to disclose or to communicate any matter coming to his knowledge in the performance of a function under Part VA of the Ordinance. There is provided by the Ordinance no defence of lawful authority, and the only exception permitted (see section 42G(2)) is disclosure made in relation to, or for the purpose of, any disciplinary proceedings under Part V of the Ordinance, or in relation to or for the purpose of criminal proceedings. To permit such a subpoena to stand would sit ill with the provisions and intent of section 42G. The respondent is under a statutory duty to discourage dishonourable conduct and practices by professional accountants and, to that end, to hold inquiries where the circumstances so require. That is a function which that body is entrusted to fulfill in the public interest, and it seems to me that the conduct of investigations is likely to be inhibited if those who would otherwise communicate their views and information freely to an Investigation Committee, were under the impression that they could not do so for fear that what they say or show might be disclosed, and might even be used against them in future litigation. I do not think that the courts would readily permit that."

101. Mr McCoy, however, has argued that Stock J did not have before him at that time a series of authorities which make it clear that confidentiality was not enough to exempt a document from discovery.

102. The first authority cited was Arbuthnott v. Fagan [1996] LRLR 143. A loss review committee appointed by the Council of Lloyd's had taken evidence from a number of persons. A byelaw made under the Lloyd's Act of 1982 gave the committee power to require those persons to appear before it but also made provision for non-disclosure of their evidence:

Subject to the following provisions of this byelaw, no information obtained pursuant to any exercise of powers under Lloyd's Acts 1871 to 1982 (or any byelaw or regulation made thereunder) shall be disclosed without the consent of:

(a) the person from whom it was received; and

(b) (if different) the person whom it concerns.

103. The byelaw went on to say that such evidence would, however, be disclosed for the purposes of criminal or disciplinary proceedings or for the purposes of any enquiry before an independent tribunal.

104. Before moving to consider the judgment of the Court of Appeal, I am constrained to say that, in my view, the statutory obligation of secrecy imposed by the Ordinance, that obligation being subject to criminal sanction, appears far more severe in its terms than the byelaw that I have cited. The reason for that severity, I believe, can be found in the dicta of Stock J (supra) when he said:

"The Respondent is under a statutory duty to discourage dishonourable conduct and practices by professional accountants and, to that end, to hold inquiries where the circumstances so require. That is a function which that body is entrusted to fulfil in the public interest ..."

105. Returning to Arbuthnott v. Fagan, in his judgment Staughton LJ said:

It is not enough to exempt a document from discovery that it was confidential: see the speech of Lord Wilberforce in Science Research Council v. Nasse [1980] AC 1028, [1979] 3 All ER 673 at page 1065 of the former report. Confidentiality is a relevant consideration when determining whether disclosure is necessary under Ord 24, r 13. But for a document to be exempt one of the existing heads of privilege or immunity must apply, or there must be legislation having the same result. [my emphasis]

106. In the later decision of In re Galileo Group Ltd [1999] Ch 100 in which the confidentiality provisions of section 82 of the Banking Act of 1987 were considered, Lightman J referred to Arbuthnott v. Fagan and said:

When considering how far this judgment affords guidance in the present case, a number of special features in that case require to be borne in mind: (1) the issue in the Lloyd's case was whether the language in the byelaw made pursuant to a private Act directed to regulating the conduct of their business by Lloyd's agents was intended to deprive members of their (otherwise) undoubted rights to discovery of the transcripts. It is well established that a private Act is to be construed with a particular bias against interfering with such rights: see e.g. Maxwell on the Interpretation of Statutes, 12th ed. (1969), pp. 262-263; (2) there was no suggestion in that case that in the course of the examination of the agents Lloyd's disclosed to the agents information (whether in the form of documents or otherwise) not previously known to the agents. The information contained in the transcripts accordingly was accepted to be confined to information possessed by the agents before the powers under the Act were invoked.

107. I understand this dicta to say (by way of general principle) that a confidentiality provision of itself is not sufficient to exempt documents from discovery. In each instance the meaning and intent of the provision must be construed. With respect, it appears to me that in Deloitte Touche Tohmatsu Stock J was not departing from that principle; he was confirming it. In so doing, however, he was of the view that the Council of the HKSA was entitled to find comfort in the provisions of section 42G. I agree with that finding. The authorities cited by Mr McCoy have not dissuaded me from that view.

108. In the circumstances, I believe that, in deciding to constitute an Investigation Committee, the Council was entitled to be mindful of the secrecy provisions of section 42G for two reasons:

a. because, in practical terms, third parties may be more willing to co-operate and produce sensitive material when they know that those tasked with carrying out the enquiry are under a statutory obligation of secrecy, and

b. because those producing documents to the Investigation Committee will be afforded a greater measure of protection against discovery than that capable of being provided by an 'informal' investigative body such as a Monitoring Committee.

109. As I have said earlier, Louis Wong spoke of the Council, in coming to its decision to constitute an Investigation Committee, being aware of the fact that discovery of documents had in the past been a vexed question. I believe the Council was entitled to take that historical factor into account in deciding the likely course of future events in the GKC investigation. In this regard, I find support again in the dicta a Stock J in Deloittee Touche Tohmatsu (supra) when he said:

There is a further factor which supports the Respondent's case that the Council was not taking into account an irrelevant consideration in this regard, and it is that firms had repeatedly raised concern about the possibility that information disclosed voluntarily might be discovered in litigation. That being so - and it is unchallenged evidence - the Council were quite right to take that concern into account and, unless it were shown that the concern rested on flimsy ground, to give it weight in its deliberations.

d. Did the Council of the HKSA take into account irrelevant considerations or behave unreasonably in taking into account the statutory secrecy requirements imposed by section 42G?

110. In its minutes of 7 September 1999, the Council spoke of the statutory secrecy requirements imposed by section 42G of the Ordinance being one of the factors which persuaded it to constitute an Investigation Committee. I have already indicated that, in my judgment, that decision cannot be undermined as being unreasonable or wrong in law. I hold the view that the Council was entitled - in practical terms - to conclude that third parties may be more willing to co-operate and produce sensitive material when they know those tasked with carrying out the enquiry are under a statutory obligation of secrecy.

111. In this regard, I agree with Mr Huggins that the existence of a possible criminal investigation by the Commercial Crimes Bureau was a factor which could not be ignored. It could well increase the degree of caution of some third parties whose co-operation was to be sought. One palpable way of assuaging their concern, however, would be by reference to the secrecy provisions of section 42G.

112. Mr McCoy submitted that the secrecy provisions of section 42G, in fact, hinder rather than help the work of an Investigation Committee in seeking evidence from third parties. This was, as I understand it, one of the limbs of his argument that the statutory regime does not allow an Investigation Committee to seek evidence from third parties. I can find no force in either contention. In my judgment, it is manifest that an Investigation Committee, while it must act within the strictures of its secrecy provisions, is not thereby prevented from seeking information from third parties. That information may be sought and received without having to divulge the broader picture and thus offend the secrecy constraints.

Miscellaneous Matters

113. On behalf of the Applicants, Mr McCoy brought to my attention two further matters which again, for convenience, he expressed in the form of questions:

a. Ought the HKSA, as a matter of procedural fairness, to have given the Applicants details of the respect in which they were alleged to have been negligent, and the materials founding the complaint and an opportunity to make representations thereon, before deciding to appoint an Investigation Committee?

b. Did the Applicants have a legitimate expectation that the HKSA would provide it with the materials founding the complaint, and allow them to make representations thereon, before deciding to appoint an Investigation Committee?

114. It was conceded, however, that both these matters had been argued before Stock J in Deloitte Touche Tohmatsu, the judge finding against the Applicant. It was agreed, on the basis that this Court would in all probability support the findings to Stock J, that it would serve no purpose at first instance to argue the same points again. However, the Applicants sought the leave of this Court to argue the points if there was to be any appeal. As there was no objection from the HKSA, the hearing proceeded on that basis.

Conclusion

115. If I may echo the words of Stock J in Deloitte Touche Tohmatsu, this judicial review has covered much terrain, there being a large number of grounds, original and amended, advanced by the Applicants. However, while Mr McCoy has supported those grounds with his usual ingenuity, I am satisfied:

a. that the policy adopted by the HKSA did not prohibit the Council from taking into account the need for co-operation from third parties when deciding, in accordance with that policy, whether more than the voluntary co-operation of the numbers concerned would be required in order to conclude a matter satisfactory;

b. that the Council did not misdirect itself as to the law nor rely upon irrelevant matters nor did it act unreasonably in making its decision in this case to constitute an Investigation Committee.

116. I repeat that I have sympathy for the Applicants who had been co-operating with the Monitoring Committee for several months in order to resolve the matter and now saw that work gone to waste. I can also, to a degree, appreciate their concern that the appointment of an Investigation Committee may have quite unfairly, to employ the phrase of Stock J, enured to their detriment. But the GKC matter was clearly one of public concern, it was complex and multi-dimensional. The Council was obliged to take a serious view of it in seeking a full and expeditious report. In the circumstances I am satisfied that no valid grounds exist to quash its decision. That being so, the application for judicial review is dismissed. There will be a costs order nisi that the Applicants pay the Respondent's costs, those costs to be taxed, if not agreed.