TOPPING CHANCE DEVELOPMENT LTD v. CCIF CPA LTD formerly known as CHARLES CHAN, IP & FUNG CPA LTD

HCA 1609/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 1609 OF 2012

________________________

BETWEEN

________________________

________________________

D E C I S I O N

_________________________

1.  This is an action against the defendant (“CCIF”) for breach of auditor’s duties in the auditing of the accounts of First Natural Foods Holdings Limited (“FNF”). The plaintiff (“TCD”) commenced the present action as the assignee of the right of action from FNF. On 27 February 2015, I handed down my decision in respect of 7 summonses (“the Decision”) with nisi costs order. The parties apply to vary the nisi order. CCIF seeks leave to appeal as well. By consent and as directed, the parties lodged written submissions for my ruling on paper, which I now give.

BACKGROUND

2.  The background of litigation was set out in the Decision.  The same definitions and abbreviations are adopted here.

3.  Briefly, on 5 September 2012, TCD applied ex parte and was granted an injunction preserving documents in the possession or control of CCIF.  The writ herein was issued on 6 September 2012, endorsed with the claim by TCD, as the assignee of the rights of FNF, against CCIF for breach of contractual, tortuous and other duties in conducting the statutory audits of FNF and its subsidiaries and providing auditors’ reports on the consolidated financial statements of the same for the financial years 2001 to 2007.  The statement of claim was filed on 31 October 2012, whereby TCD claims for the loss and damage caused by the alleged breach of duties on the part of CCIF as the auditor arising out of alleged financial misstatements for the financial years 2005 to 2007.

4.  Chronologically, the 7 summonses were as follows:

(1)           TCD’s summons for the continuation of the Injunction until final disposal of the action or further order of the court (“the Injunction Summons”);

(2)           CCIF’s summons to strike out the statement of claim and to have the action dismissed pursuant to O.18, r.19 of the Rules of the High Court (“the O.18, r.19 Summons”);

(3)           TCD’s summons for leave to rely on its 5^th affidavit of Yen (“5^th Yen”) at the hearing of the above summonses (“the Summons re TCD’s Latest Affidavit”);

(4)           CCIF’s summons for leave to make a minor amendment to the O.18, r.19 Summons (“the Amending Summons”);

(5)           CCIF’s summons to strike out the amendments contained in the amended statement of claim pursuant to O.20, r.4 (“the O.20, r.4 Summons”);

(6)           CCIF’s summons for leave to rely on new affidavits, in the event that the Summons re TCD’s Latest Affidavit was allowed (“the Summons re CCIF’s Latest Affidavits”);

(7)           TCD’s summons for leave to amend the writ and its endorsement to include the claim for damages or equitable compensation for breach of fiduciary duties and/or other duties on the part of CCIF and pursuant to the Deed of Assignment (“The Summons to Amend the Writ”).

5.  I reproduce the order made on 27 February 2015 (the subparagraph numbering of which in §126 of the Decision is admittedly incoherent):

(1)           There be an order in terms of the applications by the Summons re TCD’s Latest Affidavit and the Summons re CCIF’s Latest Affidavits respectively with costs in the cause of the determination of the other major summonses;

(2)           There be an order in terms of the Amending Summons with no order as to costs;

(3)           The O.18, r.19 Summons is dismissed with costs to TCD in any event;

(4)           The O.20, r.4 Summons is dismissed with costs to TCD in any event;

(5)           The Injunction do continue until trial of this action or further order of the court; and save that there be no order as to the costs of the ex parte hearing on 5 September 2012, costs of the Injunction Summons be in the cause;

(6)           There be an order in terms of the Summons to amend the Writ with no order as to costs;

(7)           TCD do take out an application within 14 days to correct by amending §§32B and 33 of the amended statement of claim as per draft submitted during the hearing on 15 March 2013;

(8)           The time for service of the defence be extended to 28 days after the service of the re-amended statement of claim.

(9)           All costs shall be taxed, if not agreed, with certificate for 2 counsel.  All costs orders are nisi, and will become absolute in 14 days in the absence of application for variation[1].

6.  On 13 March 2015, both parties took out their respective summonses for applying to vary the nisi costs order.  This was followed by CCIF’s further summons dated 24 April 2015 to amend its summons.  On 13 March 2015, CCIF also took out its summons for leave to appeal against the Decision.

VARIATION OF THE NISI COSTS ORDER

7.  TCD’s application concerns §5(3) and (4) above, namely, the costs of the O.18, r.19 Summons and the O.20, r.4 Summons.  It says that CCIF should pay such costs to be taxed and paid forthwith.

8.  CCIF’s application concerns §5(6) above, namely, the costs of and occasioned by the Summons to Amend the Writ, as well as §5(2) above, namely the costs of and occasioned by the Amending Summons.  By its subsequent summons to amend, CCIF now applies for the costs of and occasioned by the amendments and re-amendments to the statement of claim.  According to the proposed amended summons, they are said to be variations of the orders set out under §5(2), (3) and (4) above.

9.  CCIF’s application concerns the incidence of costs liability, so I deal with that first.

CCIF’s application

10.  No prejudice arises out of the proposed amendment of CCIF’s summons for varying the nisi costs order, and both parties indeed put in their respective submissions addressing the application by CCIF including that as proposed to be amended.  I allow the amendment, and proceed to consider CCIF’s application as amended.

11.  The relevant chronology is that after CCIF had taken out the O.18, r.19 Summons, TCD amended the statement of claim without leave.  CCIF added the O.20, r.4 Summons targeting the amendments, whereby one of the challenges was that the amended statement of claim went beyond the endorsement to the writ.  TCD’s Summons to amend the Writ came.

12.  CCIF argues (i) that there should be no order as to costs of the O.18, r.19 Summons and the O.20, r.4 Summons; and (ii) that it should also be awarded the costs of the amendments and re-amendments to the statement of claim and the writ.  Whilst the summons of CCIF, as amended, covers (ii), the terms of the summons, both original and as amended, are not transparent about (i).  In the submissions on its behalf, CCIF also asks for the costs of the hearing in March 2013 as well, another variation not apparent from its terms of the summons, original or as amended.

13.  The proposed no order as to the costs of the O.18, r.19 Summons and the O.20, r.4 Summons effectively means TCD would be deprived of its costs of succeeding in resisting these 2 major summonses.  In the absence of special matters envisaged under O.62, r.5, the proposal deviates from the norm that costs follow the event in interlocutory proceedings: O.62, r.3(2A).

14.  In so many words, the point that CCIF makes essentially is that the original statement of claim was defective and liable to be struck out; and it was salvaged only by the amended statement of claim and the amended writ.  TCD is said to have conceded that, by its amendments to the statement of claim after the O.18, r.19 Summons had been taken out as well as amending the writ.

15.  If its argument above were right, CCIF could have been in a position to even seek costs of and occasioned by the O.18, r.19 Summons up to the filing of the amended statement of claim.  But even on that, TCD highlights the non-compliance with Practice Direction (“PD”) 19.1, §5 on the part of CCIF.  The PD provides that in the case of striking out for no reasonable cause of action, the applying party is expected to write to the opponent to signify his intention of making the application and the broad grounds or, in the absence of that, written notice of the grounds not less than 5 clear days prior to the hearing.  Non-compliance with such provisions of the PD had been considered as inappropriate, if the same would have caused the other party to amend the pleading in time and to avoid the application as well as the incidental costs.  Melvin Waxman v Li Fei Yu & Ors, HCA 1973/2012 (23 August 2013) at §§60-62, per To J is cited in support.

16.  In any event, if the situation had been that the amendments to the statement of claim indeed managed to salvage the claim, there would still have been no reason for depriving TCD of its costs of successfully resisting the O.20, r.4 Summons challenging those amendments.

17.  The reality, as the Decision now stands, is that I concluded that the statement of claim, original and as amended, is not liable to be struck out.  The factual basis for the argument in denial of TCD’s costs of resisting CCIF’s these 2 major summonses is thus lacking.

18.  As to the costs of and occasioned by the amendments to the statement of claim, the amendments were made upon TCD’s exercise of its liberty to do so before the close of pleading without need for leave of the court: O.20, r.3.  CCIF is right in that the costs of and occasioned by amendment made in the writ or any pleading without leave should be borne by the party making the amendment (unless the court directs otherwise): O.62, r.3(3).  However, no issue of such costs as merely those occasioned by the amendments and distinct from the striking out was brought before the court during the hearing of the 7 summonses; and hence no order made in respect of that.  CCIF may not put that forward as if it were or should have been part of the nisi costs order under review.  This was so, especially when it was not decided that the statement of claim was defective and had to be salvaged by the amendments.

19.  The amendment to the writ, which was ordered pursuant to TCD’s specific application before the court then, falls to be considered slightly differently.  I dismissed the challenge that the amendments to the statement of claim went beyond the endorsed claim in the writ.  Nevertheless, I allowed the amendment to the writ anyway.  By no order as to costs of the amendment, TCD was made to bear its own costs of that.  Nevertheless, as mentioned, I accept that CCIF is entitled in principle to the costs of and occasioned by such amendment with leave.  Exactly what such costs entail would be a matter for taxation.  In line with the principle, this part of the nisi costs order would be varied to such an extent.

20.  As to the further amendments to the amended statement of claim, I did not dispose of the request by TCD for such amendments.  I directed TCD to take out an application within 14 days for such purpose.  TCD did so by summons dated 13 March 2015, which was allowed by the master on 20 March 2015.  The master awarded summarily assessed costs of that to CCIF.  There is no basis for the application now before me to deal with such costs again purportedly by way of variation of the nisi costs order.

TCD’s application

21.  TCD proposes that the costs of the 2 major summonses heard mentioned above should be taxed and paid forthwith.  It argues that the costs of the 2 summonses are severable and self-contained from the rest of the action.  It cites in support the cases of Hui Yin Sang v Tsoi Ping Kwan, HCA 392/2008 (14 July 2009) at §16 per Sakhrani J; Wong Yau Kwa v Zhang Hongjie, HCCW 574/2009 (19 May 2010) at §3 per Poon J (as he then was).

22.  The amount of costs incurred is likely to be substantial, which, TCD argues, amounts to prejudice brought about by CCIF’s unmeritorious applications.  The action is at its early stage, as the defence has yet been filed.  The recovery of the costs awarded, TCD argues, should not be withheld until the conclusion of the action.

23.  TCD again refers to CCIF’s failure to provide TCD with the opportunity to avoid unnecessary costs by giving it prior written notice of the intention to apply to strike out pursuant to PD 19.1, §5.  Todano South China Co Ltd v Brightford Ltd & Anor, CACV 152/2006 (17 August 2006) at §23, per Le Pichon JA, and Melvin Waxman (above) are cited in support.  As the decision was that the statement of claim, original and as amended, is not liable to be struck out, the lack of opportunity to save defective pleading by amendment without leave and thus the striking out application is not material.  Having said that, I understand TCD made such point to highlight the prejudice caused by the costs so incurred as a result of CCIF’s extensive attack on TCD’s pleading that failed.

24.  On CCIF’s part, reference is, and I think also appropriately, made to the case of Midland Business Management Ltd v Lo Man Kui (No 2) [2011] 2 HKLRD 667, especially §§9 to 12 thereof.

25.  All the factors in the above case law considered, also including the extent to which the major applications could be said to be so unmeritorious as to warrant punishment by immediate payment of costs, the terms of the costs order finally made, the circumstances of the parties and the likely further proceedings of the present case by TCD to conclusion to order for immediate payment of the costs, I do not feel compelled to vary the nisi costs order as proposed by TCD.

LEAVE TO APPEAL

26.  Leave to appeal shall not be granted unless the intended appeal has a reasonable prospect of success or there is some other reason in the interest of justice that the appeal should be heard: see section 14AA(4) of the High Court Ordinance, Cap 4; SMSE v KL [2009] 4 HKLRD 125 at §17, per Le Pichon JA.

27.  In summary, CCIF suggests errors in the Decision in the following respects:

(1)           TCD’s locus to sue for the loss to Longyu as a result of the tax payments to the Mainland tax authority (Ground 1);

(2)           The claim in respect of the audit years between 2003 and 2005 were time-barred (Grounds 2 and 3);

(3)           the completeness and sufficiency of TCD’s pleaded claim (Ground 4); and

(4)           Costs (Ground 5).

Ground 1

28.  This is directed at §§67 to 78 of the Decision, which was the discussion of TCD’s claim for what was said to be loss reflective of what was allegedly suffered by its subsidiary Longyu as a result of the latter’s payments of tax to the Mainland tax authority.  In challenging this court’s view set out in §§74 to 78 of the Decision, CCIF specifically relies on Lehman & Co Management Ltd v Effiscient Ltd & Anor, CACV 272/2011 (13 March 2013).

29.  On the one hand, one needs to be reminded of the stringent test to be applied for the purpose of striking out in such a context, as set out in §76 of the Decision. On the other hand, the point is such one of law that, if the appellate court takes a different view upon a close scrutiny of the pleaded claim, would have an undeniably significant bearing on the viability of the claim (or at least a significant part of it).  On balance, I am prepared to accept that the ground is more than merely arguable and should be heard by the appellate court.

Ground 2 and 3

30.  These are directed at §§94 to 102 of the Decision, which dealt with CCIF’s attack that the claim in respect of the financial years prior to 2006 is time-barred. Specifically the argument focuses on the application of section 31 of the Limitation Ordinance, Cap 347, the so-called secondary or extended limitation period.

31.  In challenging this part of the Decision, CCIF categorises this court’s understanding of Kensland Realty Ltd v Tai Tang & Chong (2008) 11 HKCFAR 237 as misunderstanding of the principle.  Specifically it is pointed out that section 31 is concerned with the plaintiff’s knowledge relating to the damage, not the defendant’s liability[2]. I do not see how this differs from what were set out in §§96 to 97 of the Decision.

32.  In the present case, that those taxes had been paid was an always known fact.  Yet for the purpose of section 31, it is the timing of at least perceiving such payments as questionable and therefore reasonably warranting the embarkation of enquiry that matters.  For such purpose, TCD further refers to Haward & Ors v Fawetts (a firm) [2006] 1 WLR 682 at §§60-61, per Lord Walker; §§107-108, per Lord Mance.  In view of the contentions and materials, this, as concluded in the Decision, is factual and difficult to rule out as a matter of discretion under O.18, r.19 or O.20, r.4.

Ground 4

33.  This is the challenge against the conclusion in the Decision to accept that there is as a matter of pleading fully constituted causes of action for loss and damage caused by the breach on the part of CCIF as the auditor.  This especially relates to §§53 to 66 of the Decision, including what is now said to be misapplication of the principles in Guang Xin Enterprises Ltd v Kwan Wong Tan & Wong [2003] 3 HKLRD 527.

34.  The specifics and necessary components of the plea could be seen from the pleading and referred to in various parts of the Decision.  The plea with all its components in play, in a nutshell, was summarised in §66 of the Decision.  As far as the alleged loss was the dividends and taxes paid, the end complaint of TCD is that that should not have been incurred at all.  Hence the dismissal of CCIF’s criticism that TCD was obliged but failed to plead how each of the particular instances of alleged breach in isolation caused the alleged loss or which part of the alleged loss is attributable to each instance of alleged breach.  Despite further argument, I am not convinced about the prospect of this ground.

Ground 5

35.  This overlaps with the application for variation of the nisi costs order, which obviously would now hinge about the outcome of the intended appeal.  I should however make clear about my disagreement that certification of the engagement of 2 counsel was in the circumstances improper exercise of discretion.

DISPOSITION

36.  In respect of CCIF’s summonses, as mentioned, I allow its summons dated 24 April 2015 to amend its summons filed on 13 March 2015 to vary the nisi costs order.  Costs of the amendment of CCIF’s summons should be to TCD in any event.

37.  In respect of CCIF’s summons, so amended, to vary the nisi costs order, I vary the nisi order to the extent that the costs of and occasioned by TCD’s Summons to amend the Writ shall be to CCIF in any event; and the rest of the application to vary should be dismissed.  Subject to the variation allowed, the nisi costs order is made absolute.

38.  In view of the extent of success, CCIF shall have 20% of the costs of and occasioned by its summons, as amended, to vary the nisi costs order.

39.  TCD’s summons to vary the nisi costs order is dismissed with costs to CCIF.

40.  In respect of CCIF’s summons for leave to appeal, I give leave in respect of Ground 1 above.  In view of the extent of success of the application and the significance of the ground in respect of which leave is granted, TCD shall have 60% of and occasioned by CCIF’s application, while the remaining 40% shall be in the cause of the appeal.

41.  The costs in respect of these post-Decision summonses are to be taxed, if not agreed, with certificate for counsel.  They are nisi, and will become absolute in the absence of application in 14 days to vary.