MOULIN GLOBAL EYECARE HOLDINGS LTD (IN LIQUIDATION) FORMERLY KNOWN AS MOULIN INTERNATIONAL HOLDINGS LTD AND OTHERS v. KPMG (a firm)

HCA118/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 118 OF 2007

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BETWEEN

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D E C I S I O N

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1.  This was an application for leave for the plaintiffs to file a further expert’s report by Mr Kenneth Morrison dealing with questions of local business practice and local accounting practice. As to this, the dispute between the parties can be put on two levels.

2.  The first is as to whether or not the plaintiffs should be restricted to relying only upon Mr Swinton, their liability expert, given that Mr Swinton is unable, or may feel unable, to deal with matters of local practice and some matters of local practice have been adverted to and raised in the expert’s report of Mr Wong filed on behalf of the defendant. 

3.  On this point, it was argued that the plaintiffs should have picked up or made more of certain paragraphs in the defendant’s pleading, in which matters of local business practice and local auditing practice were mentioned, in particular paragraph 115, 147.1, 263.5 and 263.6 or 263 generally and 254.6 and 255.6(d), which broadly raise the following areas.

4.  The first relates to the practice of Hong Kong companies of holding their manufacturing facilities in China through local Mainland Chinese nominees. 

5.  The second relates to the making of advances to third parties who are known to be associated with or related to the controlling shareholders of a small to medium sized family company. 

6.  The third relates to a specific point as to audit practice in Hong Kong relating to the date on which an audit opinion is given, in particular as to whether that is the date of actual completion of audit work or whether it might be given at a slightly earlier stage when audit work has been substantially completed, when there are still a few outstanding matters to be dealt with. 

7.  Having considered the pleading, it does not seem to me that the paragraphs in question make it as clear as it is suggested by Mr Lam, that specific matters of Hong Kong business practice or Hong Kong audit practice would be relied upon. 

8.  It is fair to say that a point of Hong Kong audit practice is raised in paragraph 263.5 in relation to the date upon which the audit opinion is given and that Hong Kong business practice is referred to in relation to the other two matters in paragraphs 115 and 254.6 respectively.  But as Mr Jat, I think rightly, points out, the impact of these matters is they relate to an auditor’s duties is not as clearly spelt out.

9.  In those circumstances, I do not think that it was altogether unreasonable for the plaintiffs not to have picked up on these particular points as matters that would require to be carefully addressed in their expert evidence.  But even if I am wrong as to this, it does seem to me that ultimately, as Mr Lam pointed out, the test that one should apply in deciding whether or not a particular step should be permitted in the proceedings is to bear in mind the overriding requirement of our procedural rules, which is that fairness must be afforded to both parties with a view to achieving justice in the actual dispute before the court.

10.  In the present case, given the significance which the defendant has placed on these matters of local practice in its expert’s opinion, it does seem to me that unless some fundamental unfairness would be caused to the defendant by allowing the plaintiffs to have the opportunity, even at this somewhat belated stage, to address those matters, the injustice that would be caused to the plaintiffs in requiring them to go into trial without an opportunity to respond to these matters which have assumed some importance in the defendant’s expert report, would be greater than the injustice that might be caused to the defendant by allowing the plaintiffs to have an opportunity to address these matters. 

11.  I therefore am of the view that it would be appropriate to allow the plaintiffs to file a limited amount of further evidence to deal with the matters of business practice and audit practice that have been raised by Mr Wong in his report.

12.  This leads on to the second aspect of the application, and as to this, it does seem to me that it is important that the scope of Mr Morrison’s report should be clearly defined.  With this in mind, I would propose to restrict it to dealing with the matters raised in the specific paragraphs that have been identified by the plaintiffs in Mr Jat’s skeleton.  Those seem to be the paragraphs that deal substantially with the matters that are in issue. 

13.  I would also wish to make it clear that it does seem to me that Mr Morrison’s role should be limited to commenting on the existence or otherwise of the business practice in question, and on the existence or otherwise of the audit practice in question.  Whether or not, in the light of the existence or otherwise of the business practice or the audit practice in question, the defendant in this particular case should be regarded as having fallen short of the standard of care to be expected of it, or should be regarded as having met that standard of care, should be left to the primary liability expert, Mr Swinton, to deal with. 

14.  In other words Mr Swinton will have to consider the matter on the basis a) that Mr Wong is right; and b) that Mr Wong is incorrect, as to  his appreciation of local business practice in relation to the advances to third parties, in relation to the holding of assets through nominees in Mainland China and also in relation to any questions of local audit practice that may arise.  Thus, to the extent that Mr Morrison may wish to comment on whether or not it is in accordance with local audit practice or business practice to do things in a particular way, he may do so.  The court will then have to decide whether or not that audit or business practice is made out and whether or not, in the light of that practice, if it is established, the defendant can be said to have been negligent in that particular, and this is a matter that can and should be addressed by Mr Swinton. 

15.  In relation to the other points that have been raised by Mr Lam,  Mr Lam suggested that it would be fundamentally unfair for the defendant to have one expert when the plaintiffs were given the opportunity of having two.  It seems to me that provided that the scope of the evidence to be dealt with by each expert is limited in the way that I have indicated, there should, at the end of the day, be no such unfairness. 

16.  It might be that if the plaintiffs had better appreciated the role that local practice and local audit practice would have to play in these proceedings that they would have asked for leave to file expert reports from two experts dealing with different aspects of the matter.  That this was not appreciated earlier may be regrettable but it seems to me that the court should, at this stage, look forward to the trial rather than look back and try to allocate blame to one side or the other for having failed to pick up on this point which, it may or may not be the case, should have been appreciated.

17.  So far as the impact on the trial is concerned, it seems to me that given that the trial is, at this stage, still some five months off, it is unlikely that there will be any significant impact on the trial.  There certainly is no suggestion that there should be any impact on the commencement date of the trial.  The only practical impact would appear to be on the holding of a meeting of the experts.  That, I understand, is currently scheduled for 29 October 2010 and it is currently the proposal of the plaintiffs that Mr Morrison’s report should be filed by 12 November.  It would seem to me that the sensible course, if it can be arranged, would be for the meeting of experts to be put back to a date after 12 November or such earlier date as the plaintiffs may feel that they are able to deliver Mr Morrison’s report. 

18.  If that proves not to be possible, then it would seem to me that perhaps the sensible course might be for Mr Wong and Mr Swinton to meet to deal with all matters, other than those which are to be covered by Mr Morrison in his report, on 29 October with a supplemental or follow-up meeting to be held as soon as practicable after the delivery of Mr Morrison’s report.  But that, I think, is really a matter of administration which would be best left to the parties to try to resolve in the generally cooperative way in which they have hitherto been able to deal with most matters relating to the procedural aspects of this litigation.

19.  I will therefore give leave to the plaintiffs to file a further expert’s report by Mr Morrison, limited in the respects that I have indicated.

(Discussion re report and costs)

16. Costs of today will be in the cause.