HOTUNG INVESTMENT (CHINA) LTD v. ERNST & YOUNG (sued as a firm) AND OTHERS

HCA 2376/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2376 OF 2009

-------------------------

-----------------------------------------------

REASONS FOR DECISION NO 2

-----------------------------------------------

Introduction

1.  This is an application for leave to appeal against my decision on 7 September 2011 dismissing the defendants’ application to strike out the plaintiff’s writ and statement of claim, and alternatively decide certain issues as preliminary issues.

2.  On 19 October 2011 I refused the defendants’ leave to appeal.  I now give reasons for my decision.

The defendants’ ground for appeal

3.  Mr Bernard Man, for the defendants had not the advantage of responding to my Reasons for Decisions for dismissing the application in his submission as my Reasons was not then available.  As I am handing down my Reasons For Decision at the same time as this Decision (No 2), there is no need to set out my Reasons for Decision again now.

4.  Mr Man reused a large number of arguments advanced by the defendants in the application.  Two of them stood out as having the chance of passing the threshold provided by s14AA(4)(a) of the High Court Ordinance Cap 4 as disclosing a reasonable prospect of success.

5.  The first ground is that the plaintiff “cannot rely on the alleged fraud or concealment perpetrated on Gabrielle and Sheridan (which they discovered or could with reasonable diligence discover more than 6 years before the writ), and then say that because a different person, Sean, did not know about it until 2007, the limitation period did not start running until then”.

6.  At first glance this is an attractive argument, until one focuses on the identity of the plaintiff.  The plaintiff has always been Hotung Investments (China) Limited and a fraud had been practised on that company.  Gabrielle and Sheridan no doubt suffered from the fraud, but they did so in consequence of the loss suffered by plaintiff, ie indirectly.

7.  The plaintiff’s pleaded case, as I understand it, has always been that the plaintiff was controlled by those who practised fraud on it and so lacked capacity to investigate the fraud and take actions about it.  As far as the issue of limitation is concerned, the plaintiff’s case does not depend on absence of knowledge or suspicion of the fraud on the part of Sean, Gabrielle and Sheridan, as they had not the means to control the plaintiff.  They are also not suing in their own rights.

8.  With respect, the defendants’ argument appears to be a futile attempt to force upon the plaintiff knowledge and suspicion that are entirely irrelevant.  For this reason I hold that this line of reasoning has no reasonable prospect of success on appeal.

9.  The second ground is titled “disconnect[ion] between the alleged assistance and the alleged breach of fiduciary duty”.  In short, the defendants argue that the acts allegedly done by the 3^rd defendant could not have assisted the alleged breaches of fiduciary duty by the then directors.  Mr Man argued that the preparation of letter and indemnity could not have hindered Gabrielle and Sheridan from inquiring into the management of the plaintiff.  Mr Man’s submission is that on the face of the letter and indemnity there is nothing that explicitly or implicitly tells them, inter alia, not to worry about the management.

10.  With respect, this argument is entirely irrelevant.  The Court is only concerned with whether the 3^rd defendant intended to practise the fraud with these instruments and succeeded.  Whether Gabrielle and Sheridan altered their positions as a result of these instruments will affect the issue of causation.  In other words the Court is only concerned with the subjective intentions of the 3^rd defendant, Gabrielle and Sheridan.  The issue of whether objectively the instruments could have caused Gabrielle and Sheridan to take a different course of action is entirely irrelevant.

Conclusion

11.  The grounds of appeal advanced by the defendant have no reasonable prospects of success. The ground regarding whether the state of knowledge of Gabrielle, Sheridan and Sean should be attributed to the plaintiff is misconceived as it ignores the status of the plaintiff as a legal person.  The ground regarding whether the acts done by the 3^rd defendant could have assisted the breach of fiduciary duties by the directors is also flawed as it attempts to unnecessarily introduce an objective or reasonableness qualification to the plaintiff’s cause of action.

12.  Accordingly the defendant’s application for leave to appeal was dismissed with costs to the plaintiff.