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

HCMP12/2016

MISCELLANEOUS PROCEEDINGS NO. 12 OF 2016

(ON AN INTENDED APPEAL FROM HCA NO. 1609 OF 2012)

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JUDGMENT

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Hon Chu JA giving the Judgment of the Court:

Introduction

1.  This is the defendant's application for leave to appeal against the decision ("the Decision") of Deputy High Court Judge Leung ("the Judge") dated 27 February 2015 on additional grounds. The Judge had on 22 December 2015 granted leave to appeal against the decision, but limited to one ground that relates to the doctrine of reflective loss. 

2.  The action in the court below is a claim for breach of auditor's duties. The plaintiff sued in the capacity as the assignee of a deed of assignment dated 4 September 2012, under which the provisional liquidators of First Natural Foods Holdings Limited ("FNF") assigned to the plaintiff the rights and interests in all causes of action in the property of FNF against the defendant ("CCIF"). CCIF was the auditor and tax representative of FNF for the period between 2001 and 2007. The detailed background facts relating to the action and the procedural history leading to the various applications before the Judge have been set out in paragraphs 2 to 31 of the Decision. They will not be repeated.

3.  The present leave application concerns the Judge's decision on: (1) CCIF's summons as amended on 14 November 2012 applying to strike out the Statement of Claim; and (2) CCIF’s summons dated 27 February 2013 applying to disallow and strike out the amendments in the Amended Statement of Claim ("ASOC")[1]. Although there were two summonses, the core issue before the Judge is whether the amendments in the ASOC are liable to be struck out.  Put briefly, the amendments are to expand the scope of the claim against CCIF to cover its conduct in respect of the audits for FNF’s financial years 2003, 2004 and 2005. The Judge decided against CCIF and dismissed both summonses.

4.  As noted above, upon CCIF’s application, the Judge granted leave to appeal on the ground relating to the principle of reflective loss, but refused leave to appeal on the other grounds in the draft notice of appeal. On the basis of the leave granted by the Judge, the defendant has commenced an appeal before the Court of Appeal under CACV 279/2015. By the present application, CCIF seeks leave to include in the appeal three of the grounds in the draft notice of appeal, which the Judge had refused to give leave.

5.  Broadly speaking, the three additional grounds relate to: (1) whether the amendments in the ASOC relating to breaches of duties in respect of the financial years before 2006 should be disallowed or struck out as being time-barred (proposed Grounds 2 and 3); and (2) whether the amendments have pleaded complete causes of action for loss and damage caused by breach of duties on the part of CCIF (proposed Ground 4).

Test for granting leave to appeal

6.  The threshold for granting leave to appeal under section 14AA(4) of the High Court Ordinance, Cap. 4, is trite. Leave will only be granted if the applicant satisfies the court that 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. Reasonable prospect of success involves the notion that the prospect of succeeding must be More than fanciful, without having to be probable: SMSE v. KL [2009] 4 HKLRD 125.

Proposed Grounds 2 and 3 

7.  Before the Judge, the defendant argued that the causes of action in respect of the financial years 2003 to 2005 had become time-barred when the writ was issued in September 2012. In response, the plaintiff relied on section 31 of the Limitations Ordinance, Cap. 347. The Judge dealt with the issue in paragraphs 94 to 102 of the Decision. In paragraphs 101 and 102, he concluded:

"101. In the normal course of events, TCD would have the opportunity of pleading reliance on section 31 of Cap 347 together with the factual basis in reply to the limitation defence raised by CCIF.  There is no requirement that it should have been pleaded in the claim in contemplation of the limitation defence.

102. The conclusion that the claim in tort being time-barred is an abuse of process can be drawn only if section 31 does not work in favour of FNF/TCD.  This is fact sensitive; and in the circumstances of this case, it cannot be said at this stage that TCD would plainly and obviously fail to discharge the burden of establishing the factual basis for invoking section 31."[2]

8.  In the proposed Grounds 2 and 3, CCIF complains that the Judge had misunderstood the Court of Final Appeal's decision in Kensland Realty Ltd v. Tai, Tang & Chong (2008) 11 HKCFAR 237, and that the Judge had exercised his discretion incorrectly in view of the prejudice to the defendant by reason of the delay as set out in the proposed Ground 2, and the substantial savings of time and costs resulting from upholding the limitation argument. 

9.  In our view, the contention that the Judge erred in his understanding of section 31 and the decision in Kensland Realty Ltd is not reasonably arguable. The submission that section 31 is not properly engaged because the amendments in the ASOC contain no element of latent damage has ignored the essential purpose of section 31, which is to redress the injustice of barring a plaintiff’s claim by limitation where the latency of the damage incurred has deprived him of the knowledge required to bring proceedings within the primary limitation period: Kensland Realty Ltd at §63. 

10.  The Judge had in paragraphs 96 and 97 of the Decision set out correctly the aspects of knowledge in section 31(5) to (7). There is no basis for the suggestion that the Judge had confused knowledge relating to the damage incurred with knowledge as to the defendant's liability or knowledge as to whether there is a good claim against the defendant. Knowledge that the damage was attributable to the defendant's negligence is an aspect of knowledge under section 31(5), and this is not the same as mere knowledge that there is damage: see Kensland Realty Ltd at §§86 to 89.  Hence, even though the payment of PRC taxes, dividends and auditor's fees in respect of the financial years 2003 to 2005 were facts known to FNF, this does not mean time necessarily starts to run from the respective date of payments. As the Judge rightly explained in his decision refusing leave to appeal (at paragraph 32), for the purpose of section 31, what matters is when FNF or the plaintiff has acquired knowledge that the damage is attributable to the defendant's negligence. 

11.  The Judge is further correct to say that, in light of the parties' contentions and the circumstances of the case, the issue of when FNF or the plaintiff has acquired knowledge for the purpose of section 31 involves factual issues not suitable for a striking out.  In Kensland Realty Ltd at §§30 and 141, it is pointed out that whether section 31 can be invoked is a mixed question of law and fact, and requires examination of a host of issues. Contrary to the submission of Mr Barlow SC, who appeared for CCIF, it is not a pure question of law. Nor does the fact that there has been a lapse of some ten years such that, on the defendant's assertion, there are no identifiable witnesses, render the observations of Chan and Ribeiro PJJ inapplicable.

12.  As to the reference to Ronex Properties Ltd v. John Laing Construction Ltd [1983] 1 All ER 961 and the prejudice to the defendant contained in proposed Ground 2, we do not agree they demonstrate the Judge erred as a matter of law or in his exercise of discretion. While it is open to a defendant to seek to strike out, as an abuse of process, a claim which is time-barred, this has to be a very clear case: Ronex Properties Ltd at 966.  And if it is not a proper case for striking out, the potential prejudice or savings in time and costs cannot provide a proper basis for striking out the claim. 

13.  In his oral submissions before us, Mr Barlow advanced a new ground that time for the purpose of section 31 should start to run from the appointment of the provisional liquidators to FNF in January 2009, and that FNF or the plaintiff had acquired actual knowledge for the purpose of section 31 by the time the provisional liquidators obtained the second set of accounts (“2^nd Longyu Accounts”) of FNF’s subsidiary, Fuqing Longyu Food Development Co Ltd (“Longyu”), which was the main operation arm of FNF’s group of companies, that were filed with the State Administration of Industry and Commerce in Fuqing (“SAIC”).  Since, on the plaintiff’s evidence[3], the provisional liquidators obtained the 2^nd Longyu Accounts for the years 2004 to 2006 in late January 2009, the causes of action in the ASOC became time-barred before the writ was filed in September 2012.  

14.  Mr Maurellet, who appeared for the plaintiff, rightly pointed out that this argument does not come within any of the grounds in the draft supplemental notice of appeal annexed to the present summons. It was also not raised in the written submission in support of the summons.  Neither is it a ground in the draft notice of appeal before the Judge when CCIF made the initial leave application.  We take the view that CCIF should not, in this renewed application for leave to appeal on additional grounds, advance a ground that was not raised in the leave application before the Judge.  

15.  Even if we were prepared to consider it, this new ground is not reasonably arguable. The mere fact that the misbehaved directors were removed from office with the appointment of liquidators does not mean that FNF acquired acknowledge of the damage incurred by the company.  Although the provisional liquidators became aware of, and obtained copies of, the 2^nd Longyu Accounts for the years 2004 to 2006, it does not mean they could immediately know which of the two sets of Longyu accounts, or whether any of them, was true and accurate.  On the plaintiff’s case[4], it was much later on in 2010, 2012 and 2013, and after making further investigations and obtaining further accounts and documents, that the provisional liquidators became aware that, inter alia, it was likely that the 2^nd Longyu Accounts represented the correct state of financial affairs of Longyu, that the consolidated accounts of the FNF’s group of companies contained significant misstatements, and also the breach of duties particularized in paragraph 30 of the ASOC.  If anything, this new ground serves to highlight the fact-sensitive nature of the section 31 issue and that this is not a clear case for striking out.

Proposed Ground 4

16.  It is also CCIF’s argument before the Judge that the causes of action in the ASOC are incomplete in that they do not contain the pleas of: (1) the damage that resulted from the misconduct alleged against CCIF; and (2) the loss that flowed from that alleged misconduct.  Reliance was placed on the decision in Guang Xin Enterprises Ltd v. Kwan Wong Tan & Fong [2003] 3 HKLRD 527. The Judge, for reasons given in paragraphs 56 to 66 of the Decision, rejected the argument.  The thrust of his reasoning appears by paragraphs 63 to 66:

"63. Whether CCIF had failed to do what should have been done in carrying out the audit, and whether if such had been done, CCIF should have detected the fraud on the accounts or enabled FNF to prevent its loss, are questions depending on the circumstances of the case.  As mentioned, this is factual.

64. CCIF then criticises the lack of pleading as to how each of the 11 particular instances of alleged breach (under §30) per se caused the alleged loss, or which part of alleged loss is attributable to each instance of alleged breach.

65. In my view, these are never the real questions in the circumstances of the case.  What are pleaded were specific instances of alleged breach of duties on the part of CCIF in carrying out the audit for FNF in the particular financial year or years between 2003 and 2007.  In the submissions on behalf of TCD, the evidence adduced in support of each of them is highlighted.  Contrary to what is submitted on behalf of CCIF, it cannot be said, at least at this stage, that they nothing but bare assertions or mere conjecture.

66. The theme of the plea is that had CCIF exercised the requisite professional scepticism, it should have detected the alleged specific problematic transactions, which would have apparent bearing on the accuracy and thus the alleged misstatements in the accounts of Longyu in that particular year.  The alleged misstatements in respect of each financial year in question are now fully revealed by the discovery of the 2^nd Longyu Accounts obtained from SAIC.  The discrepancies are set out.  Had that been taken into account, there would have been no retained earnings available for the declaration of dividends in any of the financial years in question.  Nor would there have been net profits to attract tax liability."

17.  The proposed Ground 4 contends that the Judge erred in not following Guang Xin Enterprises Ltd, in particular §24 where Rogers VP held:

“On the other hand a company that knew irregularities were taking place, seems to me to be in a different position. In such circumstances it is by no means clear that, even if the auditors were to draw attention to the irregularities, the company would take any steps to prevent the continuation of those irregularities, because the company had known about them and would, without more, be presumed to have approved of its own conduct. In my view, the logical conclusion that a company would take immediate steps in respect of a hitherto unknown fraud does not apply in a situation where a company itself knows that it is committing "irregularities" and the matter happens to be spelt out in the accounts. This is particularly so in the case of a private company, because the accounts are not generally published. …”

18.  The Judge considered Guang Xin Enterprises Ltd at paragraphs 60 to 62 of the Decision. He pointed out (in paragraph 61) that in that case, 

"[Rogers VP] was drawing a distinction between a situation where the pleaded case is that the company was unaware of the irregular practice of its person in control and a situation where the pleaded case is that the company was aware of it.  In the former case, the Vice President accepted (at §23) that it is easily understandable the company, which was previously unaware that a fraud was being committed against it, would logically have taken steps to recover from and to prevent repetition of the fraud, had the auditor drawn its attention to the fictitious transactions.  The latter case, as that in Quang Xin Enterprises Ltd, is in a different position.  Roger VP observed (at §24) that the logical conclusion mentioned above does not apply in a situation where a company itself knows that it is committing irregularities and the matter happens to be spelt out in the accounts.  This is particularly so in the case of a private company, the accounts of which are not generally published."

19.  It became clear from Mr Barlow’s oral submission that he did not take issue with the Judge’s above analysis. We also do not understand him to be really arguing that the Judge went wrong in his summary of the plaintiff’s plea in paragraph 66 of the Decision.  It must, in our view, follow that the Judge is correct in his view (at paragraph 62) that the present case is premised on ignorance on the part of FNF about the misconduct of the persons in control, and is therefore different from that considered by Roger VP in Guang Xin Enterprises Ltd in §24.

20.  The proposed Ground 4 is plainly untenable.  

Conclusion 

21.  In short, none of the additional grounds in the draft supplementary notice of appeal enjoys reasonable prospect of success. There is also no other reason in the interest of justice for these grounds to be heard in the pending appeal. Accordingly, we dismiss the defendant's summons.

22.  Applying the normal rule of costs follow event, we make an order that the defendant pays the plaintiff the costs of this application. 

23.  The plaintiff has provided two statements of costs for summary assessment, covering respectively the costs up to the written submissions stage and the costs incurred thereafter, which include the hearing before us.  The defendant’s solicitors have put in written objections to them.

24.  In assessing the plaintiff’s costs, we proceed on the party-and-party basis.  We take note that this is not a heavy or complex leave application, and that the arguments had substantially been argued before the Judge both at the initial hearing and in the leave application.  We do not accept there is justification for departing from the usual hourly rate for solicitors allowed in party-and-party taxation, notwithstanding the seniority of the primary fee earner. We also do not consider the application justifies the involvement of two Counsel. We are further of the view that the amount of counsel’s brief fee for the hearing before us should be substantially reduced to take into account the fact that the written submissions had already been prepared and separately charged for. Taking a broad-brush approach, we summarily assessed the plaintiff’s costs at HK$180,000.

[1] The Statement of Claim has since been re-amended, with which the present application is not concerned.

[2] “TCD” stands for the plaintiff.

[3] 5^th Affidavit of Yen Ching Wai David, §11(1).

[4] 5^th Affidavit of Yen Ching Wai David, §§12 and 13.