CHINA HUISHAN DAIRY HOLDINGS COMPANY LTD (IN PROVISIONAL LIQUIDATION) AND OTHERS v. KPMG (A FIRM) AND ANOTHER

HCA 745/2020

[2024] HKCFI 1494

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 745 OF 2020

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BETWEEN

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D E C I S I O N

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Introduction

1.  This is a joint application of D1 and D2 by their respective summonses filed on 8 June 2022 and 9 June 2022, amended and refiled on 2 and 4 August 2022 respectively (“the Summonses”) (1) to set aside the order of Master Dick Ho dated 14 May 2021 (“the Extension Order”) granting an extension of validity of the Writ issued herein and (2) to dismiss Ps’ claims in audit negligence.

2.  In each of the Summonses, two identical grounds are expressly set out. First, Ds say that Ps had no good reason to justify the need to extend the validity of the Writ. Second, Ps failed to give full and frank disclosure in the Affirmation of Ho Kwok Leung Glen (“Ho”) dated 29 April 2021 filed in support of their application for the Extension Order (“the 1^st Ho Affirmation”). Specifically, Ds say that Ps failed to disclose that Deloitte Advisory (Hong Kong) Limited (“Deloitte Advisory”) had been appointed by P1 as independent financial advisor (“IFA”) and independent forensic accountant (“IFC”) on 13 April 2017 and 21 July 2017 respectively and that Ps failed to address time limitation issues adequately.

3.  Ps oppose the application contending that they had a good reason for the extension of the validity of the Writ and that there was no material non-disclosure (“MND”). Their fallback position is that this court should in any event exercise the discretion to uphold the Extension Order or re-grant the order in similar terms.

Background facts

4.  The following account of the undisputed background facts is largely taken from the written submission of Ps, represented by Mr Manzoni SC with Mr Karas (solicitor advocate).

5.  P1, China Huishan Dairy Holdings Company Limited (In Provisional Liquidation) (“CHD”), was listed on the Hong Kong Stock Exchange. CHD purportedly engages in the business of dairy farming, including breeding dairy cows, growing and processing feeds, and producing and selling milk and dairy products in Mainland China. P2 and P6 are subsidiaries of CHD. All of the other Ps except P5 are wholly owned by CHD.

6.  In December 2016, Muddy Waters Capital LLC published two reports (“Muddy Waters Reports”) alleging misstatements in CHD’s financial statements for the financial years ended 31 March 2014 to 2016 (“FY2014” to “FY2016” respectively). The Muddy Waters Reports further included an allegation that CHD and P2 to P6 (collectively “the Group”) had been reporting fraudulent profits and that its former chairman Mr Yang Kai (“Mr Yang”) had misappropriated at least RMB150 million of assets from the Group.

7.  As a result, CHD’s share price dropped approximately 85% in March 2017, following a meeting with creditor banks to discuss the Group’s overdue interest payments on bank facilities.

8.  In April 2017, Deloitte Advisory was engaged by CHD as IFA to analyse the financial position of the Group as of 31 March 2017 and to assist with the Group’s potential debt restructuring. Whilst there was no formal termination of the engagement, Deloitte Advisory substantially ceased work in or around August 2017.

9.  In July 2017, Deloitte Advisory was also engaged as IFC by the solicitors for CHD’s Independent Board Committee to investigate certain transactions during the period between October 2016 and March 2017. However, no substantive work was conducted by Deloitte Advisory due to the non-payment of fees.

10.  In December 2017, the joint provisional liquidators of CHD (“JPLs”) were appointed by the Grand Court of the Caymans Islands. Mr Lai Kar Yan Derek (“Lai”) and Mr Yeung Lui Ming Edmond (“Yeung”) both of Deloitte Touche Tohmatsu in Hong Kong, together with Mr Stuart Sybersma of Deloitte & Touche in the Cayman Islands were appointed as the JPLs. Restructuring options could not be successfully implemented and the listing of CHD’s shares was cancelled on 23 December 2019.

11.  In March 2021, CHD was placed into compulsory liquidation and the JPLs were appointed as joint official liquidators (“JOLs”) by the Grand Court of the Caymans Islands. In February 2023, Ho, a partner of Deloitte Touche Tohmatsu, was in succession to Yeung and became one of the JOLs.

12.  Ds were the statutory auditors of the Group. D1 gave an unqualified opinion in respect of CHD’s consolidated financial statements for each of FY2014 to FY2016 (“the 2014, 2015, and 2016 Financial Statements” respectively) and D2 was the component auditor of the Group.

13.  The Writ concerns the Ps’ claims in respect of Ds’ audit of CHD’s 2014 Financial Statements and the provision of an Independent Auditor’s Report dated 11 June 2014 (“the IAR”). Ps claim in the Statement of Claim (“SOC”) that:

13.1 The 2014 Financial Statements contained significant misstatements including in relation to its cattle numbers, milk production, raw milk price, milk sales revenue, alfalfa production and purchases, cattle valuation, dairy farm capital expenditure and lease prepayments.

13.2 In breach of contract and duty, Ds failed to identify and report these misstatements in the 2014 Financial Statements. The misstatements were so pervasive that Ds’ audit was fundamentally deficient in failing to identify them.

13.3 Had Ds not been negligent in the FY2014 audit, they would have identified the above material misstatements, made relevant disclosures to those charged with the governance of Ps, CHD’s Audit Committee and/or CHD’s board of directors, and qualified or disclaimed their audit opinions. Accordingly, CHD and the Group would not have relied on the misstated 2014 Financial Statements and would have taken relevant steps to investigate the misstatements and safeguard its assets, which would have prevented subsequent losses and other misappropriations.

13.4 As a result of Ds’ negligence, Ps have suffered significant losses of at least around RMB930 million solely in respect of the FY2014 audit.

14.  Ps make similar claims in respect of the FY2015 and FY2016 audits, but those claims are not the subject matter of the present dispute.

Procedural history

15.  Ps took out the Writ herein on 21 May 2020. Shortly before its expiry, on 29 April 2021, Ps made an application for an extension of the validity of the Writ supported by the 1^st Ho Affirmation to the Master (“the Extension Application”).

16.  The Master made the Extension Order on 14 May 2021 extending the validity of the Writ for 12 months from 21 May 2021 to 20 May 2022.

17.  On 29 April 2022, the Writ and the SOC were served on Ds and both of them filed their respective Acknowledgements of Service on 11 May 2022.

18.  Ds have filed the 1^st and 2^nd Affidavits of Olivia Yang Chung Tong and the 1^st and 2^nd Affirmations of Zhang Jun in support of the Summonses. To resist the applications, Ps have filed the 2^nd and 3^rd Ho’s Affirmations (respectively “the 2^nd Ho Affirmation and 3^rd Ho Affirmation”).

19.  On 28 February 2024, the parties filed a consent summons for leave to file the 4^th Ho’s Affirmation (“the 4^th Ho Affirmation”) and a consent order was made as a result.

Ds’ grounds to set aside the Extension Order

20.  D1 and D2 are separately represented by two different firms of solicitors. Ms Lam SC leading Ms Cheung appear for D1 and Mr Yu represents D2. They share the same position. They mainly rely on two broad main grounds to set aside the Extension Order. Plainly their primary ground is MND.

21.  The MND alleged by Ds includes:

(1) Ps’ failure to disclose that many claims were already time barred;

(2) Ps’ failure to disclose the extent of the information already available to them; and

(3) Ps’ failure to disclose that access to the audit work papers was not necessary to assess or plead their claims.

22.  Both Ms Lam and Mr Yu address me extensively on MND and Mr Yu focuses on the time limitation issues.

23.  Additionally, Ms Lam makes submission on the further ground that there was no good reason to extend the validity of the Writ.

Applicable legal principles

24.  There is no dispute about the applicable legal principles. Both Mr Manzoni and Ms Lam refer to the well-known two-stage process in applications for an extension of the validity of a writ under O.6 r.8(2) of the Rules of the High Court. In China Medical Technologies, Inc. (In liquidation) v Bank of China (Hong Kong) Ltd [2018] HKCFI 1395 at §28 (“China Medical (CFI)”), Au Yeung J said this about the two-stage process.

“In the first stage, the plaintiff must first establish matters amounting to good reason for extension or at least capable of so amounting. In the second stage, matters such as the balance of hardship will fall to be considered if the discretion to extend arises in the first place. The two stages are not “watertight” compartments for all purposes and some relevant factors may overlap: Chow Ching Man v Sun Wah Ornament Manufactory Limited [1996] 2 HKLR 338 at 341B-C (Bokhary JA, as he then was); following the English approach in Kleinwort Benson Ltd v Barbrak Ltd [1987] AC 597 (“Kleinwort Benson”) and Waddon v Whitecroft Scovell Ltd [1988] 1 WLR 309.”

25.  Ms Lam highlights to this court the instructive observation of G Lam J (as he then was) in Sealegend Holdings Ltd v China Taiping Insurance (HK) Co Ltd [2013] 4 HKLRD 508 at §29:

“The law concerning the validity of a writ and its extension is no mere formal procedural rule. Underlying it is the policy of the law that promotes finality to litigation, the prevention of stale claims, and the protection of a defendant from having a claim hanging over his head indefinitely. Inasmuch as a plaintiff with a reasonable cause of action has a right to bring and serve proceedings within prescribed periods, a (potential) defendant has a right not to be vexed by actions that are time-barred or writs that have expired, unless they are extended by the court in accordance with the law.”

26.  Mr Manzoni points out that determination of whether a good reason exists requires consideration of the state of affairs as at the time of the extension is sought. Subsequent evidence filed at the inter partes stage is relevant only to showing the position as at the time of the renewal application, and should not be used to re-assess the adequacy of a reason prima facie already found to have been good: National Commercial Bank v Hague [1994] CLC 230 p.241H .

27.  For MND found in similar applications, both Ms Lam and Mr Yu heavily rely on China Medical (CFI) and the decision of the Court of Appeal in which China Medical (CFI) was affirmed: China Medical Technologies In (in liquidation) v Bank of China (Hong Kong) Ltd [2019] 2 HKLRD 710 (“China Medical (CA)”). Indeed these two authorities provide this court with sound guidance in the resolution of present dispute.

28.  At §§65-71, Au-Yeung J in China Medical (CFI) summarised the legal principles relating to the duty to make full and frank disclosure in ex-parte applications and I find it convenient and pertinent to adopt her summary here:

“65. When applying for an ex parte order, the duty is on the applicant to make full and frank disclosure to the court of all relevant facts which he knows. Failure to do so may in itself be a ground for setting aside such an order. Hong Kong Civil Procedure 2018, Vol 1, §§32/6/13.

66. The test as to materiality is an objective one. It is not for the applicant or his legal advisers to decide the question, hence it is no excuse for the applicant subsequently to say that he was genuinely unaware, or did not believe, that the facts were relevant or important: Gee on Commercial Injunctions, 6^th ed, at §9-003.

67. “Material information” means all matters which are relevant to the court’s assessment of the application in question, and it is no answer to a complaint of non-disclosure that if the relevant matters had been placed before the court, the decision would have been the same: Gee, 6^th ed, at §9-003; New Asia Energy Limited v Concord Oil (Hong Kong) Limited, unreported, CACV 347/1998, 3 November 1999, at pp.4-5, Keith JA.

68. It will usually not be a sufficient answer to an allegation of non-disclosure for an applicant to say that the relevant information giving rise to the defence was contained in an exhibit though not referred to in the body of the affidavit in the context of a possible defence. The applicant has the responsibility of ensuring that all relevant points are presented clearly and distinctly: Gee, at §9-005.

69. The duty of disclosure extends to identifying potential defences (such as limitation), which although not yet taken, would have been available to be taken by the defendant had he been present at the application, provided that: (a) the defence is one which can reasonably be expected to be raised in due course by the defendant, and (b) the defence is not one which can be dismissed as without substance or importance. Gee, at §9-007; New Asia Energy, at p.5.

70. Mr Manzoni SC does not dispute these duties. However, he reminds the court that it must be vigilant to the possibility of litigants alleging material non-disclosure on slender grounds to seek discharge of an ex parte order where there is little hope of doing so on the substantial merits of the case or on the balance of convenience: Brink’s Mat Ltd v Elcombe [1988] 1 WLR 1350, at 1359B-E, Slade LJ.

71. In deciding whether to set aside an ex parte order on the ground of material non-disclosure, the court adopts a four-limb test:

(a) Was there non-disclosure of facts?

(b) Were the facts not disclosed material?

(c) Was the non-disclosure innocent?

(d) If there was material non-disclosure, should the court nevertheless exercise its discretion not to discharge the ex parte order?

Hong Kong Civil Procedure 2018, §32/6/13; citing Yau Chiu Wah v Gold Chief Investment Ltd [2003] 3 HKLRD 553, Recorder Ma SC (as he then was), at pages 22 to 25.”

29.  On the continuing duty to make full and frank disclosure, Ms Lam draws my attention to China Medical (CA) §§69 -71 in which Kwan JA (as she then was) said this,

“69. … The continuing duty is to update the court on matters material to the granting and continuing of the ex parte order. In this instance, the ex parte order is for extension of the Writ. There should be no difference in principle from other kinds of orders or relief obtained ex parte, when the court entrusts the applicant with its order so that justice can be done. The need to continue to make full and frank disclosure while the proceedings remain on an ex parte basis should apply in the extension of a writ just as in any other situation where ex parte relief is granted. It is not for the applicant to act as judge in his own cause and decide what effect if any the new developments are to have on the ex parte relief.

70. It is incumbent on the applicant to make full and frank disclosure whilst the proceedings remain on an ex parte basis. It is not for the party on the receiving end to take a vigilant and proactive approach, for until the other party is fully and properly apprised of what had occurred on the ex parte application, it is under a continuing disability as it could not have taken meaningful measure to protect its own interests.

71. … I agree with the Judge it is plainly material to disclose Harris J’s decision, as the liquidators had placed great reliance on the s 221 Application to contend that this constituted good reason for extending the Writ. This is also relevant to the length of any extension that might be granted by the Master.”

30.  About the importance of limitation issues in ex-parte applications for an extension of the validity of a Writ, it is imperative to first refer to the following categorisation in Kleinwort Benson set out by Au Yeung J in the China Medical (CFI) at §90:

(1) At a time when the writ is still valid and before the relevant period of limitation has expired (“category 1”);

(2) At a time when the writ is still valid but the relevant period of limitation has expired (“category 2”); and

(3) At a time when the writ has ceased to be valid and the relevant period of limitation has expired (“category 3”).

31.  Au Yeung J at §95 added a category 4 (“category 4”): where a writ was issued after the limitation period of a relevant course has expired.

32.  Au Yeung J explained that in categories 3 and 4 cases, and not in categories 1 and 2 cases, when the extension application is made, a defendant has an accrued right of limitation.

33.  The four categories were discussed by the Court of Appeal in China Medical (CA). The following two paragraphs pertaining to the four categories at §§83-84 (per Kwan JA (as she then was)) are heavily relied on by the defence:

“83. … Limitation issues are of crucial importance to the exercise of discretion whether to extend the writ and for how long. The rationale for informing the court which category the claims fall under is to differentiate the claims in which a defendant who has not been served has an accrued right of limitation (categories (3) and (4)) from those that he has not (categories (1) and (2)). Further, as stated by Reyes J in Pacific Electric Wire & Cable Co Ltd v Hu Hung Chiu [2011] 1 HKLRD 1000 at §18, it would be unlikely for there to be good reason for extension in category (2) cases and even less likely in category (3) cases.

84. It is therefore incumbent on the liquidators to present the relevant limitation points clearly, unequivocally and comprehensibly. That was not done in Borrelli 1^st. Whether the Master would have exercised his discretion less favourably or in the same way if he had been correctly informed is beside the point. Nor is it an answer to say that the extension of the Writ would have no effect on the category (4) claims as the defendant would still be able to run a limitation defence which had accrued before the Writ was issued. The fact remains that the defendant would have to deal with the category (4) claims, which it would not have to deal with without an extension.”

Discussion

34.  Given the special emphasis laid by the defence, I shall first deal with the MND issue, in particular the non-disclosure of the time limitation issues.

MND

Time limitation issues

35.  In 1^st Ho Affirmation (§8), Ho explained that the Writ was issued on a protective basis to prevent any potential actions against Ds becoming time-barred.

36.  Ho went on to explain that the Writ principally concerns potential claims against Ds arising from the 2014 Financial Statements and the 2014 Auditor’s Report and the value of such claim is likely to exceed several hundred million RMB. Whilst the JOLs would continue to investigate such claims, the Writ was issued in order to protect any claims from the expiry of any applicable limitation periods (§§9-10).

37.  Ho stated that if the Writ was not renewed, Ps’ potential claims might become time barred and the prejudice to Ps would be grave and substantial as the potential claims might be valuable assets of Ps.

38.  Ho suggested that D1 might seek to rely on Clause 41.2 of KPMG’s General Business Terms (“the 4-Year Term”) included in the engagement letter between CHD and D1 dated 31 March 2013 with respect to the Global Offering Prospectus (“the 2013 Engagement Letter”) even though there were subsequent engagement letters in respect of the FY2014 audit and interim review. The 4-Year Term provides that claims must be commenced within 4 years of provision of the services.

39.  Ho then explained that in the event that the 4-Year Term applied, the limitation period for such claims might have expired as early as 11 June 2018 being (a) four years from the date of the IAR and (b) prior to the date the Writ was filed on 21 May 2020 (§65).

40.  Ho continued to assert that if necessary, Ps would rely on an extended limitation period pursuant to section 31 of the Limitation Ordinance, Cap 347 (“the LO”), or alternatively, a postponement of the limitation period pursuant to section 26 of the LO by reason of fraud, deliberate concealment or mistake. The position of Ps is that the earliest possible date upon which Ps had the relevant knowledge to bring a claim against Ds for the purpose of sections 31 or 26 would be when they were appointed as JPLs on 6 December 2017 such that the earliest extended limitation date is 6 December 2020 under section 31 or 6 December 2023 under section 26 (§66).

41.  Ho fairly pointed out that these potential extensions might be challenged by Ds on the ground that Ps had sufficient relevant knowledge before the appointment of JPLs to bring the claim or that there was no fraud, deliberate concealment or mistake to enliven a section 26 postponement (§67).

42.  Both Ms Lam and Mr Yu attack the adequacy of this disclosure of Ho. Ms Lam submits that many of the claims of Ps (contractual and tortious) became time-barred during the period between the Extension Application and the eventual service of the SOC on 29 April 2022 pursuant to sections 4 and 31(4)(a) of the LO. Ms Lam submits that Ps failed to disclose this to the Master.

43.  Ms Lam further complains that Ps did not explain that the primary limitation periods that apply if the court rejected Ps’ reliance on the extended limitation periods, and that they had already expired.

44.  She continues to submit that Ps did not disclose that neither sections 26 and 31 should be construed to postpone time where there was an inability to sue in the case of a company controlled by wrongdoers. Neither of these provisions can be applicable to Ps’ claims in the absence of any allegations of fraud, deliberate concealment or mistake, Lastly she submits that section 31 would not apply to Ps’ contractual claims or override the 4-Year Term.

45.  Mr Yu makes a comprehensive and powerful submission on MND relating to time limitation issues. The gist of his objection is that Ho in his supporting affirmation did not mention any primary limitation periods and the dates of their expected expiry relating to their claims against D2. Ho did not state clearly any dates on which the causes of action accrued or provide any information about the heads of losses.

46.  Mr Yu has helpfully compiled the table below setting out the claims or heads of loss of Ps pleaded in the SOC and their respective dates of accrual of causes of action and expiry of primary limitation periods. Ps claim to be unaware of the exact dates of the accrual of the cause of action in respect of the heads of loss marked with an asterisk.

	Claim / Heads of Loss	Amount (RMB ‘000)	Accrual of cause of action	Expiry of primary limitation period
1.	Contractual claim arising from the FY2014 Audit	See heads of loss below	11 June 2014	11 June 2020
2.	Tortious claim arising from FY2014 Audit	See heads of loss below	11 June 2014	11 June 2020 at the earliest
3.	Dividend payments to shareholders following FY2014	311,208	On or around 30 September 2014*	On or around 30 September 2020
4.	Tax on overstated profit paid in FY2014	Not presently quantified	11 June 2014*	11 June 2020
5.	Tax on overstated profit paid in FY2015	Not presently quantified	June 2014 to March 2015*	June 2020 to March 2021
6.	Finance costs (interest & other finance charges) paid between June 2014 and March 2015	Up to 500,882	June 2014 to March 2015*	June 2020 to March 2021
7.	Audit fees paid in FY2014	5,858	11 June 2014*	11 June 2020
8.	Share repurchases made in FY2015	111,541	October to December 2014	October to December 2020
9.	Remuneration paid to Mr Yang and Ms Ge from June 2014 to March 2015	Up to 2,171	June 2014 to March 2015*	June 2020 to March 2021
10.	Misappropriations	Not presently quantified	Presently unknown but Ps identified fund outflows from September 2016 to May 2018*	Presently unknown but likely between September 2022 and May 2024
11.	Funding loss	Not presently quantified	Presently unknown*	Presently unknown

47.  Mr Yu submits that it was incumbent on Ps to give this information clearly and distinctly. And it should not have been left to the Master to work out the dates of expiry of the statutory limitation periods and find out which categories their claims fall into: China Medical (CFI) at §100.

48.  Specifically for those unquantified misappropriation and funding loss claims, Mr Yu submits that Ps have failed to disclose the uncertainty regarding whether those claims had become prima facie time barred.

49.  Mr Yu notes that Ho asserted in the 2^nd Ho Affirmation that he had already explained that all the quantified claims fall within category 2 when the Extension Application was made meaning the primary limitation periods had already expired. He submits that this did not amount to sufficient disclosure and even for category 2 claims, the plaintiff is still obliged to disclose the primary limitation periods. In this respect, Mr Yu relies on the following speech of Lord Brandon in Waddon v Whitecroft Scovell [1988] 1 WLR 309:

“I feel bound to observe that this affidavit was seriously defective in that it made no mention whatever of the fact that the primary period of limitation applicable to the appellant’s claim would expire shortly. It is the duty of solicitors acting for a party on an ex parte application to the court to make a full and frank disclosure of all matters relevant to such application. The fact to which I have referred was, having regard to long-established authority on the extension of the validity of writs where questions of limitation are involved, not just a relevant matter but a crucial one.”

50.  This was cited in Binning Bros Ltd (in liquidation) v Thomas Eggar Verrall Bowles (a firm) [1998] 1 All ER 409, which was referred to this court by both Ms Lam and Mr Yu. Binning Bros Ltd was quoted in both China Medical (CFI) and China Medical (CA). As explained by Au Yeung J in China Medical (CFI), in Binning Bros Ltd, the general indorsement on the writ mentioned no dates and the supporting affidavit did not disclose that 8 out of 49 heads of claim would be statute barred on the date the extension order was granted and the rest would be barred in less than 8 weeks’ time. Hutchison LJ held that to be a very serious omission, amounting to a failure to comply with the duty of making full disclosure on an ex parte application.

51.  Next, Mr Yu complains that Ho failed to disclose that there was no basis for Ps to invoke sections 26 and 31 of the LO. Mr Yu explains detailedly why none of the fraud, deliberate concealment and mistake exception in section 26 is applicable to the present case even on Ho’s own evidence. He submits that section 31 has no application to Ps’ contractual claims whereas their tortious claims cannot be saved in the absence of clear evidence of their lack of knowledge.

52.  I agree with Mr Manzoni that there is no merit in this alleged MND concerning limitation periods.

53.  In Allied Weli Development Ltd (In Liquidation) v Chuang Yue Chien Eugene [2020] HKCFI 2746, in an attempt to set aside an ex parte order for renewing an unserved writ of the liquidators, the defendant similarly placed reliance on China Medical (CFI) and China Medical (CA) to make good their allegation of MND relating to time limitation issues. As identified by DHCJ Le Pichon at §77, the question essentially was whether the liquidators had presented a fair and accurate picture of potential arguments that the defendant might raise.

54.  In the present case, it is clear from the Indorsement of Claim and the SOC that the claims of Ps arose from the FY2014 audit. The earliest time when time started to run is 6 years from the date of the publication of the IAR, i.e. 11 June 2014. When the Writ was issued on 21 May 2020, all of Ps’ claims, contractual or tortious, were not time-barred.

55.  When the Extension Application was made on 29 April 2021, the Writ was still valid and the relevant periods of limitation of all of Ps’ claims or at least some of them had expired.

56.  In the 1^st Ho Affirmation, Ho made it clear that the Writ was protective in nature and in the absence of a renewal of the Writ at the time of the Extension Application, Ps’ potential claims might become time barred.

57.  On this evidence, Mr Manzoni submits that all contractual claims of Ps are category 2 cases and other tortious claims accruing after the IAR could only fall into either category 2 or category 1. They cannot be categories 3 or 4 cases. And the defence has not argued that they are.

58.  On this basis, Mr Manzoni submits that whilst category 1 cases need no disclosure in the absence of limitation issues, Ho has already made adequate disclosure about Ps’ category 2 claims. I accept his submission.

59.  In forming this view, of course I have borne in mind the important duty to present the relevant limitation points clearly, unequivocally and comprehensibly as highlighted by Kwan JA (as she then was) in China Medical (CA). But whether such a duty has been discharged is a fact-sensitive question.

60.  In China Medical (CA), when the writ was issued, the limitation period of the 6 claims of the liquidators totalling USD203.25 million had already expired. These were category 4 claims. The rest of the liquidators’ claims were categories 1 (totalling USD20 million) and 2 claims (totalling USD132.25 million). Au-Yeung J in China Medical (CFI) concluded that the master was misled into believing that the plaintiff would be denied all the claims as large as USD355.5 million (the total worth of categories 1, 2 and 4 claims) if the writ was not extended. The liquidators simply did not segregate category 1 claims from the others. On these factual conclusions, Kwan JA agreed that the liquidators did not present the relevant information points clearly, unequivocally and comprehensively.

61.  Waddon does not really support Mr Yu’s objection. In that case, the issue was not whether the plaintiff had made sufficient disclosure of his category 2 claim. In the supporting affidavit, the plaintiff did not mention any potential limitation issues at all.

62.  Nor does Binning Bros Ltd. There, the application for extending the validity of the writ was supported by a very brief affidavit from the handling solicitor, which merely explained in a few sentences the difficulties of the liquidator had had in investigating matters. No time limitation issue was ever raised. Hence, Hutchison LJ made the conclusion that there was a non-compliance with the duty of making full and frank disclosure.

63.  The facts of the present case is a far cry from that of China Medical (CFI), Waddon and Binning Bros Ltd. Here, all claims of Ps are either category 1 or category 2. Ho’s evidence is sufficiently clear. Ho accepts that all such periods had expired at the time of the Extension Application. There is no need to identify the specific dates on which the primary periods of the statutory limitation relating to Ps’ claims would expire. In fact, given the undisputed difficulties that Ps had encountered in the investigation rendering it impossible for the JOLs to formulate their claims and assess their viability properly at the time of the Extension Application, it was impractical for Ps to identify such dates in the 1^st Ho Affirmation.

64.  In the premise, I am satisfied that, on the evidence of Ho placed before the Master, the time limitation issues were fairly and adequately canvassed. The Master was fully appraised of the actual situation of the present case and the potential time limitation issues involved. The Master was not in any way misled or misguided. There was no MND in respect of time limitation issues.

The 4-Year Term

65.  Merely out of abundance of caution, Ho mentioned the 4-Year Term in the KPMG’s General Business Terms enclosed in the 2013 Engagement Letter. The 2013 Engagement Letter basically related to the CHD’s engagement of D1 for the purpose of a specific IPO, which was an altogether different matter and had nothing to do the FY2014 audit.

66.  It is noteworthy that CHD engaged Ds for the FY2014 audit and interim review by different engagement letters which neither enclosed nor referred to the KPMG’s General Business Terms. The 4-Year Term is prima facie inapplicable to the engagement of D1 in the FY2014 audit and interim review.

67.  Mr Manzoni characterises any argument based on the contractual limitation as week argument. It appears to me to be an understatement. Ms Lam does not argue that the KPMG’s General Business Terms are relevant and that D1 could in this action rely on the 4-Year Term therein. In any event, D2 is not privy to the KPMG’s General Business Terms including the 4-Year Term.

68.  Ho mentioned sections 26 and 31 of the LO just in case the 4-Year Term is applicable and so D1 could rely on a shorter contractual limitation period. In that case, all the contractual claims of Ps would fall within category 4. Ps contend that sections 26 and 31 could assist Ps to extend or postpone the shortened limitation periods.

69.  Given the apparent inapplicability of the 4-Year Term, I opine that it is not necessary to delve into the arguments of the defence that these two sections are not applicable despite Mr Yu’s impressive presentation.

70.  I agree with Mr Manzoni that Ps have already fulfilled their duty to make a mention of the 4-Year Term as a potential defence of D1. Ho’s further mention of sections 26 and 31 was for completeness only. Mr Manzoni submits that it is too onerous if not impossible a burden for an applicant in an ex parte application to be required to argue or identify counter rebuttals to rebuttals to possible arguments. On the facts of this matter, he must be right.

71.  In the premises, I conclude that there was no MND in respect of time limitation issues.

Failure to disclose the availability of information prior to Ps’ appointment

72.  Now I turn to the other two allegations of MND. Basically, D1 contends that Ps had concealed the engagement of Deloitte Advisory as CHD’s IFA on 13 April 2017 and as IFC on 21 July 2017 before their appointments first as JPLs and later as JOLs. D1 says that the JOLs should have received certain information of CHD relevant to their present claims against Ds. Ds now argue that these engagements and the information Deloitte Advisory obtained as a result should have been disclosed to the Master at the Extension Application.

73.  Ms Lam complains that the concealment of the appointment of Deloitte Advisory as CHD’s IFA is particularly egregious given that two of the JOLs, namely, Lai and Yeung, were directors of Deloitte Advisory and the third one, Ho, was an engagement partner.

74.  Ms Lam refers to this court the IAR and the evidence of Ho in the 2^nd Ho Affirmation and submits that in performing the role as the IFA, Deloitte Advisory interviewed 29 Group personnel, conducted site visits to 12 dairy farms, 5 leased agricultural land plots and 9 processing plants, obtained key information and documents relating to FY2014 not reported in the 2014 Annual Report of CHD and produced a draft report (“the Draft Report”) containing a detailed description of the business of the Group on 10 June 2017.

75.  Ms Lam invites this court to look at a few paragraphs of the SOC where references are made to IFA. She submits that these references show the relevance of this appointment.

76.  Ms Lam then submits that in making the Extension Application, the JOLs were less than frank when they concealed their previous appointment as IFA and alleged that they lacked information and could not even determine whether a claim existed without further investigation.

77.  I do not find any substance in this complaint.

78.  I have studied the IFA engagement letters. The services to be rendered by Deloitte Advisory was expressly stated to include a limited scope financial analysis of the Group. I accept that the work contracted to be undertaken by Deloitte Advisory was confined to FY2017 and the focus was the preparation of a limited financial analysis of the assets and liabilities of the Group as of 31 March 2017 and cash flow projection from 2017 to 2025.

79.  CHD needed IFA to assess its own financial position as at FY2017 for the purpose of negotiations with bank creditors with a view to debt restructuring. The Draft Report showed the work undertaken by IFA.

80.  It is worthy of note that the Disclaimer of the Draft Report contained a statement to the effect that Deloitte Advisory had not conducted any forensic investigation into the allegations made in the Muddy Waters Reports, nor had it issued any opinion on those reports.

81.  It is clear that IFA had a different scope of work and Deloitte Advisory was not tasked with the assessment of the validity or adequacy of the FY2014 audit.

82.  I have perused all the references to IFA in the SOC. None of them could remotely suggest that the allegations were made on the basis of any information/matters discovered or findings made in the course of the work undertaken by IFA.

83.  As to the appointment as IFC, according to the engagement letter dated 21 July 2017, the specific task that IFC was to perform was to conduct an investigation of the bank balances and bank transactions of the major bank accounts of the Group as well as the guarantees provided by the Group for the period from 1 October 2016 to 31 March 2017.

84.  Ho explained in the 2^nd Ho Affirmation that, similarly, the IFC engagement letter expressly provided that no opinion would be given on the allegations made in the Muddy Waters Reports concerning material misstatements in 2014-2016 Financial Statements.

85.  Furthermore, due to CHD’s failure to pay the professional fees in accordance with the engagement letter, Deloitte Advisory did not commence any work in the capacity of the IFC and Deloitte Advisory had never received any information or documents in the course of this engagement.

86.  The defence has adduced no rebuttal evidence in this regard and there is no reason why I do not accept the explanation of Ho.

87.  I agree with Mr Manzoni that it is not realistic to require the JOLs to identify each and every instance and source of information received from CHD in the Extension Application. Nor is this necessary. The real question was whether the JOLs had sufficient information and knowledge to determine whether Ps’ potential claims regarding the FY2014 audit were viable. It was the quality of the information and knowledge about CHD that mattered.

88.  I am satisfied that the appointments as IFA and IFC had nothing to do with Ps’ allegations in these proceedings and did not provide adequate information for the JOLs to decide on the feasibility of the potential claims of Ps. I see no reason why Ps should disclose these appointments in the Extension Application.

Failure to disclose the importance of the audit work papers

89.  Lastly, Ms Lam complains that the JOLs overstated the importance of the full set of Ds’ audit work papers and related documents maintained in Mainland China (“the Mainland Audit Documents”) when making the Extension Application.

90.  Ms Lam refers to the 1^st Ho Affirmation and points out that Ho deposed to the high desirability for the JOLs to obtain and review the Mainland Audit Documents to assist investigation and determination as to whether there was a claim against either of Ds. She submits that they failed to disclose that in fact Ps managed to plead their claims without gaining access to those documents eventually.

91.  I do not think that this allegation can amount to MND. It was at most a misrepresentation.

92.  This submission, in any event, has no merit. In the first place, it cannot be disputed that the Mainland Audit Documents were of cardinal importance and they were necessary for the JOLs’ investigation into the business and financial affairs of the Group in FY2014.

93.  Deprived of the access to the Mainland Audit Documents, the JOLs were handicapped in their detection of the existence of any material misstatements in the 2014 Financial Statements and their extents. The JOLs had experienced difficulties in finding out whether Ds were negligent in the FY2014 Audit.

94.  The fact that Ps could subsequently manage to plead their case against Ds without the sight of the Mainland Audit Documents could not start to cast doubt on their importance and utility. Ps’ ability to overcome the lack of those documents does not suggest that they were not necessary in the first place. It is unreasonable and unfair to say that Ps had misrepresented to the Master in the Extension Application that Ps badly needed the Mainland Audit Documents in their investigation.

95.  Ms Lam further complains that Ps have failed to perform their continuing duty of full and frank disclosure when, on the evidence of Ho, by August 2021, it was clear to Ps that they could not have access to the Mainland Audit Documents. She submits that this was a change in circumstances that a report should be immediately made to the court before the expiry of the extended period.

96.  I find no validity in this complaint. The JOLs asked for the time extension not just to obtain access to the Mainland Audit Documents. They needed further time to carry out various investigations to confirm the viability of their potential claims. Despite the inability to get hold of the Mainland Audit Documents, the JOLs tried to seek such information from alternative sources. So long as they still carried on their investigations during the extended period, there was no change of material circumstances calling for a report to the court to be made. The court could not be expected to closely monitor the progress of their investigation.

97.  To conclude, none of the MND has any merit. I find that the JOLs have adequately discharged their duty of full and frank disclosure in the Extension Application.

Lack of good reason to extend the validity of the Writ

98.  Only Ms Lam makes a brief submission on this ground.

99.  As Mr Manzoni rightly points out, the threshold to be met in applications for extensions of validity of writs is not high and the applicants are required only to show that there are matters amounting to good reason for extension of at least capable of so amounting: China Medical (CFI) at §28 and see also Yip Kam v Zhongshan Foodstuffs & Aquatic Import & Export Group Co Ltd of Guangdong [2010] 2 HKLRD 914 per Le Pichon JA at §39 citing with approval Baly v Barrett [1988] NI 369, 417 per Lord Brandon.

100.  In the present case, the following matters outlined by Mr Manzoni are not in dispute.

101.  When the Group collapsed, the JPLs inherited control of CHD in December 2017 and they could only recover limited books and records from the offices. They did not have the meaningful assistance of the former directors and officers of CHD. They found the circumstances of the collapse of the Group to be suspect but they had very limited information about the financial positions of the Group throughout the years including FY2014.

102.  Whilst the JPLs had access to a limited set of audit works paper for the FY2014 to FY2016 audits prepared by D1, these documents covered only limited scope and did not cover the principal operations of the Group in the Mainland, which audit was performed by D2 as the component auditor. D1 could not allow JPLs to have access to books and records of CHD too.

103.  Against this background, it is perfectly understandable that the JPLs and hence the JOLs certainly had a genuine need for more time to continue their investigation by, among other things, making further effort to seek access to the Mainland Audit Documents.

104.  I have little doubt that at the time of the Extension Application, there existed good reasons for an extension to be granted.

105.  I refuse to accept the submissions of D1 that the JOLs already had sufficient information and knowledge to proceed with the Writ and plead all the claims against Ds. There is simply no such evidence.

106.  The defence could only point to the appointment of Deloitte Advisory as IFA and the fact that Ps managed to come up with the SOC without the Mainland Audit Documents. As explained above, I do not see how these matters could negate the need to carry out further investigations for the purpose of an accurate assessment of the validity of their potential claims against Ds.

107.  Indeed, Ps carried out the investigations during the extended period which are helpfully set out in the table provided by Mr Manzoni below:

	Investigations	Relevant claim(s) in the SOC
1.	Consulted dairy specialist, and identified relevant sources of information regarding the Mainland dairy industry, properly to understand and assess central aspects of the Group’s business, including: • Alfalfa production numbers • Cattle population, birth and culling rates, cattle age- class composition • Milk yield, quality and selling price • Valuation of the Group’s cattle • Consumption of feed by cattle • Dairy farm capex expenditure	Overstatement of: • cattle population (SOC, Section D.2) • milk production, milk price and revenue (SOC, Section D.3) • cattle valuation (SOC, Section D.5) • dairy farm capital expenditure (SOC, Section D.6) Understatement of costs of sales (SOC, Section D.4)
2.	Comparison and analysis of line items reported in the Group’s 2014 Financial Statements or recorded in KPMG HK’s audit work papers with that of CHD’s competitors in the Mainland, including: • Non-feed costs per milkable cow • Capex on construction-in-progress farms • Average lease prepayment per unit area of farm	Understatement of costs of sales (SOC, Section D.4) Overstatement of dairy farm capital expenditure (SOC, Section D.6) and lease prepayments (SOC, Section D.7)
3.	Engagement of a Mainland law firm to attend the relevant Mainland government authorities and offices to verify the existence and veracity of the Group’s cropland and cattle farm leases.	Overstatement of lease prepayments (SOC, Section D.7)
4.	Investigations on potential connected parties to identify non-arms-length transactions of the Group	Transactions with connected property, plant and equipment counterparties (SOC, Section D.6.4 and Schedule 2)

108.  Ms Lam strongly criticizes the alternative investigation procedures adopted by the JOLs and calls into question the actual gain or benefit of such investigation. I do not accept that such criticisms are reasonable.

109.  It cannot be incumbent on Ps to explain what investigations were carried out during the extended period and what and how further information was obtained to justify the extension granted. So long as they could show that they genuinely needed an extension to amass further evidence and that they did make an effort to do so, the extension order ought not be disturbed.

110.  Ms Lam submits that Ps should have served the Writ and then asked either the court or Ds for more time to serve their SOC if further time is needed to carry out further investigation.

111.  I cannot accept this submission. A plaintiff should not be compelled to plunge into action before he has a reasonable chance to make an informed decision on the merits of his intended claims. It is neither in the interests of justice nor in line with the spirits of Civil Justice Reform to let an action go off half-cocked.

112.  Any reliance on China Medical (CFI) to dismiss the need to adopt alternative investigative procedures as an invalid reason for an extension is misplaced. There, Harris J had already delivered a decision holding that the liquidators did not need any more information to decide whether they had a viable claim. In light of that decision, Au Yeung J did not accept that any other investigation could constitute a good reason to extend the validity of the writ.

113.  Plainly there is no such finding in the present case. I have already concluded that the JOLs did not have adequate information to assess the viability of their potential claims at the time of the Extension Application. There is no rebuttal evidence to suggest that the investigations carried out by the JOLs during the extended period did not yield any fruit.

114.  Lastly, for completeness, I accept that there is no general prohibition over the production or transfer of audit workpapers stored in the Mainland: Tenwow International Holding Limited (In Liquidation) & Anor. v PricewaterhouseCoopers (a firm) & Anor. [2024] HKCFI 1146. This confirms that there is a solid basis for the understanding of the JOLs that there are means to gain access to the Mainland Audit Documents.

115.  For the reasons given, I find no merit in the D1’s challenge of the existence of a good reason for the extension.

Conclusions and orders

116.  I have not dealt with all the points raised and skilfully presented by Ms Lam and Mr Yu. I believe that the findings I have made are sufficient to lead me to the conclusion that there was no MND and that Extension Order was rightly made.

117.  The Summonses fall to be dismissed.

118.  Each of D1 and D2 should pay Ps their costs of and occasioned by their respective Summonses including all costs reserved, to be taxed if not agreed, with certificate for senior counsel and a solicitor advocate.

119.  It remains for me to thank Mr Manzoni, Mr Karas, Ms Lam, Ms Cheung and Mr Yu for their enormous efforts and I have been ably assisted in this matter.