TOPPING CHANCE DEVELOPMENT LTD v. CCIF 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

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D E C I S I O N

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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. The interlocutory dispute started off with TCD obtaining an ex parte injunction against CCIF for the preservation of documents. This eventually developed into 7 summonses before this court.

BACKGROUND

2. FNF was a company incorporated in Bermuda and registered as an overseas company in 2001 having its principal place of business in Hong Kong.  The shares of the company were listed in the Main Board of the Hong Kong Stock Exchange (“HKSE”).

3. CCIF started practice as certified public accountants in 1998; and was the statutory auditor of the accounts and the tax representative of FNF for the period between 2001 and 2007.

4. FNF had interest in 6 subsidiaries in the group (“the Group”).  The subsidiaries were incorporated respectively in Hong Kong, the Mainland and BVI.  Of them 3 were said to be inactive except for holding the other 3 companies in the Mainland.  Of the Mainland subsidiaries, 2 of them were incorporated only in 2006 and 2007 respectively.  The remaining Mainland subsidiary, Fuqing Longyu Food Development Co Ltd (“Longyu”), was the major operation arm of the Group, generating 95% of the Group’s profits.  It possesses the majority of the assets of the group, including cash in bank in Fuqing.

5. Attributing to a series of events since mid-December 2008 involving alleged misconduct of the Chairman[1] and his 2 related executive directors[2], FNF was said to have lost control of Longyu[3].  Trading in the shares of FNF was suspended on 15 December 2008.  Due to resultant inability to meet its debt obligations, FNF presented its winding-up petition in early January 2009.

6. Upon the petition, Mr Yen Ching Wai David (“Yen”) and Mr Liu Yiu Keung Stephen, both of Ernst & Young Transactions Limited, were appointed as the Joint and Several Provisional Liquidators of the company (“the Provisional Liquidators”).  They started to investigate into the affairs of the Group, whilst working on the restructure of the debts and a scheme of arrangement with the creditors.  The Chairman and the directors in question were removed; and the Provisional Liquidators were appointed to the board.

7. Amongst other things, one of the key discoveries during the investigation by the Provisional Liquidators was that besides the audited accounts of Longyu kept among the books and records of FNF at its registered office (“the 1^st Longyu Accounts”), another set of such audited accounts (“the 2^nd Longyu Accounts”) was obtained from the State Administration for Industry and Commerce in Fuqing (“SAIC”).  Both sets of Longyu accounts were apparently audited by the same Mainland auditor, who invariably gave their unqualified audit opinion about them.  Yet the 2 sets of audited accounts differ from each other substantially in various material respects.  As Longyu was the major asset of FNF, the integrity of the group consolidated accounts of FNF audited by CCIF in Hong Kong for the same accounting period was called into question.  Hence the investigation into the true state of financial affairs of the Group.

8. The Provisional Liquidators attempted to obtain assistance and the related documents from the former Chairman and directors mentioned above but in vain.  So was the Provisional Liquidators’ attempt to gain control of or even access to Longyu in the Mainland.  Much had been done, including litigation, to seek assistance from the other Mainland parties and authorities.  Exhausting such means, the Provisional Liquidators turned to CCIF.  Requests for related documents and correspondence with CCIF began in January 2009.

9. Taking the view that CCIF was evasive and un-cooperative, the Provisional Liquidators eventually took out an application pursuant to section 221 of the Companies Ordinance, Cap 32 in the winding-up proceedings in June 2011 for an order compelling CCIF to produce the documents as requested and their individual responsible auditors to attend oral examination.  In late June 2011, CCIF revealed that their working files in respect of the audits for the Group for the financial years ended 2004 and before had already been destroyed in April 2010 in accordance with their alleged document retention policy and professional practice.

10. In September 2011, the HKSE approved the scheme of arrangement and the resumption of the trading of the shares of FNF on conditions.  The section 221 application by the Provisional Liquidators was then vacated, upon CCIF’s undertaking by letter dated 24 February 2012 not to destroy the documents sought by the Provisional Liquidators until the discharge of the Provisional Liquidators or the withdrawal of the wind-up petition (“the Undertaking”).

11. The Provisional Liquidators were discharged by the order of the court on 4 September 2012, when the Undertaking also expired.  By way of a deed of assignment dated the same date, FNF, acting by the Provisional Liquidators, absolutely assigned to TCD all rights in, title to and interests in all causes of action in the property of the company, including the right to institute proceedings against CCIF.

12. TCD is the very company used as the vehicle by the Provisional Liquidators under the scheme of arrangement sanctioned by the court.  The transfer of the right of action against CCIF was part of the approved scheme.  The Provisional Liquidators became 2 of the directors of TCD.  TCD took the place of FNF as the listed company when its shares resumed trading on 6 September 2012.

13. Following the deed of assignment mentioned above, on 5 September 2012, TCD applied ex parte for an injunction seeking preservation of documents as mentioned above.  The application was premised on the risk that CCIF might destroy the related documents once the Undertaking expired upon the discharge of the Provisional Liquidators.  L Chan J granted the injunction (“the Injunction”). Schedule 3 of the Injunction identifies the documents in various classes for the financial years 2001 to 2007.

14. 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.

15. 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.

THE APPLICATIONS

16. The 7 summonses before me came about as follows.

17. Together with the writ, TCD filed its inter partes summons for the continuation of the Injunction until final disposal of the action or further order of the court (“the Injunction Summons”).

18. By summons dated 14 November 2012, CCIF applies 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”).

19. Pursuant to the directions of the court, the parties have filed their affidavits for the purpose of their respective summonses by early February 2013.  Among others, they included those of Yen of the Provisional Liquidators, Chan Wai Dune Charles (“Chan”) of CCIF and Christopher John Dobby (“Dobby”) of the solicitors for CCIF.

20. On 19 February 2013, TCD filed its amended statement of claim.

21. On 22 February 2013, TCD took out another summons, this time 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”).

22. This was followed by the summons dated 26 February 2013 taken out by CCIF for leave to amend the O.18, r.19 Summons (“the Amending Summons”).  On the following day, 27 February 2013, CCIF took out another 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”).

23. CCIF then filed its 5^th affidavit of Chan and the 3^rd affidavit of Dobby before taking out a summons on 1 March 2013 for leave to rely on those new affidavits, in the event that TCD is allowed to rely on 5^th Yen (“the Summons re CCIF’s Latest Affidavits”).

24. On the day before the hearing, TCD filed the last of the 7 summonses.  By that, it seeks 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”).

25. By the Amending Summons, CCIF sought to make clear that it is seeking to strike out both contractual and tortuous causes of action pleaded in the statement of claim.  The amendment was uncontroversial and therefore allowed.  Argued during the hearing was therefore the O.18, r.19 Summons so amended.

26. Likewise, the parties were prepared to argue with reference to the recent affidavits filed by them respectively.  Therefore the Summons re TCD’s Latest Affidavit and the Summons re CCIF’s Latest Affidavits also became uncontroversial.

27. What remain to be decided are:

(1)   the Injunction Summons (including whether the ex parte injunction should be discharged);

(2)   the O.18, r.19 Summons as amended;

(3)   the O.20, r.4 Summons; and

(4)   the Summons to amend the Writ.

28. O.29, r.2(1) empowers the court to order preservation of any property which is the subject matter of the cause or matter, or as to which any question may arise therein.  As far as the Injunction Summons is concerned, the American Cyanamid[4] test applies.  TCD has the burden of establishing that the claim raises a serious question to be tried; and that damages, without the injunction, would not be adequate remedy if it succeeds at the trial.  The balance of convenience, or risk of injustice, ought to favour the grant of the order.  The principles are not in dispute.

29. The burden of TCD in showing a serious question to be tried is contrasted with that of CCIF in satisfying the court that TCD’s claim is clearly and obviously bad and liable to be struck out.  If CCIF manages to discharge the latter burden, the claim should be struck out and the action be dismissed.  The basis for the Injunction accordingly naturally falls away.  Only if the claim survives the striking out would the application for the continuation of the Injunction have the necessary footing.

30. CCIF does not apply to strike out the amended statement of claim.  The O.18, r.19 Summons has not been amended for such purpose either.  Instead CCIF opted to apply to strike out the amendments to the statement of claim pursuant to O.20, r.4. Pursuant to that rule, the court shall order the amendment to be struck out, if leave to introduce the amendment would have been refused had it been applied for under O.20, r.5.

31. As regards the Summons to amend the Writ and its endorsement, its significance and determination hinges upon whether the amended statement of claim survives the striking out.

THE PLEADED CLAIM

The statement of claim

32. According to TCD, CCIF was under the contractual duty (express and implied) to discharge their audit engagement with the degree of skill, care and diligence that would be expected of reasonably competent and prudent auditors, and in full compliance with the Statements of Auditing Standards (“SAS”) and the Hong Kong Standards on Auditing (“HKSA”) issued by the Hong Kong Institute of Certified Public Accountants at different stages of the auditing process, namely (i) planning; (ii) design; (iii) evidence collection; (iv) review; and (v) reporting.  It was under a similar duty in tort.

33. By reason of the fact that the majority of the assets of the Group was held by Longyu, and that there were substantial discrepancies between the 2 sets of Longyu audited accounts, the consolidated financial statements of the Group are said to have been materially misstated; and they could not have given a true and fair view of the affairs of the group and its profits and cash flow for the financial years of 2006 and 2007.

34. CCIF has allegedly failed to comply with the applicable audit standards in carrying out proper audit procedure with the necessary professional scepticism in the following respects:

(1)   confirmations regarding Longyu’s bank balances and accounts receivable (in respect of financial years 2007);

(2)   encumbrances on landed properties held by Longyu (in respect of financial year 2007);

(3)   suspicious creditors and their confirmations (in respect of financial year 2007); and

(4)   discrepancies between the 2 sets of Longyu audited accounts and the group consolidated financial statements (in respect of financial years 2005-2007).

35. It is contended that but for the aforesaid breach, CCIF should have detected the material misstatements and would have been able to inform FNF.  Had that been done, the company would have been able to take measure to prevent or correct the material misstatements and to take actions to recover the resultant loss.  By reason of the breach, FNF wrongly paid out dividends in excess of RMB 100 million and tax in excess of RMB 160 million for 2005, 2006 and 2007.

36. TCD claims damages, which comprises the dividend and the tax paid by FNF as mentioned above as well as the audit fees paid to CCIF.

The amended statement of claim

37. There are the following major amendments.

38. On top of the contractual and tortuous duties, CCIF was allegedly in a fiduciary relationship with FNF and owed FNF duties as such, including the duty to act loyally in the best interest of FNF and to act in the manner as required by the various professional standards already pleaded (§16A).

39. On top of the claim in respect of the financial years from 2005 to 2007, claims in respect of the financial years 2003 and 2004 are added.  On top of the existing 4 instances of alleged breach of duties on the CCIF, CCIF is said to have been in breach of its duties concerning the following additional respects (§30(4) – (10)):

(1)   giving an unqualified opinion while bank confirmations or other materials were outstanding (in respect of financial years 2003 and 2004);

(2)   misconduct with regard to the letters of representation (in respect of financial years 2003-2007);

(3)   creation of further backdated documents (in respect of financial years 2006 and 2007);

(4)   non-disclosure of related party transactions (in respect of financial years 2005-2007);

(5)   misconduct in respect of Shanghai Joyance International Trade Co Ltd (in respect of financial years 2005-2007);

(6)   CCIF’s conflict of interest (in respect of financial years 2003-2007); and

(7)   forged sales records (in respect of financial years 2004-2007).

40. In line with the claim in respect of financial years 2003-2007, the discrepancies between 2 sets of Longyu audited accounts for each of these years are set out. It is now expressly pleaded that in respect of each of the financial years between 2003 and 2007, the 2^nd Longyu Accounts gave a true and fair view of the state of affairs of Longyu (§§19-22).

41. Further, there is the alternative plea that if the 2^nd Longyu Accounts were not made available to CCIF and CCIF did not discover their existence and contents, CCIF nevertheless ought to have discovered the same either by requiring FNF or Longyu to authorise it to gain access to the same as filed with the SAIC or by using the services of a search agent (§30(11)(e)).  Had CCIF conducted the necessary inquiries and consideration in accordance with the requisite professional standards, it ought to have discovered that the 2^nd Longyu Accounts gave the true and fair view of the state of affairs of Longyu and the Group, and would not have given its unqualified opinions in respect of the consolidated statements of the Group as the same in fact did not give such a true and fair view (§30(11)(g)).

42. CCIF’s breaches of the contractual and/or tortuous and/or fiduciary duties also constitute breaches of its duty to carry out the audit at various stages of the audit in compliance with the professional standards at the various stages of audit in each of the financial years in question (§31).

43. The section on causation underwent substantial amendments:

(1)   TCD repeats that had CCIF conducted the necessary inquiries and consideration in accordance with the requisite professional standards, it ought to have discovered that the 2^nd Longyu Accounts gave the true and fair view of the state of affairs of Longyu and the group, and would not have given its unqualified opinions in respect of the consolidated accounts of the Group which contained all the misstatements.  As originally pleaded, CCIF would have been able to inform FNF and in particular the audit committee of the misstatements (§32).

(2)   Dividends in each financial year in question had been paid upon reliance of CCIF’s unqualified opinion on the Group’s consolidated accounts.  FNF was misled into believing that the Group had sufficient retained earnings for distribution.  The fact in each financial year in question was without exception otherwise.  The payment of dividends was therefore unlawful and wrongful (§32A).

(3)   Taxes in each financial year in question had been paid upon reliance of CCIF’s unqualified opinion on the Group’s consolidated accounts.  The true situation revealed by the 2^nd Longyu Accounts was that it made substantial net losses in these financial years (except for 2004, when the net profits would have been set off by the loss carried forward from the previous year).  Hence no tax liabilities in respect of each of these financial years (§32B).

(4)   As to the existing plea of loss of, and thus claim for, the audit fees paid to CCIF, the basis of claim is now added, namely that the auditing services rendered by CCIF to FNF for the financial years between 2003 and 2007 were valueless.  FNF (and now TCD) is therefore entitled to recover them (§32C).

44. Accordingly, the loss and damage being the tax, dividend and audit fees paid in respect of the additional financial years (2003 and 2004) are added.  There is also the additional claim for equitable compensation (§33).

THE O.18, r.19 SUMMONS & THE O.20, r.4 SUMMONS

45. Though CCIF seeks to strike out the amendments to the statement of claim pursuant to O.20, r.4, the argument is that had leave to amend been applied for, the amendments would have been bad and therefore should not have been allowed.  Therefore, deciding whether the statement of claim as amended is liable to be struck out should effectively answer whether the amendments should be disallowed/struck out.  This was also how counsel approached the applications during the hearing.

46. By the O.18, r.19 Summons as amended, CCIF says that the claim is liable to be struck out and the action dismissed on the following grounds:

(1)   It discloses no reasonable cause of action;

(2)   It is an abuse of court process because: (i) the claim is speculative in the absence of any present knowledge that any cause of action exists, in order to find a cause of action from discovery and speculative interrogatories; (ii) it attempts to plead causes of action which are either incomplete or time-barred;

(3)   It is embarrassing, in particular because: (i) it is prolix; (ii) it is devoid of all essential particulars; and (iii) it attempts to plead the possibility of causes of action which are not presently known to exist.

47. There is certain extent of overlap amongst the considerations for the purpose of the above grounds.  Only that for the purpose of ground (1), only the pleading is considered and without evidence: O.18, r.19(2); and for that purpose, a reasonable cause of action means one, which, as pleaded, has at least some chance of success.

Claim against auditors

48. A claim against auditors must contain the following ingredients:

(1)   the duty, which may arise by reason of statute, contract or common law;

(2)   the fact that the relevant duty was owed to the plaintiff;

(3)   breach of the relevant duty;

(4)   damage as a result of the breach; and

(5)   loss flowing from the breach.

49. In the context of a listed company, the duty of the auditor is report to the shareholders of the company in the general meeting the opinions of the auditors as to whether the financial statements give a true and fair view of the company’s financial situation, after conducting audit of the company’s accounting records.

50. CCIF emphasizes that the auditor’s reports are not warranties as to the state of the company’s accounts or the company’s finances.  It is not the mere incorrect company accounts, but also the failure of the auditor’s duty in giving the opinion that the accounts gave a true and fair view of the company’s financial situation, that attracts liability.

51. As to the scope of such duty of an auditor, the authorities cited suggested the following:

(1)   Auditors must not be made liable for not tracking out ingenious and carefully laid schemes of fraud when there is nothing to arouse their suspicion, and when those frauds are perpetrated by tried servants of the company and are undetected for years by the directors.  Auditors cannot be expected to detect all material misstatements or instances of fraud: see In re Kingston Cotton Mill Company (No 2) [1896] 2 Ch 279 at 290.

(2)   No liability shall be imposed for errors of judgment unless the error was such as no reasonably well-informed and competent member of that profession could have made: see Saif Ali v Sydney Mitchell & Co [1980] AC 198 (HL) at 220D.

(3)   The duty of the auditors is owed to the shareholders and in respect of the kind of loss which the shareholders have suffered.  The breach must be an effective or dominant cause of such loss: see Caparo Industries Plc v Dickman [1990] 2 AC 605 at 627; Banque Bruxelles SA v Eagles Star [1997] AC 191 at 212C; Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360 (CA) at 1374G-H; 1369H-1370C.

52. There is no dispute as to the above principles.

The duties and alleged breach

53. CCIF criticises the lack of pleading of the errors or omissions allegedly made by CCIF which no reasonably competent auditor would have made, and thus how CCIF in the circumstances was in breach of its duty to FNF.

54. In these respects, the pleading contains the following relevant contentions:

(1)   Whilst the express terms of the engagement of CCIF are unknown without discovery, CCIF is said to be under an implied contractual duty to fully comply with the various accounting standards in its audits (which are extensively set out in the pleading) and to exercise reasonable care and skill in applying the standards at the various stages of the audits (also set out in the pleading). There was a similar concurrent duty in tort.

(2)   The discrepancies between the 2 sets of Longyu audited accounts and those between them and the audited group consolidated accounts in each financial year were set out.  In view of such discrepancies, the consolidated financial statements have allegedly been materially misstated and did not give a true and fair view of the Group’s profits and cash flow.

(3)   By the amendments, it is made clear that the 2^nd Longyu Account gave the true and fair view of the financial situation of Longyu in these financial years.

(4)   By the amendments, it is also said that even if CCIF were not aware of the existence of the 2^nd Longyu Accounts (which is denied), it nevertheless ought to have become aware of that, had it carried out the audit with the requisite professional scepticism reasonably expected by the audit standards reflected by the SAS and HKSA published by the professional body.

(5)   Notwithstanding the above, CCIF gave its unqualified opinion that the Group consolidated accounts represented a true and fair view of the Group’s state of affairs.  In doing so, CCIF has allegedly failed to comply with the applicable audit standards in its audits.

(6)   Particulars of the relevant audit standards, what CCIF should do pursuant to those standards, and the errors or omissions of CCIF at various stages, both during the audit and subsequent to the signing off of the auditors’ opinion, are pleaded in details.  As amended, a total of 11 instances of breach of duties in the course of CCIF’s audit are alleged.

55. In terms of the pleading and the substance of what are pleaded in respect of the duties and alleged breach, the case of FNF cannot be said to be clearly and obviously bad for the present purpose.

Causation

56. CCIF emphasizes the element of causation; and submits that it is necessary to set out the connection between the alleged breach to the damage suffered: see Bullen & Leake & Jacob’s Precedents of Pleadings (14^th ed) Vol.2 at §75-05.

57. Regarding causation, Lord Nicolls of Birkenhead in Kuwait Airways Corpn v Iraqi Airways Co (Nos 4 and 5) [2002] 1 AC 993 explained that the court will first apply a “but for” test, and then go on to make a value judgment.  The question is whether the loss falls within the ambit of the defendant’s duty of care.

58. Insofar as FNF is contending that CCIF’s failure had deprived it of the opportunity to discover, prevent or recover the loss pleaded, the test set out in Allied Maples Group Ltd v Simmons & Simmons [1995] 1 WLR 1602 (at 1609-1611, 1614) is a helpful guidance.  Amongst others, if the defendant’s negligence consists of omission, causation depends not on a question of historical fact, but on the answer to the hypothetical question, namely, what the plaintiff would have done if the advice had been provided.  The plaintiff has to prove on the balance of probabilities that he would have taken action to avoid the risk.  This will be a matter of inference from all the circumstances of the case.  In other words, this is factual.

59. The above authorities were adopted by the Singaporean Court of Appeal in JSI Shipping Pte Ltd v Taefoonwongcloong (a firm) [2007] 4 SLR 460 (CA) in the context of an auditor’s duty to detect fraud in the accounting.

60. CCIF relies heavily on Guang Xin Enterprises Ltd v Kwan Wong Tan & Wong [2003] 3 HKLRD 527.  There the claim was about the fictitious transactions that the company had been led to enter into, which caused it loss.  The pleaded case was that had the auditors drawn the company’s attention to those transactions in the auditors’ reports and accounts, and had the company thus known the true position, it would not have carried out the transactions.  Rogers VP emphasized that particular care is needed for the plea of causation; and said that particulars as to precisely who would have taken what steps, had the irregularities been revealed (if not for the negligence of the auditors), need to be spelt out.

61. One however should not lose sight of the context in which such emphasis was made.  The Vice President was actually 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.

62. The pleading in the present case contains a specific section on causation.  As mentioned above, it is pleaded that but for the alleged breach of the various standards of reasonable care in carrying out the audit, CCIF should have detected the material misstatement; and would have informed FNF and particularly its audit committee, which would have been able to prevent or to correct the misstatements and to take actions to recover the resultant losses.  The premise is indeed one of ignorance of the company about the malpractice of the persons in control; and there is no reason to suspect whether the company’s awareness of the true situation would have made a material difference.

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.

The loss

67. The alleged loss is said to be the dividends and taxes wrongly paid by FNF for the financial years in question.  In principle, loss caused by wrongful payment of dividends approved as a result of the breach of duties on the part of the auditors is recoverable: see Jackson & Powell on Professional Negligence (7^th ed) at §17-079.  Likewise, in the case of wrongful payment of taxes for non-existent tax liability, the loss as a result of the payments is in principle recoverable: see Jackson & Powell (above); Re Thomas Gerrard & Sons Ltd [1968] Ch 455 (at 478F); Moulin Global Eyecare Trading Ltd (in liq) v CIR [2012] 2 HKLRD 911 at §85, per Fok JA (as he then was).

68. There is now no dispute that the taxes pleaded were in fact paid by Longyu in discharge of its corporate tax liability in the Mainland.  The pleading in this respect is admittedly incorrect; and Mr Strachan for TCD indeed proposes during the hearing on 15 March 2013 to further amend the pleading (§§32B and 33) to correct that.  However, this gives rise to the more important question, namely, whether FNF (and thus TCD as the assignee) has any right to claim for this part of the alleged loss apparently suffered by its wholly owned subsidiary.  This is how the arguments in respect of reflective loss came to be advanced during the hearing.

69. In Johnson v Gore Wood & Co [2002] 2 AC 1, Lord Bingham had this to say (at 35):

“ These authorities support the following propositions. (1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder’s shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company’s assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss. So much is clear from Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, particularly at pp 222-223…… (2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in that company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding. This is supported by Lee v Sheard [1956] 1 QB 192, 195-196, George Fischer and Gerber. (3) Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers loss separate and distinct from that suffered by the company caused by breach of a duty independent owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other……”

70. Lord Millett (at 61) also explained:

“ A company is a legal entity separate and distinct from its shareholders. It has its own assets and liabilities and its own creditors. The company’s property belongs to the company and not to its shareholders. If the company has a cause of action, this is a legal chose in action which represents part of its assets. Accordingly, where a company suffers loss as a result of an actionable wrong done to it, the cause of action is vested in the company and the company alone can sue. No action lies at the suit of a shareholder suing as such, though exceptionally he may be permitted to bring a derivative action in right of the company and recover damages on its behalf……Correspondingly, of course, a company’s shares are the property of the shareholder and not of the company, and if he suffers loss as a result of an actionable wrong done to him, then prima facie he alone can sue and the company cannot. On the other hand, although a share is an identifiable piece of property which belongs to the shareholder and has an ascertainable value, it also represents a proportionate part of the company’s net assets, and if these are depleted the diminution in its assets will be reflected in the diminution in the value of the shares……

This causes no difficulty where the company has a cause of action and the shareholder has none; or where the shareholder has a cause of action and the company has none, as in Lee v Sheard……George Fischer (Great Britain) Ltd v Multi Construction Ltd……and Gerber Garment Technology Inc v Lectra Systems Ltd ……Where the company suffers loss as a result of a wrong to the shareholder but has no cause of action in respect of its loss, the shareholder can sue and recover damages for his own loss, whether of a capital or income nature, measured by the diminution in the value of his shareholding. He must, of course, show that he has an independent cause of action of his own and that he has suffered personal loss caused by the defendant’s actionable wrong. Since the company itself has no cause of action in respect of its loss, its assets are not depleted by the recovery of damages by the shareholder.

   The position is, however different where the company suffers loss caused by the breach of a duty owed both to the company and to the shareholder.  In such a case the shareholder’s loss, in so far as this is measured by the diminution in value of his shareholding or the loss of dividends, merely reflects the loss suffered by the company in respect of which the company has its own cause of action.  If the shareholder is allowed to recover in respect of such loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders.  Neither course may be permitted.  This is a matter of principle; there is no discretion involved.  Justice to the defendant requires the exclusion of one claim or the other; protection of the interests of the company’s creditors requires that it is the company which is allowed to recover to the exclusion of the shareholder……”

71. In the Hong Kong Court of Final Appeal case of Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370, Lord Millett (sitting as NPJ) reiterated (at §85) the above rationale behind the exclusion of a shareholder’s right of action in respect of the company’s loss when the company itself has a cause of action to recover from the defendant.

72. TCD argues that in the present case, CCIF’s breach of duty owed to FNF (as the parent company and shareholder) caused its loss due to the taxes paid by Longyu (as the company wholly owned by FNF) for non-existent tax liability; and FNF has causes of action against CCIF (with whom it had direct contractual, tortuous and allegedly fiduciary relationship) whereas Longyu does not.  Hence a situation akin to proposition (2) of Lord Bingham in Johnson.

73. CCIF however argues that Longyu does have causes of action to recover from the Mainland tax authorities the taxes wrongly paid or to recover the resultant loss from the Mainland auditor responsible for the Longyu audited accounts or both; and in the premises, FNF (as the shareholder) has no right to sue for Longyu (the company)’s loss.

74. Immediately apparent from the arguments of both sides is their respective references to different defendants.  A cause of action for breach of duty must be defendant-specific.  As I read it, when Lord Bingham and Lord Millett were referring to the cause(s) of action to recover loss that the company or the shareholder may possess, they were referring to those against the same party responsible for the loss.  That was the context of those cases cited by the Law Lords in support.  This also makes sense, when one considers Lord Millett’s explanation of the rationale behind excluding one claim or the other, namely, justice to the defendant permits no double recovery by the company and the shareholder.

75. On this basis, insofar as CCIF is responsible for the loss directly suffered by Longyu as a result of the taxes paid, FNF, as the party which engaged CCIF, has the right of action for damages for such loss, whereas Longyu apparently does not.  The measure of damages is arguably such loss caused to the subsidiary, as that resulted in the same loss to the balance sheet or profits of the holding company: see George Fischer (Great Britain) Ltd (cited in Johnson above).

76. It has been said that as the exclusionary rule denying a claimant what otherwise would be his right to sue, the onus is on the defendant to establish its applicability.  It should be established that the company has both the right to claim and that the claim is available on the facts: see Shaker v Al-Bedrawi [2003] 2 Ch 250 (at §83, per Peter Gibson LJ).  For the present purpose, Lord Bingham in Johnson said (at 36):

“……The problem can be resolved only by close scrutiny of the pleadings at the strike-out stage and all the proven facts at the trial stage: the object is to ascertain whether the loss claimed appears to be or is one which would be made good if the company had enforced its full rights against the party responsible, and whether the loss claimed is “merely a reflection of the loss suffered by the company”……At the strike-out stage any reasonable doubt must be resolved in favour of the claimant.”

77. Whilst FNF claims no right of action to recover the taxes wrongly paid from the Mainland tax authorities or to claim against the Mainland auditor responsible for the Longyu audited accounts, whether Longyu has such causes of action against these parties is by no means clear.  Whether the right of action exists against either the tax authority or the Mainland auditor would be a matter of Mainland law.  Proper Mainland legal expert evidence in this respect is lacking.  Such evidence, even if available, may well add to the factual dispute.  Whether the claims against either party are available on the facts is also unclear at this stage.

78. In the circumstances, I must refrain from drawing a conclusion adverse to the right of action by FNF (and thus TCD) against CCIF in respect of the loss caused by the taxes allegedly wrongly paid by the wholly owned Longyu as a result of CCIF’s breach of duty owed to FNF.

79. As to the audit fees paid to CCIF, the amendment to the pleading now makes clear that TCD seeks to recover them on the basis that the audit services rendered by CCIF all these years, in view of the alleged breach, have been valueless.  In principle, such basis of claim exists: see Jackson & Powell on Professional Liability (7^th ed) at §3-010.  Whether the claim is available on the facts is not a question that could be answered at this stage.

Abuse of process

80. CCIF specifically argues that the claim is an abuse of process for the following reasons:

(1)   Circuitry of action is inevitable.

(2)   The right of action of FNF against CCIF is personal and not assignable.

(3)   By attributing the blame to CCIF for not detecting the fraud in the company’s accounting, FNF is taking advantage of its own wrong (through the former directors who allegedly committed the fraud).

(4)   The claim is in part time-barred.

Circuitry of action

81. The constitution of FNF consists of its Bye-Laws.  Bye-Law 166 provides that FNF shall provide an unconditional indemnity to its auditors for any liability, other than any liability for fraud or dishonesty.  No fraud or dishonesty is alleged against CCIF, and therefore CCIF is allegedly protected by such Bye-Law.

82. Then clause 5 of the deed of assignment between FNF and TCD provides that TCD shall on demand indemnify FNF against any reasonable cost, fee and expense, loss, damage, liability, claim or interest suffered, sustained or incurred by FNF in connection or as a result of the transferred claims (to TCD as defined in the assignment).

83. The circuitry of action, CCIF argues, will come about as CCIF would be entitled to seek indemnity against FNF pursuant to Bye-Law 166 while FNF would be entitled to seek indemnity against TCD.  So CCIF argues that by creating the inevitable circuitry of action, which eventually gets back to TCD, TCD’s present action amounts to an abuse of process.

84. There is no expert evidence on the relevant Bermudan company law, so the argument is presented according to local law.  The Bye-Laws, as the constitution of FNF, is presumably a contract governing the rights and obligations of the company and its members, to which CCIF was never a party.  How CCIF manages to take advantage of Bye-Law 166 is unclear.  The same Bye-Law provision was considered in Moulin Global Eyecare Holdings Ltd v Olivia Lee Sin Mei [2010] 2 HKLRD 1096, where Rogers VP (at §§7 and 18) made a similar observation.  There is no assertion that such an indemnity pursuant to Bye-Law 166 was somehow incorporated as a term of the contract between FNF and CCIF.

85. In any event, to make sense out of the indemnity, Bye-Law 166, properly construed, probably contemplates the situation where the auditors may be exposed to liability instead of their own liability to FNF that contracted them.  This is at least arguable, and the answer is not plain and obvious for the present purpose.

86. Following from above, the circuitry of action is more apparent than real.

Right not assignable

87. CCIF argues that any rights of action of a company against its auditor for negligence in the conduct of the audit of its accounts are personal rights of action which are not lawfully assignable to any third party.  Any such course is barred by public policy: see Defries v Milne [1913] 1 Ch 98; Trendex Trading Corporation v Credit Suisse [1982] AC 679.

88. Defries went as far as reiterating that the right of action purely in tort for damages is not at all assignable.  But TCD is the assignee also of the right and benefit of action for breach of contractual duties on the part of CCIF, which overlap with the tortuous duty of care.

89.  What infringed the public policy, according to Trendex Trading Corporation, was the likelihood of a profit being made out of the cause of action assigned, which manifestly savoured of champerty.  The present case involves the preservation of the right of action by FNF, which was insolvent, against CCIF for the benefit of the shareholders and creditors, as well as the assignment of such right of action to a third party set up for the purpose of the scheme of arrangement approved by the court.  The analogy sought to be drawn between the decisions against assignment of a right of action in tort and the present case is not clear and obvious, if at all apparent.

FNF’s own wrong

90. CCIF stresses that it was contracted by FNF to carry out statutory audit of the company and the group but not its subsidiaries.  Section 133(1)(b) provides that it is the duty of the holding company to provide its auditors with information and explanation in respect of its non-Hong Kong subsidiaries as the auditors reasonably require for the purposes of their duties as the auditors of the holding company.  Default, according to section 133(2), is an offence punishable by fine.  CCIF argues that it was FNF’s failure to provide it with the actual audited accounts of Longyu, and by claiming on the basis of failure to detect the inaccurate accounts of Longyu, FNF is shifting the statutory burden and benefiting from its own wrong.

91. CCIF relies on Moulin Global Eyecare Trading Ltd (in liq) (above), where the Court of Appeal held that the Hampshire Land[5] principle does not apply.  The principle denies attribution of knowledge of an agent who was defrauding the principal in the same transaction.

92. The context of Moulin Global Eyecare Trading Ltd must be noted.  It involved the attempt of the company to impeach the assessed tax liability on the basis of the fraud of directors on the company.  The counterpart was the CIR.  This differs from the present case where the company is claim for the loss as a result of alleged tax liability on non-existent profits due to the fraud of its persons in control on the company and the alleged failure of the auditors to exercise reasonable care to detect the fraud.  Fok JA (as he then was) expressly added (at §85) his observation that the public policy argument that the attribution to a company of the knowledge of fraudulent directors in the context of filing of tax returns does not deny such cause of action against the auditors[6].

93. The present action is primarily brought in the interest of the shareholders (and creditors) of FNF for the loss occasioned to the company by the alleged breach of CCIF.  As a matter of principle, that the persons in charge of the company might have been fraudulent in withholding the true accounts is no answer to whether CCIF was in breach of the very contractual obligations to act as the gate-keeper of the company that CCIF has undertaken for remuneration.  As a matter of fact, the dispute, among others, is whether CCIF had duly taken all the reasonable steps in carrying out the audit, including requiring FNF to produce all the Longyu accounts.  Whether CCIF was in breach of such duty, amongst others, and, if yes, whether there was contributory negligence on the part of FNF, if alleged, are matters to be established in the circumstances of this case.  The conclusion that the present claim must fail for being against public policy cannot be drawn at this stage.

Limitation

94. CCIF argues that the pleaded causes of action in respect of the financial years prior to 2006 are time-barred by the time when the present action was commenced (which was September 2012).  As far as the statement of claim is concerned, the claim in respect of 2005 is affected.  So are the claims in respect of 2003 and 2004 introduced by the amendments to the pleading.

95. For the present purpose, the question is whether it is plain and obvious that the claim is bound to fail because of the limitation defence.  This in turn depends on the validity of what TCD contends in reply, namely, its reliance on section 31 of the Limitation Ordinance, Cap 347.  This applies only to the claim in tort (though the alleged duties overlap with those allegedly implied contractually).

96. Section 31 of Cap 247 extends the time of accrual of a cause of action in negligence to the earliest date on which the plaintiff first had both the knowledge required for bringing the action for damages in respect of the damage, and a right to bring such an action.  Such knowledge means that of such facts about the damage as would lead a reasonable person who had suffered such damage to consider it sufficiently serious to justify his instituting proceedings for damages against a defendant who did not dispute liability and was able to satisfy a judgment; and that the damage was attributable to the act or omission allegedly constituting negligence: section 31(5).  Such knowledge includes that which the plaintiff might reasonably have been expected to acquire from facts observable or ascertainable by him or facts ascertainable by him with appropriate expert advice which he has taken all reasonable steps to obtain: section 31(7). Knowledge that the act or omission involved negligence as a matter of law is irrelevant for the purpose: section 31(6).

97. In the context of professional negligence, it is the knowledge of the loss and damage as well as what would justify embarking on enquiry on the preliminaries to the issue of a writ: see Kensland Realty Ltd v Tai Tang & Chong (2008) 11 HKCFAR 237.  The onus is on the plaintiff to establish that the cause of action accrued within the limitation period: see Kensland Realty Ltd (at §§67; 153).

98. Both parties refer to cases involving claims against accountants.  CCIF refers to Hotung Investment (China) Ltd v Ernest & Young & Ors [2012] 5 HKLRD 421.  There the court considered whether section 26 of Cap 347 applied to postpone the period of limitation to run from the time when the plaintiff has discovered or could, with reasonable diligence, have discovered the fraud, concealment or mistake, which formed the basis of the action against the defendant.  On the facts of the case, the court rejected the contention that the plaintiff company discovered the fraud of the defendants only when it was free from the control of the wrongdoers and able to act on the requisite knowledge is directed at the knowledge of the plaintiff, not ability of the plaintiff to sue (see §56).  The argument with reference to the Hampshire Land principle was rejected for having no bearing on the situation, which did not involve fraud of the directors on the company being the victim.  Nor did the principle have any relevance to section 26 (see §37).  This case does not assist.

99. TCD refers to The New China Hong Kong Group Limited & Ors v Ernest & Young & Anor, HCCL 41/2004 & HCCL 2/2005 (29 August 2008) where Mr Recorder Ho again studied in detail the rules of attribution of knowledge and the Hampshire Land principle for the purpose of section 31 of Cap 347 (see §§80-108). Specifically, the learned Recorder observed (at §107) that the application of the rule is to a large extent based on degree and commonsense.  The rule operates to prevent an officer’s knowledge from being imputed to the company if the relevant knowledge is that pertains to the officer’s wrongful act directed against the company and of which the company itself is the victim.  I agree.

100. Back to the facts of the present case, TCD contends that the Provisional Liquidators were appointed in January 2009; and prior to that, FNF had been the victim of fraud on the part of the then Chairman and his associates in control.  The other directors of the board allegedly had no knowledge.  The company could not be imputed with the knowledge of the culprits in control.  TCD therefore contends that both the Provisional Liquidators and the SFC did not have the requisite knowledge basis until 2010 at the earliest.  In the case of TCD, the present action was subsequently commenced; and in the case of the SFC, the petition against the former Chairman and others for the aforesaid fraudulent misconduct pursuant to section 214 of the Securities and Futures Ordinance was also filed.  The factual circumstances relied upon in both sets of proceedings, as revealed by the pleadings, are in essence similar.

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.

Embarrassing

103. CCIF argues that the pleading is liable to be struck out for being embarrassing in that it is prolix and devoid of essential particulars.

104. Prolixity, as a matter of form, exists in that the irrelevant matters pleaded are extensive, incoherent or incomprehensible.  In the present case, the professional standards of auditors are pleaded, which are said to provide the measure of the reasonable standard of care expected of CCIF in contract and tort.  CCIF is said to have been in breach of such standards at various stages of the audit for FNF.  They are extensively pleaded but cannot be said to be irrelevant or incomprehensible.

105. In saying that the statement of claim is devoid of essential particulars, CCIF is picking on TCD’s pleading of what are described as the best particulars that could be provided and of further particulars to be supplied upon discovery.  This is associated with the criticism that the cause of action is speculative.

106. In my view, so long as the particulars provided suffice to support the cause of action, neither the plea that these are the best particulars that could be pleaded nor the plea that further particulars are subject to discovery is objectionable.  The fact is that neither of these pleas being criticised is strictly necessary, as nothing prevents a party from supplying further and better particulars subject to the rules of the court.  As to whether the cause of action pleaded is sustainable as a matter of pleading, I refer to the discussion above.

O.18, r.15(2)

107. CCIF argues that the amendment infringes O.18, r.15(2) in that the plea of alleged breach of fiduciary duty on the part of CCIF and the claim for equitable compensation exceed the scope of the endorsement to the writ.

108. The endorsement of claim sets out these causes of action: (i) breach of the agreements between FNF and CCIF for statutory audits for the financial years 2001 to 2007; and (ii) for breach of the duty of care and other duties of CCIF.

109. O.18, r.15(2) permits a party to alter, modify or extend the statement of claim and to claim further or other relief without amending the writ, provided that the new cause of action arises from the facts which are the same as, or include or form part of, the facts giving rise to the cause(s) of action mentioned in the endorsement.

110. In view of the references to the financial years covering 2001 to 2007 in the endorsement and the alleged breach of the contractual and tortuous and “other duties” (albeit unspecified), I do not find the amendments to the statement of claim to include the claim in respect of the financial years prior to 2005 and for breach of fiduciary duties on the part of CCIF to be falling outside the parameter of the endorsement of claim.

Conclusion

111. In conclusion, I am not satisfied that the statement of claim, original and as amended, is plainly and obviously liable to be struck out.  It follows that both the O.18, r.19 summons and the O.20, r.4 summons fail.

THE SUMMONS TO AMEND THE WRIT

112. This summons, according to Mr Strachan, was taken out to avoid the focus of the hearing being misdirected by the argument that the amended statement of claim went outside the parameter of the existing endorsement of claim.  The proposed amendment explicitly sets out in the endorsement of claim the cause of action for breach of fiduciary duties and the claim for equitable compensation.

113. For the reason explained above, TCD’s fallback is not really necessary.  Having said that, I allow the amendment, which can cause no real prejudice to CCIF.

THE INJUNCTION SUMMONS

114. The request for documents and the commencement of the section 221 application by the Provisional Liquidators in June 2011 as well as the subsequent undertaking by CCIF dated 24 February 2012 to preserve the documents were all premised on the Provisional Liquidators’ investigation into the affairs of FNF pursuant to their appointment.  Such basis ceased to exist upon the discharge of the Provisional Liquidators in early September 2011.  TCD then seeks an injunction to the similar effect[7], but such application could only be based on its present action against CCIF.

115. The applicable test mentioned in the early part of this decision refers.  As mentioned, the principles are not in dispute.

116. CCIF asks for the discharge of the ex parte injunction on the ground that it was obtained by misrepresentation and non-disclosure of material facts known to TCD.  They include the non-disclosure of the absence of: (i) any identified substantive case against CCIF; (ii) necessity for the Injunction; (iii) actual urgency; and (iv) a real risk of destruction of the related documents.  In any event, CCIF opposes the Injunction Summons.

117. As far as the alleged non-disclosure of the absence of an identifiable substantive case against CCIF is concerned, the above discussion in respect of CCIF’s striking out application provides the answer.  There is accordingly serious question to be tried in the present case.

118. Reference is made to the history of requests by the Provisional Liquidators for documents and the responses of CCIF.  They are evidenced by the contemporaneous correspondence during the period between January 2009 and July 2011.  Much is argued as to whether the Provisional Liquidators were unreasonable and oppressive and whether CCIF was evasive and un-cooperative.  Amongst them, the notable event was CCIF’s disclosure of destruction of the pre-2004 audit work files in relation to the Group towards the end of June 2011.  This was less than 3 weeks after the section 221 summons had been served on CCIF.  The destruction of the documents allegedly took place in April 2010.

119. CCIF explained that the destruction of the pre-2004 documents was carried out in accordance with its policy and the applicable professional requirements.  It also explained that it had been led to believe that the Provisional Liquidators were after the post-2004 documents.  Whether these were genuine excuses is in dispute.  Yet irrespective of the dispute, that CCIF would see fit to proceed to destroy the related audit documents without prior notice to the Provisional Liquidators whilst fully aware of the ongoing investigation of the Provisional Liquidators into the affairs of the Group, in my view, gave rise to legitimate concern about the need to preserve the documents.

120. CCIF complains that the obtaining of the Injunction ex parte is unjustified for the lack of real urgency.  The Undertaking was due to expire upon the discharge of the Provisional Liquidators.  CCIF says that the making of the application for the Injunction only close to the discharge of the Provisional Liquidators was self-induced urgency.  However, I accept TCD’s explanation of the need to synchronise the court’s approval of the scheme of arrangement, which involved the assignment of the right of claim by FNF to TCD, and the discharge of the Provisional Liquidators.  It is for TCD to commence the present action, and incidental to that, to apply for the Injunction.  This could only happen upon the assignment of FNF’s right of action.

121. CCIF criticises TCD for misleading the ex parte judge to grant the Injunction in relation to documents covering 2001 to 2007, whilst TCD’s complaint in its affirmation related to 2005 to 2007 only.  Likewise, whilst the writ is endorsed with a claim relating to 2001 to 2007, the pleading subsequently filed in October 2012 contained claims in respect of 2005 to 2007 only.  However, in his submission before the ex parte judge, counsel for TCD indeed disclosed and explained the difference between the scope of the Injunction being sought and the focus of the complaint in the supporting affirmation.  He further disclosed the possible defence of limitation in relation to the claim in respect of pre-2006 financial years.

122. CCIF also criticises TCD for non-disclosure of its prior offers of undertaking in respect of preservation of the documents to TCD.  The Undertaking was actually referred to in counsel’s submission to the ex parte judge.  Having said that, I do have reservation about the propriety of proceeding with the application for the Injunction on ex parte basis.  The fact was that notwithstanding the abovementioned history, the Provisional Liquidators accepted the Undertaking by CCIF and withdrew the section 221 summons.  Until its lapse, there is no suggestion that the Undertaking had not been honoured.  That the lapse of the Undertaking would give rise to an immediate risk that the documents would be destroyed did not seem real and that an application had to be made ex parte not even with notice to CCIF was not justified.

123. However all these do not change my overall view that the Injunction to guard against any future risk of destruction of the documents by CCIF, if not subject to restraint, is on the whole warranted.  Whilst it is suggested that CCIF might have agreed to extend its undertaking to preserve the documents, it is noted that none has actually been offered by the time of the hearing.

124. Whether or not damages would be adequate remedy is of little relevance, in view of the Injunction being sought to preserve the documents instead of assets or substantive rights.  For that reason, even assuming the answer to whether or not the restraint is warranted is not clear cut, there are all the reasons to maintain the status quo.  To CCIF, the effect of the Injunction will probably take the form of cost of storage.  Balance of risk of injustice or inconvenience in the circumstances tilts in favour of the Injunction.  The discussion in respect of TCD’s undertaking as to damages is of little significance as well.

125. In conclusion, notwithstanding my reservation about the seeking of the Injunction on ex parte basis, I resolve not to discharge the Injunction.  The Injunction should continue.

ORDER

126. To sum up:

(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 this determination;

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

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

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

(8)   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;

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

(3)   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 as mentioned in §68 above;

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

127. 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.

128. I thank counsel for their assistance.