WANG HAIHONG AND OTHERS v. J.P. MORGAN SECURITIES (ASIA PACIFIC LTD) AND ANOTHER

HCA 344/2019

[2021] HKCFI 2840

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 344 OF 2019

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DECISION

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A. INTRODUCTION

1.  The Defendants apply to strike out the Plaintiffs’ claims on the ground that they are time barred. The Plaintiffs’ case is they subscribed or purchased shares in a listed company by relying on a prospectus, which the Defendants had taken part in preparation. It turned out that the prospectus contained false, incomplete or misleading information. The company has since been delisted. The Plaintiffs contend that their shares have become worthless. The question is when the Plaintiffs’ causes of action, based on the Defendants’ alleged breach of tortious and statutory duties, accrued. The Plaintiffs submit that they only accrued upon the delisting of the company whereas the Defendants submit that they accrued at the time when the Plaintiffs acquired the shares.

B.   THE INDISPUTABLE FACTS

2.  Trony Solar Holdings Co Ltd (“Trony”) was a company incorporated in the Cayman Islands, and listed on the Main Board of the Stock Exchange of Hong Kong (“SEHK”) from 7 October 2010 to 23 August 2018.

3.  On 24 September 2010, Trony published a prospectus (“the Prospectus”) for the initial public offering of its shares (“the IPO”).

4.  The Plaintiffs were and are still shareholders of Trony. The 3^rd, 7^th and 33^rd Plaintiffs were subscribers of the allotted shares in the IPO and purchasers of further shares thereafter in the secondary market, whereas the remaining Plaintiffs bought their shares in the secondary market. They purchased their shares between the period of 7 October 2010 and 24 May 2012.

5.  The 1^st Defendant was and is a registered institution under the Securities and Futures Ordinance (Cap. 571) (“the SFO”). In relation to the IPO, it acted as the Sponsor, one of the Joint Global Coordinators, one of the Joint Bookrunners and one of the Joint Lead Managers.

6.  The 2^nd Defendant was and is a firm of Certified Public Accountants. It acted as the Auditors and Reporting Accountants in the IPO, and the auditor of Trony until 17 February 2015. 

7.  Both Defendants were involved in the preparation of the Prospectus. In particular, the 2^nd Defendant was involved in the preparation of the Accountants’ Report (Appendix I) and the Profit Forecast (Appendix II).

8.  On 21 June 2012, trading of the shares of Trony was suspended on its own application to the SEHK (“the Suspension”) pending the release of an announcement which “is or may be price sensitive in nature”.

9.  On 22 June 2012, Trony announced that its board of directors had identified possible discrepancies in its financial records such that it had decided to apply for the Suspension, and it had established an independent investigation committee (“the IRC”) to conduct an inquiry.

10.  On September 2012, Trony announced that the IRC was established on 21 May 2012; it had appointed an independent professional adviser, PricewaterhouseCoopers (“PwC”), on 19 September 2012 to assist the IRC to conduct a forensic review of potential discrepancies in its financial records (“the Forensic Review”).

11.  On 11 October 2012, Trony announced that the 2^nd Defendant had received anonymous emails in March 2012 and an anonymous letter on 20 April 2012 containing certain allegations against Trony; Trony had received a report from its PRC legal advisors on 8 June 2012 in respect of some of the matters referred to in those allegations; and the SEHK had on 3 October 2012 informed Trony about the conditions imposed for resumption of trading.

12.  On 18 July 2013, Trony announced that the fieldwork in respect of the Forensic Review had been completed in mid-July 2013, and a report on the findings of the Forensic Review was being prepared.

13.  On 12 December 2014, Trony announced the results of the Forensic Review. It was discovered that there were three sets of books and records of the operating subsidiary of Trony in Shenzhen. They suggested that some information or classes of information stated in the Prospectus may be false, incomplete or misleading.

14.  On 30 June 2016, Trony announced that the Listing Department of SEHK had decided to commence the procedures to cancel the listing of Trony on the grounds that, inter alia, there were serious concerns that materially false, incomplete or misleading information had been included in the company’s documents.

15.  On 5 January 2017, SEHK gave Trony a 6-month period within which it must, to avoid delisting, remedy the matters rendering it no longer suitable for listing. 

16.  Trony did not remedy the matters as required by the SEHK.  On 14 July 2017, the Listing Committee decided to cancel the listing of Trony.

17.  On 24 July 2017, Trony sought a review by the Listing (Review) Committee of the Listing Committee’s decision. On 20 November 2017, the Listing (Review) Committee upheld the decision. On 28 November 2017, Trony sought a further review by the Listing Appeals Committee.  On 10 August 2018, the Listing Review Committee upheld the decision.

18.  On 23 August 2018, Trony was delisted. 

C.   THE PLAINTIFFS’ CLAIMS AGAINST THE DEFENDANTS

19.  The Plaintiffs rely on a number of causes of action to hold the Defendants liable for the allegedly false, incomplete or misleading information in the Prospectus. They claim that they would not have subscribed for and/or purchased their shares had they known that such information was false, incomplete or misleading.

20.  First, they claim that the Defendants breached the duty of care under the common law of negligence.

21.  Second, they invoke section 108(1) of the SFO:

“Where a person makes any fraudulent misrepresentation, reckless misrepresentation or negligent misrepresentation by which another person is induced-

(a) to enter into or offer to enter into-

(i) an agreement to acquire, dispose of, subscribe for or underwrite securities; or

(ii) a regulated investment agreement or an agreement to acquire, dispose of, subscribe for or underwrite any other structured product; or

(b) to acquire an interest in or participate in, or offer to acquire an interest in or participate in, a collective investment scheme,

The first-mentioned person shall, whether or not he also incurs any other liability (whether under this Part or otherwise), be liable to pay compensation by way of damages to the other person for any pecuniary loss that the other person has sustained as a result of the reliance by the other person on the misrepresentation.”

22.  Third, they rely on section 40(1) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (“CWUMPO”):

“Subject to the provisions of this section, where a prospectus invites persons to subscribe for shares in or debentures of a company, the following persons shall be liable to pay compensation to all persons who subscribe for any shares or debentures on the faith of the prospectus for the loss or damage they may have sustained by reason of any untrue statement included therein, that is to say-

(a) every person who is a director of the company at the time of the issue of the prospectus;

(b) every person who has authorized himself to be named and is named in the prospectus as a director or as having agreed to become a director either immediately or after an interval of time;

(c) every person being a promoter of the company; and

(d) every person who has authorized the issue of the prospectus;

Provided that where under section 38C the consent of a person is required to the issue of a prospectus and he has given that consent, he shall not by reason of his having given it be liable under this subsection as a person who has authorized the issue of the prospectus except in respect of an untrue statement purporting to be made by him as an expert.”

23.  Fourth, they rely on sections 277(1) and 281(1) of the SFO. 

Section 277(1) provides that:

“Disclosure of false or misleading information inducing transactions takes place when, in Hong Kong or elsewhere, a person discloses, circulates or disseminates, or authorizes or is concerned in the disclosure, circulation or dissemination of, information that is likely-

(a) to induce another person to subscribe for securities, or deal in futures contracts, in Hong Kong;

(b) to induce the sale or purchase in Hong Kong of securities by another person; or

(c) to maintain, increase, reduce or stabilize the price of securities, or the price for dealings in futures contracts, in Hong Kong,

if –

(i) the information is false or misleading as to a material fact, or is false or misleading through the omission of a material fact; and

(ii) the person knows that, or is reckless or negligent as to whether, the information is false or misleading as to a material fact, or is false or misleading through the omission of a material fact.”

Section 281(1) then provides:

“Subject to subsection (2), a person who has committed a relevant act in relation to market misconduct shall, whether or not he also incurs any other liability (whether under this Part or otherwise), be liable to pay compensation by way of damages to any other person for any pecuniary loss sustained by the other person as a result of the market misconduct, whether or not the loss arises from the other person having entered into a transaction or dealing at a price affected by the market misconduct.”

Provided that where under section 38C the consent of a person is required to the issue of a prospectus and he has given that consent, he shall not by reason of his having given it be liable under this subsection as a person who has authorized the issue of the prospectus except in respect of an untrue statement purporting to be made by him as an expert.”

24.  The Plaintiffs’ case is that their shares in Trony have been rendered valueless by the loss of its listing status. Hence, they seek damages which represent the amounts they had paid for the shares including the value thereof, and other charges and fees. 

D.   THE DEFENDANTS’ STRIKING OUT APPLICATIONS

25.  Both Defendants apply to strike out the Plaintiffs’ claims on the ground that they are time barred. The 1^st Defendant also seeks in the alternative an order that this question be tried as a preliminary issue. As no factual dispute is involved, I take the view that it is sufficient to consider the Defendants’ striking out applications. No distinction needs to be drawn between the two Defendants. Their applications made on the same ground should stand or fall together.

26.  It is trite that a defendant may apply to strike out the plaintiff’s claim as frivolous and vexatious and an abuse of process of the court on the ground that it is statute-barred (Ronex Properties v John Laing [1983] 1 QB 398 at 408C; Yanfull Investments Ltd v Datuk Ooi Kee Liang [2017] 5 HKC 42 at 56, §43). In Kensland Realty Ltd v Tai, Tang & Chong (2008) 11 HKCFAR 237 at 289, §153, McHugh NPJ held that:

“An order striking out a Statement of Claim, which is based on a limitation defence, can only be sustained if that defence is “manifestly and immediately destructive of the Plaintiff’s claim”: Ronex Properties v. John Laing Construction Ltd [1983] 1 QB 398 at 408A; Peconic Industrial Development Ltd v. Yu Ka Hong [2006] 4 HKC 406 at para.27.  However, once a limitation defence is raised, the onus is on the plaintiff to prove that the cause of action relied upon accrued within the limitation period.  In form, a limitation defence appears to be a defence of confession and avoidance.  If it were, the onus of proof would lie on the party raising it.  Indeed, the Full Court of the Supreme Court of Victoria has decided that, where the action concerns the occurrence of latent damage, the onus is on the defendant to plead and prove that the cause of action fell outside the period specified in the statute of limitations: Pullen & Another v. Gutteridge Haskins and Davey Pty Ltd [1993] 1 VR 27.  But courts in the United Kingdom and this Court have taken the opposite view.  They have insisted that, although the defendant must raise and plead the limitation defence, once the defence is pleaded, the onus is on the plaintiff to prove that the cause of action accrued within the limitation period: Darley Main Colliery Co. v. Mitchell (1886) 11 AC 127 at 135; Cartledge v. Jopling & Sons Ltd [1963] AC 758 at 784; London Congregational Union v. Harriss & Harriss [1988] 1 All ER 15 at 29; Bank of East Asia v. Tsien Wui Marble Factory (1999) 2 HKCFAR 349 at 384; Haward v. Fawcetts [2006] 1 WLR 682 at 688, HL.  Accordingly, Kensland carries the burden of proving that its claim fell within the limitation period.”

27.  Hence, in this case, the Plaintiffs carry the burden of proving that their claims fell within the applicable limitation period.

E.   THE APPLICABLE LIMITATION PERIOD

28.  Section 4(1) of the Limitation Ordinance (Cap. 347) (“the LO”) provides that:

“The following actions shall not be brought after the expiration of 6 years from the date on which the cause of action accrued, that is to say—

(a) actions founded on simple contract or on tort;

…

(d) actions to recover any sum recoverable by virtue of any Ordinance or imperial enactment, other than a penalty or forfeiture or sum by way of penalty or forfeiture…”

29.  The parties agree that the Plaintiffs’ cause of action based on the tort of negligence falls into sub-section 4(1)(a) whereas their causes of action based on breach of various statutory duties fall within sub-section 4(1)(d). Hence, the applicable limitation period for all causes of action shall be 6 years.

30.  The writ of summons herein was issued by the 1^st Plaintiff on 5 March 2019 and amended on 25 February 2020 to include the 2^nd to 35^th Plaintiffs.

31.  At the hearing, the Plaintiffs confirmed that they would not rely on section 26(1)(b) or section 31 of the LO to extend the limitation period as pleaded in the Indorsement of Claim. Hence, the only issue is whether the Plaintiffs’ causes of action accrued on or after, but not before, 5 March 2013.

F.   WHEN DID THE CAUSES OF ACTON ACCRUE IN PRINCIPLE?

F1.  The cause of action in tort

32.  As damage is an essential element in the cause of action in tort, the question is when the plaintiff “first incurred damage” (Kensland Realty Ltd v Tai, Tang & Chong (2008) 11 HKCFAR 237 at 259, §50).

33.  In Kensland Realty Ltd v Tai, Tang & Chong (2008) 11 HKCFAR 237 at 259-260, §51, Ribeiro PJ held that:

“A cause of action in tort accrues when the damage which results from the tortious conduct is real, as distinct from minimal or negligible and is actual, as opposed to purely contingent.  The concept of “damage” is given a broad meaning.  It encompasses damage consisting of “any detriment, liability or loss capable of assessment in money terms.” Where economic loss is involved, it includes loss suffered “by payment of money, by transfer of property, by diminution in the value of an asset or by the incurring of a liability.” Whether damage has been incurred in any particular case is a question of fact.  Its precise quantification may only be possible at a later date, by which time it may have become more serious, but that does not detract from the earlier accrual of the cause of action. The damage must, however, be recoverable as falling within the measure of damages applicable to the defendant’s wrong in question.”

He held further at p 263, §60 that:

“Limitation periods generally run from the date of accrual of the cause of action. With the tort of negligence, as we have seen, this is when damage is incurred, “damage” being broadly defined as encompassing any detriment, liability or loss capable of monetary assessment. The great breadth of the concept means that the consequences which immediately follow upon a defendant’s breach of duty will often qualify as “damage” so as to set time running for limitation purposes. This is so even if such damage is imperceptible at that stage and is not reasonably discoverable until much later – by which time the limitation period may already have expired.”

34.  In the same case at p 291, §157, McHugh NPJ held that:

“In my opinion, however, the concession made by Kensland in the courts below was correct. A plaintiff suffers damage when that person incurs a liability to pay damages, and that is so even though the quantification of the damage is not then ascertainable: Wardley Australia Ltd v. State of Western Australia (1992) 175 CLR 514 at 536 per Brennan J cited with approval by Lord Nicholls of Birkenhead in Nykredit Mortgage Bank Plc v. Edward Erdman Group Ltd (No.2) [1997] 1 WLR 1627 at 1634 and by Lord Hoffmann in Law Society v. Sephton [2006] 2 AC 543 at 551. Thus, when a defendant’s negligent breach of a duty of care causes physical harm to the plaintiff or the plaintiff’s property, the defendant incurs a liability to pay damages from that moment. The time for bringing the plaintiff’s action runs from the moment that the plaintiff suffers damage. That the damage cannot be quantified, or is not known, at that moment is not relevant. If the plaintiff acquires a benefit at the same time as acquiring the liability, however, it may not be possible to determine whether the plaintiff has suffered damage until an adverse balance is struck between the benefit and the burden of the liability: Wardley Australia Ltd v. State of Western Australia (1992) 175 CLR 514 at 536 per Brennan J. Similarly, if the damages are not payable until the happening of a further event, the plaintiff’s liability is contingent only and damage is not sustained until the event occurs: Wardley Australia Ltd v. State of Western Australia. Personal guarantees are cases that usually fall within this category.”

35.  In Nykredit Mortgage Bank Plc v. Edward Erdman Group Ltd (No.2) [1997] 1 WLR 1627 at 1630G-H, Lord Nicholls of Birkenhead held that:

“Take first a simple case which gives rise to no difficulty. A purchaser buys a house which has been negligently overvalued or which is subject to a local land charge not noticed by the purchaser’s solicitor. Had he known the true position the purchaser would not have bought. In such a case the purchaser’s cause of action in tort accrues when he completes the purchase. He suffers actual damage by parting with his money and receiving in exchange property worth less than the price he paid.”

36.  In Maharaj v Johnson [2015] PNLR 27 at 560, §19, the Privy Council held that in respect of a “no transaction” case, namely, a case where the claimant, in the absence of the defendant’s breach of duty, would have entered into “no transaction” at all:

“…the inquiry is whether, and if so at what point, the transaction into which the claimant entered caused his financial position to be measurably worse than if he had not entered into it …”

37.  In Chiu Kwai Ping v Yip, Tse & Tang (A Firm) [2020] HKCA 886, §27, Kwan VP repeated that:

“…That the precise quantification of the loss may only be possible at a later date, by which time it may have become more serious, does not detract from the earlier accrual of the cause of action (Kensland Realty v Tai Tang & Chong at §51). That the damage cannot be quantified, or is not known, at that moment is not relevant (Kensland Realty v Tai Tang & Chong at §157, per McHugh NPJ).

38.  In short, there must be some real and actual damage. This is a question of fact. It is insufficient that there is merely a risk of damage, or a purely contingent damage. The damage must be assessable or measurable. However, it does not matter that the damage cannot be quantified yet, or it will be difficult to quantify, or the amount of damage may change later. Put in another way, what the Court is concerned about is the existence (or non-existence) of some real and actual damage, rather than the quantum thereof. The loss or damage must, of course, belong to the type of loss or damage that is recoverable under the particular cause of action in tort. In this case where the cause of action is a claim for negligent statements, one is concerned with economic or financial loss.

F2.  The causes of action based on statutes

39.  McGee, Limitation Periods (8^th ed., 2020), §11.018 at p 211, states that:

“…That date must depend on construction of the particular statute. If the statute provides for compensation for loss suffered, then that cause of action will normally accrue when there is actual loss to the claimant, rather than at a possibly earlier date when the work which eventually causes the loss is completed.”

40.  The Plaintiffs cited Yorkshire Board v British Telecom [1986] 1 WLR 1029. The Public Utilities Street Works Act 1950 provided by section 26(6):

“…Operating undertakers shall pay to owning undertakers compensation equal to the expense reasonably incurred by the owning undertakers of making good damage to apparatus of theirs to which this section applies which is caused by the execution lawfully or works to which this section applies of the operating undertakers…”

Lord Bridge of Harwich held at p 1032F-G:

“Confining attention to the enacting words, it seems to me that a statutory cause of action created by a requirement that A“shall pay” a sum of money to B accrues when and not before the obligation to pay arises. If the words “compensation equal to the expense reasonably incurred… of making good damage” refer to a sum of money and indicate how it is to be calculated, then, on the face of it, I find it difficult to understand how the obligation to pay that sum of money can arise until the event has occurred which enables the amount payable to be calculated.”

It is clear that the decision in that case depended on the wording of the statute in question. It does not lay down any general principle which is applicable to the present case.

41.  The key words of the statutory provisions involved in this case are as follows:

(a)  Under section 108(1) of the SFO, “compensation by way of damages to the other person for any pecuniary loss that the other person has sustained as a result of the reliance by the other person on the misrepresentation”.

(b)  Under section 40(1) of the CWUMPO, “compensation to all persons who subscribe for any shares or debentures on the faith of the prospectus for the loss or damage they may have sustained by reason of any untrue statement included therein”.

(c)  Under section 281(1) of the SFO, “compensation by way of damages to any other person for any pecuniary loss sustained by the other person as a result of the market misconduct”.

42.  The most important phrases are “any pecuniary loss” and “loss or damage”. They are couched in broad terms. There is no reason why they should not be given their natural and ordinary meaning. Further, it is likely that a defendant may incur concurrent liabilities under the common law and the relevant statutes. It is improbable that the legislature would intend that these causes of action would or should accrue at different times. In Wardley Australia Ltd v Western Australia (1992) 175 CLR 514, the High Court of Australia held at p 526 that, under section 82(1) of the Trade Practices Act 1974, which provided that “A person who suffers loss and damage by conduct or another person that was done in contravention of a provision of Part IV or V may recover the amount of the loss or damage by action against the other person or against any person involved in the contravention.”, as under the common law, a plaintiff can only recover compensation for actual loss or damage incurred, as distinct from potential or likely damage. Although each statute must be construed independently, in that case, the High Court of Australia construed the words “loss and damages” to mean actual loss or damage as under the common law. The same approach is apposite in the present context.

43.  Accordingly, I take the view that the phrases “any pecuniary loss” and “loss or damage” in the said statutory provisions mean any real and actual financial loss. In other words, it is the same requirement as that under the common law of negligence.

44.  It follows that the Plaintiffs’ causes of action under the common law and based on the statutes accrued at the same time, namely, when they suffered real and actual damage.  The big question is which date(s) that was/were.

G.   DID THE PLAINTIFFS FIRST SUFFER DAMAGE UPON THE DELISTING OF TRONY?

45.  The Plaintiffs’ answer is that it was the date when Trony was delisted, namely, 23 August 2018.

46.  First, Mr Joffe, on behalf of the Plaintiffs, argued that the damage suffered by them was contingent upon the delisting of Trony. Hence, their causes of action only accrued when that contingent event happened. They relied on Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514 and Law Society v Sephton [2006] 2 AC 543.

47.  These two authorities had been cited by Ribeiro PJ in §51 of the judgment in Kensland quoted above to support the proposition that the damage must be “actual, as opposed to purely contingent”. The word “purely” is crucial as shown by Shore v Sedgwick Financial Services Ltd [2009] Bus LR where Dyson LJ held at p 50, §27:

“A clear distinction has been drawn in the authorities between transaction which give rise to pure contingent liabilities (“the contingent liability cases”) and transactions (“the transaction cases”) in respect of which, to use the words of Lord Hoffmann in the Sephton case [2006] 2 AC 543, at para 22:

‘The plaintiff had paid money, transferred property, incurred liabilities or suffered diminution in the value of an asset and in return obtained less than he should have got. But these authorities have no relevance to a case in which a purely contingent obligation has been incurred.’”

48.  Pausing here, one would immediately note that the phrase “purely contingent” used by Ribeiro PJ in Kensland was also the phrase used by Lord Hoffmann in Sephton.  Dyson LJ then explained at pp 50-51, §29 why Sephton was a case of pure contingent liability:

“The Sephton case is an example of a pure contingent liability case. The defendant accountants certified a solicitor's annual reports negligently. In fact the solicitor had misappropriated a large sum from his client account. When the Law Society discovered the solicitor's fraud, they intervened and struck him off the roll. Claims were made for compensation from the Solicitor's Compensation Fund and the Law Society made payments to the victims of the solicitor's fraud. The Law Society issued proceedings against the accountants, claiming that they had relied on their reports when deciding not to exercise any of their powers in relation to the solicitor's practice. The House of Lords held that the solicitor's misappropriations gave rise to a possible liability in the Law Society to pay out of the fund, contingent on the misappropriation not being otherwise made good and a claim in proper form being made. A contingent liability, such as the possibility of a liability to pay money in the future was not in itself damage until the contingency occurred. Accordingly, the Law Society's claim was not statute-barred.”

49.  In Sephton, Lord Hoffmann held at p 550, §18 that:

“I say at once that I am in complete agreement with this analysis, which provides the answer to this appeal. By virtue of the terms of the Solicitors' Compensation Fund Rules 1995, Mr Payne's misappropriations gave rise to the possibility of a liability to pay a grant out of the Fund, contingent upon the misappropriation not being otherwise made good and a claim in proper form being made. Such a liability would be enforceable only in public law, by judicial review, but would still in my opinion count as damage. But until a claim was actually made, no loss or damage was sustained by the Fund…”

50.  The analysis that he was in complete agreement with is that given in the principal judgment in Wardley Australia Ltd v State of Western Australia. Lord Hoffmann summarized the facts of the Australian case at p 550, §16 as follows:

“The State of Western Australia sued under a statute creating liability for misleading conduct, claiming that on 26 October 1987 it had been induced by the defendant's misrepresentation to indemnify a bank against loss on a loan to a company in difficulties. The indemnity was called in November 1988 and the State paid $22.5m in December 1989. Proceedings were commenced on 24 October 1990, within the three year limitation period provided by the statute, but the State applied on 14 January 1991 to amend to plead an additional misrepresentation on 25 October 1987. This was more than 3 years after the execution of the indemnity but less than three years after it had been called and paid. The High Court decided that the State suffered no damage while its obligation under the guarantee remained contingent. Damage occurred only when it was called.”

After that, on the same page, §17, he quoted the analysis by the Australian court with which he was in complete agreement:

“The High Court said, at pp 529, 531, 532, that Forster v Outred & Co was explicable:

‘by reference to the immediate effect of the execution of the mortgage on the value of the plaintiff's equity of redemption …. It has been contended that the principle underlying the English decisions extends to the point that a plaintiff sustains loss on entry into an agreement notwithstanding that the loss to which the plaintiff is subjected by the agreement is a loss upon a contingency. For our part, we doubt that the decisions travel so far. Rather, it seems to us, the decisions in cases which involve contingent loss were decisions which turned on the plaintiff sustaining measurable loss at an earlier time, quite apart from the contingent loss which threatened at a later date…. If…the English decisions properly understood support the proposition that where, as a result of the defendant's negligent representation, the plaintiff enters into a contract which exposes him or her to a contingent loss or liability, the plaintiff first suffers loss or damage on entry into the contract, we do not agree with them. In our opinion, in such a case, the plaintiff sustains no actual damage until the contingency is fulfilled and the loss becomes actual; until that happens the loss is prospective and may never be incurred.’”

51.  The importance of the word “purely” in the phrase “purely contingent” in the present context is that, in some cases involving contingent liabilities, the claimant may have suffered an actual damage even before the contingency happened. A good example is Forster v Outred & Co [1982] 1 WLR 86.  In that case, the English Court of Appeal held that the claimant suffered damage when she executed a mortgage deed (rather than when she was called upon to pay) as a result of negligent advice given by the defendant solicitor. As Lord Hoffmann observed at p 549, §14 at Sephton:

“… the mortgage, although the liability which it secured was contingent, had the immediate effect of depressing the value of Mrs Forster’s farm.”

52.  Returning to this case, I take a firm view that this is not a case concerning contingent liability, let alone “purely contingent liability”, at all. As Brennan J said in the Wardley case at (1992) 175 CLR 514 at 536 (which had been cited by Ribeiro PJ in Kensland):

“A plaintiff may suffer economic loss or damage in a number of ways: by payment of money, by transfer of property, by diminution in the value of an asset or by the incurring of a liability …”

It is vital to characterize the way in which the Plaintiffs suffered the economic loss or damage properly. The nature of loss or damage suffered by the Plaintiffs is not the incurring of any liability; rather, it is the diminution (and, on the Plaintiffs’ case, complete loss) of the value of the property acquired by them as a result of relying on the negligent statements made by the Defendants. The principles concerning purely contingent liabilities are of no relevance or assistance whatsoever in the present context.

53.  Second, Mr Joffe relied heavily on the way the Plaintiffs pleaded their loss and damage. In particular, they pleaded in §28 of the Amended Statement of Claim that:

“On 23 August 2018, Trony was delisted. The shares owned by the Plaintiffs in Trony have been rendered valueless by the loss of its listing statutes.”

Mr Joffe stressed that they are not claiming any decrease in value in the shares before the delisting. It is not open to the Defendants to recast their pleaded case. Having regard to the loss and damage that they are claiming, such loss and damage must have occurred only upon the delisting of Trony.

54.  Mr Dawes, acting for the 2^nd Defendant, submitted that it is wrong to assert that the Plaintiffs’ shares have become valueless. This is because, firstly, although they can no longer be traded in the open market, there can be sold by private treaties; secondly, in the event of liquidation, the shareholders can still participate as contributories and the shares may still have some residual value. While I tend to agree with him, bearing in mind that this is a striking out application, I shall assume that the Plaintiffs’ pleaded case is true.

55.  It is correct that the Plaintiffs may well have suffered the loss and damage as pleaded only upon the delisting of Trony. However, it does not follow that this was the date when they first suffered any loss and damage. One must of course refer to a plaintiff’s pleading to identify the cause of action. But it does not mean that, in determining when that cause of action accrued, the Court is dictated by how the plaintiff pleaded or quantified his loss and damage.

56.  At the hearing, I gave the following simple and hypothetical example. A plaintiff suffered a leg injury when he was knocked down by a car in a traffic accident. The nature and extent of the injury were not immediately apparent after the accident. The plaintiff hoped that he would recover fully. Unfortunately, the condition of his injured leg deteriorated continuously; and ultimately it had to be amputated. After that, he commenced an action in negligence against the careless driver. In the Statement of Damages, he claimed loss and damage consequential upon the amputation of his leg. In this example, it must be beyond doubt that the cause of action accrued immediately after the accident, and not upon the amputation of the plaintiff’s leg.

57.  The fallacy of the Plaintiffs’ argument in this respect is that the loss and damage pleaded by a plaintiff would invariably include those that he has suffered as at the date of the pleading; but the amount of such loss and damage may have been affected by events taking place between the occurrence of the tortious act and the date of the pleading. The date when an event leading to the loss and damage as pleaded (namely, the amputation of the leg in my example) may not be the date when the plaintiff first incurred damage.

58.  Back to the facts of this case, the date when Trony was delisted was only the date when the Plaintiffs’ loss had allegedly become complete and irreversible. It cannot be assumed or taken to be the date when they first suffered any real and actual loss. As I said earlier, it is important to characterize the way in which the Plaintiffs suffered their economic loss properly. Although Mr Joffe denied that the Plaintiffs are claiming any diminution in value of their shares, it is quite clear to me that, in substance, they are. By claiming that their shares have been rendered valueless, in effect, they are claiming that the value of their shares have decreased to nil or zero. It is simply the most extreme form of diminution in value of a property. Another way of looking at the matter is this. The Plaintiffs pleaded that they would not have bought the shares had they known that some information in the Prospectus was false, incomplete or misleading. Hence, prima facie, their loss would be the amount by which they were out of pocket, namely, the prices they had paid for the shares plus other incidental fees and charges. However, as they had in fact acquired the ownership in the shares, they must, of course, give credit to the value thereof. All that they are saying now is that no credit needs to be given because the shares have become valueless.

59.  In my view, the Plaintiffs first suffered loss and damage when there was a real and actual diminution in value of their shares. The first question is what the value of their shares means. The loss and damage claimed by each Plaintiff in the Amended Statement of Claim is the “amount paid by each plaintiff in each transaction, which includes the value of the shares and other charges and fees” (footnote no. 1, Annex 1). The Plaintiffs’ case is that they relied on the information in the Prospectus before deciding to buy the shares. In McConnel v Wright [1903] 1 Ch 546 at 555 and 557-558, the English Court of Appeal held that in an action by a shareholder in a limited company against a director for damages for misrepresentations in the prospectus, prima facie, the price paid for the shares is taken to be the exact equivalent of the value of the shares “having the advantages represented in the prospectus”.  The value of the Plaintiffs’ shares was, therefore, prima facie the prices they had paid for them. This is the starting point, or base figure, that one should use to judge whether there has been any diminution.

60.  The next question is when there was a real and actual decrease in the value of their shares as just defined. Put it in another way, when did their shares become less worthy than the price at which they were acquired? This takes me to Mr Joffe’s argument that the Defendants have not adduced any evidence on the value of the shares after they had been acquired by the Plaintiffs. As this is a question of fact, in the absence of any such evidence, no diminution in value of the shares, and hence, any loss or damage of such nature, has been shown at any point of time before the delisting of Trony.

61.  In discerning whether there was any decrease in value in the shares, one needs to consider the meaning of “value” in the present context further. In Potts v Miller (1940) 64 CLR 282, Starke J held at p 289 that “the measure of damage in cases in which a person is induced by fraud to take up shares is the difference between the amount he subscribed or paid for the shares and the real value – not the market value – of the shares on allotment”; and Dixon J held at pp 299-300:

“The burden lies upon the plaintiff of proving that the shares acquired were, at the time when they were allotted or purchased, of less value than the amount paid or payable for them by the plaintiff… You begin therefore with the assumption that the shares subscribed for are worth their par value. But if that par value has been obtained or arrived at by reference to estimates of assets or other considerations falsely or erroneously stated in a prospectus, it is legitimate, as an argument upon facts, to treat the value placed upon the assets as founded upon the falsity of the error and to proceed from that starting point in judging of the true value of the shares.”

These principles, known as the rule in Potts v Miller, were approved in HTW Valuers (Central QLD) Pty Ltd v Astonland Pty Ltd [2004] 217 CLR 640 at §§34-38. At §36, the Australian Court held:

“One key qualification of the rule which prevents it from being inflexible is that the test depends not on the difference between price and “market value”, but price and “real value” or “fair value” or “fair and real value” or “intrinsic” value or “true value” or “actual value” or what the asset was “truly worth” or “really worth” or “what would have been a fair price to be paid … in the circumstances… at the time of the purchase”. This distinction is sometimes difficult to draw, but it is old and fundamental.”

62.  The important point is that one must focus on the “real”, “true”, “fair” or “intrinsic” value rather than the “market price”. The reason was summarized in HTW Valuers (Central QLD) Pty Ltd, §37:

“A second qualification flows from the first. The distinction between a value which answers one of the tests just stated and market values means that market values – the prices actually obtainable in market sales – may be disregarded if they are “delusive or fictitious” because they are the result of “a fraudulent prospectus, manipulation of the market or some other improper practice on the part of the defendant”. There are other reasons why the law does not limit recovery by reference to market value – the amount for which the plaintiff might have sold the assets acquired. One is that, subject to mitigation issues, the plaintiff is “not bound to sell them”. Another is that there may not be a market. Another is that the market is mistaken on some basis other than manipulation. It is common to speak of shares being undervalued (or overvalued) by the market.”

63.  Another important point reaffirmed in HTW Valuers (Central QLD) Pty Ltd, §38, is that, in determining the “real”, “true”, “fair” or “intrinsic” value of the shares, one may look at the matter with hindsight:

“The last point is supported by another matter to which Dixon J referred, in the context of shares:

‘[T]he real value of what the plaintiff got must be ascertained in the light of the events which afterwards happened, because those events may show, for instance that what the shares might have sold for was not their true value or that it was a worthless company.’”

He referred to Sir James Hannen’s observation in Peek v Derry:

“[S]ubsequent events may shew that what the shares might have been sold for was not their true value, but a mistaken estimate of their value.”

Dixon J continued:

“[L]ooking back from subsequent events to the earlier state of the company it may appear that at the time the shares were taken the assets of the company did not correspond in value to the money paid.”

64.  Hence, in this case, one must consider whether there was any real and actual decrease in the “real”, “true”, “fair” or “intrinsic” value of the shares with the benefit of hindsight, namely, knowledge of the relevant subsequent events. The relevant subsequent events are those pleaded by the Plaintiffs: the discovery of discrepancies in Trony’s financial records, the Suspension, the conduct and results of the Forensic Review, and the delisting of the company. The most crucial fact is the discovery that certain information contained in the Prospectus was false, incomplete or misleading. According to the Plaintiffs’ pleaded case, the following information and/or classes of information given in the Prospectus was or were false and/or misleading: information about the Group’s sales, revenues, profits, suppliers, customers and taxes paid for the successive periods ended on 30 June in 2008, 2009 and 2010; and that about the Group’s assets, liquidity, cash and financial ratios for the same periods (§23 of the Amended Statement of Claim).

65.  As mentioned, generally speaking, the price paid for the shares is taken to be the exact equivalent of the value of the shares “having the advantages represented in the prospectus”. These advantages would be based on the assumption that the representations made in the prospectus were true, complete and accurate. Insofar that the Prospectus contained the allegedly false, incomplete or misleading information, the “real”, “true”, “fair” or “intrinsic” value of the shares has lost either wholly or partially the advantages represented by such information in the Prospectus. What then was the effect of the loss of such advantages on the value of the shares? There were only three possibilities: no effect, positive effect or negative effect. This is where the Court is not only entitled, but obliged, to apply common and commercial sense, and look at the matter realistically. There cannot be any doubt that the loss of such advantages must have a negative impact on, resulting in a decrease in, the “real”, “true”, “fair” or “intrinsic” value of the shares.

66.  It is true that the decrease in the real value of the shares has not been quantified in the absence of any evidence. However, I only need to be satisfied that the diminution in value, and hence, the Plaintiffs’ loss and damage, was real and actual, rather than minimal or negligible. It should be borne in mind that Trony applied for the Suspension because the discrepancies in the financial records constituted price-sensitive information; and the SEHK found the matter serious enough to cancel the listing of the company.  Again, applying common and commercial sense, it will be wholly unrealistic to suggest that the diminution in value of the shares, and hence, the Plaintiffs’ loss and damage, was minimal or negligible.

67.  When did the Plaintiffs first suffered such loss and damage? The Plaintiffs pleaded that the representations made in the Prospectus containing such information were false, misleading and/or deceptive “at the time when they were made” (§29 of the Amended Statement of Claim).  They were made when the Prospectus was issued, published, circulated and/or disseminated on 24 September 2010.  The Plaintiffs pleaded that they had relied on the truthfulness of the representations made in the Prospectus in deciding to buy the shares (§6.3 of the Amended Statement of Claim).  In my view, they suffered the said loss and damage from the very moment when they paid for the shares, and other incidental fees and charges. The simple truth is that the shares that the Plaintiffs had bought were never worth as much as what they had paid for.

68.  If the Plaintiffs’ argument is correct, it would imply that they suffered no real or actual damage, and there was no diminution in value of their shares whatsoever at all, before the delisting of Trony.  This does not seem to be a realistic proposition at all.  As Mr Man acting for the 1^st Defendant submitted, one may test the matter in the following way: assuming that the Plaintiffs commenced proceedings before the delisting, could the Defendants successfully apply to strike out the claims on the ground of no reasonable cause of action because the essential element of damage was lacking? I would have thought that the answer must be a resounding no.

69.  For these reasons, I reject the Plaintiffs’ submission that their causes of action accrued only upon the delisting of Trony. Since this is their only argument, they have failed to discharge the burden of proving that their claims fell within the limitation period.

70.  At the time when the Plaintiffs bought their shares, they were unaware that some of the information in the Prospectus was false, incomplete or misleading. Had they known, they would not have bought the shares.  This is where section 31 of the LO may become relevant.  Under section 31(4)(a), the limitation period may be extended to 3 years after the Plaintiffs acquired the requisite knowledge. The adverse findings of the Forensic Review were only announced on 12 December 2014.  This would be the latest date by which the Plaintiffs must have acquired sufficient knowledge to commence legal proceedings. But this would not help because 12 December 2014 would still be more than 3 years before the issuance of the writ herein on 5 March 2019. This may be why the Plaintiffs decided not to rely on section 31.  Nevertheless, as both Mr Man and Mr Dawes had reminded me, since the Plaintiffs expressly disavowed any reliance on section 31 of the LO, sections 4(1)(a) and (d) must apply in full force.  I agree.

71.  All in all, I have come to the conclusion that the Plaintiffs’ causes of action accrued on the dates when they acquired their shares.  As they bought their respective shares on different dates, and some of them also bought their own shares at different times, the exact dates when the causes of action accrued would vary. But since they bought their shares between 7 October 2010 and 24 May 2012, there is no doubt that the 6-year limitation has expired by the time the writ was issued.

H.  CONCLUSIONS AND ORDERS

72.  For the above reasons, I conclude that the Plaintiffs’ claims are time barred. Hence, I order that the Plaintiffs’ claims be struck out and their actions against the Defendants be dismissed. I also make a costs order nisi (which shall become absolute after 14 days in the absence of any application for variation) that the Plaintiffs shall pay the Defendants the costs of this action including all costs reserved (if any), the costs of the present applications and this hearing (with a certificate for two counsel) to be taxed if not agreed.