OVERSEAS TRUST BANK LTD v. COPPERS & LYBRAND (a firm) AND OTHERS

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HEADNOTE

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A PARTY TO LITIGATION WHO CAN DEMONSTRATE THAT HIS OPPONENT'S CLAIM AGAINST HIM IS PLAINLY WITHOUT SUBSTANCE IS ENTITLED TO HAVE THAT CLAIM STRUCK OUT BEFORE TRIAL AS AN ABUSE OF THE PROCESS OF THE COURT.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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JUDGMENT

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1. In this action, which is an action for breach of contract, the plaintiff ("OTB") claims damages from the defendants ("Coopers"), its former auditors, for alleged professional negligence. Its case may be briefly summarized as follows.

2. OTB is a bank. On 5th June 1985, the directors of OTB informed the regulatory authorities that it was insolvent. Its business had been conducted dishonestly and imprudently. The Hong Kong Government ("the Government") immediately stepped in and rescued it.

3. OTB's accounting year ends on 30th June. In its accounts for the years ending 30th June 1981, 30th June 1982 and 30th June 1983, OTB failed to make adequate provision for the bad and doubtful debts to which its dishonest and imprudent management had exposed it. It now says that if Coopers had done their work properly, they would have had to insist and would have insisted upon greater provision being made in each of these years for these bad and doubtful debts; if this were not done, Coopers would have had to qualify and would have qualified their audit reports. The regulatory authorities would have been alerted to the problems of OTB. They would either have intervened in such a way as to have precluded any further mismanagement of the business, or they would have let OTB go to the wall. Either way, the subsequent losses would have been stemmed or avoided.

4. Coopers deny the allegation that they did not do their work properly. They also deny that the regulatory authorities would have intervened as suggested.

5. OTB has some branches outside Hong Kong, including one in Bahrain and another in Colombo. Coopers have brought into the action, as first third party, a firm of accountants practising in Bahrain and known as Peat Marwick Mitchell and Co. ("Peats"). Coopers have also brought into the action, as second third party, a firm of accountants practising in Colombo and known as Ford Rhodes Thornton and Co. ("Ford Rhodes").   The application with which the Court is now concerned is an application by Peats; Ford Rhodes are not involved in it and I say no more in this judgment about the position of that firm.

6. Peats apply for an order that the third party statement of claim served on them be struck out and that the third party proceedings against them be dismissed.

7. This application has already engaged the attention of Mr. Justice Nazareth, who, in effect, refused to entertain it; but the Court of Appeal, on 15th December 1989, remitted it to this Court for rehearing.

8. The leading judgment was delivered by the Vice-President, Mr. Justice Fuad. I gratefully adopt his summary of the claim made by Coopers against Peats, in relation to which he said this :

"[Coopers] plead, inter alia, that [Peats] audited the annual accounts of the Bahrain branch of OTB under contracts made with them for the years ending 1980, 1981 and 1982. [Peats] knew or ought to have known that those accounts would or were likely to be relied upon by OTB and/or by its auditors [Coopers] in preparing and/or auditing the accounts of OTB for the years ending 30th June 1981, 1982 and 1983. By virtue of these contracts and/or at common law [Peats] owed seven particularised duties to OTB and to [Coopers] in carrying out their audit work. In relation to each of six borrowers whose names are set out in a schedule, it is averred that [Peats] failed to perform some or all of these duties. Detailed reasons are given in several paragraphs setting out why it is said that the system of internal control of the Bahrain branch of OTB was at all material times grossly defective and inadequate and its lending business was carried on imprudently.

 

It is then pleaded that negligently and in breach of the duties set out earlier, [Peats] had failed to detect or recognise many of the deficiencies in the system of internal controls of the Bahrain branch of OTB and in its lending business, and/or in the circumstances that [Peats] were or ought to have been aware of those deficiencies. Instead, [Peats] had :

 

It is then averred that [Coopers] had relied on [Peats'] audits of the Bahrain branch of OTB for each of the years 1980, 1981 and 1982 and on the accounts of the Bahrain branch of OTB for those years, and had therefore reported that the accounts gave a true and fair view of the financial position for the relevant years, and that adequate provisions had been made in the accounts for doubtful loans and advances, and that loans and advances in the balance sheet were stated net of such provisions.

 

It is further pleaded that had Peats drawn the attention of OTB and/or [Coopers] to the deficiencies pointed to and to the full extent of the deficiencies, and had [Peats] reported that the accounts did not give a true and fair view of the financial position of the Bahrain branch of OTB, or had [Peats] reported that larger provisions were required to be made in the accounts for bad and doubtful loans and advances, and had [Peats] exercised proper skill and care in their audit of the Bahrain Branch of OTB for those years, OTB would not have made the advances after October 1981 which were now irrecoverable, and would have taken steps to recover loans and advances which it had made and would have recovered more in respect thereof than it has in fact recovered or was likely to recover.

 

The third party statement of claim continues by avering that OTB had suffered loss and damage which loss consisted principally of the advances which OTB would not have made, had its business been conducted prudently after October 1981 or 1982 or 1983. The particulars of the advances are set out in another schedule. OTB had suffered loss in respect of dividends, amounting to over $213 million, which were paid out on the basis of the profits shown in OTB's accounts and also in respect of the tax that had been paid in Hong Kong and Macau for the years 1981 onwards which would not have been payable, had the accounts shown the true state of affairs. This amounted to over $39 million. Accordingly, it is said :

 

'If by reason of the above matters, the Defendants are liable to compensate OTB for the losses referred to ... or any loss or damage then the Defendants are entitled to contribution, alternatively damages, from [Peats] in respect of such liability.'

 

The pleading concludes :

 

'And the Defendants claim against [Peats] contribution, alternatively damages, in respect of any liability of the defendants to OTB'."

9. The Vice-President observed that Coopers were seeking to pass on to Peats the whole of Coopers' liability arising out of OTB's claim in respect of 173 accounts, whereas it was common ground that only 6 (I should add, now 7) of these accounts were booked through the Bahrain office of OTB, that Peats were only concerned with the Bahrain office of OTB and that OTB claimed to have suffered loss in respect of only one (I should add, now 2) of those accounts. He continued :

"It seems to me that in these circumstances, owing to the unusual and possibly extravagant nature of this claim, [Peats] were entitled to seek to show the Court that it was one which should be struck out, not on the ground that the facts disclosed were improbable or that it was difficult to believe that they could be proved (see per Lord Herschell in Lawrance v. Lord Norreys (1888)39 Ch.D. 213, at p.217) but on the ground that 'the case has not a solid basis capable of proof ... the story told in the pleadings is a myth ... and has no solid foundation' (per Lord Herschell, at p.220) and one where the 'statement of claim presents ... a tissue of improbabilities, which ought not to be sent to proof.' (per Lord Watson, at p.222)."

10. Peats, then, were entitled to attempt to persuade this Court that the case sought to be made against them was plainly without substance.

11. In the course of the hearing before me, Mr Michael Crystal, QC, for Peats, subjected Coopers' claim against Peats to a sustained critical analysis supported, where appropriate, by reference to the affidavit evidence, which persuaded me that Coopers' case against Peats was, indeed, plainly without substance. Mr Neville Thomas, QC, for Coopers, was unable to persuade me otherwise. In these circumstances, I found it unnecessary to call on Mr Crystal to reply; and I indicated that I proposed to strike out the third party statement of claim and to dismiss the third party proceedings. I added that I would put my reasons for doing so into writing; and this I now I do.

12. I deal first with Coopers' claim for contribution against Peats. This claim is plainly misconceived. OTB has no claim against Peats in tort. It is simply not possible for Coopers to bring a claim for contribution against Peats within the provisions of section 19(1) (c) of the Law Amendment and Reform (Consolidation) Ordinance, Cap.23, which (while it was in force) provided for contribution between joint and several tortfeasors; and if it cannot do that, it can have no claim for contribution against Peats. Coopers' liability (if any) to OTB for breach of contract cannot give rise to a claim for contribution in tort against Peats.

13. The rest of Coopers' claim against Peats is equally without substance.

14. The evidence establishes that OTB retained Peats to audit the accounts of its Bahrain branch for the purposes of submission of such audited accounts to the Bahrain Monetary Agency. Coopers, as auditors of OTB, received copies. The accounting year end of OTB's Bahrain branch is 31st December. Accordingly, Coopers argue that they were entitled to rely and did rely on Peats' audit reports as of that date in each year in preparing their own audit reports for OTB on 30th June in each succeeding year. But I am constrained to say that I found this argument quite unsustainable. It has no legal or factual foundation.

15. In the absence of any contract between Coopers and Peats, on what legal basis can Coopers claim to have been entitled to rely on the audit reports of Peats made for the purpose of submission to the Bahrain Monetary Agency? I am of the opinion that if Coopers could have shown that Peats knew that Coopers would have been very likely, or even likely, to have relied on Peats' audit reports of the Bahrain branch of OTB as at 31st December in each year for the purpose of conducting their own review of the relevant loans (all arranged through OTB's head office in Hong Kong) for the purposes of Coopers' own audit reports as at 30th June in each year, then Coopers would, arguably, have established the necessary "proximity" to justify their claim that they were entitled to rely on Peats' audit reports : compare Caparo Industries PLC v. Dickman [1990]2 WLR 358.   But, in fact, all the evidence is the other way. Coopers, very properly, conducted their own credit reviews of the booked out loans. There is not a shred of evidence that they relied on Peats' audit reports of the previous December in so doing. On the contrary, the evidence establishes that Coopers were well aware that Peats were in no position to review the booked-out loans and that, if anything, it was Peats who were relying on Coopers to do so. It is, in my judgment, not going too far to describe Coopers' case on this aspect of the matter as a myth. Although Coopers were invited to do so, no one from Coopers has suggested in evidence that any reliance was placed by anybody at Coopers on Peats' audit reports in preparing their own.

16. Coopers' case against Peats is thus exposed as being entirely without substance. It is a case without any foundation in law or fact, intended to pass on to Peats a liability, out of all proportion to Peats' peripheral involvement in the matter, for the entirety of OTB's claim against Coopers. Coopers' claim against Peats is manifestly ill-founded; it is oppressive; and for these reasons, I was satisfied that the third party statement of claim ought to be struck out and the third party proceedings against Peats dismissed. I will hear counsel on any question of costs or otherwise which may arise as a consequence of this judgment on a date and at a time to be fixed through the usual channels.