CHINA LUMENA NEW MATERIALS CORP. v. BDO LTD

HCA 693/2018

[2026] HKCFI 1767

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 693 OF 2018

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BETWEEN

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D E C I S I O N

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A. INTRODUCTION

1.  This is the substantive hearing of the Plaintiff (“P”)’s Summons dated 30.04.2025 (“the Amendment Summons”) for leave to amend the Statement of Claim (“SOC”) and the Voluntary Further and Better Particulars filed on 10.03.2021 (“the 2021 VFBP”) as per the drafts (“Draft ASOC” and “Draft AVFBP”) annexed to the Amendment Summons. The application is opposed by the Defendant (“D”).

2.  In this hearing, P is represented by Mr Bernard Man SC, leading Mr Justin Ho and Mr Jonathan Fung. D is represented by Mr Paul Shieh SC, leading Mr James Wood.

B. BACKGROUND

3.  This is an audit negligence case concerning D’s audits of P’s financial statements for financial years 2010, 2011 and 2012 (“Relevant Audits”).

4.  P is a Caymanian company now in provisional liquidation. These proceedings were commenced and prosecuted by the joint provisional liquidators (“JPLs”) appointed by the Grand Court of the Cayman Islands in 2015.

5.  D was P’s auditor for the financial years 2010, 2011 and 2012. The Relevant Audits were done by D.

6.  P was the holding company of a corporate group (“Group”) engaged in the production and sale of polyphenylene sulfide (“PPS”) and thernardite products. Between 2009 and 2022, its shares were listed on the SEHK (stock code: 67).

(1) The Group’s thenardite business was conducted through two companies known as Sichuan Chuanmei Mirabilite Co Limited (四川省川眉芒硝有限责任公司) and Sichuan Chuanmei Special Glauber Salt Co Limited (四川川眉特种芒硝有限公司).

(2) The Group’s PPS business was operated by a subsidiary known as Sino Polymer New Materials Co Ltd (“Sino Polymer”) which held two subsidiaries known as Sichuan Deyang Chemical Co Ltd (四川得陽化學有限公司) and Sichuan Deyang Special New Materials Co Ltd (四川得陽特種新材料有限公司).

7.  P came to hold Sino Polymer through a series of transactions in 2011. On 14.01.2011, P acquired 94.1% of the shares in Sino Polymer for consideration of RMB 9.5 billion (“1^st SP Transaction”). On 09.06.2011, P acquired the remaining 4.775% minority interest for consideration of RMB 407.9 million (“2^nd SP Transaction”). The vendors in these transactions (“SP Transactions”) included investment holding companies beneficially owned by three of the largest shareholders of P, including Mr Suo Lang Duo Ji, who was also the Group’s Non-Executive Director and Chairman at the material time.

8.  On 25.03.2014, Glaucus Research Group California LLC (“Glaucus”), a short selling firm, published a research report (“Glaucus Report”) alleging that P had made numerous material misrepresentations in its IPO prospectus and subsequent financial statements. Glaucus alleged that tax records and public filings made by P’s subsidiaries with the State Administration for Industry and Commerce and Chinese Mainland tax authorities were inconsistent with, and showed substantially less favourable figures than those disclosed in P’s financial statements. In view of these findings, Glaucus opined that the shares were a “strong sell” and recommended a target price of nil.

9.  After the publication of the Glaucus Report, trading in P’s shares was suspended on the same day.

10.  On 01.04.2014, another short selling firm, Emerson Analytics (“Emerson”) published a research report similarly alleging that P had grossly exaggerated its revenue and balance sheet (“Emerson Report”). Emerson alleged, inter alia, that (a) P’s medical thernardite output was absurdly high in that it meant that the average Chinese consumer would consume more than 30 doses for laxative purposes, (b) various of P’s factories were not in operation or were running at extremely low utilization, and (c) P’s actual production of PPS resin and PPS compounds was substantially lower that reported. Emerson recommended a delisting of P’s shares.

11.  On 23.01.2015, a winding-up petition was presented in the Grand Court of the Cayman Islands against P. On 25.02.2025, the JPLs were appointed.

12.  After the appointment, the JPLs requested for documents from D in relation to P’s Group, and D provided some documents relating to P’s Group to the JPLs. However, the audit working papers (“AWDs”) were not provided to the JPLs.

13.  On 30.03.2017, D consented to a Tolling Agreement to extend time for the JPLs to investigate and commence proceedings by 1 year.

14.  After the parties’ entry into the Tolling Agreement, there were further negotiations between the parties as to the JPLs’ document requests. However, no agreement was reached. D commenced proceedings in the Cayman Islands for a declaration as to the property and documents in D’s possession which it had to provide to the JPLs. P commenced these proceedings on 27.03.2018, shortly prior to the expiry of the Tolling Agreement. On 21.01.2019, the Writ of Summons was served on D. On 18.02.2019, P filed the SOC.

15.  The JPLs say that they had limitations in pleading a full case at the time of the SOC. According to the JPLs, they had the following limitations at the time of the SOC:

(1) The main evidence of the material misstatements in P’s financial statements which was available to the JPLs at the time was limited to (a) the analysis in the Glaucus Report and the Emerson Report, (b) publicly available credit reports and (c) financial analysis conducted by the JPLs based on publicly available information.

(2) The JPLs did not have any of the AWPs for the Relevant Audits as D refused to provide the same to the JPLs.

16.  Various pleas and particulars in the SOC including those relating to breach and loss were expressly stated as being “the best particulars that the JPLs can give … pending discovery, in particular BDO’s audit working papers”.

17.  On 06.09.2019, D filed its Defence. At [2.1] of the Defence, D asserted that P’s claim was “vague, ambiguous and inadequately particularized” and “relies upon a limited amount of documentation, much of which is inaccurate, unauthoritative, unreliable and/or biased”.

18.  On 17.01.2020, P filed the Reply to the Defence.

19.  On 12.03.2020, D took out a summons for further and better particulars of the SOC (“2020 FBP Summons”), which contained 50 Requests.

20.  On 01.04.2020, P filed its Answers to Request for Further and Better Particulars of the SOC (“Answer”). The Answer was stated as being “without prejudice to the Plaintiff's right to provide further particulars and/or to amend the SOC after discovery”.

21.  On 24.09.2020, P filed its voluntary Further and Better Particulars of the SOC (“2020 VFBP”).

22.  On 08.10.2020, the 2020 FBP Summons was heard by Master Winnie Tsui (as she then was):

(1) Save and except the Requests mentioned below, the learned master dismissed the Requests made by D in the summons.

(2) The learned Master allowed Request 31.

(3) As for Requests 12, 13, 15, 17, 41, 43 and 46 (“the Remaining Requests”) which relate to P’s case on material misstatements and the true financial position and loss, the learned master noted that, prima facie, they were legitimate questions as the answers would help define the exact scope of the parties’ disputes. However, as P had already confirmed that it would only be able to answer them until after discovery, the learned Master did not allow those requests.

23.  On 10.11.2020, P filed the Answer to Request 31 pursuant to the Order made by the Court. The Answer to Request 31 was marked “without prejudice to [P]’s right to provide further particulars and/or to amend the SOC after discovery”.

24.  On 10.03.2021, P filed the 2021 VFBP, in which P pleaded “[P] does not intend to refer to any deficiencies in [P]’s acquisition of Sino Polymer in 2011. [P]’s case is that [D] failed to properly audit the SP Transaction, as pleaded in paragraphs 48 to 56 of [the SOC]”. In the same document, there is a caveat saying that the pleas therein are “without prejudice to [P]’s right to provide further particulars and/or to amend the SOC after discovery”.

25.  After the close of pleadings, between 06.2021 to 12.2021, the parties discussed and agreed on discovery directions. Between 03.2022 and 11.2024, the parties conducted discovery. In the discovery exercise, D disclosed the AWPs for the Relevant Audits for the first time.

26.  In mid-2024, the JPLs obtained copies of two judgments issued by the Hangzhou Intermediate People’s Court and the Zhejiang Higher People’s Court respectively (“the Mainland Judgments”). The Mainland Judgments arise out of criminal proceedings instituted by the Hangzhou People’s Procuratorate against (a) the Group’s Chairman and Non-Executive Director (from 02.01.2008 to 01.04.2011), Mr Suo Lang Duo Ji, (b) the Group’s Chairman and Executive Director (from 01.04.2011), Mr Zhang Zhigang and (c) P’s Executive Director and Chief Executive Officer (from 01.02.2008), Mr Zhang Daming, for obtaining loans totalling US$680m for the Group using fictitious financial data. The Mainland Judgments also contained extensive admissions by the Group’s employees and suppliers as to how the Group’s accounts were manipulated.

27.  In late 2024, the JPLs obtained various tax filings of P’s subsidiaries in Chinese Mainland and disclosed the same in these proceedings by way of P’s 7^th List of Documents.

28.  On 25.09.2024, D began following up on the Remaining Requests by issuing a further summons for further and better particulars substantially in the form of the Remaining Requests (“2024 FBP Summons”). In response to the 2024 FBP Summons, P said that it was in the process of preparing amendments to its pleadings which would render the 2024 FBP Summons unnecessary. D then agreed that P would have time to make amendments until 30.04.2025. On 24.04.2025, P sent copies of the Draft ASOC and the Draft AVFBP to D. On 30.04.2025, P took out the Amendment Summons.

29.  The Amendment Summons is P’s first application for leave to amend pleadings in these proceedings.

C. DISCUSSION

C1. General Principles

30.  The general principles concerning amending pleadings have been succinctly summarized by Cheng J in Circuitronix LLC v Kingboard Chemical Holdings Ltd[1]:

(1) Generally speaking, all such amendments ought to be made for the purpose of determining the real question in controversy between the parties to any proceedings or of correcting any defect or error in any proceedings.

(2) In exercising its discretion, the Court must also have regard to the underlying objectives in RHC Order 1A. The Court needs to balance all relevant factors to decide how its discretion should be exercised, if the application is made in circumstances offending one or more of the underlying objectives. In giving effect to the underlying objectives, the Court must always recognize that the primary aim in exercising the powers of the court is to secure the just resolution of disputes in accordance with the substantive rights of the parties.

(3) Leave is readily granted to amend before the trial unless it can be demonstrated that the new claim based on the proposed amendment is bound to fail. In consider whether the proposed amendment is bound to fail, the Court will take the applicant’s proposed pleaded case at its highest.

(4) While the Court is entitled to have regard to the merits of the case, it should only do so when the merits are readily apparent, and are so apparent as not to require prolonged investigation.

(5) In the case of a late application for amendment, absent any real prejudice, the application must be decided upon the general principle that the Court seeks to adjudicate on the real issues and disputes between the parties and, if possible, technical and procedural rules should not stand in the way of allowing the parties to raise their real claims or defences before the Court for adjudication.

(6) Where prejudice is claimed, the burden is on the party opposing the amendment to show prejudice which cannot be compensated for by appropriate orders as to costs.

(7) The Court shall not order a pleading to be amended unless it is of the opinion that the order is necessary either for disposal fairly of the cause or matter or for saving costs.

C2. P’s proposed amendments

31.  Apart from some clerical amendments, P have grouped the proposed amendments in the Draft ASOC and in the Draft AVFBP into 3 categories.

32.  The first category is the amendments relating to P’s case on material misstatements. The proposed amendments under this category provide particulars on P’s case regarding the material misstatements in its financial statements for the Relevant Years. According to P, these proposed amendments are responsive to the Remaining Requests in two respects:

(1) At the time of the SOC, P’s case on material misstatements was based on the Glaucus Report, the Emerson Report and various sources of publicly available information (such as credit reports). At that time, the JPLs did not have the AWPs and the Mainland Judgments. P’s reliance on the Glaucus Report, the Emerson Report and credit reports was challenged by D in its Defence. D contended these materials could not be reliable sources of financial information. In the 2020 FBP Summons and 2024 FBP Summons, D sought particulars of the basis for the allegations in the Glaucus Report and the Emerson Report. After the preparation of the SOC, the JPLs obtained the AWPs and the Mainland Judgments. P therefore seeks to amend the SOC to include these matters, in addition to the reliance on the Glaucus Report, Emerson Report and credit reports.

(2) D sought particulars of P’s case regarding the extent of the material misstatements in its financial statements for the Relevant Years. By now, the JPLs have obtained the AWPs and have had the opportunity to analyse the same with assistance from its experts. P therefore seeks to amend the SOC to include the details found out after analysing the AWPs.

33.  The second category is the amendments relating to P’s case on D’s breaches of duty. The purpose of the proposed amendments in this category is to refine P’s case on D’s negligence. P says that:

(1) As to the existing pleaded breaches, P seeks to provide further particulars in light of documents disclosed by D.

(2) As to the existing pleaded breach relating to the acquisition of Sino Polymer, P seeks to amend the SOC to contend that the price for the SP Transactions was significantly inflated in light of information gleaned from the AWPs.

(3) P also seeks to plead further breaches of duty by D which the JPLs have identified from their review of the AWPs.

34.  The third category of the amendments relating to P’s case on loss and damage. P says that the proposed amendments arise out of, and are directly responsive to, the Remaining Requests. Having obtained the AWPs, the JPLs have now been able to refine and further particularise its case on quantum and loss. In particular, P has reduced its claim from RMB 6.5 billion to RMB 5.39 billion based on the latest available materials.

35.  Having considered the proposed amendments and bearing in mind (a) the general principles as set out in [30] above, (b) this is the first time that P is seeking leave to amend its pleadings in this case, and (c) these proceedings are still at an early stage (discovery has just been completed, no witness statement or expert evidence has been filed yet), I am of the view that prima facie, P is entitled to have leave to amend its pleadings in the way proposed in the Amendment Summons. In the circumstances, whether leave to amend should be granted depends upon whether D is able to make out a valid ground of objection.

C3. D’s Grounds of Opposition

36.  D has put forward the following grounds of objections:

(1) The amendments in the Draft ASOC in respect of the alleged deficiencies in the Relevant Audits arising from the acquisition of Sino Polymer / the SP Transactions (“Sino Polymer Pleas”) are out of scope of the Writ of Summons and are misconceived.

(2) The Draft ASOC pleaded extensively from the Mainland Judgments. The plea is objectionable as an attempt to plead evidence. It is trite that a pleading should only contain material facts, not evidence as to how one seeks to prove those facts.

(3) There is exceptional delay in taking out the Amendment Summons and there would be prejudice to D which cannot be compensation by costs if the application is allowed.

These grounds of objection would be discussed in the below.

C3.1 Ground 1 – Sino Polymer Pleas outside the scope of the Writ of Summons

37.  The Sino Polymer Pleas are in relation to the alleged breaches of duty by D in respect of its audit work on Sino Polymer for the financial year 2010, which was conducted under a separate letter of engagement with Sino Polymer.

38.  As said in [7] above, P only acquired Sino Polymer on 14.01.2011.

39.  Mr Man SC submits that P’s claim against D in this case is for breaches of duties owed by D to P in the Relevant Audits. However, the Sino Polymer Pleas are still relevant for the following reasons:

(1) In P’s financial statements for the financial year 2011 (which are the first set of P’s financial statements incorporating Sino Polymer’s financial statements), D was necessarily required to be satisfied of the accuracy of the opening balances of those financial statements, including the opening balances in Sino Polymer’s accounts. Accordingly, insofar as D relied on and adopted its audit work on Sino Polymer’s financial statements for previous years in auditing the opening balances in P’s 2011 financial statements and fell below the standard of a reasonably competent auditor in doing so, that would constitute breaches of duties owed to P within the scope of its work in auditing P’s financial statements for 2011.

(2) In auditing the closing balances in P’s financial statements for 2011 and 2012, D would need to consider whether P had properly accounted for SP Transactions. P’s case is that D failed to properly conduct this assessment in breach of its duty of care, when in reality the purchase price of the SP Transactions had been significantly inflated, with the result that P’s consolidated total equities or net assets as reported in its 2011 and 2012 financial statements were correspondingly inflated.

(3) D’s conduct of its audit of Sino Polymer for 2010 is also relevant in that they would be admissible similar fact evidence in support of P’s case that D conducted the Relevant Audits negligently. P is entitled to plead such facts in support of its case.[2]

(4) The 2021 VFBP is subject to the caveat stated therein (see [24] above). Having now obtained and reviewed the AWPs, P has decided to amend its pleadings and is now able to aver that the purchase price of the SP Transactions was inflated.

40.  Mr Shieh SC submits that the Sino Polymer Pleas are outside the scope of the Writ of Summons and should not be permitted for the following reasons:

(1) Bearing in mind that P only acquired Sino Polymer on 14.01.2011, the closing balances in Sino Polymer’s financial statements in 2010 would not be relevant in the auditing P’s 2011 financial statements. Obviously, the closing balances in Sino Polymer’s 2010 financial statements would not be part of P’s 2011 financial statements. There is no linkage between Sino Polymer’s financial statements in 2010 and P’s financial statements in 2011.

(2) The pleas in [68D] to [68L] of the Draft ASOC are all matters concerning the alleged negligence by D in auditing the Sino Polymer’s 2010 financial statements. Those matters would not be relevant in these proceedings.

(3) As to P’s reliance on “similar fact evidence”, civil similar fact evidence has to be probative, and the evidence would not distort the trial and distract the attention of the court to collateral issues.[3] An audit of a different company in a different year is hardly probative. Further, it would be disproportionate to add one more year of audit negligence (concerning a different party) to the action and add further undue delay to the action.

41.  Having considered the parties’ respective submissions, I am of the following view:

(1) I agree with Mr Shieh SC that the closing balances in Sino Polymer’s 2010 financial statements would not be part of P’s 2011 financial statements, for P only acquired Sino Polymer on 14.01.2011. However, that does not mean that the knowledge acquired by D in auditing Sino Polymer’s 2010 financial statements would be entirely irrelevant to P’s claim against D in this case.

(2) Mr Man SC submits that if D noticed something which was obviously false and untrue in auditing the Sino Polymer’s 2010 financial statements and acquired knowledge of these untrue matters, and D turned a blind eye to or did not pay attention to these untrue matters in auditing P’s 2011 and 2012 financial statements and proceeded on the basis that everything in Sino Polymer’s 2010 financial statements was true, D might have breached the duties owed to P in auditing P’s 2011 and 2012 financial statements. I agree with Mr Man SC that this is an arguable point and is not bound to fail.

(3) Mr Shieh SC submits that the aforesaid argument advance by Mr Man SC is unpleaded in the Draft ASOC and P is not entitled to rely upon this point. Having reviewed the Draft ASOC, I am in respectful disagreement with Mr Shieh SC on this point. In my view, the argument advanced by Mr Man SC is covered by the Draft ASOC.

(4) Section B of the Draft ASOC is “[D]’s Duties as Auditor of [P]”, under which the following are pleaded:

“19.5 In order to be able to form an opinion on the financial statements, [D] would:

……

(b) Expect to obtain such appropriate evidence as they considered sufficient to enable them to draw reasonable conclusions therefrom.

……

19.7 [D] would endeavour to plan their audit so that they would have a “reasonable expectation of detecting material misstatements in the financial statements or books of account (including those resulting from fraud, error or non-compliance with law or regulations)”.

19.8 So far as the Group’s accounts were concerned, [D] was required to report on those accounts in similar terms outlined in paragraphs 19.1 to 19.5 above. ……

21. The implied terms of [D]’s retainer with [P] included the following, such terms being implied as a matter of business efficacy and/or obviousness:

……

21.3 [D] would exercise the level of skill and care reasonably to be expected of competent professional accountants;

21.4 [D], in carrying out their obligations as auditors, would exercise the care, skill and diligence reasonably to be expected of a firm of professional accountants with (i) an international name and reputation; and (ii) specialist expertise in the audit of large and complex listed multi-national conglomerates;

……

22. By reason of their appointment as auditor and in providing services to [P] and the Group,:

22.1 [D] owed a duty at common law to [P] to carry out their work as auditors of [P] and the Group with reasonable care, skill and diligence to be expected of a reasonably competent auditor.

22.2 [D] owed the same duties at common law to [P] as those implied duties set out in paragraph 21 above.”

(5) Section D of the Draft ASOC is “[D]’s Breaches of Retainer and Negligence”. Under this section, in [42], it is pleaded “… [D] acted in breach of its duties and/or negligently, in that, as pleaded in Sections D2 to D7 below …”

(6) The pleas identified by Mr Shieh SC, ie [68D] to [68L] of the Draft ASOC, are all under Section D6B of the Draft ASOC (ie within the ambit of “Sections D2 to D7” mentioned in [42] of the Draft ASOC).

(7) Section E of the Draft ASOC is “Causation, Loss and Damage”.

(8) Having considered the Draft ASOC as a whole, in my view, the argument put forward by Mr Man SC as summarized in subparagraph (2) above has been encapsulated in the Draft ASOC. I have already said that the point made by Mr Man SC is an arguable point. For this reason, the Sino Polymer Pleas are relevant to P’s claim against D in these proceedings.

(9) I also agree with Mr Man SC that the Sino Polymer Pleas are also relevant in the sense that the matters covered by those pleas may be regarded as “similar fact evidence” in the trial. In my view, those matters are of sufficient probative value and P is entitled to rely upon the same in support of its case in the trial.

(10) I appreciate that this is a complicated case and allowing the introduction of the Sino Polymer Pleas in this case would further complicate the matter. However, while the Sino Polymer Pleas are relevant to P’s claim, bearing in mind that the primary aim in exercise the powers of the Court is to secure the just resolution of disputes in accordance with the substantive rights of the parties, I cannot and should not disallow the Sino Polymer Pleas because these pleas would further complicate the case.

42.  For the reasons above, in my judgment, Ground 1 is not a valid objection to P’s application.

C3.2 Ground 2 – Impermissible plea of evidence which tends to embarrass the trial

43.  It is trite that only material facts, not evidence, are to be pleaded.[4]

44.  By Ground 2, D is objecting [41I] and [41J] of the Draft ASOC. In [41I], it is pleaded that in a criminal trial in the Chinese Mainland, some employees and suppliers of the Group had admitted that they had defrauded a bank in the Mainland by obtaining loans totalling US$680 million in P’s name and in the Group’s name by using fictitious financial date which overstated the companies’ performance and profits and exaggerated the ability to repay the loans. In [41J], the gists of the evidence given by some witnesses in the judgment of that criminal case (“Mainland First Instance Judgment”, dated 3 March 2023) were set out.

45.  It is not always easy to draw the line between facts and evidence.[5] Having considered the proposed pleas under objection, in my view, it is not plain and obvious that P has crossed the line in proposing [41I] and [41J] in the Draft ASOC.

46.  Mr Shieh SC submits that it would be very difficult for D to plea to some matters said by the witnesses in that criminal trial, and Mr Shieh SC has referred me to the matters pleaded in [41J.5] and [41J.7] of the Draft ASOC as examples. In reply, Mr Man SC submits that in relation to those matters, D may simply plead “not admitted”. Mr Man SC submits that [41I] and [41J] of the Draft ASOC would not put D into any embarrassing position at all. I am in respectful agreement with Mr Man SC.

47.  Ground 2 is not a valid objection.

C3.3 Ground 3 – Delay and prejudice

48.  Mr Shieh SC submits that lateness and delay alone, even in the absence of prejudice that cannot be compensated in costs, can be a ground for refusing leave to amend. Mr Shieh SC is relying upon SFC v Andrew Liu[6], in which Coleman J said:

“22. It is also settled that late applications for amendment can be dismissed on the basis of lateness alone. Hence, there is no longer room for the notion that delay, even though inordinate and unexplained, will be forgiven as long as there is no prejudice and costs are paid: see Chu Hsiao Chiu v Ma Jinrui [2020] HKCFI 942 at [18]-[20].

23. As I put it in that case, first the Court expects that an applicant will provide a full account of the lateness of the application, and full justification as to why the application should be entertained at that time. Secondly, whilst the ultimate concern of the Court is to achieve a just resolution of the case, it does not mean that a party should be permitted to raise any arguable case at any point in the proceedings, simply on payment of costs. If a party has been afforded a reasonable opportunity to advance its case, the just resolution of the case does not require that he should be allowed a further opportunity in spite of his own inordinate and inexcusable delay.”

49.  Mr Man SC submits that as a matter of principle, it would be wrong to dismiss an application to amend a pleading as a whole solely on the ground of delay without assessing the amendment-specific prejudice, if any, that would be caused to the defendant by the delay. Mr Man SC is relying upon the Court of Appeal’s decision in Li Ngan Kwan v Gao Li Hui[7], in which Au JA said:

“39. … in our view, although delay is a relevant factor that the Judge could take into account, [counsel for the plaintiffs] is right to say that one must focus on the prejudice, if any, that would be caused to the defendants by the amendments as a result of the delay before the court could decide how to exercise that discretion. This should thus be assessed by looking at each of the proposed amendments instead of referring to the long delay per se as a general reason for not allowing all the amendments.

40. Accordingly, we are of the view that the Judge erred in her analysis in dismissing the Amendment Summons as a whole based solely on the ground of delay without assessing the amendment-specific prejudice, if any, that would be caused to the defendants as a result of the delay by reference to each category of the proposed amendments.” (Emphasis in original)

50.  Mr Man SC submits that what has been said by the Court of Appeal in the Li Ngan Kwan case is a principle which is binding upon this Court. Mr Shieh SC submits that what has been said by the Court of Appeal is limited to the particular circumstances of that case and cannot be categorized as a general principle. Having read the Li Ngan Kwan case in detail, I am in agreement with Mr Man SC on this point. In [39] and [40] of the judgment, the Court of Appeal specifically pointed out an error in the judgment of the court below. That error is an error on the approach and on the principle. I am of the view that what has been by the Court of Appeal in those paragraphs is a principle which should be followed by this Court. If there is any difference between a first instance decision and the principle laid down by the Court of Appeal in Li Ngan Kwan, I should follow the Li Ngan Kwan case. Accordingly, in considering Ground 3 raised by D, I have to bear the principle in Li Ngan Kwan case in mind.

51.  Mr Shieh SC submits that:

(1) P’s claim concerns events which took place over 15 years ago and the JPLs have had 11 years to investigate any alleged negligence on the part D in respect of the Relevant Audits.

(2) When the JPLs commenced this action 8 years ago in March 2018, they were already in possession of P’s own books and records and at least the 19,000 documents voluntarily produced by the JPLs between 2015 and 2017.

(3) It is no answer for the JPLs to repeatedly say that they did not have the AWPs. It cannot be disputed that the JPLs had no pre-action entitlement to the AWPs under Cayman Islands Companies Law. If the JPLs truly believed that they were entitled to the AWPs, they should have made an application to the Grand Court. It was for the JPLs to first particularise their case, instead of trying to find something incriminating in the AWPs. The JPLs failed to do that and instead they have fished for evidence for the past 8 years and now seek to re-write their case.

(4) In an audit negligence claim based on material misstatements contained in the audited accounts, the question of whether there are alleged material misstatements depends principally upon the company’s own records, as the audit papers would presumably only show how auditor came to their opinion in the audited financial statements challenged.[8]

(5) In any event, the JPLs have had all the AWPs since mid-2022 and yet it took them 3 years until 2025 to produce the DASOC.

(6) The proposed amendments will cause real prejudice to D if allowed. They will put D in the position of being obliged to investigate facts and obtain evidence well beyond the ambit of the facts that D could reasonably be assumed to have investigated for the purpose of defending the original claim that the JPLs first started to investigate 11 years ago in 2015.

(7) This is a claim for professional negligence which places the professional reputation and livelihood of the deponent and his colleagues in the employ of D at stake. They have had this claim hanging over their heads for 8 years, and there is still no end in sight.

(8) Several team members (who were involved during the Relevant Audits and the SP Transactions) have long since left D’s employment. Even if such potential witnesses were willing to provide evidence in support of D’s case, their recollection of events will inevitably be impacted by the significant passage of time since the underlying events in P’s claim occurred. If P’s application is allowed, it would prejudice, embarrass or delay the fair trial of this action.

52.  Notwithstanding Mr Shieh SC’ s eloquent submissions, I am unable to agree that there is any merit in Ground 3.

(1) The fact is that these proceedings were commenced and are being prosecuted by the JPLs. Mr Man SC has referred me to the reasons given Master Tsui (as she then was) in the hearing on 08.10.2020, in which the learned Master expressly accepted that the JPLs did not have access to the complete books and records of P, and hence were unable to provide some particulars requested by D.

(2) According to D, all the AWPs were disclosed by 7 October 2022. However, I agree with Mr Man SC that the following matters would need to be taken into account in assessing whether there is any undue delay:

(a) Given the complexity of this case (concerning 3 years of audit work in respect of a listed corporate group engaged in specialised industry and the voluminous evidence involved (over 52,000 documents have been discovered by the parties so far)), it is natural that the JPLs would need to take time to consider the matter and to prepare the Draft ASOC.

(b) The AWPs are technical documents which the JPLs required expert assistance to review.

(c) Given the size of the claim, the JPLs have to be prudent and careful in the preparation of the Draft ASOC.

(d) The Mainland Judgments were only obtained by the JPLs in mid-2024. Matters in the Draft ASOC relating to these judgment could only be raised after that time.

(3) With the aforesaid in mind, I would not say that there is any undue delay by P in taking out the Amendment Summons on 30 April 2025.

(4) Even if I were wrong in saying that there is no undue delay, there is no evidence showing that there would be any amendment-specific prejudice to D if some particular proposed amendments in the Draft ASOC are allowed.

(a) While P has raised an arguable case against D, unless the dispute is settled by an agreement between the parties, the matter would need to be resolved at the trial. The legal process would take time. This is an inevitable fact.

(b) These proceedings are still at an early stage and far from ready for trial. In the circumstances, even if there is any delay on P’s part in taking out the Amendment Summons, the delay cannot be said as substantial in the whole scheme of things.

(c) I accept Mr Man SC’s submission that auditors are required to prepare documentation “so as to enable an experienced auditor, having no previous connection with the audit, to understand (a) the nature, timing and extent of the audit procedures performed … (b) the results of the audit procedures and the audit evidence obtained; and (c) significant matters arising during the audit and the conclusions reached thereon”[9], and hence D should have proper documentary records and should have no need to rely substantially on oral evidence in defence of these proceedings.

(d) I am also in agreement with Mr Man SC that a generalized assertion that memories have grown fainter would usually not be sufficient to establish prejudice.[10] D has not identified in relation to which proposed amendments, who would have difficulties in giving evidence for D due to lapse of time.

53.  Even if there is delay on P’s part, D has failed to show any amendment-specific prejudice.

54.  In my view, Ground 3 is not a valid objection.

C4. Conclusion

55.  As said in the above, P has made out a prima facie case and D has not put forward any valid objection to P’s application. Accordingly, P’s application must be allowed.

D. DISPOSITION

56.  I allow P’s application. There be an order in terms of [1] to [4] of the Amendment Summons.

57.  P’s application for leave to amend pleadings is resisted but allowed after hearing arguments. In these circumstances, I make the following costs order on nisi basis:

(1) Subject to the below, costs of the Amendment Summons, including costs of and occasioned by the amendments, be to D in any event, to be taxed if not agreed;

(2) save the aforesaid, costs of and occasioned by the opposition to the Amendment Summons be to P forthwith, with a certificate for two counsel, and those costs be summarily assessed on paper without an oral hearing.

Unless there is an application for variation of the costs order nisi made by an inter parties summons within 14 days after the handing down of this decision, the costs order nisi shall become absolute without a further order. There be leave to P to lodge and serve a statement of costs (limited to 3 pages) for summary assessment within 14 days after the costs order nisi becoming absolute, and leave to D to lodge and serve a list of objections (limited to 3 pages) within 14 days thereafter.

58.  Lastly, it remains for me to express my gratitude to all counsel for the very helpful assistance rendered to the Court.