Extramoney Ltd And Another v Chan, Lai Pang & Co (A Firm)

CourtHigh Court (Hong Kong)
Judgment Date15 January 1994
Judgement NumberHCA8437/1987
SubjectCivil Action
HCA008437/1987 EXTRAMONEY LTD AND ANOTHER v. CHAN, LAI PANG & CO (a firm)

1987 No. A8437

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

___________

BETWEEN

EXTRAMONEY LIMITED 1st Plaintiff
CARRIAN HOLDINGS LIMITED
(in liquidation)
2nd Plaintiff
and Defendants
CHAN, LAI PANG & CO. (a firm)

(By Original Action)

____________

AND BETWEEN

CHAN LAI, PANG & CO. (a firm) Plaintiffs
and
EXTRAMONEY LIMITED 1st Defendant
CARRIAN HOLDINGS LIMITED
(in liquidation)
2nd Defendant
THE ATTORNEY GENERAL REPRESENTING THE COMMISSIONER OF INLAND REVENUE 3rd Defendant
CARRIAN FINANCE LIMITED 4th Defendant
CARRIAN REALTY LIMITED 5th Defendant
CARRIAN JOINT VENUTRE LIMITED 6th Defendant
THOMAS BRIAN STEVENSON 7th Defendant
WILFRED KEITH TIMSO 8th Defendant
JOHN WILLIAM CRAWFORD 9th Defendant

(By Counterclaim)

________________

Coram: Deputy High Court Judge Fung, Q.C.

Dates of Hearing: 13th, 15th, 18th, 19th, 20th, 21st, 22nd, 25th, 26th, 27th May and 20th July 1992, 9th February, 8th, 9th, 10th, 11th, 12th, 15th, 16th, 17th, 18th, 19th, 22nd, 23rd, 24th, 25th, 26th, 29th, 30th and 31st March, 1st, 2nd, 3rd, 6th, 7th and 8th April 1993.

Date of delivery of Judgment: 15th January 1994

----------------

J U D G M E N T

----------------

INTRODUCTION

1. The dispute which I am asked to adjudicate embraces issues of some legal and factual complexity, the genesis of which can traced to a simple complaint of oversight by professional auditors in failing to detect an allegedly inflated statement of profits in the audited accounts of a certain company which led, according to the complainants, to an overpayment of profits tax by the company concerned and the declaration and payment of a dividend for which they now seek to hold the auditors liable. The action unfolded in the following manner.

2. On 21st December 1987, two private companies incorporated with limited liability under Hong Kong law, namely, Extramoney Limited ("Extramoney") and its corporate grandparent and ultimate holding company Carrian Holdings Limited (in liquidation) ("Holdings") (collectively "the Plaintiffs") commenced proceedings by way of a generally indorsed writ claiming as against their auditors, a firm of certified public accountants practising under the name or style of Chan, Lai, Pang & Co. ("the Defendants") damages for, inter alia, negligence in the audit of the Plaintiffs' accounts for the year ended 31st December 1980 ("the 1980 Accounts"). In the five years or so that intervened between the issue of the writ and the completion of the trial on 8th April 1993, the claim underwent not inconsiderable metamorphosis. In its final incarnation which materialised on or about l0th March 1993 by way of a statement of Claim with red and green amendments and violet deletions, the Plaintiffs rely on a number of different causes of action which I shall summarise below. I use the expression "deletion" since Mr. John Griffiths Q.C. who appears for the Plaintiffs was anxious to avoid describing the last edition of the Statement of Claim as a further re-amendment but sought instead to characterise the changes in violet as a convenient aide-memoire defining those allegations in the statement of Claim with which he no longer proposes to proceed. The nomenclature is a matter of no moment and I propose now to refer in some detail, as I think such course would serve by way of a useful clarificatory exercise, to the parties' final pleaded positions.

The CLAIM

3. The Plaintiffs complain, first and foremost, of negligence ("the Principal Claim") by the Defendants in their audit of the 1980 Accounts of respectively Extramoney and Holdings (the latter to the extent that Extramoney's aforesaid accounts are consolidated in the group accounts of Holdings for that year) in that on 8th January 1982 they reported without qualification such accounts to be true and fair when, according to the Plaintiffs, Extramoney's 1980 Profit and Loss Account purporting to show net profits before tax of some HK$140.5 million was incorrect insofar as it overstated the same by an amount of HK$101,688,640.10 (dubbed "the fictitious profit" by the Plaintiffs but which, in the interest of lowering the temperature of the debate during the hearing and for another reason which will later become apparent, I have referred at the trial and will continue herein to refer to as “the Disputed Profit”).

4. Such alleged overstatement is said to arise from the incorrect inclusion in Extramoney's 1980 Profit and Loss Account of a journal entry purporting to state that Extramoney had made a profit of that magnitude on the sale by one George Tan (“Mr. Tan"), being the Plaintiffs' 100% beneficial owner, on behalf of Extramoney of 14,133,920 quoted shares in Holdings' publiclylisted subsididary Carrian Investment Limited ("CIL"), whereas, according to the Plaintiffs, no such profit had in fact been made and Extramoney had no records to verify the said entry. The Plaintiffs contend that, had the Defendants exercised reasonable care in their audit of the said accounts and due diligence in pursuing obvious inquiries and investigations in the course of the same, they would have discovered the Disputed Profit to be fictitious whereupon they would, as reasonably careful auditors, either have reported that the 1980 Accounts did not give a true and fair view of Extramoney's state of affairs or, alternatively, qualified their report to reflect the fact that they could not verify the making by Extramoney of the Disputed Profit.

5. The above factual allegations are said to give rise to further or alternative complaints of breach of contract and/or breach of statutory duty by the Defendants qua auditors vis-a-vis the Plaintiffs.

6. The Plaintiffs allege that, as a result of the Defendants' breaches of duty as aforesaid, whether the same be tortious, contractual or statutory in nature, they suffered loss for which they claim damages by way of redress, such loss consisting of (a) overpayment of profits tax (HK$22.9 million having been paid by Holdings on Extramoney's behalf to the Inland Revenue) which, to the extent of HK$16,778,625 together with a 5% late payment surcharge of HK$838,931 thereby totalling HK$17,671,556 (“the Overpaid Profits Tax"), arose from the Disputed Profit and (b) a dividend of HK$90 million (“the Dividend”) distributed by Extramoney to its shareholders, namely, Carrian Finance Limited ("Finance") and Carrian Realty Limited ("Realty"), which latter sum was, to the extent of HK$74,315,006, not covered by Extramoney's presumably real, as opposed to its allegedly fictitious, profits.

7. Apart from the aforesaid allegations which were advanced by way of the Principal claim, the Plaintiffs also complain, by way of amendment to the pleadings introduced on 1st November 1991, of the receipt on 20th May 1981 by the Defendants from Holdings of HK$1.2 million by way of a Holdings' cheque signed by Mr. Tan purporting to be an overtime or bonus payment in relation to the internal auditing of the Carrian Group ("the Subsidiary Claim"). The Defendants' fees in respect of the audit of Extramoney's 1980 Accounts were by comparison a modest HK$28,000. Since the Defendants had apparently performed no overtime work over the relevant period and were, furthermore, not the internal auditors to the Carrian Group, the Plaintiffs say that any payment, whether described as "bonus" or otherwise, constituted a gratuitous payment for no consideration and made, to the Defendants's knowledge, in breach of trust or fiduciary, duty owed by Mr. Tan to Holdings. In the circumstances, the Plaintiffs (according to the pleadings although, strictly speaking, the claimant should more properly be Holdings) seek to recover the same from the Defendants as constructive trustees.

8. Apart from a declaration of constructive trusteeship in the manner aforesaid, the Plaintiffs also claim by way of relief, among other matters, an account of profits made by the Defendants as a result of their alleged receipt of and/or conversion of trust property, judgment in the sum of HK$17,617,556 (being the Overpaid Profits Tax), damages, interest pursuant to statute and costs. Additionally, Extramoney seeks to recover from the Defendants HK$74,315,006 (being the amount of the Dividend paid out but not allegedly covered by actual profits).

The DEFENCE

9. The Defendants have structured a multi-layered response to the Principal Claim, as will be evident from my summary thereof set out below. Whilst conceding the existence of a duty on their part to exercise reasonable care and skill in expressing a view in their auditors' report as to whether or not the 1980 Accounts gave a true and fair view of the state of affairs of Extramoney, the Defendants deny, first and foremost, any negligence or breach of duty. They further deny that Extramoney's 1980 Profits were overstated or that there was no record which verified the crucial journal entry of HK$101,688,640.10. On the contrary, they say that they were, in the course of their audit, furnished with documents and information which verified the aforesaid entry, namely, statements of a stock brokerage firm known as Okasan International (Asia) Limited ("Okasan") showing market acquisitions of CIL shares which, when later sold, generated the Disputed Profit, Extramoney's internal memoranda and journal entries as well as information orally supplied by Mr. Tan acting for the Plaintiffs. In the circumstances, the Defendants positively assert that the Disputed Profit arose from purchases and sales of CIL shares by Mr. Tan for and on behalf of Extramoney in 1980.

10. Further or alternatively, the Defendants say that, in the discharge of their duties as auditors, they were entitled to and did rely on the documents and...

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