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Topping Chance Development Ltd v Ccif Cpa Ltd

Judgment Cited authorities 17 Cited in Precedent Map Related
Judgment Date27 February 2015
Year2015
Judgement NumberHCA1609/2012
CourtHigh Court (Hong Kong)
HCA1609/2012 TOPPING CHANCE DEVELOPMENT LTD v. CCIF CPA LTD

HCA 1609/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 1609 OF 2012

________________________

BETWEEN
TOPPING CHANCE DEVELOPMENT LIMITED Plaintiff

and
CCIF CPA LIMITED formerly known as
CHARLES CHAN, IP & FUNG CPA LIMITED		 Defendant

________________________

Before: Deputy High Court Judge Leung in Chambers
Date of Hearing: 5, 8 and 15 March 2013
Date of Decision: 27 February 2015

_________________________

D E C I S I O N

_________________________

1. This is an action against the defendant (“CCIF”) for breach of auditor’s duties in the auditing of the accounts of First Natural Foods Holdings Limited (“FNF”). The plaintiff (“TCD”) commenced the present action as the assignee of the right of action from FNF. The interlocutory dispute started off with TCD obtaining an ex parte injunction against CCIF for the preservation of documents. This eventually developed into 7 summonses before this court.

BACKGROUND

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

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

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

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

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

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

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

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

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

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

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

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

14. The writ herein was issued on 6 September 2012, endorsed with the claim by TCD, as the assignee of the rights of FNF, against CCIF for breach of contractual, tortuous and other duties in conducting the statutory audits of FNF and its subsidiaries and providing auditors’ reports on the consolidated financial statements of the same for the financial years 2001 to 2007.

15. The statement of claim was filed on 31 October 2012, whereby TCD claims for the loss and damage caused by the alleged breach of duties on the part of CCIF as the auditor arising out of alleged financial misstatements for the financial years 2005 to 2007.

THE APPLICATIONS

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

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

18. By summons dated 14 November 2012, CCIF applies to strike out the statement of claim and to have the action dismissed pursuant to O.18, r.19 of the Rules of the High Court (“the O.18, r.19 Summons”).

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

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

21. On 22 February 2013, TCD took out another summons, this time for leave to rely on its 5th affidavit of Yen (“5th Yen”) at the hearing of the above summonses (“the Summons re TCD’s Latest Affidavit”).

22. This was followed by the summons dated 26 February 2013 taken out by CCIF for leave to amend the O.18, r.19 Summons (“the Amending Summons”). On the following day, 27 February 2013, CCIF took out another summons to strike out the amendments contained in the amended statement of claim pursuant to O.20, r.4 (“the O.20, r.4 Summons”).

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

24. On the day before the hearing, TCD filed the last of the 7 summonses. By that, it seeks leave to amend the writ and its endorsement to include the claim for damages or equitable compensation for breach of fiduciary duties and/or other duties on the part of CCIF and pursuant to the Deed of Assignment (“The Summons to Amend the Writ”).

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

26. Likewise, the parties were prepared to argue with reference to the recent...

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