The Registrar of the Hong Kong Institute of Certified Public Accountants v. X and Another

CACV 244/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 244 OF 2016

(ON APPEAL FROM THE ORDER OF THE DISCIPLINARY
COMMITTEE OF THE HONG KONG INSTITUTE OF CERTIFIED
PUBLIC ACCOUNTANTS DATED 2 DECEMBER 2016)

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Before: Hon Lam VP, Kwan JA and G Lam J in Court

Date of Hearing: 20 September 2017

Date of Judgment: 20 October 2017

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REASONS FOR JUDGMENT AND
DECISION ON COSTS

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Hon G Lam J (giving the judgment of the Court):

1.This is an appeal from a decision and order of the Disciplinary Committee (“Committee”) set up under the Professional Accountants Ordinance (Cap 50) (“the Ordinance”). At the end of the hearing we allowed the appeal with costs of the appeal and reserved our decision on the question of costs below. These are our reasons for allowing the appeal and our decision on the costs below.

The background

2.The disciplinary proceedings in question related to the audit of the financial statements of [Company A] (“the Company”) and its subsidiaries (together “the Group”) for the year ended 31 March 2010.  The appellants in this appeal, Y and X, who were respondents in the disciplinary proceedings, were respectively the auditors of the Company and the engagement partner for the audit.  The respondent in this appeal was Registrar of the Hong Kong Institute of Certified Public Accountants (“HKICPA”), who acted as the complainant in the disciplinary proceedings below.  For ease of reference we shall continue to refer in this judgment to the parties by their nomenclature below as the “Complainant” and the “Respondents” respectively. 

3.The disciplinary complaints concerned the accounting treatment of the acquisition of a subsidiary by the Company in 2009.  In July 2009, the Company entered into a sale and purchase agreement whereby it agreed to acquire from third‑party vendors a majority holding of the issued shares in [Company B] for a total consideration of HK$1,621,863,240.  It was agreed that the consideration for the acquisition was to be satisfied by the allotment and issue of 3,243,726,480 shares in the Company at HK$0.5 each.  The acquisition was completed on 24 September 2009.  As at that date, the published price of the shares of the Company was HK$0.65. 

4.There were provisions in the applicable accounting standards concerning how such “business combinations” should be reported in the financial statements of the acquirer. In particular, as regards reporting the cost of an acquisition, paragraphs 24 and 27 of the Hong Kong Financial Reporting Standard 3 (Revised) (“HKFRS 3”) provided as follows:

“24. The acquirer shall measure the cost of a business combination as the aggregate of: (a) the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for control of the acquiree; plus (b) any costs directly attributable to the business combination.”

“27. The published price at the date of exchange of a quoted equity instrument provides the best evidence of the instrument’s fair value and shall be used, except in rare circumstances. Other evidence and valuation methods shall be considered only in the rare circumstances when the acquirer can demonstrate that the published price at the date of exchange is an unreliable indicator of fair value, and that the other evidence and valuation methods provide a more reliable measure of the equity instrument’s fair value. The published price at the date of exchange is an unreliable indicator only when it has been affected by the thinness of the market. If the published price at the date of exchange is an unreliable indicator or if a published price does not exist for equity instruments issued by the acquirer, the fair value of those instruments could, for example, be estimated by reference to their proportional interest in the fair value of the acquirer or by reference to the proportional interest in the fair value of the acquiree obtained, whichever is the more clearly evident … Further guidance on determining the fair value of equity instruments is set out in HKAS 39 Financial Instruments: Recognition and Measurement.”[1]

5.In preparing its financial statements for the year ended 31 March 2010, however, the Group did not adopt the published price of the Company’s shares as at the date of acquisition for the purpose of valuing the consideration paid, as suggested, prima facie, by paragraph 27 of HKFRS 3.  Instead, it adopted the contract price of HK$0.5 per share for that purpose.  Note 38(a) of the 2010 financial statements stated:

“On 24 September 2009, the Group acquired 54.28% of the issued share capital of [a subsidiary] … at a consideration, before expenses, of approximately HK$1,621,863,000 which was satisfied by the allotment and issue of 3,243,726,480 new ordinary shares of the Company of HK$0.01 each at an issue price of HK$0.5 per share. The adoption of HK$0.5 per share as the fair value of the shares issued by the Company at the date of exchange was based on a fair value assessment made by the Board of Directors … [T]he Board of Directors considered the published price of the Company’s shares at the date of exchange (ie HK$0.65) is not a suitable and reliable indicator of fair value of the shares issued for the acquisition due to the thinness of the market of the Company’s issued shares. If the published price of HK$0.65 of the Company’s share was adopted, the share consideration would be increased by approximately HK$486,559,000 …”

6.On 20 July 2010, the Respondents issued an unmodified and unqualified opinion on the 2010 financial statements. 

7.Following a complaint received by the Financial Reporting Council in April 2012, the Audit Investigation Board (“AIB”) conducted an investigation and, in its report dated 26 February 2013, concluded that the auditor should have issued an auditor’s report with a modified opinion on the 2010 financial statements in this respect.  Notwithstanding representations made by the Respondents expressing disagreement with the AIB’s findings, in June 2014, in accordance with s 34(1A) of the Ordinance, the Registrar of the HKICPA, as the Complainant, submitted to the Council of the HKICPA a complaint against the Respondents. The nature of the complaint is that the Respondents failed to comply with a professional standard.

8.S 34(1) and (1A) of the Ordinance relevantly provide as follows:

“(1) A complaint that —

(a) a certified public accountant —

……

(vi) failed or neglected to observe, maintain or otherwise apply a professional standard;

……

shall be made to the Registrar who shall submit the complaint to the Council which may, in its discretion but subject to section 32D(7), refer the complaint to the Disciplinary Panels.”

“(1A) Where the Registrar has reason to believe that subsection (1)(a) or (b), or subsection (1)(a) as applied by subsection (1AA), applies to a certified public accountant or a corporate practice, he shall submit the facts to the Council which may, in its discretion, refer the complaint to the Disciplinary Panels.”

9.In the letter of complaint from the Registrar dated 17 June 2014 to the Council of the HKICPA, the principal issues were stated to relate to the failure by the Company to comply with paragraphs 24 and 27 of HKFRS 3 in that the published price of the Company’s shares at the date of acquisition was not used to measure the fair value of the consideration shares issued for the acquisition.  It was stated that the auditor:

“failed to express a modified auditor’s opinion in respect of the valuation of the consideration shares, in accordance with paragraphs 11 and 13 of HKSA 700, regarding the Company’s non‑compliance with HKFRS 3. Accordingly, there is non‑compliance with the professional standards stated in the complaints below. As such, the Respondents had failed or neglected to observe, maintain or otherwise apply a professional standard under s 34(1)(a)(vi) of the PAO.”

10.The letter of complaint also referred to the AIB report for details.  The views of the AIB were set out in s 5.2 of that report.  The gist of its views may be seen from the following two paragraphs:

“5.2.14 In conclusion, the AIB considers that there was no evidence suggesting that the published price of the Company’s shares at the date of exchange was an unreliable indicator of their fair value and other evidence and valuation methods provided a more reliable measure of their fair value. Hence, the AIB considers that in accordance with paragraphs 24 and 27 of HKFRS 3 …, the Consideration Shares should have been measured at the published price of the Company’s shares of HK$0.65 at the date of the Acquisition instead of their issue price.

5.2.15 Given the above issue of non‑compliance with accounting requirement and the financial impact as set out in Paragraph 5.1.1.3 was material to the Relevant Financial Statements, the AIB considers that [Y] should have issued an auditor’s report with a modified opinion on the Relevant Financial Statements in this respect.  It appears to the AIB that the requirements of paragraphs 11 and 13 of HKSA 700 … were not observed.”

11.In the Registrar’s letter of complaint, two complaints were raised against the Respondents, namely, that they had failed or neglected to observe, maintain or otherwise apply a professional standard, namely paragraphs 11 and 13 of the Hong Kong Standard on Auditing  (“HKSA”) 700, and in the alternative, that they had failed or neglected to observe, maintain or otherwise apply a professional standard, namely s 100.4(c) as set out in more detail in ss 130.1 of the Code of Ethics for Professional Accountants.  The wording of the complaints was in substance identical to that set out in the Complainant’s Case (as quoted in paragraph 14 below).

12.Paragraphs 11 and 13 of HKSA 700, which formed the basis of the 1^st Complaint, provided as follows:

“11. The auditor should evaluate the conclusions drawn from the audit evidence obtained as the basis for forming an opinion on the financial statements.”

“13. Forming an opinion as to whether the financial statements give a true and fair view or are presented fairly, in all material respects, in accordance with the applicable financial reporting framework involves evaluating whether the financial statements have been prepared and presented in accordance with the specific requirements of the applicable financial reporting framework for particular classes of transactions, account balances and disclosures. This evaluation includes considering whether, in the context of the applicable financial reporting framework: (a) The accounting policies selected and applied are consistent with the financial reporting framework and are appropriate in the circumstances …”

13.Paragraphs 100.4 and 130.1 and 130.4 of the then applicable Code of Ethics for Professional Accountants, which form the basis of the 2^nd Complaint, provided as follows:

“100.4 A professional accountant is required to comply with the following fundamental principles:…...

(c) Professional Competence and Due Care

… A professional accountant should act diligently and in accordance with applicable technical and professional standards when providing professional services.”

“130.1 The principle of professional competence and due care imposes the following obligations on professional accountants … (b) To act diligently in accordance with applicable technical and professional standards when providing professional services.”

“130.4 Diligence encompasses the responsibility to act in accordance with the requirements of an assignment, carefully, thoroughly and on a timely basis.”

14.In the Complainant’s Case dated 2 December 2014 submitted under the Disciplinary Committee Proceedings Rules, the two complaints raised against the Respondents were set out as follows:

“1. In breach of section 34(1)(a)(vi) of the PAO, the Respondents have failed or neglected to observe, maintain or otherwise apply a professional standard, namely paragraphs 11 and 13 of HKSA 700, for their failure to express a modified auditors’ opinion in respect of the Company’s measurement of the fair value of the Consideration Shares in the 2010 Financial Statements (the “1^st Complaint”);

2. In the alternative to the 1^st Complaint, the Respondents, in breach of section 34(1)(a)(vi) of the PAO, failed or neglected to observe, maintain or otherwise apply a professional standard, namely section 100.4(c) as set out in more detail in sections 130.1 of the Code of Ethics for Professional Accountants, for their failure to act diligently in accordance with HKFRS 3, in relation to the measurement of the fair value of the Consideration Shares, when carrying out the audit of the 2010 Financial Statements (the “2^nd Complaint”).”

15.Further, it was stated in the Complainant’s Case under the heading “The Issues”:

“18. There is no dispute that, under the relevant standards, a reporting entity should adopt the published price though in “rare circumstances” it may depart from this approach if it could demonstrate that:

a. the published price at the date of exchange is an unreliable indicator of fair value; and

b. the alternative valuation method is a more reliable measure of fair value.

19.   Both the AIB and the Complainant disagree with the Respondents that either the published price was an unreliable indicator of fair value and/or that the alternative method of valuation accepted by the Respondents was more reliable than the published price.  In reaching this view, the Complainant agrees with the analysis as set out by the AIB in its Investigation Report dated 26 February 2013 …”

The Committee’s determination

16.Following a hearing held in May 2016, the Committee issued its determination on liability on 8 July 2016.  On the central question of whether the published price of the consideration shares at the date of acquisition was an unreliable indicator of fair value because it had been affected by the thinness of the market, the Committee noted that all three of the expert witnesses in the case had testified that it was difficult to give a precise definition of the term “thinness of the market”.  The Committee considered that, in the circumstances of the case, “for anyone to decide whether or not thinness of the market exists is very much a question of professional judgment”.  The Committee concluded that it could not determine whether or not “thinness of the market” existed, and that the circumstances under which the Company had measured the fair value of the consideration shares might be said, by some experts, to be rare circumstances. 

17.Accordingly, in relation to the 2^nd Complaint, the Committee determined that

“the different interpretations and different expert opinions on the meaning of HKFRS 3 (Revised) in relation to the measurement of fair value of the consideration shares and the different logic that has been employed throughout the case to define thinness of the market raise sufficient doubts to support the charge that the respondents failed to act diligently in this context”.

The Committee concluded that the 2^nd Complaint was not established.

18.However, in relation to the 1^st Complaint, the Committee came to the following conclusion:

“The Committee considers that in relation to the First Complaint, the Respondents have failed to adequately draw the readers’ attention to the auditors’ consideration of the matters relevant to the auditors’ report. The Committee determines that the Respondents did not adequately apply the necessary professional standard in accordance with HKSA 700 paragraphs 11 and 13, namely to demonstrate that they had adequately evaluated whether they were or were not able to express an unmodified auditors’ opinion in respect of the Company’s measurement of the fair value of the Consideration Shares in the 2010 Financial Statements. In the absence of a disclosure in its Note 38(a) on the basis of “thinness” of market that rendered the published price unreliable or unsuitable as the fair value of the share considerations, it was incumbent on the Respondents to demonstrate in their auditors’ report that they had adequately evaluated the relevant complex matters involved in the Acquisition of the subsidiary, including a very substantial acquisition and connected transaction under Chapter 14A of the Listing Rules. The auditors were required to demonstrate that the “Financial Statements were prepared in accordance with a financial reporting system that is designed to meet the common needs of a wide range of users” (paragraph 1, HKSA 700). …

The Committee determines that, given the circumstances of the very substantial acquisition and connected transaction and the measurement of value adopted by the directors in valuing the locked‑in Consideration Shares, the auditors’ report fell below the professional standard as a result of a matter of professional judgment.  In the Committee’s view, the auditors’ report does not adequately demonstrate the auditors’ evaluation of the complexity and context of the financial statements for the common needs of a wide range of users.”

19.In a separate subsequent decision on sanction and costs, the Committee made an order that

(1) both Respondents be reprimanded under s 35(1)(b);

(2) the Respondents jointly pay a penalty of HK$250,000 under s 35(1)(c); and

(3) the Respondents jointly and severally pay the Complainant costs in a sum of HK$2,411,978.64 under s 35(1)(iii).

The grounds of appeal

20.As against the Committee’s decision on liability, the Respondents have raised three grounds of appeal which may be broadly described as follows:

(1) The Committee found the Respondents guilty of a disciplinary charge that was completely different from the 1^st Complaint.

(2) The Committee erred in law in holding that the Respondents had a professional duty under HKSA 700 to demonstrate adequately the auditors’ evaluation of the complexity and context of the financial statements.

(3) The Committee’s approach was inconsistent with the Complainant’s acceptance that if he failed to persuade the Committee to accept his interpretation of HKFRS 3, the complaint should be dismissed, and also with the Committee’s rejection of the 2^nd Complaint. 

21.Separately, the Respondents also challenge the Committee’s order of costs on the ground that since the Complainant failed on the issue of the interpretation of HKFRS 3 and the issue of thinness of the market, it was wrong in principle for the Committee to order the Respondents to bear the entirety of the Complainant’s costs. 

Ground 1

22.Mr Mok submitted that the Committee convicted the Respondents on the 1^st Complaint unfairly and in breach of the rules of natural justice, because the case found against the Respondents was not mentioned in the complaints, not relied upon by the Complainant, and not canvassed during the disciplinary hearing.  We agree.

23.The general principle that a person is entitled to receive fair notice of the charge against him is not in doubt: Ridge v Baldwin [1964] AC 40, 113–114; O’Reilly v Mackman [1983] 2 AC 237, 275–276.  Mr Horace Wong SC, who appeared for the Complainant on this appeal (but not below), submitted that the conviction fell within the scope of the charge under the 1^st Complaint, in that the complaint charged, and the Committee found, that the Respondents failed to comply with paragraphs 11 and 13 of HKSA 700. 

24.With respect, Mr Wong’s submission ignores the need to inform the accused person of the contents and particulars of the charge.  A professional person subject to disciplinary proceedings is entitled to fair notice, not only of the specific rules or standards he is said to have breached, but, with sufficient particularity, of what it is that he is said to have done or omitted to do which constituted an infringement of the applicable rules or standards. 

25.Having regard to the AIB report, the letter of complaint and the Complainant’s Case referred to above, it is plain that the 1^st Complaint was based squarely on the Company’s non‑compliance with paragraphs 24 and 27 of HKFRS 3 and the Respondents’ failure to issue a modified opinion in respect of it.  The gist of the Complainant’s case before the Committee was that:

(1) paragraphs 24 and 27 of HKFRS 3 required the use of the published price to measure the fair value of the consideration shares unless the published price was not a reliable indicator of fair value;

(2) the published price would only not be a reliable indicator of fair value if it had been affected by thinness of the market;

(3) there was no thinness of market in relation to the Company’s shares;

(4) the published price should therefore have been used and in failing to use it the Company failed to comply with paragraphs 24 and 27 of HKFRS 3;

(5) given the impact of the fair value on the goodwill of the Company, an unmodified auditors’ opinion was not appropriate;

(6) the Respondents should have issued a modified opinion in accordance with paragraphs 11 and 13 of HKS 700; in failing to do so they failed or neglected to observe, maintain or otherwise apply a professional standard.

26.There was never a case brought by the Complainant for contravention of paragraphs 11 and 13 of HKSA 700 on the ground that, even if the Respondents had acted properly in not giving a modified auditors’ opinion because the published price was properly not adopted by the Company for valuing the consideration shares, they had nevertheless failed adequately to demonstrate their evaluation of the relevant complex matters involved in the acquisition. 

27.On any view of the substance of the matter, it seems to us that the Complainant’s complaint and the Committee’s finding are wholly different.  The former was concerned with whether or not the auditor was correct, or acted diligently, in evaluating the audit evidence and endorsing the Company’s use of the contract price rather than the published price of the consideration shares as their fair value.  The latter went to the presentation of the audit opinion, irrespective of the correctness of the opinion or the adequacy of the work undertaken in arriving at that opinion.

28.On behalf of the Complainant, Mr Wong argued that even though (as he accepted) neither the letter of complaint nor the Complainant’s Case raised the allegation that the Respondents failed adequately to demonstrate their evaluation of the relevant complex matters involved in the acquisition, that matter was in fact anticipated by the Respondents and sufficiently canvassed at the oral hearing, and the Respondents had been given a fair opportunity of dealing with it.  He also emphasised that the proceedings before the Committee were quasi‑judicial proceedings of a domestic tribunal characterised by less formality compared to formal judicial proceedings: see Yeung Kwok Keung Dennis v Chiropractors Council of Hong Kong (unrep, CACV 104/2014, 11 May 2015) at §46.

29.This submission has to be assessed in the context of the rules and procedures applicable to this particular disciplinary regime.  Under the Ordinance, it is for the Registrar of the HKICPA to refer a matter to the Council, and for the Council, in its discretion, to refer the matter to the Disciplinary Panels.  The function of the Committee, as constituted by the Disciplinary Panels, is to decide whether the complaint referred to it has been proved (s 35(1) and rule 12).  The Disciplinary Committee Proceedings Rules provide for the submission of written Cases by both parties “setting out their respective submissions on all material matters” (rule 17) and, in particular, a Complainant’s Case setting out “the Complainant’s analysis explaining why the facts as asserted by the Complainant substantiate the Complainant’s allegation or allegations” (rule 18 and schedule 2).  The procedures effectively require full written exposition of the parties’ cases in advance.  The principal purpose of the oral hearing is to allow the Committee to ask questions and clarify matters (rule 27).  In the context of such a procedure, in circumstances where neither the letter of the Registrar referring the matter to the Council nor the Complainant’s Case made any mention of the new allegation, it is difficult to see how it could fairly form the basis of a disciplinary conviction.

30.Furthermore, we are unable to accept that the Respondents had in fact anticipated the allegation in question or that they understood it as being encompassed in the complaint.  The passages in the Respondents’ written materials below that are relied on here by Mr Wong were penned in a different context.  Their thrust was that if the use of the contract price of HK$0.5 per share constituted a failure to comply with HKFRS 3, the disclosure made by the Group in the 2010 financial statements was nevertheless adequate and the financial statements provided a true and fair view of the state of affairs of the Group, so that there was no need for the Respondents to issue any modified auditor’s report.  They were not a response to the point on which the Committee ultimately found against the Respondents.  From the written materials submitted prior to the hearing below, there is, in our view, no basis to conclude that the point was fairly notified to or anticipated by the Respondents.

31.What transpired at the hearing fortifies this view.  It is true that questions were raised at the hearing by certain members of the Committee as to whether, even if there was no failure to comply with HKFRS 3, the Respondents could or should have added further explanation in their audit report why they considered there was no departure from HKFRS 3. These questions were however directly met with the objection made by counsel on behalf of the Respondents that they did not go to the charge against the Respondents.  On the materials before us, it is clear that they did not form part of the Complainant’s case before the Committee.

32.In these circumstances it is not sufficient for the Complainant to say that the Respondents’ expert witness was at one point in the oral evidence asked whether, on the hypothesis that the Company had complied with HKFRS 3, it was necessary for the auditor to point out the “rare circumstances” in the auditor’s report and that he answered in the negative.  It is simply impossible to conclude that, had the new allegation been properly included as part of the complaint with fair notice to the Respondents, there was nothing more that the Respondents could have said in defence either in evidence or in submissions or in cross‑examination of the Complainant’s expert witness.

33.The way in which the Committee found the 1^st Complaint proved in effect admitted into the charge a new allegation of which the Respondents were not aware and which they did not have a full and proper opportunity of refuting.  This is a serious irregularity which, in our view, vitiated the conviction: see Dr Ip Kay Lo Vincent v Medical Council of Hong Kong [1998] 4 HKC 257, 265–266.

34.Accordingly, on Ground 1 alone, the Committee’s finding on the 1^st Complaint could not be allowed to stand.  For these reasons we allowed the appeal.  It is unnecessary to consider Grounds 2 and 3, on which we express no views.  The Complainant accepted that the Respondents should have the costs of the appeal and we so ordered.

Costs in the Committee

35.The Complainant contends that different considerations apply to the costs in the disciplinary proceedings below because, unlike costs of the appeal, they are not governed by the Rules of the High Court.  Mr Wong submitted on behalf of the Complainant that, following the approach in the United Kingdom laid down in Baxendale‑Walker v Law Society [2008] 1 WLR 426, the general rule should be adopted in Hong Kong that, at least as a starting point and default position, there should be no order of costs against the prosecuting authority where a disciplinary complaint fails.[2]

36.It is not in dispute that the Committee has a discretion with regard to costs.  S 35(1)(iii) of the Ordinance provides that the Committee may in any case:

“make such order as the Disciplinary Committee thinks fit with regard to the payment of costs and expenses of and incidental to the proceedings, whether of the Institute (including the costs and expenses of the Disciplinary Committee) or of any complainant or of the certified public accountant …”

37.On appeal, this court may “confirm, vary or reverse the order or decision appealed against” (s 41(1) of the Ordinance) and has “all the authority and jurisdiction of the court or tribunal from which the appeal was brought” (s 13(4) of the High Court Ordinance; and see s 41(3) of the Ordinance).  Since the costs order made by the Committee fell away with the setting aside of their substantive determination, the discretion on costs falls to be exercised by this court afresh.

38.The reasons for the approach adopted in the United Kingdom may be gleaned from the English Court of Appeal’s judgment in Baxendale‑Walker v Law Society (supra) in which Sir Igor Judge P stated as follows:

“34. Our analysis must begin with the Solicitors’ Disciplinary Tribunal itself. This statutory tribunal is entrusted with wide and important disciplinary responsibilities for the profession, and when deciding any application or complaint made to it, s 47(2) of the 1974 Act undoubtedly vests it with a very wide costs discretion. An order that the Law Society itself should pay the costs of another party to disciplinary proceedings is neither prohibited nor expressly discouraged by s 47(2)(i). That said, however, it is self‑evident that when the Law Society is addressing the question whether to investigate possible professional misconduct, or whether there is sufficient evidence to justify a formal complaint to the tribunal, the ambit of its responsibility is far greater than it would be for a litigant deciding whether to bring civil proceedings. Disciplinary proceedings supervise the proper discharge by solicitors of their professional obligations, and guard the public interest, as the judgment in Bolton’s case makes clear, by ensuring that high professional standards are maintained, and, when necessary, vindicated. Although, as Mr Stewart maintained, it is true that the Law Society is not obliged to bring disciplinary proceedings, if it is to perform these functions and safeguard standards, the tribunal is dependent on the Law Society to bring properly justified complaints of professional misconduct to its attention. Accordingly, the Law Society has an independent obligation of its own to ensure that the tribunal is enabled to fulfil its statutory responsibilities. The exercise of this regulatory function places the Law Society in a wholly different position to that of a party to ordinary civil litigation. The normal approach to costs decisions in such litigation — dealing with it very broadly, that properly incurred costs should follow the ‘event’ and be paid by the unsuccessful party — would appear to have no direct application to disciplinary proceedings against a solicitor.

…

39. In our judgment Jackson J was right to equate the responsibilities of the Institute in Gorlov’s case with the regulatory actions of the licensing authority in Booth’s case.  As Bolton’s case demonstrates, identical, or virtually identical considerations apply when the Law Society is advancing the public interest and ensuring that cases of possible professional misconduct are properly investigated and, if appropriate, made the subject of formal complaint before the tribunal.  Unless the complaint is improperly brought, or, for example, proceeds as it did in Gorlov’s case, as a ‘shambles from start to finish’, when the Law Society is discharging its responsibilities as a regulator of the profession, an order for costs should not ordinarily be made against it on the basis that costs follow the event.  The ‘event’ is simply one factor for consideration.  It is not a starting point.  There is no assumption that an order for costs in favour of a solicitor who has successfully defeated an allegation of professional misconduct will automatically follow.  One crucial feature which should inform the tribunal’s costs decision is that the proceedings were brought by the Law Society in exercise of its regulatory responsibility, in the public interest and the maintenance of proper professional standards.  For the Law Society to be exposed to the risk of an adverse costs order simply because properly brought proceedings were unsuccessful might have a chilling effect on the exercise of its regulatory obligations, to the public disadvantage.  Accordingly, Moses LJ’s approach to this issue did not go further than the principles described in this judgment.”

39.The approach in Baxendale‑Walker was considered by this court (differently constituted) in Solicitor v Law Society of Hong Kong [2007] 4 HKLRD 798.  In that case the disciplinary charges brought by the Law Society against a solicitor were all dismissed by the Solicitors Disciplinary Tribunal, but it made no order as to costs.  On appeal by the solicitor against the decision on costs, this court allowed the appeal and awarded him 65% of his costs in the proceedings before the Tribunal to be paid by the Law Society.  Ma CJHC (as he then was), with whom Sakhrani J agreed, took the view that the reasoning for the Baxendale‑Walker approach, involving “undue financial hardship” to the Law Society (of England and Wales in that case) and a “chilling effect” on the exercise of its duties, was not applicable to solicitors’ disciplinary proceedings in Hong Kong because, under s 25 of the Legal Practitioners Ordinance (Cap 159), an adverse costs order against the Law Society in respect of proceedings before the Tribunal could, subject to certain conditions, be reimbursed out of the general revenue (see paragraphs 16–19 and 46 of the judgment).

40.Concurring in the result, Stone J went further in his reasoning.  His Lordship did not consider the funding arrangement applicable to the Law Society to be decisive or even a dominant factor.  At paragraphs 36–43, his Lordship stated:

“36. I do not consider that public regulatory function and/or the funding circumstances of any particular regulator should in general be regarded as prima facie determinative of the correct approach toward the award of costs in disciplinary proceedings brought by that regulator. These are factors which may be placed into the broad discretionary ‘mix’ in deciding costs’ awards, but in my view certainly should not be accorded the dominant or potentially decisive weight for which Mr Westbrook now contends.

37. It seems to me, with respect, that there is a real danger of trespassing upon dangerous ground were it to be accepted as a matter of principle that, in the absence of “good reason” to do so, there should be no costs’ sanction against a regulator, be it the Law Society or any other entity publicly charged with regulating professional conduct, in the event of a successful defence of disciplinary proceedings.

38. Regulatory disciplinary proceedings represent an important element within our jurisprudential system. Subject to oversight by the courts, whether in terms of application for judicial review or in the invocation (as here) of the appellate jurisdiction, the existence of such ‘domestic’ regulation is an essential requirement, not least in terms of promoting public trust, wherein professionals judge, and pronounce upon, the conduct of other professionals in any particular discipline.

39. Equally, however, and by reason of the potential for damage to any individual charged who subsequently may be exonerated from the allegations mounted against him on behalf of his professional body, as a matter of principle such disciplinary proceedings are not to be instituted absent most careful and rigorous consideration by those tasked with mounting such cases on behalf of the particular regulatory authority.

40. In terms of the award of costs consequent upon any unsuccessful prosecution, it seems to me that any move to adopt a variation in fundamental approach in the terms canvassed before us by Mr Westbrook would not assist, and on occasion positively may serve to detract from the analytical stringency which is required on the part of any regulator electing to advance a case of professional misconduct against a participant within a particular profession.

41. It strikes me that any approach as to costs which as a starting point potentially would serve to ‘insulate’ that regulatory body from the fiscal consequences of a successful defence — so that henceforth the burden would be placed upon a successful defendant to make his case, in terms of “good reason” so to do, that there should be a variation to an effective ‘immunity’ generally to be accorded to a regulator in terms of costs — would constitute a retrograde step, and in my judgment this view should represent the overriding approach in Hong Kong irrespective of considerations of public function and/or the funding implications for any particular regulatory body.

42. I venture to suggest that in terms of the proceedings of domestic tribunals the costs’ position is catered for perfectly adequately by continuing to vest in the particular domestic tribunal concerned — in this instance, the Solicitors’ Disciplinary Tribunal — the ‘usual’ rule as to an wholly unfettered discretion on the part of that tribunal as to the award of costs in the specific circumstances of any given case.

43. The proper and reasonable exercise of such unfettered discretion is, as a matter of principle, more than sufficient to cater for the justice of any particular situation, and with respect, I do not consider that the ‘regulatory responsibility/public interest’ argument, as deployed in Baxendale‑Walker, suffices to place the prosecuting regulator in Hong Kong outwith the existing and long‑standing and generally accepted principles relating to the award of costs in adversarial proceedings.”

41.Referring to Stone J’s views, the Chief Judge said “a cogent case is made out” although he preferred to leave the point open since it did not directly arise in the appeal (see paragraph 20 of the judgment).

42.In our view, the Complainant has not on this appeal made out a case that the Baxendale‑Walker approach should be adopted generally in relation to proceedings in the Disciplinary Committee of the HKICPA.  This court’s decision in Solicitor v Law Society of Hong Kong is authority that the mere fact that disciplinary proceedings have been brought in the exercise of a professional body’s statutory regulatory responsibility, in the public interest and for the maintenance of proper professional standards is not enough to justify a special rule that there should generally be no order as to costs, for otherwise that rule would have been applied by the court in that case irrespective of the statutory provisions for reimbursement of expenses out of the general revenue. 

43.It seems to us that a key consideration taken into account in the English cases was the “fear of exposure to undue financial prejudice”[3] and the “chilling effect”[4] on the regulatory authority in the exercise of its disciplinary functions.  This is not a matter we are prepared to assume in favour of the Complainant here, in the absence of any relevant material placed before us with regard to the actual and potential financial resources of the HKICPA, its membership, the level of subscriptions and the likely level of the financial burden arising from adverse costs orders in disciplinary proceedings.  There is at least an argument that disciplinary proceedings of this kind, which serve an object of upholding standards and maintaining public confidence in the profession, are as much in the interests of the profession as they are in the public interest, and that as such the costs of an acquitted member in failed proceedings should be borne by the profession as a whole.  Nor has there been any submission made to us that takes account of the different professional disciplinary regimes found in Hong Kong or the policy reasons, if any, behind the reimbursement provisions that are found in the Legal Practitioners Ordinance but, as far as we are aware, not in other statutory regimes of professional discipline.  In these circumstances, we do not consider it an appropriate case in which to decide definitively whether or not to adopt the Baxendale‑Walker approach in the context of accountants’ disciplinary proceedings, still less for disciplinary proceedings in Hong Kong generally.

44.In the present case, the Respondents have provided answers to the allegations against them at an early stage, during the AIB investigation.  The complaints were nevertheless brought, and the Respondents were put to great expense in defending them.  The Committee decided that the Complainant had failed to discharge the burden of proof of his case on HKFRS 3, although it upheld the 1^st Complaint on a ground which, in our view, had not been properly raised below.  Before the Disciplinary Committee, the Complainant had relied on certain guidelines published by the HKICPA called “Guidelines for the Chairman and the Committee on Administering the Disciplinary Committee Proceedings Rules” and submitted that costs should follow the event if he prevailed[5] (although he also submitted that if he failed, costs should not be awarded against it[6]).  In the end, the Committee, noting that costs should follow the event, ordered the Respondents to pay the Complainant’s costs in the sum of over $2.4 million.[7]  Both complaints against the Respondents have now failed.  In the circumstances of this case, it seems to us that an order for the Complainant to pay the Respondents their costs in the Committee would in principle be fair.  There will be an order accordingly.

Mr Horace Wong SC and Mr Lau Ka Kin, instructed by Reed Smith Richards Bulter, for the Complainant (Respondent)

Mr Johnny Mok SC and Mr Adrian Lai, instructed by Wilkinson & Grist, for the 1^st and 2^nd Respondents (Appellants)