China Candy Holdings Ltd v. Hlb Hodgson Impey Cheng Ltd
Read the full judgment text of HCA 1593/2023 on BabelCite. This High Court CFI judgment was delivered on 24 January 2025.
1. By a writ dated 3 October 2023 (the “ Writ ”), the Plaintiff (“ P ”) commenced an action against the Defendant (“ D ”) for alleged damages and losses suffered as a result of D’s alleged breach of contract and/or negligence.
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HCA 1593/2023 [2025] HKCFI 304 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 1593 OF 2023 ________________________ BETWEEN
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________________________ J U D G M E N T ________________________ A. INTRODUCTION 1.By a writ dated 3 October 2023 (the “Writ”), the Plaintiff (“P”) commenced an action against the Defendant (“D”) for alleged damages and losses suffered as a result of D’s alleged breach of contract and/or negligence. 2.This is the determination of D’s application by summons dated 20 May 2024 (the “Summons”) to strike out P’s Statement of Claim dated 27 February 2024 (the “SOC”) and to dismiss the action. B. RELEVANT FACTUAL BACKGROUND 3.The relevant facts are largely based on public information and are generally undisputed. 4.P is a company which had been listed on the Growth Enterprise Market (“GEM”) of The Stock Exchange of Hong Kong Limited (“HKEx”) from 11 November 2015 to 31 December 2019 (stock code: 8182). 5.On 20 December 2016, P and D entered into an engagement letter (the “Engagement Letter”), whereby D was engaged to act as P’s auditor to audit P’s financial statements for the year ended 31 December 2016 (the “2016 Financial Statements”). 6.On 16 March 2017, D issued its independent auditor’s report on the 2016 Financial Statements (the “Auditor’s Report”). 7.On 10 October 2017, P received a notice from the Securities and Futures Commission (the “SFC”) requesting information on P’s top five customers, the trial balances and ledgers of P’s subsidiaries. 8.On 12 December 2017, at the request of P, the trading of its shares on HKEx was suspended. 9.On 14 December 2017, P announced that:
10.On 5 February 2018, P announced that:
11.On 14 February 2018, D resigned as P’s auditor. 12.Mazars later issued its investigation report dated 31 January 2019 to P, the key findings of which were summarised by P in its announcement on 26 March 2019:
13.Through the SFC’s investigation, it was revealed that when D conducted its audits for P’s financial statements, P had provided to D falsified documents prepared by its staff (such as bank statements, vouchers, and bank slips). 14.On 31 December 2019, P was delisted by HKEx pursuant to GEM Rule 9.14A because P had failed to resume the trading of its shares by 31 July 2019. 15.In its SOC, P puts forward two claims. It alleges that in failing to discover and/or identify the mistakes and/or misstatements in P’s 2016 Financial Statements, D had:
16.D’s alleged wrongdoings are said to have resulted in the SFC initiating an investigation against P, the subsequent suspension of P’s stock trading, and ultimately, P’s delisting on HKEx. P pleads that it consequently suffered damages and losses under two heads:
C. RELEVANT LEGAL PRINCIPLES 17.The legal principles for striking out are well-established and uncontroversial. 18.Order 18, rule 19(1) of the Rules of the High Court (Cap 4A) sets out the grounds on which the court may order any pleading to be struck out:
19.A defendant may apply to strike out a claim for being frivolous or vexatious where the claim is obviously unsustainable: Hong Kong Civil Procedure 2025 Practice Note 18/19/7. 20.A defendant may also apply to strike out a claim for being frivolous, vexatious or an abuse of process of the court on the ground that it is time-barred. An order striking out a Statement of Claim based on such a defence can only be sustained if the defence is “manifestly and immediately destructive of the Plaintiff’s claim.” However, where a limitation defence is raised by the defendant, it is for the plaintiff to prove that its cause of action accrued within the limitation period: Wong Haihong & Ors v JP Morgan Securities (Asia Pacific Ltd) & Anor [2021] 4 HKLRD 770 at §26. 21.Under section 4(1)(a) of the Limitation Ordinance (Cap 347), the limitation period for actions founded on simple contract or on tort are 6 years from the date on which the cause of action accrued. D. DISCUSSION D1. Limitation defence: contractual claim 22.It is trite that a breach of contract claim accrues at the date of breach. 23.D submits that P’s contractual claim is time-barred and should accordingly be struck out as any claim for D’s alleged failures in conducting its audits of the 2016 Financial Statements would have accrued by the date it issued the Auditor’s Report, ie on 16 March 2017. 24.On the other hand, P alleges that D had breached the Engagement Letter by inter alia failing its duty as an auditor to be a “whistle blower” and report any fraud to the relevant authorities. This, P submits, is a continuous duty which was all along borne by D from its engagement as P’s auditor in 2015 until its resignation in 2018. Hence, P’s contractual claim only accrued on the last date of D’s subsisting breach ie when D resigned on 14 February 2018 (or alternatively when D was overtaken by the SFC who informed P of the suspected fraud on 10 October 2017, in which case P’s claim would still not be time-barred). 25.I do not accept P’s submission for two reasons. First, there is nothing in the Engagement Letter which enables P to plead a breach of any continuous “whistle-blowing” duty going beyond the date of the Auditor’s Report. 26.On a reading of the Engagement Letter, particularly under section 3 on D’s duties as auditor, one cannot find any express reference to any ongoing “whistle-blowing” duty. Clause 3.3, for example, only says this:
27.This is consistent with the implied terms of the Engagement Letter as alleged by P at §4 of the SOC. They do not stipulate any “whistle-blowing” duty but are again centred around D’s duties regarding the content of the Auditor’s Report. For example, §4(7)-(9) state these obligations:
28.It is clear that under the Engagement Letter, D’s alleged duties pertain only to the manner in which it conducts its audits and/or to the content of the Auditor’s Report, rather than any ongoing “whistle-blowing” duty. 29.Further, Mr Joseph Wong, counsel for P, seeks to rely on §14 of Days Impex Limited (in Liquidation) v Fung, Yu & Co. (a firm) & Anor, HCA 1035/2014 (unrep, 24/10/2017) to argue that an auditor may be obliged to report fraud under relevant auditing guidelines which the Engagement Letter touches upon. 30.However, Mr Eugene Kwan, counsel for D, rightly points out that even where D can be said to have had a “whistle-blowing” duty under the Engagement Letter (which I do not hold to be the case, for the reasons stated above), the case of Days Impex, Ibid does not assist P in showing that any such duty would have been a continuous one. At most, it only supports the notion that an auditor may have a duty to report fraud immediately upon discovery. In the present case, D’s duty to report fraud (if any) would have arisen at once if such was discovered when conducting its audits. Therefore, it remains that the latest date on which P’s contractual claim could have accrued must be the date of the Auditor’s Report. 31.Second, and in any event, it is in fact nowhere pleaded in P’s SOC that D had breached any “whistle-blowing” duty, continuous or otherwise. Besides the lack of reference to this duty at §4 of the SOC, as mentioned at paragraph 27 above, P also makes no mention of any failure by D to “blow the whistle” when particularising D’s alleged breach at §§12-13 of the SOC. Instead, P continues to plead D’s alleged failures vis-à-vis the content of the Auditor’s Report:
32.Indeed, besides a brief statement that D had been P’s auditor from 2015 to 2018, there is nothing in the SOC which speaks of any “whistle-blowing” duty or which goes beyond the scope of the 2016 Engagement Letter. It is not for P to make such a submission now when such duty is simply not pleaded in the SOC. 33.For the above reasons, I am satisfied that the latest date on which P’s contractual claim could have accrued is the date of the Auditor’s Report, ie 16 March 2017. As P issued the Writ more than 6 years later on 3 October 2023, P’s breach of contract claim is out-of-time. D2. Limitation defence: tortious claim 34.D also contends that P’s negligence claim is time-barred. 35.A cause of action in the tort of negligence accrues when the plaintiff first suffers damage: Wang Haihong, Supra at §§32-33. A plaintiff cannot circumvent a time bar by claiming only part of the damage which occurred within the limitation period, if he has in fact suffered damage outside that period: Polley v Warner Goodman & Street (a firm) [2003] PNLR 40 at §15. 36.On the question of when damage first occurred in contexts involving contingent liabilities, the case authorities primarily distinguish between two situations. 37.The first involves a “purely contingent liability” which is “not as such damage until the contingency occurs”: Law Society v Sephton [2006] 2 AC 543 at §30. In Sephton, Ibid, a solicitor’s misappropriation of clients’ funds gave rise to a possible liability of the Law Society to pay out of the Solicitor’s compensation fund to the victims. Applying the case of Wardley Australia Ltd v State of Western Australia (1992) 109 ALR 247, the House of Lords at §§76-78 of Sephton, Ibid held that this possible liability had not yet constituted damage as it was contingent on a proper claim being made by the victims. Absent such a claim, the Law Society had suffered no change in its legal position nor any loss to its assets. 38.As Arden LJ explained at §33 of Axa Insurance v Akther & Darby [2010] 1 WLR 1662 (which was cited with approval by Stuart-Smith J in Co-operative Group Ltd v Birse Developments Ltd (in liq) [2014] PNLR 21 at §39):
39.By contrast, the second situation involves a “damaged asset”, where actual damage is held to have occurred when the possible future liability renders an asset less valuable: Co-operative Group, Ibid at §44.In Shore v Sedgwick Financial Services Ltd & Anor [2009] Bus LR 42, for example, the plaintiff was advised by the defendant financial advisers to transfer his pension to a riskier scheme. When his pension later fell in value, the plaintiff commenced an action against his advisers for negligence which was found to be time-barred by the trial judge. On appeal, the trial judge’s decision was upheld. The English Court of Appeal concluded that the plaintiff had first suffered loss not when the pension actually fell in value but at an earlier time when he had invested into a less secure scheme and was thereby exposed to the risk of financial harm. 40.In D’s submission, the present situation falls within the second category. On P’s pleaded case, it is D’s alleged failures in the Auditor’s Report which caused P to be exposed to the risk of being investigated and subsequently delisted. Relying on the cases of Co-operative Group, Supra and Shore, Ibid, D submits that this risk of being delisted sufficed as damage to P as it impaired the value of P’s listing status, rendering it a “damaged asset”. As such, P first suffered alleged damage when the Auditor’s Report was issued on 16 March 2017. 41.On the other hand, P mainly relies on Wardley, Supra and Sephton, Supra to argue that the risk of being delisted merely amounted to “purely contingent damage”:
42.It is thus P’s submission that it only suffered damage when the risk of delisting had materialised on 31 December 2019. 43.In my judgment, I agree with D’s submission that the present case is one involving a “damaged asset”. 44.First, it has been held that a company’s listing status is a valuable asset as a chose in action: Re China Energy Holdings Ltd (No 2) [2018] 2 HKLRD 338 at §§37-39; China Shanshui Cement Group Ltd v Mi Jingtian [2018] HKCFI 1553 at §101. 45.When P was exposed to the risk of being delisted upon the publication of the Auditor’s Report (assuming in P’s favour that there are no issues of causation), P’s listing status suffered an immediate diminution of value as the bundle of rights held and encapsulated under it were rendered more vulnerable to deprivation. 46.This loss can be demonstrated by way of a hypothetical as presented by D: if P were to “sell” its listing status to a buyer via a backdoor listing, P’s risk of being delisted would have no doubt affected the sale value of P’s listing status. Indeed, the possibility of a delisting has been held as constituting damage to the company in a case concerning a service-out application: China Shanshui, Supra at §§101-102. 47.Therefore, I am satisfied that P’s exposure to the risk of being delisted amounts to “loss additional to that resulting from the incurring of a purely contingent liability”: AXA Insurance, Supra at §33(quoted at paragraph 38 above). 48.Further, I am not persuaded by P’s argument that no damage can be said to have occurred before the risk of delisting materialised as it would have been reversible had the SFC decided not to delist P. The authorities make clear that exposure to a risk of actual financial harm is by itself sufficient to constitute damage, regardless of whether that damage crystallises or is later made good. See Shore, Supra at §42 per Dyson LJ:
49.In other words, the permanence of the loss in value of P’s listing status is irrelevant. It does not detract from the fact that when the Auditor’s Report was issued, P had sustained damage then and there, at which point P’s tortious cause of action against D accrued and the 6-year limitation period began to run. 50.Further still, as a matter of principle, P argues that it would have been premature to allow P to claim against D on the above basis before the actual delisting, as P would not have had any cause of action against D if the SFC ultimately decided not to delist P. 51.I agree with D that P’s concern is misconceived. P’s notion that the accrual of a claim would hinge on the plaintiff’s loss being eventually crystallised runs counter to reason and certainty. It would be especially undesirable given that pure economic loss is generally prone to fluctuation due to external factors such as shifting market conditions. This would render the accrual of a cause of action unpredictable. 52.Rather, I am inclined to think that if a plaintiff is exposed to a risk which causes a diminution of value in its asset, but that diminution is later made good by subsequent events, the fact that the plaintiff ultimately suffered no net loss only goes to the issue of quantum. It would not extinguish the cause of action which had in fact accrued as soon as the plaintiff suffered damage by being exposed to that risk. 53.Lastly, the mere fact that the damage suffered is not easily quantifiable does not preclude or disprove its existence. 54.Therefore, I am satisfied that, assuming causation is not at issue, P first suffered actual damage when it was exposed to the risk of being delisted as at the moment the Auditor’s Report was issued on 16 March 2017. Accordingly, P’s negligence claim is also out-of-time. 55.Having come to the above conclusion, P’s tortious claim for costs incurred after 16 March 2017 under the second head of damages pleaded, ie for costs associated with the SFC investigations, also falls away. D3. Causation 56.Given my findings that both of P’s claims are time-barred, it is not strictly necessary for this court to make a determination on other issues. However, for the sake of completeness, I shall address counsels’ submissions on the ground of causation. 57.In this regard, D submits that P’s claims are obviously unsustainable as there is no causal link between D’s alleged wrongdoings and P’s alleged losses. 58.I agree with D’s submissions in part. 59.Under the first head of damages pleaded by P, as quoted in paragraph 16 above, P claims for the alleged financial loss relating to its delisting. I am unable to see any causation between that and D’s alleged wrongdoings. Indeed, had D conducted itself in the manner which P alleges D should have, D would have discovered the fraud and material misstatements of the 2016 Financial Statements during its audits and stated the same in the Auditor’s Report. This would have only given further impetus for the SFC to launch an investigation against P and likely expedited P’s delisting. 60.Further, Mr Wong, counsel for P, relied on Days Impex, Supra at §§20-21 to argue that it would be inappropriate to strike out a claim against auditors where “their actions cause the company to trade in a particular way and incur further losses”, as the issue of causation in these cases involve fact-sensitive questions on which evidence should be heard and tested. 61.However, I do not find P’s submission to be to the point. In Days Impex, Supra, the court was concerned with the question of whether the auditors’ alleged wrongdoings had caused the plaintiff company to incur further trading losses: see Days Impex, Supra at §§29-34. In the current action, Mr Wong accepts in his oral submissions that P has not claimed for any trading losses in its SOC. The principle in Days Impex, Supra is thus inapplicable here. 62.Under the second head of damages regarding costs associated with the SFC investigations, P is on much more solid ground. In my view, there is some substance in P’s submission that if D had detected the fraud when conducting its audits, the need to engage Mazars would have been obviated or at least the scope of the work to be done by Mazars would have been reduced. On the facts, there would appear to be at least some overlap between the respective scopes of work which Mazars and D were respectively engaged to carry out, albeit that of Mazars may have been more narrowly formulated. In any case, this would turn on factual evidence and is not a point for striking-out. 63.Nevertheless, as I have held above that P’s claims are statute-barred, the outcome of the case remains unchanged. E. CONCLUSION 64.For the foregoing reasons, I order that:
65.Parties agree that costs should follow the event. I therefore order that the costs of and occasioned by the Summons together with the costs of this action, including all costs reserved (if any), be paid by P to D. Such costs are to be taxed if not agreed.
Mr Joseph Wong, instructed by Messrs David Fenn & Co, for the plaintiff Mr Eugene Kwan, instructed by Messrs Reynolds Porter Chamberlain, for the defendant |
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