Guang Xin Enterprises Ltd. v. Kwan Wong Tan & Fong (A Firm)

HCA002788A/2001

HCA 2788/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2788 OF 2001

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Coram: Deputy High Court Judge R Tong, SC in Chambers

Dates of Hearing: 29-30 April & 2-3 May 2002

Date of Judgment: 21 May 2002

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J U D G M E N T

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1.This is an application by the Defendant to strike out the Statement of Claim under Order 18 Rule 19(1)(a).

2.The Plaintiff was a Hong Kong company incorporated on 29th January 1985. On 12th October 1998, it entered into Creditors' Voluntary Liquidation pursuant to section 228A of the Companies Ordinance, Cap. 32, on the basis that the company could not by reason of its liabilities continue its business. The total estimated realisation in the Liquidation was said to be some HK$264 million against known liabilities of some HK$3,708 million. If one were to include the contingent claims of another HK$537 million, the total deficiency would become over HK$4 billion.

3.The Defendant were a firm of Certified Public Accountants and were auditors of the Plaintiff's accounts and financial statements ("the Accounts") for the years ending 31st December 1994 to 31st December 1996.

4.The Statement of Claim is a formidable document. Together with its various appendices and schedules, it runs to some 300 pages. Included in the pleading are all the Accounts of the Plaintiff from 1985 to 1997. Despite its length, at the heart of the Statement of Claim is an allegation that by reason of the alleged incorrect reporting of the Defendant, the Plaintiff continued trading from the publication of the 1994 Accounts to the date of its demise in 1998 thereby suffering loss.

Approach

5.The application to strike out was made under Order 18 Rule 19(1)(a). Under that rule, no evidence is admissible and the court is only concerned with the facts as pleaded by the party whose pleading is under attack. For this reason, all the facts so pleaded must be presumed to be true or capable of being proved at trial. Glidewell L J said in one of the cases cited to me, Galoo Ltd. v. Bright Grahame Murray [1994] 1 W.L.R. 1360 at 1365H:

"[since] the court at this stage is concerned only with the allegations in the [pleading] and not with evidence, the court hearing the application was and is in as good a position to decide the issue now as it would have been at the conclusion of a trial."

6.That does not mean, of course, that the task is any easier. Enough has been said about how a court would strike out a pleading only if it is "bound to fail" or "incontestably bad". But these words merely convey the final conclusion of the judge hearing an application to strike out. They do not begin to tell you the actual process by which a judge comes to that conclusion.

7.Broadly speaking, a pleading will be struck out on two grounds: first, if a material averment is missing and secondly, if the result contended for is untenable.

8.A material averment here means an averment of fact without which the cause of action or defence is not complete and the result contended for will not arise. Where a material averment is missing, the court will sometimes allow the pleading to stand if it is of the view that the deficiency can be cured by either particulars or amendment. Other times, the court may say the missing averments are so extensive that a preferred course perhaps is to strike out the whole pleading and let the party concerned start again.

9.If the deficiency lies not with a lack of a material averment but with the fallacy of the result contended for, then the matter may be a little more problematic. A contended result may be untenable, generally speaking, for two reasons. It may be that the contended result is untenable as a matter of fact. If so, the task of a judge is relatively straight forward. All he needs to do is to examine the a priori reasoning of the party's claim or defence and see if the result contended for is indeed untenable as a matter of fact.

10.If the contended result is said to be untenable as a matter of law, then the question is: has the legal principle involved been sufficiently defined to cover the question at hand. What a judge has to do is to guard against any possibility that the boundary of the law may be extended in favour of the party whose pleading is under attack if or by the time the matter gets to trial. I remember the salutary words of Browne-Wilkinson V C in Lonrho plc v. Tebbit [1991] 4 All E.R. 973 at p. 979f very well:

"A claim should only be struck out in a plain and obvious case. The difficulty arises when, as in the present case, a claim to strike out depends upon the decision of one or more difficult points of law. In such a case, the judge should normally refuse to entertain such a claim to strike out. But, if in a particular case the judge is satisfied that the decision of the point of law at that stage will either avoid the necessity for trial altogether or render the trial substantially easier and cheaper, he can properly determine such difficult point of law on the striking-out application: see Williams & Humbert Ltd v. W & H Trademarks (Jersey) Ltd [1986] 1 All E.R. 129 at 139, 143, [1986] AC 368 at 435-436, 441 per Lord Templeman and Lord Mackay.

In considering whether or not to decide the difficult question of law, the judge can and should take into account whether the point of law is of such a kind that it can properly be determined on the bare facts pleaded or whether it would not be better determined at the trial in the light of the actual facts of the case. The methodology of English law is to decide each case on a case-by-case basis from which, in due course, principles may emerge. Therefore, in a new and developing field of law it is often inappropriate to determine points of law on the assumed, and scanty, facts pleaded in the statement of claim."

11.If this matter goes to trial, both discovery and oral evidence including expert evidence will be extremely drawn-out and complicated. It will be a lengthy and costly trial which will take up substantial judicial resources. Thus, there is a public interest element in seeing this matter simplified if not resolved even if difficult questions of law may be involved provided, of course, it is proper to do so.

Plaintiff's Financial Position As Pleaded

12.Despite the brave assertions of Mr Roger ter Haar, QC, leading counsel of the Plaintiff, to the contrary, the operations of the Plaintiff had never been profitable.

13.In 1985, the Plaintiff had a turnover of over $19 million but suffered a trading loss of $16,272. The net current liabilities were $2.3 million against a paid up capital of $1 million. It survived by reason of a $4 million loan from its ultimate parent company ("the Shareholder"). It is significant to note that the Plaintiff's principal activities were described as "investment holding and re-export of merchandise to group companies in China." The Plaintiff was never an ordinary trading company.

14.In 1986, the Plaintiff's turnover ballooned to $56.5 million but only recorded a modest profit of $184,004. Its investment in joint ventures and associated companies amounted to some $38 million. The loan from the Shareholder increased to $37 million. Short term bank loan was $37.7 million.

15.In 1987, the Plaintiff turned in a trading loss of $3.7 million with a net current liabilities amount of $78 million. The loan from the Shareholder increased to $122 million.

16.This pattern continued in that in each successive year, these figures got bigger. In 1988, trading loss was $9 million against a modest turnover of $14 million. Net current liabilities were $168.8 million. Loan from the Shareholder increased to $193 million. The Statement of Changes in Financial Position showed a cash deficit of some $90 million.

17.In 1989, the principal activities of the Plaintiff were stated to be "investment holding, provision of finance to group companies and third parties and sales of merchandise." The nature of the Plaintiff's trade did not change thereafter. Neither did its fortune. It posted a trading loss of $13 million with net current liabilities of $212 million. The Shareholder's loan increased to $170.8 million.

18.1990 was a slightly better year for the Plaintiff. There was a trading profit of $36.6 million and the net current liabilities went down to $93 million. The Shareholder's loan, however, remained high at $183.5 million. In 1991, the profit went down to $2.7 million and the loan from the Shareholder went back up to $206 million.

19.In 1992, the Plaintiff slipped back into the red with a loss of $13 million. In particular, the figure for long term liabilities was a massive $562 million with $520 million being the Shareholder's loan.

20.In 1993, the year immediately preceding the 1994 Accounts audited by the Defendant, the Plaintiff had a trading profit of $12 million of which $8.7 million was profit on disposal of fixed assets. More significantly, the Plaintiff had net current liabilities of $117.8 million and long term liabilities of $447.6 million of which $398.6 million was due to the Shareholder. The Cash Flow Statement showed a net cash outflow from investing activities of $115 million and a total net cash outflow before financing of $334 million. There was a cash deficit of $493 million at the end of year.

21.It will be seen immediately that the plaintiff was far from being a healthy company and its survival was directly dependent upon the support of its Shareholder who was apparently prepared to continue to support the Plaintiff no matter how large its deficit was.

22.In 1994, the Defendant became the auditors of the Plaintiff.

The Claims

23.It was in this context that the Plaintiff's claims were made. Put simply, the Plaintiff raised two claims. First, it claimed that due to the Defendant's negligence in auditing its Accounts, the Plaintiff "had adopted a policy of borrowing in order to fund its interest commitment"; that had the true position be known the Plaintiff would realise it had a net deficit of $435.4 million of shareholders' funds and "would have ceased to make further investments" of some $889 million and would not have increased its borrowings to $1,396.6 million.

24.The negligence alleged was that the Defendant had failed to discover that some values of the investments were grossly overstated so that in fact the shareholders' funds stood at a deficit of $435.4 million instead of a surplus of $136.3 million.

25.In paragraph 108, the Plaintiff claimed that had the true position be known it "would have either ceased business or commenced an orderly winding down of its operations and would have avoided operating expenses (net of interest paid) of $140.1 million".

26.I shall refer to this claim as the "Trading Loss Claim".

27.Secondly, the Plaintiff claimed that there were certain letter of credit transactions which were not "genuine" in that while the transactions purported to be chain sale of goods transactions with the Plaintiff buying steel pipes and other goods from certain suppliers ("the Suppliers") for re-sale to a company called Wantong Steel Pipe Co. Ltd. ("Wantong") and another company called Life Circle Limited ("Life Circle"), no goods were in fact supplied to the Plaintiff and there were no on-sales to Wantong or Life Circle. The Suppliers, however, did "repay" the Plaintiff some of the monies received from the banks under the relevant letters of credit which they obviously would not do had they been genuine sellers of goods to the Plaintiff.

28.A disturbing feature of these transactions was that many of the supporting documents purportedly evidencing the sales were "signed by the Plaintiff's directors (Yi Qing Lin and Huang Qing Zhou) and managers (Geng Guang Li, Wong Yin and Chung Fuk Cheung) rather than representatives of the other parties to the transactions as would have been the case had these been genuine transactions."

29.The Wantong transactions contributed a sum of $366.4 million to the Plaintiff's total turnover for 1994, representing 95% of the "Sales" of the Plaintiff for the same period. It is to be noted that the Plaintiff did receive commissions and handling charges of $14.4 million on top of money "repaid" by the Suppliers.

30.Paragraph 30(c) of the Statement of Claim pleaded that "the balance of turnover of the Plaintiff consisted almost entirely of sums in respect of interest and dividends receivable from other parties."

31.The Plaintiff's case was that because these transactions were not genuine, the Plaintiff in fact had no genuine turnover and no significant income. Had the real position been revealed, these transactions would have come to an end and the Plaintiff would not have suffered a loss of "at least $264.5m" when it eventually floundered in 1998 and went into Creditors' Voluntary Liquidation pursuant to section 228A of the Companies Ordinance, Cap. 32.

32.I shall refer to this claim as the "Sales Loss Claim".

Parties' Submissions

33.Mr Gordon Pollock, QC, appearing on behalf of the Defendant, made three main submissions:-

(a) Bearing in mind the limited scope of an auditor's duty, the Trading Loss Claim was not one recognized by law. He relied on Galoo Ltd. v. Bright Grahame Murray [1994] 1 WLR 1360, a decision of the English Court of Appeal;

(b) The Plaintiff was hopelessly insolvent in 1994 in any event and a negligent auditor should not be made liable for losses which in reality had no effect on either the Plaintiff or its shareholders; and

(c) The Plaintiff made no attempt whatsoever to identify any individuals or entity which relied upon the audited accounts or were misled by what they contained or failed to contain.

34.Mr ter Haar, QC, on the other hand, contended that causation was rarely a matter which could be determined on assumed facts and must be a matter for trial. He also relied heavily on Sew Hoy & Sons Ltd. v. Coopers & Lybrand [1996] 1 NZLR 392, a decision of the New Zealand Court of Appeal. If necessary, he was prepared to argue that Galoo was wrongly decided.

An Auditor's Role

35.It has been said that an auditor is neither an insurer nor a defective; that he is a watch-dog but not a bloodhound. In In re Kingston Cotton Mill Company (No. 2) [1896] 2 Ch. 279, Lindley L J said (at p. 284):-

"The duty of an auditor generally was very carefully considered by this Court in In re London and General Bank [1895] 2 Ch. 673, and I cannot usefully add anything to what will be found there (at pp. 682-684). It was there pointed out that an auditor's duty is to examine the books, ascertain that they are right, and to prepare a balance-sheet showing the true financial position of the company at the time to which the balance-sheet refers. But it was also pointed out that an auditor is not an insurer, and that in discharge of his duty he is only bound to exercise a reasonable amount of care and skill."

36.Lopes L J said (at p. 288) in the same case:-

"An auditor is not bound to be a detective, or, as was said, to approach his work with suspicion or with a foregone conclusion that there is something wrong. He is a watch-dog, but not a bloodhound."

37.Nor is he a business adviser. In Caparo Industries plc v. Dickman [1990] 2 AC 605, Lord Bridge said (at p. 625D):-

"The position of auditors in relation to the shareholders of a public limited liability company arising from the relevant provisions of the Companies Act 1985 is accurately summarised in the judgment of Bingham L J in the Court of Appeal [1989] QB 653, 680-681:-

'The members, or shareholders, of the company are its owners. But they are too numerous, and in most cases too unskilled, to undertake the day to day management of that which they own. So responsibility for day to day management of the company is delegated to directors. The shareholders, despite their overall powers of control, are in most companies for most of the time investors and little more. But it would of course be unsatisfactory and open to abuse if the shareholders received no report on the financial stewardship of their investment save from those to whom the stewardship had been entrusted. So provision is made for the company in general meeting to appoint an auditor (section 384 of the Companies Act 1985), whose duty is to investigate and form an opinion on the adequacy of the company's accounting records and returns and the correspondence between the company's accounting records and returns and its accounts: section 237. The auditor has then to report to the company's members (among other things) whether in his opinion the company's accounts give a true and fair view of the company's financial position: section 236. In carrying out his investigation and in forming his opinion the auditor necessarily works very closely with the directors and officers of the company. He receives his remuneration from the company. He naturally, and rightly, regards the company as his client. But he is employed by the company to exercise his professional skill and judgment for the purpose of giving the shareholders an independent report on the reliability of the company's accounts and thus on their investment. 'No doubt he is acting antagonistically to the directors in the sense that he is appointed by the shareholders to be a check upon them.' In re Kingston Cotton Mill [1896] 1 Ch. 6, 11, per Vaughan Williams J. The auditor's report must be read before the company in general meeting and must be open to inspection by any member of the company: section 241. It is attached to and forms part of the company's accounts: sections 238(3) and 239. A copy of the company's accounts, including the auditor's report, must be sent to every member: section 240. Any member of the company, even if not entitled to have a copy of the accounts sent to him, is entitled to be furnished with a copy of the company's last accounts on demand and without charge: section 246.'

No doubt these provisions establish a relationship between the auditors and the shareholders of a company on which the shareholder is entitled to rely for the protection of his interest. But the crucial question concerns the extent of the shareholder's interest which the auditor has a duty to protect. The shareholders of a company have a collective interest in the company's proper management and in so far as a negligent failure of the auditor to report accurately on the state of the company's finances deprives the shareholders of the opportunity to exercise their powers in general meeting to call the directors to book and to ensure that errors in management are corrected, the shareholders ought to be entitled to a remedy. But in practice no problem arises in this regard since the interest of the shareholders in the proper management of the company's affairs is indistinguishable from the interest of the company itself and any loss suffered by the shareholders, e.g. by the negligent failure of the auditor to discover and expose a misappropriation of funds by a director of the company, will be recouped by a claim against the auditors in the name of the company, not by individual shareholders."

38.At page 630F, Lord Oliver said:-

"It is the auditors' function to ensure, so far as possible, that the financial information as to the company's affairs prepared by the directors accurately reflects the company's position in order, first, to protect the company itself from the consequences of undetected errors or, possibly, wrongdoing (by, for instance, declaring dividends out of capital) and, secondly, to provide shareholders with reliable intelligence for the purpose of enabling them to scrutinise the conduct of the company's affairs and to exercise their collective powers to reward or control or remove those to whom that conduct has been confided."

39.And Lord Jauncey explained the duty at page 660B:-

"Three matters emerge from the statutory provisions, namely: (1) that the responsibility for the preparation of accounts giving a true and fair view of the company's financial state is placed fairly and squarely on the shoulders of the directors; (2) that the role of the auditors is to provide an independent report to the members on the proper preparation of the balance sheet and profit and loss account, and as to whether those documents give a true and fair view respectively of the state of the company's affairs at the end of the financial year and of the company's profit and loss for that year. Their role is thus purely investigative rather than creative: (3) that the company's accounts, including the auditors' report, will be furnished to all members of the company as well as to debenture holders and any other persons entitled to receive notice of general meeting."

40.In Bank of Credit and Commerce International (Overseas) Ltd. v. Price Waterhouse [1999] BCC 351, Laddie J, after referring to the Caparo case, and in particular the passage from the speech of Lord Bridge referred to above, said (at p. 368H):-

"I do not read Lord Bridge as saying in the passage quoted above that the auditor has a duty to report on whether one or more of the directors is a good manager. It seems to me that the 'errors in management' he refers to are the errors in drawing up the company's accounts and covers also such of the imprudences and wrongdoings which, in the course of carrying out the audit, come to or should come [to] the auditor's attention. That is the thrust of all three speeches. The auditor's primary function is to give a clean bill of health in relation to the company's figures for the previous year.

The matter may be looked at in the following way. As Bingham L J said in the passage quoted by Lord Bridge, the auditor is employed by the company to exercise his professional skill and judgment for the purpose of giving the shareholders an independent report on the reliability of the company's accounts. In the course of the professional life of an average auditor he will carry out audits for numerous clients involved in widely different businesses. The skill he offers and for which he is paid is the skill in looking at the company's accounts and the underlying information on which they are or should be based and telling the shareholders whether the accounts give a true and fair view of the company's financial position. He is not in possession of facts nor qualified to express a view as to how the business should be run, in the sense of what investments to make, what business to undertake, what prices to charge, what lines of credit to extend and so on. Not only does he not normally have the necessary expertise but those are areas in respect of which his advice is not sought. When the company engages an auditor, it is not seeking his help in steering the management into making better management decisions. There are others who hold themselves out as able to give that sort of assistance. To adopt the approach of Lord Hoffmann in [Banque Bruxelles Lambert v. Eagle Star Insurance Co. Ltd. [1997] AC 191], the auditors were not asked to advise on what investments or loans to make or guarantees to assume."

Still less whether the company should carry on its business.

Trading Loss Cases

41.Traditionally, a claim against auditors was based on their failure to uncover misfeasance by the management in misapplying assets of the company, I shall refer to these as "defalcation claims". In recent years, large scale liquidations have prompted the emergence of what I shall call "trading loss cases" where the auditors were blamed for the trading losses of the continued existence of an insolvent company. In Hong Kong, I think the first large scale auditors claim was made in the Carrian liquidation although that claim never came to trial. There are a number of reported cases on such a claim.

42.The first decision Mr Pollock QC relied on was the case of Alexander v. Cambridge Credit Corporation Ltd. (1987) 9 NSWLR 310. There, the company went into liquidation in 1974. The trial judge found that but for the breach of duty by the auditors, the company would have gone into receivership in 1971 and the damage suffered was A$145 million, being the increase between 1971 and 1974 in the deficiency of assets required to meet liabilities. On appeal, the New South Wales Court of Appeal held by a majority that there was no causal connection between the breach of duty and the damage alleged. Mahoney JA thought that the mere continued existence of the company was not enough to establish a causal link between the breach and damage. At page 334B, he said:-

"In the present case, the company's loss resulted from the defendants' breach in the sense that the course of events vis-a-vis the company would have gone in a different direction had it not been for that breach. But that, I think, is not, or is not necessarily, sufficient. Thus, the breach allowed the company to continue in business. If its net worth had fallen because, for example, the main buildings it owned had been destroyed by an earthquake, I do not think that that loss would have been causally related to the breach which let the company continue in business."

Later on at F & G, he added:-

"To allow the company to continue in existence is, in a sense, to expose it to all of the dangers of being in existence. But allowing the company to remain in existence does not, without more, cause losses from anything which is, in that sense, a danger incident to existing. There are some dangers loss from which will raise causal considerations and some will not."

43.The decision of Cambridge Credit was followed in Galoo Ltd. v. Bright Grahame Murray [1994] 1 WLR 1361. There, it was said had the auditors not been negligent, the company would have ceased to trade immediately and subsequent losses would not have occurred. The Statement of Claim was struck out by Deputy Judge Walker QC and the plaintiff's appeal to the English Court of Appeal was dismissed.

44.In that case, there was an allegation that the management had falsely overstated the stock and thus led the company to believe that it had more assets than it actually had. This is not dissimilar to the allegation of over-valuation of investments in the present case. The plaintiff in Galoo made two claims. First, a claim was made for losses flowing from loans. It was said, had the auditors not been negligent, the company would not have borrowed some ￡30 million. Again, this is not dissimilar to the allegation in paragraph 106 of the Statement of Claim in our present case that had the true financial position been revealed, the Plaintiff would not have incurred borrowings of some $1,516.6 million.

45.Secondly, the company in Galoo claimed that it incurred a trading loss of some ￡25 million as a result of relying on the negligent auditing of the auditors there. This is mirrored in our present case by paragraphs 105 and 108 of the Statement of Claim respectively where it was claimed that had the true position be known further investments to the sum of some $889.1 million would not have been made and "the Plaintiff would have either ceased business or commenced an orderly winding down of its operations and would have avoided operating expenses (net of interest paid) of $140.1 million."

46.In my view, the claim as pleaded in our present case subject to the Sales Loss Claim is practically on all fours with that pleaded in Galoo.

47.In delivering the leading judgment of the Court, Glidewell L J first of all cited with approval this passage from the judgment of Deputy Judge Walker QC (at page 1374E):-

"Trading losses ...... are losses which by their nature do not flow from whatever statement appears in the accounts as to the state of the company's assets or profits; they flow from trading. If a company trades, it may suffer losses or it may enjoy profits, and those losses or gains depend upon a number of factors such as the prudence of the trading, market conditions, and so on. It does not seem to me that trading losses as such can possibly be attributed to statements as to the status of the company before that trading ever takes place ..... it seems to me that, for the reasons I have given ........ trading losses as such cannot arguably be said to be damages which flow from the auditors' negligence."

He then added this after the quotation:-

"The passages which I have cited from the speeches in Monarch Steamship Co. Ltd. v. Karlshamns Oljefabriker A/B [1949] AC 196 make it clear that if a breach of contract by a defendant is to be held to entitle the plaintiff to claim damages, it must first be held to have been an "effective" or "dominant" cause of his loss. The test in Quinn v. Burch Bros. (Builders) Ltd. [1966] 2 QB 370 that it is necessary to distinguish between a breach of contract which causes a loss to the plaintiff and one which merely gives the opportunity for him to sustain the loss, is helpful but still leaves the question to be answered 'How does the court decide whether the breach of duty was the cause of the loss or merely the occasion for the loss?'

The answer in my judgment is supplied by the Australian decisions to which I have referred, which I hold to represent the law of England as well as of Australia, in relation to a breach of a duty imposed on a defendant whether by contract or in tort in a situation analogous to breach of contract. The answer in the end is 'By the application of the court's common sense.'

Doing my best to apply this test, I have no doubt that the deputy judge arrived at a correct conclusion on this issue. The breach of duty by the defendants gave the opportunity to Galoo and Gamine to incur and to continue to incur trading losses; it did not cause those trading losses, in the sense in which the word 'cause' is used in law."

48.The decision in Galoo was followed in the BCCI case. The claim there was summarized at page 354F of Laddie J's judgment:-

"The essence of the major claim made in the consolidated action is that the audits done respectively by EW and PW were carried out negligently. As a result numerous imprudences were not discovered or their importance was not brought to the attention of the relevant boards of directors. The plaintiffs continued to trade, further frauds were committed and further losses were incurred. It is alleged that had the audits been carried out properly, further losses would have been avoided, further substantial payments (e.g. of tax and charitable donations) would not have been made, certain guarantees would not have been given, subsequent investments in subsidiaries would not have been made, further irrecoverable loans would not have been made and there would have been greater prospects of recovering some or all of the loans which have now become wholly or largely irrecoverable. The plaintiffs therefore claim damages amounting to some billions of US dollars. The claims are put both in contract and tort."

49.After citing Caparo, BBL, Galoo and Cambridge Credit the learned Judge referred to the continued trading of the company and continued (at p. 365H):-

"As far as the pleadings are concerned they are the sort of transactions which it was proper for Holdings to enter into. Similarly in relation to all the investments in and loans to the non-plaintiff subsidiaries, nowhere has it been pleaded or asserted that those subsidiaries' activities were tainted by imprudences or wrongdoing nor is it suggested that there was anything untoward in investing in the subsidiaries or in extending loans to them. There is nothing pleaded to suggest that any one of them was improper. Indeed, as far as the Holdings pleadings are concerned, they could have been commercially astute and laudable investments and guarantees. As paragraph 49.7 of the statement of claim asserts, all of these transactions 'proved loss making by reason of the insolvency' of BCCI. It is not asserted that they were in any sense improper."

So here.

50.At page 371E, the learned Judge said:-

"In my view there is no arguable case that the EW defendants' duty of care to Holdings, whether arising out of its appointment to audit the consolidated or unconsolidated accounts, extends as far as to cover a liability for deficits arising out of legitimate but loss-making business activities, such as investing in subsidiaries and guaranteeing loans. None of those activities was asserted as being either touched by fraud or imprudence. They are not pleaded as being a continuation of a type of business which was touched by fraud or imprudence which the EW defendants should have discovered and disclosed. They are simply losses occasioned by BCCI's continuing in trade. This conclusion can be expressed in alternative ways. The EW defendants' duty of care did not extend this far. This is not the kind of damage from which they had to take care to save Holdings harmless. Alternatively, the pleaded losses were not caused by the breaches alleged. They were caused by continued trading. The alleged negligence of the EW defendants, if proved at the trial, was just one of the factors which resulted in Holdings continuing to trade. Save in this respect it is not alleged to have played any part in generating the losses for which Holdings seeks compensation. This conclusion applies to investments in both the plaintiff subsidiaries and non-plaintiff subsidiaries."

51.These cases thus suggest very strongly that there is no legal basis in support of the Plaintiff's claim for trading losses in the present case.

Sew Hoy

52.Mr ter Haar, QC, however, relied strongly on Sew Hoy, supra. He contended that Sew Hoy was authority for the proposition that trading losses could be a head of recoverable damage if properly pleaded and if necessary, Galoo (and presumably BCCI also) was wrongly decided and I should follow the New Zealand Court of Appeal.

53.I do not think Sew Hoy is of assistance to him at all. There, the company's claim was pleaded on a basis that:-

(a) The auditors there had certain knowledge of the nature of the company's business (see the substituted paragraph 9 set out at page 406 line 20 to line 50 of the report). There is no such allegation here;

(b) The company there had a trading business of an importer, manufacturer and distributor of clothing. It was alleged that the negligent audit had caused the company to trade in a certain way from which loss was inevitable (see for example, Thomas J at page 409 lines 41-51 and page 411 lines 45-52). The converse of that was the company could have traded in a different way and avoided the loss. Contrast the position here that the main business of the Plaintiff was investment and the only difference alleged was that the Plaintiff would have ceased business. You can have only one way of investing: either to invest or not to invest;

(c) The company there had a surplus of assets over liabilities even with the corrected accounts for the two years in question (see Henry J at page 403 lines 47-52; and Thomas J at page 405 lines 30-43). That left open the possibility of the company continuing to trade profitably in some other way. Here, the Plaintiff's case was that insolvency was inevitable. Indeed, Mr Ter Haar, QC accepted that the Cash Flow Statement in 1994 showed that the Plaintiff was technically insolvent even on the negligent reporting of the Defendant;

(d) There, the company only claimed "inevitable losses" flowing from the decision to continue trading in the same way as before and not "losses which resulted from other causes such as imprudent decisions in the course of trading" (see McKay J at page 396 line 36 - page 397 line 5 and page 401 lines 23-31; Henry J at page 404 lines 24-39; and Thomas J at page 409 lines 41-51, page 410 lines 44-54 and page 411 lines 45-52).

Here, there was no attempt to identify what losses did flow from imprudent decisions. The whole case was put on the basis that had the true position been known no investment of any kind would have been made and all the investments made "inevitably" led to loss. That itself is a misconception. An investment, unlike trading, is merely a form of converting cash into a different form of asset which represents the same or similar value. If after making the investment, the investor goes bankrupt, the value of the investment is still there and will not necessarily represent a loss unless the market goes down.

Causation

54.But there is a more fundamental objection to Sew Hoy and I prefer to base my decision on the premise that Sew Hoy, properly understood, in fact went against well established principles of causation in this area of the law and should not be relied on.

55.It is important to note first of all that in Sew Hoy itself, it was accepted that the "but for" test should no longer be regarded as a sufficient test for liability in tort. For example, Thomas J said at page 408 line 38:

"Galoo was undoubtedly correct in confirming that the 'but for' test is not a definitive test of causation. As a complete test that test has long been regarded suspect."

56.That is in line with what has been said on the subject in Cambridge Credit: at page 335 D-E, per Mahoney JA; and BCCI: at page 360F and 367D, per Laddie J.

57.What then, should be the proper test? The New Zealand Court of Appeal proceeded to ask the question whether in certain circumstances, a decision to continue trading could itself led to a loss and reached the answer that it could. Mckay J said this at page 400 line 31:

"The Plaintiff asserts that the negligence of the Defendant caused its decision to continue trading in what was in fact a substantial loss-making situation, and that this decision was in itself a cause of loss. I see nothing untenable or unarguable in that situation. Only the losses so caused are claimed. No other causative links are relied upon, so it is unnecessary to plead other links .............

................. I do not think Galoo can be regarded as deciding, as a matter of law, that a decision by a company trading at a loss that it will continue trading can never, as a matter of law, that a decision by a company trading at a loss that it will continue trading can never, without something more, be a cause of further loss. The contrary is a familiar fact of commercial experience."

Thomas J said at page 409 line 41:

"To state that trading losses flow from trading is to state the obvious. The key question remains. Did the Defendant's default cause the trading to continue and, if it did, did it cause the trading losses which then eventuated. If it can be said that the company not only continued to trade, but continued to trade in a certain way as a result of the auditor's breach and that the way in which it traded is responsible for the trading losses, it is at least arguable that a causal link is established."

58.In a way, that was an approach based on the "but for" test. This was recognized at least by Thomas J himself (at page 411 lines 45 to 52):-

"The company has gone beyond the 'but for' situation. Its essential contention is that the auditors' negligent audit confirmed the profitability of the company as shown in its annual accounts and that, as a result, the company decided to continue to trade in such a way as to incur further ongoing trading losses. Certainly, such a formulation can be phrased in the 'but for' manner. But the causation can also be positively asserted in that the auditor's breach caused the company to refrain from taking the necessary steps to avoid the ongoing trading losses."

59.With greatest respect, the New Zealand Court of Appeal asked the wrong question and inevitably got the wrong answer. The question is not did the decision to continue trading cause the loss but was the loss the kind of damage that it was the auditors' duty to guard against?

60.In one sense, of course, a decision to continue trading led to trading losses. But for that decision the company would not be exposed to the possibility of losing valuable assets. But that is no different from the examples of a man giving a wrong direction at a cross road cited by Mahoney JA in Cambridge Credit, supra. at page 333F or the mountaineer with a bad knee cited by Lord Hoffmann in BBL, supra. at page 213D.

61.As Lord Bridge said in Caparo, supra., in relation to duty of care (at page 627D):

"It is never sufficient to ask simply whether A owes B a duty of care. It is always necessary to determine the scope of the duty by reference to the kind of damage from which A must take care to save B harmless."

62.The same point can be made as to causation. Were trading losses flowing from a decision to trade based on inaccurate financial information provided by the auditors the kind of damage which the auditors had promised to save the company from harmless? In my judgment, the law has firmly answered that question in the negative.

63.I have already referred to Cambridge Credit. I have also referred to the role of the auditor as explained by the House of Lords in Caparo. In Berg Sons & Co. Ltd. v. Mervyn Hampton Adams [1993] BCLC 1043, Hobhouse J said (at page 1064):-

"It also follows that the purpose of the statutory audit is to provide a mechanism to enable those having a proprietary interest in the company or being concerned with its management or control to have acess to accurate financial information about the company. Provided that those persons have that information, the statutory purpose is exhausted. What those persons do with the information is a matter for them and falls outside the scope of the statutory purpose."

64.In BBL, supra., Lord Hoffmann said (at page 211H):

"A plaintiff who sues for breach of a duty imposed by the law (whether in contract or tort or under statute) must do more than prove that the defendant has failed to comply. He must show that the duty was owed to him and that it was a duty in respect of the kind of loss which he has suffered. Both of these requirements are illustrated by Caparo Industries Plc. v. Dickman [1990] 2 AC 605. The auditors' failure to use reasonable care in auditing the company's statutory accounts was a breach of their duty of care. But they were not liable to an outside take-over bidder because the duty was not owed to him. Nor were they liable to shareholders who had bought more shares in reliance on the accounts because, although they were owed a duty of care, it was in their capacity as members of the company and not in the capacity (which they shared with everyone else) of potential buyers of its shares. Accordingly, the duty which they were owed was not in respect of loss which they might suffer by buying its shares."

Later, at page 212C, he said:-

"How is the scope of the duty determined? In the case of a statutory duty, the question is answered by deducing the purpose of the duty from the language and context of the statute: Gorris v. Scott (1874) L.R. 9 Ex. 125. In the case of tort, it will similarly depend upon the purpose of the rule imposing the duty. Most of the judgments in the Caparo case are occupied in examining the Companies Act 1985 to ascertain the purpose of the auditor's duty to take care that the statutory accounts comply with the Act."

At page 214C, after referring to the duty of the doctor of the mountaineer with a bad knee his Lordship concluded:

"The doctor was asked for information on only one of the considerations which might affect the safety of the mountaineer on the expedition. There seems no reason of policy which requires that the negligence of the doctor should require the transfer to him of all the foreseeable risks of the expedition.

I think that one can to some extent generalise the principle upon which this response depends. It is that a person under a duty to take reasonable care to provide information on which someone else will decide upon a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong. A duty of care which imposes upon the informant responsibility for losses which would have occurred even if the information which he gave had been correct is not in my view fair and reasonable as between the parties. It is therefore inappropriate either as an implied term of a contract or as a tortious duty arising from the relationship between them.

The principle thus stated distinguishes between a duty to provide information for the purpose of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action he should take. If the duty is to advise whether or not a course of action should be taken, the adviser must take reasonable care to consider all the potential consequences of that course of action. If he is negligent, he will therefore be responsible for all the foreseeable loss which is a consequence of that course of action having been taken. If his duty is only to supply information, he must take reasonable care to ensure that the information is correct and, if he is negligent, will be responsible for all the foreseeable consequences of the information being wrong."

65.That, in my view, was the true basis of the decision in Galoo and in BCCI. In the latter case, Laddie J cited this passage from the speech of Lord Oliver in Caparo (at page 358H):

"In seeking to ascertain whether there should be imposed on the adviser a duty to avoid the occurrence of the kind of damage which the advisee claims to have suffered it is not, I think, sufficient to ask simply whether there existed a 'closeness' between them in the sense that the advisee had a legal entitlement to receive the information upon the basis of which he has acted or in the sense that the information was intended to serve his interest or to protect him. One must, I think, go further and ask, in what capacity was his interest to be served and from what was he intended to be protected?

It follows that even if an adviser is guilty of a breach of duty, he is not liable for all losses which may be said to flow directly or indirectly from that breach."

His Lordship, after citing BBL, Galoo, and Cambridge Credit then concluded (at page 362D):

"This passage emphasises the importance of not limiting the inquiry to a simple 'but for' analysis of the facts. Initiation of a train of events which results in loss to the plaintiff does not, per se, make the initiator liable for those losses. [Cambridge Credit] is particularly useful because it emphasises that when the defendant's duty is to protect the plaintiff from particular dangers, he may be held responsible in law for losses from dangers of that kind. His liability extends to protecting the plaintiff from losses apt to flow from those particular dangers, not from all losses whether apt to flow or not. Cambridge continued to trade after 1971. Had Alexander performed its duty properly it would not have done so. In that sense all losses incurred after 1971 were caused or facilitated by or would not have been incurred but for the breach of duty. But Alexander was not liable for all losses. Trading exposes a company to risks. A business can be run properly and yet make a loss. Alexander's breach of duty was not regarded as the cause, in the legal sense, of the losses which arose simply from continued trading. What caused those losses were the dangers inherent in the marketplace and the directors' management decisions which, with the benefit of hindsight, can be seen to have been the wrong decisions to take. It can be seen that the finding for the defendants in [Cambridge Credit] could just as well be put now on the Caparo basis. The scope of the duty imposed on Alexander had to be determined by reference to the kind of damage from which it had to take care to hold Cambridge harmless. As Cambridge's auditor, Alexander was under no obligation to take care to protect it against trading losses. Its job was to audit the company's figures.

It seems to me that the same approach to causation was adopted in Galoo and the same conclusions can be drawn from it."

Policy Considerations

66.This legal result is not only in line with the scope of the auditor's legal duty but is also well supported by policy considerations.

67.In Cambridge Credit, McHugh JA said (at page 351C):

".....even if a causal connection between breach and loss exists, liability depends ultimately on legal policy and not logical theories of causation."

68.In BBL, Lord Hoffmann said (at page 213C):

"Rules which make the wrongdoer liable for all the consequences of his wrongful conduct are exceptional and need to be justified by some special policy. Normally the law limits liability to those consequences which are attributable to that which made the act wrongful." (emphasis added).

69.The policy considerations against imposing on auditors such huge liabilities as trading losses are compelling. Auditors are professionals who must practise in partnerships and not limited liability entities. To protect against such claims, there must be effective insurance. The cost of such insurance coverage will ultimately be borne by both the auditors and their clients. If the true responsibility of auditors' work is to provide accurate information to shareholders as a body to enable them to enjoy and exercise their rights and interests as shareholders as Caparo suggests it is, is it justifiable to impose on the industry such huge cost in order to safeguard the trading fortunes of the company in which the shareholders are interested? After all, the entire corporate regime is based on the concept that it is the management who are responsible for the trading fortunes of the company and there are other professionals who can advise management and guide them in the discharge of their duty.

70.In BCCI, Laddie J (at page 371C) dealt with the submission that auditors should be liable for all trading losses flowing from their negligence in this way:

"If accepted, they would represent a radical extension of the liabilities shouldered by an auditor. If he failed to carry out his duties properly he could turn into an insurer against all future trading losses of his client. I have no idea whether any group of professionals would be prepared to accept appointment on that basis. If they were, no doubt the fees they would have to charge would have to increase in proportion to the increased risks involved. It is questionable whether they could ever obtain meaningful insurance cover when auditing the accounts of even the most modest companies. On the present state of the law, I think it would be imposing on him a liability greater than he or his client could reasonably have thought he was undertaking."

I entirely agree.

Remoteness

71.There is another formidable argument in the way of the Plaintiff. Mr Pollock, QC submitted that on the Plaintiff's case, it was in any event hopelessly insolvent in 1994 and hence any recovery was truly a claim for the benefit of creditors and not of either the shareholders of the Plaintiff or the Plaintiff itself. Thus, as a matter of policy, the law should not allow the Trading Loss Claim to proceed.

72.I think there is great force in that argument but I am of the view that it is rather a question of remoteness than anything else. Given the premise that the auditor's duty is to enable the shareholders to exercise their rights as a whole under the Companies Ordinance, is it within the contemplation of the parties that any loss causally flowing from a breach of that duty should be recoverable even if only for the benefit of creditors?

73.The House of Lords in Caparo has firmly said no insofar as investors or individual shareholders of the company are concerned. Mr ter Haar, QC accepted that Al Saudi Banque v. Clark Pixley [1990] 1 Ch. 313 is authority to say that no duty was directly owed to creditors of the company. If creditors cannot sue direct, should they be allowed to sue in the guise of liquidators? Lord Hoffmann in his speech to the Chancery Bar Association ("Common Sense and Causing Loss" dated 15th June 1999) thought not. I agree.

74.Put it another way, if the scope of duty of the auditor is merely to protect the interest and rights of the shareholders as a body, there is a very strong argument to say the extent of the auditor's liability is coterminous with the interest and rights of the shareholders. In Caparo, Lord Bridge said (at p. 627E):-

"Assuming for the purpose of the argument that a relationship between the auditor of a company and individual shareholders is of sufficient proximity to give rise to a duty of care, I do not understand how the scope of that duty can possibly extend beyond the protection of any individual shareholder from losses in the value of the shares which he holds."

75.In my view, there is nothing wrong in the law limiting the liability of the auditor to the value of the shares held by the shareholders at the time of the negligent audit.

76.Mr ter Haar, QC rightly observed that this argument was never raised in any of the cases we have seen. That may be so. But an argument is not any more invalid simply because it was not thought of before. In any event, I think the validity of this argument flows really from the scope of duty of the auditor as defined in the cases I have referred to above.

Factual Difficulties

77.Finally and in any event, quite apart from the legal difficulties discussed above, the factual premise of the Plaintiff's case is equally fallacious.

78.I have already referred to the state of the Plaintiff's financial position up to 1993 at the beginning of this decision. One can see the position in 1994 in fact turned for the worse even by looking at the inaccurate report before adjustment.

79.First of all, it is important to note that although the Plaintiff posted a massive turnover of $533 million, it had only a gross profit of $1 million arising out of the "sales" portion of the Plaintiff's business. The weight of the Plaintiff's income came from interest and dividends from its many investments producing a profit before taxation of $28 million.

80.Against this, the Plaintiff had net current liabilities of $354.4 million and long term liabilities of $1 billion. The Cash Flow Statement showed that the net cash outflow before financing was $630 million and the Plaintiff had a cash deficit of $504 million at the end of the year.

81.It was a small wonder that the Plaintiff did not cease business even on the negligent audit report. No doubt the fact that it was not wound up in 1994 was due to the continued support of the Shareholder and in turn the bank creditors. Their assessment of the company's outlook in the years to come was never pleaded but presumably their decision to continue supporting the company must be based on things like market outlook, viability of the investments and the respective financial positions of the Plaintiff as well as the Shareholder. It was by no means a matter of certainty that if the values of the investments were properly audited by the Defendant, the decision would have been any different. I doubt if a decision to cease trading can ever be based on the financial statements alone. Relevant considerations must include market outlook, support of shareholders and creditors, possible restructure of the company, its assets or liabilities, a possible change of capital and downsizing of operations or investments of the company or a combination of all those things. The list can go on and on. A negligent audit in this sense can never be the "effective" or "dominant" cause of the decision to continue trading.

82.Secondly, It must be remembered that the main business of the Plaintiff was investment in group companies and third party ventures. A decision to go into such investments must be initially based on an evaluation of the profitability or return of the investments. There was no suggestion anywhere that these investments whether before or after 1994 were imprudently made or unreasonable. I have already alluded to the commercial fact that an investment, particularly in real properties, by itself can never be a loss. Even if the investor cannot sustain the investment by further injection of funds, normally he should be able to dispose of what he had already paid for in return for cash unless the market has turned against him. But an auditor is not an insurer against market downturn. It follows that the contention by the Plaintiff that had the true position been known, it would not have lost all the subsequent funds invested is factually untenable.

83.The position is the same for the borrowings or the interest alleged to have been suffered by the Plaintiff. As Galoo itself pointed out, a loan accepted by a company is not a loss let alone an inevitable loss; a fortiori if the money was used to invest prudently. It will only become a loss if the money was not put to good use. The business history of Hong Kong is full of examples of "company doctors" turning a company around by making good and timely investments by proper use of borrowed funds.

Proposed Amendment

84.For all these reasons, the Plaintiff's Trading Loss Claim must therefore fail. On the last day of hearing, after much prompting from the Court, the Plaintiff decided to put in an additional paragraph of the Statement of Claim on causation at the last minute.

85.I hope I am not being unfair to say that the proposed amendment was nothing more than a regurgitation of what had already been pleaded except with some more details as to reliance. This is really in answer to Mr Pollock, QC's criticism that the Plaintiff had failed to properly plead reliance on the negligent audit by the Plaintiff. In this regard, Mr Pollock, QC relied on Berg Sons, supra. I do not think that case is of great assistance. First of all, that was not a case of striking out but a case at trial. Secondly and more importantly, it was not the case of the plaintiffs there that they had been misled. At page 1050e of the report, Hobhouse J said:-

"It is no part of the plaintiff's case that Mr Golechha, nor any director or shareholder of Berg, was in any misled by anything which [the defendants] said or did; nor is it alleged that Mr Golechha, or any member of the company, in any way relied upon anything [the defendants] said or did. It further is not alleged that Mr Golechha was not fully aware of all relevant facts and considerations."

86.Mr Pollock, QC quite rightly accepted this is a pleading point and if and insofar as there is a material averment lacking, this can easily be cured by an amendment. In my view, despite Mr Pollock, QC's forceful arguments, it can hardly be said that the auditors' report was totally ignored by the management or the shareholders. The lack of a plea of reliance is not fatal in relation to the Trading Loss Claim.

87.The question of reliance is far more pertinent in relation to the Sales Loss Claim to which I shall turn later.

88.The proposed amendment, however, instead of addressing the real point in the case, namely, causation, reiterated the Plaintiff's claim along the suggestion of Sew Hoy that but for the negligence of the Defendants, the company would not have continued trading and in that sense, its losses were "inevitable".

89.I have already explained why that is not a good answer to the Defendants' criticism of the Plaintiff's case and it must follow from my decision that even with the proposed amendment, the Plaintiff's case on Trading Loss cannot be saved.

Sales Loss Claim

90.Mr Pollock, QC argued that the Sales Loss Claim must fail for the same reasons. Furthermore, such a claim suffers from the same objection based on the hopelessly insolvent argument as the Trading Loss Claim.

91.Mr ter Haar, QC retorted by submitting that there is a distinction here in that the transactions were fictitious and should really be treated as a defalcation claim.

92.Mr Pollock, QC, on the other hand, tried to argue that the substance of these transactions was that they were "loans" to the Suppliers. The Plaintiff in fact received not only repayment of most of these advances but also very substantial commissions and handling charges. In 1994 alone, that came to some $14.4 million. The fact that eventually part of the sums advanced could not be recovered was not due to the nature of the transactions but credit worthiness of the Suppliers for which the Defendant were not responsible.

93.He further submitted that the transactions were in truth a fraud on the banks but not on the Plaintiff. It was, in any event, never pleaded as a fraud on the Plaintiff.

94.Mr Pollock, QC's arguments have great force. But whether the transactions were a fraud on the Plaintiff or not must be a question of fact which I am in no position to decide at this stage. The Plaintiff has pleaded the fictitious nature of the transactions. It has also pleaded that the majority of the directors and the shareholders were ignorant of the true nature of these transactions. It is not impossible for the Plaintiff to build a defalcation claim on what has already been pleaded. If fraud on the Plaintiff is a material averment missing, then that defect can be cured by a proper amendment setting out proper facts.

95.At the beginning of the hearing I asked Counsel whether there should be a distinction drawn between a trading loss claim and a defalcation claim. Counsel from neither side was prepared to commit their respective arguments to a clear distinction between these two claims. I am of the view, however, that not only there is a distinction but the distinction is a necessary and valid one.

96.First, losses flowing from a failure to uncover defalcation have always been the liability of the auditor. The books are full of such examples. Barings plc v. Coopers & Lybrand [1997] 1 BCLC 427 is a recent example. It is too late now to exclude that from the liabilities of an auditor.

97.In BCCI, Laddie J (at page 371F) based his decision on denying recovery of trading loss on the fact that the trading activities were not "touched by fraud or imprudence which the ...............defendant should have discovered and disclosed." I also draw comfort from the fact that such a distinction was indeed drawn in Sasea Finance v. KPMG [2000] 1 All E R 676: see in particular, the judgment of Kennedy LJ at page 683b-f.

98.Secondly, there is nothing wrong in the law according different remedies to a situation involving fraud. The distinction between remedies arising from misrepresentation and fraudulent misrepresentation is a good example. The law has always taken a strong stance against fraud and the more extensive recovery will act as a deterrent to such activities by requiring the auditor to take more care in his work in this respect.

99.It is, however, a fact that the Plaintiff's present case on its Sales Loss Claim was not put on a defalcation basis. In particular, there is no plea as to who precisely was misled if at all by the audit report. The point in Berg Sons assumed a much greater importance here. I know not in fact whether the Plaintiff has sufficient evidence to support such a case. The proposed amendment suggested some directors of the Plaintiff were "unaware of the errors" or the fictitious nature of the "sales". This is, however, not enough. What the Plaintiff has to do is to plead credible facts which go to show that the "sales" were a fraud on the Plaintiff and that the board of directors was misled. The Plaintiff then has to allege that the Plaintiff by its directors or shareholders relied on the negligent audit in failing to stop the fraud which led to loss. In these circumstances, I have no alternative but to also strike out the Sales Loss Claim as presently pleaded. I leave it open for the Plaintiff to reformulate its claim on these transactions if it is able to do so within 21 days.

Order

100.For these reasons, I order that the Statement of Claim be struck out. As a consequence, the action should be dismissed save for the cause of action on the Wantong and Life Circle transactions if the Plaintiff is able to reformulate its claim on these transactions in light of my decision herein within 21 days. If not, then I think that part of the action must also be dismissed.

101.I make an Order Nisi for costs to follow the event with certificate for two Counsel.

102.What remains is for me to thank Counsel for their careful and succinct submissions which have made my decision more focused if not relatively easier.

Representation:

Mr R ter Haar QC, leading Mr J Fok, SC and Mr G Lam, instructed by Messrs Deacons, for the Plaintiff

Mr G Pollock, QC, leading Mr C Sussex, SC and Mr J Harris, instructed by Messrs Linklaters, for the Defendant

Plaintiff's appeal against the 1st judgment and order (CACV263/2002) to Court of Appeal dimsssed and 2nd appeal by the Plaintiff (CACV292/2002) to Court of Appeal allowed. Please refer to CACV263/2002 dated 13 March 2003