Read the full judgment text of HCA 2788/2001 on BabelCite. This High Court CFI judgment was delivered on 21 May 2002 before Deputy High Court Judge R Tong, SC.
Civil procedure – striking out – Order 18 Rule 19(1)(a) of the Rules of the High Court – application by defendant auditors to strike out plaintiff's statement of claim – auditor's negligence – company in creditors' voluntary liquidation – claim against former auditors for losses suffered through continued trading of insolvent company – whether trading loss claims are recoverable in law against negligent auditors – the plaintiff was a Hong Kong company incorporated on 29 January 1985, principally engaged in investment holding, provision of finance to group companies and sales of merchandise – the company entered into creditors' voluntary liquidation on 12 October 1998 pursuant to section 228A of the Companies Ordinance, Cap 32, with estimated total deficiency of over HK$4 billion – the defendant was a firm of certified public accountants who audited the plaintiff's accounts for the years ending 31 December 1994 to 31 December 1996 – the plaintiff claimed that the defendant had negligently failed to discover that the values of certain investments were grossly overstated – had the true position been known, the plaintiff would have ceased trading or commenced an orderly winding down of its operations – the plaintiff also raised a separate claim relating to alleged fictitious letter of credit transactions – whether the trading loss claim should be struck out – whether the sales loss claim should be struck out – whether Galoo Ltd v Bright Grahame Murray or Sew Hoy & Sons Ltd v Coopers & Lybrand should be followed – the court held that trading losses are not the kind of damage that the auditor's duty was designed to protect against – the auditor's role is to provide accurate information to shareholders, not to insure against trading losses – the 'but for' test of causation is not sufficient – the proper approach is to consider the scope of the duty by reference to the kind of damage the auditor must take care to save the company from – the plaintiff's claim was practically on all fours with Galoo – Sew Hoy was distinguishable and was contrary to established principles of causation – the court rejected the argument that trading loss claims should be permitted where the company would have ceased trading but for the negligent audit – the plaintiff was hopelessly insolvent in 1994 and dependent on continued support from its shareholder – a decision to cease trading cannot be based on financial statements alone – the trading loss claim was struck out – the sales loss claim was also struck out as currently pleaded, with leave to the plaintiff to reformulate as a defalcation claim within 21 days – the court drew a distinction between trading loss claims and defalcation claims, noting that losses flowing from a failure to uncover defalcation have always been the liability of the auditor – the court made an order nisi for costs to follow the event with certificate for two counsel – the plaintiff's appeal against the first judgment and order (CACV263/2002) was dismissed, and the second appeal (CACV292/2002) was allowed by the Court of Appeal.
Legal issues: Recoverability of trading loss claims against negligent auditors · Whether the Sales Loss Claim can proceed on a defalcation basis
Outcome: Statement of Claim struck out; action dismissed save for the cause of action on the Wantong and Life Circle transactions if the plaintiff reformulates as a defalcation claim within 21 days
Cites 3 cases