Yue Xiu Finance Co. Ltd. and Another v. Dermot Agnew and Others

HCA003959/1995

1995, No.A3959

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H E A D N O T E

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Accountants carried out statutory audit for two companies - The Plaintiffs claimed that they have relied on the audited reports in transactions and sustained loss because the audit was negligently carried out - Accountants applied to strike out the claim - The Plaintiffs amended the pleading before the striking out application.

1995, No.A3959

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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Coram: Hon Mr Justice Cheung in Chambers

Dates of hearing: 28, 29 and 30 June 1995

Date of handing down of judgment: 26 July 1995

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J U D G M E N T

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1. The applications were heard in chambers. I am delivering this judgment in court in view of the importance of the principles.

Nature of Application

2. The Defendants have taken out two applications before me. The first is an application to strike out the Statement of Claim on the basis that it discloses no reasonable cause of action pursuant to O18, r.19(1) of the Rules of Supreme Court. The second is an application pursuant to O20, r.4 to disallow the amendment made by the Plaintiffs to the Statement of Claim.

Background

3. The 1st Plaintiff ("Yue Xiu") is a company incorporated in Hong Kong and carries on the business as a licensed money lender. The 2nd Plaintiff ("Simister") is a company incorporated in Liberia and is a wholly owned subsidiary of Yue Xiu.

4. The Defendants ("Deloittes" and "Ho & Ho") are two firms of accountants. They acted as joint auditors of two companies known as Texxan Industries Limited ("Texxan") and Chino Industries Limited ("Chino"). The relevant statutory audits they carried out were for the year ended 31st March 1988. They signed the joint audited report on 28th April 1989.

5. In 1987, Yue Xiu extended trade credit facilities to Texxan and Chino in the form of letters of credits.

6. Prior to June 1988, Texxan and Chino were controlled by one John Koon ("Koon"). In June 1988, pursuant to negotiations which begun in late 1987, in consideration of $16.6m paid by Simister and its nominees to Koon, Simister acquired from Koon 7,999,999 shares in a Bermuda company called Texson Holdings Limited ("Texson Holdings") which holds 100% of the shares in Texxan and Chino. The remaining 7,900,001 shares in Texxan were held by nominees of Koon namely, Goldstar Enterprises Inc. ("Goldstar"), Young Bo Lee and Agnes Koon Woo Kam Oi. The intention was to seek a listing for Texson Holdings at the Hong Kong Stock Exchange.

7. The acquisition took place pursuant to a Subscription and Shareholders Agreement ("the Shareholders Agreement") dated 24th June 1988 made between Koon, Goldstar and Simister and a Re-organisation Agreement simultaneously executed.

8. Under Clause 2.2 and Schedule 2 of the Shareholders Agreement, Koon and Simister undertook that, as soon as possible following completion, they would procure the Defendants as joint auditors of Texxan and Chino to "certify to Koon and Simister the combined profits (net of tax and inter-company transactional profits, if any, but before extraordinary items) ("the combined profits") of Texxan and Chino in respect of the year ended 31st March 1988, such combined profits to be computed by reference to their respective audited profit and loss accounts made up to 31st March 1988 and to be conclusively determined by the joint auditors acting as experts and not as arbitrators."

9. Under the Shareholders Agreement, Koon and Simister further undertook to each other that :-

1. Depending on the level of such combined profits, certain adjustment payments might have to be made in accordance with specific formulae (Schedule 2); and

2. If the combined profits were conclusively certified by the joint auditors acting as experts at less than $8,761,785 then an option would come into being permitting Simister's share to be put to Koon, either at his or Simister's election ("The put option"). (Clause 11)

Nature of the Claim against the Defendants

10. The Plaintiffs alleged that :-

1. The Defendant knew the negotiations, the re-organisation and the terms of the Shareholders Agreement. (paras.15,16,17 of the Statement of Claim)

2. The Defendant consented to act as the joint auditors to Chino and Texxan in certifying the combined profits of those two companies for the purposes of Clause 2.2, Schedule 2 and Clause 11 of the Shareholders Agreement. (para.15 of the Statement of Claim).

3. The Defendant carried out the audits knowing that Simister would rely on the said audited financial statement in determining whether they have a claim under Clause 2.2 and Schedule 2 and a right to exercise the put option provided for in Clause 11.1. (para.16 of the Statement of Claim)

4. When consenting to act as joint auditors for the purposes of the said Clause 2.2 Schedule 2 and Clause 11, and when carrying out the joint audit of the financial statement and signing the joint audit reports, the defendants well knew or ought to have known that prior to the execution of the Shareholders Agreement Yue Xiu had made available substantial financing to Texxan and Chino and that if the audited combined profits of Chino and Texxan for the year ended 31st March 1988 exceeded HK$8,761,785 Yue Xiu through Simister would remain an investor and Yue Xiu was likely to make available yet more financing to Texxan and Chino (para.17 of the Statement of Claim).

5. In the circumstances, the Defendants "well knew or ought to have known ..." that Simister and Yue Xiu would each rely on them to exercise reasonable skill and care in carrying out the said audit (para.18 of the Statement of Claim).

6. Accordingly, the Defendants owed to the Plaintiffs "a duty to exercise reasonable care and skill in acting as joint auditors in respect of the financial statement of Chino and Texxan for the year ended 31st March 1988." (para.19 of the Statement of Claim)

Negligence

11. The Plaintiffs complain that the Defendants were negligent in conducting the audits in that :-

1. They signed unqualified audit reports in respect of the accounts of Texxan and Chino in which these companies reported profits of $3,797,212 and $8,088,188 respectively (paras.20(1) & (2) of Statement of Claim).

2. Chino should in fact have made a provision of $28,202,996 against doubtful debts from related parties so that a combined loss of $16,317,596 should have been reported instead of the reported combined profits totalling $11,885,400 (paras.20(3) and (4) of Statement of Claim).

3. Ho and Ho, who were the sole auditors of those related parties, had the requisite knowledge and in auditing Texxan and Chino the Defendants should have scrutinised the accounts of such related parties (para.20(5) to (8) of the Statement of Claim).

4. The Defendants should either have insisted on Texxan and Chino providing for the doubtful debts to show the loss or, if Texxan and Chino had refused to do so, they should have qualified their audit report (paras.20(9) to (11) of the Statement of Claim).

Yue Xiu's loss

12. It is Yue Xiu's case that this negligent auditing has caused it loss because :-

1. in reliance on "the accounts of Chino and Texxan for the year ended 31st March 1988" Yue Xiu advanced $37,566,632 to Texxan and $87,937,966 to Chino making a total of $125,504,598 which it would not have been done if the related party debts had been provisioned or if the Defendants had suitably qualified their audited reports.

2. the advances are not recoverable because Chino and Texxan are now insolvent.

Simister's loss

13. It is Simister's case that this negligent auditing has caused it loss because :-

1. if the related party debts had been provided for or qualified audited reports issued, Simister would not have "assumed" that it had no claim for a payment adjustment from Koon worth $32,635,192 under the Shareholders Agreement, but would instead have recovered that sum from Koon. Alternatively, Simister would have operated the put option and recovered $24.6 million from Koon. (paras.21(a)(i) and (b)(i) of the Statement of Claim)

2. alternatively, if the Defendants had qualified their audited reports, Simister "would have required them to certify what the true combined profit or loss was" which would either have led to their recovering $32,635,192 from Koon as a pre-payment adjustment under the Shareholders Agreement or alternatively to Simister's exercise of the put option and hence recovery of $24.6 million from Koon. (paras.21(a)(ii) and (b)(ii) of the Statement of Claim).

Observation on the Statement of Claim

14. From the summary, it can be seen that the Plaintiffs, who are third parties, are relying on the audited reports prepared by the Plaintiffs for two companies, namely Texxan and Chino and claimed that the Defendants owe them a duty of care in respect of the reports. The following observation can be made of the Statement of Claim.

1. It is not alleged that the Defendants were the auditors of the Plaintiffs. It is not alleged that they ever had any contractual relationship with the Defendants or that they had ever retained the Defendants to perform any services for either of them.

2. Simister is not a shareholder in either of the audit companies. It has an investment interest at one removed, holding shares in Texson Holdings which holds the shares in Chino and Texxan. Yue Xiu is yet further removed from Chino and Texxan being Simister's parent company.

3. While it is alleged that they consented to act for the purpose of the Shareholders Agreement, it is not alleged that the Defendants had in fact so acted. In particular, it is not alleged that the Defendants:-

(a) certified to Koon or Simister the combined profits as defined; or

(b) "had conclusively determined" what such "combined profits" were "acting as experts and not as arbitrators."

4. Indeed it is alleged that Simister took it upon itself to rely on the audited accounts and "assumed" that it had no claim for adjustment or right to exercise the put option.

5. It is not alleged that either of the Plaintiffs ever relied on any acts done by the Defendants save as auditors of Texxan and Chino.

6. While it is alleged that the Defendants knew or ought to have known that the Plaintiffs would rely on their audited report as auditors of Texxan and Chino, it is not alleged that the Defendants ever intended that either of the Plaintiffs should place such reliance on their statutory audited work.

7. While it is alleged that Yue Xiu relied on the audited accounts in deciding whether or not to lend the money mentioned, it is not alleged that the Defendants ever knew or intended that Yue Xiu would rely on them in relation to any particular loan transaction. Indeed, no particulars were pleaded of the loans made by Yue Xiu.

Authorities

15. The principles to be applied in this area are found in the case of Caparo Industries Plc v. Dickman (1990)2 AC 605 ("Caparo"). In this case, the plaintiff Caparo Industries accomplished the take-over of a company called Fidelity Plc and then sued Fidelity's auditors on the basis that Caparo had relied on Fidelity's audited accounts in proceeding with the take-over which account had been negligently certified by the auditors while showing overvalued stock and under-providing for after-sales credits so that they should have shown a ￡ 400,000 loss instead of a ￡ 1.3 million profit. The auditors had reported on the accounts giving a clear certificate to the effect that they were properly prepared and gave a true and fair value of the relevant matters. The accounts were sent to the shareholders of Fidelity.

16. Caparo alleged that its share purchases subsequent to the sending of the accounts to shareholders were made in reliance on those accounts and that if it had known the true position, it would not have purchased them or made the bid at the price paid at all. Caparo argued that the auditors knew or ought to have known of the press release by Fidelity forecasting a significant profits shortfall thus causing a slide in the share price of Fidelity and Fidelity's need for financial assistance, and secondly ought to have foreseen that Fidelity was vulnerable to a take-over bid and that bidders such as Caparo may well rely on the accounts in assessing a bid and suffer loss if the accounts were inaccurate.

17. An order was made for the trial of a preliminary issue on whether the auditors owed a duty of care to Caparo (a) as potential investors in Fidelity; or (b) as shareholders in Fidelity after it had acquired the shares in respect of the audit of the relevant accounts. The House of Lords held that the auditors owed no duty of care to Caparo in either capacity. It held that the auditors did not owe any duty of care to Caparo in respect of their purchase of Fidelity's shares. The purpose of the statutory requirement for an audit of public companies was the making of a report to enable shareholders to exercise their class rights in general meetings and did not extend to the provision of information to assist shareholders in the making of decisions as to future investment in the company. Further, there was no reason in policy or principle of why auditors should be deemed to have a special relationship with non-shareholders contemplating investment in the company in reliance on the published accounts even when the affairs of the company were known to be such as to render it susceptible to an attempted take-over. Lord Bridge of Harwich at p.260, after reviewing previous decisions which had decided that a duty of care existed in respect of negligent statements, stated that : -

" The salient feature of all these cases is that the defendant giving advice or information was fully aware of the nature of the transaction which the plaintiff had in contemplation, knew that the advice or information would be communicated to him directly or indirectly and knew that it was very likely that the plaintiff would rely on that advice or information in deciding whether or not to engage in the transaction in contemplation. In these circumstances the defendant could clearly be expected, subject always to the effect of any disclaimer of responsibility, specifically to anticipate that the plaintiff would rely on the advice or information given by the defendant for the very purpose for which he did in the event rely on it. So also the plaintiff, subject again to the effect of any disclaimer, would in that situation reasonably suppose that he was entitled to rely on the advice or information communicated to him for the very purpose for which he required it. The situation is entirely different where a statement is put into more or less general circulation and may foreseeably be relied on by strangers to the maker of the statement for any one of a variety of different purposes which the maker of the statement has no specific reason to anticipate. To hold the maker of the statement to be under a duty of care in respect of the accuracy of the statement to all and sundry for any purpose for which they may choose to rely on it is not only to subject him, in the classic words of Cardozo C.J. to 'liability in an indeterminate amount for an indeterminate time to an indeterminate class:' see Ultramares Corporation v. Touche (1931) 174 N.E. 441, 444; it is also to confer on the world at large a quite unwarranted entitlement to appropriate for their own purposes the benefit of the expert knowledge or professional expertise attributed to the maker of the statement. Hence, looking only at the circumstances of these decided cases where a duty of care in respect of negligent statements has been held to exist, I should expect to find that the 'limit or control mechanism ... imposed upon the liability of a wrongdoer towards those who have suffered economic damage in consequence of his negligence' rested in the necessity to prove, in this category of the tort of negligence, as an essential ingredient of the 'proximity' between the plaintiff and the defendant, that the defendant knew that his statement would be communicated to the plaintiff, either as an individual or as a member of an identifiable class, specifically in connection with a particular transaction or transactions of a particular kind (e.g. in a prospectus inviting investment) and that the plaintiff would be very likely to rely on it for the purpose of deciding whether or not to enter upon that transaction or upon a transaction of that kind." (emphasis added)

18. Lord Oliver of Aylmerton identified the proximate or special relationship in which the duty of care may arise. At p.638 he held that :-

"... What can be deduced from the Hedley Byrne case, therefore, is that the necessary relationship between the maker of a statement or giver of advice ('the adviser') and the recipient who acts in reliance upon it ('the advisee') may typically be held to exist where

(1) the advice is required for a purpose, whether particularly specified or generally described, which is made known, either actually or inferentially, to the adviser at the time when the advice is given;

(2) the adviser knows, either actually or inferentially, that his advice will be communicated to the advisee, either specifically or as a member of an ascertainable class, in order that it should be used by the advisee for that purpose; (emphasis added)

(3) it is known either actually or inferentially, that the advice so communicated is likely to be acted upon by the advisee for that purpose without independent inquiry; and

(4) it is so acted upon by the advisee to his detriment.

That is not, of course, to suggest that these conditions are either conclusive or exclusive, but merely that the actual decision in the case does not warrant any broader propositions."

19. The House of Lords approved of the earlier decision of Millett J in Al Saudi Banque v. Clark Pixley [1990] Ch.313 in which it was held that the auditors of a company owed no duty of care to a bank which lent money to a company, regardless of whether the bank was an existing creditor or a potential one, because no sufficient proximity of relationship existed in either case between the auditor and the bank.

20. Subsequent cases illustrated the application of the principles in Caparo. InJames McNaughton Paper Co Ltd v. Hicks Anderson & Co [1991]2 QB 113, while negotiations were taking place for the take-over of a group of companies by the plaintiff company, the group instructed their accountants to prepare accounts for the group. The accountants submitted the accounts as final draft, showing a net loss for the year of ￡ 48,094 and in reply to a question put by the plaintiff said the group was breaking-even or doing marginally worth. Subsequently, the plaintiff completed the take-over and discovered a number of errors in the accounts. The plaintiff claimed negligence against the accountants for loss and damages suffered as a result of the take-over. The Court of Appeal held that there was no relationship or proximity between the plaintiffs and the accountants as to establish a duty of care.

21. Neill LJ at p.125 held that :-

"(a) ... In England, a restrictive approach is now adopted to any extension of the scope of duty of care beyond the person directly intended by the maker of the statement to act upon it; and

(b) in deciding whether a duty of care exist in any particular case it is necessary to take all these circumstances into account; but

(c) that not withstanding (b) it is possible to identify certain matters which are likely to be of importance in most cases in reaching a decision as to whether or not a duty exists."

The learned judge referred to six matters which are relevant in deciding whether or not a duty exists :-

1. The purpose for which the statement was made.

Where the statement had been prepared or made by the adviser for the express purpose of being communicated to the advisee, it may often be right to conclude that the advisee was within the scope of duty of care. However, where the statement have been prepared or made or primarily prepared or made for a different purpose and for the benefit of someone other than the advisee, then it would be necessary to look carefully at the precise purpose for which the statement was communicated to the advisee.

2. The purpose for which the statement was communicated.

It is necessary to consider whether the communication was for information only or was it made for some action to be taken and if so what action and by whom? Who require the communication to be made?

3. The relationship between the adviser, the advisee and any relevant third party.

Where the statement was made or prepared in the first instance to or for the benefit of someone other than the advisee, it would be necessary to consider the relationship between the parties. It may be that the advisee is likely to look to the third party and through him to the adviser for advice or guidance. Or the advisee may be wholly dependent and in a position to make any necessary judgment himself.

4. The size of any class to which the advisee belongs.

Where there is a single advisee or he is a member of only a small class, it may sometimes be simple to infer that the duty of care was owed to him. It may be more difficult to make such an inference where there is a large membership particularly where the statement was made for someone outside the class.

5. The state of knowledge of the adviser.

The precise state of knowledge of the adviser is one of the most important matters to be examined. Knowledge includes not only actual knowledge but also such knowledge as would be attributed to a reasonable man in the circumstances in which the adviser was placed. On the other hand, any duty of care will be limited to transactions or type of transactions which the adviser acknowledged and will only arise where the adviser knows or ought to have known that the statement of advice would be relied upon by a particular person or class of persons in connection with that transaction. It is also necessary to consider whether the adviser knew that the advisee would rely on the statement without obtaining independent advice.

6. Reliance by the advisee.

It is useful to examine the matter from the point of the view of the plaintiff. One should consider whether and to what extent the advisee was entitled to rely on the statement to take the action that he did it. It is also necessary to consider whether he did in fact rely on the statement, whether he did use or should have used his own judgment and whether he did seek or should have sought independent advice.

22. In Morgan Crucible Co Plc v. Hill Samuel & Co Ltd and others [1991] Ch.295, the plaintiff had taken over a company and brought an action against the defendants who were the advisers, accountants and directors of that company. The Plaintiff alleged breach of duty of care by negligent mis-representation in audited financial statements, in an unaudited interim statement published prior to the bid, and in a series of representations contained in defence documents issued to shareholders and on the plaintiff's advisers after the bid on which the Plaintiff had foreseeably relied in making and increasing their offer and whereby they had suffered loss. The Court of Appeal held at p.319 that :-

"In these circumstances, we are of the opinion that it is at least arguable that the present case can be distinguished from Caparo's case on its assumed facts. On such facts, each of the directors in making the relevant representations was aware that Morgan Crucible would rely on them for the purpose of deciding whether or not to make an increased bid and intended that they should; this was one of the purposes of the defence documents and the representations contained therein. Morgan Crucible duly did rely on them for this purpose. In these circumstances subject to the question of justice and reasonableness, we think it plainly arguable that there was a relationship of proximity between the directors and Morgan Crucible sufficient to give rise to a duty of care ...."

23. In respect of the auditors, the Court of Appeal also found that the Plaintiff have established an arguable case as to duty of care against the auditors in that it was reasonably foreseeable to the auditors and the auditors must have known and intended that the directors and the financial advisers of the plaintiff would rely upon the representation contained in the audited accounts in the profit forecast.

24. Berg Son & Co Ltd v. Adams & Other (1992) BCC 661 is an action against an insolvent company's former auditors in respect of alleged loss caused to the company by the auditor's alleged negligence and/or breaches of duty and/or contract in relation to the preparation and certification of the company's audited account. Hobhouse J at p.681 held that :-

" The statements of principle in Caparo show that there must be a specific relationship between the function which the defendant is requested to perform and the transaction in relation to which the plaintiff says he has relied upon the proper performance of that function. It is not enough that there be a general potential for reliance or that there may be a class of transactions which may foreseeably be entered into. There must be a specific transaction which can be said to be the transaction, or among the transactions, to which the carrying out of the function was directed. (emphasis added) The result of applying such a test is that it will only be in very clear and immediate circumstances that it will be possible to say that a statutory auditor owes a duty of care to a banker who may at some later date chose to lend money to a company. The present case is not such a case. The relevant transactions by which Union Discount alleged that it suffered the loss which is the subject-matter of its claim in the present case were remote from the exercise of the certification of the accounts of Berg by Dearden Farrow in October 1982."

25. In Galoo Ltd (in Liquidation) & Others v. Bright Grahame Murray (a firm) & Another [1994]1 WLR 1360, the Defendant ("BGM"), a firm of chartered accountants were the auditors of the accounts of Galoo & Gamine. The 3rd Plaintiff Hillsdown purchased shares in Gamine. It also made loans to Galoo and Gamine. The three issues for the Court of Appeal's consideration were :-

Issue 2 - Loss resulting from the original purchase by Hillsdown of the shares in Gamine. The deputy judge decided that the Statement of Claim disclosed a reasonable cause of action under this head and declined to strike it out.

Issue 3 - Loss resulting from making the loans to Gamine, the deputy judge struck out this claim.

Issue 4 - For amounts paid under a supplemental agreement for the purchase of further shares in Gamine, the claim was struck out.

26. The Court of Appeal confirmed the deputy judge's decision on all 3 issues. At p.1382 Glidewell LJ held that :-

"The distinction between the set of facts which it was held in Morgan Crucible Co Plc v. Hill Samuel & Co Ltd [1991] Ch.295 would suffice to establish a duty of care owe by auditors from those facts which it was held in the Caparo Industries Case [1990]2 AC 605 would not have this effect is inevitably a fine one. In my judgment, the distinction may be expressed as follows. Mere forseeability that a potential bidder may rely on the audited accounts does not impose on the auditor a duty of care to the bidder, but if the auditor is expressly made aware that a particular identified bidder will rely on the audited accounts or other statements approved by the auditor, and intends that the bidder should so rely, the auditor will be under a duty of care to the bidder for the breach of which he may be reliable." (emphasis added)

27. In respect of issue 2, facts were pleaded which involved a direct representation by a letter from the auditors to the take-over bidder that the audited accounts which, to the auditor's knowledge would be used to fix the purchase price, gave an accurate account of the state of the target company's affairs. In contrast, in relation to issue 4, the Plaintiff could not relate the share purchase to the same direct representation since the purchase took place pursuant to a different supplementary contract.

28. In respect of issue 3, the pleadings stated that (p.1385 of the judgment) :-

"The Defendants knew or ought to have known from the date of the acquisition agreement onwards that ... (iii) [Hillsdown] were obliged, at the option of the remaining shareholders in [Gamine] to acquire their shares in [Gamine] at a price to be fixed by reference to accounts which could be audited only by [BGM] ... (v) [Hillsdown] were using [BGM's] account and audit work in their consideration of the existing lending to and/or the making of further advances to [Galoo & Gamine]."

29. On this issue, Glidewell LJ at p.1385 of the judgment held that :-

"It will be seen that the statement of claim does not plead that B.G.M. knew that Hillsdown would rely on the audited accounts for the purpose of making further loans, nor that B.G.M. intended that Hillsdown should so rely." (emphasis added)

Principles in striking out application

30. Before I apply the authorities to the present case , I will first of all repeat the well-known principles regarding striking out of pleading on the ground that it does not disclose a reasonable cause of action.

1. On an application to strike out a pleading under O18, r.19.(1)(a) no evidence is admissible and since it is only the pleading itself which is being examined, the court is required to assume that each and every one of the facts pleaded (unless manifestly incapable of proof) is true and will be capable of proof at the trial.

2. Base on that assumption, the issue is whether the plaintiff's claim is nevertheless bound to fail? Only if the answer in relation to any claim is "yes" should that claim be struck out. Since the court at this stage is concerned only with the allegations in the statement of claim and not with evidence, the Court hearing the application is in as good a position to decide the issue now as it would have been at the conclusion of a trial.

3. Order 18, r.19(1) expressly provides that the Court may, as an alternative to striking out a pleading, order that it be amended. Obviously, if after an amendment properly made the statement of claim does disclose a reasonable cause of action, it should not be struck out.

4. In E (A minor) v. Dorset County Council [1994]3 WLR 853, Sir Bingham M.R. held that it is clear that a statement of claim should not be struck out under RSC O.18, r.19 as disclosing no reasonable cause of action save in clear and obvious cases, where the legal basis of the claim is unarguable or almost incontestably bad. At p.865 he held that :-

".... This must mean that where the legal viability of a cause of action is unclear (perhaps because the law is in a state of transition), or in any event sensitive to the facts, an order to strike out should not be made. But if after argument the court can be properly persuaded that no matter what (within the reason bounds of the pleadings) the actual facts the claim is bound to fail for want of a cause of action, I can see no reason why the parties should be required to prolong the proceedings before that decision is reached."

Yue Xiu

The Defendants' argument

31. I will first of all consider the Statement of Claim in its unamended form before I deal with the amendments. Mr Ribeiro, Leading Counsel for Deloittes, whose argument was adopted by Mr Stone, Leading Counsel for Ho & Ho argued that Yue Xiu's claim is plainly and obviously unsustainable. The sum total of its claims are :-

1. It had previously provided trading facilities to Texxan and Chino, as Defendants knew or ought to have known;

2. That if the combined profits exceed HK$8,761,785, Yue Xiu, through Simister, would remain an investor and Yue Xiu was likely to make available yet more financing to Texxan and Chino;

3. That the Defendants well knew or ought to have known that Yue Xiu was relying on them to exercise reasonable skill and care in carrying out the said audit;

4. That relying on the audited accounts for the year ended 31st March 1988, Yue Xiu advanced $37,566,632 to Texxan and $87,937,966 to Chino (totalling $125,504,598) which it would not have done if the Defendants had not negligently failed to insist on a provision of $28.2m for bad debts in Chino's book or else qualify the accounts.

32. On the pleaded facts, the Defendants merely conducted a statutory audit of Texxan and Chino for its ordinary purpose, i.e. to report to the shareholders as a class in general meetings on the financial condition of those companies. Like the English counterpart, the Hong Kong Companies Ordinance sets out the requirement of appointment of auditors in companies and that the auditors shall report to the members of the company on the accounts examined by them and laid before the company in general meeting. Yue Xiu is not a shareholder, the facts pleaded do not found any relationship of proximity necessary to give rise to any duty of care in connection of Yue Xiu's lending losses. It is not pleaded that the Defendants knew or intended that Yue Xiu would rely on the audited reports in relation to any particular transaction.

33. Issue No.3 in Galoo is relevant to Yue Xiu's claim. At p.1385, Glidewell LJ held that :-

" On this issue also I agree with the deputy judge. As I have said, the statement of claim does not plead the facts which in Morgan Crucible Co. Plc v. Hill Samuel & Co Ltd [1991] Ch.295 were held to be those necessary in order to establish a duty of care, namely that the auditor knew that the intending lender would rely on the accounts approved by the auditors for the purpose of deciding whether to make the loans or increase loans already made, and intended that the intending lender should so rely. In other words I agree with the deputy judge..."

The Plaintiffs' argument

34. Mr Edward Chan, Leading Counsel for the Plaintiffs, argued that the intention of the Defendants that the report should be relied on by the Plaintiffs in the transaction giving rise to the loss was not held to be a separate requirement in Caparo where there was no reference to any such requirement. He argued that this is only an alternative to the requirement that the Defendants should have known of the Plaintiffs' relying on the report in the relevant transaction and not as a necessary additional and independent requirement giving rise to a duty of care.

35. Mr Chan further referred to the judgment of Glidewell LJ in Galoo at p.1385 which stated that :-

"It will be seen that the Statement of Claim does not plead that B.G.M. knew that Hillsdown would rely on the audited accounts for the purpose of making further loans, nor that B.G.M. intended that Hillsdown should so rely."

He submitted that this passage supported his argument that the requirement of the Defendants' intention that the Plaintiffs should rely on the report is only an alternative one.

36. Mr Chan argued that on the pleaded facts, the Defendants were not a mere auditor whose report was made use of without their acknowledge or specific knowledge. Instead there are the following features pleaded :-

1. The Defendants were aware of the negotiations between Yue Xiu for the acquisition of substantial interest in Chino and Texxan through the vehicle of Texson Holdings. For that purpose, a special audit was commissioned and undertaken by the Defendants. I should point out that in para.8 of the Amended Statement of Claim, it is now pleaded that the Defendants were appointed as joint auditors in respect of :-

i) the audit of the financial statement for Texxan and Chino for the eight months to 30th November 1987 which joint audit was expressly required for the purpose of the Shareholders Agreement; and

ii) the audit of the financial statements for Chino and Texxan for the year ended 31st March 1988.

The financial statements for the eight months period up to 30th November 1987 is of no relevance to the present application. The report that the Plaintiffs is relying and of which they alleged have caused the loss is the one for the year ended 31st March 1988, as can be seen from para.20 of the Statement of Claim.

2. The Defendants were aware of the progress and the term of the Shareholders Agreement eventually entered into which called for ascertaining of the combined profits of the two companies to be certified by them as experts and not merely as an auditor undertaking regular audit.

3. The terms of the Shareholders Agreement expressly required the 1st Defendant to be appointed as the auditor for Texson Holdings, the vehicle through which the two companies was acquired.

4. The terms of the Shareholders Agreement expressly required Simister to procure the appointment of the Defendants to certify the combined profits which was to be computed by reference to the respective audited profit and loss accounts of the two companies made up to 31st March 1988 to be conclusively determined by the Defendants as experts.

5. Yue Xiu had made loans to Chino and Texxan before the Shareholders Agreement. The Shareholders Agreement was a product of a long negotiation for the Yue Xiu Group to acquire a major shareholding in Chino and Texxan (eventually through the creation of Texson Holdings).

6. The Defendants were aware of the past lending and knew or should have known of Yue Xiu's reliance on their joint audited accounts in deciding whether to make further loans to the two companies and that it was likely that further loans would be made if the combined profits of the two companies showed a healthy profit. Further, the Defendants also intended that Yue Xiu would so rely on their audited accounts.

37. Mr Chan submitted that the facts as pleaded in the Statement of Claim would pass all the test of Neil LJ in James McNaughton.

(1) Purpose for which the statement was made

The facts pleaded may justify a finding that the audited accounts did not just serve the statutory purposes but also the purpose envisaged in the Shareholders Agreement and in so far as Yue Xiu's claim is concerned, the purpose of furnishing Yue Xiu about financial information of the two companies.

(2) Purpose of the communication

At this stage, the court cannot find that the communication was solely made to satisfy the statutory requirments.

(3) Relationship between the advisor, advisee and the relevant third party

The relationship was very close in this case. The advisors were agreed by the advisee and the other major shareholder to be appointed as the joint auditors to certify the combined profits. There was no suggestion of the advisee having any other independent source of the financial information of the relevant third parties. In view of the fact that the combined profits is to be ascertained by computation from the audited accounts audited by the Defendants, the relationship between the Plaintiffs and the Defendants was very close.

(4) Size of the class

So far as Simister is concerned, it was obviously a unique situation, the class would contain two persons i.e. Simister and Koon or his nominees. So far as Yue Xiu is concerned, the class is also small. Yue Xiu is not an ordinary creditor. It was a major investor in the companies.

(5) State of knowledge of the adviser

The Defendants knew of the loans by Yue Xiu in the past, and also must have known of the interest of Yue Xiu in the affairs of the companies and their investment through Simister in the companies and that Yue Xiu is likely to lend further sum on the strength of a healthy combined profit. In so far as Simister is concerned, the Defendants knew of the Shareholders Agreement and its term.

(6) Reliance by the adviser

Both Yue Xiu and Simister relied on the audited accounts. There was no suggestion in the pleading that they had any other source which made it unreasonable to rely on the Defendants' audited accounts.

Pleading defective

38. The issue in Yue Xiu's claim is whether on the pleaded case a relationship of proximity exists which gives rise to a duty of care on the part of the Defendants who had audited the financial statements of Texxan and Chino.

39. The starting point is that Caparo did not decide that an audited report can never be relied by third parties as the basis on which a duty of care may arise on the part of the auditors. However, what the case did decide is that foreseeability is not the sole basis to attract liability on the part of the auditors.

40. Lord Oliver at p.643 of the judgment had this to say :-

"... it is almost always foreseeable that someone, somewhere in some circumstances, may choose to alter his position upon the faith of the accuracy of a statement or report which comes to his attention and it is always foreseeable that a report - even a confidential report, may come to be communicated to persons other than the original or intended recipient. To apply as a test of liability, only the forseeability of possible damages without some further control would be to create a liability wholly indefinite in area, duration and an amount and would open up a limitless risk of uninsurable risk for the professional man."

41. In my view, Mr Chan's construction of Caparo is incorrect. In order to establish the relationship of proximity, it is necessary to show that the Defendants knew the Plaintiffs would rely on the audited reports for a particular purpose and intended that the Plaintiffs should rely on the reports. To construe otherwise would defeat the basis upon which Caparo was decided. While the speech of Lord Bridge did not expressly refer to the requirement of the intention on the defendant that the plaintiff should rely on the statement in the transaction giving rise to the loss, other speeches by the Law Lords had made this matter beyond doubt.

42. I have already referred to the four requirements that Lord Oliver had deduced from Hedley Byrne. The second requirement stated that "the adviser knows, ... that his advice will be communicated to the advisee, ... in order (emphasis added) that it should be used by the advisee for that purpose." The words "in order" could only mean that it was intended to be relied upon by the advisee, and in this case, Yue Xiu.

43. Again at p.654 Lord Oliver stated that :-

"to widen the scope of the duty to include loss caused to an individual by reliance upon the accounts for a purpose for which they were not supplied and were not intended (emphasis added) would be to extend it beyond the limits which are so far deducible from the decision of this House."

44. Similar view is echoed by Lord Jauncey of Tullichette at p.658 where he held that :-

"Lord Templeman (in Smith v. Erics Bush [1990]1 AC 831) undoubtedly considered that one of the necessary ingredients of the relationship of proximity was the fact that the valuer knew of the particular transaction for the purpose for which reliance would probably be placed on his report." (emphasis added)

45. Furthermore, Mr Chan had wrongly construed the judgment of Glidewell LJ in Galooat p.135 as only requiring an alternative element before liability can be established. The matter is put beyond doubt by his judgment at p.1382 in which he said :-

"... but if the auditor is expressly made aware that a particular identified bidder will rely on the audited accounts or other statements approved by the auditors, and intends that the bidder should so rely (emphasis added), the auditor would be under a duty of care to the bidder for the breach of which he may be liable."

And further at p.1385:-

"namely that the auditor knew that the intending lender will rely on the accounts approved by the auditors for the purpose of deciding whether to make the loans or increase loans already made, and intended that the intending lender should so rely." (emphasis added)

46. I set out paras.16, 17 & 18 of the Statement of Claim which are the basis upon which the Plaintiffs alleged the existence of a duty of care.

"16. On 28th April 1989 DHS and H&H (i.e. the Defendants) each signed Joint Audit Reports on the financial statements of CIL and TIL (i.e. Chino and Texxan) for the year ended 31st March 1988. Whilst carrying out the audit work leading to the said reports and when signing the said reports themselves, DHS and H&H each knew or ought to have known of the SSA (i.e. Shareholders' Agreement) and in particular Clause 2.2, Schedule 2 and Clause 11 thereof and that SIL (i.e. Simister) would rely on the said audited financial statements in determining whether they had a claim under the said Clause 2.2 and Schedule 2 and/or a right to exercise the put option provided for in the said Clause 11.1.

17. Further, when consenting (and/or acquiescing therein) as aforesaid to act as Joint Auditors for the purposes of the said Clause 2.2, Schedule 2 and Clause 11, and when carrying out the said joint audit on the said financial statements and/or signing the said joint audit reports thereon, DHS and H&H well knew or ought to have known that prior to the execution of the SSA, YXFC (i.e. Yue Xiu) had made available substantial financing to TIL and CIL and that if the audited combined profits of CIL and TIL for the year ended 31st 1988 exceeded HK$8,761,785 YXFC through SIL would remain an investor and YXFC was likely to make available yet more financing to TIL and CIL.

18. In the premises, DHS and H&H well knew or ought to have known when they consented (or acquiesced) as pleaded in paragraph 15 above and/or when they audited the financial statements of CIL and TIL as aforesaid that SIL and YXFC were each relying on them to exercise reasonable skill and care in carrying out the said audit and in so consenting (or acquiescing) and/or undertaking the said audit, each of DHS and H&H assumed vis-a-vis SIL and YXFC the responsibility of exercising such reasonable care."

47. It is apparent from these paragraphs that the Plaintiffs have merely pleaded that it was foreseeable by the Defendants that Yue Xiu might rely on the audited accounts and advance more money to the two companies. It was pleaded that the Defendants knew or ought to have known of various matters, some of which would only happen in the future such Yue Xiu relying on the accounts in deciding whether or not to further lend money or the future lending of Yue Xiu. All these matters are only relevant to the issue of foreseeability. This is not sufficient to attract liability on the part of the Defendants. What is glaringly missing is that the Defendants intended that Yue Xiu should rely on the audited reports to make specific loans to the two companies which is one of the essential requirements set out in Caparo and followed in subsequent cases such as Morgan Crucible and Galoo. The Statement of Claim fails to show a proximate relationship giving rise to a duty of care on the part of the Defendants.

48. On this ground alone the claim by Yue Xiu did not disclose a reasonable cause of action and ought to be struck out.

Specific transactions

49. In respect of specific transactions, para.17 of the Statement of Claim merely pleaded that Yue Xiu was likely to make available yet more financing to Chino and Texxan, it did not plead any particular loan to these two companies. In para.21 it is pleaded that Yue Xiu relied upon the audited accounts and advanced HK$375,666,322 to Texxan and HK$87,937,966 to Chino. No particulars were given on these sums such as to the time of the advancement, whether or not the advancement was made in parts and if so, details of each part or whether the advancement was made all at one time.

50. Mr Chan argued that the law does not require that the Defendants should know of the particular transaction before the duty of care arise. It is sufficient if they knew of the type of transaction namely the lending to the two companies which is now pleaded. He further argued that where particulars are lacking, the Defendants could demand for the particulars and the absence of which is not a basis for striking out under O.18, r.19(1). In support of his argument he referred to Lord Bridge at page 621 of Caparo in which he said :-

".... the necessity to prove .... that the Defendant knew that his statement would be communicated to the Plaintiff either as an individual or as a member of an identifiable class, specifically in connection with a particular transaction or transactions of a particular kind (e.g. in a prospectus inviting investment) and that the Plaintiff would be very likely to rely on it for the purpose of deciding whether or not to enter upon that transaction or upon a transaction of that kind." (emphasis added)

Mr Chan further drew support from Lord Bridge at page 624 when he approved of the decision of Richmond, P. in the New Zealand case of Scott Group Limited v. McFarlane [1978]1 NZLR 553 in which the learned judge stated that :-

".... I do not think that such a relationship should be found to exist unless, at least, the maker of the statement was, or ought to have been, aware that his advice or information would in fact be made available to and be relied on by a particular person or class of persons for the purposes of a particular transaction or type of transaction ...." (emphasis added)

51. I agreed with Mr Ribeiro's submission that one must consider the context in which Lord Bridge referred to the type of transaction. The issue in Caparois whether the plaintiff as investors and shareholder could make use of the statutory audited reports for that type of purpose, namely, to invest in the company. However, where, as in this case, the Plaintiffs are relying on special facts to establish a duty of care on the part of the Defendants, the court must be satisfied that the financial statements were relied for a particular transaction. The requirement that the statutory reports must be required for a particular purpose or transaction was amply set out in Caparo and in the subsequent cases I have referred. I will further refer to the speech of Lord Jauncey where at p.657, after referring to the judgment of Denning LJ in Candler v. Crane Christmas & Co [1951]2 KB 164, he held that:-

"Denning LJ truly considered that the scope of any duty of care was limited to the precise transaction (emphasis added) for which the accountants knew that the accounts were to be used."

At p.658, he further held that :-

"... in each of these cases where a duty of care has been held to exist, the statement in question has, to the knowledge of its maker, been made available to the plaintiff for a particular purpose (emphasis added) upon which he has relied."

52. The importance of reliance on the reports for specific transactions can be seen from the judgment of Hobhouse J in Berg Sons at p.669 :-

" Furthermore, there would only be a limited period of time within which it would be reasonably foreseeable that a bank or discount house would rely upon a given set of audited accounts. By the time of the completion of the audit, over six months had already elapsed since the end of the year covered by these accounts. It would not be reasonably foreseen that these accounts would still be relied upon by any banker acting in the ordinary course of business as a basis for assessing the then creditworthiness of Berg after the passage of more than about 15 months from the end of the period covered by the accounts. By that time the information contained in the audited accounts would be so out of date that it would not reasonably be foreseen as the basis for a business judgment concerning the extension of credit to Berg or the discounting of bills."

53. In the end I find that Yue Xiu has not pleaded a reasonable cause of action against the Defendants in the Statement of Claim. To quote the words of Lord Bridge in Caparo at page 624 :-

"It would be equally wrong, in my opinion, to hold an auditor under a duty of care to anyone who might lend money to a company by reason only that it was foreseeable as highly probable that the company would borrow money at sometime in the year following publication of its audited accounts and that lenders might rely on those accounts in deciding to lend."

Simister

54. I will now turn to the case of Simister against the Defendants. Apart from what he had said regarding the case of Yue Xiu, Mr Chan further argued that the Defendants were aware of the terms of the Shareholders Agreement and the significance of the combined profits to the rights of Simister under Clause 2.2 and Schedule 2, and also Clause 11. He argued that although these clauses spoke of the certifying of the combined profits, it does not necessarily mean that the Defendants, when accepting the appointment as joint auditor, would be required to give a certification of such combined profits separate and distinct from the audited report on the financial statements they had prepared. He argued that this is clear from the fact that the combined profits was to be computed by reference to their respective audited profit and loss accounts. Thus it was not envisaged that a separate and distinct certification of combined profits would be necessary when the sum could be clearly computed from the profit and loss accounts audited and thereby also certified by the Defendants.

55. Mr Chan further submitted that there is no reason why the audited accounts so prepared by the Defendants could not serve and intended by all parties concerned including the Defendants themselves to serve both the statutory purpose and at the same time also the purpose of certifying the combined profits as required by the Shareholders Agreement when the Defendants were aware of the Shareholders Agreement and the fact that under the Shareholders Agreement they were required to certify the combined profits which was to be arrived at by a computation of the profit and loss accounts they had audited. Under the terms of the Shareholders Agreement if the combined profits exceeds HK$12,915,000, Simister shall pay to Koon a sum as equals 2 x (combined profits - HK$12,300,000). If the combined profits is less than HK$11,685,000, Koon shall pay to Simister a sum as equals 2 x (HK$12,300,000 - combined profits). In the financial statements for the year ended 31st March 1988 prepared by the Defendants, Chino and Texxan respectively reported profits after tax and before extraordinary items of HK$3,797,212 and HK$8,088,188. The combined profits was thus HK$11,885,400. Mr Chan submitted that this figure was within the range of the combined profits set out in the Shareholders Agreement. Mr Chan accepted that no certification had been made by the Defendants under the terms of the Shareholders Agreement and the audited accounts were not the same thing as the certification, but he argued that the matter was so obvious that there was no need to ask for a certification of the combined profits from the Defendants.

Different roles of the Defendants

56. In my view, Simister's claim against the Defendants is equally unsustainable. The Defendants had no contractual relationship with Simister nor was Simister a shareholder in either Texxan and Chino. It holds shares in Texson Holdings which in turn holds shares in Texxan and Chino.

57. On Simister's own case, the Shareholders Agreement provided that the Defendants would be "procured" by Simister and Koon to act as experts to "certify to Koon and Simister" the "combined profits". As against Simister, the role of the Defendants was totally different in relation to the one they had performed as auditors for the shareholders of Texxan and Chino on the audited accounts. The certification under the Shareholders Agreement would involve the Defendants "computing" and "conclusively determining" the combined profits "by reference to" the audited profit and loss accounts.

58. Accordingly, on Simister's pleading, the Shareholders Agreement envisaged that Simister and Koon would cause the Defendants to enter into a relationship with Simister and Koon to advise for the purposes of operating the mechanism under the Shareholders Agreement in respect of the payment and put option. It is obvious that such a relationship would involve the Defendants in a wholly different role from its role as one of the joint auditors of Texxan and Chino.

59. Unless and until the Defendants were procured so to act and in fact determined and certified the "combined profits" to Simister and Koon as defined, the Defendants had assumed no relevant relationship with Simister and Koon. No such procuring of the Defendants and no determination or issue of any such certificate by the Defendants is alleged in the Statement of Claim.

60. Instead, Simister pleaded that it took it on itself to rely on the work which had been done by the Defendants in a wholly different context, for a different purpose and for the benefit of different persons. i.e., the work done by the Defendants as auditors for the purpose of the annual statutory audits of Texxan and Chino and for the benefit of their shareholders as a class.

61. What Simister did was to use the accounts audited by the Defendants to compute for itself what Simister (and not the Defendants) determined to be "combined profits" for the purposes of the Shareholders Agreement. It is plain and obvious that such facts placed no duty of care on the Defendants vis-a-vis Simister.

Simister's pleading also defective

62. Although Mr Chan maintained that the Plaintiffs are not deeming the audited reports to be the certification under the Shareholders Agreement, as in the case with Yue Xiu, there is no allegation that the Defendants intended that Simister should place reliance on the statutory audit for the purpose of Simister's own evaluation or computation which underpins the assumptions made by Simister as to its position under the Shareholders Agreement. Indeed, the parties expressly provided otherwise. Further, the statutory audit function and the function of the certification are separate and distinct and the combined profits which is defined as net of tax and inter company transactional profits, if any, but before extraordinary items, may well be different from a simple addition of the profits of the two companies. This may well be the reason why under the Shareholders Agreement the certificate of combined profits was to be conclusive evidence whereas the audited accounts were not. Mr Stone submitted and I agree that the Plaintiffs could not possibly have pleaded that the Defendants intended that Simister should rely on the audited accounts because this was totally contrary to the detailed arrangements set out in the Shareholders Agreement.

63. In my view, the cause of action by Simister against the Defendants is unsustainable, no duty is owed by the Defendants as auditors of Texxan and Chino to Simister and no other relationship with Simister ever came into being which was capable of sustaining a cause of action against the Defendants.

Amendments

Paragraph 8

64. I will now turn to the amendments. Pursuant to O.20 r.1 and 3 the Plaintiffs, as they were entitled to do, amended the Statement of Claim without leave on 26th June 1995, which was two days before the hearing of the striking out application. The first amendment appeared at para.8 of the Statement of Claim which is as follows.

"8. At some time prior to late 1987, DHS and H&H were appointed to act as joint auditors of TIL and CIL and in fact so acted in particular in relation to (i) the audit of the financial statements for TIL and CIL for the eight months to 30th November 1987, which joint audit was expressly required for the purposes of the Subscription and Shareholders Agreement hereinafter referred to, and (ii) the audit of the financial statements for TIL and CIL for the year ended 31st March 1988."

The Defendants asked me to disallow the amendments pursuant to O.20, r.4 as the amendments were improperly formulated. In my view, in respect of item (i), a totally irrelevant matter is pleaded. It referred to the audited report for the 8 months period up to 30th November 1987. This is not the report upon which the Plaintiffs based their cause of action. In respect of item (ii), it did not add anything new to the Statement of Claim.

Paragraph 17

65. The next amendment is at para.17 which is as follows :-

"17. Further, when consenting (and/or acquiescing therein) as aforesaid to act as Joint Auditors for the purposes of the said Clause 2.2, Schedule 2 and Clause 11, and when carrying out the said joint audit on the said financial statements and/or signing the said joint audit reports thereon, DHS and H&H :-

(1) well knew or ought to have known that prior to the execution of the SSA, YXFC had made available substantial financing to TIL and CIL and that if the audited combined profits of CIL and TIL for the year ended 31st March 1988 exceeded HK$8,761,785 YXFC through SIL would remain an investor and YXFC was likely to make available yet more financing to TIL and CIL in reliance upon (i) the joint audit reports of DS and H&H dated 21st June 1988 on the financial statements of TIL and CIL for the eight months ended 30th November 1987 (which said joint audit reports were annexed to the SSA as warranted by Koon as aforesaid), and (ii) the financial statements of TIL and CIL for the year ended 31st March 1989 contained in the said joint audit reports (dated 28th April 1989) prepared or to be prepared by DHS and H&H; and/or

(2) intended that YXFC should so rely as pleaded in (1) above."

66. In respect of para.17(1)(i) the reference to the financial statement for the 8 month period up to 30th November 1987 is again irrelevant. In respect of para.17(1)(ii), this is again only an elaboration of the previous pleadings.

67. However, what is more objectionable is that the amendment does not save the pleadings. It is now pleaded under para.17(2) that the Defendants intended Yue Xiu should rely on the audited reports. Under O.20, r.4 the court may disallow an amendment if such amendments would not be allowed where leave is sought. Pursuant to the Practice Direction, the Defendants had by a letter dated 16th May 1995 informed the Plaintiffs of their intention to strike out the Statement of Claim. Invitation was made to the Plaintiffs to amend the Statement of Claim before the summons to strike out would be issued. No response was made. Then two days before the hearing of the application to strike out, the Plaintiffs amended the Statement of Claim. This is obviously an attempt to ward off the striking out application.

68. The amendment under para.17(2) is totally devoid of any particulars. It is clear from Note 18/12/11 of the Supreme Court Practice 1995, particulars must be given where intention is pleaded. The matter is one of fundamental importance. The Plaintiffs are alleging a proximate relationship between the parties which gives rise to a duty of care on the part of the Defendants. To do so, they must set out fully the circumstances in which they say this relationship exists. In Morgan Crucible where the Court of Appeal held that the amended pleadings disclosed a reasonable cause of action, one can see at page 323 of the judgment the circumstances in which the plaintiff said the duty of care arises. In Berg Sons at page 680 it was pleaded that the auditors knew that the lender was among those extending credit to the company, it was foreseeable that the lender would be sent copies of the audited accounts and it was foreseeable that the lender would rely upon those audited accounts in deciding whether or not to continue to extend credit to the company or extend further credit. Such allegations were held not to be sufficient for the purpose of imposing a duty of care on the part of the auditors. Here no particulars were given as to the basis in which it was said that the Defendants intended Yue Xiu should rely on the audited reports. I have at the hearing invited Mr Chan to furnish the particulars if the Plaintiffs were in a position to do so. None was provided. This lack of particulars, together with the absence of a pleading on specific transaction which I have already dealt with in the earlier part of the judgment is, in my view, fatal to the Plaintiffs' claim. Quite apart from the fact, as Mr Riberio submitted, that the Defendants being professionals and are sued for negligence in respect of their professional duties are entitled to know the case against them, the court must be alert as to the manner in which the amendments are made. I could do no more but to respectfully adopt the words of Fuad J.A. in Perak Pioneer Limited v. Carrian Holdings Limited, Civil Appeal No.59 of 1985 in which he held that :-

"An applicant, who seeks to amend a petition or other pleading is seeking an indulgence and has to comply with the relevant Rules. The opposing party is fully entitled to object to the amendments on principles laid down by practice and the R.S.C. It was incumbent on the judge to decide, once he did not adjourn the matter, each issue raised as to the propriety of the amendments, on its merits.

As regards particulars, in my view, it is no answer to an objection that a proposed amendment lacks particulars, to say that particulars can later be given. Of course, if a pleading lacks particulars, particulars can be asked for in the usual way and ordered by the Court if necessary, but where an amendment is applied for it would be an unusual case where the Court would consider it appropriate to allow an amendment to be made which lacks particularity, and might cause embarrassment."

69. I am satisfied that if the Plaintiffs had applied for leave to amend para.17(2), such leave would not be granted and as such, I would disallow the amendment.

Paragraph 20

70. The next amendment is in respect of paras.20(10) and (11).

"20. In acting as join auditors as aforesaid, DHS and H&H, acting in breach of the said duty of care.

Particulars

(1)-(9) ................

(10) If DHS and H&H had insisted as aforesaid CIL would have published accounts which would have incorporated the provisions insisted upon and which would have reported a combined loss of HK$16,317,596 upon which accounts DHS and H&H would have expressed a clean audit opinion thereby duly certifying the aforesaid combined loss.

(11) If CIL had refused to incorporate the said provision, DHS and H&H should not have signed unqualified audit reports but should have:

(a) declined to express any opinion on whether the financial statements gave a true and fair view of the companies' state of affairs and results for the year; or

(b) expressed any opinion on whether the financial statements gave a true and fair view of the companies' state of affairs and results for the year as being subject to appropriate adjustments arising out of the fact that the auditors had been unable to ascertain the collectability of the receivables due from the related parties; and

(c) in any event, would have been in a position to provide a certificate as to the said combined loss and would have done so upon the request of SIL and/or YXFC."

71. Paragraph 20(10) does not save the pleading because it equates the audited accounts with the certification under the Shareholders Agreement when the certification never came into existence. A duty of care simply does not arise in the manner as pleaded by the Plaintiffs. Facts must be pleaded showing that although the audited reports were prepared for one purpose, if was nonetheless intended by the Defendants that the audited report should be relied upon by the Plaintiffs for particular purposes.

72. Paragraph 20(11) does not in any way help the Plaintiffs. It did not plead the circumstances in which the duty of care exist in relation to the Plaintiffs. In respect of sub-para.(11)(c), the truth of the matter is that the Defendants were never asked to provide a certification. Furthermore, as Yue Xiu was not a party to the Shareholders Agreement, it could not ask for the certificate, thus the pleading in respect of Yue Xiu was misconceived.

73. In the circumstances I would disallow all the amendments.

Conclusion

74. The Plaintiffs' Statement of Claim is struck out and the Plaintiffs' action against the Defendants is dismissed and that the Defendants be at liberty to enter judgment for the costs of the action. There shall be costs nisi to the Defendants of the application to strike out and the application to disallow the amendment. I certify that the applications are fit for two counsel.

Representation:

Mr Edward Chan, Q.C. & Mr Joseph Fok, inst'd by M/s Johnson, Stokes & Master, for the Plaintiffs

Mr Robert Ribeiro, Q.C. & Mr Godfrey Lam, inst'd by M/s Barlow Lyde & Gilbert, for the 1st Defendant

Mr William Stone, Q.C. & Mr Pat Chan, inst'd by M/s Deacons, for the 2nd Defendant