Extramoney Ltd and Another v. Chan, Lai Pang & Co (A Firm)
Read the full judgment text of HCA 8437/1987 on BabelCite. This High Court CFI judgment.
1. The dispute which I am asked to adjudicate embraces issues of some legal and factual complexity, the genesis of which can traced to a simple complaint of oversight by professional auditors in failing to detect an allegedly inflated statement of profits in the audited accounts of a certain company which led, according to the complainants, to an overpayment of profits tax by the company concerned and the declaration and payment of a dividend for which they now seek to hold the auditors liable.
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1987 No. A8437 IN THE SUPREME COURT OF HONG KONG HIGH COURT ___________ BETWEEN
____________ AND BETWEEN
(By Counterclaim) ________________ Coram: Deputy High Court Judge Fung, Q.C. Dates of Hearing: 13th, 15th, 18th, 19th, 20th, 21st, 22nd, 25th, 26th, 27th May and 20th July 1992, 9th February, 8th, 9th, 10th, 11th, 12th, 15th, 16th, 17th, 18th, 19th, 22nd, 23rd, 24th, 25th, 26th, 29th, 30th and 31st March, 1st, 2nd, 3rd, 6th, 7th and 8th April 1993. Date of delivery of Judgment: 15th January 1994 ---------------- J U D G M E N T ---------------- INTRODUCTION 1. The dispute which I am asked to adjudicate embraces issues of some legal and factual complexity, the genesis of which can traced to a simple complaint of oversight by professional auditors in failing to detect an allegedly inflated statement of profits in the audited accounts of a certain company which led, according to the complainants, to an overpayment of profits tax by the company concerned and the declaration and payment of a dividend for which they now seek to hold the auditors liable. The action unfolded in the following manner. 2. On 21st December 1987, two private companies incorporated with limited liability under Hong Kong law, namely, Extramoney Limited ("Extramoney") and its corporate grandparent and ultimate holding company Carrian Holdings Limited (in liquidation) ("Holdings") (collectively "the Plaintiffs") commenced proceedings by way of a generally indorsed writ claiming as against their auditors, a firm of certified public accountants practising under the name or style of Chan, Lai, Pang & Co. ("the Defendants") damages for, inter alia, negligence in the audit of the Plaintiffs' accounts for the year ended 31st December 1980 ("the 1980 Accounts"). In the five years or so that intervened between the issue of the writ and the completion of the trial on 8th April 1993, the claim underwent not inconsiderable metamorphosis. In its final incarnation which materialised on or about l0th March 1993 by way of a statement of Claim with red and green amendments and violet deletions, the Plaintiffs rely on a number of different causes of action which I shall summarise below. I use the expression "deletion" since Mr. John Griffiths Q.C. who appears for the Plaintiffs was anxious to avoid describing the last edition of the Statement of Claim as a further re-amendment but sought instead to characterise the changes in violet as a convenient aide-memoire defining those allegations in the statement of Claim with which he no longer proposes to proceed. The nomenclature is a matter of no moment and I propose now to refer in some detail, as I think such course would serve by way of a useful clarificatory exercise, to the parties' final pleaded positions. The CLAIM 3. The Plaintiffs complain, first and foremost, of negligence ("the Principal Claim") by the Defendants in their audit of the 1980 Accounts of respectively Extramoney and Holdings (the latter to the extent that Extramoney's aforesaid accounts are consolidated in the group accounts of Holdings for that year) in that on 8th January 1982 they reported without qualification such accounts to be true and fair when, according to the Plaintiffs, Extramoney's 1980 Profit and Loss Account purporting to show net profits before tax of some HK$140.5 million was incorrect insofar as it overstated the same by an amount of HK$101,688,640.10 (dubbed "the fictitious profit" by the Plaintiffs but which, in the interest of lowering the temperature of the debate during the hearing and for another reason which will later become apparent, I have referred at the trial and will continue herein to refer to as “the Disputed Profit”). 4. Such alleged overstatement is said to arise from the incorrect inclusion in Extramoney's 1980 Profit and Loss Account of a journal entry purporting to state that Extramoney had made a profit of that magnitude on the sale by one George Tan (“Mr. Tan"), being the Plaintiffs' 100% beneficial owner, on behalf of Extramoney of 14,133,920 quoted shares in Holdings' publiclylisted subsididary Carrian Investment Limited ("CIL"), whereas, according to the Plaintiffs, no such profit had in fact been made and Extramoney had no records to verify the said entry. The Plaintiffs contend that, had the Defendants exercised reasonable care in their audit of the said accounts and due diligence in pursuing obvious inquiries and investigations in the course of the same, they would have discovered the Disputed Profit to be fictitious whereupon they would, as reasonably careful auditors, either have reported that the 1980 Accounts did not give a true and fair view of Extramoney's state of affairs or, alternatively, qualified their report to reflect the fact that they could not verify the making by Extramoney of the Disputed Profit. 5. The above factual allegations are said to give rise to further or alternative complaints of breach of contract and/or breach of statutory duty by the Defendants qua auditors vis-a-vis the Plaintiffs. 6. The Plaintiffs allege that, as a result of the Defendants' breaches of duty as aforesaid, whether the same be tortious, contractual or statutory in nature, they suffered loss for which they claim damages by way of redress, such loss consisting of (a) overpayment of profits tax (HK$22.9 million having been paid by Holdings on Extramoney's behalf to the Inland Revenue) which, to the extent of HK$16,778,625 together with a 5% late payment surcharge of HK$838,931 thereby totalling HK$17,671,556 (“the Overpaid Profits Tax"), arose from the Disputed Profit and (b) a dividend of HK$90 million (“the Dividend”) distributed by Extramoney to its shareholders, namely, Carrian Finance Limited ("Finance") and Carrian Realty Limited ("Realty"), which latter sum was, to the extent of HK$74,315,006, not covered by Extramoney's presumably real, as opposed to its allegedly fictitious, profits. 7. Apart from the aforesaid allegations which were advanced by way of the Principal claim, the Plaintiffs also complain, by way of amendment to the pleadings introduced on 1st November 1991, of the receipt on 20th May 1981 by the Defendants from Holdings of HK$1.2 million by way of a Holdings' cheque signed by Mr. Tan purporting to be an overtime or bonus payment in relation to the internal auditing of the Carrian Group ("the Subsidiary Claim"). The Defendants' fees in respect of the audit of Extramoney's 1980 Accounts were by comparison a modest HK$28,000. Since the Defendants had apparently performed no overtime work over the relevant period and were, furthermore, not the internal auditors to the Carrian Group, the Plaintiffs say that any payment, whether described as "bonus" or otherwise, constituted a gratuitous payment for no consideration and made, to the Defendants's knowledge, in breach of trust or fiduciary, duty owed by Mr. Tan to Holdings. In the circumstances, the Plaintiffs (according to the pleadings although, strictly speaking, the claimant should more properly be Holdings) seek to recover the same from the Defendants as constructive trustees. 8. Apart from a declaration of constructive trusteeship in the manner aforesaid, the Plaintiffs also claim by way of relief, among other matters, an account of profits made by the Defendants as a result of their alleged receipt of and/or conversion of trust property, judgment in the sum of HK$17,617,556 (being the Overpaid Profits Tax), damages, interest pursuant to statute and costs. Additionally, Extramoney seeks to recover from the Defendants HK$74,315,006 (being the amount of the Dividend paid out but not allegedly covered by actual profits). The DEFENCE 9. The Defendants have structured a multi-layered response to the Principal Claim, as will be evident from my summary thereof set out below. Whilst conceding the existence of a duty on their part to exercise reasonable care and skill in expressing a view in their auditors' report as to whether or not the 1980 Accounts gave a true and fair view of the state of affairs of Extramoney, the Defendants deny, first and foremost, any negligence or breach of duty. They further deny that Extramoney's 1980 Profits were overstated or that there was no record which verified the crucial journal entry of HK$101,688,640.10. On the contrary, they say that they were, in the course of their audit, furnished with documents and information which verified the aforesaid entry, namely, statements of a stock brokerage firm known as Okasan International (Asia) Limited ("Okasan") showing market acquisitions of CIL shares which, when later sold, generated the Disputed Profit, Extramoney's internal memoranda and journal entries as well as information orally supplied by Mr. Tan acting for the Plaintiffs. In the circumstances, the Defendants positively assert that the Disputed Profit arose from purchases and sales of CIL shares by Mr. Tan for and on behalf of Extramoney in 1980. 10. Further or alternatively, the Defendants say that, in the discharge of their duties as auditors, they were entitled to and did rely on the documents and representations submitted by Mr. Tan on behalf of the Plaintiffs wherefor the latter are estopped from denying the existence of the Disputed Profit; alternatively, prior to the signing of the auditors' report, the share transactions were ratified by the directors of Extramoney. 11. A third major line of defence was erected by the Defendants in the form of a contributory negligence argument whereby they contend that, if there existed any loss (which they deny as a fact), the same was caused or contributed to by negligence and/or misrepresentation on the part of the Plaintiffs. The Defendants also rely on the fact that neither Plaintiff has taken any step to recover the Overpaid Profits Tax from the Inland Revenue and, further, that no-one among Extramoney or its corporate shareholders and directors and the three joint liquidators of Holdings (all partners of Messrs. Ernst & Young, certified public accountants) took any steps to recover the Dividend from Holdings or cause the latter to account as constructive trustee or recover the loss by way of tax or dividend from any director, fiduciary or constructive trustee, wherefor Extramoney had failed to mitigate its loss. 12. A fourth major line of defence relied on by the Defendants arose from their assertion Extramoney had suffered no loss as a result of the payment of the overpaid Profits Tax and the Dividend since it had received by return valuable consideration in the form of (a) a debit entry in Holdings’ account with Extramoney of HK$63,523,683.47, (b) 3,417,000 CIL shares from Mr. Tan valued at HK$37,621,939.05 and (c) the benefit of margin interest paid by Mr. Tan on Extramoney's behalf of HK$543,017.58. 13. A fifth major line of defence erected by the Defendants revolves around the concept of causation. They say that if there existed any negligence or breach of duty on their part (a fact which they deny), the same in no way caused the payment of the Overpaid Profits Tax or the Dividend. Put alternatively, they say that the payment of the Overpaid Profits Tax and the Dividend were voluntary acts on the part of Holdings in no way caused by the Defendants' alleged negligence or other conduct. Finally, the Defendants pray in aid the provisions of the Limitation Ordinance. 14. All the above pleas made by the Defendants are intended to meet the Principal Claim founded on alleged negligence or other breach of duty. I turn now to the Defendants' answer to the Subsidiary Claim based on the former's receipt, supposedly for no consideration, of HK$1.2 million by way of a Holdings’ cheque signed by Mr. Tan allegedly in breach of trust or fiduciary duty owed to Holdings. 15. The Defendants deny that the payment was gratuitous or, made in breach of trust or fiduciary duty or constituted in any way a misapplication of Holdings' funds. They readily concede that the same could not properly be described as an overtime or bonus payment but assert on the contrary that the money had nothing whatsoever to do with the discharge of their duties as auditors to the Plaintiffs or, indeed, their firm as such, but arose rather from the individual three partners' private dealings with Mr. Tan as members (together with others) of an investment syndicate (“the Syndicate") which was interested in or around May 1981 in acquiring certain quantities of CIL shares. 16. On their case, one Tsang Kit ("Mr. Tsang"), being the sole proprietor of a stock brokerage firm known as Hung Fat Securities Company ("Hung Fat") which managed the market investments of the Syndicate asked Raymond Chan ("Mr. Chan"), being the senior partner of the Defendants, to approach Mr. Tan to buy on the Syndicate's behalf two lots of respectively 328,000 and 2 million CIL shares. Mr. Chan did so on 12th May 1981 after he and Mr. Tan had agreed on a purchase price of HK$8 per share, payment to be made on 19th May 1981. On or about the latter date, two cheques made out for respectively HK$2,624,OOO (with the name of the payee left blank) and HK$16 million (expressed, upon Mr. Tan's request, to be payable to Extramoney) were delivered to Mr. Tan pursuant to the agreement. Subsequently, on 20th May 1981, the Defendants on behalf of the Syndicate drew under protest a third cheque in the sum of HK$1.2 million, after Mr. Tan (on the apparent instigation of certain members of his family) had requested a price increase or premium for the block of 2 million CIL shares, and handed the same to Mr. Tan on the understanding that he would attempt to persuade his family members to adhere to the original agreement, the idea being that, should he be successful in his persuasive efforts, the extra HK$1.2 million would be refunded to the Syndicate. Mr. Tan's powers of persuasion apparently yielded fruit and the money was indeed returned by way of a Holdings' cheque dated 20th May 1981 signed by him for HK$1.2 million and made payable to the Defendants. 17. The Defendants admit the characterisation in the relevant payment voucher PWL 627/81 ("the Payment Voucher") of the HK$1.2 million as being overtime or bonus payment for the internal auditing of the Carrian Group to be incorrect but assert that neither they nor the individual partners authorised or knew at the material time of the use of such description. When Mr. Chan subsequently discovered the matter, he immediately drew the same to the attention one Bentley Ho (probably best described as Mr. Tan's right hand man in the running of his various companies) and indicated that a correction was required. In the circumstances, the Defendants deny that they are in possession of trust property and say, alternatively, that if there were any breach of trust or fiduciary duty, the individual partners and the Syndicate were bona fide purchasers of the sum of HK$1.2 million for value without notice. 18. Also prayed in aid by way of further or alternative defences to the Subsidiary Claim are a plea of limitation and another of laches rendering it inequitable for the Plaintiffs currently to pursue the Subsidiary Claim. The latter arises from the fact that the amendment to the Statement of Claim which, introduces the Subsidiary Claim was made, as I have earlier mentioned, on 1st November 1991 being over 10 years after the occurrence of the events in question, further that (according to the Defendants) it is no longer possible to subpoena or obtain the records of Hung Fat, its proprietor Mr. Tsang having been declared bankrupt in 1982 whereafter he could not be traced and, finally, that the Defendants or its individual partners’ ability to pursue claims as against the other members of the Syndicate had been irrevocably prejudiced by the lapse of time. The COUNTERCLAIM 19. Apart from defending themselves against the principal and the Subsidiary Claims, the Defendants have instituted a Counterclaim against the Plaintiffs as respectively 1st and 2nd Defendants to the Counterclaim, the Attorney General representing the Commissioner of Inland Revenue ("the Commissioner") as the 3rd Defendant to the Counterclaim, Finance, Realty and Carrian Joint Venture Limited ("Joint Venture") (the first two being shareholders and directors with the last being a director of Extramoney) as respectively the 4th, 5th and 6th Defendants to the Counterclaim, and the three liquidators of Holdings, namely, Thomas Brian Stevenson, Wilfred Keith Timso and John William Crawford, all partners of Messrs. Ernst and Young, as respectively the 7th, 8th and 9th Defendants to the Counterclaim (collectively "the Liquidators"). 20. The Defendants seek, first of all, a declaration that Extramoney had made the Disputed Profit as a matter of fact and that the profits tax and surcharge had been properly paid. Alternatively, on the facts pleaded by the Plaintiffs and/or as set out in the Plaintiffs' solicitors' letter to the Commissioner dated 31st March 1987 contending, among other matters, that Extramoney's profits were mis-stated to the extent of the Disputed Profit by Mr. Tan acting in fraudulent breach of his fiduciary duty owed to the Plaintiffs, that "at the very most, Extramoney may have received a gift of capital [from Mr. Tan] but did not produce profits of that sum", that the assessor made his assessment on the basis of fraudulent information and that, throughout, the applicable appeal period, Mr. Tan controlled the Plaintiffs so as to prevent them from taking steps to correct the assessment, the Defendants now seek a declaration that Extramoney and Holdings are entitled to repayment by the Inland Revenue of such tax and surcharge and an order that they prosecute an appeal from such assessment to the Board of Review with due diligence. 21. In the further alternative, the Defendants seek declarations that, upon payment to the Plaintiffs of any sum which I may order them to pay in this action, they be subrogated to the rights of the Plaintiffs in pursuing the said appeal and be entitled to all refunds of tax and surcharge. 22. As regards the Counterclaim mounted against the corporate shareholders and directors of Extramoney (respectively Finance, Realty and Joint Venture), the Defendants say that since they were all controlled and 100% beneficially owned by Mr. Tan, the latter's knowledge is to be imputed to them such that, if the Disputed Profit were truly fictitious as contended by the Plaintiffs, they were all fully aware of such fact and of the fact that the payment of the Dividend out of non-existent profits constituted a breach of fiduciary duty owed to Extramoney. Since Holdings was also beneficially owned and controlled by Mr. Tan, the Defendants contend that Holdings was likewise fully aware of such facts and received the Dividend as a constructive trustee and, insofar as Finance, Realty and Joint Venture knowingly assisted in the transfer of the Dividend to Holdings, each of them became a contructive trustee of the same. 23. By similar reasoning, the Liquidators are joined as defendants to the Counterclaim since, according to the Defendants, they control Holdings and its aforesaid subsidiaries and have caused none of them to account for or disgorge the Dividend paid out by Extramoney. 24. In the circumstances, the Defendants also counterclaim for various declaratory and other relief which may conveniently be divided, albeit at some risk of over-simplification, into five different lots. The first consists of a declaration that Holdings and/or Extramoney's corporate shareholders hold the Dividend or part thereof amounting to HK$74,315,006 (being so much of the Dividend as is not covered by Extramoney's Other Profits) on trust for Extramoney and declarations that Extramoney is entitled to repayment of the said sums with compund interest and that Extramoney is entitled to trace the said sums and to all necessary accounts and enquiries. The second lot consists of a declaration that the Liquidators are obliged to account to Extramoney for all sums received and/or paid or used to the extent that any such sums were trust funds held by Holdings on behalf of Extramoney and an order that Holdings and the Liqidators be restrained from paying, charging or in ay other manner dealing wirth their assets save as to any excess over the said sum and interest. The third lot consists of an order that Holdings and/or Extramoney's shareholders and the Liquidators do pay such sums found due on the taking of an account and a dclaration that Finance, Realty and/or Joint Venture acted in breach of trust or fiduciary duty to Extramoney and are obliged to repay the Dividend or HK$74,315,006 to Extramoney. The fourth and final lot consists of a declaration that upon judgment being given against them, the Defendants are subrogated t~ the rights of Extramoney as against its aforesaid shareholders and directors, Holdings and the Liquidators. The DEFENCES to COUNTERCLAIM 25. Separate replies and defences to the Counterclaims were filed by respectively the Commissioner represented at the hearing by Mr. Robert Andrews of the Attorney General's Chambers of the one part and the corporate defendants to the Counterclaim and the Liquidators all of whom were represented by Mr. Griffiths of the other part. 26. The Commissioner's defence revolves around the issue as to which of the High Court or the Board of Review has exclusive jurisdiction to determine the issue of the correctness of Extramoney' s original assessment to tax and hence the question of reimbursement of the profits tax paid, the Commissioner taking the view that such matters are justiciable only by the Board of Review. The facts on which he bases such contention are that, on or around 9th January 1982, Extramoney furnished a return of profits for the tax year 1980/81 disclosing assessable profits amounting to HK$132,881,885 and represented by the Defendants' unqualified report (qua auditors) attached to the audited 1980 Accounts that the same gave a true and fair view of the state of affairs of Extramoney at 31st December 1980. Extramoney was assessed to tax on such profits and, on or about 25th March 1982, Holdings remitted the tax together with a 5% surcharge for late payment. Some five years later, on or around 31st March 1987, Extramoney claimed that, of the profits tax previously paid, HK$17,617,556 were not properly chargeable. The Assessor refused to correct the assessment. On or around 9th March 1989, the Plaintiffs objected to such refusal but the Commissioner confirmed his previous decision. On or about 3rd January 1990, the Plaintiffs appealed to the Board of Review. Since the latter, according to the Commissioner, has exclusive jurisdiction to determine the matter raised by such appeal, I would have no power to entertain the Defendants' Counterclaim for declaratory relief that the Plaintiffs are entitled to a refund of the Overpaid Profits Tax. 27. The Reply and Defence to Counterlaim of the corporate defendants and the Liquidators consists principally of a joinder of issue but, insofar as it raises any significant fresh pleas, it consists of a contention in response to the Defendants’ argument based on want of causation that the management of Extramoney, appreciating the effect on the financial and banking communities of a proposed qualification by prudent auditors to Extramoney's 1980 Accounts, would have withdrawn the suggestion that the Disputed Profit had been made by Extramoney, wherefor no such profits would have been submitted to the Inland Revenue and the Dividend would have been cancelled. The ISSUES 28. In summary, therefore, the principal questions for my determination are:-
The DISPUTED PROFIT 30. Question (1) sub-divides into two issues, namely, whether the Disputed Profit was ever generated as a matter of fact and, if so, whether the same was made by Extramoney as opposed by some other person or entity. Since both the above components form integral parts of the claim in negligence or breach of contractual or other duty, the onus of establishing either the non-existence of the Disputed Profit or, if it did exist, that it was not made by Extramoney lies with, the Plaintiffs: see, for example, Halsbury's Laws of England, 4th ed., Vol. 17, para. 14. I shall consider each such issue in turn. GENERATION of the DISPUTED PROFIT as a FACT 31. The basic facts giving rise to the complaint are not controversial. Extramoney was a share-dealing company wholly beneficially owned and controlled by Mr. Tan carrying on the business of buying and selling on the stockmarket publicly-quoted shares being, principally, those of Holdings' listed subsidiary CIL, all three companies (together with others) forming part of a corporate empire founded by Mr. Tan in the late 1970s and known as the Carrian Group. Incorporated on 4th December 1979, Extramoney's first accounts (namely, what I have throughout this Judgment referred to as "the 1980 Accounts") covered the period 4th December 1979 to 31st December 1980 ("the 1980 Period"). Over that period the price of CIL shares rose from HK$5 per share in early 1980 to about HK$30 in November before settling, after adjusting for the effects of bonus issues, at the HK$20 level at the end of the year. Over the same period, Extramoney traded heavily in CIL shares and disclosed in its 1980 Profit and Loss Account under "Income" profits on the sale of quoted shares amounting (originally to some HK$314 million but which, after a provision for diminution in market value of retained shares of some HK$132 million, was reduced) to HK$182,096,691.34 ("the Gross Profits"). A considerable portion of this figure was made up of the Disputed Profit (of HK$101,688,640.10) stated in a single line journal entry in Extramoney's books to have been made by Mr. Tan on behalf of Extramoney from the sale of an unspecified number of CIL shares. Collapse of Carrian and the CCB Raids 32. Suspicions were aroused when, after the collapse of the Carrian Group including its publicly-listed arm CIL in or around October 1983 and the subsequent winding-up of Holdings (the details of which are not relevant to this case wherefor I do not propose to burden this Judgment with any reference to the same), an investigation was implemented into the causes of such collapse which included inspecting, among other material, the books of the various Holdings' subsidiaries (including Extramoney) and their auditors' audit files seized by the Commercial Crimes Bureau ("the CCB") from respectively the companies' and the auditors' premises in the last quarter of 1983. In the course of such inspection, it was discovered that whereas Extramoney's profits other than the Disputed Profit ("the Other Profits") appeared to be well-documented, traceable and explicable, there was an apparent absence of independent supporting documentation (whether in Extramoney’s books and records or the Defendants' audit working papers) verifying the underlying transactions said to give rise to the Disputed Profit. 33. It may conveniently be mentioned here that, while all parties and their witnesses made repeated references during the course of the trial to the Disputed Profit and the other Profits being respectively "the HK$101 million profit" and "the HK$81 million profit", the use; of such shorthand references is not merely inaccurate but is actually misleading and would tend unfairly to inflate and distort the significance of the Disputed Profit to the Gross Profits since the figure of HK$101 million has not been adjusted by the aforesaid provision for diminution in value of retained shares whereas HK$81 million figure is arrived at by simplistically deducting the former unadjusted figure from the pre-adjusted Gross Profits of HK$182 million. I intend, therefore, to adhere in this Judgment to the expressions 'Disputed Profit' and ‘Other Profits’. 34. I have used earlier the adjective 'apparent' to characterise the aforesaid absence of independent supporting documentation verifying the Disputed Profit since the exact contents of the Defendants' audit file was a matter of considerable controversy at the hearing. The Defendants contend that they had always - had included among their audit working papers pertaining to the audit of Extramoney's 1980 Accounts two additional documents verifying the generation of the Disputed Profit ("the Additional Material”), but the same would appear to be missing from the materials which has come into the Plaintiffs' solicitors’ possession for the institution and conduct of these proceedings some years after the original CCB raid and seizure executed on the Defendants’ office premises in 1983. The Plaintiffs hotly deny the allegation of inclusion within the Defendants’ original audit working papers of the Additional Material. This is an important issue which I shall resolve in a later part of this Judgment. 35. In the meantime, I find from tolerably clear evidence that, apart from the, Additional Material and certain internally generated entries (which I will detail shortly), there is no verifying material supporting the making of the Disputed Profit among the various documents purporting to Extramoney's books and records for the 1980 Period and the Defendants’ audit pertaining to the same in the possession of the Plaintiffs' solicitors. For the Plaintiffs, it is this singular want of documentary verification which casts doubt on the very existence of the Disputed Profit. So as to determine whether such suspicions were justified, it is necessary to recapitulate in brief what the Plaintiffs' solicitors possess by way of seized documentary material. The Material Seized 36. So far as concerned Extramoney, this consisted of the company's general ledger, its cash book and supporting vouchers as well as the Defendants' audit working papers relating thereto which were seized separately by the CCB in the second of two raids on the Defendants' office premises carried out on respectively 8th and 13th December 1983. The general ledger is divided into folios containing the company's various accounts including its assets, liabilities and profit and loss accounts. The cash book lists and details cash receipts and cash payments. The supporting vouchers consist, in the case of Extramoney, of receipt vouchers, payment vouchers. And journal (or transfer) vouchers. As I understand the expert evidence adduced by the parties, it is uncontroversial that audit working papers are compiled by auditors to serve primarily as evidence of work done and would include key schedules analysing major transactions and major balances and records of the verification work performed on such key items or balances as well as conclusions reached by the auditors. An auditor's process of verification may be undertaken by tracing or following a transaction either from a source document or voucher all the way through to the relevant entry in the general ledger or vice versa. The Audit Trail 37. The material seized revealed that Extramoney's Other Profits (namely, its Gross Profits aside from the Disputed Profit) are clearly traceable from a series of documents or documentary entries in Extramoney's books and records and the Defendants' audit working papers which together constitute what is known within the accounting profession as an 'audit trail'. By way of example, all purchases of quoted shares can be traced, first of all, to an entry in Extramoney's cash book setting out the date of acquisition, the name of the stockbroking firm involved, the name of the stock concerned, the quoted unit price, the amount acquired, the total purchase price including brokerage and stamp duty, the number of the cheque drawn to pay the purchase price and the voucher number. 38. Next stop on the audit trail is an Extramoney Pay Order (signed by the officer of the company preparing the same and countersigned by another officer signifying his approval of such payment) with a serial number which tallies with the voucher number entered in the cash book, a date, the name of the stockbroking firm to be paid and such other particulars as the name of the stock concerned, the quoted unit price, the amount to be acquired, the total purchase price including brokerage and stamp duty, the cheque used to pay the purchase price, all of which would match the particulars set out in Extramoney's corresponding cash book entry to which I have already made reference. 39. Thereafter one sees on the audit trail a bought note of the particular brokerage firm involved setting out Extramoney's name as the purchaser, a date, the number of shares purchased, the name of the stock concerned, the quoted unit price, the purchase price, the amounts of brokerage and stamp duty payable and the total price, all of which again matches the particulars entered in Extramoney's aforesaid cash book. 40. The fourth stop on the audit trail is an entry in a folio (entitled 'Investment in Mai Hon' if the acquisition should relate to CIL shares, Mai Hon Investments Limited being the former name of CIL) inserted in Extramoney' s general ledger particularising the purchase with a date, the name of the stock concerned, the number acquired, the total purchase price and the corresponding cash book page reference where the matching entry is to be found. 41. The final stop on the audit trail is an entry in a schedule of share transactions (entitled, in the case of CIL transactions, 'Schedule of Mai Hon Share Transactions') prepared by the Defendants in the course of their audit of Extramoney's Accounts filed in their audit file setting out the number of shares purchased, the purchase consideration and the transaction date which again matches the particulars appearing in Extramoney's books. 42. A similar five-stop audit trail exists for sales (as opposed to purchases) of shares by Extramoney starting with a cash book entry setting out particulars of the transaction including the date, the folio reference, the name of the stock concerned, the number sold and the total sale price. This can next be traced to a depositor's receipt issued by Extramoney's bankers evidencing the payment into Extramoney's account of the sale proceeds. Next stop on the audit trail is the contract or sold note or notes issued by the relevant stockbrokers evidencing the sale of the stock in question. Thereafter the transaction can be traced to an entry or entries in a folio (entitled, where the transaction concerned CIL shares, "Proceeds on Sale of Mai Hon Shares") included in Extramoney's general ledger. Finally, the transaction particulars will appear in the 'Schedule of Mai Hon Share Transactions' prepared by the Defendants' audit staff and included in the audit file. 43. It can be appreciated from the foregoing material that the available documentation supporting or verifying the generation of the Other Profits is both comprehensive and of an observably high quality. Even Mr. Meocre Li, the Plaintiff's expert witness being a certified public accountant of some 15 years' standing with considerable experience in auditing and accounting standards and a member of the Accounting Standards Committee of the Hong Kong society of Accountants, conceded as much. Is there equivalent documentation verifying the Disputed Profit? Is there an audit trail at all and, if so, is it possessed of equal or sufficient clarity? 44. By way of a starting point, one finds among the books and records of Extramoney for the 1980 Period an entry in an undated transfer voucher debiting Mr. Tan with the amount of the Disputed Profit giving a folio reference 'L609/1' and simultaneously crediting Extramoney with the same amount designated 'Profit on share dealing' giving another folio reference 'PlOl/1'. Turning to the first-mentioned folio 'L609/1' which is a page from Extramoney's current account with Mr. Tan filed in Extramoney's 1980 general ledger, one finds a single entry dated 31st December 1980 debiting Mr. Tan with the whole amount of the Disputed Profit stating 'Profit on sale of CIL to George Tan'. One then finds in the other folio 'P101/1' which is a schedule entitled 'Profit & Loss on Sale of Investments' also included in Extramoney’s general ledger an entry dated 31st December 1980 which reads 'Profit on sale of CIL' and crediting Extramoney with the amount of the Disputed Profit. 45. Subject only to the question of the inclusion of the Additional Material, the above constitutes all the available documentation on the Disputed Profit found among 'Extramoney’s books and records. A number of features are striking. First, it is unclear how many transactions gave rise to the Disputed Profit. If it be a single transaction, then it purports to have occurred on the very last day of the relevant year generating a very significant portion of the Extramoney's trading profits for that year. If it be more than one transaction, then they are collectively recorded by way of a lump sum entry at the year-end with no breakdown in terms of dates or figures. Further, the year-end date does not inspire a reader with confidence that the transaction necessarily occurred on that particular day but suggests rather that the transaction was given such a date so as to qualify for inclusion in that year's accounts. 46. Secondly and more significantly, all the documentation available from Extramoney's books and records (again subject only to the question of the inclusion of the Additional Material) referring to the Disputed Profit consists of the company's internally generated entries. There is available no underlying or third party documentation such as contract or sale notes with which one could independently verify the occurrence of the transaction or transactions supposedly generating the Disputed Profit. Therein lies an important qualitative difference between the documentation supporting the other Profits and that referrable to the Disputed Profit. 47. Thirdly, the journal entry recording the making of the Disputed Profit is contradicted by Extramoney's inventory of its holdings of CIL shares over the 1980 Period and also by the absence of any corresponding records in Extramoney' s cashbook and general ledger wherein Extramoney's shareholdings and details of its monthly purchases of CIL shares were recorded. Moreover, there was no record to indicate that Extramoney ever held a sufficient number of CIL shares so as to generate the Disputed Profit. Folio 'A302' in Extramoney's general ledger setting out the 'Cost of Mai Hon Shares Sold' reveals no record of Extramoney having acquired 14,133,920 CIL shares which were then sold so as to generate the Disputed Profit. Folio 'A301': entitled 'Investment in Mai Hon' is likewise silent on the acquisition of the requisite number of CIL shares. 48. Fourthly, the books of Extramoney contain no corresponding entries for the gross proceeds from such alleged sale. Folio 'A 703 ' entitled 'Proceeds on Sale of Mai Hon (Investment) Shares' in the general ledger gives no figure for the proceeds of sale of the 14,133,920 CIL shares. Fifthly, there is no record of the prices of the purchase or the sale of the CIL shares giving rise to the Disputed Profit. All the above contrasts sharply with the quality and sufficiency of the documentation available to support the generation of the Other Profits. 49. Sixthly, there is available no agency agreement made between Mr. Tan and Extramoney or other record of Mr. Tan acting as Extramoney's agent. Finally, it is clear that there have been no similar previous dealings by Mr. Tan on behalf of Extramoney over the entirety of the 1980 Period. 50. That there may exist a reasonable doubt as to the existence and authenticity of the Disputed Profit from a perusal of Extramoney's books and records is confirmed by Schedule 'R1' prepared by the Defendants in the course of their audit of Extramoney's accounts and included in their audit file entitled 'Profit on Share Dealing' which sets out a table consisting of four columns headed respectively 'Month', 'Sale Proceeds', 'Cost of Sale' and 'Profit (Loss)’ and which summarises Extramoney's profits derived from share dealing giving a monthly breakdown. It is noteworthy that the Disputed Profit which, as I have earlier mentioned, constitutes a very significant portion of Extramoney's Gross Profits for the year is assigned not to any particular month but rather is appended to the table after the December entry thereby raising a question as to the precise date or dates when such profit was made. Further and, not surprisingly, the member of the Defendants' audit team who looked into the matter and prepared Schedule 'R1' was apparently unable to give any figures under either the 'Sale Proceeds' or the 'Cost of Sale' columns corresponding to the Disputed Profit. 51. In summary, I find the Plaintiffs' suspicions of the authenticity of the Disputed Profit to be perfectly justified. This does not, however, adequately dispose of the first issue under Question (1) as to whether or not the Disputed Profit was generated as a matter of fact, since the Additional Material said to form part of the Defendants' original audit working papers and adduced in evidence by the Defendants at the hearing before me is far from silent in terms of reference to the Disputed Profit. The Additional Material 52. According to the Plaintiffs, none of the Additional Material were found among Extramoney's original accounting records or the Defendants' original audit file seized by the CCB in 1983 but emerged for the first time on or shortly before discovery by the Defendants in 1989. The Defendants hotly contest this allegation and maintain that both items had always been enclosed within the covers of their original audit file. This controversy assumed mammoth proportions during the hearing but, as I shall later demonstrate, there was eventually less to this point than met the eye at least in relation to answering Question (1) though perhaps not so in relation to Question (2). Before resolving this issue, I intend first to describe the Additional Material. 53. The first additional document relied on by the Defendants at the trial appears to be a record of market purchases and subsequent bonus issues of CIL shares which, when later sold (although such sales are not shown on the document itself), supposedly generated the Disputed Profit. It is a third party document being an eight-page statement issued by a stock brokerage firm known as Okasan International (Asia) Limited (“Okasan”) showing acquisitions of 9,208,000 CIL shares between 18th July and 13th August 1980 under an account opened in the name of, not Extramoney, but rather its shareholder and director Finance ("the Okasan Statement”). It purports to present at most one half the evidential picture to support the existence of the Disputed Profit. According to Mr. Colin Passmore, a partner of the Plaintiffs’ solicitors then in charge of this piece of litigation, his clients saw a copy of the Okasan Statement for the first time in or about March 1989 during pre-discovery disclosure by the Defendants. 54. The second additional document appears to be a summary of sales of CIL shares giving rise to the Disputed Profit and (notwithstanding obvious shortcomings therein to which I shall revert in detail) purports thus to complete the evidential picture. It is a photocopy of a handwritten schedule (“the Profit Schedule") found in a file of papers described as belonging to Extramoney and prepared, according to Mr. Thomas Lai ("Mr. Lai") of the Defendants being the partner in charge of the auditing of Extramoney's 1980 Accounts and the submission of its tax returns for the year, by his audit assistant one Lee Chun-ip ("Mr. Lee"). It purports to give a breakdown of the Disputed Profit by reference to disposals therein listed of nine individual lots totalling 14,133,920 CIL shares (arrived at by the aforesaid acquisition of 9,208,000 such shares as shown on the Okasan Statement together with accretions thereto from two successive bonus issues) and particularised under eight columns headed respectively 'No. of shares in hands [sic]', 'Average unit cost HK$', 'Total cost HK$', 'No. of shares disposed', 'Buyers' , 'unit cost HK$', 'Consideration HK$' and finally 'Profit & Loss on Disposal'. The last-mentioned column is divided into two sub-columns entitled respectively 'The Co. HK$' and 'Travel Division HK$'. Of the nine listed transactions, eight generated profits amounting to some HK$86 million entered under 'The Co.' sub-column whilst the remaining transaction was entered under the 'Travel Division' sub-column. According to Mr. Passmore, the Plaintiffs saw this document for the first time on 28th September 1989 when it was shown to them by the Defendants shortly after the parties' mutual discovery. Authenticity of the Additional Material 55. The Plaintiffs suggest or imply that the Profit Schedule is not a contemporaneous document but, rather, a self-serving one devised by the Defendants after the event to justify their original want of vigilance in detecting the problems underlying the proper inclusion of the Disputed Profit in Extramoney's 1980 Profits and Loss Account. The Defendants maintain, on the other hand, that both the Okasan Statement showing purchases and the Profit Schedule showing sales had always formed part of their audit working papers. They seek to explain their apparent absence from the seized documents produced by the Plaintiffs at the trial by reference to poor safekeeping by either the CCB after their seizure of the originals in the last quarter of 1983, or by the Independent Commission Against Corruption (“the ICAC") to whom all such materials were turned over for safekeeping after the completion of CCB's investigations in 1987 for the purposes of commencing criminal proceedings against Mr. Tan, or by the Liquidators or by their firm Messrs. Ernst and Young to whom some originals such as bank statements and some ledgers were, together with photocopies of the other documents, turned over for the purpose of preparation for commencement of civil suits or, in the final alternative, by the Plaintiffs' solicitors who last handled the original documents in the spring of 1992 for the purpose of conducting certain interlocutory proceedings in this action. The Defendants' contentions of poor safekeeping of the seized material gained considerable force when it emerged that the original (as opposed to photocopies) of the Defendants' audit file was, indeed, lost shortly after the interlocutory hearings in early 1992 either when the same were still with the Plaintiffs' solicitors or after they had been returned to the ICAC (the former being the ICAC's version and the latter being the Plaintiffs' solicitors' position) and has not since been recovered with the result that the same could not produced at the trial before me. There followed certain predictable recriminations within the plaintiffs' camp which it is unnecessary for me either to go into or in any way attribute blame save to state the obvious which is that the Defendants are, of course, in no way responsible for such loss. 56. I shall first review the evidence before stating my findings on the above issue as to whether the Profit Schedule ever formed part of the Defendants' original audit file. The following are the salient features of evidence supporting the Plaintiff's contention. First of all, Mr. Meocre Li, testified to specifically searching for supportings of the Disputed Profit among the original books and records of Extramoney and the Defendants' original audit file when he commenced investigations in December 1983 or early 1984 on or shortly after the second CCB raid carried out on the Defendants' premises but failed to find any such material. According to him, he came across neither the Profit Schedule nor the Okasan Statement. Secondly, a photocopy of the Defendants' original audit file was fortunately made by Mr. Meocre Li's staff on his instructions in late 1983 or early 1984 shortly after the seizure for use as a working copy and the original immediately thereafter returned to the CCB. The photocopy has, in the meantime, been preserved and was produced by the Plaintiffs as Exhibit ‘P1’ at the hearing. Neither the Profit Schedule nor the Okasan Statement can be found in that exhibit. Thirdly, Superintendent Rodney starling of the Royal Hong Kong Police Force testified to, inter alia, the general system employed by the CCB in safekeeping seized Carrian documents but, whilst I am grateful to him for coming forward to assist me in resolving an issue in this dispute, I confess to finding this part of his testimony not of particular assistance since the Superintendent was neither personally involved in the Carrian raids nor responsible for the safekeeping of documents seized nor even attached to the CCB at the material time wherefor there are clear limits to the amount of assistance I can derive from his evidence. 57. As against such evidence, Mr. Lai of the Defendants testified that during the raid executed by the CCB at the Defendants' offices in December 1983, the CCB released, upon the Defendants' request, the original audit file to the Defendants for photocopying prior to leaving the Defendants' office with the original afterwards. According to Mr. Lai, the original audit file had enclosed within the covers thereof but not filed or attached therein loose copies of the Profit Schedule and the Okasan Statement. Mr. Lai further said that, when the original audit file was surrendered to the CCB after photocopying had been complete, it was handed over in like fashion with the loose documents enclosed between the covers. During the course of the trial, the Defendants adduced the photocopy in evidence as Exhibit 'D11'. This exhibit consists of a file of the Defendants' audit working papers pertaining to Extramoney's 1980 Accounts together with loose copies enclosed within the covers of the same file of the Profit Schedule and the Okasan Statement. 58. There arose, however, considerable controversy between the parties as to whether Mr. Lai was honest when he testified to having photocopied the original audit file in 1983 when Mr. Colin Passmore of the Plaintiffs' solicitors records him in a contemporaneous note taken at a meeting between them held in 1989 as saying to the former that he only made the photocopy in 1986 or 1987 after he first learnt that the writ herein had been issued, at a time when the originals were no longer in the Defendants' possession, the same having been seized by the CCB as long ago as 1983. Mr. Lai hotly denies making any such statement and challenges, by extension, the accuracy of Mr. Passmore's note. 59. Having seen and heard respectively Mr. Meocre Li, Mr. Passmore and Mr. Lai testify on this factual aspect of the case, I am persuaded on a balance of probabilities, first and foremost, that while neither the Profit Schedule nor the Okasan Statement formed an integral part of the Defendants’ original audit file in the sense of being physically attached thereto or filed therein, they were nevertheless enclosed within the covers of such file as loose documents; secondly, that Mr. Lai did undertake the photocopying of the original audit file together with the loose enclosures in 1983 at the time of the CCB raid prior to handing over the original file with loose enclosures to the CCB; thirdly, that Mr. Passmore attempted to and did successfully make an accurate contemporaneous note of what Mr. Lai said in 1989; and, finally, that Mr. Lai's oral reference at the 1989 meeting to a date later than that on which he actually made the photocopying is attributable to nothing more sinister than an unfortunate slip of Mr. Lai's recollection during the course of what Mr. Passmore loosely described in his evidence (although not in those precise terms) as a somewhat tense confrontation between the Defendants' audit partner and his accuser's solicitors. 60. I am reinforced in the above conclusions by Superintendent Starling's evidence in cross-examination that, as a matter of standard CCB practice, relevant commercial documents are not necessarily seized or handed over on the exact same day of any given raid but, for reasons of administrative convenience, may sometimes be surrendered a few days later and sometimes in several instalments. The above conclusions are further reinforced by the Defendants I disclosure on discovery of the Profit Schedule under Schedule 2 of their List of Documents filed on 3rd July 1989 as having been "last in the Defendants’ possession, custody or power in December 1983 when they were handed to the Commercial Crime Bureau of the Hong Kong Police". 61. A necessary corollary to my foregoing findings is that the loose copies of the Profit Schedule and the Okasan Statement enclosed within the covers of the original audit file handed over to the CCB were lost sometime after the date of seizure in 1983 and well before this trial. The likelihood on a balance of probabilities is that they were lost either shortly after the original audit file was handed over to the CCB in December 1983 following the completion of photocopying by the Defendants or at or around the time Mr. Meocre Li's staff photocopied the various seized files and papers to make working copies for investigation, since I believe Mr. Meocre Li to be telling me the truth when he testified to being unable to find supportings for the Disputed Profit, let alone the Profit Schedule and the Okasan Statement, when he first began going through the Extramoney papers for the 1980 Period. I certainly have no doubt that the Additional Material were lost before the seized documents (or what remained of them) were handed over to the Plaintiffs’ solicitors for commencement of the present action since I believe the Plaintiffs' solicitors to have been genuinely surprised to come across for the first time copies of the two items when the same were disclosed by the Defendants' solicitors on or shortly before discovery in 1989. 62. That there may have been some papers lost amongst the six million odd documents (including some 80 odd files from the Defendants) seized by the CCB is not at all surprising. Indeed, such is the sheer volume of paper involved that the converse would have been astonishing. Secondly, that loose documents may have been lost in the course of or shortly after their seizure and removal to the offices of the CCB prior to inspection by Mr. Meocre Li and his 20-strong investigative team from Messrs. Arthur Anderson or alternatively in the course of or after photocopying by the latter is a fortiori not surprising. Thirdly, Mr. Li himself admits that he did not check bundles for completeness after photocopying by his staff to make working copies. Fourthly, Mr. Li moreover conceded with refreshing candour, more than once in the course of cross-examination, that a certain number of the seized documents have been mislaid or lost or gone missing from time to time. Fifthly, Mr. Li testified that he saw more contract notes supporting the transactions recorded in Extramoney over the 1980 Period shortly after he commenced investigations in late 1983 or early 1984 than were available at the hearing before me thereby reinforcing the notion that some relevant papers may have been lost. Sixthly, Mr. Colin Passmore confirms on affidavit that the Defendants have consistently complained throughout the litigation of inadequate discovery by the Plaintiffs. While this in no way establishes the validity of the complaint, it does undermine any suggestion that the complaint may have been a recent invention. Seventhly, Miss Chua Si-hua, an in-house legal adviser to Messrs. Ernst and Young, said on affidavit that it was only in the late summer of 1991 that Extramoney's journal vouchers for the 1980 Period were discovered in a file under the name of a totally different company and confirmed in cross-examination that documents were not always filed in the place one would expect. She further said that the 1980 transfer vouchers which she would expect to be with the ICAC were not there and confirmed on affidavit in August 1992 that the originals of Holdings' 1980 and 1981 journal vouchers have been lost but the latter surfaced shortly before the trial. Finally, the loss of the original audit file in or around the spring of 1992 shortly after the completion of certain interlocutory hearings in this action generates no confidence in the assumption that either the CCB or the ICAC or the Plaintiffs' solicitors' methods of safekeeping were necessarily foolproof. Additional Material: The Profit Schedule 63. Having found as a fact the inclusion by way of loose enclosures of the Profit Schedule and the Okasan Statement within the covers of the Defendants' original audit file, I turn now to examine the significance or evidential value of each of the two documents in establishing the existence of the Disputed Profit. Considering first of all the Profit Schedule, a number of features of the document are noteworthy. First of all, none of the transactions therein listed are dated. Indeed, no date appears on the document at all. Secondly, no seller or sellers are identified in relation to any of the transactions. Thirdly, there appears on the face of the document to be no 'tick marks', being a form of shorthand or code widely used by auditors for confirming or checking entries or calculations in their audit working papers, the presence of which on any given document in an audit file would indicate that verification work had been performed on such entries or calculations. Mr. Lai, the partner of the Defendants in charge of the audit of Extramoney, concedes in cross-examination that tick marks should have been made by all his staff so that seniors and supervising partners like himself could refer to them. In stark contrast to the schedules found in the Defendants' audit file all of which are to a greater or lesser extent covered with tick marks, the absence of such tell-tale signs from the Profit Schedule supports the Plaintiffs' contention that such document formed no part of the Defendants' original audit working papers. Fourthly, there is no cross-referencing between either the Profit Schedule (or, indeed, the Okasan Statement) or the entries therein to the audit working papers or vice versa. Again, the absence of such cross-referencing reinforces the Plaintiffs' above contention. 64. Fifthly, the fact that all the figures listed by way of sales consideration in the Profit Schedule are (save only for the first transaction) round figures appears to indicate either that the Disputed Profit was generated without the payment of either brokerage or stamp duty, or alternatively that the computation of the Disputed Profit was undertaken without reference to any such payments. For reasons canvassed below, the latter conclusion would appear to be correct. First of all, it cannot be gainsaid that whilst brokerage would not be levied for private trades where no broker was engaged, apart from the very first disposal listed in the Profit Schedule which is clearly depicted as a market transaction since the very word "Market" is inserted to identify the purchaser under the 'Buyers' column, five out of the other eight listed transactions give as the name of the purchaser under the 'Buyers' column the notation “C & M”, being (according to Mr. Meocre Li's evidence which I accept) the initials of a well-known brokerage firm known as C & M Securities Co. frequently used by members of the Carrian Group. Additionally, whilst brokerage may be avoided for non-market dealings, stamp duty is payable in any event. Thirdly, for each of the fourth to seventh disposals, the performance of a simple arithmetical exercise of multiplying the unit cost with the number of shares sold would yield the exact consideration figure shown on the Profit Schedule. Balanced as against the above observations, which may be regarded on one interpretation as casting doubt on the authenticity of the figures set out in the Profit Schedule, the total number of shares disposed of under the nine listed transactions being 14,133,920 matches exactly the number mentioned in the Okasan Statement as having been acquired which, when later sold, generated the Disputed Profit. For the above reasons and as well as others canvassed below, the foregoing observations support the alternative conclusion that the Disputed Profit was computed in the main without reference to either brokerage or stamp duty. 65. All of the above are valid criticisms of the relative value and demonstrate the inherent limitations of the Profit Schedule in establishing the authenticity of the Disputed Profit. It is also plain that, irrespective of my finding on the issue of the document's authenticity or whether it formed part of the Defendants' original audit file, the Profit Schedule constitutes, in the words of Mr. Meocre Li which I accept, merely the starting point for verification rather than the end product being actual verification of the Disputed Profit itself. Additional Material: The Okasan Statement 66. The same observation cannot, however, cannot be made of the Okasan Statement which is treated by consent as being an authentic, contemporaneous third party document made by a known firm of stockbrokers. The following observations are pertinent. The Okasan Statement establishes beyond a peradventure market purchases of 9,208,000 CIL shares from 18th July to 13th August 1980. The initial accumulation of 9,208,000 CIL shares referred to in the Profit Schedule matches precisely the acquisition of the identical number of shares between the aforesaid dates shown the Okasan Statement. Secondly, the two issues of bonus shares referred to in the Profit Schedule which boosted the cumulative holding (less periodic disposals) to 14,133,920 CIL shares can be demonstrated to have actually taken place by reference to the Okasan Statement. Indeed, Mr. Meocre Li conceded in cross-examination that whoever produced the Profit Schedule must have had the Okasan Statement in front of him. Other Documentarv Evidence 67. Further documentary evidence adduced by the Defendants at the trial (although clearly forming no part of either Extramoney's 1980 books and records or the Defendants’ audit working papers) advanced the cause of verification of the Disputed Profit. The eighth listed transaction in the Profit Schedule depicting the sale of one million CIL shares for HK$15.4 million to certain buyers designated "Alex Fung & Lawrence" (who, as the evidence shows, were at the material time both Carrian employees) is independently confirmed by the late discovery just before the adjourned hearing this year and subsequent production as Exhibits 'D5' and 'D7' of respectively a copy of Mr. Fung's cheque drawn on the Hang Seng Bank dated 30th October 1980 and payable in the amount of HK$7.7 million being exactly half the aforesaid listed sale price and, secondly, a bank statement issued by the Hang Seng Bank in respect of Mr. Fung's account for the months of October and November 1980 confirming that such an amount had, indeed, been withdrawn therefrom. 68. In the circumstances, I find on the totality of the evidence the transactions listed in the Profit Schedule to be genuine and I further find, on a preponderance of probabilities, the Disputed Profit to have been generated as a matter of fact. The above finding disposes, accordingly, of the first issue, leaving extant the remaining one under Question (1) as to whether the Disputed Profit was made by Extramoney as opposed to some other person or entity. ATTRIBUTION of the DISPUTED PROFIT to EXTRAMONEY 69. The documentary evidence is overwhelming in suggesting a negative answer to this outstanding issue. First of all, the account depicted by the Okasan Statement as having generated the Disputed Profit was, as I have mentioned more than once, opened and maintained not in the name of either Extramoney or even Mr. Tan (being, supposedly, Extramoney's agent) but rather that of Finance. The Defendants attempt to explain this away by reference to, first of all, Extramoney's consistent practice of acquiring CIL shares through nominees as shown in the documents and, secondly, Mr. Tan's supposed policy decision in early 1980 to put all dealings in CIL shares carried out on behalf of the Carrian Group into Extramoney. I say 'supposed' policy decision because Mr. Tan never came forward to testify at the trial. I shall revert to the ramifications of this point later. Thirdly, the Defendants say that the signing of Extramoney's 1980 Accounts by Finance qua director of Extramoney is representation to them qua auditors that the Disputed Profit, although generated in Finance's name as shown in the Okasan Statement, was in fact made by Extramoney. This last point made by the Defendants is, however, less than persuasive since I consider as a matter of law (see, for example, London Oil Storaqe Ltd. v. Seear, Hasluck and Co. (1904) 31 Accts. L.R. 1, discussed later in this Judgment) that the signing of accounts by a director, while importing a representation by him as to the truth of the contents thereof, in no way relieves the auditors of their duty to verify the accounts. 70. In any event, the Defendants' proffered explanations as outlined above are, however, contradicted by all the documentary material I have earlier canvassed in relation to the inadequacy of Extramoney's book entries supporting the making of the Disputed Profit (whether ipso facto or by Extramoney) in stark contrast to that which verified the generation of the Other Profits including, in particular, the total absence in Extramoney’s cash book evidencing the movement of funds to purchase the requisite number of CIL shares over the summer months referred to in the Okasan Statement so as to generate the Disputed Profit. As is evident from my canvassing of the documentary material in considering the first issue under Question (1), none of the purchases of CIL shares, the payments or liability to the brokers Okasan, as shown in the Okasan Statement, were recorded in the books and records of Extramoney. 71. Secondly, the absence of any reference in the books and records of Extramoney to the dividend paid out on the CIL shares acquired (before subsequent resale so as to generate the Disputed Profit) reinforces the view that such shares were not purchased and such profit not made by Extramoney. As the hearing progressed, it became common ground that dividends amounting of approximately HK$l million paid out on some 5,208,000 CIL shares which had at the material time not yet been resold had been retained by Mr. Tan by way of commission or reward for the generation of the profit on behalf of Extramoney. The Directors' Report nevertheless stated that "no emoluments were paid or accrued to the directors". The Defendants sought to argue that since Mr. Tan was not stricto sensu a director of the company the same need not be disclosed in Extramoney's accounts as director's emoluments. When it was subsequently pointed out that section 1 of the Companies Ordinance defined a director as including "any person occupying the position of director by whatever name called" and section 161 (2) of the same Ordinance dealing with particulars in accounts of directors' emoluments, pensions etc. provided that "the amount shown [in the accounts] shall include any emolument paid to or receivable by any person in respect of his services as a director of a company", the Defendants changed their stance and Mr. Lai of the Defendants conceded in his evidence that, with the benefit of hindsight, the dividends should have been disclosed in the accounts and the value thereof paid to Mr. Tan by way of director's emoluments but, unfortunately, the above course had not been followed. 72. Mr. Lai further testified that he attempted to persuade Mr. Tan to debit his current account maintained with Extramoney with the amount of the dividend amounting to about HK$l million which he had retained but the latter refused on the ground that the figure was insignificant compared with the amount of the Disputed Profit generated by him for Extramoney and that it was equivalent to a commission. Additionally, Mr. Lai testified that Mr. Tan had directly instructed Okasan to issue to his favour a cheque in the amount of the dividend which cheque he later paid into his own personal account. While I do not doubt the veracity of Mr. Lai's testimony in this regard, I have to confess that, in my judgment, the above account in no way strengthens the Defendant's contention that the Disputed Profit was made by Extramoney. 73. As against that last observation, the Defendants point out, first of all, that all the pre-18th September transactions shown on the Okasan Statement as having been carried out in the name of the account-holder Finance are nowhere to be found in Finance's books (the same being also audited by the Defendants) and, secondly, that Mr. Tan's supposed policy of putting all acquisitions of CIL shares within the Carrian Group into Extramoney supports the supposition that the Disputed Profit must have been made by Extramoney. Ignoring for the time being the absence of direct evidence to support the notion of there having been any decision made by Mr. Tan to effect the aforesaid policy and assuming that the same can be inferred by reference to documentary material covering Extramoney's dealings in CIL shares, the Defendants' theory nevertheless begs the question whether the specific acquisitions of CIL shares shown on the Okasan Statement were in fact made for the Carrian Group as opposed to for Mr. Tan himself or one or other of his private companies. 74. Thirdly, the Okasan Statement is itself divided into two parts with 17th September 1980 as the cut-off date as indicated by a manuscript scribble followed by two lines across the middle of page 6 of the Statements which Mr. Lai of the Defendants has identified as respectively his initials and hand-drawn dividing lines indicating that the entries below the said lines record transactions executed in the name of Finance but in reality on behalf of a private company belonging to Mr. Tan but forming no part of the Carrian Group known as Perak Pioneer Limited ("Perak Pioneer"). The fact that the transactions starting on 18th September 1980 as shown in the remainder of the Okasan Statement can be traced to entries in the books of Perak pioneer as contrasted with the absence of similar book entries for Extramoney cannot but support the notion that the pre-18th September transactions were not executed on the part of Extramoney. 75. Fourthly, the contents of Profit Schedule itself support the notion that the transactions therein listed and carried out so as to generate the Disputed Profit were not done on behalf of Extramoney. To begin with, none of the nine individual sales listed in the Profit Schedule save for the third one can be found among Extramoney's 1980 books and records. The third listed transaction records a sale of 4,448,000 CIL shares (to a person or entity who can no longer be identified since the name originally appearing on the Profit Schedule has since been obliterated with the name of Mr. Tan substituted instead) at a price of HK$42,700,800 thereby generating a profit of HK$18,690,461.52. This transaction appears to correspond (by reason of a remarkable coincidence of figures) to an entry in Extramoney's cashbook dated 22nd August 1980 recording the purchase by Extramoney of an identical number of CIL shares for the exact same sum of HK$42,700,800. Thus it would appear that, if the transactions listed in the Profit Schedule were indeed made on behalf of Extramoney as contended for by the Defendants, then, by the third listed sale, Extramoney took the inexplicable step of selling to itself 4,448,000 CIL shares it had earlier acquired and, in the process, absurdly recorded a profit of HK$18,690,461.52 when, if the Defendants' contention be right, there should be no profit recorded at all. 76. The Defendants seek to overcome this conundrum by suggesting that Mr. Tan having, qua agent of Extramoney, sold certain shares to himself at a profit and then immediately thereafter on-selling to Extramoney at the same price, he would necessarily have to account to Extramoney for the said profit. However, the above proposition needs only to be stated for its absurdity to be demonstrated since Extramoney ended up by retaining the same lot of shares and there was never any sale to the market or a third party which would have generated a real profit. Put another way, if the purchaser of the shares were Extramoney, then the seller is more likely than not to be a person or entity other than Extramoney. 77. Fifthly and most significantly, additional reference to the Disputed Profit found in four pages of apparently contemporaneous documentation dated variously 5th to 7th May 1981 found in a file containing Carrian internal memoranda entitled "John Wong Inter-office Memo" and adduced by the Plaintiffs at the trial as Exhibit 'P2' reinforce the notion that the Disputed Profit was not made by Extramoney. The provenance and authorship of much of Exhibit 'P2' has always been controversial and the same remains, to a significant extent, unknown and unestablished even at the end of the trial. However, as I shall explain below, such ignorance on my part is a matter of little moment to a proper determination of the second issue under Question (1). Exhibit 'P2' incorporatinq the 'Dear Georqe' Letters 78. The first page of Exhibit ‘P2’ consists of a note handwritten in blue ink addressed to one John Wong (who was, as the evidence shows and which I accept, the financial controller of the Carrian Group) marked "For your information" and signed by one Anita Law (Miss Law being, as the evidence shows which again I accept, Mr. Tan's personal assistant) with a notation beneath the signature which reads "7/5" which the parties accept as a reference to 7th May and, although the year was unspecified, the likelihood on the balance of probabilities is that the date of Miss Law's note is 7th May 1981. 79. The remaining three pages are typewritten with handwritten notations appended thereto. The first such typewritten page (being the second page of Exhibit 'P2') has at the top an inscription handwritten in red ink which reads "Chan & Lai Mr. Lai what do you think?" followed by a signature which Mr. Meocre Li as well as Mr. Lam Hon-ming ("Mr. Lam"), a partner of Messrs. Ernst and Young involved in the liquidation of Holdings, identify and I accept as that of Mr. Tan together with a date which reads "5/5/81". Although neither Mr. Li nor Mr. Lam are handwriting experts, each of them has, in the course of their respective earlier investigations into respectively the CIL collapse carried out between 1983 and 1987 and the Holdings liquidation, come across Mr. Tan's signature a sufficient number of times and so achieved a degree of familiarity with it as to enable him to recognise the same with ease. 80. To the left of the signature is another handwritten notation in black ink which, as the evidence of Mr. Meocre Li shows which I accept, is Miss Law's handwriting and which reads "out 5/5" indicating that the document was despatched on 5th May 1981 to "Chan & Lai" meaning the Defendants (the firm's former name being Chan Lai & Co. before the third partner Mr. Pang joined the other two resulting in 7th August 1980 in a change of name to the present one). Below the handwritten notations are calculations of profits made by Extramoney in respect of CIL shares transferred to a sister company in the Carrian Group known as Carrian Travel Services Ltd ("Travel Services"). 81. The last two typewritten pages (respectively the third and fourth pages of Exhibit 'p2') consist of two unsigned letters both dated 6th May 1981 apparently addressed to Mr. Tan as can be seen from the notation "Dear George" typewritten at the top of each letter (collectively "the 'Dear George’ Letters"). The first 'Dear George' Letter (being the third page of Exhibit 'P2') is headed "TRAVEL DIVISION" (which the evidence shows and I accept to be a composite reference to number of travel service related companies within the Carrian Group, namely, Travel Services, Kent Travel Ltd., Farallon Air and Sea Travel Ltd.) followed by a series of calculations including those pertaining to profits from trading in CIL shares which replicate the figures for the first and last transactions listed in the Profit Schedule. 82. The second 'Dear George' Letter (being the last page of Exhibit 'P2') is important wherefor I make no apology for setting out the text verbatim:-
83. Each of the 'Dear George’ Letters bears at the bottom of the page a notation scrawled in black ink which reads "OK" and which, as both Mr. Lam and Mr. Meocre Li testified and which I accept abd find, is Mr. Tan's handwriting. 84. The authorship of the 'Dear George' Letters was hotly contested at the hearing, the Plaintiffs suggesting that the same were written to Mr. Tan by Mr. Lai of the Defendants in his capacity as partner in charge of the audit of Extramoney. At one stage, the Plaintiffs attempted to bolster this theory by referring to what they contend is Mr. Lam's handwriting at the very bottom of respectively the first 'Dear George' Letter which reads "P.S. These are Thomas Lai's reply & OK is written 'by Mr. Tan", and also the second 'Dear George' Letter which reads "P.S: Same as page 1", such page reference being, presumably, to the first 'Dear George' Letter. When Mr. Lam subsequently gave evidence, however, he specifically denied ever inscribing those comments and protested that, in any event, he never wrote on original documents. As matters turned out, no-one was ever called to testify to being the author of the comments, when they were written or, more importantly, the basis for the conclusions therein stated. Accordingly, I hold the manuscript comments to be wholly inadmissible for the purpose of proving the authorship of the 'Dear George' Letters. 85. In the meantime, Mr. Lai who was cross-examined on the issue hotly denied ever writing the ‘Dear George' Letters. Having seen the latter testify and having regard to the patently unprofessional nature of the drafting as well as presentation of the two letters, the same being plagued with grammatical and typographical errors and typewritten on blank sheets of paper with no letterhead as opposed to the Defendants' own stationery as would befit correspondence by a professional accountant to an important client and which are, moreover, left unsigned, I accept Mr. Lai's evidence he is not the author of the 'Dear George' Letters. Without reaching any positive conclusion as to the authorship of such documents since the requisite evidence for the making of any such finding has not emerged, I nevertheless find the 'Dear George' Letters, partly because of the careless manner in which they were drafted and typewritten but more importantly for the reasons set out below, to be authentic contemporaneous documents addressed to Mr. Tan suggesting and detailing how certain share trading profits should be treated, which suggestions were apparently accepted by Mr. Tan. 86. A number of important points emerge from the ‘Dear George' Letters. First of all, the two dates, both 6th May 1981, attributed thereto appear to be authentic since the Letters were clearly written after the issuing of the Okasan Statement and certainly after the carrying out of the share transactions which gave rise to the Disputed Profit. The reference at the bottom of the first 'Dear George' Letter to the second and third transactions depicted therein appearing in "Carrian Finance Limited - OKASAN STATEMENT" bears this out. Secondly, the precise matching of all the other calculations relating to the first and last transactions listed in the Profit Schedule with the second and third transactions appearing in the first 'Dear George' Letter reinforces the notion of the genuineness of the transactions listed in the Profit Schedule. Thirdly, the existence of an error in the calculation of the unit cost of the shares comprised in the last transaction depicted in the first 'Dear George' Letter, which error is not repeated in the matching ninth sale listed in the Profit Schedule, would tend to indicate that the Profit Schedule was drawn up after the 'Dear George' Letters had already been written and despatched. The foregoing hypothesis of the subsequent creation of the Profit Schedule is supported by the absence of any reference in the 'Dear George' Letters to the existence of the former document. Thus it would appear that, in terms of chronology, the Okasan Statement appears earliest, to be followed next by the 'Dear George’ Letters with the Profit Schedule coming last. 87. Fourthly, the first 'Dear George' Letter shows that the first and last transactions listed in the Profit Schedule, which together with the other seven listed transactions make up the Disputed Profit, were carried out by "Travel Division" rather than Extramoney. This impression is reinforced by my fifth observation which is that the second 'Dear George' Letter records a suggestion dated 6th May 1981 made to Mr. Tan to consolidate in Extramoney the profits derived from the CIL share-dealing shown on the Okasan Statement since "'Extramoney' is engaged in dealing in 'CIL' shares only". 88. This leads me to my sixth and final observation which is that respectively the implication in the 'Dear George’ Letters that certain profits arising from CIL share dealings were not made by Extramoney and the express suggestion that such profits should be transferred to Extramoney are both confirmed by the summary appearing at the bottom of the Profit Schedule itself which states that an amount of some HK$86 million entered under 'The Co.' sub-column should be transferred to an entity designated “the Co." whilst the HK$15 odd million entered under the 'Travel Division' sub-column should likewise be transferred to “the Co." thereby making up the composite total of HK$101 million being the amount of the Disputed Profit. Although the entity referred to in the Profit Schedule as “the Co.” is nowhere therein defined, it is clear that such entity, to which the Disputed Profit was to be transferred, never made such profit by itself in the first place. 89. All of the above leads me to the inexorable conclusion that the original transactions carried out over the 1980 Period as recorded in the Okasan Statement were not at the material time carried out by or, indeed, even intended to be carried out in the name of Extramoney and that it was only in mid-1981 that, for what appears to be group accounting reasons, Mr. Tan decided pursuant to suggestions to record the Disputed Profit as belonging to Extramoney. Although there was some suggestion at the hearing as to whether the real motive underlying such profit attribution was to inflate the profits of Extramoney, they amount to no more than mere speculation and do not assist my determination of the issue and in any event do not, as a theory, sit at all comfortably with the uncontroverted facts of, firstly, the year-end HK$132 million provision for diminution in value of CIL shares retained by Extramoney and, secondly, the HK$46 million management fee charged to Extramoney by Holdings. Of the HK$132 million provision for diminution in value of CIL shares retained, the evidence shows that HK$127 millions' worth came from shares transferred to Extramoney from an associate company within the Carrian Group called Filomena Limited ("Filomena") which, prior to such transfer, held a majority interest in CIL being the Carrian Group's core interest in ClL. In 1980 Filomena traded in CIL shares and at the year-end sold what it had not disposed of on the market at above the market price to Extramoney thereby creating a provision in the accounts of Extramoney and a corresponding profit or extraordinary item in the accounts of Filomena. More to the point, whatever be Mr. Tan's real motive (and the same is not important for present purposes), the evidence shows that he decided more than five months after the year-end, for group accounting reasons, to put into the books of Extramoney the Disputed Profit generated over the 1980 Period by market dealings in CIL shares carried out in the name of Finance. Efficacy of Post Year-end Attribution of Profits 90. Is the post year-end injection of profits of another company into Extramoney legitimate in terms of accounting treatment? More accurately, would Mr. Tan's decision reached in May 1981 being almost half a year after the close of the 1980 Period and, more importantly, some considerable time after the actual transaction dates be effective in rendering the Disputed Profit one which was made by Extramoney over the 1980 Period? This was how Question (1) ultimately presented itself at the end of the trial. Mr. Adrian Hamilton Q.C., who appears for the Defendants, was highly critical of what he termed the chameleon-like changes in the case advanced against his clients from one of "totally fictitious" or non-existent profit (as originally described by one of the Liquidators in a statutory declaration made on 31st March 1987 towards the close of the investigatory stage prior to the commencement of these proceedings but who never gave evidence at the trial) to a question of proper accounting treatment but, while I am not unsympathetic to the difficulties which may confront a party in having to meet an opponent's shifting front, I do not regard the attack made of the Plaintiffs' case to be warranted. In my view, their stance may, subject only to the parameters laid down in the pleadings, legitimately be adapted in line with changing circumstances and the evidence which emerged as the trial progressed. 91. I received starkly conflicting answers from the experts on this ultimate question. I should mention here before canvassing their evidence that, not only do I intend and imply no criticism of either expert by reference to such conflict, but I regard the expert witnesses called by respectively the Plaintiffs and the Defendants to be very highly qualified and experienced, each of whom gave clear and succinct evidence and, in my view, did their level best to assist me in the resolution of all questions on which their expertise might shed some light. 92. There was, at one stage, some criticism made by Defence Counsel of the partiality and suitability of Mr. Meocre Li acting for the Plaintiffs as an expert on accounting and auditing standards and practices in the light of his previous involvement assisting the CCB in their investigation into the causes of the collapse of Carrian Group from 1983 to 1987, an aspect of Mr. Li's curriculum vitae to which I have already adverted in earlier passages of this Judgment. I accept, of course, that it is unfortunate and undesirable for anyone previously involved in the investigation of facts leading to conclusions that may have prompted the commencement of proceedings to testify as an expert witness in relation to issues the subject of those very proceedings, since (the witness's honesty and integrity not being in doubt) a clear risk nevertheless arises of one or more parties challenging his expert opinion on the basis that it may have been prejudiced or at least coloured, even if only subconsciously, by his factual findings. That risk materialised in the present case. However, I bear in mind, first of all, that neither the controversy surrounding the Disputed Profit nor, indeed, any other activities concerning Extramoney (as opposed to some other conclusions drawn by the CCB as a result of their aforesaid investigations) ever led to criminal or other proceedings against Mr. Tan. Secondly and more importantly, having seen and heard Mr. Meocre Li testify in the witness box, I am impressed by his professionalism and am wholly satisfied that, whilst the findings of the CIL investigation lay not surprisingly at the back of his mind in (indeed, he confessed in cross-examination that his problem was that he could not "shut off the knowledge that [he had] gained from the previous investigation"), Mr. Li never allowed such matters to cloud or otherwise affect his expert assessment of the issues in the instant case but, on the contrary, expressly limited the basis of his opinion to the material available to the parties. 93. I should also mention at this juncture that both the Plaintiffs' and the Defendants' experts were clearly agreed on one important point, namely, that it would be improper and unacceptable for a company to record after the year-end a profit or other transaction that had not taken place during the year. They appeared to be divided on the further question whether a 100% beneficial owner and controller (such as Mr. Tan) of a private company (such as Extramoney) could properly attribute profit which he had made (either personally or through another entity) during the year to that company after the year-end. The following discussion shows how their later evidence emerged and the ultimate issue crystallised. 94. Mr. Kenneth Morrison, both a chartered and a certified public accountant of some 20 years' standing, much of it in auditing and audit review, called by the Defendants as their expert, concluded that if the Defendants did receive representations from Mr. Tan that the shares in question were purchased on behalf of Extramoney and if the Defendants did sight supporting documentation relating to the sales of the 9,208,000 CIL shares, such evidence would support the inclusion of the Disputed Profit in the books of Extramoney. Mr. Morrison was heavily cross-examined by Mr. Griffiths on the question whether an auditor must guard against the natural tendency of a controlling shareholder or the management of a company to rewrite corporate history, particularly in the context of group accounts where it might be beneficial for tax or other reasons to shift after the year-end profit from one subsidiary to another. Mr. Morrison's response was that a reasonably careful auditor would have to ensure that the accounts present a true and fair view of the state of affairs of the company. As became clear subsequently, this could not fairly be described as an evasive answer to Counsel's question for Mr. Morrison was asked, as the questioning progressed, to focus on an auditor's need to guard against the "improper” shifting of such profits after the year-end. This begged, of course, the question of what type or genre of post year-end profit-shifting from one subsidiary to another might be considered improper. Mr. Morrison plainly took the view that group management may after the year-end legitimately assess where transactions occurring within the year should appropriately be booked, the expression "appropriately" meaning where such booking accurately reflects the facts as they occurred during the year. Thus, as I understand Mr. Morrison's evidence, Mr. Tan's market dealings in CIL shares over the 1980 Period could only be booked with Extramoney after 1980 provided Mr. Tan was at the material time of undergoing such transactions in 1980 acting for and on behalf of Extramoney. Otherwise, Mr. Tan's crediting of his personal profit to Extramoney after 1980 would constitute a gift (as opposed to a trading profit) and therefore not subject to taxation. As will become apparent when I consider Mr. Meocre Li's opinion later in this Judgment, there is little or no difference between Mr. Morrison's view in this regard and the conclusions of Mr. Li. 95. In questioning by me after the completion of re-examination by Mr. Hamilton, Mr. Morrison, however, expanded on his earlier answers given in cross-examination in at least three aspects and qualified such earlier answers in one important regard. He says, first of all, that the booking of management fees after the year-end is legitimate even where no decision had been reached during the year as to the charging of such fees since the latter would tend to be arrived at after the balance sheet date. Other legitimate post year-end adjustments are provisions against doubtful debts and provisions against obsolete inventory. What Mr. Morrison said he would not countenance was the booking of a profit after the year-end if the transaction had not occurred during the year, which I take to mean where the event underlying the post year-end adjustment had not taken place within the financial year under consideration. The foregoing three examples of post year-end adjustments would appear, therefore, to conform with his stated principle that the book entry must accurately reflect the facts as they had occurred during the year. 96. Mr. Morrison went on to say, however, that where a profit had been generated within a given financial year but it is unclear whether the person responsible for generating such profit had at the material time been acting for himself or on behalf of one of a number of different companies which he wholly owned and controlled, that individual can freely choose after the year-end the company with which to book the profit provided that he beneficially owned 100% of all the companies to be selected for this treatment. The fact that the company thus favoured had to be 100% beneficially owned such that there are no minority interests affected one way or another was the essential qualification given by Mr. Morrison to his earlier answer. Provided that essential condition was satisfied, such ex post facto accounting treatment would, according to him, be permissible and efficacious even where the transaction giving rise to the profit had not originally been undergone on behalf of the selected company. 97. The introduction by Mr. Morrison of this important exception to his stated general rule that the accounts in order to present a true and fair view must accurately reflect events as they had occurred during the year exposes, however, his opinion to criticism and has the effect, ultimately, of undermining the same. First of all, such an exception contradicts Mr. Morrison I s earlier testimony that Mr. Tan's market dealings in CIL shares over the 1980 Period could only be booked with Extramoney after 1980 provided Mr. Tan was, at the time of such dealings, acting as Extramoney's agent; otherwise, the post year-end booking of profits arising from those dealings with Extramoney could properly be effected only by registering a gift from Mr. Tan to Extramoney and the same would not attract profits tax assessment. Secondly, the exception postulated by Mr. Morrison would appear to ignore the fundamental principle of law as well as accounting that a set of accounts ought to give a true and fair view of the state of affairs of a company and the transactions undergone during the year since accounts incorporating a post year-end profit attribution would not, ex hypothesi, give any such a view of the company's acts and dealings over the year under consideration. 98. Mr. Meocre Li's position appears, on the other hand, to be free of such internal and other contradictions. Mr. Li had already agreed in earlier cross-examination that there was nothing unusual in the fact of there being year-end adjustments in any given year. Upon his recall following the completion of Mr. Morrison's testimony to deal with the question whether it would be proper for a 100% beneficial owner of a company to attribute profits after the year-end to such company where the transactions giving rise to the profits had not been undergone during the year on behalf of that company, Mr. Li expanded on the above subject. While he agreed with Mr. Morrison that such matters as management fees, provisions for bad debts and inventory obsolescence could properly form the subject of year-end adjustments, he staunchly disputed the latter's suggestion that a 100% beneficial owner of two or more companies could enjoy a free hand in deciding where to book the profits ex post facto. According to Mr. Li, a person seeking to act as an agent for another must decide, prior to entering into the transactions in question, for whom he intends so to act. Translated into a general principle, Mr. Li expressed the view that it was essential for "the transactions, the events, the meeting of the minds to take place prior [to] or at the year-end". In other words, in Mr. Li's view, a profit can only be booked as a profit in the company which actually made it and, whereas one can transfer profits generated by one company into another's accounts, such monies cannot properly be transferred qua profits. This was entirely consistent with his previous evidence given in earlier cross-examination by Mr. Hamilton that "the relationship between the principal and the agent would have to be established at the time or prior to the transaction” and not afterwards. 99. Mr. Li offers by way of ratio for his distinction the fact that the practice of making year-end profit and loss adjustments is open to abuse and that readers of financial statements would be misled into believing that something had happened during the year which plainly had not taken place. Mr. Li's objection to allowing a 100% beneficial owner of various companies to decide after the year-end where among those companies to book the profit he made during the year is that such practice would enable the owner to manipulate the accounts and render the task of auditing impossible since it would not be possible then for such massaged accounts to give a true and fair view of the state of affairs of the company at the balance sheet date, namely, the year-end. Hence it is crucial, acccording to Mr. Li, to determine at the point of time the transaction was conducted the identity of the principal on whose behalf the transaction was conducted, namely, the person or entity who would take the profit or bear the loss. 100. In my judgment, there is much to commend in Mr. Li's opinion. I need add only two further observations of my own. First of all, profits attributed after the year-end to one company must also mean that they have been either taken way from or not given to another. Secondly, if the practice of attributing profits ex post facto means that it must, by definition, also operate in reverse in relation to another company in the group, such a practice must additionally operate in relation to losses. A person who has incurred a loss personally may decide, for the purpose of securing fiscal advantage or other reasons, to attribute a loss to one of his wholly-owned companies instead of carrying it himself. The principle that accounts ought to give a true and fair view of the state of affairs of a company and the transactions undergone over the year would be hopelessly compromised if an individual could, after the year-end, by a whim either confer a windfall upon any company which he wholly beneficially owned or deprive the same of its profits properly generated over the year or, alternatively, attribute a loss to a company which had never sustained one during the period in question. In conclusion, I find by reason of its logic, coherence and consistency with legal principles coupled with, as I have earlier mentioned, an absence of internal contradictions, no difficulty accepting Mr. Li’s view as regards the propriety and efficacy of post year-end transfers of profit in preference to that of Mr. Morrison. 101. Mr. Li was further cross-examined on the legitimacy and efficacy of intra-group transfers of profit from Filomena to Extramoney at the end of the 1980 Period as compared with that which took place between Finance and Extramoney in May 1981. He sought to justify the Filomena transfer on the basis that “so long as proper disclosures were made so that the readers of financial statements can ask questions if necessary, including the tax authorities if they need to, then I can see that the financial statements can still show a true and fair view". When questioned further by Mr. Griffiths after being recalled, he expressed the view that if an owner of a company were minded to inject into that company profits which he had made either personally or from another source, he could do so either by way of a gift of capital (which would not, ex hypothesi, attract profits tax) or record it as an extraordinary item and make a disclosure of the nature of such item as being, in reality, a de facto gift, which course of action, although in Mr. Li's view "less preferrable", would nevertheless be proper. 102. Mr. Li was challenged on this last point by Mr. Hamilton referring to the Hong Kong society of Accountants' ("HKSA") Statement No. 114, a document accepted by all parties as laying down proper standards of accounting practice to be observed by members of the profession, which requires all extraordinary items to be accounted for through the profit and loss account rather than through reserves. "Extraordinary items" are defined in the statement as "those items which derive from events or transactions outside the ordinary activities of the business and which are both material and expected not to recur frequently or regularly". The statement recognises the existence of two different points of view on the treatment of, inter alia, extraordinary items. One was that, so as to avoid distortion, the profit and loss account for the year should include only the normal recurring trading activities of the business. The other view (advocated by the statement) was that the profit and loss account for the year should include and show separately all extraordinary items which are recognised for that year since inclusion would give a better view of profitability and progress whereas exclusion, being a matter of subjective judgment, could lead to variations and loss of comparability. between reported results of companies and could result in extraordinary items being overlooked over a series of years. Mr. Li accepted eventually that treating such injection of money by Mr. Tan (assuming such to be the case) as an extraordinary item in Extramoney's profit and loss account would be legitimate and, if so treated, the same would be available for distribution. Upon questioning by me, Mr. Li also accepted that it would be legitimate to transfer, after the year-end, profit earned by one company to another in the same group provided it is entered in the books of the latter company as an extraordinary profit whereafter it would be available for distribution. 103. At the end of the day, however, the above discussion of the proper treatment of extraordinary items is academic since the Disputed Profit was not recorded or treated as such in Extramoney's books. Further, since there is nothing in Mr. Li's further testimony which in any way undermines his statement of the imperative for the accounts properly to reflect events as they had occurred in the year under consideration, I am not swayed in my acceptance of the validity of his opinion in preference to that of Mr. Morrison. Relevance of Mr. Tan's Alleqed Oral Representations 104. Before leaving Question (1), I must turn finally to consider the Defendants' allegation that Mr. Tan, in answer to queries made by Mr. Lai during the auditing process, made oral representations to the latter to the effect that Extramoney made the Disputed Profit over the 1980 Period. There are a number of problems surrounding the making of such an allegation which renders the same ineffective in advancing the Defendants' case in determining Question (1). 105. To begin with, the Plaintiffs seek to cast doubt on the veracity of this allegation by reference to the total absence of written records and memoranda of such representations whether within the Defendants' audit working papers or elsewhere. Mr. Lai of the Defendants freely admitted that he did not ask for a letter of representation or a board resolution or a declaration of trust because he thought the documents produced could support what Mr. Tan had orally represented. That it is better practice for auditors to record such oral representations by their client is clearly borne out by HKSA statement No. 118 recommending the securing of "letters of representations i.e. written confirmation by the client of information and opinions expressed in respect of matters such as stock values and amounts of current and contingent liabilities" and HKSA Practice Guideline No. 9 recommending that auditors should attempt to obtain all clients' representations in writing. 106. However, having seen and heard Mr. Lai of the Defendants give evidence as to the making of such representations by Mr. Tan, I do not doubt that he was telling me the truth and, further, bearing in mind the size of the Defendants' firm and the nature of their practice, I have come to the view that the absence of such documentary evidence demonstrates regrettable non-compliance by the Defendants with the standards of professional practice laid down by the HKSA rather than mendacity on Mr. Lai's part in giving evidence. 107. The real problem with Mr. Lai's allegations of oral representations by Mr. Tan lies in the fact that, Mr. Tan not having been called to testify, such allegations whilst no doubt relevant to showing Mr. Lai's state of mind and belief (a matter to which I shall revert in canvassing Question (2) below) is inadmissible hearsay for the purposes of establishing the truth of such representations. Put more fundamentally, even if the fact be established that Mr. Tan did make those representations to Mr. Lai, that in no way proves that the position thus represented is true. On the contrary, the contention underlying Mr. Tan' s representations is flatly contradicted by all the documentary evidence hereinabove canvassed. 108. This then disposes of the remaining issue under Question (1) and I reiterate my findings by way of conclusion that, while the Disputed Profit was indeed generated as matter of fact over the 1980 Period, it was not generated by Extramoney. I further find that the post year-end decision of Mr. Tan (albeit the 100% beneficial owner and controller of Extramoney and Finance) to put the Disputed Profit generated over 1980 in the name of Finance into Extramoney's books for the 1980 Period was inefficacious in rendering the Disputed Profit the trading profit of Extramoney for the 1980 Period. NEGLIGENCE and BREACH of CONTRACTUAL and STATUTORY DUTIES 109. Having found as a fact in answer to Question (1) the Disputed Profit to have been made during the 1980 Period though not by Extramoney, the next question for my determination is whether the Defendants were negligent or otherwise in breach of contractual or other duty in certifying Extramoney's 1980 Accounts (which incorporate the Disputed Profit as the company's trading profits for that year) as presenting a true and fair view of its state of affairs. 110. There is no doubting the proposition I have earlier mentioned that the overall burden of establishing negligence on the part of the Defendants lies with the Plaintiffs. There is equally no controversy surrounding the question of standard of proof inasmuch as, having regard to the gravity of the Plaintiffs’ allegations, clear proof of negligence or breach of duty on the part of the Defendants is required in the circumstances of this case: Jackson & Powell on Professional Negligence, 3rd ed., para. 1-05 and Note 14 on p. 5, Charlesworth & Percy on Negligence, 8th ed., para. 8.07, Dwyer v. Roderick (unrep.) The Times November 12th 1983, Hucks v. Cole (unrep.) The Times May 9th 1968. 111. The Defendants' duties qua auditors of Extramoney's 1980 Accounts are variously defined by statute, the pronouncements of the Hong Kong society of Accountants ("the HKSA") and the common law. I propose to consider those duties in reverse order. AUDITORS' DUTY of CARE and CONTRACTUAL DUTY 112. What is the ambit of the Defendants' contractual and other duties under the common law? The primary duty of an auditor auditing the books and accounts of a company is succinctly defined by Lindley L.J. in Re Kingston Cotton Mill Co. (No.2) [1896] 2 Ch 179 (CA) at 284 as a duty "to examine the books, ascertain that they are right, and to prepare a balance-sheet shewing the true financial position of the company at the time to which the balance-sheet refers". The experts are also agreed that the standard of auditing required is the same whether a large or a small firm were involved. 113. Thus, given my finding in course of answering Question (1) that the post year-end attribution to Extramoney of the Disputed Profit generated during 1980 in the name of Finance is ineffective in properly rendering the same the trading profits of Extramoney for the 1980 Period, the Defendants' preparation of Extramoney's and Holdings' Balance Sheets incorporating the Disputed Profit as the trading profits of Extramoney and certification of such accounts to be true and fair constitutes a prima facie breach of this primary duty owed to their clients the Plaintiffs. Given that the legal burden of showing negligence or other breach of duty remains always with the Plaintiffs, can the Defendants nevertheless shift the tactical burden of demonstrating that they have taken all reasonable precautions in their auditing task that a reasonably prudent auditor would have taken under the particular circumstances of the case? 114. To be fair to the Defendants, a brief recapitulation of both the uncontroversial background facts and a more detailed examination Mr. Lai's evidence, qua partner of the Defendants in charge of the audit of Extramoney, of the various steps which he says were taken (including the receipt of oral representations from Mr. Tan and sight of certain documentary supportings) to verify the existence of the Disputed Profit, justify its inclusion in Extramoney's and Holdings' 1980 Accounts and validate the Defendants' certification thereof as being true and fair are warranted. I should note at this juncture that, having seen and heard Mr. Lai testify, I am satisfied that, although his testimony is not wholly free of inconsistencies, Mr. Lai was basically telling me the truth as regards the steps in the course" of verification which he said he took. Certain implications of the evidential rule against the admission of hearsay evidence should nevertheless be borne in mind in considering Mr. Lai's testimony of, first of all, Mr. Tan's supposed oral representations to him and, secondly, the contents of the supportings. It must not be forgotten that, Mr. Tan never having emerged to testify and to the extent that a considerable portion of the supportings which Mr. Lai says he saw at the time of the audit were not available at the trial, Mr. Lai' s aforesaid testimony is inadmissible for the purposes of establishing the truth of either Mr. Tan's alleged representations or the contents of the supportings (to the extent that the same were not adduced by way of documentary evidence at the hearing) but are relevant only to showing the information made available to Mr. Lai at the time of the audit. Mr. Lai's Testimony 115.The Defendants commenced their audit of Extramoney's 1980 Accounts in March 1981 and completed the same on 8th April of the same year, with the accounts being signed off on 8th January of the following year. Throughout the audit, Mr. Lai said that he met Mr. Tan three times to take and clarify instructions. 116. On 25th March 1981, according to Mr. Lai, a member of Holdings' in-house accounting staff Miss Florence Ho submitted to him for audit a trial balance of Extramoney drawn up by her which showed gross proceeds of sale of CIL shares of some HK$482 million and the cost of CIL shares sold as HK$262 million leaving a profit of approximately HK$220 million. Mr. Lai and his audit team thereupon checked the trial balance as against Extramoney's ledger accounts whereafter they prepared in draft a balance sheet and a profit and loss account showing the same figure by way of profit, namely, HK$220 odd million as aforesaid. The draft balance sheet and profit and loss account were then submitted to Miss Ho for approval. 117. It is striking to note that when Miss Ho, the in-house accountant, prepared the trial balance she did not include the Disputed Profit as part of the profits of Extramoney. Neither did Mr. Lai and his audit team when they prepared the draft balance sheet and profit and loss account. This is hardly surprising since the Disputed Profit did not appear in the books and records of Extramoney which they had then examined. I shall revert later to the significance of the above points. 118. Shortly after the submission of the draft balance sheet and profit and loss account, Miss Ho notified Mr. Lai that Mr. Tan wished to see him. At a meeting at Mr. Tan's office sometime between 25th March and 8th April 1981, Mr. Tan told Mr. Lai that he had profitably conducted on behalf of Extramoney certain dealings in CIL shares using a margin account opened in the name of Finance with the stockbrokers Okasan wherefor he wished to account for such profit to Extramoney. He asked Mr. Lai to check with Miss Ho as to whether the HK220 million profit figure shown on the draft balance sheet and profit and loss account included such profit. According to Mr. Lai, Mr. Tan further informed him that he had also bought on behalf of Extramoney other CIL shares on eight separate margin accounts opened with Okasan in the names of various nominees all surnamed Lam. Since these other shares had yet to be disposed of, Mr. Tan asked Mr. Lai to check with Miss Ho to ensure that the same were included in Extramoney's closing inventory. 119. After the meeting, Mr. Lai checked through Extramoney's books and records but failed to unearth any relevant statements issued by Okasan supporting Mr. Tan's oral representations. Indeed, he found no record of dealings in CIL shares through Okasan either in the books of Extramoney or those of Finance. One or two days thereafter, Mr. Lai met Mr. Tan again at the latter's office. It was on the occasion of this second meeting that Mr. Tan handed to Mr. Lai two softcover manila folders, the first containing two identical copies of the Okasan Statement showing market acquisitions of CIL shares in an account opened in the name of Finance accompanied by a bundle of bought and sold notes and the second containing margin account statements by Okasan relating to 8 different accounts held by various persons all surnamed Lam again accompanied by another bundle of copies of bought and sold notes. Mr. Tan pointed out to Mr. Lai that that he had personally paid the margin interest due on the account covered by the Okasan Statement and that, notwithstanding the name of the account-holder being Finance, all purchases of CIL shares made between 18th July and 13th August 1980 as shown on pages 1 to 6 of thereof were made on behalf of Extramoney whilst all purchases made thereafter were for the account of Perak Pioneer. Mr. Tan also told Mr. Lai that, of the profit derived from the aforesaid sales of CIL shares, some HK$15 million belonged to the Travel Division of the Carrian Group. 120. After the second meeting, Mr. Lai took away the two folders and computed from the Okasan Statement that the purchases of CIL shares made between 18th July and 13th August totalled 9,208,000. He also verified such acquisitions as against the bought notes in the first manila folder. Mr. Lai testified that all the bought notes covering acquisitions between 18th July and 13th August 1980 were available at the time he made the aforesaid audit although at the trial, only the ones supporting acquisitions made on 13th August 1980 could be adduced in evidence. I pause to note that the absence of the other bought notes is a matter of no moment since the authencity of the Okasan Statement has not been challenged. 121. Thereafter Mr. Lai says that he examined the sold notes enclosed within the first manila folder and found that the aforesaid 9,208,000 CIL shares previously acquired under Finance's name had, together with accretions arising from two bonus issues, apparently been sold under nine separate lots. Mr. Lai thereupon asked his audit assistant Mr. Lee to prepare a schedule of sales after specifically drawing to Mr. Lee's attention the fact that there was, after the disposal of the first and second lots, a six for ten bonus issue and, after the eighth disposal, a four for ten bonus issue. He also explained to Mr. Lee that the third disposal should be treated as a notional sale to Mr. Tan and that the pay order should be treated as a sell-back to Extramoney. Mr. Lai further pointed out to Mr. Lee that, of the profits, an amount of some HK$15 million should be attributed to the Travel Division. 122. According to Mr. Lai, Mr. Lee duly prepared a schedule of sales being the document which was referred to at the trial and throughout this Judgment as the Profit Schedule showing a profit of HK$101 odd million arising from the sales of CIL shares in nine lots and handed the same to Mr. Lai. The latter I thereafter verified the nine transactions therein listed as against the available sold notes, making in the process rough notes on pieces of paper which he discarded at the end of the audit. 123. Mr. Lai testified that, in the course of the aforesaid verification exercise, he found, in relation to the first of the nine sales listed in the Profit Schedule, sold notes to support the sale of 900,000 CIL shares and, although he did not find cheques or pay-in slips, he concluded that 900,000 CIL shares were sold on the market. The second disposal being of 320,000 CIL shares was, according to Mr. Lai, supported by a handwritten memo stating "Take delivery of 320,000 shares @ HK$8.60 per share" by which Mr. Lai concluded that Mr. Tan had taken delivery of 320,000 CIL shares at the stated price. The third disposal listed in the Profit Schedule was supported by a handwritten memo which reads "Return old shares 2,780,000 (new shares 4,448,000) to Extramoney" and a pay order. 124. According to Mr. Lai, the fourth to seventh disposals listed in the Profit Schedule was supported by C & M sold notes and photocopies of cheques beneath which were notes as to the amount of shares sold and the name of the purchaser. Mr. Lai duly noted that because the sixth listed disposal generated a profit of a little over HK$15 million, Mr. Lee had thought it convenient to attribute the same to the Travel Division. The eighth disposal was supported by photocopies of two cheques and two pay-in slips concerning respectively Mr. Alex Fung and Mr. Lawrence Lam's respective purchases of 500,000 CIL shares each. The ninth disposal was supported by a C & M sold note and a photocopy of a cheque and the said photocopy specified the number of shares sold and the name of the purchaser. From the above exercise, Mr. Lai concluded that the first, fourth to seventh and ninth disposals were all made to outsiders and that the second disposal was to Mr. Tan himself. 125. Upon completion of the verification exercise, Mr. Lai confirmed that all the aforeaid 9,208,000 CIL shares acquired in the name of Finance between 18th July and 13th August 1980 had together with bonus issues been sold. Mr. Lai then initialled the middle of the sixth page of the Okasan Statement and inscribed two lines underneath his initials to indicate to his audit team that 13th August 1980 was to be regarded as the cutoff date for acquisitions made on behalf of Extramoney. I pause to note at this juncture that one of the factual substrata underlying the conclusions set out in Mr. Meocre Li's report is, as Mr. Li freely concedes in cross-examination, the assumption that the Defendants did not see the Okasan Statement during the course of the audit. This assumption is clearly wrong since I accept Mr. Lai's evidence that his initials appearing in the middle of page 6 of the Okasan Statement were inscribed at the conclusion of the verification exercise. However, in view of my conclusion on Question (1) that the Disputed Profit could not properly treated as the profit of Extramoney, the fact that the Defendants saw and read the Okasan Statement in the course of the audit does not dispose of the ultimate question as to whether they had acted negligently or otherwise in breach of duty owed to the Plaintiffs when they certified Extramoney's 1980 Accounts to be true and fair. 126. Shortly thereafter, Mr. Lai showed to Mr. Tan the Profit Schedule as drawn up at the time showing the attribution of the HK$15 million profit from the sixth transaction attributed to the Travel Division. This was the third and last time Mr. Lai met Mr. Tan prior to the completion of the audit. At this meeting, Mr. Lai sought clarification or confirmation of Mr. Tan's previous instructions to attribute HK$15 million worth of profits to the Travel Division. Mr. Tan examined the Profit Schedule and said that the profit derived from the first of the nine sales therein listed should be attributed to Kent Travel while that derived from the ninth sale should go to Farallon Air and sea Travel Ltd., both the aforesaid companies being members of the Carrian Group's Travel Division. The total of the two aforesaid sets of profits came to around HK$15 million. The Profit Schedule was re-drafted to reflect the above instructions. Sometime shortly after the aforesaid meeting, Mr. Tan changed his mind and wanted the entirety of the HK$101 million put into the books of Extramoney. The re-draft of the Profit Schedule was duly amended by hand so as to attribute the whole of the Disputed Profit to “the Co.” being a reference to Extramoney). This is the document with manuscript amendments appearing thereon a copy whereof eventually became produced by the Defendants at the trial as part of their audit file Exhibit 'D11'. 127. Mr. Lai and his audit team then prepared the balance sheet and profit and loss account of Extramoney showing the entirety of the Disputed Profit as part of the trading profits of Extramoney for the 1980 Period, completing the aforesaid task on 8th April 1981. On January 1982, the Defendants signed off the 1980 Accounts certifying the same in their report as being true 'and fair. Had the Defendants discharged their duties and exercised all reasonable care as auditors? Impact of Mr. Lai's Testimony 128. In my judgment, even allowing for the existence of documentary supportings of the generation of the Disputed Profit as deposed to by Mr. Lai, Mr. Tan's oral representation that the same should be considered the profit of Extramoney was never free from doubt since the supportings merely indicate the making of such profit but do not point to Extramoney as the maker thereof. On the contrary, as I have already found in the course of answering Question (1), they point away from Extramoney. 129. Further, none of the aforesaid supportings could be found among the original books and records of Extramoney which Mr. Lai and his audit team had earlier examined after being presented with the trial balance by Miss Florence Ho on 25th March 1981. By contrast, the purchases of CIL shares in the names of the 8 Lams were documented in the books of Extramoney and in the Defendants' audit working papers. Similarly, all the acquisitions of CIL shares made after 17th September 1980 as shown on the Okasan Statement and represented by Mr. Tan to be for the account of Perak Pioneer could be verified from Perak Pioneer's books and records to have been paid for by the latter and entered in its books. 130. Mr. Lai nevertheless made no inquiries as to why they were not in the original books of the company and made the remarkable admission in cross-examination that he had not even considered the matter at the time. Neither did he inquire of Miss Ho as to whether she had seen the new documentation before. I have already noted earlier that when Miss Ho prepared the trial balance on 25th March 1981 she did not include the Disputed Profit as part of the profits of Extramoney. Neither did Mr. Lai and his audit team include the Disputed Profit as part of the profits of Extramoney when they prepared the draft balance sheet and profit and loss account since the same did not appear in the books and records of Extramoney which they had then examined. Each of the aforesaid points would have put a reasonably prudent auditor on inquiry as to the reliability of the controller's oral representations that the Disputed Profit truly formed part of the trading profits of Extramoney as opposed to some other person or entity. 131. Both experts as well as Mr. Lai are agreed on the following approach. First of all, that it would be totally improper for an auditor merely to accept the say so of the shareholder or the management even of a private company without verification. A reasonably prudent auditor should confirm management representations by reference to contemporaneous documentation. This is entirely consistent with well-established legal principles: see per Pennycuick J. in Re Thomas Gerrard & Son Ltd. [1968] Ch 455 at 477E; per Hobhouse J. in Berg Sons & Co. Ltd. v. Adams [1992] BCC 661 at 685 F to 686 B. Similar views were expressed by Moffitt J. in Pacific Acceptance Corporation Ltd. v. Forsyth (1970) 92 WN 29 at 67 F - G as follows:-
132. Secondly, both experts and Mr. Lai are agreed that one of the matters an auditor has to guard against is the natural tendency of management to rewrite the corporate history of the past year if such a course entailed fiscal or other advantages. In the words of the Defence expert Mr. Morrison, "one takes a cautious approach to management representations rather than accepting everything wholeheartedly". Mr. Lai conceded the fact that since Mr. Tan being the 100% beneficial owner and controller of Extramoney is a related party to the transaction, a reasonably careful auditor would have to approach his representations with caution. Management manipulation of corporate financial results being a contingent evil which a reasonably careful auditor ought to guard against, Mr. Lai further agreed that, borrowing the expression of Lopes L.J. in Re Kinqston Cotton Mill Co. (No. 2) [1896] 2 Ch 279 at 289 and bearing in mind Lindley L.J. 's warning ibid. at 284 not to be overly suspicious, an auditor should act as "a watchdog but not a bloodhound" . 133. More specifically, Mr. Lai accepted in cross-examination that, before he could include the Disputed Profit in Extramoney's 1980 Accounts he had to be satisfied of two matters, namely, that the Disputed Profit had been made as a matter of fact and that the same was made by Extramoney as opposed to some other person or entity. Consistent with both experts' opinion, Mr. Lai also agreed that what is impermissible and unlawful is to make an agreement after the year-end and then write it back into the previous year’s accounts. The attribution of the Disputed Profit to Extramoney being based in large part on Mr. Tan's oral representations, how ought a reasonably careful auditor to regard the documentary supportings? 134. It is plain in my judgment that a reasonably careful auditor looking at the documents contained in the two manila folders would note, first of all, that the Okasan Statement shows prima facie market purchases of CIL shares by Finance rather than Extramoney. Secondly, with the exception of the third disposal shown on the Profit Schedule of a block of 4,448,000 CIL shares, none of the CIL shares acquired as shown on the Okasan Statement are entered in the books of Extramoney. Thirdly, none of the payments required for the various acquisitions of CIL shares as shown on the Okasan Statement appears in the books of Extramoney. Fourthly, margin payments to Okasan were made by Mr. Tan rather than Extramoney. Fifthly, dividends declared on the CIL shares acquired as shown on the Okasan Statement were paid to Mr. Tan rather than Extramoney. Sixthly, no liabilities owing to either Okasan or Tan or receivables from either of them are entered in the books of Extramoney. Seventhly, the very fact that the Okasan Statement itself is, according to Mr. Tan, broken up into two parts with all acquisitions after 17th September 1980 being for Perak Pioneer a private company belonging to Mr. Tan and not to the Carrian Group would make a reasonably prudent auditor exercise caution when looking at that document. Finally, Mr. Tan's change of mind as to how he wished HK$15 million of the Disputed Profit to be dealt with (viz. initially to be credited to the Travel Division, later to be attributed to Extramoney alongside the remainder of the Disputed Profit) ought to have sounded off alarms bells inside the head of any reasonably prudent auditor as to whether any portion of the Disputed Proflt really properly belonged to Extramoney. While the above list of reasonable queries is by no means exhaustive, none of the aforesaid ought to imbue any reasonably prudent auditor with confidence that Mr. Tan operating in the name of Finance was truly acting for Extramoney at the time he engaged in those share dealings or that the Disputed Profit was profits of Extramoney over the 1980 Period. Did the Defendants pursue the above or any relevant inquiries? 135. I have to confess that the unfortunate impression I derive from Mr. Lai's evidence is that in 1981 when the audit was undertaken, he shared none of the above concerns or appreciated the implications thereof. On the contrary, I am driven to note that one of the salient features of Mr. Lai's testimony is that he perceived his role during the later part of the audit as being (and, indeed, he sought) to justify ex post facto the events as shown on the Profit Schedule with a theory of disposal of the CIL shares so as to show the making of the Disputed Profit by Extramoney as opposed to any other person or entity. It is noteworthy that Mr. Lai testified in chief that "as far as I was concerned, I was simply taking orders from Mr. Tan". Further, Superintendent Starling on interviewing Mr. Lai on 12th June 1984 recorded in his contemporaneous notes Mr. Lai observing that "G. Tan was a pushy guy" in the context of Mr. Tan's request that Mr. Lai prepare an accountants' report (as opposed to an auditors' report) for management purposes in relation to the accounts of Holdings. While I have no wish to burden this Judgment with the details, it suffices to note that both reports were prepared by Mr. Lai and his audit team labouring over the space of a weekend; both were signed by the Defendants on the following Monday, the accountants' report earlier followed by he auditors' report; but the two reports annex accounts contain materially different figures. In sum, I do not get the impression that Mr. Lai approached the audit of Extramoney's 1980 Accounts, insofar as it concerned the Disputed Profit, with even an open, let alone an inquiring mind. 136. In this regard, no evidence is more telling than Mr. Lai's efforts in presenting a justification or reconciliation of the third disposal of 4,448,000 CIL shares shown on the Profit Schedule (already discussed briefly in the course of my answering Question (1)) as a transaction by Extramoney so as to make up part of the Disputed Profit, a tortuous and convoluted endeavour on Mr. Lai’s part that was 1ittle short of heroic given the unpromising material with which he was constrained to work. According to Mr. Lai's interpretation of the supportings, Mr. Tan purchased in August 1980 at the prevailing market price of HK$8.60 per share two lots of 2 million CIL shares from himself as agent of Extramoney "to do a deal" on his own account. He sold 900,000 CIL shares leaving 3.1 million. He later sold another 320,000 CIL shares. That left undisposed 2,780,000 CIL shares which increased by virtue of a bonus issue to 4,448,000 CIL shares. According to Mr. Lai, Mr. Tan must have decided to return the shares to Extramoney but on 22nd August resold the same back to Extramoney at HK$9.60 per share being the equivalent (after the bonus issue) of HK$15 per share or almost double the original cost price. He then had to account to Extramoney for the very profit thus obtained from Extramoney. The difficulties surrounding this story are further exacerbated by the contradiction between Extramoney's pay order to buy back 4,448,000 CIL shares at HK$9.60 per share and a handwritten memo in Extramoney' s books which says "Return to Extramoney 2.78 million old shares (4.448 million new shares)". Even the Defendants' expert Mr. Morrison concedes in cross-examination that the above theory requires explanation since, one would not prima facie expect an agent to make a profit from his principal; nor would one expect to see an agent purchasing from his principal, having previously bought on the latter's behalf. 137. Mr. Lai did not apparently seek any explanation from Mr. Tan even though it is fair to say that he appreciated the difficulties surrounding the theory. While I have no doubt that Mr. Lai conscientiously considered long and hard the most satisfactory way of reconciling the oral representations made to him by Mr. Tan and detailed in the Profit Schedule with recognised accounting principles, there is no mention in his evidence of any inquiry made by him of Mr. Tan to clarify the many problems and resolve obvious contradictions and difficulties as would befit the approach of a reasonably prudent auditor, nor is there any explanation as to why he failed to do so. 138. The Defendants signed off their Report certifying Extramoney's 1980 Accounts to be true and fair on 8th January 1982. In view of the conclusion which I have reached in answering Question (1), I find that the Defendants were not in a position properly to form such a view as to the state of affairs of Extramoney. The Defendants as reasonably prudent auditors ought to have raised with the company's management such queries as would lead them to secure adequate and sufficient supportings to justify including the Disputed Profit in Extramoney's 1980 Accounts, failing which they would have to qualify such Accounts. In my judgment, the Defendants' failure to follow the above course means that they have acted negligently and in breach of their contractual duty towards Extramoney. Additionally, by certifying the group accounts of Holdings which incorporate the 1980 Accounts of its subsidiary Extramoney to be true and fair, the Defendants have likewise acted negligently and in breach of their contractual duty to Holdings. RELEVANCE of PROFESSIONAL GUIDELINES 139. I turn next to consider the relevance to my decision under Question (2) the views expressed and recommendations laid down by the Hong Kong Society of Accountants (“the HKSA"), being the governing body for accountants practising in Hong Kong, whose statements and Practice Guidelines are accepted by all parties as setting down proper standards of practice for and reasonably capable of being achieved by members of the profession. As laid down by Woolf J. (as he then was) in Lloyd Cheyham & Co. Ltd. v. Littlejohn & Co. [1987] BCLC 303 at 313 c to e, while such statements and Practice Guidelines do not lay down rigid rules, they constitute “very strong evidence as to what is the proper standard which should be adopted and unless there is some justification, a departure from this will be regarded as constituting a breach of duty". 140. Two such statements and one Practice Guideline are relevant in the present context. The first is HKSA statement No. 110 which recommends that events which are known to have occurred after the balance sheet date should not normally be taken into account in preparing accounts unless, inter alia, they assist in forming an opinion as to the amount properly attributable, in the conditions existing on the balance sheet date, to any item the amount of which was subject to uncertainty on that date. The foregoing provisions are entirely consistent with both experts' agreed views (canvassed by me in the course of answering Question (1)) that it would, as a general rule, be improper and unacceptable for a company to record after the year-end a profit or other transaction that it had not generated or undergone whether by itself or through an agent during the year in question. Mr. Meocre Li and Mr. Morrison differed on the question whether an exception lay for a company wholly beneficially owned or controlled by a given individual. 141. The aforesaid controversy begged, of course, the question of proper attribution expressly referred to in statement No. 110 by way of exception to the general rule. For all the reasons cited by me in the course determining that controversy, Mr. Tan's decision in May 1981 to attribute to Extramoney the Disputed Profit generated in the name of Finance in 1980 should not have been taken into account by the Defendants by way of positive indication that the Disputed Profit properly formed part of the trading profits of Extramoney over the 1980 Period. For the same reasons, neither does it fall within the stated exception to Statement No. 110. Accordingly, the Defendants' certification of Extramoney's and Holdings' 1980 Accounts to be true and fair constituted a breach of the provisions of Statement No. 110 and fell to be considered as a breach of duty to their clients the Plaintiffs. 142. The second relevant statement is HKSA statement No. 118 which reminds members that the main object of auditors' working papers is to record and demonstrate the steps which have been taken by the auditors to enable them to form an opinion on the accounts on which they are required to report and provides that, in order to achieve such object, the working papers should provide, inter alia, evidence of the work carried out by the auditors and schedules in support of the accounts additional to, or summarising the detail in the client's books. The Profit Schedule prepared by Lai's assistant is an example of the latter. Evidence of work carried out would include "a record showing queries raised during the audit and their disposal, with notes where appropriate for attention the following year" and "letters of representations i.e. written confirmation by the client of information and opinions expressed in respect of matters such as stock values and amounts of current and contingent liabilities". 143. Clearly, the examples given of matters on which representations are required are not and not intended to be exhaustive. Such a conclusion is reinforced by HKSA Practice Guideline No. 9 which recommends that auditors should attempt to obtain all clients' representations in writing. I have earlier nmentioned in the course of answering Question (1) that the absence of documentary material evidencing the receipt by the Defendants of oral representations from their lay client Mr. Tan to the effect that the Disputed Profit formed part of the Extramoney's trading profits over the 1980 Period demonstrates regrettable non-compliance by the Defendants with the standards of professional practice laid down by the HKSA rather than mendacity on Mr. Lai's part in testifying to the receipt of such representations. 144. Indeed, Mr. Lai admitted candidly in cross-examination that while he and his audit team were aware of the above recommendations but they fell short of following the same. Further, he freely conceded that he should have documented queries he made of the client Mr. Tan but "at the time, as the person ultimately responsible, I haven't considered the point". Clearly, the Defendants have failed to secure in writing Mr. Tan's representations to them as regards Finance's generation of the Disputed Profit for and on behalf of Extramoney contrary to HKSA statement No. 118 and Practice 'Guideline No. 9 and, in so doing, have acted in breach of their common law duty of care and contractual duty owed to their clients the Plaintiffs. Put another way, the Defendants' failure to mention in their report such lacunae in the documentary evidence supporting the making of the Disputed Profit which they say was made good by Mr. Tan's representations constituted a breach of their duty of care owed to the Plaintiffs. 145. I turn now to consider the relevant statutory provisions governing the scope of the Defendants' duties owed to the Plaintiffs in the context of this case. AUDITORS' STATUTORY DUTIES 146. Section 121 of the Companies Ordinance requires a company to keep proper books of accounts and such books and records as may be necessary to give a true and fair view of the company's affairs and to explain its transactions. Given my finding in course of answering Question (1) that the post year-end attribution to Extramoney of the Disputed Profit generated during 1980 in the name of Finance is ineffective in properly rendering the same the trading profits of Extramoney for the 1980 Period, it is plain that the books and records of Extramoney, incorporating as they do the Disputed Profit, gives a distorted rather than a true and fair view of Extramoney's affairs over that period. 147. Section 123(1) of the Companies Ordinance stipulates that every balance sheet of a company shall give a true and fair view of the state of affairs of the company at the end of its financial year and that every profit and loss account of a company shall give a true and fair view of the profit and loss of the company for the financial year. Again, it is plain that Extramoney's 1980 Balance Sheet, incorporating as it does the Disputed Profit, does not give a true and fair view of the state of Extramoney's affairs as at 31st December 1980. Similarly, Extramoney's 1980 Profit and Loss Account, which incorporate the Disputed Profit as if it were a part of the trading profits of the company over the 1980 Period, does not give a true and fair view of Extramoney's profit and loss for the 1980 Period. 148. Section 126 (1) of the Companies Ordinance requires group accounts to give a true and fair view of the state of affairs and profit or loss of the company and the subsidiaries dealt with thereby as a whole. Once more, it is clear that Holdings' 1980 Accounts consolidating the accounts of its various subsidiaries within the Carrian Group including the 1980 Accounts of Extramoney (with the Disputed Profit improperly embraced therein as part of Extramoney's profits over the 1980 Period) do not give a true and fair view of Holdings' state of affairs or profit and loss over that period. 149. Section 141 (4) of the Companies Ordinance (Cap. 32) makes it "the duty of the auditors of a company, in preparing their report under this section, to carry out such investigations as will enable them to form an opinion as to the following matters, that is to say, --
and if the auditors are of opinion that proper books of account have not been kept by the company ... , or if the balance sheet and ... profit and loss account are not in agreement with the books of account and returns, the auditors shall state that fact in their report". 150. The Defendants gave unqualified auditors' reports covering both Extramoney's and Holdings 1980 Accounts. However, in the light of my findings in the course of answering Question (1) of, first of all, an almost total absence of an acceptable audit trail among Extramoney's books and records covering the Disputed Profits (which is not, much ameliorated even by a consideration of the Additional Material) as contrasted with the existence of an impressive and comprehensive audit trail tracing the generation of Extramoney's Other Profits and, secondly, that Extramoney's books and records including the Additional Material do not support the theory (as per Mr. Tan's oral representations) of generation of the Disputed Profit by Extramoney wherefor Extramoney's Balance Sheet and Profit and Loss Account for the 1980 Period do not agree with the books, it is plain that the Defendants have either failed to carry out investigations as would enable them to form an opinion as to whether proper books of account have been kept by Extramoney and whether Extramoney's balance sheet and profit and loss account are in agreement with the books or alternatively failed to state that fact in their auditors' report. In either event, the Defendants have clearly acted in breach of their aforesaid statutory duty. 151. Section 141 (6) of the Companies Ordinance provides that "if the auditors fail to obtain all the information and explanations which, to the best of their knowledge and belief, are necessary for the purposes of their audit, they shall state that fact in their report". Clearly, the Defendants in this case obtained insufficient material in terms of third party documented proof to enable them to verify the Disputed Profit as the trading profit of Extramoney over the 1980 Period. The choice then lay upon the Defendants to either qualify their report under subsection (4) or state under subsection (6) that they have been given insufficient material to verify the Disputed Profit as the profit of Extramoney. Having chosen neither course but having issued instead clean auditors' reports certifying respectively Extramoney's and Holdings' 1980 Accounts to be true and fair, the Defendants have clearly acted in breach of their statutory duty. 152. Since auditors lay under a duty to familiarise themselves with their relevant statutory obligations (per Astbury J. in Re Republic of Bolivia Exploration Syndicate Ltd. (1914) 1 Ch. 139, at 171), the aforesaid breaches of statutory duty by the Defendants constitute also breaches of their common law duty of care and contractual duty owed to their clients the plaintiffs. 153. I conclude, therefore, from all of the above that the Defendants have by certifying the 1980 Accounts of Extramoney and Holdings to be true and fair acted negligently and in breach of their contractual and statutory duties owed to the Plaintiffs. OTHER DEFENCES 154. Aside from denying negligence or other breach of duty, a defence which has failed in the light of my answer to Question (2) above, the Defendants also raise in their pleadings issues of estoppel, ratification, contributory negligence and limitation by way of further or alternative defences to the Plaintiffs' Principal Claim. I shall consider each of these further issues in turn. ESTOPPEL and RATIFICATION 155. The estoppel and ratification arguments being interrelated, I shall deal with them in tandem. The Defendants' case is that, in the discharge of their duties as auditors, they were entitled to and did rely on the documents and representations submitted by Mr. Tan on behalf of the Plaintiffs as being true and correct wherefor the latter are estopped from denying the existence of the Disputed Profit or asserting that there was no such profit attributable to Extramoney. The Defendants say, alternatively, that prior to the signing of the auditors' report, the share transactions which gave rise to the Disputed Profit were confirmed and ratified by the directors of Extramoney. The latter plea is a reference to Extramoney’s directors Finance and Realty signing the audited Balance Sheet and Profit and Loss Account (incorporating the Disputed Profit as the profit of Extramoney) prior to the Defendants signing off their auditors' report on 8th January 1982 certifying the 1980 Accounts as being true and fair. 156. Both the above issues have already been effectively canvassed in the course of my answering Question (2) above. To recapitulate, first of all, I understand both experts as well as Mr. Lai of the partner of the Defendants in charge of the audit of Extramoney to be ad idem in their view that it would be wholly unacceptable for an auditor to proceed on the say so of a director of a company, albeit the 100% beneficial owner and controller thereof without independent, and preferably documentary, verification. Secondly, legal principles are to the same effect, namely, that an auditor does not discharge his duty by accepting the representations of the board or the management of a company without undertaking his own investigations by way of checking the accuracy and reliability of those representations: Re Thomas Gerrard & Son Ltd. (supra) at 477E, per Pennycuick J.; Berq Sons & Co. Ltd. v. Adams (supra) at 685 F to 686 B, per Hobhouse J.; Pacific Acceptance Corporation Ltd. v. Forsyth (supra) at 67 F - G, per Moffitt J. 157. Thirdly, both the expert as well as the non-expert evidence go further in agreeing that one of the matters an auditor has to guard against is the natural tendency of the management of a company to rewrite the accounts if such a course entailed fiscal or other advantages such that a responsible auditor ought to act as a watchdog to prevent such abuse. Fourthly, as Mr. Lai himself concedes, the fact that Mr. Tan being the 100% beneficial owner and controller of Extramoney is a related party to the transaction, a reasonably careful auditor would have to approach his representations with extra caution. Fourthly, Mr. Lai specifically accepted in cross-examination that, before he could include the Disputed Profit in Extramoney's 1980 Accounts he had to be satisfied of two matters, namely, that the Disputed Profit had been made as a matter of fact and that the same was made by Extramoney as opposed to some other person or entity. 158. Finally, the Defendants' plea of ratification begs, in law, the question as to whether Mr. Tan was at the time of the carrying out of the transactions in question acting for and on behalf of Extramoney: see Bowstead on Agency (15th ed.) Art. 15 which provides:-
159. Lord Macnaghten laid down a rule to similar effect in Keighley, Maxsted & Co. v. Durant (1901) A.C. 240 (HL) at 247:
160. The above puts paid to any principle of estoppel or ratification operating in the circumstances of this case so as to prevent the Plaintiffs from asserting either the impropriety of including the Disputed Profit as part of the trading profits of Extramoney or negligence or other breach of duty on the Defendats' part in certifying the Plaintiffs’ 1980 Accounts to be true and fair. The estoppel and ratification defences therefore fail. CONTRIBUTORY NEGLIGENCE 161. I accept the Defendants’ legal submission that contributory negligence is available to them as a defence in this case since their liability in contract vis-a-vis the Plaintiffs is the same as their liability in the tort of negligence independently of the existence of any contract: see Jackson & Powell on Professional Negligence (3rd ed.) paras. 1-84/5; Forsikrinqssaktieselkapet Vesta v. Butcher [1986] 2 All ER 488 at 507e - 510f, 510f - 511a, per Hobhouse J. upheld by the Court of Appeal [1989] A.C. 852 per O'Connor L.J. at 860 - 7 and per Neill L.J. at 875F - G. 162. As to their pleaded case on contributory negligence, the Defendants say that, if any loss flowed from their breach of duty (a matter which they deny but which I shall determine in answering the next Question), the same was caused or contributed to by negligence and/or misrepresentation on the part of the Plaintiffs. The issue raised is closely related to the previous issues of estoppel and ratification inasmuch as they share the same factual substratum. The plea of contributory negligence arises from the same fact of oral representations made by Mr. Tan on behalf of the Plaintiffs to Mr. Lai during the course of the audit which, according to the Defendants, misled them into attributing the Disputed Profit to Extramoney. 163. For the five reasons earlier canvassed in disposing of the estoppel and ratification arguments, this plea must also fail. Additionally, the foundation of the Plaintiffs' complaint is the wrongful inclusion of the Disputed Profit as the trading profits of Extramoney, a matter peculiarly within the expertise of the Defendants qua professional auditors of the company in respect of which they are paid for their advice rather than a question for laymen like Mr. Tan or the management of Extramoney. 164. My conclusion is reinforced by the legal principle that auditors who are in breach of duty cannot exculpate themselves by pointing to wrongdoing by directors or the management which might have led to such breach since the latter is just the sort of conduct which the auditors have been paid to detect and protect the company from in the first place: see per Lord Alverstone L.C.J. in London oil Storaqe Ltd. v. Seaar. Hasluck and Co. (1904) 31 Accts. L.R. 1:
165. Similar sentiments were expressed by Stanton J. in New Plymouth Borouqh v. The Kinq [1951] NZLR 49 at 64 (lines 24 37):-
166. The above disposes of the contributory negligence claim against the Defendants. LIMITATION 167. Although limitation was pleaded by way of a defence to the Principal Claim, it was but faintly argued and scarcely touched upon in this context by Mr. Hamilton in his closing speech, I daresay for the obvious reason that the Defendants' certification of Extramoney's 1980 Accounts being the subject of complaint having been made on 8th January 1982 coupled with the writ herein having been issued on 21st December 1987, the plea that the Principal Claim was somehow statute-barred is difficult, if not impossible, to sustain. Accordingly, I determine the limitation point against the Defendants. LOSS and DAMAGE 168. Given my answers to Questions (1) and (2) above, the Plaintiffs carry nevertheless the burden of proving that loss and damage flowed from the Defendants' breach of contractual and other duty, otherwise the action fails: MacGregor on Damages, 15th ed., para. 343. PURPOSES of STATUTORY AUDIT 169. Before considering the Plaintiffs’ pleaded case on loss and damage and the evidence adduced to establish the same, it is as well to bear in mind the purposes served and interests protected by the Defendants’ audit of the 1980 Accounts of Extramoney and Holdings, the very activity the careless execution whereof forms the subject of complaint in these proceedings. As laid down by Lord Oliver in Caparo Industries plc v. Dickman [1990] 2 AC 605 (HL) at 630 F, the duty of an auditor in carrying out a statutory audit serves twin purposes, namely, "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 dividend 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". 170. The House of Lords rejected in that case the argument; that the statutory audit served any wider purpose of, say, providing information to persons other than those who were proprietors of the company or concerned in its control and management. As explained by Hobhouse J. in Berq Sons & Co. Ltd. v. Adams (supra) at 676H, the restrictive interpretation placed by the House of Lords on the purpose of the statutory audit imposes "also a restriction upon the scope of the duty of care that arose simply from carrying out the statutory audit. The existence of a duty of care owed to the members of the company added little if anything to the duty to the Company". 171. Thus, Hobhouse J. observed ibid. at 677 C-D that "the duty that arises from the carrying out of the statutory audit, although owed as well to the other persons falling within the scope of the statutory purpose, is in effect equivalent with the duty owed to the company itself" and at 677E 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 and control to have access to accurate financial information about the company. Provided those persons have that information, the statutory purpose is exhausted." 172. As will be seen below, the above principles have far-reaching consequences for auditors acting on the representations of a 100% beneficial owner and controller (such as Mr. Tan) of the company whose accounts are being audited (Extramoney and Holdings) provided the company is solvent and no fraud or misfeasance has been committed vis-a-vis the company by such owner and controller (the situation in this case as I shall detail below). The PLAINTIFFS' PLEADED CASE 173. The Plaintiffs' case is that, by negligently failing to raise with the management of Extramoney and Holdings the need to qualify the 1980 Accounts but by certifying instead that the same gave a true and fair view of the company's and the group's state of affairs and profits when they plainly did not do so, the Defendants caused loss to the Plaintiffs inasmuch as, first of all, tax was assessed and paid on the Disputed Profit when the same was not in fact due and, secondly, the Dividend was declared by Extramoney which was, to the extent of HK$74 million, paid out of the company's capital as opposed to its other Profits. 174. More specifically, the Plaintiffs allege that, had the Defendants raised with Mr. Tan the need to qualify the accounts of both Extramoney and Holdings, the management, appreciating the effect within the financial and banking communities of such a qualification, would not have been willing to risk the inevitable reverberations within those communities of a qualification of the accounts of a constituent member of the Carrian Group consolidated in the accounts of Holdings and would have withdrawn the suggestion that the said profit had been made by Extramoney whereupon no such profit would have been submitted to the Inland Revenue for assessment to tax. 175. The Plaintiffs further allege that, had the Defendants raised with Mr. Tan the spectre of qualifying the accounts, Extramoney would through his direction have reversed the payment of at least HK$74 million out of the Dividend paid totalling HK$90 million. Because they failed to raise this prospect with the management of Extramoney, the latter is HK$74 million worse off in its contra accounts with Holdings. The EVIDENCE 176. The Plaintiffs never sought to make good the above allegations by calling the one person who could properly have testified to the same, namely, the 100% owner and controller of both Extramoney and Holdings, Mr. Tan. The latter, as I have already noted in the course of answering Questions (1) and (2) above, was notable for his absence at the trial. The only evidence on loss and damage led by the Plaintiffs came from Mr. Michael Kennedy Brown, a experienced banker formerly with the Standard Chartered Bank in the early 1980s being the time of the events in question. He testified that lending banks tend place considerable reliance on the accounts of the borrowing company noting, in particular, such questions as whether the accounts are audited and, secondly, whether the same are qualified. He makes the common sense point that a qualification on the accounts of the borrowing company would put a lending banker on inquiry. If loans were made on the basis of collateral security such as CIL shares, then the lending bank would look principally to that collateral by way of security. The above is, however, somewhat academic since it goes no way towards establishing the Plaintiffs' pleas. 177. Both the Plaintiffs are private companies and there is no legal obligation to make their accounts public. Further, as the Plaintiffs' own expert Mr. Meocre Li conceded in cross-examination (in a manner entirely consistent with Hobhouse J. 's observations in Berq Sons & Co. Ltd. v. Adams supra at 677E as to the purposes of the statutory audit and the scope of the auditors' duty thereunder), the statutory requirements of an audit of a company's accounts are not directed to giving information to bankers and others. 178. Three salient features of the evidence should be noted. First of all, Mr. Tan was at all material times the 100% beneficial owner and controller of the Plaintiffs. Unlike the situation in Re Thomas Gerrard & Son Ltd. [1968] ch. 455, there was no minority interests to be taken into account. Borrowing the words of Lord Reid in Tesco v. Nattrass [1972] A.C. 153 (HL) at 170F, Mr. Tan is "acting as the company and his mind which directs his acts is the mind of the company ... He is an embodiment of the company or, one could say, he hears and speaks through the persona of the company, within his appropriate sphere, and his mind is the mind of the company". 179. There is no doubting the common sense point, consistent with all the authorities, that "so long as the company is solvent the shareholders are in substance the company": the controlling shareholder is in essence the company: per Dillon L.J. in Multinational Gas and Petrochemical Co. v. Multinational Gas and Petrochemical Services Ltd. [1983] Ch. 258 (CA) at 288G -H. 180. Secondly, neither Plaintiff was insolvent at any material time of the events under consideration. There were no outside creditors' interests to be taken into account. Indeed, Extramoney was never put in liquidation. So far as concerned Holdings, its subsequent liquidation long after the events in question had nothing to do with either the generation or the attribution of the Disputed Profit or Mr. Tan's represenations and wishes or the Defendants' conduct or other events germane to these proceedings. Further, as Mr. Morrison said in his report, with which observation Mr. Meocre Li agreed in his course of his testimony, "in or around December 1980 Holdings is likely to have been regarded as financially sound by the financial community and therefore an acceptable debtor for which recovery would be reasonably assured for balance sheet purposes". 181. In such a situation, the observations of Street L.J. in Kinsela v. Russell Kinsela Pty. Ltd. (in liquidation) (1986) 4 N.S.W.L.R. 722 at 730 cited with approval by Dillon L.J. in West Mercia Safetywear Ltd. (in liquidation) v. Dodd [1988] B.C.L.C. 250 at 252 - 3 are pertinent :-
182. Kerr L.J. expressed similar observations in Attorney General's Reference (No.2 of 1982) [1984] QB 624 at 640 B - D:
183. Thirdly, no fraud or misfeasance by Mr. Tan vis-a-vis either Extramoney or Holdings is even pleaded, let alone established by evidence. While there may have been a vague subtext of unspecified wrongdoing by Mr. Tan implied or hinted at in the course of the Plaintiffs' presentation of this case, it remains no more than that at the end of the day. There was never any clear case of fraud or misfeasance advanced against Mr. Tan in the context of these proceedings, let alone backed up by hard evidence. Indeed, the very subject of complaint in this case being Mr. Tan's post year-end attribution of profits to Extramoney for reasons of group tax efficiency was not and, indeed, could not properly be characterised as a fraud or misfeasance committed by Mr. Tan vis-a-vis either Extramoney or Holdings. The narrowness of the experts' respective eventual opinions on the propriety or efficacy of Mr. Tan's act of ex post facto attribution as well as the substance of those opinions bear this out. Again, this distinguishes the present proceedings from the situation in Re Thomas Gerrard & Son Ltd. (supra) where the managing director had been systematically defrauding the company in question for years, an activity which went uncompletely undetected year after year by the auditors (who had been paid to detect, among other matters, this very type of wrongdoing) because they innocently, indeed blindly, took the managing director's word for it and believed him to be a man of the highest integrity. In other words, the auditors in that case behaved in a manner wholly unbecoming of a professional watchdog paid to guard and protect the company and the minority shareholders against such wrongdoing. 184. There is no controversy that in cases of fraud or misfeasance, very different considerations apply:- see, for example, Bowstead on Agency (15th ed.) Art. 102(2):-
185. Thus, where the management is guilty of a fraud on the company which the auditor negligently failed to detect, the auditor cannot relieve himself from by liability by arguing that the company had at all material times through its management full knowledge of all the relevant circumstances wherefor the company must have acquiesced in the management's wrongdoing: see Houqhton v. Nothard [1928] AC 1 (HL) , In re Hampshire Land Co. [1896] 2 Ch. 743 (CA). 186. In the present case, at the end of the day, notwithstanding all of Mr. Brown's admissible evidence, I am left with the distinct impression that the Plaintiffs' case on loss and damage rests on the dubious foundation of speculation as to what Mr. Tan would or would not have done had the auditors told him that which he already knew, namely, that the imputation of the Disputed Profit to Extramoney would not accord with the historical development of events during the 1980 Period. Since Mr. Tan never emerged at trial to give evidence whether for the Plaintiffs or the Defendants, there was no hard evidence as to what he would or would not have done. In other words, the Plaintiffs have failed to discharge the burden of proving 'that' any loss and damage flowed from the Defendants' negligence or breach of contractual or other duty. 187. In the circumstances, the manner in which a similar (though by no means identical) situation was disposed of by the Court in Berq Sons & Co. Ltd. v. Adams (supra) is instructive. This was an action against an insolvent company's former auditors in respect of alleged losses caused to the company by the auditors' alleged negligence and breach of contractual or duty in relation to the preparation and certification of the company's audited accounts for a particular year. All the shares in the company were beneficially owned by one person. The allegations of want of care made against the auditors related to the unqualified auditor's certificate signed in respect of the accounts for the year ending 31st March 1982. The relevant criticisms made of the 1982 audited accounts were, first, that the accounts should have shown a turnover of approximately £2 million instead of a figure over 10 times that size of of £23 odd million and secondly, that certain bills for £2 odd million included in the "bills receivable" should have been treated as irrecoverable with the result that the bills receivable would have been reduced from almost £5 million to a little under £2 1/2 million, the profit before taxation would be reduced from a profit of £50,000 odd to a loss of over £2 1/2 million and the net assets would be reduced from a little under a quarter of a million pounds sterling to a deficiency of £2 odd million. 188. In dismissing the plaintiffs' claims, Hobhouse J. held that the auditors were at fault in not qualifying their certificate for uncertainty in respect of the aforesaid bills, the same constituting a breach of their contract with the company. He also held that whereas the auditors had erred in relying upon the unsupported representations of the 100% owner and controller of the company and, notwithstanding that they had been confirmed by him in writing, the same remained without support or corroboration and should not have been accepted as sufficient for the purposes of an unqualified certificate. However, the company was not misled and did not rely on the certificate and it had not been proved that as a matter of causation the fact that the audit certificate on the 1982 accounts was not qualified for uncertainty in respect of the aforesaid 'bills had any relevance to the eventual failure of the company. CONCLUSIONS 189. It cannot be over-emphasised that the reality of this case is that it is the companies Extramoney and Holdings and not their shareholders or creditors who are suing the Defendants. Further, Extramoney has never been in liquidation and, so far as concerned Holdings, it was at all times material to this case a financially solvent company. Additionally, no fraud or misfeasance has been committed by Mr. Tan vis-a-vis either Plaintiff. Last but not least, both Plaintiffs were at all times private companies wholly owned and controlled by a single individual, Mr. Tan. The essence of the duty owed by the Defendants qua auditors of Extramoney in relation to the accounts is to provide knowledge of the affairs of the company for use by the management, ultimately, Mr. Tan. It is noteworthy that the ultimate victim of the Defendants' breach of duty did not give evidence. Being the living embodiment of each Plaintiff, Mr. Tan could not conceal anything from himself or defraud himself. He was not misled by the Defendants' report on the 1980 Accounts of Extramoney. Put another way, there was no evidence to this effect. The one controlling beneficial owner already possessed full knowledge and information which it was the purpose of the statutory audit so to provide him. 190. The Defendants say that Mr. Tan had already given effect to his intention to inject the Disputed Profit into Extramoney prior to the signing of the auditors' report on 8th January 1982. There is no evidence to show that he would have reversed the injection if the Defendants were to have qualified their auditors' report on Extramoney's 1980 Accounts. I do not accept speculations to the contrary to be sufficiently persuasive so as to establish the Plaintiffs' case on loss and damage. Accordingly, I find that if the Defendants were riegl1gent or otherwise in breach of duty or contract vis-a-vis the Plaintiffs , such conduct did not give rise to the payment of profits tax based on the Disputed Profit. Additionally, so far as concerned the payment of the Dividend, the same took place before the audit of Extramoney's books by the Defendants so that in no way can such action be traced to the Defendants' conduct. 191. On the contrary, all the available evidence showed that Mr. Tan was at all material times the sole moving light of the Carrian Group and each the Plaintiffs who was, to borrow an expression, "calling all the shots" in the running of his various companies rather than taking advice from his companies' auditors, wherefor there is no warrant for supposing that the outside advisers' tail was wagging the particular headstrong corporate dog in the instant case. On the contrary, it is salutary to recall in this particular context the Defendants' partner Mr. Lai's evidence in chief that "as far as I was concerned, I was simply taking orders from Mr. Tan" and Superintendent Starling's notes of his interview of Mr. Lai on 12th June 1984 wherein Mr. Lai observed that Mr. "Tan was a pushy guy". 192. I therefore reiterate that the Defendants' negligence and breach of contract have, in my judgment, given rise to no proven loss on the part of the Plaintiffs. I should" also 'indicate that, for the above reasons, the Defendants' breaches of duty evidenced by non-compliance with HKSA Statements and Guideline and breaches of statutory duty laid down under sections 141(4) and (6) of the Companies Ordinance (Cap. 32) gave rise, in my judgment, also to no loss and damage suffered by the Plaintiffs. LATE PAYMENT SURCHARGE 193. As to the question of the late payment, surcharge, the audit was completed on 8th April 1981 but the 1980 Accounts only signed off on 8th January 1982.' There was, however, nothing sinister in the delay and no' criticism should befall the Defendants on that account. By an internal memo sent to Mr. John Wong the Group financial controller dated 29th October 1981, Mr. Rod Bell the Group financial director, proposed that the submission of Extramoney' s tax returns for the 1980 Accounts should be delayed until after the Inland Revenue had assessed Filomena's tax returns. Thus the delay was deliberately engineered on the part of the Carrian management wherefor in no way should the late payment surcharge be visited upon the Defendants. MITIGATION of LOSS 194. In the light of my conclusion on the last Question, no answer is strictly required on this one. However, in the event that I should be wrong in my last answer, I will indicate in brief my views on the present issue. 195. The Defendants plead that neither Plaintiff has taken any step to recover the Overpaid Profits Tax from the Inland Revenue and, further, that no-one among Extramoney or its corporate shareholders and directors and the three Liquidators of Holdings took any steps to recover the Dividend from Holdings or cause the latter to account as constructive trustee or recover the loss by way of tax or dividend from any director, fiduciary or constructive trustee, wherefor Extramoney had failed to mitigate its loss. 196. The above point was neither argued nor developed fully (nor expressly abandoned) at the trial, I suspect for two reasons. First of all, the plea that neither Plaintiff has taken any step to recover the Overpaid Profits Tax from the Inland Revenue is in fact incorrect as a matter of fact. The Plaintiffs have in fact applied by their solicitors' letter to the Commissioner dated 31st March 1987 for a refund of the Overpaid Profits Tax alternatively a correction of Extramoney's original assessment to profits tax on the basis that the Disputed Profit was not the profit of Extramoney. The Assessor has refused to disturb the original assessment. In or around 9th March 1980, the Plaintiffs objected to such refusal but the Commissioner confirmed his previous decision. On or about 3rd January 1990, the Plaintiffs appealed to the Board of Review. The date for the hearing of this appeal has not been fixed pending my decision in these proceedings. 197. More fundamentally, such a plea is academic in the light of the existence of the Defendants' Counterclaim for declaratory relief in terms of the Plaintiffs' entitlement to a refund of the Overpaid profits Tax and a reimbursement of so much of the Dividend as is based on the Disputed Profit. The lodging of the Counterclaim, like the application made to the Commissioner and the appeal to the Board of Review, puts paid to the notion that the Plaintiffs have failed to mitigate their loss. Additionally, the Plaintiffs' failure to mitigate their loss, if such be established at all, would then sound in an award of costs on the Counterclaim in the Defendants' favour if the same were to succeed. The HK$1.2 MILLION PAYMENT 198. Question (6) is sub-divided into two parts, namely, whether, first of all, the HK$1.2 million payment to the Defendants by way of a Holdings' cheque was made by Mr. Tan in breach of trust or fiduciary duty owed to Holdings and secondly, in the event of a positive answer to the first part, whether the Defendants became constructive trustees of the same for Holdings. The first issue is one of mixed law and fact while the second is purely a legal question. I shall consider each in turn. The EVIDENCE 199. The facts emerged in the evidence of Mr. Raymond Chan the precedent partner of the Defendants which I shall summarise below. He testified that in 1980 his stockbroker Mr. Tsang of Hung Fat told him that Mr. Tan was making small private placements of CIL shares at a slight discount to the market. The three partners of the Defendant firm, namely, Mr. Chan, Mr. Lai and Mr. Joseph Pang (“the Three Partners") jointly maintained an account with Hung Fat ("the Three Partners' Account") and authorised Mr. Tsang to operate the same on a discretionary basis. According to Mr. Chan’s evidence, in the second half of 1980, Mr. Tsang asked Mr. Chan to approach Mr. Tan to see if he could obtain between, say, 200,000 and half a million CIL shares on private placement for Hung Fat's customers and discretionary accounts including that of the Three Partners. This was by no means an unusual request. On the contrary, Mr. Chan testified Mr. Tsang had made similar requests of him in the past and he had always done his best to comply. 200. Mr. Chan testified to the usual modus operandi adopted the parties in such circumstances. He would first approach Mr. Tan for the shares. Mr. Tan would invariably indicate that he wanted the Defendants' cheque by way of a performance guarantee for payment of the purchase price even though or because he was well aware that there were other customers (with whom he was riot acquainted) of Hung Fat involved in the proposed purchases. Mr. Tan would also indicate that he would not be responsible for contract stamps or brokerage so that Mr. Tsang would have to prepare contract notes, pay stamp duty and charge the brokerage to the customers or to their accounts. The price would be· agreed being at a slight discount to market and completion would then be scheduled for a few days after the agreement date. Mr. Chan would then notify Mr. Tsang who would thereupon arrange for his customers' cheques to be paid into the Defendants' account. Upon receipt of all the cheques, Mr. Chan would make out the Defendants' cheque payable to CIL or its nominee and deliver the same to Mr. Tan at the latter's office on the scheduled transaction date. Mr. Chan would collect the share scrip in return and take the same back to his off ice where they would await collection by Mr. Tsang who would then allocate the same among" his various customers including" the Three Partners. 201. Mr. Chan next testified to specific events. In the instant case, the Three Partners purchased 328,000 CIL shares on 19th May 1981 at HK$8 per share and another 2 million CIL shares on 28th May 1981 at HK$8. 60 per share. The price for this particular purchase of CIL shares was agreed on 12th May with completion scheduled to take place on 19th May 1981. On or shortly before 12th May 1981, Mr. Tsang telephoned Mr. Chan to tell him that a group of investors was interested in buying 2.3 million CIL shares and asked the latter to approach Mr. Tan about the matter. On 12th May, Mr. Chan went to talk to Mr. Tan and agreed a price of HK$8 per share with payment scheduled seven days afterwards. Mr. Chan called Mr. Tsang from Mr. Tan's office to confirm the acceptability of the price and the payment terms. Mr. Tsang gave his assent over the telephone. Mr. Tan then suggested that Mr. Chan increase the proposed purchase to cover a slightly larger batch of 2,328,000 instead of 2.3 million CIL shares on account of the new figure being more auspicious under Cantonese numerology. Mr. Chan agreed. The market high for CIL shares on 12th May was HK$8.40, the low being HK$8.20. 202. Mr. Tsang collected various cheques from his customers covering the proposed purchase of 2,328,000 CIL shares and paid them into the Defendants' bank account on respectively Saturday 16th and Monday 18th May 1981. However, by Tuesday 19th May 1981, Mr. Chan was unsure whether all the cheques had been cleared wherefor he arranged to pay only for the odd amount of 328,000 CIL shares, leaving the larger portion of 2 million unpaid. On the same day, Mr. Chan took the cheque covering the smaller amount to Mr. Tan's office and collected the share certificates pertaining to the 328,000 CIL shares. 203. By 4 p.m. being the close of banking hours on that same day, Mr. Chan was reasonably sure that the cheques given to him by Mr. Tsang had cleared wherefor he wrote out another cheque for the large amount and made the same payable to Extramoney as instructed by Mr. Tan and took the same to him. It was at that juncture that Mr. Tan told Mr. Chan that the agreed price of HK$8 per share was too low in the opinion of his family members and that HK$8.60 was a more appropriate price. Mr. Chan said that he was unhappy with such a sudden change of mind on the part of Mr. Tan whereupon he told Mr. Tan that he did not accept the proposed price revision. After some discussion, Mr. Tan suggested that Mr. Chan give him a further HK$1. 2 million to cover the extra cost of 2 million CIL shares at the extra 60 cents per share but that in the meantime he would try to persuade his family members to adhere to the original price and, if he were successful, he would return the difference to Mr. Chan. Documentary evidence was adduced by consent to show that on 19th May 1981 the market price high for CIL shares was HK$9.05, the low being HK$8.70. 204. Mr. Chan testified that he returned to his office after the aforesaid discussion with Mr. Tan and there made out a cheque payable to Extramoney for HK$1.2 million but post-dated to 20th May 1981 although he had at the time received no additional funds from Mr. Tsang. He then returned to Mr. Tan's office with the post-dated cheque and told the latter not to cash the cheque until the following day since he needed to speak to the other customers of Hung Fat. Meanwhile Mr. Tan said that, armed with the cheque, he would attempt to persuade his family mambers to adhere to the original agreed price. After that conversation, Mr. Chan left with the certificates pertaining to the 2 million CIL shares. Later that same evening Mr. Tsang came round to the Defendants' premises to collect the scrip. 205. On the following day, namely, 20th May 1981, Mr. Chan telephoned Mr. Tan to ascertain the news in relation to his persuasive efforts vis-a-vis his family members. After some discussion over the telephone, Mr. Tan apparently gave in and told Mr. Chan that he could obtain a cheque by way of refund from his brother Jonah Tan. Later that same day, Mr. Chan secured at Mr. Tan 's office from Jonah Tan by way of a refund a Holdings' cheque for HK$1.2 million made payable to the Defendants and dated 20th May 1981, such cheque being the subject matter of the Subsidiary Claim in this case. Mr. Chan then paid the Holdings cheque into the Defendants' account. Again, documentary evidence was adduced by consent to show that on 20th May 1981, the market high for CIL shares was HK$8. 95, the low being HK$8.65 and the closing was HK$8.80. 206. Thereafter nothing more was heard about the cheque until the Defendants conducted an interim audit of Holdings and its subsidiaries later that year, sometime between August and November 1981. A member of the Defendants' audit team Mr. Samson Leung discovered that there was recorded in Holdings' books what was described as a bonus payment of HK$1.2 million made to the Defendants. Since Holdings had never made any bonus payment to the Defendants, Mr. Chan immediately suspected that this might be the refund payment incorrectly described and, accordingly, asked Mr. Leung to verify how the entry was recorded in Extramoney's books. Mr. Leung duly checked and reported back to Mr. Chan that the same had been recorded as a sale of 2 million CIL shares at HK$8.60 per share. Mr. Chan thereupon telephoned Mr. Bentley Ho to tell him that there has been an incorrect description of the refund and asked him to arrange for a correction in the books of respectively Extramoney and Holdings. Mr. Ho said that he would see to the matter. Although Mr.Chan was told of the matter by Mr. Leung, he was never shown the entries in question. He only saw the books after mutual discovery herein. 207. At the trial there was adduced from Extramoney's books and records a transfer voucher designated V. No. J205 dated 20th May 1981 crediting Extramoney's current account with Holdings with HK$1. 2 million described as being the "amount refunded by CHL on behalf of Extramoney Ltd. to Chan Lai Pang & Co. due to overpayment of the proceeds on disposal of 2,000,000 CIL shares wrongly borne by CHL as bonus in the accounts, now reversed. 2,000,000. x ($8.60 - $8.00)". There was also adduced in evidence from the books of Holdings a corresponding transfer voucher designated V. No. J596 and dated 20th May 1981 debiting Holdings’ current account with Extramoney the amount of HK$1.2 million described as the "amount refunded by CHL on behalf of Extramoney Ltd. to Chan Lai Pang & Co. due to overpayent of the proceeds on disposal of 2,000,000 CIL shares wrongly borne by CHL as bonus in the accounts, now reversed". Both the aforesaid vouchers are initialled to signify approval by “JW", a reference to John Wong, the financial controller of the Carrian Group. Additionally, in Holdings' general ledger L602/9, there can be seen a post year- end entry dated 20th May 1981 for HK$1.2 million described as being the "amount refunded by CHL on behalf of Extramoney Ltd. to Chan Lai Pang & Co. due to overpayment of the proceeds on disposal of 2,000,000 CIL shares wrongly borne by CHL as bonus in the accounts, now reversed, 2,000,000 x ($8.60 - $8)". Finally, there was also adduced in evidence from Extramoney's books and records a photocopy of a cheque for HK$1.2 million drawn by Extramoney and payable to Holdings being the refund from Extramoney to Holdings, the latter having made a refund of the like amount to the Defendants. 208. Mr. Tsang was declared bankrupt in 1982 and his current whereabouts are unknown. All the Registrar General's records and documents pertaining to Mr. Tsang's bankruptcy were destroyed on 26th September 1990 pursuant to Court Order, a fact among others which engendered the Defendants' plea of laches to characterize the want of expedition in the manner in which the Plaintiffs chose to pursue the Subsidiary Claim, the latter introducing the allegations only by way of a late amendment to the Statement of Claim on 1st November 1991 being over 10 years after the occurrence of the events in question. CONCLUSION 209. Notwithstanding the want of records from Hung Fat and the absence of Mr. Tsang as a witness to confirm Mr. Chan’s story, I am satisfied, first of all, having seen and heard Mr. Chan testify, secondly, bearing in mind the documentary evidence adduced from Extramoney's books and records hereinabove described to corroborate his testimony and, last but not least, the very nature of the story with its many touches of Hong Kong realism, that Mr. Chan was 'telling me the truth. Additionally, there was no positive evidence, whether oral or documentary, available to support the Plaintiffs’ contrary contentions which remain speculative at best. In conclusion I accept Mr. Chan's evidence as to the HK$1.2 million payment, and conclude, accordingly, that the Defendants do not hold the said sum as constructive trustees for the Plaintiffs or either of them. LACHES and LIMITATION 210. In the light of my findings of fact in answering Question (6) above and bearing in mind my foregoing decision notwithstanding the Defendants' inability through lapse of time to subpoena or obtain the records of Hung Fat after the bankruptcy and disappearance of its proprietor Mr. Tsang in 1982, I propose to express no views on the now academic questions of whether the Subsidiary Claim is in any event time-barred under the Limitations Ordinance or whether I should in the exercise of my discretion decline to adjudicate the Subsidiary Claim by reason of laches on the part of the Plaintiffs in the prosecution thereof rendering it unfair to allow it to proceed. The HIGH COURT's JURISDICTION to ORDER REFUND of OVERPAID TAX 211. Again, in view of my answers to Questions (1) and (4) above, it is not strictly necessary for me to express give a view on Question (7). However, in deference to Counsels' submissions and in the event of my being wrong in my aforesaid answers, I will express my view on this matter and give brief reasons in support. The ISSUES 212. The Counterclaim affects the Commissioner only insofar as the Defendants seek a declaration that the tax and surcharge on the Disputed Profit was properly paid or alternatively, in the event of the Plaintiffs' claim succeeding as against them, that the Plaintiffs are entitled to repayment by the Inland Revenue of the Overpaid Profits Tax. The Commissioner's pleaded position is I have no power to grant any such delaratory relief since the Board of Review has exclusive jurisdiction to determine the issue of the correctness of Extramoney's original assessment to tax and hence the question of reimbursement of the profits tax paid. This is an issue of pure law. At the hearing before me, Mr. Andrews for the Commissioner submitted, additionally, that in the event of my deciding in the Defendants' favour on the question of jurisdiction, I should should nevertheless decline the relief sought in the exercise of my discretion. I shall deal with the two issues in that order. JURISDICTION 213. The factual background against which legal submissions were made is uncontroversial. On or around 9th January 1982, Extramoney furnished tax returns for the 1980 Period disclosing assessable profits amounting to HK$132,881,885 and represented by the Defendants' unqualified report (qua auditors) attached to the audited 1980 Accounts that the same gave a true and fair view of the state of affairs of Extramoney at 31st December 1980. Extramoney was assessed to tax on such profits and, on or about 25th March 1982, Holdings remitted the tax together with a 5% surcharge for late payment. Some five years later, in or around 31st March 1987, Extramoney claimed that, of the profits tax previously paid, HK$17, 617,556 were not properly chargeable. The Assessor refused to correct the assessment. In or around 9th March 1989, the Plaintiffs objected to such refusal but the Commissioner confirmed his previous decision. On or about 3rd January 1990, the Plaintiffs appealed to the Board of Review. No date has been fixed for the hearing of that appeal pending my present decision. 214. The Commissioner’s case is that the Inland Revenue Ordinance ("the IRO") establishes a self-contained code for the assessment, determination and collection of a charge to profits tax and for deciding all claims and challenges thereto. Additionally, the IRO has created statutory persons to determine disputes arising out of an assessment to tax and including, in particular, the Board of Review to adjudicate exclusively on those matters properly brought before it on appeal. I shall now summarise the statutory scheme. The statutory Scheme 215. Section 14 of the IRO is a mandatory provision requiring profits tax to be charged in respect of assessable profits from a trade or business in Hong Kong. 216. Section 64 states that any person aggrieved by an assessment may, by written notice to the Commissioner setting out grounds, object to that assessment. 217. Section 66 confers a right upon the aggrieved person, in the event of the Commissioner failing to agree with his objection, to appeal to the Board of Review. Under Section 67, an appeal to the Board of Review under Section 66 may be transferred to be heard by the High Court instead of the Board of Review. 218. Section 69(1) states that the decision of the Board of Review shall be final save for an appeal by case stated on a question of law to the High Court. Section 69(7) provides for further appeals to the Court of Appeal and the Privy Council. 219. Section 70 provides that the amount of assessable income or profit or the net assessable value that has been determined on objection or appeal shall be final and conclusive for all purposes of the IRO as regards such amount. 220. Section 70A(l) confers power on an assessor within 6 years of the tax year in question to correct his original assessment if satisfied that the same is excessive "by reason of an error or omission in any return or statement submitted in respect thereof, or by reason of any arithmetical error or omission in the calculation of the amount of the assessable income or profits assessed or in the amount of the tax charged". 221. Section 70A(2) states that where an assessor refuses to correct an assessment in accordance with the application, the person shall have the same right of objection and appeal under Part XI as if the notice of refusal were a notice of assessment. 222. Section 79(1) provides that "[i]f it is proved to the satisfaction of the Commissioner by claim duly made in writing within 6 years of the end of the year of assessment or within 6 months after the date on which the relevant notice of assessment was served, whichever is the later, that any person has paid tax in excess of the amount with which he was properly chargeable for the year, such person shall be entitled to have refunded the amount so paid in excess: Provided that nothing in this section shall operate to extend or reduce any time limit for objection, appeal or repayment specified in any other section or to validate any objection or appeal which is otherwise invalid, or to authorise the revision of any assessment or other matter which has become final and conclusive." Effect of statutory Scheme 223. It can be appreciated from - the foregoing statutory provisions that once an assessment to tax has been made, changes can only be made thereto following the procedure laid down under the IRO. If the taxpayer's objection is not upheld by the Commissioner, his only recourse under the statute is to lodge an appeal with the Board of Review. Save only where an appeal is transferred to the High Court under the provisions of section 66 or if there is an appeal from the Board of Review's own decision by way of case stated on a point of law only does the High Court involved in the adjudicatory process. No power is independently conferred upon the High Court to determine the correctness or otherwise of an assessment to tax on questons both of fact and of law. Put another way, the High Court is not made a primary fact-finding tribunal for the purposes of determining the correctness of tax assessments. 224. The use of the expressions "final" and "final and conclusive" in the statute to characterise the decisions of the Board of Review is also telling. The legislative intent is plain that the Board should adjudicate finally on all matters of fact properly brought before it. The above statutory provisions have the effect, in my judgment, of establishing in the IBO a comprehensive code for deciding all disputes arising from a tax assessment, conferring in the process exclusive primary jurisdiction upon the Board of Review to determine such disputes on the facts. Declaratory Relief 225. How ought the Defendants’ claims for declaratory relief be dealt with? I have no doubt, following my detemination on the jurisdictional question against the Defendants, that their prayers for the alternative declarations hereinabove defined should be dismissed. If the High Court has no primary jurisdiction to determine a liability to tax, then it must follow that it has no jurisdiction to make declarations with regard thereto: see, for example, Barraclouqh v. Brown [1897] A.C. 615 (HL), an authority for the proposition that the grant of declaratory relief in the exercise of the Court's discretion is dependant upon the existence of a right to a remedy: see per Lord Herschel ibid at 620. The House of Lords held in that case that, where a statute gave a right to recover expenses in a court of summary jurisdiction from a person who is not othewise liable, there is no right to come to the High Court for a declaration that the applicant has a right to recover the expenses in a court of summary jurisdiction: he can only take proceedings in the latter court. 226. I draw comfort in my conclusions from the following remarks of Lord Diplock in Re Vandervell's Trusts [1971] A.C. (HL) at 943H and 944G upon considering the effect of similar (though by no means identical) provisions in the U.K. Income Tax Management Act 1964:-
227. I turn now to consider the question of discretion. DISCRETION 228. If I were wrong in my determination of the question of jurisdiction such that I do have power to grant the declartatory relief sought, how ought I to exercise my discretion? The following three factors militate against the exercise of my discretion (assuming that I have any) to grant the declaratory relief sought by the Defendants. 229. First of all, the declarations sought by the Defendants are not supported by any claim of right vis-a-vis the Commissioner. Put another way, the parties are agreed that the Defendants do not qualify as "a person aggrieved" within the meaning of section 64 of the IRO wherefor they do not fall within the statutory scheme at all. The person or entity who does so qualify is Extramoney which has, accordingly, exclusive pessession of the statutory remedy to recover any tax overpaid. Whether or not the Overpaid Profits Tax were properly paid by Extramoney and whether they are entitled to repayment of the same are issues properly before the Beard of Review by way of appeal from the assessor's refusal to correct the original assessment. Whatever be the outcome of that appeal, the Defendants have no right to recover the Overpaid Profits Tax as such. 230. For the same reason, they have and can have no specific remedy operating in personam vis-a-vis the Commissioner. Thus it would not appear that any specific purpose is served by either declaratory relief save by way of an ineffective attempt to bind the Board of Review in its pending appeal. I say ineffective since the Board of Review is not, of course, a party to these proceedings and for one other more fundamental reason mentioned below. And if no practical utility arises from the grant of a declaratory relief, the same will refused in the exercise of the Court's discretion: per Lord Watson in Barraclough v. Brown(supra) at 622. 231. Secondly and more importantly, I am not currently in a position to grant either but, in particular, the second declaration sought. The granting of such relief is dependent on more than a finding of fact that the Disputed Profit formed no part of the trading profits of Extramoney over the 1980 Period. Such a declaration can only be properly made upon a determination on both law and fact that the tax charged was "excessive by reason of an error or omission in any return or statement ... or of any arithmetical error or omission in the calculation of the amount of the profits assessed" within the meaning of section 70A of the IRO. These are issues in the appeal fairly raised before the Board of Review but which have not been either fully or comprehensively canvassed at this trial. 232. If Extramoney deliberately chose to attribute the Disputed Profit to itself so as to secure fiscal advantages for the Carrian Group, then it is a moot point whether the same fell to be considered an error or omission within the meaning of the section so as to entitle Extramoney to claim a repayment of the Overpaid Profits Tax. There is much relevant case law on the point (see, for example, Sun Yau Investment co. Ltd. v. Commissioner of Inland Revenue (1984) 2 H.K.T.C. 17, 21 per Mantell J.; Carrimore Six Wheelers Ltd. v. Commissioners of Inland Revenue (1944) 26 Tax cases 301; Inland Revenue Board of Review Decisions Case No. 014/88 (1988); Chinachem Investments Company Ltd. v. Commissioner of Inland Revenue (1987) 2 H.K.T.C. 261) which was not fully ventilated and argued before me wherefor, in the interests of avoiding prejudice to the pending appeal beforre the Board of Review, I propose to express no view on the matter. 233. Thirdly, if the suggestion is that I make declarations limited to findings of fact as opposed to those involving both law and fact, then the same are unnecessary by reason of the application of different and much laxer evidentiary rules in the finding of fact by the Board of Review. Section 68(7) of the IRO provides that at the hearing of the appeal the Board may subject to the provisions of Section 66(3) admit or reject any evidence adduced whether oral or documentary and the provisions of the Evidence Ordinance relating to the admissibility of evidence shall not apply. Accordingly, the Board is empowered to admit or reject any evidence adduced, whether in an oral or documentary form, including this Judgment which I apprehend will be placed before them if ever the appeal should be heard. CONCLUSIONS 234. I decline for want of jurisdiction to grant either of the declaratory relief sought the Defendants to bind the Commissioner. Were I wrong in my determination on want of jurisdicition, I would, in any event bearing in mind all the circumstances of this case, exercise my discretion against granting the declaratory relief. COUNTERCLAIM aqainst the PLAINTIFFS I the LIQUIDATORS and the CORPORATE DEFENDANTS 235. Similarly, in view of my answer to Question (4) above, it is strictly unnecessary for me to express a view on Question (8). In the event, however, of my being wrong in my aforesaid answer, my views as regards the Counterclaim mounted against, first of all, the Plaintiffs, secondly, Extramoney's shareholders and directors (respectively Finance, Realty and Joint Venture) and, finally, the Liquidators, are set out below. I shall consider each of the above listed sets of defendants to the Counterclaim in turn. COUNTERCLAIM aqainst the PLAINTIFFS 236. In the event of my being wrong in holding that the Defendants' breach of duty did not cause the payment of the Overpaid Profits Tax, the Defendants counterclaim for an order that the Plaintiffs prosecute with due diligence an appeal from the assessor's refusal to correct his original assessment of Extramoney's tax liability to the Board of Review, alternatively for declaratory relief that, upon payment to the Plaintiffs of any sum which I may order them to pay in this action, they be subrogated to the rights of the Plaintiffs in pursuing the said appeal and be entitled to all refunds of tax and surcharge. 237. This part of the Counterclaim suffers from none of the problems that plagued the Defendants' claim for declaratory relief to bind the Commissioner. Accordingly, if the Defendants' breach gave rise to overpayment of the profits tax on the part of the Plaintiffs, I would grant the declaratory relief as claimed against the latter. I turn now to consider the Counterclaim against Holdings, Extramoney’s shareholders and directors, and the Liquidators. COUNTERCLAIM aqainst the 2nd PLAINTIFF, EXTRAMONEY's SHAREHOLDERS and DIRECTORS and the LIQUIDATORS 238. The Defendants say that since each of Extramoney' s shareholders (namely, Finance and Realty) and directors (namely, Finance, Realty and Joint Venture) as well as its ultimate holding company Holdings were 100% beneficially owned and controlled by Mr. Tan, the latter's knowledge is to be imputed to them such that, if the Defendants' negligence and breach of contractual and statutory duties led to the payment of the Dividend out of the capital as opposed to the Other Profits of Extramoney, they were all fully aware of such fact as well as the additional fact that, the same constituted a breach of fiduciary duty owed to Extramoney. In the circumstances, Holdings received the Dividend as a constructive trustee and, insofar as Finance, Realty and Joint Venture knowingly assisted in the transfer of the Dividend to Holdings, each of them became likewise a contructive trustee of the same. 239. By similar reasoning, the Liquidators are joined as defendants to the Counterclaim since, according to the Defendants, they control Holdings and its aforesaid subsidiaries and have caused none of them to account for or disgorge the dividend paid out by Extramoney. 240. The positions occupied in equity by respectively Holdings and each of Extramoney’s aforesaid shareholders and directors with respect to the receipt and the retaining of the Dividend currently in the hands of the Liquidators are encapsulated by the following observations of Mil1ett J. in Agip (Africa) Ltd. v. Jackson [1990] 1 Ch. 265 at 291:-
241. On appeal to the Court of Appeal reported [1991] 3 W.L.R. 116, Fox L.J. said at 131G - 132A:-
242. Applying the above principles, since Mr. Tan had full knowledge of all that went on in relation to Extramoney, such knowledge must in turn be imputed to his each of his corporate alter egos being Extramoney's shareholders and directors and its ultimate holding company Holdings (all of which are 100% owned and controlled by him) wherefor each of them had constructive notice of the fact that the Disputed Profit was not made by Extramoney whereupon each of them held on contructive trust HK$74,315,006 being so much of the Dividend as is not covered by Extramoney's Other Profits which sum can be traced in equity to monies and other assets of Holdings currently in the hands of the Liquidators. 243. Accordingly, if I were wrong in my answer to Question (4) above and loss did in fact result from the Defendants' breach of duty, I would allow the Counterclaim for declaratory and other relief as against the Plaintiffs to facilitate recovery of the Overpaid Profits Tax as aforesaid and also as against Holdings, Extramoney's shareholders and directors and the Liquidators in relation to the payment of the Dividend but only to the extent of HK$74,315,006. Accordingly, as against the latter set of defendants to the Counterclaim, I would grant relief in the following form:-
CONCLUSIONS 244. To reiterate, I find the Disputed Profit to form no part of the trading profits of Extramoney for the 1980 Period. I further find the Defendants to have been negligent and in breach of their contractual and statutory duties in their audit of Extramoney's 1980 Accounts and in certifying the Plaintiffs' audited accounts for that period as being true and fair. I find, however, no loss to flow from the Defendants' breach of duty wherefor I award the Plaintiffs nominal damages against the Defendants of HK$l. The Counterclaim is dismissed. 245. It remains for me to thank all Counsel for their assistance. I give the parties liberty to apply on costs and any other outstanding matters.
Mr. John Griffiths, Q.C., and Mr. Clifford Smith (instructed by Messrs. Simmons and Simmons) for the Plaintiffs by Original Action and the 1st and 2nd and the 4th to 9th Defendants by Counterclaim. Mr. Adrian Hamilton, Q.C., Mr. Arjan Sakhrani, Q.C., and Mr. Barnabus Fung (instructed by Messrs. Pang, Kung & Co.) for the Defendants by Original Action and the Plaintiffs by Counterclaim. Mr. Robert Andrews, Senior Crown Counsel, for the 3rd Defendant by Counterclaim. |
Cases cited in this judgment