Case Detail

CACV 244/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 244 OF 2016

(ON APPEAL FROM THE ORDER OF THE DISCIPLINARY
COMMITTEE OF THE HONG KONG INSTITUTE OF CERTIFIED
PUBLIC ACCOUNTANTS DATED 2 DECEMBER 2016)

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IN THE MATTER OF a Complaint made under section 34(1)(a)(vi) of the Professional Accountants Ordinance (Cap 50) (“PAO”) and referred to the Disciplinary Committee under section 33(3) of the PAO

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BETWEEN
	THE REGISTRAR OF THE HONG KONG INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS	Complainant
and
	X	1^st Respondent
	Y	2^nd Respondent

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Before: Hon Lam VP, Kwan JA and G Lam J in Court

Date of Hearing: 20 September 2017

Date of Judgment: 20 October 2017

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REASONS FOR JUDGMENT AND
DECISION ON COSTS

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Hon G Lam J (giving the judgment of the Court):

1. This is an appeal from a decision and order of the Disciplinary Committee (“Committee”) set up under the Professional Accountants Ordinance (Cap 50) (“the Ordinance”). At the end of the hearing we allowed the appeal with costs of the appeal and reserved our decision on the question of costs below. These are our reasons for allowing the appeal and our decision on the costs below.

The background

2. The disciplinary proceedings in question related to the audit of the financial statements of [Company A] (“the Company”) and its subsidiaries (together “the Group”) for the year ended 31 March 2010. The appellants in this appeal, Y and X, who were respondents in the disciplinary proceedings, were respectively the auditors of the Company and the engagement partner for the audit. The respondent in this appeal was Registrar of the Hong Kong Institute of Certified Public Accountants (“HKICPA”), who acted as the complainant in the disciplinary proceedings below. For ease of reference we shall continue to refer in this judgment to the parties by their nomenclature below as the “Complainant” and the “Respondents” respectively.

3. The disciplinary complaints concerned the accounting treatment of the acquisition of a subsidiary by the Company in 2009. In July 2009, the Company entered into a sale and purchase agreement whereby it agreed to acquire from third‑party vendors a majority holding of the issued shares in [Company B] for a total consideration of HK$1,621,863,240. It was agreed that the consideration for the acquisition was to be satisfied by the allotment and issue of 3,243,726,480 shares in the Company at HK$0.5 each. The acquisition was completed on 24 September 2009. As at that date, the published price of the shares of the Company was HK$0.65.

4. There were provisions in the applicable accounting standards concerning how such “business combinations” should be reported in the financial statements of the acquirer. In particular, as regards reporting the cost of an acquisition, paragraphs 24 and 27 of the Hong Kong Financial Reporting Standard 3 (Revised) (“HKFRS 3”) provided as follows:

“24. The acquirer shall measure the cost of a business combination as the aggregate of: (a) the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for control of the acquiree; plus (b) any costs directly attributable to the business combination.”
“27. The published price at the date of exchange of a quoted equity instrument provides the best evidence of the instrument’s fair value and shall be used, except in rare circumstances. Other evidence and valuation methods shall be considered only in the rare circumstances when the acquirer can demonstrate that the published price at the date of exchange is an unreliable indicator of fair value, and that the other evidence and valuation methods provide a more reliable measure of the equity instrument’s fair value. The published price at the date of exchange is an unreliable indicator only when it has been affected by the thinness of the market. If the published price at the date of exchange is an unreliable indicator or if a published price does not exist for equity instruments issued by the acquirer, the fair value of those instruments could, for example, be estimated by reference to their proportional interest in the fair value of the acquirer or by reference to the proportional interest in the fair value of the acquiree obtained, whichever is the more clearly evident … Further guidance on determining the fair value of equity instruments is set out in HKAS 39 Financial Instruments: Recognition and Measurement.”[1]

5. In preparing its financial statements for the year ended 31 March 2010, however, the Group did not adopt the published price of the Company’s shares as at the date of acquisition for the purpose of valuing the consideration paid, as suggested, prima facie, by paragraph 27 of HKFRS 3. Instead, it adopted the contract price of HK$0.5 per share for that purpose. Note 38(a) of the 2010 financial statements stated:

“On 24 September 2009, the Group acquired 54.28% of the issued share capital of [a subsidiary] … at a consideration, before expenses, of approximately HK$1,621,863,000 which was satisfied by the allotment and issue of 3,243,726,480 new ordinary shares of the Company of HK$0.01 each at an issue price of HK$0.5 per share. The adoption of HK$0.5 per share as the fair value of the shares issued by the Company at the date of exchange was based on a fair value assessment made by the Board of Directors … [T]he Board of Directors considered the published price of the Company’s shares at the date of exchange (ie HK$0.65) is not a suitable and reliable indicator of fair value of the shares issued for the acquisition due to the thinness of the market of the Company’s issued shares. If the published price of HK$0.65 of the Company’s share was adopted, the share consideration would be increased by approximately HK$486,559,000 …”

6. On 20 July 2010, the Respondents issued an unmodified and unqualified opinion on the 2010 financial statements.

7. Following a complaint received by the Financial Reporting Council in April 2012, the Audit Investigation Board (“AIB”) conducted an investigation and, in its report dated 26 February 2013, concluded that the auditor should have issued an auditor’s report with a modified opinion on the 2010 financial statements in this respect. Notwithstanding representations made by the Respondents expressing disagreement with the AIB’s findings, in June 2014, in accordance with s 34(1A) of the Ordinance, the Registrar of the HKICPA, as the Complainant, submitted to the Council of the HKICPA a complaint against the Respondents. The nature of the complaint is that the Respondents failed to comply with a professional standard.

8. S 34(1) and (1A) of the Ordinance relevantly provide as follows:

“(1) A complaint that —
(a) a certified public accountant —
……
(vi) failed or neglected to observe, maintain or otherwise apply a professional standard;
……
shall be made to the Registrar who shall submit the complaint to the Council which may, in its discretion but subject to section 32D(7), refer the complaint to the Disciplinary Panels.”
“(1A) Where the Registrar has reason to believe that subsection (1)(a) or (b), or subsection (1)(a) as applied by subsection (1AA), applies to a certified public accountant or a corporate practice, he shall submit the facts to the Council which may, in its discretion, refer the complaint to the Disciplinary Panels.”

9. In the letter of complaint from the Registrar dated 17 June 2014 to the Council of the HKICPA, the principal issues were stated to relate to the failure by the Company to comply with paragraphs 24 and 27 of HKFRS 3 in that the published price of the Company’s shares at the date of acquisition was not used to measure the fair value of the consideration shares issued for the acquisition. It was stated that the auditor:

“failed to express a modified auditor’s opinion in respect of the valuation of the consideration shares, in accordance with paragraphs 11 and 13 of HKSA 700, regarding the Company’s non‑compliance with HKFRS 3. Accordingly, there is non‑compliance with the professional standards stated in the complaints below. As such, the Respondents had failed or neglected to observe, maintain or otherwise apply a professional standard under s 34(1)(a)(vi) of the PAO.”

10. The letter of complaint also referred to the AIB report for details. The views of the AIB were set out in s 5.2 of that report. The gist of its views may be seen from the following two paragraphs:

“5.2.14 In conclusion, the AIB considers that there was no evidence suggesting that the published price of the Company’s shares at the date of exchange was an unreliable indicator of their fair value and other evidence and valuation methods provided a more reliable measure of their fair value. Hence, the AIB considers that in accordance with paragraphs 24 and 27 of HKFRS 3 …, the Consideration Shares should have been measured at the published price of the Company’s shares of HK$0.65 at the date of the Acquisition instead of their issue price.
5.2.15 Given the above issue of non‑compliance with accounting requirement and the financial impact as set out in Paragraph 5.1.1.3 was material to the Relevant Financial Statements, the AIB considers that [Y] should have issued an auditor’s report with a modified opinion on the Relevant Financial Statements in this respect. It appears to the AIB that the requirements of paragraphs 11 and 13 of HKSA 700 … were not observed.”

11. In the Registrar’s letter of complaint, two complaints were raised against the Respondents, namely, that they had failed or neglected to observe, maintain or otherwise apply a professional standard, namely paragraphs 11 and 13 of the Hong Kong Standard on Auditing (“HKSA”) 700, and in the alternative, that they had failed or neglected to observe, maintain or otherwise apply a professional standard, namely s 100.4(c) as set out in more detail in ss 130.1 of the Code of Ethics for Professional Accountants. The wording of the complaints was in substance identical to that set out in the Complainant’s Case (as quoted in paragraph 14 below).

12. Paragraphs 11 and 13 of HKSA 700, which formed the basis of the 1^st Complaint, provided as follows:

“11. The auditor should evaluate the conclusions drawn from the audit evidence obtained as the basis for forming an opinion on the financial statements.”
“13. Forming an opinion as to whether the financial statements give a true and fair view or are presented fairly, in all material respects, in accordance with the applicable financial reporting framework involves evaluating whether the financial statements have been prepared and presented in accordance with the specific requirements of the applicable financial reporting framework for particular classes of transactions, account balances and disclosures. This evaluation includes considering whether, in the context of the applicable financial reporting framework: (a) The accounting policies selected and applied are consistent with the financial reporting framework and are appropriate in the circumstances …”

13. Paragraphs 100.4 and 130.1 and 130.4 of the then applicable Code of Ethics for Professional Accountants, which form the basis of the 2^nd Complaint, provided as follows:

“100.4 A professional accountant is required to comply with the following fundamental principles:…...
(c) Professional Competence and Due Care
… A professional accountant should act diligently and in accordance with applicable technical and professional standards when providing professional services.”
“130.1 The principle of professional competence and due care imposes the following obligations on professional accountants … (b) To act diligently in accordance with applicable technical and professional standards when providing professional services.”
“130.4 Diligence encompasses the responsibility to act in accordance with the requirements of an assignment, carefully, thoroughly and on a timely basis.”

14. In the Complainant’s Case dated 2 December 2014 submitted under the Disciplinary Committee Proceedings Rules, the two complaints raised against the Respondents were set out as follows:

“1. In breach of section 34(1)(a)(vi) of the PAO, the Respondents have failed or neglected to observe, maintain or otherwise apply a professional standard, namely paragraphs 11 and 13 of HKSA 700, for their failure to express a modified auditors’ opinion in respect of the Company’s measurement of the fair value of the Consideration Shares in the 2010 Financial Statements (the “1^st Complaint”);
2. In the alternative to the 1^st Complaint, the Respondents, in breach of section 34(1)(a)(vi) of the PAO, failed or neglected to observe, maintain or otherwise apply a professional standard, namely section 100.4(c) as set out in more detail in sections 130.1 of the Code of Ethics for Professional Accountants, for their failure to act diligently in accordance with HKFRS 3, in relation to the measurement of the fair value of the Consideration Shares, when carrying out the audit of the 2010 Financial Statements (the “2^nd Complaint”).”

15. Further, it was stated in the Complainant’s Case under the heading “The Issues”:

“18. There is no dispute that, under the relevant standards, a reporting entity should adopt the published price though in “rare circumstances” it may depart from this approach if it could demonstrate that:
a. the published price at the date of exchange is an unreliable indicator of fair value; and
b. the alternative valuation method is a more reliable measure of fair value.
19. Both the AIB and the Complainant disagree with the Respondents that either the published price was an unreliable indicator of fair value and/or that the alternative method of valuation accepted by the Respondents was more reliable than the published price. In reaching this view, the Complainant agrees with the analysis as set out by the AIB in its Investigation Report dated 26 February 2013 …”

The Committee’s determination

16. Following a hearing held in May 2016, the Committee issued its determination on liability on 8 July 2016. On the central question of whether the published price of the consideration shares at the date of acquisition was an unreliable indicator of fair value because it had been affected by the thinness of the market, the Committee noted that all three of the expert witnesses in the case had testified that it was difficult to give a precise definition of the term “thinness of the market”. The Committee considered that, in the circumstances of the case, “for anyone to decide whether or not thinness of the market exists is very much a question of professional judgment”. The Committee concluded that it could not determine whether or not “thinness of the market” existed, and that the circumstances under which the Company had measured the fair value of the consideration shares might be said, by some experts, to be rare circumstances.

17. Accordingly, in relation to the 2^nd Complaint, the Committee determined that

“the different interpretations and different expert opinions on the meaning of HKFRS 3 (Revised) in relation to the measurement of fair value of the consideration shares and the different logic that has been employed throughout the case to define thinness of the market raise sufficient doubts to support the charge that the respondents failed to act diligently in this context”.

The Committee concluded that the 2^nd Complaint was not established.

18. However, in relation to the 1^st Complaint, the Committee came to the following conclusion:

“The Committee considers that in relation to the First Complaint, the Respondents have failed to adequately draw the readers’ attention to the auditors’ consideration of the matters relevant to the auditors’ report. The Committee determines that the Respondents did not adequately apply the necessary professional standard in accordance with HKSA 700 paragraphs 11 and 13, namely to demonstrate that they had adequately evaluated whether they were or were not able to express an unmodified auditors’ opinion in respect of the Company’s measurement of the fair value of the Consideration Shares in the 2010 Financial Statements. In the absence of a disclosure in its Note 38(a) on the basis of “thinness” of market that rendered the published price unreliable or unsuitable as the fair value of the share considerations, it was incumbent on the Respondents to demonstrate in their auditors’ report that they had adequately evaluated the relevant complex matters involved in the Acquisition of the subsidiary, including a very substantial acquisition and connected transaction under Chapter 14A of the Listing Rules. The auditors were required to demonstrate that the “Financial Statements were prepared in accordance with a financial reporting system that is designed to meet the common needs of a wide range of users” (paragraph 1, HKSA 700). …
The Committee determines that, given the circumstances of the very substantial acquisition and connected transaction and the measurement of value adopted by the directors in valuing the locked‑in Consideration Shares, the auditors’ report fell below the professional standard as a result of a matter of professional judgment. In the Committee’s view, the auditors’ report does not adequately demonstrate the auditors’ evaluation of the complexity and context of the financial statements for the common needs of a wide range of users.”

19. In a separate subsequent decision on sanction and costs, the Committee made an order that

(1) both Respondents be reprimanded under s 35(1)(b);
(2) the Respondents jointly pay a penalty of HK$250,000 under s 35(1)(c); and
(3) the Respondents jointly and severally pay the Complainant costs in a sum of HK$2,411,978.64 under s 35(1)(iii).

The grounds of appeal

20. As against the Committee’s decision on liability, the Respondents have raised three grounds of appeal which may be broadly described as follows:

(1) The Committee found the Respondents guilty of a disciplinary charge that was completely different from the 1^st Complaint.
(2) The Committee erred in law in holding that the Respondents had a professional duty under HKSA 700 to demonstrate adequately the auditors’ evaluation of the complexity and context of the financial statements.
(3) The Committee’s approach was inconsistent with the Complainant’s acceptance that if he failed to persuade the Committee to accept his interpretation of HKFRS 3, the complaint should be dismissed, and also with the Committee’s rejection of the 2^nd Complaint.

21. Separately, the Respondents also challenge the Committee’s order of costs on the ground that since the Complainant failed on the issue of the interpretation of HKFRS 3 and the issue of thinness of the market, it was wrong in principle for the Committee to order the Respondents to bear the entirety of the Complainant’s costs.

Ground 1

22. Mr Mok submitted that the Committee convicted the Respondents on the 1^st Complaint unfairly and in breach of the rules of natural justice, because the case found against the Respondents was not mentioned in the complaints, not relied upon by the Complainant, and not canvassed during the disciplinary hearing. We agree.

23. The general principle that a person is entitled to receive fair notice of the charge against him is not in doubt: Ridge v Baldwin [1964] AC 40, 113–114; O’Reilly v Mackman [1983] 2 AC 237, 275–276. Mr Horace Wong SC, who appeared for the Complainant on this appeal (but not below), submitted that the conviction fell within the scope of the charge under the 1^st Complaint, in that the complaint charged, and the Committee found, that the Respondents failed to comply with paragraphs 11 and 13 of HKSA 700.

24. With respect, Mr Wong’s submission ignores the need to inform the accused person of the contents and particulars of the charge. A professional person subject to disciplinary proceedings is entitled to fair notice, not only of the specific rules or standards he is said to have breached, but, with sufficient particularity, of what it is that he is said to have done or omitted to do which constituted an infringement of the applicable rules or standards.

25. Having regard to the AIB report, the letter of complaint and the Complainant’s Case referred to above, it is plain that the 1^st Complaint was based squarely on the Company’s non‑compliance with paragraphs 24 and 27 of HKFRS 3 and the Respondents’ failure to issue a modified opinion in respect of it. The gist of the Complainant’s case before the Committee was that:

(1) paragraphs 24 and 27 of HKFRS 3 required the use of the published price to measure the fair value of the consideration shares unless the published price was not a reliable indicator of fair value;
(2) the published price would only not be a reliable indicator of fair value if it had been affected by thinness of the market;
(3) there was no thinness of market in relation to the Company’s shares;
(4) the published price should therefore have been used and in failing to use it the Company failed to comply with paragraphs 24 and 27 of HKFRS 3;
(5) given the impact of the fair value on the goodwill of the Company, an unmodified auditors’ opinion was not appropriate;
(6) the Respondents should have issued a modified opinion in accordance with paragraphs 11 and 13 of HKS 700; in failing to do so they failed or neglected to observe, maintain or otherwise apply a professional standard.

26. There was never a case brought by the Complainant for contravention of paragraphs 11 and 13 of HKSA 700 on the ground that, even if the Respondents had acted properly in not giving a modified auditors’ opinion because the published price was properly not adopted by the Company for valuing the consideration shares, they had nevertheless failed adequately to demonstrate their evaluation of the relevant complex matters involved in the acquisition.

27. On any view of the substance of the matter, it seems to us that the Complainant’s complaint and the Committee’s finding are wholly different. The former was concerned with whether or not the auditor was correct, or acted diligently, in evaluating the audit evidence and endorsing the Company’s use of the contract price rather than the published price of the consideration shares as their fair value. The latter went to the presentation of the audit opinion, irrespective of the correctness of the opinion or the adequacy of the work undertaken in arriving at that opinion.

28. On behalf of the Complainant, Mr Wong argued that even though (as he accepted) neither the letter of complaint nor the Complainant’s Case raised the allegation that the Respondents failed adequately to demonstrate their evaluation of the relevant complex matters involved in the acquisition, that matter was in fact anticipated by the Respondents and sufficiently canvassed at the oral hearing, and the Respondents had been given a fair opportunity of dealing with it. He also emphasised that the proceedings before the Committee were quasi‑judicial proceedings of a domestic tribunal characterised by less formality compared to formal judicial proceedings: see Yeung Kwok Keung Dennis v Chiropractors Council of Hong Kong (unrep, CACV 104/2014, 11 May 2015) at §46.

29. This submission has to be assessed in the context of the rules and procedures applicable to this particular disciplinary regime. Under the Ordinance, it is for the Registrar of the HKICPA to refer a matter to the Council, and for the Council, in its discretion, to refer the matter to the Disciplinary Panels. The function of the Committee, as constituted by the Disciplinary Panels, is to decide whether the complaint referred to it has been proved (s 35(1) and rule 12). The Disciplinary Committee Proceedings Rules provide for the submission of written Cases by both parties “setting out their respective submissions on all material matters” (rule 17) and, in particular, a Complainant’s Case setting out “the Complainant’s analysis explaining why the facts as asserted by the Complainant substantiate the Complainant’s allegation or allegations” (rule 18 and schedule 2). The procedures effectively require full written exposition of the parties’ cases in advance. The principal purpose of the oral hearing is to allow the Committee to ask questions and clarify matters (rule 27). In the context of such a procedure, in circumstances where neither the letter of the Registrar referring the matter to the Council nor the Complainant’s Case made any mention of the new allegation, it is difficult to see how it could fairly form the basis of a disciplinary conviction.

30. Furthermore, we are unable to accept that the Respondents had in fact anticipated the allegation in question or that they understood it as being encompassed in the complaint. The passages in the Respondents’ written materials below that are relied on here by Mr Wong were penned in a different context. Their thrust was that if the use of the contract price of HK$0.5 per share constituted a failure to comply with HKFRS 3, the disclosure made by the Group in the 2010 financial statements was nevertheless adequate and the financial statements provided a true and fair view of the state of affairs of the Group, so that there was no need for the Respondents to issue any modified auditor’s report. They were not a response to the point on which the Committee ultimately found against the Respondents. From the written materials submitted prior to the hearing below, there is, in our view, no basis to conclude that the point was fairly notified to or anticipated by the Respondents.

31. What transpired at the hearing fortifies this view. It is true that questions were raised at the hearing by certain members of the Committee as to whether, even if there was no failure to comply with HKFRS 3, the Respondents could or should have added further explanation in their audit report why they considered there was no departure from HKFRS 3. These questions were however directly met with the objection made by counsel on behalf of the Respondents that they did not go to the charge against the Respondents. On the materials before us, it is clear that they did not form part of the Complainant’s case before the Committee.

32. In these circumstances it is not sufficient for the Complainant to say that the Respondents’ expert witness was at one point in the oral evidence asked whether, on the hypothesis that the Company had complied with HKFRS 3, it was necessary for the auditor to point out the “rare circumstances” in the auditor’s report and that he answered in the negative. It is simply impossible to conclude that, had the new allegation been properly included as part of the complaint with fair notice to the Respondents, there was nothing more that the Respondents could have said in defence either in evidence or in submissions or in cross‑examination of the Complainant’s expert witness.

33. The way in which the Committee found the 1^st Complaint proved in effect admitted into the charge a new allegation of which the Respondents were not aware and which they did not have a full and proper opportunity of refuting. This is a serious irregularity which, in our view, vitiated the conviction: see Dr Ip Kay Lo Vincent v Medical Council of Hong Kong [1998] 4 HKC 257, 265–266.

34. Accordingly, on Ground 1 alone, the Committee’s finding on the 1^st Complaint could not be allowed to stand. For these reasons we allowed the appeal. It is unnecessary to consider Grounds 2 and 3, on which we express no views. The Complainant accepted that the Respondents should have the costs of the appeal and we so ordered.

Costs in the Committee

35. The Complainant contends that different considerations apply to the costs in the disciplinary proceedings below because, unlike costs of the appeal, they are not governed by the Rules of the High Court. Mr Wong submitted on behalf of the Complainant that, following the approach in the United Kingdom laid down in Baxendale‑Walker v Law Society [2008] 1 WLR 426, the general rule should be adopted in Hong Kong that, at least as a starting point and default position, there should be no order of costs against the prosecuting authority where a disciplinary complaint fails.[2]

36. It is not in dispute that the Committee has a discretion with regard to costs. S 35(1)(iii) of the Ordinance provides that the Committee may in any case:

“make such order as the Disciplinary Committee thinks fit with regard to the payment of costs and expenses of and incidental to the proceedings, whether of the Institute (including the costs and expenses of the Disciplinary Committee) or of any complainant or of the certified public accountant …”

37. On appeal, this court may “confirm, vary or reverse the order or decision appealed against” (s 41(1) of the Ordinance) and has “all the authority and jurisdiction of the court or tribunal from which the appeal was brought” (s 13(4) of the High Court Ordinance; and see s 41(3) of the Ordinance). Since the costs order made by the Committee fell away with the setting aside of their substantive determination, the discretion on costs falls to be exercised by this court afresh.

38. The reasons for the approach adopted in the United Kingdom may be gleaned from the English Court of Appeal’s judgment in Baxendale‑Walker v Law Society (supra) in which Sir Igor Judge P stated as follows:

“34. Our analysis must begin with the Solicitors’ Disciplinary Tribunal itself. This statutory tribunal is entrusted with wide and important disciplinary responsibilities for the profession, and when deciding any application or complaint made to it, s 47(2) of the 1974 Act undoubtedly vests it with a very wide costs discretion. An order that the Law Society itself should pay the costs of another party to disciplinary proceedings is neither prohibited nor expressly discouraged by s 47(2)(i). That said, however, it is self‑evident that when the Law Society is addressing the question whether to investigate possible professional misconduct, or whether there is sufficient evidence to justify a formal complaint to the tribunal, the ambit of its responsibility is far greater than it would be for a litigant deciding whether to bring civil proceedings. Disciplinary proceedings supervise the proper discharge by solicitors of their professional obligations, and guard the public interest, as the judgment in Bolton’s case makes clear, by ensuring that high professional standards are maintained, and, when necessary, vindicated. Although, as Mr Stewart maintained, it is true that the Law Society is not obliged to bring disciplinary proceedings, if it is to perform these functions and safeguard standards, the tribunal is dependent on the Law Society to bring properly justified complaints of professional misconduct to its attention. Accordingly, the Law Society has an independent obligation of its own to ensure that the tribunal is enabled to fulfil its statutory responsibilities. The exercise of this regulatory function places the Law Society in a wholly different position to that of a party to ordinary civil litigation. The normal approach to costs decisions in such litigation — dealing with it very broadly, that properly incurred costs should follow the ‘event’ and be paid by the unsuccessful party — would appear to have no direct application to disciplinary proceedings against a solicitor.
…
39. In our judgment Jackson J was right to equate the responsibilities of the Institute in Gorlov’s case with the regulatory actions of the licensing authority in Booth’s case. As Bolton’s case demonstrates, identical, or virtually identical considerations apply when the Law Society is advancing the public interest and ensuring that cases of possible professional misconduct are properly investigated and, if appropriate, made the subject of formal complaint before the tribunal. Unless the complaint is improperly brought, or, for example, proceeds as it did in Gorlov’s case, as a ‘shambles from start to finish’, when the Law Society is discharging its responsibilities as a regulator of the profession, an order for costs should not ordinarily be made against it on the basis that costs follow the event. The ‘event’ is simply one factor for consideration. It is not a starting point. There is no assumption that an order for costs in favour of a solicitor who has successfully defeated an allegation of professional misconduct will automatically follow. One crucial feature which should inform the tribunal’s costs decision is that the proceedings were brought by the Law Society in exercise of its regulatory responsibility, in the public interest and the maintenance of proper professional standards. For the Law Society to be exposed to the risk of an adverse costs order simply because properly brought proceedings were unsuccessful might have a chilling effect on the exercise of its regulatory obligations, to the public disadvantage. Accordingly, Moses LJ’s approach to this issue did not go further than the principles described in this judgment.”

39. The approach in Baxendale‑Walker was considered by this court (differently constituted) in Solicitor v Law Society of Hong Kong [2007] 4 HKLRD 798. In that case the disciplinary charges brought by the Law Society against a solicitor were all dismissed by the Solicitors Disciplinary Tribunal, but it made no order as to costs. On appeal by the solicitor against the decision on costs, this court allowed the appeal and awarded him 65% of his costs in the proceedings before the Tribunal to be paid by the Law Society. Ma CJHC (as he then was), with whom Sakhrani J agreed, took the view that the reasoning for the Baxendale‑Walker approach, involving “undue financial hardship” to the Law Society (of England and Wales in that case) and a “chilling effect” on the exercise of its duties, was not applicable to solicitors’ disciplinary proceedings in Hong Kong because, under s 25 of the Legal Practitioners Ordinance (Cap 159), an adverse costs order against the Law Society in respect of proceedings before the Tribunal could, subject to certain conditions, be reimbursed out of the general revenue (see paragraphs 16–19 and 46 of the judgment).

40. Concurring in the result, Stone J went further in his reasoning. His Lordship did not consider the funding arrangement applicable to the Law Society to be decisive or even a dominant factor. At paragraphs 36–43, his Lordship stated:

“36. I do not consider that public regulatory function and/or the funding circumstances of any particular regulator should in general be regarded as prima facie determinative of the correct approach toward the award of costs in disciplinary proceedings brought by that regulator. These are factors which may be placed into the broad discretionary ‘mix’ in deciding costs’ awards, but in my view certainly should not be accorded the dominant or potentially decisive weight for which Mr Westbrook now contends.
37. It seems to me, with respect, that there is a real danger of trespassing upon dangerous ground were it to be accepted as a matter of principle that, in the absence of “good reason” to do so, there should be no costs’ sanction against a regulator, be it the Law Society or any other entity publicly charged with regulating professional conduct, in the event of a successful defence of disciplinary proceedings.
38. Regulatory disciplinary proceedings represent an important element within our jurisprudential system. Subject to oversight by the courts, whether in terms of application for judicial review or in the invocation (as here) of the appellate jurisdiction, the existence of such ‘domestic’ regulation is an essential requirement, not least in terms of promoting public trust, wherein professionals judge, and pronounce upon, the conduct of other professionals in any particular discipline.
39. Equally, however, and by reason of the potential for damage to any individual charged who subsequently may be exonerated from the allegations mounted against him on behalf of his professional body, as a matter of principle such disciplinary proceedings are not to be instituted absent most careful and rigorous consideration by those tasked with mounting such cases on behalf of the particular regulatory authority.
40. In terms of the award of costs consequent upon any unsuccessful prosecution, it seems to me that any move to adopt a variation in fundamental approach in the terms canvassed before us by Mr Westbrook would not assist, and on occasion positively may serve to detract from the analytical stringency which is required on the part of any regulator electing to advance a case of professional misconduct against a participant within a particular profession.
41. It strikes me that any approach as to costs which as a starting point potentially would serve to ‘insulate’ that regulatory body from the fiscal consequences of a successful defence — so that henceforth the burden would be placed upon a successful defendant to make his case, in terms of “good reason” so to do, that there should be a variation to an effective ‘immunity’ generally to be accorded to a regulator in terms of costs — would constitute a retrograde step, and in my judgment this view should represent the overriding approach in Hong Kong irrespective of considerations of public function and/or the funding implications for any particular regulatory body.
42. I venture to suggest that in terms of the proceedings of domestic tribunals the costs’ position is catered for perfectly adequately by continuing to vest in the particular domestic tribunal concerned — in this instance, the Solicitors’ Disciplinary Tribunal — the ‘usual’ rule as to an wholly unfettered discretion on the part of that tribunal as to the award of costs in the specific circumstances of any given case.
43. The proper and reasonable exercise of such unfettered discretion is, as a matter of principle, more than sufficient to cater for the justice of any particular situation, and with respect, I do not consider that the ‘regulatory responsibility/public interest’ argument, as deployed in Baxendale‑Walker, suffices to place the prosecuting regulator in Hong Kong outwith the existing and long‑standing and generally accepted principles relating to the award of costs in adversarial proceedings.”

41. Referring to Stone J’s views, the Chief Judge said “a cogent case is made out” although he preferred to leave the point open since it did not directly arise in the appeal (see paragraph 20 of the judgment).

42. In our view, the Complainant has not on this appeal made out a case that the Baxendale‑Walker approach should be adopted generally in relation to proceedings in the Disciplinary Committee of the HKICPA. This court’s decision in Solicitor v Law Society of Hong Kong is authority that the mere fact that disciplinary proceedings have been brought in the exercise of a professional body’s statutory regulatory responsibility, in the public interest and for the maintenance of proper professional standards is not enough to justify a special rule that there should generally be no order as to costs, for otherwise that rule would have been applied by the court in that case irrespective of the statutory provisions for reimbursement of expenses out of the general revenue.

43. It seems to us that a key consideration taken into account in the English cases was the “fear of exposure to undue financial prejudice”[3] and the “chilling effect”[4] on the regulatory authority in the exercise of its disciplinary functions. This is not a matter we are prepared to assume in favour of the Complainant here, in the absence of any relevant material placed before us with regard to the actual and potential financial resources of the HKICPA, its membership, the level of subscriptions and the likely level of the financial burden arising from adverse costs orders in disciplinary proceedings. There is at least an argument that disciplinary proceedings of this kind, which serve an object of upholding standards and maintaining public confidence in the profession, are as much in the interests of the profession as they are in the public interest, and that as such the costs of an acquitted member in failed proceedings should be borne by the profession as a whole. Nor has there been any submission made to us that takes account of the different professional disciplinary regimes found in Hong Kong or the policy reasons, if any, behind the reimbursement provisions that are found in the Legal Practitioners Ordinance but, as far as we are aware, not in other statutory regimes of professional discipline. In these circumstances, we do not consider it an appropriate case in which to decide definitively whether or not to adopt the Baxendale‑Walker approach in the context of accountants’ disciplinary proceedings, still less for disciplinary proceedings in Hong Kong generally.

44. In the present case, the Respondents have provided answers to the allegations against them at an early stage, during the AIB investigation. The complaints were nevertheless brought, and the Respondents were put to great expense in defending them. The Committee decided that the Complainant had failed to discharge the burden of proof of his case on HKFRS 3, although it upheld the 1^st Complaint on a ground which, in our view, had not been properly raised below. Before the Disciplinary Committee, the Complainant had relied on certain guidelines published by the HKICPA called “Guidelines for the Chairman and the Committee on Administering the Disciplinary Committee Proceedings Rules” and submitted that costs should follow the event if he prevailed[5] (although he also submitted that if he failed, costs should not be awarded against it[6]). In the end, the Committee, noting that costs should follow the event, ordered the Respondents to pay the Complainant’s costs in the sum of over $2.4 million.[7] Both complaints against the Respondents have now failed. In the circumstances of this case, it seems to us that an order for the Complainant to pay the Respondents their costs in the Committee would in principle be fair. There will be an order accordingly.

(Johnson Lam)	(Susan Kwan)	(Godfrey Lam)
Vice President	Justice of Appeal	Judge of the Court of First Instance

Mr Horace Wong SC and Mr Lau Ka Kin, instructed by Reed Smith Richards Bulter, for the Complainant (Respondent)

Mr Johnny Mok SC and Mr Adrian Lai, instructed by Wilkinson & Grist, for the 1^st and 2^nd Respondents (Appellants)

[1] There is further guidance in paragraph 48A of, and AG71 of Appendix A to, the Hong Kong Accounting Standard 39 but for present purposes it is unnecessary to set it out.

[2] See also the summary in R (Perinpanathan) v City of Westminster Magistrates’ Court [2010] 1 WLR 1508 at §40, a case which concerned a question of costs under s 64 of the Magistrates’ Court Act 1980 following an unsuccessful application by the police to a magistrates’ court for confiscation of a sum of money suspected to have been intended for use in unlawful conduct.

[3] a phrase that appears to have originated from Lord Bingham CJ’s judgment in Bradford Metropolitan District Council v Booth (2000) 164 JP 485 at §23.

[4]Baxendale-Walker (CA) at §39.

[5] Complainant’s Submissions on Sanctions and Costs, §32; Complainant’s Further Submissions on Sanctions and Costs, §9.

[6] Complainant’s Submissions on Sanctions and Costs, §§34–37.

[7] See §§25 and 33 of the Committee’s Determination on Sanctions and Costs dated 2 December 2016.

CACV 244/20 16

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 244 OF 2016

(ON APPEAL FROM THE ORDER OF THE DISCIPLINARY COMMITTEE OF THE HONG KONG INSTITUTE
OF CERTIFIED PUBLIC ACCOUNTANTS DATED 2 DECEMBER 2016)

________________________

IN THE MATTER OF a Complaint made under section 34(1)(a)(vi) of the Professional Accountants Ordinance (Cap 50) (“PAO”) and referred to the Disciplinary Committee under section 33(3) of the PAO

________________________

BETWEEN
	THE REGISTRAR OF THE HONG KONG INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS	Complainant
	and
	X	1^st Respondent
	Y	2^nd Respondent

________________________

Before: Hon Yuen JA and Kwan JA

Date of Decision on Costs: 21 June 2017

________________________

DECISION ON COSTS

________________________

Hon Kwan JA (giving the decision on costs of the Court):

1. On 2 June 2017, we handed down our judgment granting the application of the respondents to stay the publication of two decisions of the Disciplinary Committee of the Hong Kong Institute of Certified Public Accountants (“the Institute”) until the final determination of the appeal from the decisions. There was no dispute at the conclusion of the hearing that costs of the application should follow the event. Accordingly, we made an order that the Registrar of the Institute (“the Registrar”) should pay the costs of the respondents in this application, with a certificate for two counsel. We directed the respondents to provide an updated statement of costs within 7 days for summary assessment of costs.

2. We have considered the respondents’ updated statement dated 9 June 2017. We have also taken into account the list of objections served by the Registrar’s solicitors on 13 June without prior permission. The respondents’ solicitors sought to respond to the same by a letter dated 15 June 2017. We do not consider it helpful for a party to make lengthy submissions in response in a summary assessment of costs. If the court thinks it necessary to seek a response, it would invite the receiving party to reply. There is no right to the last word.

3. Previously, the respondents had submitted a statement of costs on the basis that the application was to be dealt with on paper, the total amount of which was $528,550. The Registrar’s bill on the basis of paper disposal was slightly more than half of the respondents’ costs. The updated statement of costs of the respondents came up to $1,009,885. We think this is excessive on any view.

4. We will reduce the hourly rate of one of the fee earners from $5,000 to $4,000. Taking into account the degree of complexity of the work involved in this matter, we do not think the enhanced rate of $5,000 is justified. We agree with the observations of the solicitors for the Registrar that as the other fee earner is a partner with 8 years’ qualification, there would appear to be much duplication of work of the two fee earners as well as excessive time.

5. We will also make substantial reduction to the fees of senior and junior counsel, taking into account that much work had already been done on the basis of paper disposal and counsel had been assisted by solicitors who had spent significant time on the matter.

6. On the basis of the above matters, we reduce the total amount of solicitors’ fees from $442,385 to $234,410. We reduce the total amount of counsel’s fees from $567,500 to $390,000.

7. The Registrar’s solicitors submitted that the court should make a further reduction on top of the above considerations on account of the risk of a chilling effect in which the public will be disadvantaged if the Institute, as a privately funded regulator[1] exercising a public function, can be threatened with the damaging financial risk of a substantial litigation bill, citing Baxendale-Walker v Law Society [2007] 3 All ER 330 at §§34 and 39.

8. The English Court of Appeal was addressing the proposition that when the Law Society is discharging its responsibilities as a regulator of the profession, an order for costs should not ordinarily be made against it on the basis that costs follow the event. It held that the ‘event’ is simply a factor for consideration and is not a starting point, given the regulatory function of the Law Society places it in a wholly different position to that of a party in ordinary civil litigation.

9. We are not concerned with the incidence or liability of costs in this application. As mentioned above, it was not disputed at the conclusion of the hearing that costs should follow the event. The order for costs we made in our judgment is not an order nisi. We do not think the English decision can be relied on to further reduce on taxation the amount of reasonable costs that had been awarded against the Institute.

10. Accordingly, the amount of costs we would allow the respondents on summary assessment is $624,410.

(Maria Yuen)
Justice of Appeal

(Susan Kwan)
Justice of Appeal

Reed Smith Richards Butler, for the Complainant

Wilkinson & Grist, for the 1^st and 2^nd Respondents

[1] Unlike the Law Society of Hong Kong, which can seek reimbursement out of general revenue of its expenses necessarily incurred while exercising its public function and discharging its statutory duties, see Solicitor v Law Society of Hong Kong [2007] 4 HKLRD 798. It was on this basis that the Court of Appeal distinguished Baxendale-Walker v Law Society, at §§16 to 18.

CACV 244/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 244 OF 2016

(ON APPEAL FROM THE ORDER OF THE DISCIPLINARY COMMITTEE OF THE HONG KONG INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS DATED 2 DECEMBER 2016)

________________________

IN THE MATTER OF a Complaint made under section 34(1)(a)(vi) of the Professional Accountants Ordinance (Cap 50) (“PAO”) and referred to the Disciplinary Committee under section 33(3) of the PAO

________________________

BETWEEN

	THE REGISTRAR OF THE HONG KONG INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS	Complainant
	and
	X	1^st Respondent
	Y	2^nd Respondent

________________________

Before: Hon Yuen JA and Kwan JA in Court

Date of Hearing: 15 May 2017

Date of Judgment: 2 June 2017

________________________

J U D G M E N T

________________________

Hon Yuen JA:

1. I agree with the judgment of Kwan JA.

Hon Kwan JA:

2. This is an application to stay or restrain the publication of two decisions of the Disciplinary Committee of the Hong Kong Institute of Certified Public Accountants (“the Institute”) until the final determination of the appeal from the decisions (“the Decisions”), which were made in July and December 2016. The appeal is to be heard by the Court of Appeal in September 2017 with two days reserved. The present summons was issued in January 2017 by the two respondents in the disciplinary proceedings who had the proceedings brought against them by the Registrar of the Institute (“the Registrar”) as the complainant. The Registrar intended to publish an extract of the reasons in the Decisions and the order made in the Decisions on the website of the Institute in accordance with the policy of the Institute.

3. These questions are raised in the application: (1) whether the tribunal below, namely, the Disciplinary Committee, has jurisdiction to publish its decisions; (2) whether the Court of Appeal has jurisdiction to grant an interim injunction to restrain or stay the publication of a decision of the Disciplinary Committee pending an appeal to the Court of Appeal until its final determination; (3) if there is a statutory policy under the Professional Accountants Ordinance, Cap 50 (“PAO”) regarding the stay of publication of disciplinary decisions pending appeal; and (4) if the Court of Appeal does have jurisdiction, whether relief should be granted in the present case.

The Decisions and orders made

4. There were two complaints against the respondents in the disciplinary proceedings. They were brought in the alternative. The disciplinary proceedings of the respondents were heard in public, in accordance with section 36(1A) of the PAO[1].

5. In the decision in July 2016, the Disciplinary Committee held that the 1^st complaint was proved in that the respondents had failed or neglected to observe, maintain or otherwise apply paragraphs 11 and 13 of Hong Kong Standard on Auditing 700 (“HKSA 700”), for their failure to express a modified auditors’ opinion in respect of a listed company’s measurement of the fair value of the consideration shares in its financial statements. The 2^nd complaint was not proved and was dismissed.

6. In the decision in December 2016, the Disciplinary Committee imposed the following sanction. The respondents were ordered to be reprimanded under section 35(1)(b) of the PAO, they shall jointly pay a penalty under section 35(1)(c) and shall jointly and severally pay the complainant’s costs under section 35(1)(iii). The Disciplinary Committee stated in §23 that it “finds no reason to prohibit the publication of the present order in accordance with the Institute’s prevailing publication policy.”

7. The respondents filed a notice of appeal to appeal against the Decisions on 28 December 2016. On the same day, they applied to the Disciplinary Committee invoking section 35 of the PAO and/or Order 59 of the Rules of the High Court for a stay or suspension of the Committee’s order to publish the orders or any part thereof until the final determination of the appeal. The Registrar responded to the application on 6 January 2017 asserting no justification for withholding the decision of the Committee from the public and stating his intention to upload the Decisions on the Institute’s website upon the expiry of seven days thereof.

8. On 12 January 2017, the Disciplinary Committee made a direction that it is functus officio after it has handed down its decision on sanctions and costs on 2 December 2016 and it agreed with the Registrar that as the matter is under appeal, the application is under the jurisdiction of the Court of Appeal.

9. The present summons was issued in the appeal proceedings on 11 January 2017. For reasons which will become apparent, it does not seek a stay of the enforcement of the above orders of the Disciplinary Committee pending the determination of the appeal, only a stay of the publication of the Decisions in the interim.

Whether the Disciplinary Committee has jurisdiction to publish its decisions

10. Under rule 32 of the DC Rules[2], it is provided that the decision of the Disciplinary Committee shall be set out in writing and shall specify the terms of any order made. Rule 33 deals with the filing of orders and publication and provides as follows:

“The Clerk [to the Disciplinary Committee] shall file any order made by the Disciplinary Committee under sections 35(1) or 35B of the [PAO], or by-law 35(1) of the [Professional Accountants] By-laws, with the Registrar, who shall cause a copy of the order to be served forthwith on the Respondent either personally or by post addressed to his registered address and to be published in accordance with the provisions of the [PAO] and the prevailing policy of the [Institute].”

11. Mr Stock, SC[3] contended on behalf of the Registrar that under the above provision, it is the Registrar who is empowered to publish the decision of the Disciplinary Committee and hence the Committee has no authority or jurisdiction in respect of the publication of its decisions. I do not agree with this. Rule 33 should be read as a whole and as making provision for a coherent scheme. It provides for the duties to be carried out firstly by the clerk of the Committee (in filing the order with the Registrar) and then by the Registrar (upon the filing of the order by the clerk, in causing a copy of the order to be served on the respondent and to be published). The duties are those of the Committee. Rule 33 makes provision for the persons who are entrusted with discharging the specific duties for the Disciplinary Committee.

12. As express provision is made to empower the Disciplinary Committee to publish its orders and decisions, there is no need to rely on any implied power as submitted by Mr Mok, SC[4] on behalf of the respondents.

13. I reject also the contention on behalf of the Registrar that that the Disciplinary Committee has no jurisdiction to prohibit the publishing of the Decisions, leaving aside whether the Committee is functus officio in the present situation. Under rule 11 of the DC Rules, it is provided that:

“The Chairman or the Disciplinary Committee may, in their discretion and at any stage of the proceedings, on request of the parties or on their own motion, dispense with or vary any of the requirements of these rules … or make such directions for the conduct of the proceedings as they consider appropriate …”

14. This is wide enough to confer power on the Committee to order that the decisions should not be published, or that the publication should be stayed for a certain period, or that publication should be made on certain terms.

15. It was reported in Registrar of Hong Kong Institute of Certified Public Accountants v Wong Tak Man Stephen [2016] 4 HKLRD 763 at §2.13 that in that case the Disciplinary Committee directed no publicity of the sanction should be made unless with the consent of the respondents.

16. I turn to the prevailing policy mentioned in rule 33, which is as follows[5].

17. The Institute considers it is obliged to adhere to the principles of the open administration of justice. To this end, the Institute’s prevailing policy is that it will publish on its website:

(1) a list of all complaints referred to the Disciplinary Panels which includes the date of referral, the name(s) of the respondents and the identity of the Disciplinary Committee members responsible for hearing the matter;
(2) a hearing schedule, which sets out the dates of all substantive hearings scheduled to be conducted by Disciplinary Committees; and
(3) all disciplinary decisions where orders are made against any respondent for the past five years, and if the decision is subject to appeal, this statement will be included: “(Respondent is appealing the order of the Disciplinary Committee.)” The disciplinary decisions can be found under the heading “Standards and Regulation”, the sub-heading “Compliance”, the sub-sub-heading “Disciplinary” and the sub-sub-sub-heading “Disciplinary Orders”. This is a separate section from the section of the website which allows persons accessing the website to search for members, firms and corporate practices.

18. According to the Institute’s website, disciplinary and regulatory findings will be published on the website for five years from date of issuance, and when the findings are removed from the website, details of the matter may still be available on other websites or in search results.

19. The Institute has never published any unsuccessful prosecution of complaints against professional members. It is reviewing its publication policy in respect of cases where the respondents have not been found liable for a disciplinary offence[6]. Further, we are given to understand that there has never been a successful appeal to the Court of Appeal from a decision of the Disciplinary Committee, so it is not known if the decision of the court will be published on the Institute website or whether the previous publication would simply be removed.

20. In accordance with the prevailing practice, there were published on the Institute’s website the fact that the complaints against the respondents had been referred to the Disciplinary Panels, and the date of the substantive hearing. As mentioned earlier, the substantive hearing was heard in public by the Disciplinary Committee.

Whether the Court of Appeal has jurisdiction to restrain or stay publication of a Disciplinary Committee decision pending appeal

21. The appeal from the Decisions is brought to the Court of Appeal by virtue of section 41 of the PAO. Section 41(1) provides that “an appeal shall lie to the Court of Appeal by – … (b) a certified public accountant – … (iii) who is aggrieved by an order made in respect of him under section 35(1) …”. Section 41(3) provides:

“In any such appeal the Court of Appeal may exercise such powers as are vested in it by the High Court Ordinance (Cap. 4) and the practice and procedure shall be in accordance with the rules of court made under that Ordinance …”.

22. Section 13(2) of the High Court Ordinance, Cap 4 provides:

“The civil jurisdiction of the Court of Appeal shall consist of –
…
(c) any other jurisdiction conferred on it by any law.”

23. Section 13(4) of Cap 4 provides:

“For the purposes of and incidental to –
(a) the hearing and determination of any appeal to the Court of Appeal; …
the Court of Appeal shall have all the authority and jurisdiction of the court or tribunal from which the appeal was brought.”

24. The Registrar’s position is that the Court of Appeal has no jurisdiction to restrain or stay publication of a decision of the Disciplinary Committee pending appeal. It was argued that the relevant “law” in section 13(2) of Cap 4 is section 41 of the PAO and the latter does not confer any jurisdiction in respect of the publication of decisions of the Disciplinary Committee. It was further argued that the provisions in Order 59 of the Rules of the High Court, such as rules 10(1) and (9), do not confer such jurisdiction as the Rules of the High Court are subsidiary to the High Court Ordinance and cannot confer on the Court of Appeal any jurisdiction not available in the principal legislation, citing Registrar of Hong Kong Institute of Certified Public Accountants v Wong Tak Man Stephen at §5.7.

25. I do not agree with the above submission.

26. As I have held, the Disciplinary Committee does have jurisdiction to publish its own decisions and to prohibit or stay such publication on terms. The interim injunction sought is clearly “for the purposes of and incidental to” the appeal, so pursuant to section 13(4), the Court of Appeal does have “all the authority and jurisdiction of the court or tribunal from which the appeal was brought.”

27. Further, I agree with Mr Mok that quite apart from section 13(4), the Court of Appeal does have an original jurisdiction to grant an injunction pending appeal, by virtue of Order 59 rules 10(1) and (9) (Ketchum International plc v Group Public Relations Holdings Ltd [1996] 4 All ER 374 at 378j to 379b, 381j).

28. I hold that the Court of Appeal does have jurisdiction to grant the stay or interim injunction sought in the present summons. In reaching the above conclusion, I do not find it helpful to have regard to the two English decisions cited by Mr Mok, being In re a Solicitor [1924] 1 KB 699 at 700 to 701 and In re A Solicitor [1944] 1 KB 427. The relevant provisions we are concerned with are quite simply different.

If there is statutory policy regarding stay of publication of disciplinary decisions pending appeal

29. Mr Mok submitted there is clear statutory provision to the effect that a sanction order made by the Disciplinary Committee under section 35(1) of the PAO does not become operative until the expiry of 30 days after the date of service of the order on the accountant[7] or, in the case of an appeal made to the Court of Appeal, before the appeal is finally determined. In support of this, he referred to a number of provisions: sections 35(1)(i) and (ii)[8], 35(3)[9] and 38(2). It is the last mentioned provision that is particularly pertinent and it reads as follows:

“The Registrar shall not remove the name of a certified public accountant from the register by virtue of an order under subsection (1)(a) of section 35, record a reprimand or penalty or an order to pay costs and expenses or an order in respect of practising certificate in the register by virtue of an order made under subsection (1)(b), (c), (d), (da) or (db) of that section or enforce payment of a penalty or costs or expenses under subsection (1)(c) or (d) of that section before the expiry of 30 days after the date of service of the order on the accountant or, in the case of an appeal made to the Court of Appeal against the order under section 41, before the appeal is finally determined.”

30. Mr Mok submitted it is plain from the above provision that the statutory policy is to ensure that a certified public accountant who may appeal, or has appealed, against an adverse order of the Disciplinary Committee should be protected from the execution of the order until the expiry of the time for appeal or the appeal is finally determined, as the case may be. By section 38(2), a “statutory stay” pending appeal is imposed on each and every kind of sanction that may be ordered under section 35(1).

31. He contended that the statutory policy is not grounded on the basis that the execution of the order would render the appeal nugatory, since there is little reason to think that any penalty, costs or expenses paid to the Institute cannot be recovered upon a successful appeal. He argued that the legislature must have intended that the accountant should not suffer the adverse effects of the order unless and until the same has been confirmed by the Court of Appeal.

32. Moreover, a reprimand is effectively enforced by publication. Hence, publication of the reprimand pending appeal is directly contrary to the statutory policy underlying section 38(2) and would have the effect of undermining the same. And since publication of an order or decision on the website would be far more damaging and prejudicial to the accountant than the recording of it in the register (which could have been expunged in the event of a successful appeal and protection from the adverse effects of recording in the register is given in section 38(2)), it would be wholly contrary to the statutory policy and legislative intent if such “reprimand or penalty or an order to pay costs and expenses” were to be published to the world at large pending an appeal, while the order has yet to be recorded in the register because of section 38(2). He reasoned that even though there is no express prohibition of publication of the orders and decisions on the website, it would be contrary to the statutory policy for the orders and decisions to be published in this way pending an appeal.

33. Mr Stock submitted that reliance on section 38(2) is misconceived, nor is there a statutory policy or legislative intent as contended by the respondents. He argued that the statutory policy or legislative intent must be read in the light of the principle of open justice which is of great importance to the proper administration of justice. The court should be slow to find there is a statutory policy or legislative intent as contended, which would appear to conflict with the principles of open justice, in the absence of express and clear language. Case law has firmly established that considerations of publicity of litigation leading to embarrassment and inconvenience, publicity leading to economic damage, professional embarrassment and possible damage to professional reputation, do not by themselves justify any restriction on open administration of justice (Asia Television Ltd v Communications Authority [2013] 2 HKLRD 354 at §23). The contended legislative intent to protect the professional reputation of an accountant pending appeal does not sit well with section 36(1A) (this provides for a public hearing of disciplinary proceedings to be the norm), which was introduced by the Professional Accountants (Amendment) Ordinance 2004 to enhance the transparency of the disciplinary process and to be consistent with Article 10 of the Bill of Rights (this provides that everyone shall be entitled to a fair and public hearing in the determination of his rights and obligations in a suit at law)[10].

34. Mr Stock sought to draw a distinction between the recording of a reprimand or other order in the register, and the publication of disciplinary decisions on the Institute’s website. A reprimand or other order will only be recorded in the register when the reprimand or other order becomes final upon the expiry of the appeal period or final determination of the appeal. And the details of the reprimand or other order will not be made available on the Institute’s website under the heading “Registration and Licensing” and the sub-heading “Lists of Members and CPA Practices” or in the relevant parts of the register made available for public inspection at the Institute’s office[11].

35. He submitted that the effect of section 38(2) is to delay enforcing the sanction order merely for administrative convenience. It is not about publication or the protection of professional reputation of the accountant.

36. He also placed reliance on Dr X v The Education and Accreditation Committee of the Medical Council of Hong Kong [2013] 1 HKLRD 167, in which reference was made to section 25(2) of the Medical Registration Ordinance, Cap 161 (“the MRO”). This section provides that the Registrar of Medical Practitioners shall not remove the name of the registered medical practitioner from the General Register (“GR”) or the Specialist Register (“SR”) before the expiry of one month after the date of service of the order on the person concerned, or in the case of an appeal to the Court of Appeal, before the appeal is finally determined. The argument was advanced that as the removal of a doctor’s name from the GR was suspended because of his appeal by virtue of section 25(2), the consideration of the Education and Accreditation Committee (“EAC”) to remove him from the SR and the appeal to the Medical Council from the EAC recommendation were stayed by the operation of section 25(2) until the appeal to the Court of Appeal had been determined.

37. In rejecting the argument, Fok JA (as he then was) had this to say:

“116. It is necessary to consider to whom the s.25(2) stay is directed and what action is thereby stayed. It is clear from s.25(2), which I have set out above, that it is directed to the Registrar and to the action of removing the name of a registered medical practitioner from the GR or SR as the case may be before the expiry of one month after the relevant date, that date being, in the case of an appeal to this Court, after the appeal is finally determined. It is a narrow provision suspending one particular type of order the Council may make under s.21 (removal of a registered medical practitioner’s name from the GR or SR).
117. In short, the section does not stay the proceedings before the Council, nor does it stay the proceedings of the EAC considering, for example, a s.20N recommendation. It is not directed to the EAC or the Council as a whole, but only to the Registrar, and there is no reason to read the prohibition on the Registrar from removing a registered medical practitioner’s name from the GR or SR as precluding the consideration of other matters or the making of recommendations by the EAC or as precluding the Council from considering any other ramifications of its finding of misconduct on the part of the registered medical practitioner. In particular, since the recommendation of the EAC does not result in the removal of a registered medical practitioner’s name from the SR, that is not the action to which s.25(2) is directed.”

38. Mr Stock submitted that the above approach would support a narrow or literal construction of section 38(2).

39. The ambit of section 38(2) of the PAO is much wider than section 25(2) of the MRO. As mentioned earlier, it covers each and every kind of sanction that may be imposed by section 35(1). Amendments were also made to section 38(2) by the 2004 amendment legislation, at the same time when section 36(1A) was added to the PAO. This takes away some of the force of the argument that the contended statutory policy of section 38(2) is not compatible with section 36(1A). Section 38(2) applies only to the period before the final determination of the appeal. There is no suggestion by Mr Stock that section 38(2) is unconstitutional or should be read down, other than submitting that it should be narrowly construed.

40. Even on a narrow construction, I have difficulty accepting Mr Stock’s submission that the provision is merely for administrative convenience. It deals not just with the recording of various matters in the register, but also with the enforcement of payment of a penalty or costs or expenses. And this provision is found in primary, not subsidiary, legislation. I do not think the legislative intent of section 38(2) is solely or primarily to provide for administrative convenience to the Registrar.

41. Insofar as the sanctions imposed on the respondents are concerned, the provision made in section 38(2) is clear: the Registrar is not to record a reprimand or penalty or costs order in the register or to enforce payment of the penalty or costs before the appeal is finally determined. So none of these sanctions are to take effect in a substantive way pending appeal. The only way that a reprimand is properly given effect to is by making it public. The clear legislative intent for this provision must be that pending appeal the reprimand, penalty and costs order are not to be made public, and the penalty and costs order are not to be enforced. I agree with Mr Mok it would be contrary to the statutory policy and legislative intent if the reprimand, penalty and costs order were to be published to the world at large pending an appeal, notwithstanding there is no recording of these sanctions in the register.

42. Mr Mok also has a point in that the register, according to section 22(1C) of the PAO, may be maintained “(a) in a documentary form; or (b) by recording the information required under subsection (1A) otherwise than in a documentary form, so long as the information is capable of being reproduced in a legible form.” So the recording in the Institute website may be regarded as recording in the register.

If relief should be granted in this case

43. The general principles applicable to granting an interim injunction pending appeal where the claimant has lost at first instance are as summarised by Floyd LJ in Novartis AG v Hospira UK Ltd [2014] 1 WLR 1264 at §41:

“(1) The court must be satisfied that the appeal has a real prospect of success. (2) If the court is satisfied that there is a real prospect of success on appeal, it will not usually be useful to attempt to form a view as to how much stronger the prospects of appeal are, or to attempt to give weight to that view in assessing the balance of convenience. (3) It does not follow automatically from the fact that an interim injunction has or would have been granted pre-trial that an injunction pending appeal should be granted. The court must assess all the relevant circumstances following judgment, including the period of time before any appeal is likely to be heard and the balance of hardship to each party if an injunction is refused or granted. (4) The grant of an injunction is not limited to the case where its refusal would render an appeal nugatory. Such a case merely represents the extreme end of a spectrum of possible factual situations in which the injustice to one side is balanced against the injustice to the other. (5) As in the case of the stay of a permanent injunction which would otherwise be granted to a successful claimant, the court should endeavour to arrange matters so that the Court of Appeal is best able to do justice between the parties once the appeal has been heard.”

44. In the context of an injunction to stay the publication of the sanction imposed in disciplinary proceedings pending appeal, the respondents referred us to Shackleton v Nova Scotia Board of Examiners in Psychology 1991 CanLII 4426 (NS SC), which adopted the test in an unreported decision of Hallett JA in Purdy v Insurance Agencies Ltd, 30 November 1990. The test was in two parts and is an “either/or” situation. Either the appellant must satisfy all three parts of the first test, or the second test. The three parts of the first test are:

“(i) that there is an arguable issue raised on the appeal;
(ii) that if the stay is not granted and the appeal is successful, the appellant will have suffered irreparable harm that it is difficult to, or cannot be compensated for by a damage award …
(iii) that the appellant will suffer greater harm if the stay is not granted than the respondent would suffer if the stay is granted; the so-called balance of convenience.”

45. If the appellant fails to meet the three parts of the first test, the “or” part of the test is that he must “satisfy the Court that there are exceptional circumstances that would make it fit and just that the stay be granted in the case.”

46. The respondents have no dispute with the open justice principle and the proposition that publicity of litigation leading to embarrassment and inconvenience is not by itself a ground to justify restriction on the open justice principle. They accepted it is a matter of balancing competing interests, between the public interest on the one hand, and on the other hand the statutory policy which gives rise to the right of the individual for protection from the adverse effects of a sanction pending appeal.

47. They advanced these grounds in support of their case for relief:

(1) the statutory policy regarding stay;
(2) real prospects of success in the appeal;
(3) the appeal would be rendered nugatory;
(4) minimal interference with the public’s right to know; and
(5) cross-checking against the Institute’s publication policy.

48. I have dealt with (1). This is a powerful consideration.

49. In respect of (2), the main ground of appeal is that in finding the 1^st complaint proved, the Disciplinary Committee had raised a new case and determined that the respondents “did not adequately apply the necessary professional standard in accordance with HKSA paragraphs 11 and 13, namely to demonstrate that they had adequately evaluated whether they were or were not able to express an unmodified auditors’ opinion in respect of the Company’s measurement of the fair value of the Consideration Shares in the 2010 Financial Statements.” (emphasis supplied) The Committee found the 1^st complaint established on a new case that the respondents had not given effect to HKSA 700.1 in failing to demonstrate the adequacy of their evaluation of the measurement of the Consideration Shares in the audit opinion.

50. In pursuing the complaints against the respondents, the only case advanced by the complainant was that the respondents had failed to express a modified auditors’ opinion regarding the Company’s non-compliance with paragraphs 24 and 27 of the Hong Kong Financial Reporting Standards 3 (“HKFRS 3”) – Business Combinations. Importantly, the Disciplinary Committee did not find there had been a non-compliance with HKFRS 3 and dismissed the 2^nd complaint in that there were sufficient doubts to support the charge the respondents had failed to act diligently in this context.

51. The respondents contended there was breach of natural justice in that HKSA 700.1 was never referred to at any stage of the proceedings and they were not given a chance to respond to the new case.

52. The Registrar did not accept a new case was raised and submitted that on a proper reading of the determination, the conclusions of the Disciplinary Committee were based on HKSA 700.11 and 700.13, which were expressly referred to in the 1^st complaint.

53. It is unnecessary to go further into the merits of the appeal for present purpose. I am satisfied the complaints of procedural unfairness are reasonably arguable.

54. As for (3), I do not accept damage to the professional reputation and practice of the respondents would be irreparable or that the appeal would be rendered nugatory for that reason. But I accept there may be some damage to the respondents’ professional reputation resulting from the publication of the Decisions, notwithstanding the accompanying statement on the website that the Decisions are the subject of an appeal. I take into account that potential harmful publicity may damage the respondents’ professional reputation and diminish their practice and value of their goodwill.

55. As for (4), minimal interference with the public’s right to know, the respondents emphasised that publication of the Decisions would be withheld only pending the determination of the appeal, which is to be heard in September 2017. Hence, any encroachment on the open justice principle would be temporary, limited and minimal. The public’s right to know is preserved when the Court of Appeal hears the appeal in open court and publishes its decision on the appeal. The respondents only seek to prohibit publication in the interim period so people would not jump to any conclusion about their conduct or reputation until the outcome of the appeal is known. They cited two decisions in New Zealand in which orders were made to suppress publication of the medical practitioner’s name pending appeal from the decisions of the disciplinary tribunal as the appeals would be heard promptly in two months time (A Surgeon v Director of Proceedings, Civ 2007-441-631, 9 August 2007, Heath J; and H v Director of Proceedings [2014] NZHC 1031).

56. Against that is the consideration of two aspects of public interest. The public has an interest to know, in a timely manner, the outcome of disciplinary proceedings, which have been heard in hearings held in public. The transparency and accountability of the disciplinary process are relevant considerations.

57. There is also the public interest in the accountancy profession, which “plays a critical role in ensuring the orderly and lawful conduct of commercial activities” and “dishonesty, dereliction or culpability on the part of its members can and does have a far-reaching effect, not only in the sphere of business activities but in matters concerning the financial well-being of individuals.” (Chao Pak Ki Raymond v Hong Kong Society of Accountants [2004] 2 HKC 469 at §16). In inquiring into the conduct of certified public accountants, firms and corporate practices, the purpose of the disciplinary proceedings is to preserve and maintain the reputation, integrity and status of the accountancy profession and to discourage dishonourable conduct[12]. This is to protect the financial well-being of individuals and businesses and the orderly and lawful conduct of commercial activities by ensuring that certified public accountants are competent to practise.

58. Publication of disciplinary decisions on a timely basis would provide guidance to required standards and the likely consequences of disciplinary breaches and enable members of the public to make an informed decision whether they wish to engage the services of the respondents pending an appeal. Mr Stock relied on these statements of Laws J in R v Advertising Standards Ltd, ex parte Vernons Organisation Ltd [1992] 1 WLR 1289:

“… there is no doubt that the authority here is a public authority with duties to the public to perform and those duties are to an important degree fulfilled by the procedures which include publication of the case report.” (at 1292B)
“If a private individual will not be restrained from expressing his opinion save on pressing grounds I see no reason why a public body having a duty, other things being equal, to express its opinion should be subject to any less rigid rules. …
I do not know of an instance in which a public body of that kind would fall to be restrained from carrying out what is no more nor less than its ordinary, but important, everyday duties simply upon the grounds that the intended publication contains material which is subject to legal challenge as being vitiated by some error of law. … I do not consider that the effects of that publication are damaging to the applicant in a manner which would be so irreparable, so past recall as to amount to a pressing ground, in the language of Strasbourg, a pressing social need, to restrain this public body from carrying out its function in the ordinary way.” (at 1293F to 1294C)

59. In light of these public interests, I do not propose to attach weight to the fact that the appeal would be heard in eight months’ time from the date of the application.

60. In respect of (5), cross-checking against the Institute’s publication policy, I agree with Mr Stock the fact that unsuccessful prosecutions are not published on the Institute website (this policy is under review) does not take matters any further. The dictum in Director of Proceedings v I [2004] NZAR 635 at §80 (a useful cross-check in an application for a suppression order of the name of a professional person is to ask would his name have been suppressed after acquittal, and if the answer is “yes” or even “probably”, an interim suppression order should be made) relied on by Mr Mok is taken out of context. The interim suppression order sought in that case was in the context where a decision had yet to be reached on charges in the disciplinary proceedings and presumption of innocence was a factor considered in the interim application (see §98).

61. To recap, the material factors are the statutory policy, the reasonable prospects of success of the appeal, the potential damage to professional reputation and the public interest considerations. Notwithstanding the great importance of the public interest considerations, I do not think they can outweigh the statutory policy that I have found. I am persuaded in this instance relief should be granted to the respondents. I will make an order that the publication of the Decisions be stayed until the final determination of the respondents’ appeal to the Court of Appeal or until further order.

62. There is no dispute that costs of this application should follow the event. So there will be an order that the Registrar is to pay the costs of the respondents in this application, with a certificate for two counsel. Costs will be assessed summarily upon the provision of an updated statement of costs by the respondents within 7 days of this judgment.

(Maria Yuen)
Justice of Appeal

(Susan Kwan)
Justice of Appeal

Mr Alex Stock SC and Ms Christy Wong, instructed by Reed Smith Richards Butler, for the Complainant

Mr Johnny Mok SC and Mr Adrian Lai, instructed by Wilkinson & Grist, for the 1^st and 2^nd Respondents

[1] This provides that every hearing of the Disciplinary Committee shall be held in public unless the Committee on its own motion or on application of the complainant or the respondent determines in the interests of justice that a hearing or any part thereof shall not be held in public, in which case it may hold the hearing or part thereof in private. Rule 26(2) of the Disciplinary Committee Proceedings Rules (“the DC Rules”) is to the same effect.

[2] Made by the Council of the Institute pursuant to section 33A of the PAO (since repealed) and amended pursuant to section 51(f) of the PAO.

[3] With Ms Christy Wong

[4] With Mr Adrian Lai

[5] Affirmation of Donald Paul Anthony Leo, General Counsel of the Institute, §20

[6] Affirmation of Donald Paul Anthony Leo, §23

[7] The time within which notice of the appeal should be given, see proviso to section 41(3) of the PAO

[8] These sections provide that the Disciplinary Committee may provide for an order: to take effect on such date as it thinks fit; and to take effect only on the happening or non-happening of such event within such period as may be specified.

[9] Section 35(3) provides that the Disciplinary Committee shall cause a copy of any order made under section 35(1)(a) (for the removal of the name of the accountant from the register), or if the order is varied on appeal, the order as so varied, to be published in the Gazette with a summary of the nature of the complaint to which the order relates, provided that no order shall be published before the expiry of 30 days after the date of service of the order on the accountant or, in the case of an appeal made to the Court of Appeal, before the appeal is finally determined.

[10] Paper CB(1) 2115/03-04 (01) presented to the Bills Committee on Professional Accountants (Amendment) Bill 2004 on 7 June 2004

[11] Affirmation of Donald Paul Anthony Leo, §21. We are given to understand this is because of the view taken by the Registrar of section 22(3) of the PAO that the register or a reproduction of the relevant part of the register for public inspection is only “for the purposes of enabling any member of the public to ascertain whether he is dealing with a certified public accountant, a certified public accountant (practising), a firm of certified public accountants (practising) or a corporate practice and to ascertain the particulars of registration of such person.”

[12] See the objects of the Institute in section 7(b), (g) and (h) of the PAO.

THE REGISTRAR OF THE HONG KONG INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS v. X AND ANOTHER

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