A mistake limits liquidators’ causes of action against auditor

Background

In the recent decision in Blockchain Group Company Limited (in liquidation) v. PKF Hong Kong Limited¹, Le Pichon DHCJ decided that despite an error resulting in a protective writ naming the defendant as a limited company and formerly a firm, the relevant provisions to amend a party's name could not be used to essentially replace the limited company with the firm. The decision was on the Plaintiff's appeal against a prior dismissal on the same application by Master Frances Lok.

The firm was the auditor of the Plaintiff company in liquidation from 2012 to 2017 but underwent a reorganisation in 2017 and subsequently the limited company replaced it as the Plaintiff's auditor. It was accepted that the firm and limited company were separate entities and continued to exist at the time the writ was issued.

At stake were causes of action which would otherwise be time barred if the relevant protective writ had not been issued and therefore would fall away if the wrong entity had been named as the defendant.

Her Ladyship summarised the applicable principles for the amendment of a party's name²:

1. there was a genuine mistake in naming the plaintiff or the defendant;
2. the mistake was not misleading;
3. the mistake was not such as to cause any reasonable doubt as to the identity of the person intending to sue or intended to be sued; and
4. it would be just to allow the amendment.

Her Ladyship clarified that the mistake in 1 above was limited to one of name only and not to the identity or legal rights of the party.

The Plaintiff's arguments

The Plaintiff argued that it all along intended to name the firm as the defendant. This was demonstrated in pre-action correspondence referring to the limited company as "you", suggesting that the liquidators were under the mistaken belief that the limited company was the auditor from 2012 to 2017. Further correspondence from the limited company described the engagement partners having resigned from "our firm" when they had resigned from the firm and joined the limited company. This, the liquidators argued, suggested that the limited company and the firm were one and the same.

The Plaintiff further argued that the protective writ described the claim as being against the entity that was party to the relevant contract (or an assignee) for the audit. On this construction, only the firm could be the intended party as it was the entity that entered into the relevant audit contract. Finally, by way of affidavit evidence, the liquidators expressed their belief that the limited company was the entity that succeeded the firm as the company's auditor and that the firm had then ceased to exist.

The Defendant's arguments

The Defendant argued that the mistake to allow an amendment to a party's name was limited to just that, a mistake in a name. It was inappropriate to allow an amendment where the mistake went to the identity or legal right of the party.

The court's views

Her Ladyship came to the view that by describing the Defendant as a limited company (formerly a firm), the liquidators clearly did not intend to refer to the Defendant as the same entity. They must have thought that the two names referred to two different entities. With their professional background, they simply could not have thought that a limited company and a firm could be the same thing.

On the terms of the writ, Her Ladyship was of the view that it could just as likely be construed as consistent with a claim against an entity which had taken over the liability of the actual auditor. The liquidators named the limited company as the Defendant because they thought it had succeeded the firm which had ceased to exist. This was simply the wrong description and was not a mere mistake as to the name of the Defendant.

In finding that the liquidators' argument on the description in the protective writ was too wide, Her Ladyship cited Lloyd LJ in The "Sardinia Sulcis" and "Al Tawwab"³ :

"In one sense a plaintiff always intends to sue the person who is liable for the wrong which he has suffered. But the test cannot be as wide as that. Otherwise there could never be any doubt as to the person intended to be sued, and leave to amend would always be given. So there must be some narrower test. In Mitchell v. Harris Engineering the identity of the person intended to be sued was the plaintiff's employers. In Evans v. Charrington it was the current landlord. In Thistle Hotels v. McAlpine the identity of the person intending to sue was the proprietor of the hotel. In The Joanna Borchard it was the cargo owner or consignee. In all these cases it was possible to identify the intending plaintiff or intended defendant by reference to a description which was more or less specific to the particular case. Thus if, in the case of an intended defendant, the plaintiff gets the right description but the wrong name, there is unlikely to be any doubt as to the identity of the person intended to be sued. But if he gets the wrong description, it will be otherwise. (Italics added)"

Her Ladyship was of the view that this was not a case of there being no doubt as to the identity of the defendant and merely a mistake in its name but instead it was a case of the Plaintiffs having wrongly described the defendant altogether.

In light of the above, Her Ladyship dismissed the liquidators' application for amendment of the writ. Her Ladyship also refused leave to substitute the defendant with the firm. The company's causes of action against the firm were therefore time barred with no further recourse possible. Creditors of the company were effectively deprived of the value of those causes of action, if any.

Analysis

There is a fine line between a mistake as to the name and a mistake as to the description of a defendant. For example, where a defendant is named as a limited liability partnership (LLP) but in fact is a firm with unlimited liability (and only a firm is in existence), it is likely this will be construed as a mistake as to name. However, where both an LLP and a firm are in existence with the same name (albeit with no LLP appended to the firm's name), this may be considered to be a mistake as to description.

Some difficultly may also be encountered by the existence of companies incorporated in the same name but under the laws of different jurisdictions. A Hong Kong company and a BVI company, for example, may be entirely indiscernible from their names. It is therefore prudent to describe a company with reference to its place of incorporation in the writ to allow for the company to be clearly identifiable.

In the case at hand, because both the firm and limited company were still in existence at the time the writ was issued, a business registration search would have revealed this. Had this been done, there would have been no doubt that the firm had not been succeeded or somehow subsumed into the limited company.

A business registration search would not reveal information on a firm that has ceased to exist at the time a writ is issued. However a business registration search does reveal the previous name of a business that is still in existence. This would also be the case for the liquidators' contention, where a firm had somehow become a limited company. The business registration search of the limited company would have revealed the previous name of the firm. Where the firm was no longer in existence, the partners of that firm would still have been responsible for any loss caused while the firm carried on its business. In this situation, all of the partners of the firm at the material time should be named as defendants in such writ.

Key takeaways

It is critical that plaintiffs have a degree of certainty over the name of a defendant before proceedings are commenced. Company and business registration searches should be conducted to ensure the name and description of the defendant are correct. Former names which will be evident from those company searches should also be included for the avoidance of doubt.

In the case of a firm or other type of unincorporated business, business registration searches should be conducted and will show whether the firm is still in existence and its correct name and description.

For individuals, names appearing on official identification documents should be used, where possible, and references to identification numbers or passports are prudent to maintain the ability to identify the individual in the event there is any mistake as to their name.

Finally, although there are costs implications where a person has been incorrectly named as a defendant in a writ, this may be a small price to pay to ensure a cause of action is not time barred in circumstances where information may not be complete and time pressures exist.

1. [2024] HKCFI 903↩
2. see International Bulk Shipping and Services Ltd v. Minerals and Metals Trading Corp of India [1996] 1 All ER 1017, 1025j-126a.↩
3. [1991] 1 Lloyd's Rep 201 at 207 col 1↩

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