EC-Asia International Ltd (in liquidation) v PricewaterhouseCoopers

• Jurisdiction: Singapore
• Judge: Kan Ting Chiu J
• Judgment Date: 29 December 2010
• Neutral Citation: [2010] SGHC 372
• Date: 29 December 2010
• Docket Number: Originating Summons No 1032 of 2009/N (Registrar’s Appeal No 433 of 2009)
• Published date: 13 January 2011
• Plaintiff Counsel: Anthony Lee and Gan Kam Yuin (Bih Li & Lee)
• Hearing Date: 19 January 2010
• Defendant Counsel: Aurill Kam and Douglas Chi (Rajah & Tann LLP)
• Court: High Court (Singapore)
• Subject Matter: Discovery of documents,Civil Procedure,ex turpi causa,Pre-action discovery

Kan Ting Chiu J: Introduction

The plaintiff, EC-Asia International Ltd (“the company”), made an application for pre-action discovery under Order 24 Rule 6 of the Rules of Court (Cap 322, R 5, 2006 Rev Ed) from the defendant, PricewaterhouseCoopers. The application was dismissed by an Assistant Registrar (“AR”). The company appealed against the dismissal, and I allowed the appeal and granted the application. The defendant now appeals against my decision.

The plaintiff was a company registered under the Companies Act (Cap 50, 2006 Rev Ed) in 1993. Ang Ah Peng (also known as Kelvin Ang) (“Kelvin Ang”) was the founder and managing director of the plaintiff. The defendant was the statutory auditor of the company from the Financial Year ended 30 June 2000 to the Financial Year ended 30 June 2005.

In the initial years the company appeared to be doing well. In 2004, it was listed on the Australian Stock Exchange (“the ASX”) but its fortunes changed. Subsequently it went into voluntary liquidation and was delisted from the ASX. On 18 May 2007, Neo Ban Chuan (“the Liquidator”) was appointed with two others as liquidators, but his co-liquidators subsequently left, and he continued as the sole liquidator. He issued his report (the “Liquidator’s Report”) on 29 July 2008 which set out the facts leading up to the collapse of the company.

The declared activities of the company

The stated business of the company was the recycling of memory chips that do not meet the data specification of major memory chip manufacturers (“rejected chips”). These chips were recycled by the company, re-branded with its brand names, and sold to other companies to be used in their products.

The company ostensibly carried on its business by: (a) purchasing rejected chips from chip manufacturers upon immediate payment of the purchase price; (b) paying for the purchases by drawing on trade financing facilities granted to it by banks; (c) recycling, rebranding and selling the recycled chips to third party purchasers on credit terms; and (d) factoring the accounts receivable from its purchasers and using the monies obtained from the factoring to repay the banks and fund operations.

The investigations

In 2006/2007, the company experienced financial difficulties and one creditor bank issued a letter of demand. On 6 March 2007, the board of directors of the company appointed KPMG Business Advisory Pte Ltd (“KPMG”) to undertake an independent financial review of the company with a view to making proposals to the company’s creditors to restructure the company’s debts.

KMPG conducted a stock check of the company’s inventories in Singapore and Hong Kong and discovered that the company purchased a substantial proportion of its rejected chips from three Hong Kong companies, namely Landwide Tech Ltd (“Landwide”), Tec-Hill Semiconductor Ltd (“Tec-Hill”) and Max Luck International Trading Ltd.

KPMG further discovered that a substantial portion of the company’s sales of reprocessed and recycled chips was made to Landwide, Tec-Hill and another company, Chi Tat Enterprise Company (“Chi Tat”). KPMG concluded that the sales and purchases of the company’s stocks were not genuine transactions and that much of the company’s operations consisted actually of passing the same stocks between Singapore and Hong Kong with the associated paper trail but without any actual re-processing.

When KPMG presented its findings to the company’s creditors on 13 April 2007, Kelvin Ang admitted that the company’s accounts receivables of which over 90% were attributed to Landwide, Tec-Hill and Chi Tat were not in fact collectable and that the stocks reflected in its books had little or no value. He further admitted that he had for seven years been falsifying invoices to create the appearance of genuine sales and purchases in order to deceive the company’s creditors and obtain credit facilities from them. Kelvin Ang was eventually charged and convicted for his fraudulent activities in respect of these sham transactions: see Public Prosecutor v Ang Ah Peng [2009] SGDC 94.

There were also other matters of interest relating to the affairs of the company: Conflict of Interests of Lo Tak Fu Lo Tak Fu (“Lo”) was a director of the company and also the majority shareholder of Landwide. The Liquidator stated in the Liquidator’s Report that it was reasonable to assume that the defendant knew or ought to have known of Lo’s majority interest in Landwide and that knowledge would indicate an increased audit risk which warranted more intensive audit procedures in relation to obtaining audit evidence for the company’s dealings with Landwide. The Poison Pen Letter In 2003, the company had applied to be listed on the Singapore Stock Exchange (“SGX”). On the last day of the period offer for its listing on the SGX, the Monetary Authority of Singapore (“MAS”) issued an interim stop order after the SGX and MAS received a letter on 22 May 2003 (“the Poison Pen Letter”) from a “former staff” of the company which alleged that: two named former employees who had both been convicted of dealing in stolen goods, were the real directing minds of the company; the company had violated intellectual property rights by purchasing unbranded blank chips and selling them under branded names like “Samsung”, “Hynix” or “Infineon”; and the company was inflating in the accounts of profits from a customer in Hong Kong declaring higher buying price. The directors of the company had instructed a law corporation to conduct an investigation. The investigation which was confined to the first allegation but not the second and third allegations concluded that neither of the two named persons was in control of the company. No independent investigation was conducted into the second and third allegations. The independent directors stated in the prospectus for the subsequent listing on the ASX that, at the time of the failed attempt of listing on SGX, they had made their own enquiries into each of the allegations contained in the Poison Pen Letter and had found that there were no basis for the allegations.

The Liquidator was of the view that if the second and third allegations in the Poison Pen Letter were true, the company would have engaged in fraudulent practices in deceiving its customers and the users of the chips and that the defendant, which was on the distribution list of the Poison Pen Letter should be cautious that fraud could be involved, and plan its audit procedures accordingly.

The Liquidator further stated the defendant may be liable for conducting its audit of the company negligently, thereby allowing the perpetration of the fraud by Kelvin Ang, and he intended to continue investigating the defendant’s conduct of the audit during the period of their engagement.

Correspondence leading to the pre-action discovery application

On 1 February 2008, the company, through their solicitors at that time, Shook Lin & Bok LLP (“SL&B”), wrote two letters to the defendant, an open letter and a “Without Prejudice” letter. Only the open letter was produced during the application, and it read:

We act for the Liquidator of the Company, ...

We understand that you were the statutory auditors for the Company for Financial Years ended 30 June 2001 to 30 June 2005.

As you may be aware, on 10 May 2007, the Liquidator of the Company commenced an action in the High Court against the former Managing Director of the Company, Mr Kelvin Ang Ah Peng (“Kelvin Ang”) for, inter alia, breach of fiduciary and statutory duty on the basis of Mr Kelvin Ang’s fraudulent conduct which resulted in losses to the Company.

On 21 June 2007, the Company obtained interlocutory judgment against Mr Kelvin Ang with damages to be assessed. Final judgment was entered against Mr Kelvin Ang on 19 December 2007 for the sum of US$25,981,338 on the basis of admissions made in his letter to the Liquidator dated 10 December 2007 wherein Mr Kelvin Ang admitted, inter alia, that his fraudulent conduct had caused loss and damage to the Company.

Our client’s investigations into the affairs of the Company have shown that the Company has a potential claim against you in respect of, inter alia, your failure to exercise reasonable skill, care and diligence as statutory auditors which resulted in the fraudulent conduct of Mr Kelvin Ang going undetected.

For the avoidance of doubt, all our client’s rights and the rights of the Company are expressly reserved.

[emphasis added]

The “Without Prejudice” letter was not produced at the hearing of the application, but was produced during the appeal hearing before me and I will refer to it later on.

On 21 August 2008, SL&B wrote to the defendant to request for: all letters and other documents setting out the terms of engagement governing the defendant’s engagement as the statutory auditors of the company; the company’s documents, notes, memoranda, correspondence and/or copies thereof which were supplied to the defendant in the course of their engagement for the purposes of preparing the accounts of the company; the audit and other working papers produced and/or generated by the defendant in the course of and/or as a result of their engagement as statutory...