This Friday, our Community Investment Committee attended the 2025 Chinese New Year Card Design Competition Awards at Fresh Fish Traders’ School. We are honoured to feature the winning design as our official Chinese New Year greeting card to clients.

Heartfelt congratulations to the winners and it is our honour to support the efforts of FFTS and to continue a cherished 15-year tradition with sponsoring this inspiring competition. Witnessing the recent developments and learning about the school’s vision and mission was truly inspiring and a reminder of the value of our ongoing involvement with the community.

In Tenwow International Holdings Limited (In Liquidation) and Anor v PricewaterhouseCoopers (a Firm) and PricewaterhouseCoopers Zhong Tian LLP [2024] HKCA 1193, the Court of Appeal (“CA“) ordered a letter of request to be issued by the High Court of Hong Kong to the Shanghai High People’s Court.  This request seeks the transfer of audit working papers from the Mainland to Hong Kong pursuant to the Arrangement on Mutual Taking of Evidence in Civil and Commercial Matters between the Courts of the Mainland and the Hong Kong Special Administrative Region (《關於內地與香港特別行政區法院就民商事案件相互委託提取證據的安排》) (“Mutual Arrangement“).

The case involves an audit negligence claim filed by the liquidators of the Tenwow group and one of its subsidiaries against PwC and PwC Zhong Tian (an accounting firm incorporated in the Mainland).  The liquidators alleged that PwC Zhong Tian had breached its duties by failing to detect defalcations by way of prepayments made to three supplies and illegitimate financial assistance given to a non-group company related to a director and his associates.

In respect of the audit working papers, the liquidators requested PwC Zhong Tian to provide, inter alia, its working papers; however, PwC Zhong Tian contested that Mainland laws and regulations imposed a blanket prohibition on the unauthorised transfer of audit working papers outside of the Mainland.

Mutual Arrangement

Pursuant to Article 6 of the Mutual Arrangement, the scope of assistance that may be requested by a Hong Kong court in seeking the taking of evidence by a Mainland court under the Mutual Arrangement includes:

(a) obtaining of statements from parties concerned and testimonies from witnesses;

(b) provision of documentary evidence, real evidence, audio-visual information and electronic data; and

(c) conduct of site examination and authentication.

The Court’s Ruling

Pursuant to the Mutual Arrangement, PwC Zhong Tian applied to the Court of First Instance for a letter of request to be issued by the High Court of Hong Kong to the Shanghai High People’s Court.  However, such application was rejected by Anthony Chan J on the basis that letters of request were normally issued for obtaining evidence from non-parties, or at most for taking the evidence of a party overseas, rather than for the production of documents and discovery.  Further, Anthony Chan J held that obtaining approval from the Mainland authorities did not fall within the categories referred to in Article 6, rendering the Mutual Arrangement inapplicable.

In the appeal, the CA allowed the appeal and ordered a letter of request to be issued for the following reasons, among others:

(a) In a broad sense a letter of request is a formal written document through which a court seeks assistance from a court in another jurisdiction, either under a convention or out of comity and reciprocity. While typically used to obtain evidence from third parties, it does not preclude their issuance to aid a party in fulfilling its own discovery obligations.  Therefore, it is not inappropriate in principle to use a court-to-court request procedure in aid of the production of a party’s own documents in light of a legal impediment in the foreign jurisdiction;

(b) A letter of request is only a request. Issuing a letter of request does not necessarily subordinate the court’s power to the penal laws of another jurisdiction.  It is a matter of discretion based on the case’s specifics, with no requirement to disregard or prioritise foreign law.  The court retains full control over its processes even after a request is issued;

(c) After reviewing the relevant Mainland law and regulations, the CA was cautious about making any firm findings of Mainland law due to absence of oral examination of the experts and a lack of expert evidence regarding the latest Mainland regulation. Nevertheless, the CA concluded that PwC Zhong Tian had demonstrated a real risk that it would be penalised in the Mainland if it simply handed over copies of the audit working papers to the liquidators in Hong Kong without prior approval from the Mainland authorities;

(d) The use of court-to-court procedure is justified, as any requisite approval for the transmission of audit working papers for judicial proceedings should be sought pursuant to the applicable mutual judicial assistance protocol;

(e) The Mutual Arrangement is intended to facilitate the efficient and certain acquisition of evidence for civil and commercial matters by litigants in both jurisdictions. Therefore, there is no reason to interpret the Mutual Arrangement so restrictively as to exclude the present application for approval from the Mainland authorities.  The assistance sought through the letter of request falls within the scope of the Mutual Arrangement, and aligns with the policy of Mainland law; and

(f) Concerning the objection based on the submission of futility, the CA determined that, in the absence of any evidence detailing what transpired with the letters of request in previous cases or the reasons for their non-execution, the Court would not infer that a letter of request in the present case would be futile.

Takeaways

Audit working papers are essential documents for the fair disposal of a claim alleging auditors’ negligence.  This case marks the first successful application for a letter of request to transfer the audit working papers in a contentious context, serving as a precedent for future cases involving the transfer of such documents from the Mainland to Hong Kong, particularly in audit negligence claims.  The CA’s rulings indicate a more flexible interpretation of the Mutual Arrangement, which may foster enhanced cooperation in taking of evidence in civil and commercial matters between Hong Kong and the Mainland in future cases.

The full judgment can be accessed here.

In response to Hong Kong’s evolving healthcare needs amid an aging population, Hong Kong has enacted the Advance Decision on Life-sustaining Treatment Ordinance (the “Ordinance”). Passed by the Legislative Council on 20 November 2024 and gazetted on 29 November 2024, this legislation establishes a comprehensive framework for advanced healthcare decisions. The implementation includes an 18-month transition period, allowing medical institutions, relevant departments, and organizations to update their protocols and systems, and conduct necessary staff training. To support implementation, the Hong Kong Academy of Medicine will introduce practice guidelines in the first quarter of 2025.

At its core, the concept of Advance Medical Directives is fundamentally rooted in patients’ rights to self-determination and human dignity. While patients have the right to make informed healthcare decisions, including refusing treatment, several critical questions arise: primarily, how can they exercise this right when their decision-making capacity becomes impaired, and what effect should their previously expressed wishes have on subsequent medical decisions?

To address these challenges, the Ordinance introduces two key advance decision instruments that empower individuals to make informed choices about their future medical care: (i) Advance Medical Directives and (ii) Do-Not-Attempt Cardiopulmonary Resuscitation orders. The legislation is particularly significant because, prior to its enactment, determining the validity and applicability of Advance Medical Directives in certain circumstances often involved legal uncertainties, placing medical professionals and patients’ family members in challenging situations.

Here are some key takeaways:

Advance Medical Directives (“AMDs”)

What is an AMD?

An AMD enables individuals to specify in advance their wishes regarding life-sustaining treatments for situations where they become mentally incapable of making such decisions. These legally binding documents provide healthcare professionals with clear guidance while respecting patients’ autonomy.

What is a DNACPR Order?

A Do-Not-Attempt Cardiopulmonary Resuscitation order is a legal document that directs healthcare providers not to perform cardiopulmonary resuscitation when a person experiences cardiopulmonary arrest. This means if the person’s heart stops beating or they stop breathing, healthcare providers will not attempt: (i) Chest compressions; (ii) Artificial ventilation; and (iii) Defibrillation

Transitional Arrangement

To ensure a seamless transition to the new legal framework, the Ordinance includes comprehensive transitional provisions for existing advance care planning instruments. Under these provisions, pre-existing AMDs that comply with the Ordinance’s requirements will remain valid. Nevertheless, individuals are encouraged to review their existing directives and consider updating them using the newly prescribed forms. Similarly, for pre-existing DNACPR Orders, the Hospital Authority will facilitate their transition to align with the Ordinance’s forms before the commencement dates, thereby ensuring the continued effectiveness of all advance care planning instruments.

Important considerations

The Ordinance marks a significant advancement in Hong Kong’s healthcare landscape, providing residents with greater autonomy over their end-of-life care while ensuring clear guidance for healthcare providers. When considering these advance decision instruments, individuals are recommend to:

• Discuss healthcare preferences with family members
• Seek professional medical advice
• Keep advance decision documents accessible
• Inform relevant parties about their decisions
• Periodically review their decisions, especially when health circumstances change

By following these recommended steps, individuals can  ensure that their advance decisions accurately reflect their wishes and can be effectively implemented when needed.

Access the full Ordinance here for more details.

In Hui Chun Ping v Hui Kau Mo [2024] HKCFA 32, the Court of Final Appeal (“CFA”) has handed down its judgment which provided important clarification on the applicability of a 6-year limitation period for “constructive trustees”.

The case of Hui Chun Ping concerns an agent (the Defendant) who has made a secret profit in breach of his fiduciary duty owed to the principal (the Plaintiff). The Plaintiff contended, among other things, that the Defendant was a “constructive trustee” who held the unlawful gains on constructive trust on his behalf. The key issue before the CFA was whether such a claim had been time-barred by virtue of section 20 of the Limitation Ordinance (“LO“).

Section 20 of the Limitation Ordinance

Under section 20 of the LO, all actions in respect of trust property are time-barred after a 6-year limitation period unless they fall within the exempted categories of section 20(1), to which no limitation period applies. The exempted categories under section 20(1) are:-

a)  An action by a beneficiary “in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy“; or

b)  An action by a beneficiary “to recover from the trustee trust property or the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted to his use“.

The LO adopts the definition of a “trustee” under the Trustee Ordinance (Cap. 29), which includes a constructive trustee.

Ruling of the Court of Final Appeal

The Plaintiff’s contention that the Defendant was a “constructive trustee” within the ambit of section 20(1)(b) was rejected by the Court of First Instance, the Court of Appeal and finally confirmed by the CFA.

Having considered earlier authorities which pointed out the terminological confusion caused by judges who have used the term “constructive trustees” loosely, the CFA reiterates the distinction between:

a)  “constructive trustees” who have previously accepted fiduciary duties in relation to the principal’s property prior to a subsequent breach of trust (e.g. where a defendant agreed to buy property for the plaintiff but the trust was imperfectly recorded) (“Category 1 trustees“); and

b)  “constructive trustees” whose trusteeship arose solely as a result of their wrongful conduct (e.g. making a secret and unauthorised profit) (“Category 2 trustees“).

In line with the statutory intention and legal precedents, only Category 1 trustees are “constructive trustees” within the meaning of section 20(1) of the LO. They are “trustees” in the traditional sense in that they do not receive trust property in their own right but by a transaction which both parties intended to create a trust from the outset.

Properly characterised on the facts of this case, the CFA determined that the Defendant was a Category 2 trustee, thus falling outside of the scope of section 20(1) of the LO, resulting in the Plaintiff’s primary claim being time-barred. The consequential effect of this finding meant the Plaintiff’s alternative claims for (i) equitable compensation, and (ii) accounts and inquiries (which were either substantially in the same form of, or ancillary to the main claim) were equally rejected by the CFA as being time-barred.

Conclusion

In light of Hui Chun Ping v Hui Kau Mo [2024] HKCFA 32, beneficiaries and victims of wrongful conduct who are considering a claim in relation to a constructive trust are reminded to take heed of the distinction between Category 1 trustees and Category 2 trustees, and if applicable promptly take out an action before the statutory limitation period expires.

The full judgment of Hui Chun Ping v Hui Kau Mo can be viewed here.

Background

In December 2024, The Stock Exchange of Hong Kong Limited (“HKEX“) completed its review of  the issuers’ annual reports for the financial year ended 2023 and published the Review of the Issuers’ Annual Reports 2024 (the “Report“) as well as the Guide on Preparation of Annual Report (the “Guide“) in order to assist issuers in preparing future annual reports. This article summarises the main findings and recommendations in the Report and the Guide.

Review of the Issuers’ Annual Reports 2024

HKEX completed its review of the issuers’ annual reports for 2023 and published the Report which consolidated HKEX’s assessment of issuers’ compliance with specific disclosure requirements under the Listing Rules, adopting a thematic approach and selecting specific areas based on regulatory concerns. The main findings and recommendations are as follows:

(a) Review of Specific Disclosure Requirements

(i) Share schemes: Some issuers only disclosed the number of option shares that could be granted under the remaining scheme limit, but failed to include the option shares that have been granted but not yet exercised.

(ii) Significant investments: Some issuers failed to make the relevant disclosures for significant investments, as significant investments are not confined to securities in the company, but also include funds or wealth management products. If the materiality threshold is exceeded, they must be disclosed.

(iii) Performance guarantees and use of proceeds from fundraisings: Some issuers omitted to disclose the expected timeline for applying unutilised proceeds from fundraisings. Even in the absence of a definitive timetable for the deployment of these funds, issuers should still indicate an approximate timing for fund usage, and update investors through announcements and/or in subsequent financial reports when there is better clarity on the timeline.

(b) Thematic Review

(i) Financial statements with auditors’ modified opinions

• Common examples are:
  • going concern uncertainty, commonly due to deterioration in economic condition and/or business and/or difficulties in obtaining financing; and
  • valuation of assets and limited access to accounting records, which are often attributable to lack of adequate risk identification policies and mitigating measures.
• Issuers should:
  • work closely with the auditors, closely monitor the execution and make adjustment as and when necessary; and
  • put in place adequate risk management and internal control systems through:
    • establishing an appropriate policy, to identify risks emerging from material changes in external environment, as well as internal factors (e.g. material mergers and acquisitions and major overhaul of business/operation model);
    • developing risk-mitigating controls and continuous review of their effectiveness;
    • proper documentation of control procedures and activities; and
    • regular reporting to the board for continuous oversight.

(ii) Material lending transactions

• Certain cases include director misconduct and/or internal control breakdown (e.g. loan impairments, repeated rollovers without commercial rationale, failure to safeguard loan rights).
• Issuers should ensure their controls over material lending transactions are adequate to safeguard shareholders’ funds.

(iii) Management discussion and analysis (MD&A)

• There is room for improvement in quality of disclosure, particularly in discussion of year-on-year performance variances; and significant events and risks, their impacts and issuers’ counter measures. Examples include:
  • Failure to identify and discuss specific underlying causes or business factors that drove the results;
  • Highlighting business plans (e.g., requiring substantial investments) without discussing estimated capital expenditure needs or how these needs will be met;
  • Inadequate disclosure of foreign exchange and interest rate risks, and failure to disclose their impacts or mitigation strategies to these risks; and
  • Disclosing a major change in the business model (e.g. shifting from self-operating to a franchise), but failure to provide reasons for such changes or its impact on financial results and the position in the current year and going forward.
• Newly listed issuers should strive for their MD&A disclosures to align with their listing documents. It is advisable to provide update on significant matters highlighted in the prospectus to enable investors to evaluate whether the post-listing developments are in line with the track record, business plan and prospects outlined in the prospectus.

(iv) Review of Financial Disclosure Under Prevailing Requirements (Including Accounting Standards)

• There is room for improvement in qualitative disclosure, especially regarding material accounting policy information, key judgements and estimates which should focus on how issuers have applied the accounting requirements according to their own facts and circumstances.
• Some issuers used non-GAAP measures, and in some cases the non-GAAP measures were not properly labelled; the reconciliation was omitted; and the adjusting items were not clearly explained.

Guide on Preparation of Annual Report

At the time of publishing the Report, HKEX also published this Guide which summarizes relevant key recommendations made by HKEX over the years after reviewing annual reports, as well as all disclosure requirements under the Listing Rules applicable to annual reports to assist issuers in preparing future annual reports.

(a) Mandatory disclosure requirements

(i) According to the Listing Rules (mainly Appendix D2) and guidance materials from HKEX, it is mandatory to disclose the following information in the annual reports:

• Directors, senior management and shareholders;
• Financial reporting, accounting and auditing matters;
• Issue of securities or resale of treasury shares and related matters;
• Public float;
• Repurchase of securities and treasury shares;
• Notifiable transactions;
• Connected transactions;
• Share schemes;
• (if applicable) Newly listed issuers;
• (if applicable) Issuers listed under special listing regimes or other listing structures; and
• Corporate governance / environmental, social and governance.

(b) Recommended disclosure in specific areas from thematic review

(i) Financial statements with auditors’ modified opinions

• If an issuer receives a modified audit opinion (covers “qualified opinion”, “adverse opinion” and “disclaimer of opinion”), it should disclose the following in the annual report:
  • Details of modifications and their actual or potential impact on the issuer’s financial position;
  • Management’s position and basis on major judgmental areas, and how the management’s view is different from that of auditors;
  • Audit committee’s view towards the modifications, and whether the audit committee reviewed and agreed with the management’s position concerning major judgmental areas; and
  • Issuer’s proposed plans to address the modifications.
• Issuers and their audit committees should engage in discussion with the auditors about the proposed action plans to increase the chance of successfully addressing the auditors’ concerns and resolving the audit issues.

(ii) Management discussion and analysis (MD&A)

• The MD&A provides narrative elaboration of the business trends and year-on-year variances (both positive and negative) of the financial results of an issuer compared to the preceding year, such as to allow investors to understand the key drivers of the issuer’s financial performance, risks and uncertainties of its business and related mitigating measures.
• For the content that needs to be covered in the MD&A, please refer to the Listing Rules Appendix D2, paragraphs 28(2)(d) and 32.
• To enhance the quality of disclosure, issuers are recommended to duly consider the following in determining what information to present in their MD&A:
  • Business review (including internal and external factors, using performance/efficiency indicators or industry specific ratios, material line items reported on the financial statements and other expenses)
  • Principal risks and uncertainties (including how it has affected, or is likely to affect their operation, financial position and business plans, and whether they can be mitigated)
  • Liquidity and financial resources (including how it plans to meet the relevant capital expenditure requirements, as well as the requirement to support daily operations and financial commitments (e.g. debt repayment), and whether there are any fundraising plan)
• Issuers should have due regard to their own circumstances in determining the appropriate information (in terms of type, scope and level of detail) with a view to facilitating investors in appraising the issuers’ past and future performance.
• In drafting MD&A, directors should also ensure that the presentation is clear, concise, fair, understandable and balanced, such that both good and bad news are presented and reported clearly and evenly, without glossing over or omitting material facts. Directors should endeavour to make the MD&A section informative and avoid using boilerplate statements. They are encouraged to challenge past practices of how key information is structured and conveyed, and make improvements as necessary.
• Issuers should strive to have their MD&A disclosure on par with the disclosure standard of a listing document.

(iii) Material asset impairments

• If an issuer reports a material asset impairment in its financial statement, it should discuss the circumstances that led to the impairment as part of its discussion on significant events or transactions during the financial year.
• Where the impairment is supported by a valuation, issuers should disclose details of such valuation, including:
  • Valuation method and reason for using that method;
  • Details of values of inputs used together with basis and assumptions; and
  • Explanation on any changes in valuation method used or inputs or assumptions.

(iv) Material lending transactions

• An issuer that engaged in money lending activities outside its ordinary and usual course of businesses (i.e. non-money lenders) should disclose the following:
  • Details of loan receivables (including major terms);
  • Discussion of any material impairments or write-offs of loan receivables and the basis of impairment assessments; and
  • Reasons for granting the loans and how they meet its business strategies.

(v) Performance guarantees

• Under the Listing Rules, an issuer is required to disclose in the annual report whether the actual performance of the acquired business meets the guarantee. If the guarantee is not met, the issuer is also required to:
  • disclose by announcement the shortfall; whether the vendor has fulfilled its obligation and the directors’ opinion on the fairness of their decision to exercise (or not exercise) the issuer’s rights under the terms of guarantee; and
  • provide appropriate updates in annual reports about the actions the directors have taken so far, and intend to take, and to explain the directors’ actions, in particular whether and how they are fair and reasonable and in the best interests of the shareholders.

(vi) Newly listed issuers

• The IPO prospectus contains material information on the listing applicant’s business, major shareholders, regulatory/industry environment, principal risks and other matters. After listing, issuers should disclose appropriate information in their annual reports to keep investors updated on the developments of major matters highlighted in the prospectus. For example:
  • Where there are material changes in circumstances as presented in the prospectus (such as material changes in financial performance and position, business environment and risks, business plans and use of IPO proceeds), the issuer should adequately discuss the changes and, if applicable, the directors’ actions to be taken.
  • Where the issuer was given non-competition undertakings by its major shareholders to establish a clear delineation between their businesses, the issuer should disclose whether such shareholders have fulfilled their undertakings
  • In some cases, the issuers might have undertaken (or required by the Listing Committee as a condition to listing) to take certain actions after listing. Such issuers are expected to take appropriate actions to fulfill such undertaking (or condition) and make relevant disclosure in the annual reports.
• Newly listed issuers should consult their compliance advisers for preparing the annual reports and other compliance matters.

(c) Financial disclosure under prevailing requirements

(i) Issuers should prepare the financial statements with a high standard of financial disclosure and ensure compliance with the applicable accounting standards.

(ii) When preparing financial information in annual reports, the following areas require particular attention: accounting policy information, judgements and estimates; revenue; business combinations; material intangible assets – impairment testing; valuation of Level 3 financial assets; credit risk disclosure on trade receivables; presentation of non-GAAP measures; and disclosure of possible impact of applying a new or amended standard in issue but not yet effective.

HKEX emphasised that other than the disclosure requirements set out in this Guide, issuers must ensure that their annual reports fully comply with all other relevant laws, rules and regulations, and industry standards, as applicable.

In addition, it is recommended that issuers and their audit committees adopt a proactive approach by communicating thoroughly with their auditors regarding audit plans, areas of focus for audits well before the end of that financial year in order to minimise the possibility of last-minute surprises.