The case of Cycle Links Co Ltd v Chevalier Construction (Hong Kong) Ltd was decided on 8 March 2007. One of the issues that arose for determination was whether audit confirmations issued by the defendant to the plaintiff could be relied upon by the plaintiff in support of its claim that certain retention monies due under two construction sub-contracts were still due and payable by the defendant. The plaintiff sued to recover these sums; the defendant raised a limitation plea, arguing that the plaintiff’s claims were statute barred. In response the plaintiff argued that, as a result of the audit confirmations, the defendant had acknowledged the debts and had thereby caused time to run afresh under section 23(3) of the Limitation Ordinance (Cap 347) (“the Ordinance”).
The relevant part of this particular provision reads as follows:
“Where any right of action has accrued to recover any debt … and the person liable or accountable therefor acknowledges the claim or makes any payment in respect thereof, the right shall be deemed to have accrued on and not before the date of the acknowledgment or the last payment …” Pursuant to section 24(1) of the Ordinance every such acknowledgment must be in writing and signed by the person making the acknowledgment.
Two questions therefore arose: (1) Did the audit confirmations amount to an acknowledgment; and (2) if so, did they comply with the requirements of section 24(1)? Given that the case in question concerned an application by the defendant to strike out the plaintiff’s case, all the plaintiff had to do was to establish that it had an arguable case that should be allowed to proceed to trial. Deputy High Court Judge To found for the plaintiff on both issues.
The audit confirmations in question bore the defendant’s company stamp and a signature. That was enough to satisfy the requirements of section 24(1) of the Ordinance. As for the acknowledgment issue, the audit confirmations constituted a written note, issued by the defendant, seeking the plaintiff’s confirmation that the debts stated therein were due from the defendant to the plaintiff. Arguably, therefore, that constituted an acknowledgment for the purposes of section 23(3) of the Ordinance.
In this case the Deputy Judge commented that, if the defendant does not want time to start to run, it must take steps to avoid doing anything which might constitute an acknowledgment. He went on to say that the defendant could have excluded the debt from its accounts (and in fact should have done if it no longer considered the debt to be repayable). Alternatively, it could have informed its auditors of the position and instructed them to seek confirmation rather than seeking confirmation itself (as it had in this case). The Deputy Judge then continued:
“In fact, it has become a practice for companies to write to their trading partners … and invite them to respond to confirmations sought by their auditors and leave it to its auditors to seek confirmation thereby avoiding any possible argument on acknowledgment under the Limitation Ordinance or for any other purpose”.
Whilst we would not wish to suggest that this case imposes any additional duties on auditors with regard to the audit confirmation process, we thought it was worth flagging for your attention. In our view it is a matter for the management of the audit client to determine which debts are included within the company’s financial statements and, if there are any debts which are disputed or where the issue of acknowledgment may be a factor, it is up to management to draw this to the auditors’ attention so that confirmation requests can be sent out in an appropriate form.