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Hong Kong Stock Exchange (‘HKEX’) to carry on business as an oil exploration company in the South China Sea. ENROB has expanded its activities in recent years to include a number of very risky investments in the energy sector which have created some spectacular profits as well as substantial losses. However ENROB had set up a number of creative partnership arrangements which enabled it to exclude these losses from its financial statements. As a result ENROB has appeared to be one of the most profitable companies in Hong Kong, and its share price has soared. Early in 2006, the HKEX received some complaints about ENROB’s accounting practices, and an investigation commenced. As part of the investigation HKEX requested a report from the ENROB auditors, who were the highly respected chartered accounting firm, Arthur Ng and Son. This firm provided a detailed report in June 2006, which gave justification for the non disclosures and strongly argued that the accounts provided a true and fair view of the company’s position. The report was qualified by a disclaimer that it was prepared solely for the information and use of the HKEX. As a result, HKEX was convinced everything was fine and decided to take no further action. In August 2006, the Hong Kong Central Bank (‘Central Bank’) was looking for high performing stocks in the energy sector and it purchased $HK50,000,000 worth of stock in ENROB. Not long after, in September 2006, some disgruntled former employees who were recently sacked by ENROB made statements to the press about a dispute over substantial termination benefits. These statements were to the effcet that ENROB was in ‘meltdown’ due to poor financial management. A new investigation was commenced by HKEX and this time, a more thorough investigation process found serious breaches of accounting standards, which may well amount to fraud. It also found a range of corporate governance breaches including lack of independence of the auditors and related party dealings which had not been disclosed. Upon receiving this report, the HKEX immediately halted trading in ENROB shares. It appears that Central Bank’s shares in ENROB are now effectively worthless. Required: Advise Central Bank whether it can bring an action to seek damages for misrepresentation or other common law remedies against either the HKEX, or the firm of auditors Arthur Ng and Son. [15 marks – 900 word limit] Question 5 Arthur Ng and Son holds a professional indemnity Insurance policy with a leading Australian based insurance company, the Chubb Insurance Company of Australia Limited (‘Chubb’). A copy of the terms of this policy is provided with this exam. Following the events described in question 1, you can assume now that the Central Bank has issued proceedings against Arthur Ng and Son and that firm has now duly submitted a claim for indemnity under this policy to Chubb. Chubb investigations have revealed that the audit committee of ENROB was chaired by Lenny Boy, who was formerly an audit partner with Arthur Ng & Son. Lenny had made the task of the auditors almost impossible by rarely returning phone calls and being very uncooperative in providing documents and explaining transactions. He also used his familiarity with the audit firm to assure them that ENROB practices were completely legitimate. If the auditors pressed him for more detail he would resist, pointing out that most of the accounting practices in question had been set up on the advice of p