MOULIN GLOBAL EYECARE HOLDINGS LTD (IN LIQUIDATION) AND OTHERS v. OLIVIA LEE SIN MEI

HCA 167/2008

[2019] HKCFI 1715

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 167 OF 2008

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J U D G M E N T

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Introduction

1.  This is the trial of the Action.

2.  This Action was commenced by the Plaintiff (“Holdings”) against the Defendant by a Writ of Summons issued on 29 January 2008.  The Defendant was legally represented and had vigorously defended herself for a number of years.  On 11 November 2016, her solicitors were granted leave to cease to act.  Since then, the Defendant had not participated in these proceedings and she did not attend this trial.

3.  In the absence of the Defendant at trial, Holdings has “an obligation of fair presentation” which is described as “less extensive than the duty of full and frank disclosure on a without notice application”.  Further, since Holdings’ underlying case is based on the fraud of its former senior management, cogent evidence is required in order to discharge its burden of proof on balance of probabilities.  See: CMOC Sales & Marketing Limited v Person Unknown & 30 others [2018] EWHC 2230 (Comm) at [12]‑[14].

4.  Having read Mr Manzoni SC’s extremely detailed written submissions and listened to his oral submissions at trial, this court is satisfied that Holdings has fulfilled its obligation of fair presentation.

5.  Holdings’ case as pleaded in its 2^nd Further Re‑Amended Statement of Claim (“Statement of Claim”), together with its Further and Better Particulars, is by any standard highly complicated.  In the Statement of Claim, Holdings has advanced a number of heads of claim but, owing to the pragmatism of its legal representatives, it has decided to pursue only 2 ie dividends unlawfully paid out of capital in the sum of HK$194.576 million and improper share repurchases in the sum of HK$34.291 million, together with pre‑judgment interest at the commercial rate of Prime plus 1% up to 31 October 2018 in the sum of HK$234.76 million, totalling HK$463.627 million.

6.  As explained in paragraph 22 of Holdings’ written submissions, the amounts of these 2 heads of claim differ from its pleadings in that:

(1)   Holdings does not pursue a claim for scrip dividends of HK$17.637 million “paid” in 2001, as it involved a contentious legal point.

(2)   Holdings does not claim for the 2002 final dividends of HK$30.248 million, as this was fully satisfied by the terms of settlement between Holdings and one of its former auditors.

(3)   The sum claimed for share repurchases has been adjusted to remove share repurchases of HK$2.941 million made before the Defendant was appointed a director of Holdings.

7.  Further, Holdings does not pursue its pleaded claims for (i) compensation for the early redemption of certain convertible notes, or (ii) loss quantified by reference to the increase in net deficiency of Holdings from the earliest point of time when the Defendant ought to have “blown the whistle” on the fraud of its senior management until its liquidation, as they involved significant contentious factual and legal issues.

8.  At trial, Holdings called 3 witnesses: Ms Catherine Jean Williams, senior Managing Director of FTI Consulting (Hong Kong) Limited^[1] and a specialist forensic accountant; Mr Roderick John Sutton, senior Managing Director of the Corporate Finance and Restructuring practice at FTI Consulting, a New York listed accounting firm; Mr Sutton is also one of the liquidators of Holdings; and Mr Kenneth Morrison, Managing Director of Mazars CPA Limited and a public accountant in Hong Kong.  Ms Williams and Mr Sutton had confirmed and adopted the contents of their witness statements subject to minor corrections while Mr Morrison had confirmed and adopted the contents of his expert report.  This court has carefully considered and is satisfied with the testimony of all 3 witnesses.  The statements of the other witnesses not called by Holdings were admitted as hearsay evidence.

Background

9.  Holdings was the parent company of the Moulin Group of companies.  It was incorporated in Bermuda in 1993 as the listing vehicle for the Moulin Group and was listed on The Stock Exchange of Hong Kong (“Stock Exchange”) in October 1993.  Until its collapse in mid‑2005, the Moulin Group was apparently a highly successful eyewear manufacturer and distributor.  They claimed to be the largest optical group in Asia and one of the top three eyewear businesses in the world in terms of manufacturing capabilities and distribution strength, with approximately 5,600 employees worldwide.  Holdings carried on business from Hong Kong and its headquarters were situated in Rooms 701‑4, 7^th Floor, Telford House, 16 Wang Hoi Road, Kowloon Bay, Kowloon. 

10.  Holdings’ 2 primary operating subsidiaries were:

(1)   Moulin Global Eyecare Trading Limited (“MGET”), previously known as Moulin Optical Manufactory Limited (“MOML”), the Group’s “flagship” trading company and also its treasury.

(2)   Leadkeen Industrial Limited (“Leadkeen”), through which the Moulin Group’s PRC manufacturing operations were conducted.

11.  Another prominent subsidiary of Holdings was Oaktree Investments Limited (“Oaktree”) formed in 2003 to undertake money‑lending and other treasury activities.

12.  The founder of the Moulin Group was Mr Ma Po Kee (“Ma Senior”).  At all relevant times, members of Ma Senior’s family held between 34% to 46% of the issued share capital of Holdings through the Ma family trust.

13.  From 1 January 2000 to 31 December 2004, the executive directors of Holdings were Ma Senior, Ma Bo Fung, Ma Bo Lung, Ma Lit Kin, Cary (“Cary Ma”) and Ma Hon Kin Dennis.  Ma Senior was Holdings’ executive chairman and his son Cary Ma was its managing director and CEO.

14.  Since at least 1996 and throughout her time as Holdings’ non‑executive director, the Defendant was the principal legal adviser to Holdings and the Moulin Group.  The Defendant was a non‑executive director of Holdings between 8 December 2000 and 1 November 2004 (“tenure”). By reason of her role as the principal legal adviser to Holdings, the Defendant was in frequent and regular contact with Cary Ma and other senior executives of Holdings and was familiar with its business, financial affairs and corporate activities — her knowledge of the internal operations and business transactions of Holdings far exceeded that which the title of non‑executive director normally suggests.

15.  The Defendant was also a member of Holdings’ audit committee upon its formation in 2000 together with Chau Cham Son, a town planner and architect and Ng Tai Chiu David, an accountant.

16.  The Moulin Group’s reported consolidated turnover, net profit attributable to shareholders and net assets for the reporting periods ended between 2001 and 2004 (“Relevant Period”) were:

	Turnover (HK$)	Net Profit (HK$)
Year ended 31 March 2001	888,242,000	200,662,000
Year ended 31 March 2002	1,114,799,000	143,356,000
9 months ended 31 December 2002	888,753,000	101,003,000
Year ended 31 December 2003	1,237,732,000	181,610,000
Year ended 31 December 2004 (unaudited)	1,339,818,000	139,866,000

	Net Assets (HK$)
Year ended 31 March 2001	1,336,654,000
Year ended 31 March 2002	1,420,614,000
9 months ended 31 December 2002	1,460,799,000
Year ended 31 December 2003	2,043,554,000
Year ended 31 December 2004 (unaudited)	2,136,292,000

17.  Prior to its liquidation, Holdings and the Moulin Group had engaged 3 of the “Big Four” as auditors.  They all resigned in the course of 3 years between 2002 and 2005:

(1)   KPMG acted from at least 1995 and resigned in April 2002.

(2)   Ernst & Young (“EY”) was appointed in April 2002 and resigned in December 2004.

(3)   Deloitte Touche Tohmatsu (“Deloitte”) was appointed in March 2005 and resigned on 18 April 2005.

18.  In the course of the short period of its engagement, Deloitte had experienced serious difficulties with the audit for the year ended 31 December 2004.  These difficulties were set out in its letter  dated 1 April 2005 to Holdings’ Board of directors which was enclosed with its resignation letter of 18 April 2005.  The following were extracted from the 1 April 2005 letter and its Appendix:

(1)   In the 1 April 2005 letter, Deloitte wrote:

“ Despite our repeated requests, we have not been allowed free access to all the ledgers, including in particular to the sales ledgers.…

At the same time, we have encountered a series of limitations in the sufficiency of the evidence made available to us and also an error in accounting treatment.  These are detailed in the Appendix to this letter.  As you will see, certain of the limitations raise questions as to the validity of transactions recorded by the Group…”

(2)   In the Appendix, the following 2 matters were of particular concern in view of the amounts involved:

“ Accounts Receivables in North America

In the books of Moulin Optical Manufactory Limited (“MOML”), a wholly owned subsidiary of the Group, there are four major customers located in North America, namely Cityeyes Inc., Eyevision Optics Inc., California Eyewear Inc. and New Imperial Optical Inc. (the “Customers”) with an aggregate receivable balance of approximately HK$249 million as at December 31, 2004.…

…

Our overseas member firms performed site visits on the Customers on March 28 and 29, 2005 and found that they were all located in residential buildings with no sign boards. There was also no record of the Customers in phone directories.…No supporting documents to support goods sold to the Customers during the year ended December 31, 2004 are available to support the validity of these transactions.…

…

Temporary payments and loan receivables

There are temporary payments in the books of MOML and loan receivables in the books of Oaktree Investments Limited (“Oaktree”), a wholly owned subsidiary of the Group, with an aggregate balance of approximately HK$279 million inclusive of interest receivables.…

…

We noted that there were frequent transactions impacting each of these receivable balances. However, no details and supporting documents have been provided to us to support the nature of the transactions…”

19.  On 18 April 2005, the Hong Kong Stock Exchange announced that trading of Holdings’ shares had been suspended pending the release of a price‑sensitive announcement.  On 28 April 2005, Holdings issued an announcement the gist of which was:

(1)   Deloitte had resigned as auditors with effect from 18 April 2005 and the Board would propose to the shareholders the appointment of CCIF as the new auditors.

(2)   the Board anticipated that the publication of the 2004 annual results would be delayed until the latter half of May 2005.

(3)   Trading in Holdings’ shares would continue to be suspended until the publication of its 2004 annual results and the concerns of the Stock Exchange arising from the delay in publication of those annual results had been satisfactorily addressed.

20.  By 6 May 2005, 8 bank creditors had sent letters to the Moulin Group demanding the immediate repayment of an aggregate of HK$329 million. On 9 May 2005, a steering committee of 7 of the Group’s bank creditors was formed.  On 11 May 2005, Ferrier Hodgson (“FH”) was appointed as investigating accountant for the bank creditors.

21.  On 12 May 2005, FH commenced its review of the Moulin Group, the immediate priority of which was to ascertain the true cash position of the Group, which was of particular concern to the bank creditors.  During the initial meetings with the Moulin Group’s senior management including Ma Senior and Cary Ma, FH was informed that the Moulin Group had approximately HK$480 million in cash, of which HK$310 million was purportedly held on trust in the PRC by a PRC subcontractor Mr Ma Wu Bei, and HK$170 million was held in Hong Kong.  When they were asked to provide copies of bank statements to verify the Group’s cash balances, none were provided.  Subsequently, the Moulin Group’s management provided FH with conflicting information and unsatisfactory evidence as to the Group’s cash balances.

22.  Eventually, at a meeting on 2 June 2005 attended by inter alia Mr Sutton, Mr Chris Howe of Anglo‑Chinese Corporate Finance limited, independent financial adviser to Holdings, Cary Ma and Don Lee, Moulin Group’s CFO, it was revealed that Cary Ma had the day before admitted to Mr Howe that the Moulin Group only had HK$10 million cash deposit in Hong Kong.  During the meeting, Mr Sutton repeated his request for bank statements to verify the RMB310 million cash said to be held in the PRC but none were provided.  Instead, Cary Ma informed Mr Sutton that a substantial portion of the PRC cash had been invested by Mr Ma Wu Bei in property and other investments.

23.  Further investigations by FH into the affairs of the Moulin Group identified serious fraud centred around the treasury function conducted by their senior management, through MGET and, later, Oaktree.  This included:

(1)   The circular flow of trade finance funds based on fictitious purchases from Moulin Group controlled trading companies. Forensic review of computers used by Moulin Group staff revealed that invoices purportedly issued by these trading companies were generated on Moulin Group’s computers.  These “friendly suppliers” would receive trade finance funds from the Moulin Group’s bankers and then pay those funds to Oaktree.  These transactions were recorded in the ledgers of accounts named “temporary payments” and “temporary receipts”.  This circular trade finance fraud commenced in the financial year ended 31 March 1998 and manifested itself in the very high volume of transactions in the Moulin Group’s bank statements and temporary ledgers.

(2)   Short‑term borrowings at year‑end to cover the excess aggregate balance of temporary payments over temporary receipts.  These funds would be deposited immediately prior to year‑end and withdrawn very shortly thereafter.

(3)   The Moulin Group’s cash balances were hugely overstated.  Reported figures were not supported by bank statements but were instead the product of crude accounting malpractice including short‑term loans, the deposit of cheques at year‑end which were subsequently dishonoured and cash amounts claimed to be held in the PRC which could not be verified.

(4)   There was serious doubt as to the existence of a substantial portion of the Moulin Group’s accounts receivables, including in particular the debts said to be owed by non‑existent entities in North America (“North American Debtors”).  

(5)   Assets said to be held by Leadkeen in the PRC were obscured by trust arrangements and could not be verified.

24.  On 21 June 2005, HSBC presented a petition to wind up Holdings, MGET and Leadkeen.  On 23 June 2005, Mr Sutton and Mr Desmond Chung Seng Chiong (“Mr Chiong”) were appointed joint and several provisional liquidators of the 3 companies and took over the management of them.

25.  On 5 June 2006, Holdings was wound up by the Court.  On 28 August 2006, Mr Sutton and Mr Chiong were appointed liquidators of Holdings.

Overall summary

26.  In summary, it is Holdings’ case that the financial statements of the Moulin Group had been falsified for many years by inter alia the creation of fictitious sales to the North American Debtors.  The creation of these fictitious sales concealed the fact that the Moulin Group were insolvent and loss‑making.  These fictitious sales were created at the direction of members of the Ma family particularly Ma Senior, Cary Ma and Michelle Lam, treasurer of the Moulin Group and sister‑in‑law of Ma Senior.  They were subsequently convicted of criminal offences in relation to the fraud and sentenced to jail — Ma Senior for 12 years, Cary Ma for 10 years and Michelle Lam for 8.5 years.

27.  Holdings’ case against the Defendant is that whilst a director of Holdings, she was aware of numerous irregularities which cried out for explanation but failed to ask questions or require proper explanation for them and hence had failed her duty to Holdings.  If the Defendant had performed her duty properly, the fraud perpetrated by Holdings’ senior management and its insolvency would have been exposed much earlier.

28.  As stated earlier, Holdings’ claim against the Defendant at trial is limited to the aggregate sum of HK$228.867 million that was improperly paid out in cash dividends and via share repurchases during the Defendant’s tenure as director, together with interest, when Holdings could not have lawfully paid dividends or repurchased its shares, as it was insolvent and did not have distributable reserves.

PARTICULARS

Dividends Claim

	Date of Board Approval		Date of Payment	(HK$)
Year ended 31 March 2001
Interim	14 December 2000		16 March 2001	48,590,021.85
Final	19 July 2001		5 October 2001	20,376,023.14
Less: Scrip Dividends				(17,637,431.35)
Year ended 31 March 2002
Interim[2]	13 December 2001		18 March 2002	28,218,936.34
9 months ended 31 December 2002
Interim	18 December 2002		18 March 2003	22,498,983.44
Final	3 June 2003		10 July 2003	19,432,668.77
Year ended 31 December 2003
Interim	24 September 2003		8 December 2003	31,164,039.34
Final	29 April 2004		16 July 2004	23,961,626.98
Year ended 31 December 2004
Interim	24 September 2004		25 November 2004	17,971,220.21
Total				194,576,088.72
Interest up to 31 October 2018[3]				198,274,796.03
Total with Interest				392,850,884.75

 Share Repurchases Claim

	HK$
Year ended 31 March 2001	3,133,000.00
Year ended 31 March 2002	24,930,000.00
9 months ended 31 December 2002	5,930,000.00
Year ended 31 December 2003	298,000.00
Total	34,291,000.00
Interest up to 31 October 2018[4]	36,485,301.14
Total with Interest	70,776,301.14

GRAND TOTAL

HK$463,627,185.89

Issues for determination

29.  The issues for this court’s determination are the following:[5]

(1)   Were the financial statements of Holdings and the Moulin Group falsified during the Relevant Period? (“Issue 1”)

(2)   Was Holdings insolvent during the Relevant Period? (“Issue 2”)

(3)   Was the Defendant in breach of her duty of care and skill as a director of Holdings? (“Issue 3”)

(4)   Is Holdings entitled to recover from the Defendant the amounts unlawfully paid as dividends and through share repurchases? (“Issue 4”)

(5)   What is the quantum of equitable compensation payable to Holdings by the Defendant?  (“Issue 5”)

Issue 1 — falsification of financial statements

30.  The North American Debtors were four alleged customers of MGET viz Eye Vision Optics Inc, California Eyewear Inc, New Imperial Optical Inc and City Eyes Inc.

31.  The turnover of the Moulin Group attributed to the sales to the North American Debtors was huge and, at each financial year end, significant amounts were recorded as due from them to the Moulin Group:

Year	Sales (HK$m)	Percentage of Consolidated Turnover
Year ended 31 March 2001	296.7	33.4%
Year ended 31 March 2002	219.6	19.7%
9 months ended 31 December 2002	250	28.13%
Year ended 31 December 2003	349.5	28.24%
Year ended 31 December 2004 (unaudited)	383.4	28.62%

Year	Receivables (HK$m)
Year ended 31 March 2001	216.7
Year ended 31 March 2002	156.4
9 months ended 31 December 2002	172.8
Year ended 31 December 2003	145.3
Year ended 31 December 2004 (unaudited)	249.3

32.  Holdings’ case is that the North American Debtors did not exist, no products were ever sold to them and the sales to them as recorded in the Moulin Group’s financial statements were entirely fictitious.  Further, the receivables created by the false sales to the North American Debtors were “settled” through further false transactions which resulted in the creation of false assets in the Moulin Group’s balance sheet and the understatement of their real liabilities.

33.  On the evidence, particularly Mr Sutton’s and Ms Williams’ testimony, this court is satisfied that Holdings has proved its case.  The evidence relied upon by Holdings which this court accepts is as follows.

34.  First, in 2009, Ma Senior, Cary Ma and Michelle Lam (“the Accused”) as well as other Moulin Group employees and associates were charged with offences arising from the falsification of the Moulin Group’s financial statements in particular Holdings’ and MGET’s.  The Accused admitted prior to trial that the North American Debtors did not exist and no sales had been made to them.  In summary, it was admitted that:

(1)   The invoices to the North American Debtors in 2003 and 2004 (the relevant period for the criminal offences) were false in that the transactions represented by the invoices did not take place.

(2)   There was no record of the incorporation or business registration of any of the North American Debtors.

(3)   The addresses used for the North American Debtors were residential addresses, or in one case, a Chinese restaurant, and no business was operated from those addresses.

35.  Second, the air waybills relied upon by the Defendant in support of her denial that the sales to the North American Debtors were fictitious were forgeries, after investigations with the Hong Kong Airport Authority and the shippers recorded on the air waybills.

36.  Third, the Liquidators’ own investigations into the background of the North American Debtors and their site visits confirmed the admissions made by the Accused.

37.  As a result of the falsification of sales to the North American Debtors, the Moulin Group’s turnover and profits were significantly overstated.  Further, the sales to the North American Debtors were recorded as made on credit terms; hence the recording of false sales by MGET to a North American Debtor also led to the recording of false debts owed by the North American Debtor to MGET.  To conceal the false debts, the Accused engaged in various forms of fraudulent accounting in purported “settlement” of the debts.

38.  Of the total “settlements” of HK$1.4 billion recorded in MGET’s ledgers from 1 April 2000 to 31 December 2004 as having been received from the North American Debtors, the 4 largest categories totalling HK$1.25 billion were described as (i) “Bank”; (ii) “Contra amounts”; (iii) “Bank loans” and (iv) “Temporary Receipt”.

39.  “Bank” referred to funds received by MGET’s bank accounts.  These funds were not received from the non‑existent North American Debtors.  Instead, they were obtained through short term personal loans or through a scheme by which trade finance was obtained on false pretences and injected into the Group on a short term basis and recorded as “settlements”.  The other 3 categories of “settlement” were similarly the products of false accounting, as detailed in Ms Williams’ supplemental witness statements.  The consequences of these faked transactions were to reduce the amounts recorded as owed by the North American Debtors and inflate the Group’s cash balances such that at the financial year end was that in the Moulin Group’s balance sheet, assets were overstated and liabilities were understated.

40.  After the balance sheet date, funds which had been injected into the Moulin Group on a short‑term basis were withdrawn and the understated liabilities were reinstated.  However, the receivables from the North American Debtors were not reinstated.  Instead, the payment out of funds and reinstatement of liabilities was recorded as an increase in MGET’s “Temporary Payments” ledger account.  The effect of these accounting exercises was to transfer the overstatement of assets and understatement of liabilities created by the purported “settlements” from the North American Debtors to the “Temporary Payments” account in MGET’s ledger, where they remained until the lead up to the next balance sheet date.

41.  In the lead up to the next balance sheet date, false accounting entries were made to reduce the amount in the “Temporary Payments” ledger account:

(1)   The balance of the “Temporary Receipts” ledger account that was not used to record false “settlements” was offset against the “Temporary Payments” ledger.

(2)   False journal entries were entered in order to re‑allocate part of the balance of the “Temporary Payments” ledger to other asset accounts, most notably the Ma Wu Bei assets eg PRC Investments and the Frame Board Space Assets.

42.  The final balance of the “Temporary Payments” ledger account was recorded as loans to independent third parties (“Third PartyAdvances”) which were also faked.

43.  The end result of this series of transactions was that apart from the fictitious North American Debtors receivables, other different fictitious assets were created in the Moulin Group’s balance sheets.  The 3 most significant categories of these faked assets were described in Mr Sutton’s statement as Third Party Advances, Ma Wu Bei Payments and Frame Board Space.  Their value as recorded in the Moulin Group’s consolidated balance sheet between 2001 and 2004 was as follows:

HK$m	Third Party Advances	Ma Wu Bei	Frame Board Space
Year ended 31 March 2001	233	257	-
Year ended 31 March 2002	184.3	330.4	63.7
9 months ended 31 December 2002	245.5	348.5	53.5
Year ended 31 December 2003	232.2	282.9	69
Year ended 31 December 2004 (unaudited)	261.3	355.9	79.5

44.  Holdings submits and this court accepts the falsity of these assets is evident from their source, as they were created as a result of the fictitious settlements of the accounts receivable owing by the North American Debtors. 

Issue 2 — insolvency of Holdings and Moulin Group

45.  The issue here is whether during the Relevant Period, Holdings was able to meet its debts as and when they fell due with its cash resources as it had or could command through the use of its assets.  This is commonly known as the cash flow or commercial insolvency test.  For this purpose, the fact that its assets exceeded its liabilities was irrelevant: Goode on Principles of Corporate Insolvency Law 5^th Ed at para 4‑05.

46.  In order to establish the insolvency of Holdings (as well as the Moulin Group as a whole), its Liquidators had procured the preparation of revised/adjusted financial statements for the Moulin Group and Holdings.  The methodology used was to reverse the accounting treatment of transactions and assets identified as fictitious or faked in the evidence.  This court has considered the detailed explanation of the process in Ms Williams’ statement and Mr Morrison’s comment on that process in his report.  At paragraphs 53 and 54 of his report, Mr Morrison summarized his views as follows:

“ 53. In summary, to describe the process undertaken by the Liquidators at the highest possible conceptual level:

53.1 Fictitious sales are reversed. The shareholders’ equity is reduced. On the net asset side, a liability is recognised to balance the balance sheet (DR Sales, Cr Liability). The liability reduces net assets by the amount of false sales. The liability is however represented on the asset side by fictitious assets and cash paid in at year end as window dressing.

53.2 To the extent that the Liquidators have been able to identify false assets, these have been removed from the accounts by setting off against the liability (ie DR Liability, CR False Assets).

54. In my opinion, the method adopted by the Liquidators provides a comprehensive means of removing the impact of the false accounting with regards to the fictitious transactions. The adjusted accounts provide a reliable and conservative “snapshot” as at the balance date of the financial position of the consolidated Moulin Group and the individual companies in the group, but for the false accounting.” (emphasis added)

47.  The adjusted consolidated Moulin Group financial statements show:

HK$m	Year ended 31 Mar 01	Year ended 31 Mar 02	Period ended 31 Dec 02	Year ended 31 Dec 03	Year ended 31 Dec 04 (unaudited)
Adjusted (Loss)	(1,002.5)	(127.8)	(150.6)	(176.3)	(269.5)
Current Assets	952.6	1,393.5	1,267.7	1,883.3	1,830
Current Liabilities	(874.7)	(1,533.5)	(1,608.9)	(2,128.9)	(2,152)
Net Current Assets (Liabilities)	77.9	(140.0)	(341.2)	(245.6)	(322)
Non‑current Assets	634	848.6	792.1	862.2	1,046.2
Non‑current Liabilities	(581.7)	(742.7)	(696.9)	(637.3)	(1,062.7)
Total Assets	1,586.7	2,242.1	2,059.8	2,745.6	2,876.2
Total Liabilities	(1,456.3)	(2,276.3)	(2,305.8)	(2,766.2)	(3,214.8)

48.  The adjusted financial statements show that the Moulin Group was loss‑making throughout the Relevant Period, and that, with the exception of the year ended 31 March 2001, the Moulin Group’s liabilities (current and total) exceeded their (current and total) assets.

49.  Notwithstanding that the Moulin Group appeared to have net total assets as at 31 March 2001, they were also insolvent as at that date.  As explained by Mr Morrison in his report, for the purpose of assessing the Group’s solvency, their non‑current liabilities should be treated as immediately due and payable.  This is because if the falsification of the Group’s financial statements had been identified, their bankers and other long‑term creditors would have demanded immediate repayment, in which case liabilities originally classified as “non‑current” would instead be classified as “current” and would have resulted in net current liabilities for the years during the Relevant Period as follows:

HK$m	Year ended 31 Mar 01	Year ended 31 Mar 02	Period ended 31 Dec 02	Year ended 31 Dec 03	Year ended 31 Dec 04
Net current (liabilities)	(503.8)	(882.7)	(1,038.1)	(882.9)	(1,384.7)

50.  The Moulin Group did not have sufficient liquid/current assets to pay its banks and other creditors.  Importantly, it was highly unlikely that (i) inventory and receivables could be realised at book value in an insolvency scenario; (ii) the Group could have obtained any sort of external finance if the falsification of their financial statements had been identified; and (iii) the sale of fixed assets would realise their book value in a distressed sale.[6]

51.  With regard to Holdings, its adjusted financial statements are as follows:

HK$m	Year ended 31 Mar 01	Year ended 31 Mar 02	9‑month Period ended 31 Dec 02	Year ended 31 Dec 03	Year ended 31 Dec 04 (unaudited)
Assets	480.8	522.6	414.9	541.6	1,246.9
Liabilities	(142.6)	(136.2)	(163)	(125.8)	(853)
Net Assets	338.3	386.4	251.9	416.7	393.9
Share Capital	205.1	200.7	200.9	249.6	249.6
Share Premium Reserve	184.1	163.7	165.6	558.5	558.5
Contributed Surplus	0	0	0	0	0
Retained Earnings/ Profits (Accumulated Losses)	(51)	(8)	(132.3)	(416.4)	(414.3)

52.  As can be seen above, Holdings did not have any distributable reserves in the form of retained earnings or contributed surplus during the Relevant Period to enable it to lawfully pay dividends or make share repurchases.  Further, as stated in Mr Morrison’s report, Holdings had guaranteed MOML’s bank debt, and given the insolvency of MOML, Holdings would be liable for this debt.  MOML’s bank debt was however not recorded in Holdings’ balance sheets.  If MOML’s bank debt were included in Holdings’ balance sheets, then Holdings would have a substantial deficiency in net assets: 

HK$m	Year ended 31 Mar 01	Year ended 31 Mar 02	Period ended 31 Dec 02	Year ended 31 Dec 03	Year ended 31 Dec 04
Further adjusted net assets (deficiency)	(286.2)	(352.8)	(580.2)	(427.3)	(189.7)

53.  To conclude, this court is satisfied on the evidence that the Moulin Group as well as Holdings were insolvent during the Relevant Period.

Issue 3 — The Defendant’s breach of duty of care and skill

54.  As legal adviser of the Group, a director and a member of the audit committee, the Defendant had, prior to and throughout her tenure, acquired knowledge of matters which ought to have caused her serious concern and prompted further enquiry.  Yet, the Defendant had failed to seek proper explanations from the Group’s senior management, investigate the matters or take any follow up action.  Such knowledge included the following.

55.  First, Holdings’ dispute with a North American customer California Design Studio Inc. (“CDSI”) in respect of which the Defendant was retained to advise.  The dispute concerned allegations of misconduct against Cary Ma by Mr Carlos Khantzis, President of CDSI, involving the manipulation of accounts between CDSI and the Moulin Group.  By a letter to Cary Ma dated 3 July 2000, Mr James Gill, a CPA, stated that he had been retained by Mr Khantzis to conduct a forensic reconstruction of the business transactions between CDSI and MOML and that while conducting this review, Mr Gill had encountered unexplained transactions which required precise explanation and documentation from Cary Ma to support those transactions.  Mr Gill also identified serious discrepancies in the audit confirmations from 1995 to 1999.  Importantly, Mr Gill referred to a 31 March 1997 audit confirmation from KPMG which showed activity in the amount of $1.3 million with City Eyes Inc, one of the North American Debtors, despite the fact that City Eyes Inc was dissolved and effectively became a non‑existent corporation in 1995.  Had the Defendant taken steps to investigate the matter stated in Mr Gill’s letter, the fraud of the Group’s senior management would have been exposed — City Eyes Inc ceased to exist in 1995 but was recorded in the accounting records as a major customer of the Moulin Group.

56.  Second, Holdings’ inability to pay White & Case’s legal fees.  On 9 February 2001 the Defendant wrote to Katie Kan of Moulin Group by e‑mail which was copied to Cary Ma and Peter Wong of Holdings, asking whether they could settle White & Case’s outstanding accounts immediately as the Group had not made any payment since the Defendant joined the firm in July 2000.  This should be contrasted with the draft consolidated financial statements for the Group for the 9 months ended 31 December 2000.  The statements, recording a profit of HK$172 million, was presented at the board meeting held on 8 March 2001 which the Defendant attended.  This anomaly should have prompted the Defendant to question the Group’s solvency but yet no further inquiry was made by her.

57.  Third, the Moulin Group’s purported cash advances to third parties.  The Defendant attended a Board meeting on 19 July 2001 at which she learned, as recorded in a document titled “Matters to be Minuted” tabled at the meeting, the Group had granted substantial cash advances to third parties totalling HK$233 million odd on an unsecured basis as at 31 March 2001.  The moneylending activities of the Group were also expressly recorded in the minutes of the audit committee meeting held on 11 December 2001 attended by the Defendant.  This amount of HK$233 million was the “Third Party Advances” referred to earlier in this Judgment.  They were described as “fictitious assets” in Mr Sutton’s statement and “entirely false” in Ms Williams’ statement as no loans were in fact advanced to third parties.  Rather, they were false assets created to conceal the faked sales to the North American Debtors.

58.  The existence of these purported cash advances/moneylending activities should have been a cause for very serious concern on the part of the Defendant.  As Mr Manzoni SC submits and this court agrees:

(1)   There was no commercial rationale for the Moulin Group to engage in moneylending activities and make these substantial cash advances given that it was a manufacturer and distributor of eyewear.

(2)   In the period to 31 March 2001, these advances were undocumented and unsecured.

(3)   The Moulin Group did not have a money lender’s licence until Oaktree was incorporated in March 2003 and obtained a money lending licence in September 2003, such that there was a serious risk that the advances, if real, would be irrecoverable in the event a borrower refused to repay.

(4)   The amount of the advances was significant.  The sum of HK$233 million as at 31 March 2001 amounted to 17.43% of the Moulin Group’s net assets.  The sum of HK$184 million as at 31 March 2002 amounted to 12.97% of the Moulin Group’s net assets.  According to Holdings’ consolidated financial statements, as of 31 March 2002 (which the Defendant approved at that time), the Group’s interest‑bearing bank borrowing had increased by HK$420 million over the year.  It made no commercial sense for the Group to have increased its bank borrowings and incurred additional interest expenses if the Group did have idle cash to support its money lending side business.

(5)   The Defendant knew that that one of the purported borrowers, Mr Ulrich Fisher, was not an independent third party in that he was a senior member of the Moulin Group’s management. 

59.  It seems to this court that if the Defendant had duly performed her duty as a director of Holdings and a member of the audit committee, she should have required:

(1)   full disclosure of information and documentation regarding the existence, recoverability and propriety of the purported Third Party Advances;

(2)   the lending criteria applied by the Group;

(3)   the identity of all the parties to whom the advances had been purportedly made and their relationship with the Group;

(4)   the terms and conditions on which the advances had been made; and

(5)   last but not least, evidence that the advances had actually been made.

60.  Such investigation, if properly carried out, would likely have revealed the Third Party Advances as faked assets and uncovered the fraud of the Group’s senior management.

61.  Fourth, KPMG’s resignation as auditor in April 2002.  The resignation came shortly after the financial year ended on 31 March 2002 and delayed the announcement of Holdings’ annual results.  One of the reasons for the change of auditors given by Cary Ma in his letter dated 19 April 2002 to inter alia the Defendant was KPMG’s proposed “unreasonable high fee”. 

62.  As an experienced commercial solicitor, the Defendant should have realised that resignation of auditors was always a serious matter, especially for a listed company.  Mr Manzoni SC submits and this court agrees that the Defendant should have sought to ascertain from KPMG the real reasons for their resignation and confirmed with KPMG that they did not have any outstanding concerns regarding the Moulin Group. 

63.  Judging from a letter dated 23 March 2002 from KPMG to Cary Ma, KPMG’s resignation could very well have related to their concerns as to the veracity of the Group’s accounts and whether they could properly perform the annual audit.  In that letter, KPMG identified a number of “potential audit issues which require the urgent attention of management”, including:

(1)   the purported Third Party Advances;

(2)   cash purportedly held by Ma Wu Bei on behalf of the Group in the PRC;

(3)   a deposit of RMB80 million said to have been placed with a PRC financial institution;

(4)   unreconciled intercompany balances of HK$51 million.

64.  Some of these issues eg the unlicensed moneylending activities of the Group and cash held by Ma Wu Bei on behalf of the Group in the PRC were raised by EY after their appointment, either at meetings of the Audit Committee attended by the Defendant or in writing from EY to the Board of directors of Holdings.  However, it did not appear that the Defendant was overly concerned or had made any serious enquiries about these issues.  Meanwhile, the Board of Holdings kept on approving the financial statements and the declaration of interim and final dividends year after year.

65.  Fifth, at the audit committee meeting held on 29 April 2004, the Defendant learned of further very serious issues in relation to the Group’s accounts.  In particular, the Defendant was informed that:

(1)   the addresses stated for the North American Debtors were not proper business addresses and that the purported payments from the North American Debtors could not be traced;

(2)   the amounts purportedly owed by Ma Wu Bei to the Group had been assigned to 5 independent third parties and that EY expressed concern that this was to avoid disclosing that Ma Wu Bei was a connected party; and

(3)   EY were concerned that the Third Party Advances might not be recoverable, and were being “churned” rather than repaid. 

66.  Notwithstanding these matters and the Defendant’s accumulated knowledge of the irregularities within the Moulin Group, the Defendant did not require any further investigation to be undertaken.  Instead, at the Board meeting held on 29 April 2004, the Board approved Holdings’ financial statements and the declaration of 2003 final dividends.

67.  At the audit committee meeting held on 24 September 2004 and attended by the Defendant, EY repeated their concern about the North American Debtors, about the recoverability of money from Ma Wu Bei and the huge balance of Third Party Advances at around HK$230 million.  EY also threatened to qualify the accounts if these issues were not addressed.  Nevertheless, at the Board meeting held on 24 September 2004, the Defendant approved Holdings’ Interim Report for the 6 months ended 30 June 2004 and the declaration of 2004 interim dividends.

68.  In light of the above, it is difficult to avoid the conclusion that if the Defendant had performed her duty as director of Holdings with the appropriate degree of care and skill, she should have required the irregularities which she was aware of be fully investigated. If such investigations had been carried out, the fraud of the senior management would have been exposed and they would further have revealed that Holdings was insolvent, such that no dividends would have been paid and no share repurchases would have been made.

69.  This court is therefore compelled by the evidence to hold that the Defendant was in breach of her duty as a director of Holdings during her tenure.  That deals with Issue 3.

Issue 4 — Liability of the Defendant

70.  Holdings’ Bye‑Laws and the Bermuda Companies Act 1981 set out the circumstances in which Holdings could pay dividends and repurchase its own shares.

71.  In relation to dividends, the relevant provision is Bye‑law 138:

“ 138. No dividend shall be paid or distribution made out of contributed surplus if to do so would render the Company unable to pay its liabilities as they become due or the realisable value of its assets would thereby become less than the aggregate of its liabilities and its issued share capital and share premium accounts.”

72.  The effect of this Bye‑law is that Holdings could not lawfully pay dividends if it was insolvent ie unable to pay its liabilities as they become due or did not have available distributable reserves or contributed surplus, which was exactly the case as discussed in the previous section on Issue 2.

73.  In relation to share repurchases, the relevant provision is Bye‑law 3(2):  

“ 3(2). Subject to the Act, the Company’s memorandum of association and, where applicable, the rules of any Designated Stock Exchange and/or any competent regulatory authority, any power of the Company to purchase or otherwise acquire its own shares shall be exercisable by the Board upon such terms and subject to such conditions as it thinks fit.”

74.  Section 42A of the Bermuda Companies Act allows share repurchases save and except where the company is insolvent.  In this regard, section 42A(1) and (5) provide:

“ (1) Subject to this section, a company limited by shares…may, if authorised to do so by its memorandum or bye‑laws, purchase its own shares.

…

(5) No purchase by a company of its own shares may be effected if, on the date on which the purchase is to be effected, there are reasonable grounds for believing that the company is, or after the purchase would be, unable to pay its liabilities as they become due.”

75.  Accordingly, any repurchase of shares by Holdings while insolvent was contrary to the Bermuda Companies Act and Holdings’ Bye‑laws.

76.  Where dividends have been paid unlawfully, the effect is that there has been an unauthorised return of capital and the directors are liable to replace the amounts so paid out: In Re Exchange Banking Company (1882) 21 Ch.D 519; Bairstow v Queens Moat Houses plc [2001] 2 BCLC 531.

77.  Similarly, where shares have been repurchased by a company in circumstances amounting to an unauthorized reduction of capital, the repurchase is ultra vires:Trevor v Whitworth (1887) 12 App Cas 409.

78.  It is trite law that although not trustees in the strict sense, directors are to be regarded as trustees of the company property that is under their control: Gore‑Browne on Companies para 16[2]; Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, [2011] 2 BCLC 501 at [34].  The primary consequence of this principle is that a director is answerable as a trustee for any misapplication of the company’s property in which he participated and which he knew or ought to have known to be a misapplication: Gore‑Browne on Companies para 16[2]; Simtel Communications Ltd v Rebak [2006] EWHC 572, [2006] 2 BCLC 571 at [13].  The law in this respect was succinctly summed up in the following dictum of Lindley LJ in Re Sharpe [1982] 1 Ch 154‑156:

“ As soon as the conclusion is arrived at that the company’s money has been applied by the directors for purposes which the company cannot sanction, it follows that the directors are liable to replace the money, however honestly they may have acted.”

79.  More recently, Lord Hope expressed his view, obita dictum though it might be, in Re Paycheck Services 3 Ltd [2010] 1 WLR 2793 at [45]‑[47], that a director’s liability for a misapplication involving an unlawful payment of dividends was strict.

80.  At [45]‑[47], Lord Hope expressed his view as follows:

“ [45]      First, there is the question whether the liability for the payment of unlawful dividends is strict or depends on a degree of fault being established.  There are two lines of authority on this issue.  On the one hand there are cases in which it has been said without qualification that directors are under a duty not to cause an unlawful and ultra vires payment of a dividend… On the other there is a line of authority to the effect that a director is only liable if he makes a misapplication of a company’s assets if he knew or ought reasonably to have known that it was a misapplication...

[46]      The trend of modern authority supports the view that a director who causes a misapplication of a company’s assets is in principle strictly liable to make good the misapplication, subject to his right to make good, if he can, a claim to relief under section 727 CA 1985.  The authorities that favour the contrary view really come to an end with Dovey v Cory [1901] AC 477, as the later judgment of Romer J in Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 can be read, at least in relation to dividends, as supporting strict liability.  Furthermore, the whole point of introducing the right to claim relief under section 727 was to enable the court to mitigate the potentially harsh effect of being held strictly liable.  That relief was introduced by section 32 of the Companies Act 1907, so it was not available when most of the cases in this line of authority were being decided.

[47]      It is not necessary to express a definite view on this issue in this case.  As counsel for HMRC pointed out in their written case, there has been no challenge to the finding by the deputy judge that as from 18 August 2004 all the dividends were unlawful, and it is accepted that the relief available by way of a defence under section 727 CA 1985 would have been available if Mr Holland could show that he acted reasonably.  So the issue is academic here, and it was no doubt for this reason that it was not thought to be necessary to develop the point fully in oral argument.  But the better view seems to me that in cases such as this, where it is accepted that the payment of dividends was unlawful, a director who causes their payment is strictly liable, subject of course to his right to claim relief under the statute.” (emphasis added)

81.  On the basis of Lord Hope’s obita dictum, this court is satisfied that the Defendant is strictly liable to account to Holdings for the unlawfully paid out dividends, subject to her establishing a defence under section 358 of the Companies Ordinance, Cap 32 or section 281 of the Bermuda Companies Act, that she had acted honestly and reasonably and ought fairly to be excused for her breach of duty.

82.  It is purely academic to consider the defence under section 358 of the Companies Ordinance, Cap 32 or section 281 of the Bermuda Companies Act.  Since the Defendant did not attend the trial and had adduced no evidence in support of any such defence, there is no basis upon which the Court could find that she has acted “honestly and reasonably … and ought fairly to be excused” from the consequences of her breach of duty.

83.  As far as unlawful share repurchases are concerned, it is strictly speaking not covered by Lord Hope’s dictum and, in the absence of considered argument from both sides, this court is not minded to apply it by analogy.  Even if this court were to hold that a fault element is required, whether for unlawful share repurchases or, for that matter, unlawful payment of dividends, for the reasons stated in the previous section on Issue 3, this court is satisfied that the Defendant was in breach of her duty of care and skill as a director of Holdings during her tenure, and that if she had properly performed her duty, she would have required a full investigation of the irregularities of which she was aware, the fraud of the senior management and the insolvency of Holdings would have been exposed such that no dividends would have been paid and no share repurchases would have been made.

84.  This court therefore agrees with Mr Manzoni SC that if it is necessary for Holdings to establish fault on the part of the Defendant, it has done so.

Issue 5 — Quantum  

85.  As stated in the section “Overall summary”, the quantum of Holdings’ claim is HK$463,627,185.89, being the aggregate of the dividends claim and share repurchases claim plus interest. This court proposes to deal with 2 issues[7] the factual bases of which are not disputed by Holdings’:

(1)   Whether claims in respect of interim and final dividends declared on 14 December 2000 and 19 July 2001 and the interim dividends declared on 13 December 2001, as well as shares repurchased prior to 28 January 2002 are time barred, bearing in mind the Writ of Summons herein was issued on 29 January 2008. (“Time Bar point”)

(2)   Whether Holdings is required to give credit to the Defendant for the amounts recovered from its former auditors to avoid double recovery. (“Double Recovery point”)

86.  As far as the Time Bar point is concerned, Holdings’ accepts that its claims in respect of the dividends paid in 2001 and shares repurchased prior to 28 January 2002 are prima facie time barred.

87.  Mr Manzoni SC submits that the claim for the 2002 interim dividends declared on 13 December 2001 but paid on 18 March 2002 is not time‑barred since Holdings did not suffer any loss when the interim dividends was approved by the Board of directors on 13 December 2001.  This is because no liability arises on the mere declaration of an interim dividend since the declaration does not create a debt immediately payable: Gore Browne on Companies at 25[17] fn 7.  Holdings’ cause of action did not accrue until the interim dividends was paid on 18 March 2002, which was within 6 years prior to the issue of the Writ.  This court agrees.

88.  In respect of those claims which are prima facie time‑barred, Holdings relies on section 31 of the Limitation Ordinance the relevant parts of which provide:

“ (1) This section applies to any action for damages for negligence, other than one to which section 27 applies, where the earliest date on which the plaintiff or any person in whom the cause of action was vested before him first had both—

(a) the knowledge required for bringing an action for damages in respect of the relevant damage; and

(b) a right to bring such an action,

(referred to in this section as the “date of knowledge”) falls after the date on which the cause of action accrued.

…

(3) An action to which this section applies shall not be brought after the expiration of the period applicable in accordance with subsection (4).

(4) That period is either—

(a) 6 years from the date on which the cause of action accrued; or

(b) 3 years from the date of knowledge, if that period expires later than the period mentioned in paragraph (a).”

89.  Section 31 (5) then sets out in great detail the meaning of “the knowledge required for bringing an action for damages in respect of the relevant damage”.  For the present purpose, suffice it to say that “knowledge … means knowing with sufficient confidence to justify embarking on the preliminaries to the issue of a writ, such as submitting a claim to the proposed defendant, taking advice, and collecting evidence”:  Kensland Realty Ltd v Tai, Tang and Chong (2008) 11 HKCFAR 237 at [16]. 

90.  Section 31 applies to extend the time period for a claim in negligence to 3 years after the date when Holdings had the knowledge required to bring an action against the Defendant in respect of the loss suffered.  Holdings accepts that as this extended limitation period applies only to claims in negligence,[8] it is necessary for it to establish a breach of duty of care and skill and hence negligence on the part of the Defendant.  For reasons explained in the section on Issue 3, this court is satisfied on the evidence that the Defendant was indeed in breach of her duty of care and skill as a director of Holdings during her tenure.

91.  The next question is whether the knowledge of the Ma Family of their own fraudulent misconduct should be attributed to Holdings in these proceedings.  In this court’s view, the answer should be no.

92.  In Morris v Bank of India [2005] 2 BCLC 328 at [114], Mummery LJ observed that:

“ Clearly there are some circumstances in which an individual’s knowledge of fraud cannot and should not be attributed to a company. The classic case is where the company is itself the target of an agent’s or employee’s dishonesty. …”

93.  That passage was cited with approval in Bilta (UK) Ltd (in liquidation) v Nazir (No 2) [2014] Ch 52 at [33].

94.  The legal position is made even clearer by the Court of Final Appeal in Moulin Global Eyecare Trading Ltd (in liq) v Commissioner of Inland Revenue (2014) 17 HKCFAR 218 at [106] and [133]:

“ Attribution and the fraud exception: conclusions

106. The decision of the Court of Appeal in Bilta has achieved a welcome clarification of the law in this area. The general effect of the authorities discussed above can in my view be summarized in some short propositions.

‘ (1) Questions of attribution are always sensitive to the factual situation in which they arise, and the language and legislative purpose of any relevant statutory provisions: Tesco at pp 169‑170, 194‑195, 203; Meridian at pp 507, 511‑512; Tesco No 2 at pp 1042‑1043; PCW at p 1145; Group Josi at p 1169; Duke at para 615; McNicholas at paras 48‑50; Morris at paras 116-124; Safeway at paras 29, 44‑46; Bilta at paras 33‑35, 45.

…

(7) The supposed distinction between primary and secondary victims, although sometimes a useful analytical tool, is ultimately much less important than the distinction between third party claims against a company for loss to the third party caused by the misconduct of a director or employee, and claims by a company against its director or employee (or an accomplice) for loss to the company caused by the misconduct of that director or employee: Bilta at paras 45 and 77.

(8) In cases concerned with insurance the terms of the policy are likely to be decisive, especially where a company has obtained cover against the risk of breach of duty, including fraud, by directors or employees: Arab Bank at p 283, and the comments on that case in Morris at paras 122‑124. Internal fraud was the “very thing” from which the insurance cover was intended to protect the company.

(9) The fraud exception does not appear to have been even raised as a defence, still less successfully relied on, in a claim by a company against its auditors for failure to detect internal fraud (as in Duke and MAN) with the sole exception of the extreme “one-man” company case of Stone & Rolls (see that case at paras175 and 176). Again, internal fraud was the “very thing” from which the auditors had a duty to protect the company.’

…

133. The authorities cited to the Court include some cases which do not fit comfortably into either of the “liability” and “redress” categories. These are cases of a claim under a fidelity policy covering an employee’s fraud (Arab Bank) and claims against auditors who have failed to uncover fraud (Duke and MAN, with Stone & Rolls as the controversial exception): see para 106(8) and (9) above. In those situations the claim is not for redress from a fraudster or his accomplice. It is against insurers or auditors who have, for value, undertaken to provide protection against the risk of internal fraud, or to use reasonable professional skill to uncover internal fraud. Such insurers and auditors must be supposed to have had ample opportunity to acquaint themselves with the relevant business before undertaking these obligations. There is no reason for the law to apply the fraud exception so as to absolve the contractual obligations of the insurers or the auditors (except, as the House of Lords held, in the extreme and exceptional circumstances of Stone & Rolls).” (emphasis added)

95.  Mr Manzoni SC submits and this court agrees that by analogy with the role of an auditor, the very thing that a non‑executive director such as the Defendant is engaged to do is to protect the company, including from the possibility of misconduct by fellow directors.  Accordingly, there is no reason for the law to apply the fraud exception so as to absolve the Defendant for failing her duty as a director to protect the interests of Holdings during her tenure, whether generally or for the purpose of assessing Holdings’ ability to rely on the extended limitation period.

96.  On the facts, the earliest possible date that the fraud of the Ma Family could have been uncovered by Holdings was when FH was appointed as investigating accountants and commenced its review of the Moulin Group on 12 May 2005.  The writ was issued on 29 January 2008, within 3 years of this earliest possible date when Holdings could begin to have the relevant knowledge. Holdings is therefore entitled to the benefit of the extended limitation period under section 31.

97.  As for the Double Recovery point, the Moulin Group has made recoveries from its former auditors in respect of claims which overlapped in part with the claims pursued against the Defendant.  Holdings accepts that to the extent that the Moulin Group has recovered part of the claims in these proceedings from any other party, it will account to the Defendant so as to ensure there is no double recovery by Holdings.  Holdings further accepts that it should deduct the claim for HK$30,248,277.70 in respect of the final dividends for the year ended 31 March 2002, which was fully satisfied by the terms of the settlement with Party B, one of the Group’s former auditors.

98.  Mr Manzoni SC however submits that no further deduction from Holdings’ claims is required beyond the HK$30,248,277.70.

99.  In Barings plc v Coopers & Lybrand [2003] PNLR 34 at [1118] and [1119], Evans‑Lombe J held that in the case of a “negotiated settlement”:

(1)   the normal rule is to allow the recipient of a settlement sum to appropriate the money to the satisfaction of a particular claim, subject to (i) the claim meeting the threshold that it was not obviously unsustainable; and (ii) the appropriation not being collusive or not made bona fide;

(2)   a plaintiff is not required to establish that a non‑overlapping claim would have succeeded at trial in order to be entitled to allocate the settlement sum to such a claim.

100.  In Fiona Trust & Holding Corporation v Privalov [2010] EWHC 3199 (Comm) at [1547], Andrew Smith J summarised the law as follows:

“ … the law does not allow a claimant to recover against two defendants who are liable to him for the same damage. If one has paid in satisfaction or settlement of the claim, the other is entitled to credit in respect of the payment. If a claimant receives payment from one defendant who is liable both for claims overlapping with those of another defendant and for other claims against him alone,the claimant is entitled (by the settlement agreement or otherwise) to appropriate any settlement monies either to the overlapping claims or to the other claims and, if the appropriation is made bona fide and without collusion, it conclusively determines in respect of which claims the settlement monies have been received.” (emphasis added)

101.  As can be seen from the Amended Confidential Further and Better Particulars of paragraph 395 of the Further Amended Statement of Claim, the unallocated net proceeds of settlement have been arrived at after deducting (a) the costs incurred in relation to the claims against the 2 former auditors Party A and Party B; and (b) that part of the settlement proceeds which was paid to MGET, a co‑plaintiff in the claims against Party A and Party B.  The unallocated net proceeds of settlement were then applied to claims which Holdings made against Party A or Party B only. However, since they were insufficient to fully cover the claims against Party A or Party B only, there is no surplus remaining which could be applied to reduce the amount of Holdings’ claims against the Defendant.

102.  The “non‑overlapping claims” against the former auditors for dividends, directors’ remuneration and audit fees are claims commonly pursued against auditors in negligence proceedings.  There is no evidence which suggests that they were obviously unsustainable or that the appropriation was not bona fide or was made with collusion.

103.  In the premises, this court agrees that no further deduction from Holdings’ claims is required to avoid double recovery and shall so rule.

Disposition and costs order nisi

104.  There shall be judgment in favour of the Plaintiff against the Defendant in the sum of HK$228,867,088.72 together with interest of HK$234,760,097.18 up to 31 October 2018, further pre-judgment interest at the rate of Prime plus 1% from 1 November 2018 until judgment, and thereafter at judgment rate until payment.

105.  There shall also be an order nisi that costs of the Action be to the Plaintiff, to be taxed if not agreed, and paid by the Defendant forthwith, with certificate for two counsel.

106.  Lastly, this court thanks the Plaintiff’s legal team for their very helpful assistance.

HCA 167/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 167 OF 2008

______________

___________________

J U D G M E N T

___________________

Introduction

1. By these proceedings, Moulin Global Eyecare Holdings Limited (“Moulin”), acting through its liquidators, brings claims against Ms Olivia Lee Sin Mei (“Ms Lee”), a former director, arising out of alleged breaches of her fiduciary duties, and of her non-fiduciary duties of skill, care and diligence, owed to Moulin.

2. Prior to the appointment of provisional liquidators in June 2005, Moulin carried on, through its subsidiaries, the business of the manufacture and distribution of eye-wear products.  Moulin and the group of companies which it headed had an apparently substantial and successful business, and Moulin was listed on the Stock Exchange of Hong Kong (“the Stock Exchange”).

3. Soon after the liquidators were appointed, they discovered that there were serious issues with the financial statements of the Moulin group of companies.  It transpired that senior executives of the Moulin group, and employees acting on their instructions had falsified accounting records so as to create false sales on a substantial scale, so as to significantly overstate the Moulin group’s turnover and profitability.  Such false sales were the basis of applications for trade credit and financing, the proceeds of which were falsely represented to be assets of the Moulin group. As a result, total assets were overstated and liabilities understated.  A number of the Moulin group’s senior management and staff have been convicted of various criminal offences as a result.

4. Following the discovery of the false accounting in the Moulin group’s records, the liquidators have pursued litigation against various parties.  Litigation against Moulin’s former auditors has resulted in some recovery by way of settlement.  However, according to the liquidators, there remains a substantial deficit, and creditors have so far received dividends of less than 50% of the amount of Moulin’s indebtedness to them.

5. These proceedings are part of the litigation undertaken by Moulin to seek to recover its losses.

Background to these applications

6. Ms Lee was a director of Moulin from 8 December 2000 until 1 November 2004.  She was also a member of Moulin’s audit committee.  She had, prior to her appointment as a director, been a legal advisor to Moulin and its controlling shareholders, and continued in that role while a director.

7. In January 2008, Moulin commenced these proceedings against Ms Lee.  It served a detailed Statement of Claim on 15 February 2008, in which it was alleged that she was in breach of her contractual, common law and fiduciary duties, in failing to have regard to information which should have brought her to the realisation that a number of areas of Moulin’s financial statements had been the subject of serious misreporting, and failing to take steps which, if taken, would have brought Moulin’s true financial position to light.  In consequence, it was said, Moulin had paid out dividends of some HK$242,666,000 which it was not, in fact, in a position to pay (because far from having earned profits in the financial years in respect of which such dividends were paid, it had suffered losses), had paid tax on its purported profits of some HK$28,586,636 and had paid interest on circular trade finance transactions of some HK$73,803,159.  Each of these amounts was claimed as loss, damage or compensation for which Ms Lee was liable.

8. Ms Lee applied to strike out the claim against her on the basis that she was entitled to rely on indemnities which, she contended, exonerated her from any liability to Moulin.  Although she was successful at first instance, her application was dismissed in April 2010 on appeal by the liquidators.  At this stage, Ms Lee had yet to serve a defence to the claim against her.  It appears that during the course of the appeal, the possibility of Moulin extending its claims against Ms Lee to include claims in respect of payments for share repurchases and early redemption of convertible notes, as described in the next paragraph, was raised.  The possibility that such claims might be statute barred was mentioned by those representing Ms Lee.  In the event, Moulin issued a separate writ in April 2010 in respect of those claims.

9. Notwithstanding that a separate writ had been issued in respect of the further claims the previous month, in May 2010, before Ms Lee had served any defence, Moulin served an amended statement of claim, in replacement of its original pleading.  While the claim for damages or equitable compensation in respect of dividends paid remained, those in respect of tax and interest paid were dropped.  In their place, damages or compensation were sought in respect of some HK$37,232,000 paid by Moulin to repurchase its own shares between 2000 and 2004, and some HK$98,472,648 and US$15,000,000 (plus interest) paid to voluntarily redeem certain convertible notes (known as the Chishore Notes and the HSBC Notes respectively) prior to their due dates.

10. At the end of November 2010, Ms Lee filed her defence and counterclaim.  Moulin’s reply and defence to counterclaim was served in March 2011.  All of the pleadings are substantial documents, each running to hundreds of paragraphs over between 50 and 150-odd pages.

11. Since then, the parties have progressed the case towards trial, which is presently expected to take place in the latter part of 2013.  Moulin has served factual and expert evidence in which its case on the falsity of its audited accounts, and what it says was its true financial position, are expounded.

12. At this hearing, there were four applications to be dealt with.  These were (in chronological order):-

(1)  Ms Lee’s application by summons dated 9 September 2010 to strike out Moulin’s claim, or parts of it, on the basis that it discloses no reasonable cause of action, or is frivolous or vexatious or constitutes an abuse of process.  The application was subsequently amended by a summons dated 20 October 2011 to include an alternative application to disallow the amendments made to Moulin’s statement of claim without leave in May 2010, seeking an extension of time for the purpose of making such alternative application.

(2)  Ms Lee’s application by summons dated 7 September 2011 for discovery of settlement agreements entered into between Moulin and its former auditors.

(3)  Moulin’s application by summons dated 21 September 2011 for leave to re-amend the Amended Statement of Claim in accordance with a draft Re‑Amended Statement of Claim annexed to the summons.

(4)  Ms Lee’s application by summons dated 8 November 2011 seeking to expunge parts of the witness statement of Ms Catherine Williams dated 19 September 2011, on the grounds that the parts sought to be expunged are inadmissible as they contain:-

(a)  statements of information and belief in respect of which Ms Williams has no personal knowledge; and

(b)  expressions of opinion by Ms Williams, who is put forward as a factual, and not an expert, witness.

13. At the hearing, Moulin was represented by Mr Ashley Burns SC, while Ms Lee was represented by Mr Paul Shieh SC and Miss Janet Ho.

The discovery, amendment and expungement applications

14. In the event, it was possible to substantially dispose of the applications, other than the striking out application, at the hearing, as follows:-

(1)  So far as Ms Lee’s discovery summons was concerned, it was accepted by Moulin that the settlement agreements in question should be disclosed.  The only disagreement was as to the arrangements to be made to preserve the confidentiality of the settlement agreements, both as to the identity of the parties to them, and as to their terms, this being expressly provided for in the agreements themselves.  In the event, Moulin agreed to produce redacted copies of the settlement agreements for inspection, with the redactions being carried out on the basis of relevance (so that material of no relevance to these proceedings would be redacted).  Moulin would also provide a general explanation of the basis of redaction, and Ms Lee would be at liberty to make an application for inspection of the redacted parts if those advising her felt that there was a proper basis for doing so.  So far as preservation of confidentiality was concerned, at this stage, inspection of the settlement agreements would be limited to solicitors in the firm representing Ms Lee, and counsel instructed by them (but not trainee solicitors or pupil barristers), with the question of disclosure to expert witnesses for Ms Lee, and to her insurers, being left over for later determination.

(2)  Mr Shieh indicated at the beginning of the hearing that Ms Lee would not oppose the application for leave to re-amend the Amended Statement of Claim, save in respect of the proposed re‑amended paragraph 62.  However, he also indicated that if his client’s application to strike out were unsuccessful, the amendments to that paragraph would not be opposed either.  Thus, the only live issue in relation to the application for leave to re‑amend would stand or fall with the striking out application.

(3)  As for the application to expunge parts of Ms Williams’ witness statement, it emerged during the course of argument that the main concern on Ms Lee’s part was that it was (she contended) inappropriate for Ms Williams, as a purported factual witness, to express views as to whether particular transactions, assets or accounts of Moulin or the Moulin group were fictitious or false, or whether particular transactions or accounting practices were unusual or irregular.  In the event, the parties were able to agree that any such statements should be regarded, for the purposes of the proceedings, as no more than statements by Ms Williams of the view taken by her of such transactions, assets, accounts or accounting practices.

15. I should add that questions of costs in relation to the foregoing applications were not addressed at the hearing, and were stood over to be dealt with at a later date.

The striking out application

16. That left the application to strike out (or disallow) part or all of the amended statement of claim.  Initially, the application to strike out was based on the following grounds:-

(1)  The claims based on the Chishore and HSBC notes should be struck out because the early repayment of the notes did not cause any loss to Moulin.

(2)  If at least the claims in respect of the Chishore and HSBC notes were struck out, the whole claim should be struck out because, when inflows of funds arising from new capital raised by Moulin between 2000 and 2004 were taken into account, the net financial position of Moulin appeared to have improved, so that it had not in fact suffered any loss as a result of Ms Lee’s alleged breaches of duty.

(3)  The claims based on the share repurchases and on the Chishore and HSBC notes should be struck out (or the amendment introducing them disallowed) on the basis that these claims should not have been added to the existing claim because they were new claims which were introduced after the expiry of the relevant limitation period applicable to them.

(4)  The allegations of insolvency on Moulin’s part which underpinned the various claims being advanced were bad, in that on analysis, Moulin was not in fact (or could not be shown to be) insolvent, so that the claims (which depended on Moulin being able to establish that it was in fact insolvent) could not possibly succeed, and should be struck out.

17. At the hearing, however, Mr Shieh indicated at the outset that the fourth ground mentioned in the preceding paragraph would not be pursued.  The argument therefore proceeded in relation to the remaining three grounds, although Mr Burns laid down a marker that Moulin would, when questions of costs were dealt with, seek special orders as to costs in respect of what he said were substantial costs that had, as it turned out, unnecessarily, been expended in order to answer the suggestion that Moulin was not in fact insolvent.

Whether the striking out application should be entertained at all

18. At the start of the hearing, Mr Burns submitted that the court should decline to embark upon consideration of the striking out application and should simply dismiss it summarily.  In support of this contention, he drew my attention to the principles applicable to striking out applications set out in para 18/19/4 of Hong Kong Civil Procedure, which reiterates that the summary powers to strike out a pleading should only be exercised in plain and obvious cases, where the claim was obviously unsustainable and the claim could not possibly succeed, and that the jurisdiction to strike out should not be exercised where it calls for a minute and protracted examination of the documents and facts of a case.

19. Mr Burns also reminded me of the observations of Lord Templeman in Williams & Humbert Ltd v W & H Trade Marks (Jersey) Ltd [1986] AC 368 at pages 435-6, where he said that:-

“Where an application to strike out pleadings involves a substantial and serious argument, the court should as a rule decline to proceed with the argument unless, in the rarest of cases, he not only harbours doubts about the soundness of the pleading and considers it likely that he may reach the conclusion that the pleading should be struck out, in that the ultimate issue is quite simple, but is also satisfied that striking out the pleading would obviate the necessity for trial or will substantially cut down or simplify the trial as to make the risk of proceedings with the hearing sufficiently worthwhile.”

20. He submitted that even if I decided to embark on the hearing, I should consider permitting Mr Shieh to start his submissions, but keeping in mind the possibility of calling a halt to the proceedings in the event that it should become apparent that the points being raised were not susceptible to determination on a striking out application, as was done in Morris v Bank of America NT [2001] 1 BCLC 771.

21. However, having heard Mr Shieh in response, I concluded that in the circumstances of this case, it would be appropriate to allow the striking out application to continue, as the trial was still more than a year away, the arguments to be run on the striking out application were likely to take no more than about two days, did not require the court to consider disputed questions of fact, appeared to be fairly self-contained, and would (if I were with Mr Shieh on both the complaints in relation to the claim based on the Chishore and HSBC notes, and on the need to take into account receipts that came in through new share issues) potentially dispose of the whole action.  Further, as it was expected that a decision could be given within about six weeks to two months, it did not seem likely that there would be any significant adverse impact in terms of the ability to have a trial sometime in the third or last quarter of next year, particularly as I was prepared to fix a further case management hearing at which the position (and further steps to be taken in the litigation) could be considered in the light of my decision on the striking out application.  In the event, the further case management hearing was fixed for 3 July 2012.

Striking out the claims arising from early redemption – no loss to Moulin?

22. I shall deal first with the claims based on the early repayment of the Chishore and HSBC notes.  These are set out in paragraphs 79 to 127 of the Amended Statement of Claim, which is the relevant pleading to have regard to for the purposes of this argument.  In briefest summary (which is all that is necessary for present purposes) these claims run along the following lines:-

(1)  Moulin entered into contracts relating to the Chishore and HSBC notes respectively – in the case of the Chishore notes, the transaction was structured as a loan of HK$85 million, secured by 135 million shares in Moulin, which were charged to a company called Advent as security agent for Chishore; in the case of the HSBC notes, there were two tranches of convertible notes (totalling US$15 million in value) issued which were convertible into Moulin shares at a stated conversion price. Nothing turns, for present purposes, on the different structure as between the Chishore notes and the HSBC notes.  It is also to be observed that the Chishore notes (or loan) was not entered into by Moulin directly, but by a special purpose subsidiary – for present purposes, this is not relevant either (although Ms Lee does contend that the Chishore notes involve no liability on the part of Moulin itself, this is not something that needs to be addressed in the context of this application).

(2)  Each set of notes contained, among other provisions, an undertaking on the part of the issuer that Moulin’s interest expenses would not exceed 20% of its earnings before interest and tax (“the interest covenants”).

(3)  Ms Lee was aware of the terms of each set of notes, having advised on them.

(4)  In September 2001, a default notice was sent to Moulin in respect of the Chishore notes, alleging that the interest covenant in relation to the Chishore notes had been breached, and calling for early redemption in full of the Chishore notes.  Similar default notices in relation to the two tranches of HSBC notes were received by Moulin in April 2002 and April 2003 respectively.

(5)  Ms Lee was involved in advising Moulin as to the default notices, and obtained advice from counsel in relation to the Chishore notes, which suggested that there had indeed been a breach of the relevant interest covenant.

(6)  Settlements were eventually reached after extensive negotiations, whereby each set of notes was redeemed, with interest.  Chishore was paid HK$98,472,648 plus interest, and the holders of the HSBC notes were paid a total of US$15,000,000 plus interest.

(7)  In no case was the breach of the interest covenant disclosed to Moulin’s board, shareholders or the Stock Exchange.  Instead, the repayments in respect of the HSBC notes were described as voluntary early repayments.

(8)  It is alleged that this was done to conceal the breaches of the interest covenants, and to conceal the true financial position of Moulin (which is alleged to have been insolvent at the relevant times), and that had the breaches of the interest covenants, or the true financial position of Moulin been disclosed as Moulin contends they should have been, the repayments would not have been made.

(9)  It is then contended that, in consequence, Moulin has suffered losses in the amounts of the repayments plus interest.

23. For present purposes, I shall assume that Moulin will, at trial, be able to establish the matters mentioned in paragraphs 22(1) to (8) above.  Nonetheless, Mr Shieh submits, the proposition in paragraph 22(9) is simply wrong, and is fatal to the claims based on the Chishore and HSBC notes.

24. Mr Shieh’s argument is a simple one: as the liabilities under the Chishore and HSBC notes were genuine liabilities of Moulin, which were extinguished as a result of the repayments, Moulin can have suffered no loss for which Ms Lee could be required to compensate it, as the reductions in its assets (cash) caused by the various repayments were matched by reductions in its liabilities (under the notes), with the consequence that its net financial position remained unaltered.

25. In principle, this would appear to be right.  A company does not, on the face of it, suffer loss by paying off a liability to which it is subject.  The consequence would be that there would be no loss for which Ms Lee could be required to compensate Moulin as a result of the early redemption of the Chishore and HSBC notes, so that the claim for the amounts of the repayments and interest would be bound to fail, and so should be struck out.

26. However, Mr Burns submitted that the position was not so simple.  He relied on observations in a number of cases to the effect that where a company is insolvent, the duties of directors to the company are no longer owed to the shareholders (as would be the case where the company is solvent), but to its creditors.  In Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722, the question arose as to whether the entry into by a company (that was in financial difficulties) of a leasing agreement with its directors at a substantially undervalued rent involved a breach of duty and could be avoided on the application of the company acting through its liquidators, notwithstanding that it had been approved of by all the shareholders.  The New South Wales Court of Appeal held that it could not. Street CJ pointed out (at p.730A-C) that:-

“In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company’s assets. It is in a practical sense their assets and not the shareholders’ assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration.”

Later in his judgment (at p.733D-E), he stated that:-

“In the view that I hold the challenge by the company is made good and the defence advanced by the appellants must fail. The case presents an unusually straightforward factual pattern. The company was plainly insolvent at the date of the lease and its collapse on that ground was imminent; thus no occasion arises to analyse the degree of financial instability which may be necessary to impose upon directors the obligation to consider the position of creditors. Secondly the prejudice to the creditors was the direct and calculated result of the lease; its purpose was to place the company’s assets beyond the reach of the creditors; there is thus no occasion to examine on a value basis the commercial wisdom or unwisdom of the decision of the directors.”

27. That the interests of creditors intervene on insolvency, so that directors have to have regard to them in exercising their powers in relation to a company’s assets has been recognised in a number of other decisions as well.  One such decision on which Mr Burns placed particular reliance was the decision of the English Court of Appeal in West Mercia Safetywear Ltd v Dodd [1988] BCLC 250.  In that case, a director caused the company to transfer a sum of money to its holding company, of which he was also a director, and whose overdraft he had guaranteed, in partial repayment of amounts which it owed to the holding company at a time when both companies were on the verge of liquidation.  After both companies had gone into liquidation, the company’s liquidator applied for a declaration that the director was guilty of misfeasance and breach of duty, and for an order that he repay to the company the amount paid to the holding company.  It was held on appeal that once a company was insolvent, the interests of the creditors overrode those of the shareholders, and that since the company was known by the director to be insolvent when he caused the money to be transferred to its holding company, and the transfer was a fraudulent preference made solely to relieve the director of personal liability under his guarantee in disregard of the interests of the company’s creditors, he was guilty of a breach of duty and should be ordered to repay the amount transferred with interest.  A submission that the company had suffered no loss, and that in consequence no order for repayment should be made, was rejected.

28. Mr Burns contended that in the present case, having regard to the decision in West Mercia, it could not be said that the claim for recoupment of the amounts paid to redeem the Chishore and HSBC notes at a time when Moulin was (it was to be assumed for present purposes) insolvent was unarguable, or bound to fail.  He contended that notwithstanding that the making of the repayments might have no net effect on Moulin’s balance sheet, so that its overall deficiency of assets as compared to liabilities was no different both before and after the early repayment of the notes, it was still arguable that Moulin had suffered loss, in that where a company is insolvent, its liabilities exceed liquid assets, so that in reality, every dollar of liabilities was not the equivalent of a dollar of liquid assets.  He suggested that by paying a creditor in full, when the company is insolvent, the company suffers a loss in that the pool of assets available for distribution is diminished, and that the company is worse off because it has paid in full a claim which was in real terms worth only cents in the dollar.

29. Mr Shieh responded that where a company paid a genuine debt (whether it could be described as a trade debt or not), it suffered no loss, since there was no depletion of its net assets (or increase in its net deficiency, if it were insolvent).  In support of this proposition, he relied not only on its self-evident correctness as a matter of both principle and common sense, but also on a number of English first instance authorities in which, he said, this had been recognised.

30. The first case to which Mr Shieh referred was Knight v Frost [1999] BCC 819, in which Hart J rejected the proposition that a director who caused an insolvent company to pay a debt to one creditor in preference to its debt to another was liable to make good, to the company, the amount so paid away, saying (at p.834 D-E):-

“… In my judgment, the authorities relied on do not support that proposition. In both the West Mercia Safetywear and Washington Diamond Mining Co cases, the payment in question had been a fraudulent preference because it had been made within the relevant statutory period prior to the commencement of a winding up. They are not authority for the proposition that a director who for his own purposes causes the company to prefer one of its creditors over another outside that statutory period is liable to replace the money at the suit of the company. It is through the mechanism of liquidation that the creditors are protected and the plaintiff has in this case chosen to pursue a derivative action as a shareholder rather to petition, as creditor, for [the company] to be wound.”

31. The point was subject to more detailed analysis by Park J in Re Continental Assurance Co of London plc (No 4) [2007] 2 BCLC 287.  There, liquidators of the company brought proceedings for both misfeasance and wrongful trading against the former directors.  One issue for consideration (which will be of relevance to the second basis for striking out – that based on the contention that credit should be given for inflows of funds during the period when Moulin is said to have continued to trade when it should have already been placed into liquidation) was as to the starting point for these claims.  The rival contentions were two bases put forward by the liquidators which focussed on payments out by the company during the period during which it was said that it should have been, but was not, placed into liquidation, and that contended for by the directors, who suggested that the appropriate starting point was the increase in net deficiency on the company’s balance sheet between the date on which it should have been placed into liquidation, and the date on which it actually went into liquidation.  In an interim judgment given during the course of the trial, Park J held that the correct starting point was the increase in net deficiency.  However, in explaining his reasons for this, he also made certain observations as to whether or not it could be said that the company had suffered loss as a result of paying debts.  Thus, he said (at p.294c-d):-

“… The aggregate of payments away by the company during the interim period is not the same thing as the amount which it can be said to have lost through liquidating later rather than sooner. In that connection it is, in my view, relevant that all the payments away were in discharge of trading liabilities of the company, and that the payment by a company of a trading liability does not create a loss.”

32. Park J went on to deal with arguments very similar to those raised by Mr Burns in this case, to the effect that some creditors who were paid in full during the period when the company should have been placed into liquidation would have done better than others who were not, in that the latter would only receive a dividend in the liquidation.  He concluded that the correct means of redressing such a situation was to utilise the unfair preference provisions if they were available (see the interim judgment, at p.294h-295b).  He then went on to say this (at p.295c-296b):-

“(7) In this connection it does not to my mind make any difference if, during the period when Continental paid the debts of some creditors but not others, it ought not to have been trading at all. Payments were still made in the course of trade in discharge of genuine trading liabilities. They did not in themselves inflict any loss on Continental. To repeat a point made in (3) above [i.e. the point made in the extract cited in the previous paragraph], if a company has a true trading debt and pays it in full, it does not, by paying its debt, suffer a loss.

(8) With reference to this last point, I describe a simplified example which was much discussed in the argument and which in my judgment brings out the question of principle. Assume that a company ought to have stopped trading and gone into liquidation at one time (T1) but in fact did not. Instead it traded on to a later time (T2), ceased to trade then, and went into liquidation then. At T1 it had assets of 5 and liabilities of 10, of which 5 were owed to creditor A and 5 were owed to creditor B. If it had gone into liquidation at T1, then, ignoring the costs of liquidation, it would have paid 2.5 to A and 2.5 to B. It would thereafter have gone out of existence with a net deficiency of 5. Assume now that, between T1 and T2 when the company was still trading and had not gone into liquidation, it paid 5 to A in discharge of its debt to him but did not repay B. Assume also that in doing this it was not influenced by a desire to prefer A, so [the fraudulent trading provision] does not apply. Assume, finally, that in the period of continued trading from T1 to T2 the company broke even and paid all the trading debts which it incurred in that period. So when it went into liquidation at T2 it had no new creditors. It still owed 5 to B but it had no assets left. In the liquidation at T2, B receives nothing and the company goes out of existence with a net deficiency of 5.

(9)  What is the effect on the company of its trading on until T2, and going into liquidation then, instead of ceasing to trade at T1 and going into liquidation at that earlier time?  [Counsel for the liquidators] says that the company has made a loss of 2.5, because, whereas if it had gone into liquidation at T1 it would have been able to discharge 2.5 of its debt to B, on the actual facts of the going into liquidation at T2 it cannot discharge any of its debt to B.  I do not agree with [this] conclusion.  The company makes no loss by trading on.  On either date, that is to say T1 or T2, it would have gone out of existence with net liabilities of 5.  At the earlier date – T1 – those liabilities would have consisted of 2.5 owed to A, and 2.5 owed to B.  At the later date, T2, they consisted of 5 owed to B.  That difference in the make up of the creditors whom the company cannot pay does not mean that the company – by going into liquidation later rather than sooner – has made an extra loss of 2.5.  It is correct that, as a result of the company going into liquidation later, B makes a loss of 2.5, which is matched by a gain to A of 2.5, but it is B who makes the loss of 2.5, not the company.”

33. In his judgment delivered after trial, when dealing with the misfeasance claim against the directors, Park J reiterated (paragraph 419 of his judgment, at p.448d-e) the point that the discharge by a company of a liability to which it is already subject does not cause it any loss.

34. I have cited the views and reasoning of Park J at some length because it seems to me that they provide an entirely convincing exposition as to why no loss is suffered by a company in paying its proper debts.  It also deals comprehensively with the argument advanced by Mr Burns that there is a loss in that full payment is made of a debt that is “worth only cents in the dollar”.  As Mr Shieh pointed out, on full payment being made of the debts in respect of the Chishore and HSBC notes, those debts were fully extinguished.  They could not later revive, and in the circumstances, Moulin could have suffered no loss to itself by reason of such debts having been paid.

35. Finally, Mr Shieh referred to the decision in GHLM Trading Ltd v Maroo & others [2012] EWHC 61 (23 January 2012), in which Newey J said (at paragraph 169 of his judgment):-

“… the applicability of [the fraudulent trading provision] may have a bearing on what, if any, remedy is available in respect of a breach of duty. As Hart J said in Knight v Frost, the West Mercia and Washington Diamond cases “are not authority for the proposition that a director who for his own purposes causes the company to prefer one of its creditors over another outside [the relevant] statutory period is liable to replace the money at the suit of the company”. It seems to me that a company seeking redress in respect of a “preference” to which [the statutory provision] does not apply is likely to need to show (a) that it has suffered loss, (b) that the director has profited (so that the “no profit” rule operates) or (c) that the transaction in question is not binding on the company. In a typical case, the first of these may be impossible. If the “preference” involved the discharge of a debt, the company’s balance sheet position is likely to be unaffected. The second might well also be problematic if the company has not entered an insolvency regime …”

36. Mr Burns suggested that I should not place reliance on these authorities, as all were first instance English decisions which were not binding on me.  He also sought to suggest that they were distinguishable from the present case, as the Continental decision, in particular, involved the payment of what Park J considered to be ordinary trading debts, whereas the present case involved repayments of loans which (he submitted) could not properly be described as trading debts at all, and were effected in circumstances in which there had to be serious doubt as to the purpose of making the repayments – i.e. that they may well have been made for the purpose of continuing to conceal the true, and dire, financial position in which Moulin was at the time of the repayments.

37. With respect, I do not think that this submission is a good one.  It seems to me that in stating that repayments of genuine liabilities do not result in loss to the company, the decisions accord with both principle and common sense.  Moreover, in my view, it is the decisions in the Kinsela and West Mercia cases, on which Mr Burns relies, that are readily distinguishable from the present.  In Kinsela, there was clearly a loss to the company, in that its net assets were depleted as a result of the transaction being impugned – the grant of a lease at an undervalue necessarily involved the disposition of an asset for less than the company should have obtained, so that the amount coming in was less than the value of the asset it replaced, and the company’s net asset position would, as a result, be impaired.  In West Mercia, there was the element (not present here) that not only was the payment a fraudulent preference (in the present case, quite apart from the fact that the payments in respect of the notes were made well outside the preference period, there does not appear to be any reason to think they were preferences in the sense of being motivated by a desire to prefer the note holders, rather than being in response to serious demands for repayment), but that it also involved the obtaining by the director concerned of a personal benefit or advantage (which, again, is not suggested here).  Neither case suggests that liability to make good a payment arises in the absence of loss to the company, or profit or benefit to the director.

38. Although Mr Burns also suggested that I should not strike out the claims in respect of the Chishore and HSBC notes as this involved a developing area of the law, I am unable to see the respects in which it could be said the law might be developing so as to provide Moulin with a potentially viable argument that it has indeed suffered loss as a result of the repayment of a genuine liability owed by it.  Even if the GHLM decision is taken as suggesting that there may be circumstances in which a “preference” could give rise to a claim for recoupment by the company itself, the position in this case falls outside each of the three exceptional cases suggested by Newey J, and no other, further, exceptional case was suggested by Mr Burns, within which the present case might fall.

39. Thus, for all of the foregoing reasons, I am quite satisfied that it is plain and obvious that the early repayment of the Chishore and HSBC notes could give rise to no loss on the part of Moulin, so that there can be no question of Ms Lee being liable to make good any loss. The suggestion to the contrary is, in my view, unarguable.  I therefore conclude that it would be right to strike out the claims for alleged losses arising out of the early repayment of these notes, and I shall so order. However, I should make it clear that insofar as it is sought to rely on such matters as further particulars of Ms Lee’s knowledge of Moulin’s true financial position, it remains open to Moulin to do so, although I do not accept that this course would justify (as Mr Burns suggested) allowing the allegations of loss to remain until trial.

Striking out the whole claim – no loss when inflows taken into account?

40. I turn next to the second basis for striking out advanced by Mr Shieh.  This was that the whole of Moulin’s claim should be struck out because account should be taken of inflows of new capital in the period between the time when Moulin should, according to its case as pleaded in the Amended Statement of Claim (which is again, for this purpose, the relevant pleading to which to have regard), have been placed into liquidation, and the time when it actually went into liquidation some years earlier.

41. Mr Burns’ initial response to this argument was to suggest that inflows of new capital were irrelevant, and could not be relied upon to reduce the quantum of Moulin’s claim, as the new capital raised during the period when Moulin continued trading was in no sense connected to the losses which it suffered.  Mr Burns suggested that receipts needed only to be taken into account where they could be said to be logically or causally connected to the losses that were claimed.  It was not sufficient that Ms Lee’s negligence or breach of duty gave rise to the circumstances (i.e. continued trading) in which additional capital could be, and was raised.  For this proposition, Mr Burns relied on Hussey v Eels [1990] 2 QB 227, Needler Financial Services Ltd v Taber [2002] 3 All ER 501 and Primavera v Allied Dunbar Insurance Plc [2003] PNLR 12.  In each of these cases, the court held that it was not necessary to give credit for a benefit or profit received where the negligence or breach of duty complained of gave rise to the opportunity, or set the scene, for the receipt of the profit, but did not cause it directly.

42. In the course of Mr Shieh’s argument, however, there was a shift in the way in which his argument was put.  Rather than suggesting that the new capital raised was somehow causally connected to the breaches of duty, or the losses, alleged by Moulin, Mr Shieh submitted that the real point was that Moulin had failed to put its claim for loss and damage on a proper footing in focussing on individual transactions or items of loss (in the form of the dividends paid, payments for share repurchases, and early redemption of the notes).  Mr Shieh suggested that, fairly read, Moulin’s Amended Statement of Claim was to be understood as advancing a claim to the effect that, because of Ms Lee’s breaches of duty, Moulin was enabled to carry on trading for a significant period after it should properly have been put into liquidation, and that the only proper basis for assessment of loss in respect of such a claim was to focus on the increase (if any) in the net deficiency of the company between the time when the company should have been put into liquidation, and the time when it actually went into liquidation.  Mr Shieh stressed, however, that although this was the only correct approach, it was nonetheless just a starting point, from which adjustments might still fall to be made on the basis of causation issues.

43. Mr Shieh drew attention to various paragraphs in the Amended Statement of Claim that, he said, made this clear.  These included:-

(1)  paragraph 150, which states: “[Moulin] paid the unlawful dividends identified at paragraph 55 above when in fact it should have been placed in provisional liquidation and/or liquidation”;

(2)  paragraph 211, which states: “Had the Defendant diligently performed her duties … [Moulin] would have been placed in provisional liquidation and/or liquidation rather than continuing to operate through fraudulent trade finance arrangements…”;

(3)  paragraphs 392 and 393, where it was pleaded that had D complied with her duties to Moulin, by no later than the date on which Moulin’s annual report for the year ended 31 March 2001, Moulin would have been placed in provisional liquidation and/or liquidation, and that this would have brought an end to the payments made and losses incurred by Moulin.

44. Similar statements were also made in the skeleton argument lodged by Mr Burns, and a speaking note handed up during the course of the hearing in which his submissions in the course of argument were helpfully recorded.

45. Thus, in paragraph 15 of the skeleton argument lodged prior to the hearing, Moulin’s case against Ms Lee was said to be that:-

“15.1 in her roles as a director, audit committee member and solicitor, [she] became aware of facts and circumstances that indicated Moulin’s parlous financial state and accounting irregularities, which, in accordance with her duties as a director, she should have investigated further;

15.2 had [she] responded to these matters appropriately and in accordance with her duties as a director, she would have brought to light the massive falsification of the Moulin group’s financial statements by [its dishonest management], and in particular the overstatement of the Moulin group’s profits and reserves and brought these matters to the attention of Moulin’s board of directors, the [Stock Exchange] and Moulin’s shareholders;

15.3  as a result of [her] failure, the fraud remained undetected, Moulin was able to continue trading and loss was suffered as a result, in the form of dividends paid out of capital (HK$242.5 m), share repurchases out of capital (HK$37.2 m) and the early redemption of convertible notes (HK$98.5 m and US$15 m).”

46. And in the speaking note, dealing with the claim in respect of the early redemption of the Chishore and HSBC notes, it was said (at paragraphs 50 and 51) that:-

“50. Moulin’s case is that acting properly and in accordance with her fiduciary and other duties, [Ms Lee] should have “blown the whistle” on issues with Moulin’s accounts. This would have led to Moulin’s actual insolvent financial state becoming public. Provisional liquidation/liquidation would necessarily have followed …

51.  This should have happened long before the convertible notes were redeemed … The convertible notes would therefore not have been redeemed if [she] had not breached her duties.”

47. In my view, it is certainly possible to view Moulin’s claims as being advanced on the basis suggested by Mr Shieh, and as such, being claims based on the consequence of Ms Lee’s alleged breaches of duty being to prolong its continued trading, and being placed into liquidation much later than it should have been.  On this basis, Mr Shieh submitted, the only correct basis for quantifying loss was to have regard to whether or not there had been any increase in the net deficiency of the company between these two dates.  In consequence, it was necessary to have regard not just to outflows during this period (such as the items of loss claimed) but also to inflows, as the increase in net deficiency (if any), and not the outflows, were the true measure of Moulin’s loss.

48. However, Mr Burns said that this was not in fact the basis on which the claim was being pursued.  He contended that Moulin was, as it was entitled to, seeking to make claims in respect of individual items of loss that it had suffered as a result of Ms Lee’s breaches of duty.  Although such breaches of duty could be properly characterised as continuing breaches, continuing throughout the period during which she should have made investigations and brought the dire financial position of Moulin to the attention of its board, its shareholders or the Stock Exchange, each loss suffered during the period was an individual loss, claimable by Moulin in accordance with well established principles.  In particular, in respect of improper payments out of capital, such as dividends or share repurchases, directors responsible for such improper payments are under strict liability to make good such payments by way of equitable compensation or damages (see e.g. Holland v Commissioners for Revenue & Customs [2010] 1 WLR 2793 per Lord Hope at paragraphs 45-49, and Bairstow v Queens Moat Houses Plc [2001] 2 BCLC 531 per Robert Walker LJ (as he then was) at paragraphs 49-54).

49. Mr Burns also suggested that apart from the argument that there was no need to consider questions of set off of countervailing benefits in cases where the claim was for equitable compensation, even on common law principles applicable to the assessment of damages for negligence (mentioned in paragraph 41 above), it was open to a plaintiff to bring a claim for specific items of loss, where only benefits accruing to the plaintiff as a natural and necessary consequence of the loss suffered need be brought into account in reduction of the damages claimed.

50. Further, Mr Burns submitted that although Moulin’s claim was for the specific items of loss identified in the Amended Statement of Claim, it was open to Moulin to advance, as an alternative, a claim based on the increase in its deficiency arising from continued trading after it should have been placed into liquidation.  In support of this proposition, he relied upon the decision of the Full Court of the Supreme Court of South Australia in Sheahan v Verco [2002] SASC 68.  In that case, Lander J said, at paragraphs 99 to 103:-

“99. The plaintiff seemed to think that if it proved that the company was trading whilst insolvent it necessarily suffered loss or damage. In my opinion that is not correct. An insolvent company may continue to trade without suffering loss or damage. Indeed an insolvent company may trade its way out of insolvency.

100. If a company was insolvent at the commencement of a period it will suffer loss or damage if, by continuing to trade, its liabilities exceed its assets by a great sum at the conclusion of the period in question. If it was solvent at the commencement of the period it will suffer loss or damage if, by continuing to trade, its net assets decrease in value. …

101. Whether a company has suffered loss or damage over a period of time requires a valuation of its assets and liabilities at the commencement and end of the relevant period. All of the assets and liabilities must be valued and assessed.

102. That evaluation can give rise to quite complex evidence. … However, in my opinion, a number of matters … are not relevant in a valuation of the company’s assets and liabilities.

103.  It is not enough to say that the company suffered loss or damage because it borrowed money during that period of time.  Of course the borrowing of money increases the company’s liabilities but the borrowed money increases its assets by the same amount.  A loan by itself is no evidence of loss or damage … A company which borrows money will only suffer loss or damage if the borrowed moneys are lost.”

51. Mr Burns recognised that Sheahan v Verco was inconsistent with the decision of Park J in Re Continental, where it was held that increase in net deficiency was not claimable as compensation for breach of duty by a director.  However, he submitted that, while it might well be open to Moulin to make a claim for the increase in its net deficiency, it was nonetheless equally open to it to make a claim on the basis which it so far had done, on the basis of Ms Lee’s breaches of duty having resulted in the individual items of loss claimed.

52. I would accept that a claim on this latter basis is, to put it no higher, well arguable.  I would also accept that in relation to such a claim, it is at least arguable that new capital raised does not have to be taken into account as an offset to the damages allegedly suffered, as it is at least open to Moulin to contend that such inflows were not causally connected with, and did not flow from the damage suffered.  In these circumstances, while I can see why Mr Shieh might have characterised the claim being advanced as one for the increased net deficiency (which was not clearly quantified or particularised in the pleading), I am satisfied that the claims as explained by Mr Burns are open to Moulin on its Amended Statement of Claim, and that it is at least arguable that loss and damage has been suffered by Moulin, which is not extinguished by inflows for which credit must be given.

53. In these circumstances, I do not think that the Amended Statement of Claim should be struck out on this ground, and I decline to do so.

54. I should add that towards the end of the hearing, Mr Burns proffered a further amendment to the Amended Statement of Claim designed to advance, as an alternative, a claim for damages quantified by reference to Moulin’s increased net deficiency.  Mr Shieh objected to the amendment on the grounds that it was not the subject of any application by way of summons, and was, he said, not properly particularised as it should have been.  As it did not seem to me to be convenient, or fair to Ms Lee, to attempt to deal with the matter in the course of this application, I directed that Moulin should consider and formulate the precise amendment which they sought to make, and to make a formal application for leave to amend if necessary.

Striking out of “new claims” on time-bar grounds?

55. This leaves the third ground for striking out put forward by Mr Shieh.  This was that the claims based on the share repurchases and on the Chishore and HSBC notes should be struck out (or the amendment introducing them disallowed) on the basis that these claims should not have been added to the existing claim because they were new claims which were introduced after the expiry of the relevant limitation period applicable to them.

56. The argument here was that both the claims based on alleged losses arising from the share repurchases, and the claims based on the early redemption of the Chishore and HSBC notes, being based as they were on repurchases which took place between 1 April 2000 and 31 December 2003, and redemptions which took place in November 2002 and May 2003, were statute barred by 13 May 2010, when they were added to the existing claims by way of the amendment made at that time by the replacement of the original Statement of Claim with the Amended Statement of Claim.  In these circumstances, it was submitted for Ms Lee that the correct course to take was to strike out those claims (or disallow the amendments to the extent of those claims) and leave it to Moulin to assert the claims by way of fresh proceedings (which it had in any event issued in April 2010).

57. This was, it was said, the correct course to take in the light of the principle enunciated in Welsh Development Agency v Redpath Dorman Long Ltd [1994] 1 WLR 1409, which has since been applied in Hong Kong in the recent Court of Appeal decision in Sun Focus Investment Ltd v Tang Shing Bor [2012] 1 HKLRD 738.  That approach is to require that new claims which are time-barred at the date of the relevant application to amend (or in this case, the date of the amendment without leave) should not be added by way of amendment to existing pleadings if they were not time-barred at the date that the proceedings were originally commenced, unless the new claims complied with the requirements of sections 35(5) and (6) of the Limitation Ordinance (Cap 346) and RHC Order 20 rule 5(5).

58. The reason for this approach lies in the effect of section 35(1) of the Limitation Ordinance, which provides for new claims added by amendment to existing pleadings to be deemed to have been commenced on the same date as the original action.  This provision has become known as the “relation back rule”.  Its effect on limitation is that if the new claims were not time-barred at the date of the original action, the amendment will (if permitted) result in the new claims being deemed to be brought at a time when they were not time‑barred, notwithstanding that they were in fact (or at least arguably) time‑barred when they were first put forward in the application to amend.  The consequence of permitting the amendment to be made would thus be to deprive the defendant of an accrued limitation defence, which would have been available to him had the new claims been advanced in fresh proceedings. This would generally be regarded as unfair to the defendant.

59. Section 35 of the Limitation Ordinance is, so far as relevant, in the following terms:-

“(1) For the purposes of this Ordinance, any new claim made in the course of any action shall be deemed to be a separate action and to have been commenced –

(a) …

(b) in the case of any other new claim, on the same date as the original action.

(2) In this section a new claim means … any claim involving either –

(a) the addition or substitution of a new cause of action …

(3) Except as provided by section 30 or by rules of court, the court shall not allow a new claim within subsection (1)(b), other than an original set-off or counterclaim, to be made in the course of any action after the expiry of any time limit under this Ordinance which would affect a new action to enforce that claim.

(4) …

(5) Rules of court may provide for allowing a new claim to which subsection (3) applies to be made as there mentioned, but only if the conditions specified in subsection (6) are satisfied, and subject to any further restrictions the rules may impose.

(6) The conditions referred to in subsection (5) are –

(a)  in the case of a claim involving a new cause of action, if the new cause of action arises out of the same facts or substantially the same facts as a cause of action in respect of which relief has already been claimed in the action by the party applying for leave to make the amendment. …”

60. RHC Order 20 rule 5 provides for amendments to be allowed generally with the leave of the court.  Rule 5(5) provides that:-

“An amendment may be allowed [after any relevant period of limitation current at the date of issue of the writ has expired] notwithstanding that the effect of the amendment will be to add or substitute a new cause of action if the new cause of action arises out of the same facts or substantially the same facts as a cause of action in respect of which relief has already been claimed in the action by the party applying for leave to make the amendment.”

61. Mr Shieh contends that the claims for loss arising out of the share repurchases and early redemptions of the convertible notes are new claims, in that they involve the addition (or substitution) of causes of action to the existing claims in the original Statement of Claim (for dividends, tax and interest).  Accordingly, he says, they should not be permitted to be introduced by way of amendment in circumstances where they would have been statute barred at the time of the amendment (or application for leave to amend, where appropriate) but would not have been so barred as at the date of the original writ.  Otherwise, he submits, Ms Lee would be deprived, by the relation back rule, of an accrued limitation defence.  The only exceptions to this would be if Moulin could show that Ms Lee has no arguable limitation defence (which Mr Shieh suggests it cannot do), or if it were able to establish either that the additional claims for loss do not amount to new claims (or new causes of action), or that, if they were new claims, they arose out of the same or substantially the same facts as the claims already pleaded (which Mr Shieh also suggests is not possible here).

62. Mr Burns disagreed with this approach.  His starting point was that the amendments had been properly made without leave pursuant to RHC Order 20 rule 3, which permits a party to make one amendment to his pleadings (in this case, Moulin making an amendment to its statement of claim) without leave prior to the close of pleadings.  That having been done, Mr Burns submitted that it was for Ms Lee to have applied to disallow the amendment within 14 days, as provided for by RHC Order 20 rule 4.  As Ms Lee had not done so, unless the court were prepared to extend time for her to do this (which it should not do, no good grounds for doing so having been established), the effect was that the relation back rule had already come into effect, and the claims in respect of share repurchases and early redemption of convertible notes were to be deemed to have been brought on the date of the original action, so that no question of limitation arose.

63. Mr Burns also submitted that in any event, Moulin had an answer to Ms Lee’s limitation argument, as it was entitled to rely on the provisions of section 31 of the Limitation Ordinance, which extends periods of limitation for claims in negligence to three years after the date on which Moulin had the knowledge required for bringing an action for damages in respect of the relevant damage.  In the present case, Mr Burns said, Moulin did not have such knowledge until relatively shortly before the claims for damages arising out of the share repurchases and convertible note redemptions were pleaded, because of the late provision of documents and material on the part of Ms Lee and her firm.

64. Further, Mr Burns suggested that it would be preferable, as a matter of proper case management, to defer the question of limitation to the trial, by leaving it open to Ms Lee to seek an extension of time to disallow the amendments and argue the points at trial.

65. In addition, Mr Burns submitted that the claims for damages or compensation arising as a result of the share repurchases and early redemptions of the convertible notes were not “new claims”, in that they were not additional causes of action, but should be regarded as part of a broader cause of action based on Ms Lee’s failure to comply with her duties as a director of Moulin.  Alternatively, he said, even if they were to be regarded as “new claims”, they should be regarded as arising out of the same, or substantially the same, facts as the existing causes of action already pleaded.  For this purpose, as I understood it, Mr Burns suggested that the relevant comparator was the Amended Statement of Claim (excluding the parts objected to), rather than the original Statement of Claim.

66. Dealing first with the question of whether or not it is now open to Ms Lee to seek to challenge these amendments, having failed to do so within the two week period mentioned in RHC Order 20 rule 4, I am of the view that it is.  Mr Shieh submitted that it was an abuse of process to seek to introduce a time-barred claim into an existing pleading unless the claim was not a new claim, or arose out of the same or substantially the same facts as the existing claims.  It followed from this that it was not open to a party to use the “free amendment” under RHC Order 20 rule 3 for such a purpose.  I think that this is right as a matter of principle.  Section 35 of the Limitation Ordinance makes it clear that a new claim can only be introduced after the expiry of the relevant period of limitation if the conditions set out in sections 35(5) and (6) are complied with.  It does not seem to me that it can have been the purpose of RHC Order 20 rule 3 to provide a means for a party to circumvent the provisions of section 35, and I do not think that the rule should be construed as permitting such claims to be given substantive finality simply because no objection is made within the time specified in rule 4.  It is notable, in this connection, that RHC Order 20 rule 1, which deals with amendments to a writ made without leave, expressly excludes from its ambit amendments that introduce (inter alia) new claims.  The challenge is therefore one which it remains open to Mr Shieh to advance on behalf of Ms Lee.

67. Alternatively, insofar as it is necessary to do so, I would exercise my discretion in favour of extending the time for the making of a challenge under RHC Order 20 rule 4.  It is clear from the judgment of the Court of Appeal in the earlier striking out appeal that the question of time bar in respect of the (then) proposed claims for damages in respect of the share repurchases and early redemptions of the convertible notes was very much one of which all parties, including Moulin, were aware.  The issue by Moulin of the further writ in April 2010 is also evidence of their awareness of the possible limitation issues.  Moulin cannot seriously suggest that they have been taken by surprise by Ms Lee’s attempt to strike out (or disallow) these amendments notwithstanding that she did so late by some four months, after the point had again been signalled in her Defence (see paragraph 2.5 of that pleading).  There does not, therefore, seem to me to be any particular prejudice to Moulin in permitting the point to be taken now.  If necessary, it can proceed with the writ that it issued, or issue a fresh writ in respect of these claims.  In this way, Ms Lee will not suffer the prejudice of being deprived of an arguable limitation defence by a sidewind, and the limitation issue can be fully ventilated in the context of the new proceedings, which I have no doubt can be tried with at the same time as the existing proceedings, with little, if any, delay to the existing proceedings.

68. While Moulin may be able to establish that it is entitled to the benefit of an extended limitation period under section 31 of the Limitation Ordinance, there is not sufficient material before me at this stage to be able to say that it will certainly be able to do so, so that Ms Lee would not be deprived of an arguable limitation defence by the effect of the relation back rule.  It seems to me that the better course (assuming that the claims in question are new claims and do not arise out of the same or substantially the same facts as the existing claims) would be to allow the question of the applicability or otherwise of section 31 to be raised and determined in the other action.  Indeed, it seems to me that, contrary to Mr Burns’ suggestion, it would only be in the other action that the section 31 point can be engaged at all.  This is because the effect of allowing the claims to remain in the existing proceedings would mean that no limitation defence (in relation to the primary limitation period of six years) could be taken by Ms Lee at all, so that there would be no need for Moulin to even raise the extended limitation period under section 31 in response.

69. It also seems to me that it would be undesirable to leave the question of whether or not these amendments should be struck out or disallowed to the trial of these proceedings.  If this were done, and the conclusion were reached that they should be so struck out or disallowed, the other proceedings would have to be revived at that point only, presumably requiring a separate subsequent trial of the claims under the other writ.  This would not seem to be an efficient way of proceeding.  On the contrary, by determining the matter now, the parties will know where they stand in relation to this issue, and can proceed with all of their claims in the appropriate manner.

70. This takes me to the nub of the issue: are the claims in respect of the share repurchases and the early convertible note redemptions “new claims”? And if so, do they arise out of the same or substantially the same facts as already pleaded in relation to the existing claims?

71. I accept, as Mr Burns submitted, that in considering whether or not the additional claims advanced are new claims, or amount to additional causes of action, the matter should be approached at a high level of generality.  I also accept that the mere addition of further particulars does not result in there being a further cause of action pleaded. As the authorities demonstrate, though, the question of whether or not there is a new claim is necessarily to a large extent a matter of impression (see e.g. per Glidewell LJ in Welsh Development at p.1418D).

72. Mr Shieh submitted that on the basis of the claims expounded by Mr Burns in the context of the second part of the striking out argument, Moulin’s claims were for separate and distinct items of loss and damage, arising on each occasion on which a dividend was paid, a share repurchase was effected, or an early redemption of convertible bonds made, when it should not have been – either because Moulin did not have the necessary distributable profits out of which to make the dividend payment or share repurchase, or because its financial position at the time was such that the dividend payment, share repurchase or early redemption should not have been made at all.  Thus, said Mr Shieh, each of the allegedly wrongful payments constituted a separate claim, involving an examination of the position in relation to each such wrongful payment.  Although the broad facts in relation to Moulin’s financial position and Ms Lee’s knowledge of it might be similar (or even virtually identical) over the whole of the period covering the various payments complained of, each payment was an individual and separate claim for loss, and as such, was a separate cause of action, and the addition of the claims in respect of the share repurchases and convertible note redemptions were additions of further causes of action which had not previously been advanced.

73. I agree with Mr Shieh.  Although Mr Burns contended that Moulin’s claim was a single claim of breach of duty by Ms Lee, involving her failure to make the necessary investigations that would have revealed Moulin’s alleged insolvency and bring that to the attention of the board, shareholders or Stock Exchange, resulting in various items of loss and damage being suffered, such that each item of loss was merely a particular of loss rather than a separate claim, it seems to me that to put the case in this way is in effect to advance the claim that Moulin should, but for Ms Lee’s breach of duty, have been placed into liquidation at an earlier date than it in fact was – a claim which Mr Burns disavowed as being the claim put forward in Moulin’s pleadings.

74. It also seems to me to be quite appropriate to regard the separate dividend payments, share repurchases and convertible note redemptions as separate and distinct claims.  None were, on the face of it, connected with each other.  Even if Ms Lee were to be regarded as being in continuous breach of her obligations from some particular point in time, this would not, in my view, render the distinct claims in relation to each item of loss a single claim for limitation purposes, even though there may well be some overlap in respect of the facts that might be relied on to establish that Ms Lee was in breach of her duties at the relevant time in the context of each individual claim.

75. If, as I think, each of the claims should be regarded as separate and distinct, it follows, in my view, that the additional claims in respect of share repurchases and convertible note redemptions cannot realistically be said to arise out of substantially the same facts as those pleaded in support of the existing claims.  In order for the additional claims to be advanced, the critical facts that need to be pleaded include (at least) the payments for share repurchases, and the amounts paid by way of redemption of the convertible notes, without which there would be no damage, and no completed cause of action in respect of those claims.  Given the importance of these facts to the additional claims advanced, I am of the view that they cannot be said to arise out of the facts already pleaded, whether wholly or substantially.  In this respect, I consider that the relevant comparator is the original Statement of Claim, and it is clear that the facts necessary to support the claims in relation to the share repurchases and convertible note redemptions are nowhere to be found in that document.

76. I am therefore satisfied that the appropriate course to take in relation to these further claims is to strike them out (or disallow them to be included in the Amended Statement of Claim), and to leave Moulin to pursue them in separate proceedings, either under the writ issued in April 2010, or some other proceedings, which can no doubt in due course be consolidated with this action.  However, to the extent that allegations in relation to these matters are sought to be relied on as further particulars of Ms Lee’s knowledge (or the knowledge she should have had) as to Moulin’s financial position at the relevant times, such allegations may remain in this action for that purpose only.

Conclusion and costs

77. In the result, while I am not satisfied that it would be proper to strike out the whole of the action, I shall order that the claims in relation to the share repurchases be struck out on the basis that they are new claims, which do not arise out of the facts already pleaded, in respect of which Ms Lee has an arguable limitation defence, and that the claims in relation to the convertible note redemptions be struck out on the same basis, and also on the basis that there is no arguable case that Moulin has suffered loss in consequence of them.  It follows that, to the extent that Moulin wishes to pursue the writ issued in April 2010 (or a fresh writ), the claims thereunder must be limited to the claims in relation to the share repurchases.

78. So far as the costs of this and the other applications are concerned, these can be dealt with at the hearing scheduled for 3 July 2012, if that can conveniently be done, or alternatively at a later hearing to be arranged for this purpose.

HCA 167/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 167 OF 2008

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HCA 167/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 167 OF 2008

____________

Dates of Hearing: 3–4 November 2008

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J U D G M E N T

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Introduction

1.  This is a summons dated 16 June 2008 taken out by the Defendant, Olivia Lee to strike out the action on a number of bases which can be compendiously described as amounting to a complaint that the writ and the statement of claim disclose no reasonable cause of action.  There is also a summons by the Plaintiffs to amend the statement of claim.  This summons had been taken out three months after the Defendant had issued her's to strike out the action.  For the purposes of this judgment, in relation to the strike out application, I will treat the statement of claim as having been amended as the Plaintiffs have asked for in the terms of their draft amended-statement of claim.  I take the matter in this way because that is how the case has been argued.  Mr Jarvis, QC, on behalf of the Defendant, has taken the proposed amendments on board and has dealt with them as part of his case on the strike out application.  In such circumstances, if I rule that the action ought to be struck out, I will dismiss the Plaintiffs' application to amend the statement of claim on the basis that even with the amendments the action is bound to fail.  If I dismiss the strike out application, the Plaintiffs ought to have leave to amend in terms of their draft pleading.  The amendment is sought at this early stage and in circumstances where it will have passed a rigorous examination on the strike out application it ought to be allowed to proceed to trial as now setting out the Plaintiffs' case against the Defendant.

The Background

2.  In order to understand the basis of the strike out application, it is necessary briefly to set out the background to the application and most particularly the position of the Defendant as a non-executive director of the 1^st Plaintiff's group of companies.

3.  The Defendant is a Canadian-trained lawyer who practised law in Canada until 1997.  It was in that capacity that she met the Ma family, who are the family in control of the Moulin Global group of companies, and advised them on aspects of their residence status in Canada.  Since 1997 she began to practice in Hong Kong, firstly with a Canadian law firm and since July 2000 with White & Case, with whom she is a partner.

4.  Since her arrival in Hong Kong in 1977, both White & Case and Goodman Philips, the Canadian law firm that she was with between 1997 and 2000, provided legal advisory services to the 1^st Plaintiff which is a company incorporated in Bermuda.  It is now in liquidation but before its collapse it was a very substantial listed company whose shares had been listed on the Hong Kong Stock Exchange (“HKEx”).  I have been referred to its 2000 Annual Report which showed that at 31 March 2000 its consolidated net assets were just short of $780 million.  It had seven executive directors, five of whom were members of the Ma family.  Its five non-executive directors included an experienced certified accountant and representatives from HSBC and Deutche Bank.  Its auditors were the world-wide firm of KPMG.

5.  In July and August 2000, the Defendant, in her capacity as a solicitor of White & Case gave the 1^st Plaintiff's legal advice and on 24 July 2000, again on behalf of White & Case, attended a Board Meeting of the 1^st Plaintiff.  On 29 August 2000, the 1^st Plaintiff's Board resolved to appoint the Defendant as a non-executive director and to establish an audit committee, of which the Defendant would in due course become a member.  The Defendant accepted these appointments on 8 December 2000.  It is in connection with these appointments that this action is now brought against the Defendant by the liquidator of the Plaintiffs for alleged breaches of duty by the Defendant in her discharge of those appointments to which some detailed reference will need to be made in the course of this judgment.

6.  It is important to understand the conditions of the Defendant's appointment.  The Defendant required that the 1^st Plaintiff execute a deed of release and indemnity in her favour and secondly, that it purchase a directors and officers liability insurance policy against any liability in respect of negligence, default, breach of duty or breach of trust of which she may be held to be guilty in relation to the 1^st Plaintiff and/or its direct and indirect subsidiaries.  These two conditions were required by White & Case in allowing the Defendant to accept these appointments with the 1^st Plaintiff.  The evidence in this regard is in an e-mail sent by White & Case to the Defendant which she forwarded to Mr Cary Ma, the 1^st Plaintiff's CEO, who was instrumental in securing the Defendant's appointment [A/12/267-268]; [B/5/11/1438]; [B/3/10/611-613].

7.  The Deed of Indemnity and the insurance policy (“D&O Insurance”) which were both dated 1 December 2000 were provided to the Defendant on 7 December 2000 following which, on 8 December, she signed her consent to act as a non-executive director.  The next day, the 1^st Plaintiff made an announcement that she had been appointed as a non-executive director and a member of the audit committee.  She was to resign from those positions on 31 October 2004 effective on 1 November 2004.

8.  I now turn to consider, in summary form, the Plaintiffs' claims against her.

The Plaintiffs' Claims

9.  These all centre on her purported duties as a non-executive director and member of the audit committee.  The amended statement of claim alleges negligence against her based on a failure to make enquires and/or to take appropriate action and thereby to allow the Moulin Group of companies under the 1^st Plaintiff to be dishonestly run into the ground by the Moulin Group management team headed by Mr Cary Ma and his relatives and other associates.  No allegation of fraud or dishonesty is levelled against her and no claim is made against her in her capacity as a solicitor with White & Case advising the Plaintiffs qua solicitor.  The loss and damage claimed which runs to over $300 million includes losses said to have been suffered by MEGT, Oaktree (the 3^rd Plaintiff), and Leadkeen (the 4^th Plaintiff by the amended statement of claim) for whom the Defendant had never acted as a director or in any other official capacity.  The losses claimed by MEGT and Leadkeen are up to 23 June 2005, some eight months after her resignation.

10.  The amended-statement of claim, which is a very carefully drafted document, runs to 100 pages including its schedules.  The Defendant's response to it on this application is to take very general issue with it in a way that, at this stage, does not require the sort of examination of a pleading that is said to be bound to fail.  In most applications of this type, the court would be required to go to individual pleaded allegations and examine them in the light of submissions made against the way a particular allegation or aspect of the case has been put which a defendant is submitting has no foundation and is therefore bound to fail.  On this occasion, whilst there are, of course, elements of this approach that Mr Jarvis has taken, he begins by erecting, as it were, the Deed of Indemnity as a substantive obstacle past which the Plaintiff cannot advance.  This claim, he submits, simply cannot get off the ground.  He has very usefully, if I may say so, analysed his approach in paragraphs 1 and 2 of his skeleton which I gratefully reproduce here before I go on to examine his arguments as he has set them out.  All his references in the passages below to Olivia are, of course, references to the Defendant.  [The application to strike out the claim is made on the following grounds:]

“1.1.    that the action was commenced by the 1st Plaintiff (‘Holdings') in breach of its covenant not to sue Olivia under clause 3(a) of the Deed of Release and Indemnity dated 1^st December 2000 made between Holdings and Olivia (‘Deed of Indemnity'), or is liable to be struck out for circuity of action or that all further proceedings should be stayed pending provision by Holdings of an indemnity pursuant to clause 1(a) and (b) of the Deed of Indemnity;

1.2.      that the SOC discloses no reasonable cause of action or is frivolous or vexatious or is otherwise an abuse of the process of the Court on the ground that the alleged breach of duties was not the dominant or effective cause of the loss and damage claimed to have been suffered by the Plaintiffs (‘Ps'); and

1.3.      that the following claims in the SOC disclose no reasonable cause of action against Olivia:

1.3.1.     all allegations and claims made by the 2nd and 3rd Plaintiffs (‘MGET' and ‘Oaktree') against Olivia;

1.3.2.     all allegations which arose after Olivia's resignation on 31^st October 2004; and

1.3.3.     all allegations and claims arising out of unaudited consolidated accounts of Holdings for the year ended 31^st December 2004 (‘2004 Accounts').

2.    In a nutshell, it is submitted that the SOC should be struck out, and the action dismissed, because the action is both hopeless and pointless:-

2.1.      the Deed of Indemnity is valid and binding upon Holdings.  It is not open to Holdings to act inconsistently with the terms of the Deed, which contains a covenant not to sue Olivia and an agreement by Holdings to indemnify Olivia for any damages which may be payable by Olivia in this action;

2.2.      even if (which is denied) the Deed of Indemnity were invalid, there is no question but that Olivia is entitled to rely on the indemnity under Bye-Law 166, which was implied into the contract of engagement between Holdings and Olivia;

2.3.      the claims against Olivia are obviously bad for circuity of action;

2.4.      there is no basis to suggest that Olivia owed any duty to MGET and Oaktree or that Olivia was liable to compensate the loss allegedly suffered by either of them;

2.5.      there is no viable case that the alleged breach of duties was the dominant or effective cause of the loss alleged to have been suffered by Ps; and

2.6.      there can be no sustainable claims based on events which took place after Olivia's resignation on 31^st October 2004 including the 2004 Accounts which were made a few months after Olivia's resignation.”

Whilst these are strong submissions to make, it is trite law that a pleading can only be struck out in a plain and obvious case.

The Law on a Striking Out Application

11.  I can take this shortly.  Both parties are agreed that this draconian remedy is only available in a very restricted range of cases.  The Defendant applying for the action to be struck out has the burden of showing that the case is a plain and obvious one in which the Plaintiff is bound to fail.  The principles appear in Hong Kong Civil Procedure 2009 at 18/19/4 pages 350-351.

12.  Relevantly, in this case where it is said that the pleaded claims are caught by the provisions of the Deed of Indemnity, the court is required to construe the Deed and analyse the claim to see whether, by its terms, it is one that is covered by the indemnity.  If it can be shown by the Defendant that there is no reasonable argument that can be mounted by the Plaintiffs to show that the Deed is not applicable to the pleaded claims then the action should be struck out as one that is bound to fail.  It is against this approach that I must now examine Mr Jarvis's submissions on the applicability of the Deed to the factual allegations that are made against the Defendant.

The Deed of Indemnity

13.  Mr Jarvis submits that the action is bound to fail because the claims fall within the terms of the provisions under clause 1(a)-(b) of the Deed under which the 1^st Plaintiff agreed to reimburse and indemnify the Defendant for any liability arising out of her having acted as a non-executive director and a member of the audit committee and secondly, that the claims that the Plaintiffs make are in breach of the 1^st Plaintiff's covenant not to sue the Defendant under clause 3 of the Deed.

14.  Before I examine this, it is helpful to say that the Plaintiffs' main riposte is to say that the indemnity is not referable to claims brought by the Plaintiffs but only one's by third parties against the Defendant in the discharge of her duties on the Plaintiffs behalf.  The Deed therefore has no application to this action.  The argument will therefore need to be examined with this very much in mind.

15.  I start by setting out clause 1(a) of the Deed of Indemnity under which the Plaintiffs agreed to immediately pay or reimburse the Defendant:

“(i)      of any and all amounts that [the Defendant] may be required to pay or has paid to settle any penalties, fines, debts, actions, causes of action, claims, proceedings, complaints, suits, obligations, demands, agreements, expenses and costs, whatsoever and wheresoever, arising out of or in connection with any complaint, investigation, claim, proceeding or action (collectively, the ‘Proceedings' and each, the ‘Proceeding') that may be taken by anyone, including but not limited to, the Securities and Futures Commission of Hong Kong (the ‘SFC'), SEHK, any other securities regulatory authorities or governmental bodies if any applicable jurisdiction (collectively, the ‘Regulatory Authorities' and each, the ‘Regulatory Authority') and any other private or public third party, or to satisfy any judgment or award that may be made against [the Defendant] arising out of or in connection with any Proceedings; and

(ii)       all expenses, costs, legal fees and disbursements as between a solicitor and his own client that may be incurred by [the Defendant] in connection with any of the Proceedings;

which now or at any time hereafter exist by reason of any events, acts or omissions in any way connected with [the Defendant] acting or having acted as a non-executive director and/or officer of [the 1^st Plaintiff] whether during the original term or after re-election and whether arising from any matter, cause or thing whatsoever which [the Defendant] has or his alleged to have done or failed to do as a non-executive director and/or officer of [the 1^st Plaintiff] including, without limitation, any negligence, deliberate acts or omissions of [the Defendant], unless [the Defendant] has acted with a fraudulent intent (all amounts to be paid by [the 1^st Plaintiff] to [the Defendant] in accordance with his paragraph 1(a) are collectively referred to as the ‘Amounts') (emphasis added)”

16.  Having regard to the terms of clause 1(a), Mr Jarvis submits that the reimbursement is in the widest possible terms covering any proceedings “that may be taken by any one” including SFC, HKEx and “any other private or public third party”.  The reimbursement itself covers any liability connected to the Defendant's activities as an “officer” of the 1^st Plaintiff which Mr Jarvis submits must include her appointment to the audit committee.

17.  The argument therefore is that she is protected in respect of any claims, be they by the Plaintiffs as in this case, or by third parties and further, that this protection covers any liability arising from her position as an “officer” of the 1^st Plaintiff, which description must cover her dual positions as non-executive director and as one of the audit committee.

18.  The effect of clause 1(b) is identical in its width and effect, on this occasion the 1^st Plaintiff's duty being to indemnify the Defendant in these terms:

“(b)     that the Company shall, upon demand, immediately indemnify and save OSL harmless from and against all claims, costs, expenses, losses, harm, injury, damages, liabilities, obligations or payments that may be made against OSL in connection with or arising from:

(i)                any liability or obligation of the Company (whether contractual or statutory) and/or OSL in her capacity as a non-executive director of the Company (as the case may be);

(ii)              any disciplinary proceeding that may be brought against the Company and/or OSL by any Regulatory Authority (as the case may be); and

(iii)            all Amounts,

which now or at any time hereafter exist by reason of any events, acts or omissions in any way connected with OSL acting or having acted as a non-executive director and/or officer of the Company whether during the original term or after re-election and whether arising from any matter, cause or thing whatsoever which OSL has or is alleged to have done or failed to do as a non-executive director and/or officer of the Company including, without limitation, any negligence, deliberate acts or omissions of OSL, unless OSL has acted with a fraudulent intent.”

Clause 3 is also relevant and needs to be set our here:

“3.     The Company hereby undertakes and agrees that it shall:

(a)     not cause or permit anything to be done which will or may impose any civil or criminal liability and/or disciplinary actions on OSL (as the case may be); and

(b)     ensure that OSL is kept fully and accurately informed as to the most up-to-date financial condition of the Company and as to all other matters which may expose OSL to any liability, obligation or cost in any way connected with OSL acting or having acted as a non-executive director and/or officer of the Company.”

Finally, clause 14 stipulates that:

“14.     This Release and Indemnity constitutes the entire agreement among the parties with respect to the matters covered herein and supersedes all previous written, oral or implied understandings among them with respect to such matters.”

19.  I will consider the all-important submission that the Deed of Indemnity embraces claims by the Plaintiffs as well as third party claims in a moment.  Before I do so, I need to set out Mr Jarvis's analysis of the effect of the Deed, assuming for the moment, that he is correct in saying that it extends to claims against the Defendant that are made by the Plaintiffs.

20.  Mr Jarvis has submitted that the effect of these clauses is that the Defendant is entitled to an indemnity in exactly the same amount as she might become liable to the 1^st Plaintiff, in which circumstances, the claim against her must fail for circuity of action.  I have had drawn to my attention two recent cases which uphold the plea of circuity of action.  The first is Barings v Coopers & Lybrand No. 2 [2002] 2 BCLC 410 at 413 C-E and 420 E-F.  In analysing the claim in that case the judge, Evans-Lombe J said of the claim that “[It] mirrors the damages being claimed against DNT and so gives them an absolute defence of circuity.  The other case referred to by Mr Jarvis which required an analysis of the circuity cases is the House of Lords decision in Co-operative Retail Service Ltd v Taylor Young Partnership [2002] 1 All ER (Comm) 918 at para.64 in which Lord Hope adopted the approach of Dillon LJ in Surrey Health BC v Lovell Construction Ltd [1990] 24 Con LR 1, who asked the question “What does the contract provide?” meaning that if, as a matter of interpretation of the contract there exists an indemnity which mirrors the claim then the claim will fail, an example of which is to be found in Deepac Fertilisers and Petrochemicals Corporation v ICI Chemicals & Polymers Ltd & Ors [1998] 2 Lloyd's Reports 139.

21.  In this regard, Mr Jarvis also makes reference to the additional feature which is that the parties had agreed that the Defendant should also have a Directors and Officers Insurance policy (“a D&O policy”) to cover her, which reflects the Deed of Indemnity.  The insured under the D&O policy was the 1^st Plaintiff.  The insurable interest is expressed in this way:

“1.       To pay on behalf of Directors and Officers against claims first made against them jointly and severally during the period of insurance for any wrongful act committed or alleged to have been committed in their capacity as Directors or Officers.

 2.       To pay on behalf of the Company against any payment which it may make to Directors and Officers as permitted by law, which such Directors or Officers has become legally obliged to pay on account of claims first made against them during the period of insurance for any wrongful act committed or alleged to have been committed by them in their capacity as Directors or Officers.

As more fully defined in the policy.”

[see B1/17-18]

It is beyond doubt that the policy itself provides for non-executive directors whose position is specifically provided for at clause 5(h):

“(h)     Non-Executive Directors

In the even that ACE is entitled to avoid this Policy from inception, or from the time of any variation in cover, due to non-disclosure or misrepresentation by the Insured(s), ACE shall maintain cover for non-executive directors who are Insured(s) under this Policy until the expiry date of the Policy Period.  Provided that such non-executive directors are able to establish to the satisfaction of ACE that they are innocent and free from all such fraudulent conduct, non disclosure, misrepresentation or intent to deceive.  Any return of premium or amendment to the terms of this Policy shall be at the discretion of ACE.”

22.  What Mr Jarvis gets from the existence of this policy is that it is consistent with the scope of the Deed of Indemnity both as to the indemnity and that the policy, he submits, is limitless in the sense that on a true construction of the “Insurable interest” the policy does not restrict itself only to claims made against the directors by third parties but is wide enough to cover claims made by the company against the directors.  In this regard, Mr Jarvis draws specific attention to clause 3 of the Deed of Indemnity [see para. 18 supra] by which the 1^st Plaintiff under 3(a) has covenanted with the Defendant not to sue her and under 3(b) to keep her fully informed as to its financial situation and any other matters which may expose her to any liability in any way connected to her position as a non-executive director or officer of the 1^st Plaintiff.

The Plaintiffs Answer to These Submissions

23.  I propose to take these points slightly out of the order in which they have been raised by Mr Sheppard, who appears on behalf of the Plaintiffs.  There are in fact four matters that have been raised in relation to the applicability of the Deed of Indemnity and on the effect that it has on this action.  Of these it seems to me that the most fundamental is that it can only cover the Defendant in respect of her liabilities or obligations to third parties and not to the Plaintiffs.  I propose to consider this issue first.  The other three are the following.  That the Deed is void because it offends the public policy considerations which govern section 165(1), Companies Ordinance.  Next, that the Deed had in fact been drafted by the Defendant acting in a solicitor and client relationship in circumstances where she “influenced” the 1^st Plaintiff to enter into the Deed and accept its terms as she had drafted them, which amount to a breach of the Defendant's duty as the 1^st Plaintiff's solicitor. And lastly, that the Deed has been back-dated and was executed before the Defendant had accepted her appointment as a non-executive director of the 1^st Plaintiff.  I now turn to each of these four responses by Mr Sheppard, as may be necessary, each of which is said to be capable of being fatal to the use of the Deed as a conclusive response to the action.

Does the Deed of Indemnity Extend to The Plaintiffs

24.  This requires me to interpret the words of the Deed to arrive at its proper meaning.  By engaging myself in this exercise, Mr Sheppard complains that I am in effect usurping the function of the trial judge.  He has drawn attention to Wenlock v Moloney & Ors [1965] 2 all ER 87, in which Danckwerts LJ at 874 observed in relation to striking out applications such as this one that:  

“There is no doubt that the inherent power of the court remains; but this summary jurisdiction of the court was never intended to be exercised by a minute and protracted examination of the documents and facts of the case, in order to see whether the plaintiff really has a cause of action.  To do that, is to usurp the position of the trial judge, and to produce a trial of the case in chambers, on affidavits only, without discovery and without oral evidence tested by cross-examination in the ordinary way.  This seems to me to be an abuse of the inherent power of the court and not a proper exercise of that power.”

In seeking to apply those remarks, Mr Sheppard has referred extensively to parts of the affirmation evidence which, he submits, merits proper investigation by means of a conventional trial through cross-examination.  In relation to the scope of the Deed, he has referred to para.13 of the Defendant's third affidavit [B/3/10/610] which he says rather indicates that the Defendant herself considered that the Deed that she had in mind only afforded protection from third party claims and not from the Plaintiffs.  The relevant passage says this:

“Pursuant to your request for me to become a director of Moulin, I am in the process of seeking our law firm's pre-approval.  Before my firm could approve my application, it needs to know (i) whether Moulin has purchased Directors & Officers Liabilities Insurance for its directors and (ii) whether Moulin will enter into an Indemnity agreement with me to agree to indemnify me for any liabilities arising from my role as a director of Moulin.  These are important mechanisms to protect a public company's directors from potential claims or lawsuits made by third parties.  Many public companies have them in place, (emphasis added).”

25.  Be that as it may, Mr Jarvis invites an examination of the accepted principles governing the interpretation of a contract which Lord Hoffman had summarised in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 890 at 912A-913F in the following way:

“(1)  Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2)     The background was famously referred to by Lord Wilberforce as the ‘matrix of fact,' but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3)     The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4)     The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax.

(5)     The ‘rule' that words should be given their ‘natural and ordinary meaning' reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Cia Naviera SA v Salen Rederierna AB, The Antaios [1984] 3 All ER 229 at 233, [1985] AC 191 at 201:

‘… if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.'”

26.  Seeking to apply this approach, Mr Jarvis submits that the natural and ordinary meaning of the indemnity under clause 1(a) is clear.  I have set out the clause at paragraph 15 above.  The indemnity covers any Proceedings “that may be taken by anyone” including SFC, HKEx and “any other private or public third party”.  Mr Jarvis says that on its proper reading this cannot be restricted to third parties.  He contends that it is impossible to read a limitation to third parties only, because the Proceedings were expressly stated to be inclusive of those taken by “any other private or public third party”. 

27.  Insofar as it is necessary to consider the factual matrix under which the Deed was entered into, and I believe that it is, Mr Jarvis submits that the Deed was intended to cover any Proceedings which may be taken by anyone, including the Plaintiffs, against the Defendant in respect of any liability arising from the Defendant having acted as a non-executive director and officer of the 1^st Plaintiff.  Addressing the factual background, the Defendant's email dated 27 July 2000 to Mr Cary Ma indicated that White & Case needed to know whether the 1^st Plaintiff had purchased a D&O insurance policy for its directors and whether the 1^st Plaintiff would “enter into an indemnity agreement with [her] to indemnify [her] for any liabilities arising from [her] role as a director of Moulin [the 1^st Plaintiff].  This coming from the Defendant's 3^rd affidavit, para.14 [see para.24 supra].  Mr Jarvis response to Mr Sheppard's submission on this email is that Mr Sheppard has chosen to highlight the words “made by third parties” and that he has ignored the effect of the preceding sentence in the email which specifically states that the 1^st Plaintiff should agree to indemnify her for “any liabilities from her [role] as a director of [the 1^st Plaintiff]”.  This email was responded to by Mr Cary Ma agreeing to have “[the 1^st Plaintiff] to enter into an agreement with you” [B/3/10/609].  Mr Jarvis draws attention to the fact that in that email, he did not suggest that the indemnity should be limited to liability to third parties.  Mr Sheppard's reply to this is that there would have been no need for Mr Ma to say so given the reference in the Defendant's email of 27 July 2000 above, which concluded with the explanation that “These are important mechanisms to protect a public company's directors from potential claims or lawsuits made by third parties.  Many public companies have them in place”.  Mr Ma would have been entitled to proceed on the basis that he considered that the 1^st Plaintiff was to enter into a Deed of Indemnity covering any liabilities owed to third parties especially where at no time had the Defendant ever suggested that the Deed was to include protection for her against any liability that she faced from the 1^st Plaintiff arising from her role as one of its non-executive directors.  And so, the Plaintiffs would suggest that where the Defendant herself had explained that these agreements afforded protection for a director from third party claims, from that moment Mr Ma would have been entitled to proceed on the basis that the Deed was only referable to third party claims.  The Plaintiffs now say that they were misled into believing that where the Defendant had narrowed down the field to third parties in her 27 July 2000 email, she should not be able to contend otherwise, or at least not to do so on an application such as this.  She ought to be obliged at a trial of this action to explain why she only referred to third party protection and did not go further and explain that this would also afford protection from claims made against her by the company particularly, as she was the lawyer here telling the company what the Deed was about.  If it was to cover the company's claims against her, as she now contends, she should have said so.  The Plaintiffs submit that there is ample material here to permit this issue to go to trial even if I were to hold that Mr Jarvis's interpretation of clause 1(a) is indisputably correct.

28.  In my judgment, what the parties eventually got was a Deed that was so widely drafted as to provide an indemnity from suit against all-comers, if I may so express it.  That is the apparent effect of the word “anyone” and the words “including but not limited to” followed by the various bodies referred to there, is in no way restrictive of the expression “anyone”, and neither is the expression “and any other private or public third party”.  The overall outcome is that “anyone” must be taken to mean what it says and that the reference to third parties, either those specifically identified or the “any other” unnamed third parties, does not have the effect of limiting the Deed to third party claims.

29.  Nevertheless, all of this being recognised, what I am troubled by is the effect that the 27 July 2000 email may have had on Mr Cary Ma when it had specifically only referred to third party claims and not made any reference to excluding claims by the company, added to which the Deed itself did not have any reference to claims by the company.  And so, what one gets is a background of the Defendant saying that these are common “mechanisms” in place to protect directors of public companies from third party claims, in addition to which the Deed when drafted made no reference to claims by the company, whilst only referring to claims by either named third parties, by way of illustration and, any other third parties.  A company director like Mr Ma, not familiar with the usual canons of construction might well be forgiven for thinking, against the background that I have just described, that the Deed was only referable to claims by third parties.

30.  This being a strike out application, with all that this requires of an applicant for such an order, I consider that the argument based on the Deed and the D&O insurance policy is sufficiently arguable to go to trial.  There is a proper argument on the affidavit evidence that the Defendant herself only considered that Deeds of this type covered third party claims and gave the Plaintiffs that impression by her email of 27 July 2000 and yet, in the drafting produced a Deed that has an unrestricted ambit with the consequence that Mr Jarvis now considers that he can advance this argument as a matter of construction.  Whilst this is all well and good, I do not believe that one can restrict the argument to merely one of construction.  Looking at the background, as I have, the Plaintiffs' case is far from a hopeless one and I am therefore against Mr Jarvis on this part of his case based as it is purely on the construction of the Deed and the D&O policy.  One needs to look at the surrounding background and documents and consider their effect on what the parties intended to agree to.  To this extent therefore, the Plaintiffs must be taken to have survived this examination and this aspect would need await its outcome following a trial.  In this respect the D&O policy and the Deed must go hand in hand and be left to the trial judge.

31.  Nevertheless, it is also submitted on the Defendant's behalf that even without the Deed and the D&O policy, she has protection from this type of action by virtue of Bye-law 166 of the 1^st Plaintiff's Bye-laws [B5/11/1518].

The Indemnity Under the Bye-Law

32.  By virtue of Bye-law 166(1), the 1^st Plaintiff has agreed:

“to indemnity and secure harmless its directors and officers from and against all actions, losses, damages and expenses which they may incur or sustain by reason of any act down or omitted in or about the execution of their duty in their offices and none of them shall be answerable for the acts, neglects or defaults of the other or others of them provided that the indemnity shall not extend to any matter in respect of any wilful negligence, wilful default, fraud or dishonesty which may attach to any of them.”

33.  Bye-law 166(2) is also relevant.  It says that:

“each member agrees to waive any claim or right of action he might have, whether individually or by or in the right of the Company, against any Director on account of any action taken by such Director, or the failure of such Director to take any action in the performance of his duties with or for the Company.”

after which there is the same exception in respect of wilful negligence, wilful default, fraud or dishonesty.

34.  Mr Jarvis has referred me to the well-known decision of the English Court of Appeal in Re City Equitable Fire Insurance Co. Ltd [1925] 1 Ch 407, where the directors and the auditors relied on an article that was similarly worded in defending an action brought against them by the liquidators.  In that case, the exception was confined only to wilful negligence and wilful default.  In this case, Bye-law 166 excepts fraud and dishonesty.  At pages 516 and 517 of the report, Pollock MR sought to explain what type of conduct would amount to “wilful” conduct.  He adopted what Lord Alverstone had said in Forder v GWR [1905] 2 KB 535.  The Master of the Rolls said this at page 517 supra:

“Lord Alverstone in Forder v. Great Western Ry. Co.(3), a later case, adopting the definition given in an Irish case, with which he expressed his agreement, says : ‘‘Wilful misconduct in such a special condition means misconduct to which the will is party as contradistinguished from accident, and is far beyond any negligence, even gross or culpable negligence, and involves that a person wilfully misconducts himself who knows and appreciates that it is wrong conduct on his part in the existing circumstances to do, or to fail or omit to do (as the case may be), a particular thing, and yet intentionally does, or fails or omits to do it, or persists in the act, failure or omission regardless of consequences.'  The addition which I would suggest is, ‘or acts with reckless carelessness, not caring what the results of his carelessness may be.''  For my own part, I agree with that definition quoted by Lord Alverstone, with the addition he proposes to make to it.  It seems to me in close accord with the previous decisions to which I have already referred, and to give a proper meaning to the words which are before us.”

In such circumstances, the party seeking to impugn a director's conduct has a high bar to clear.

35.  In urging the applicability of these Bye-laws, Mr Jarvis analyses the matter in this way.  He says that where a director such as this Defendant is appointed without a service contract which sets out the terms of her appointment, the appointment must be taken to have been made with reference to the relevant articles which empower the Board to make the appointment, in which circumstances the indemnity clause under the company's articles of association would form part of the terms of her service.  To support this proposition, Mr Jarvis has referred to three cases,  the first of which is In re Brazilian Rubber Plantations and Estates [1911] 1 Ch 425, where at p.440 Neville J held that the articles show the terms upon which a director agrees to act in that capacity.  He also went on to consider the effect of an immunity from suit contained in the articles.  Given the importance of this judgment, I will set out what the judge said:

“In Molineaux v. London, Birmingham and Manchester Insurance Co.(1) Cozens-Hardy L.J. says:  ‘The articles, though not themselves a contract between the company and the director, must be regarded as showing the terms upon which on the one hand he agrees to act as director, and on the other hand the company agree to pay him remuneration for his services.'  Here the articles of the company provide (article 151) as follows:  ‘No director shall be liable … for any loss, damage, or misfortune whatever which shall happen in the execution of the duties of his office or in relation thereto, unless the same happen through his own dishonesty.'

I think upon its construction this article is intended to relieve directors who act honestly from liability for damages occasioned even by their negligence, where such negligence is not dishonest.  And, having regard to the above decision, I do not see how to escape from the conclusion that this immunity was one of the terms upon which the directors held office in this company.  I do not think that it is illegal for a company to engage its directors upon such terms.  I do not think, therefore, that an action by this company against its directors for negligence, where no dishonesty was alleged, could have succeeded.”

36.  Leaving aside for the moment whether Bye-law 166 is capable of relieving a director from an action such as the present one, Mr Jarvis makes further reference to Re City Equitable Fire Insurance Co. Ltdsupra, as further authority for the submission that the articles of a company would be implied into a contract of service of, in that case, the auditors and also that of a director.  The judgment of Warrington LJ at pages 520-521 dealt with this aspect:

“I think that that article, as the learned judge has held expressly in the case of the directors and impliedly, if not expressly, in the case of the auditors, does in such a case as the present form part of the contract between the company and the auditors, and for the reason that the auditors are engaged without any special terms of engagement.  When that is the case, then if the articles contain provisions relating to the performance by them of their duties and to the obligations imposed upon them by the acceptance of their office, I think it is quite plain that the articles would be taken to express the terms upon which the auditors accept their position.  Of course, if the terms of their employment are expressed as a separate document, then that document must be taken to define the conditions of their engagement, and it would not be proper to assume any implied terms either from the provisions of the articles or elsewhere.  But in the present case I think it is quite plain that the terms of art.150 do, according to their proper construction, whatever that may be, effect a modification in what would prima facie be, but for that article, the obligation and liability of the auditors.”

37.  In Read v Astoria Garage [1952] 1 Ch 637, the Court of Appeal held that the terms of a director's appointment as its managing director, which the articles empowered the Board to so appoint to him, governed the terms of his appointment in the absence of a service contract, with the result that he was bound by the articles which also provided for the terms of his dismissal from that position.

38.  It seems very clear therefore that in the absence of a service contract between the company and its director, in which case one would need to look to that contract for the terms of the appointment, it is the articles, under which the appointment will have been made, which will constitute the terms under which the director will serve.

39.  This being the position in the case of the Defendant and, that Bye-law 166 was already in existence at the time of her appointment, Mr Jarvis submits that the Bye-laws, and relevantly for these purposes Bye-law 166, constitute the terms under which the Defendant was engaged as a director and member of the audit committee.

40.  In such circumstances and having regard to the terms of the indemnity and the immunity [see paras.32 and 33 above] which apply to any proceedings which the 1^st Plaintiff could otherwise bring against the Defendant, Mr Jarvis submits that it is an abuse of process for the Plaintiff to bring this action against the Defendant in breach of its covenant not to sue her under Bye-law 166(2) and secondly, it is a circuity of action for the 1^st Plaintiff to make these claims as they are covered by the indemnity under Bye-law 166(1) by which it is liable to indemnify the Defendant.  Accordingly, Mr Jarvis submits that this action ought to be struck out as one that is bound to fail.

41.  In responding to this part of the case, Mr Sheppard submits that section 165(1), Companies Ordinance provides a complete answer:

“(1)  Any provision, whether contained in the articles of a company or in any contract with a company or otherwise, for exempting any officer of the company or any person employed by the company as auditor from, or indemnifying him against, any liability to the company or a related company that by virtue of any rule of law would otherwise attach to him in respect of any negligence, default, breach of duty or breach of trust of which he may be guilty in relation to the company or related company shall, subject to subsections (2) to (4), be void.”

Under section 165(5), Companies Ordinance a “related company”,is “any company that is the company's subsidiary or holding company or a subsidiary of that company's holding company”.  This therefore would appear to put Mr Jarvis's submission based on the Bye-law out of court except for the fact that the 1^st Plaintiff is a Bermuda company and section 165 only applies to Hong Kong companies.  The analysis is this.  Section 165 applies to a “company” which section 2, Companies Ordinance defines as “a company formed and registered under this Ordinance or an existing company”.  The 1^st Plaintiff, not being a Hong Kong company (having been incorporated in Bermuda) is registered in Hong Kong under Part XI, Companies Ordinance.  It is therefore not affected by section 165(1).

42.  To make good the submission that registration under Part XI does not bring a company within the definition of section 2 of the Ordinance, reliance is placed on the judgment of Rogers J (as he then was) in Securities & Futures Commission v MKI Corporation Ltd [1995] 2 HKC 79.  At 88G, the judge held that the expression “registered … under the Ordinance” is intended to exclude companies registered under Part XI.  This is also the view of the Editors of Butterworths Hong Kong Company Law Handbook at 2.02 which refers to Securities & Futures Commission v MKI Corporation Ltd supra.  The matter does not appear to end there because, as Mr Jarvis points out, the term “company” in section 165(1) is not subject to a more extensive definition beyond that contained in section 2(1) above.  An example of an extended definition is to be found in the director's disqualification provisions in Part IVA of the Companies Ordinance under section 168C(1):

“168C.  Interpretation

(1)     In this Part, ‘company' (公司) means—

(a)    a company within the meaning of section 2; or

(b)    an unregistered company within the meaning of Part X (other than a partnership, whether limited or not, or an association)—

(i)    wherever incorporated;

(ii)   carrying on business in Hong Kong or which has carried on business in Hong Kong; and

(iii)  which is capable of being would up under this Ordinance.

(2)     In the application to this Part of the definition of ‘shadow director' is section 2(1), the word ‘company' (公司) in that definition has the same meaning as in subsection (1).”

43.  Further, in considering the Companies Ordinance as a whole, Mr Jarvis says that it is specifically provided in section 332 that only Part XI and not the part in which section 165 appears is to apply to “… all overseas companies, that is to say companies incorporated outside Hong Kong which, after the commencement of this Ordinance, establish a place of business in Hong Kong …”.

44.  From all of this Mr Jarvis submits that there is no basis for saying that section 165, Companies Ordinance can apply to the 1^st Plaintiff. 

45.  If that is right one then has to look to the law of Bermuda, being the place of the 1^st Plaintiff's incorporation.  See Dicey, Moris & Collins, The Conflict of Laws, 14^th Edition, vol.2 para.30R-020:

“RULE 162—(1) The capacity of a corporation to enter into any legal transaction is governed both by the constitution of the corporation and by the law of the country which governs the transaction in question.

         (2) All matters concerning the constitution of a corporation are governed by the law of the place of incorporation.”

In Bermuda companies registered there are governed by the Bermuda Companies Act 1981, section 4(1) of which provides that the Act applies inter alia to “all companies registered under it”.  Mr Kessaram, the Defendant's expert on Bermuda law says that registration is the process by which a company is incorporated in Bermuda (para.8, footnote 4 [A/10/229]).

46.  Crucially, under section 98 of the Act [B1/9/71], it is permissible for companies to exempt or indemnify any officer, which includes a director, from or in respect of any loss arising or liability attaching to him from such directors negligence and breach of duty except where that conduct amounts to fraud or dishonesty of which he may be guilty in relation to the company (see Mr Kessaram's report supra at paras.5-6).  As there is no allegation of fraud or dishonesty levelled against the Defendant, she must be entitled to take the benefit of Bye-law 166.

47.  Responding to these submissions, Mr Sheppard questions the need for the Deed of Indemnity when Bye-law 166 exists, although it is right to say that the Bye-law does not encompass wilful negligence and wilful default.  In such circumstances, he submits that should the Defendant invoke Bye-law 166, this will not avail her because the action against her is based on wilful negligence and/or wilful default.  Mr Sheppard also suggests that the Defendant should have advised the 1^st Plaintiff of its rights under Bye-law 166.  He submits that she was obliged to do so in her capacity as its solicitor before she entered into her arrangement with the 1^st Plaintiff to act as a non-executive director.  He also submits that the 2^nd, 3^rd and 4^th Plaintiffs are not subject to Bye-law 166 and because she was acting merely as a shadow director of their's, she is not entitled to the protection of Bye-law 166.  Finally, Mr Sheppard submits that if Bye-law 166 is being raised this should only be entertained on the basis of properly admitted evidence of Bermuda law presumably, in the setting of a trial rather than on an application such as this based only on affidavit evidence.

Conclusions on Bye-Law 166

48.  In my judgment, this Bye-law is one that is to be implied as one of the terms of the Defendant's appointment both as a non-executive director and as a member of the audit committee.  There is no service contract which one would be required to look to in order to see what the terms of her appointment were.  This situation is on all fours with what Warrington LJ had said in Re City Equitable Fire Insurance Co. Ltd supra [see para.36 above] and also as was held by the Court of Appeal in Read v Astoria Garage supra [see para.37 above].

49.  In respect of whether this exempting provision falls foul of section 165(1) Companies Ordinance, I am satisfied that as a Bermuda registered company, the 1^st Plaintiff is not subject to these restrictions.  I am persuaded by Mr Jarvis's submission that as a Part XI registered overseas company, the 1^st Plaintiff does not fall within the definition of “a company” within the meaning of section 2, Companies Ordinance.  His analysis of the effect of section 332 of the Ordinance is correct and that only Part XI of the Ordinance applies to the 1^st Plaintiff as an overseas registered company and not the part containing section 165.

50.  Mr Jarvis has therefore established beyond argument that the immunity in the Bye-law applies to the Defendant's service with the 1^st Plaintiff and that section 165 does not apply to the 1^st Plaintiff, it being a Part XI overseas company.

51.  Mr Sheppard also submits that if this is so, then the immunity contained in the Bye-law cannot assist the Defendant in this action because it does not exempt wilful negligence and/or wilful default which Mr Sheppard says the Plaintiffs' action would be based on “as is clear from the pleaded case of the Plaintiff ” (para.71 of his skeleton argument).

52.  I have already indicated, and so much is very clear from a reading of the pleading, that the amended statement of claim is very detailed and carefully drafted.  The issue at this stage is whether, as it presently stands, it can properly be said that it alleges a case of wilful negligence and/or wilful default.  Neither of these expressions are employed in the pleading itself which is something that cannot be overlooked, although I am still required to look at the substance of the allegations themselves.  Having said that, the failure to describe the negligence and the alleged default against the Defendant as wilful is in my view suggestive of the fact that the Plaintiffs did not see her conduct as worthy of such a description and therefore that a conscious forensic decision was made to leave the matter at the level of mere negligence and/or default rather than to specifically plead it as the more serious “species” of negligence and/or default.

53.  That wilful negligence is a more virulent variety of conduct is abundantly clear from the judgment of Pollock MR in Re City Equitable Fire Insurance Co. Ltd ibid at para.34 above.  This is well demonstrated by his recitation of Lord Alverstone's remarks in Forder v GWRCo. in which he described it in terms which bear repetition here:

“Wilful misconduct in such a special condition means misconduct to which the will is party as contradistinguished from accident, and is far beyond any negligence, even gross or culpable negligence, and involves that a person wilfully misconducts himself who knows and appreciates that it is wrong conduct on his part in the existing circumstances to do, or to fail or omit to do (as the case may be), a particular thing and yet intentionally does or fails or omits to do it, or persists in the act, failure or omission regardless of the consequences.”

To this Lord Alverstone added his own words:

“or acts with reckless carelessness, not caring what the results of his carelessness may be.”

54.  To allege fraud or dishonesty against an opposing party in litigation is a very serious matter indeed and counsel doing so is required to satisfy himself that he has specific instructions to do so and that the material upon which such a plea is to be based is sufficiently detailed and evidentially able to stand up to proper examination.  It follows that such allegations need to be specifically pleaded provided they pass muster so as to an enable counsel to set them out in a pleading.  Although such strict requirements are not indicated for a plea of wilful negligence or default, the fact remains that to accuse an opposite party on such a basis is a grave matter which should be so described in the body of the pleading itself.  It is quite one thing to say that somebody is negligent but it is quite another to elevate his or her conduct to wilful negligence given the type of conduct which Lord Alverstone had described.  It seems to me that, as a minimum, the pleading should expressly use the words wilful negligence and/or default.  The more grave the allegation, wilful negligence over mere negligence, the more compelling the evidence has to be in order to persuade the court that this has been proved.

55.  In this case, where as I have already observed, the expression “wilful” does not appear, it seems to me that, on the analysis that I have just provided, the Defendant is entitled to believe that she is not being held to account for more than mere or ordinary negligence and/or breach of duty.  If she were, the pleading in a case such as this should have said so.  In such circumstances, it is not good enough for Mr Sheppard to submit that “as is clear from the pleaded case” that the case is being put on the basis of wilful negligence and/or wilful default because the short and simple answer is that it has not been pleaded on that basis.

56.  For these reasons therefore I am against Mr Sheppard on this part of his submission that the immunity in Bye-law 166 is inapplicable to the pleaded case because in my judgment, for the reasons that I have just given, it is.

57.  Mr Sheppard's next point is that the Defendant should have advised the Plaintiffs of their rights, or perhaps to put it more correctly their limitations under Bye-law 166.  It seems to me that this submission is bound to fail.  These articles and the Bye-laws, including 166, came into existence when the 1^st Plaintiff was formed, well before the Defendant was appointed a non-executive director.  The Defendant was entitled to assume that the 1^st Plaintiff's Board and its management were well familiar with the 1^st Plaintiff's articles and Bye-laws.  Bye-law 166 was there and it now falls to be interpreted and given effect as may be proper on this application.  There was no duty on the Defendant to explain any of this to the 1^st Plaintiff.  I need say no more on this objection.

58.  Next, he submits that the 2^nd, 3^rd and 4^th Plaintiffs are not subject to this Bye-law as it does not form part of their constitution.  But this is not the point in contention here.  The real point at issue is the more fundamental one of whether the Defendant had acted as a shadow director of their's and as such owed them the various duties pleaded in the amended statement of claim and whether she is in breach of those duties as have been pleaded against her.

59.  The issue of whether she was a shadow director is of very general significance, not only in respect of the applicability of Bye-law 166 but also in respect of her liability to these other Plaintiffs which is a significant part of the case against her on the amendments to the statement of claim.

60.  It is therefore necessary and convenient at this stage to consider the question of whether it can be said that the Defendant was a shadow Director of MGET(the 2^nd Plaintiff), Oaktree (the 3^rd Plaintiff) and Leadkeen (the 4^th Plaintiff added by amendment).  The allegation of shadow directorship appears in the new paragraph 10 of the statement of claim.  The plea is as follows:

“10.     At all relevant times, and by reason of, inter alia, her position as:

(a)         a director of Holdings;

(b)          a founding member of the Audit Committee responsible for the supervision of the financial affairs of the Moulin Group (pleaded further below); and

(c)          a member of the Moulin Group's remuneration committee,

the Defendant was a person in accordance with whose directions or instructions the directors or a majority of the directors of MGET, Oaktree and Leadkeen were accustomed to act.”

61.  Mr Jarvis submits that on a proper appreciation of the facts as these emerge from the pleaded case and the affidavits and the documents before the court, there is no basis for the plea that the Defendant was a shadow director of these three companies.  The definition of a shadow director is “a person in accordance with whose directions or instructions the directors of a company are accustomed to act” (see Gore-Browne on Companies, 45^th Edition, para.15(2)).  This means that there must be a Board of Directors who act in accordance with instructions from the shadow director.  Such a person was described by Browne-Wilkinson VC (as he then was) in Re Lo-Line Electric Motors Ltd [1988] BCLC 698 at 706C as “the eminence grise …”.

62.  The hallmark of the shadow director is that he or she exercises real influence over the company's affairs and who directs the acts of the de jure directors.  What needs to be shown was considered by Millett J (as he then was) in Re Hydrodan (Corby) Ltd [1994] BCC 161 at 163:

“A de facto director is a person who assumes to act as a director.  He is held out as a director by the company, and claims and purports to be a director, although never actually or validly appointed as such.  To establish that a person was a de factor director of a company it is necessary to plead and prove that he undertook functions in relation to the company which could properly be discharged only by a director.  It is not sufficient to show that he was concerned in the management of the company's affairs or undertook tasks in relation to its business which can properly be performed by a manager below board level.

A de facto director, I repeat, is one who claims to act and purports to act as a director, although not validly appointed as such.  A shadow director, by contrast, does not claim or purport to act as a director.  On the contrary, he claims not to be a director.  He lurks in the shadows, sheltering behind others who, he claims, are the only directors of the company to the exclusion of himself.  He is not held out as a director by the company.  To establish that a defendant is a shadow director of a company it is necessary to allege and prove: (1) who are the directors of the company, whether de facto or de jure; (2) that the defendant directed those directors how to act in relation to the company or that he was one of the persons who did so; (3) that those directors acted in accordance with such directions; and (4) that they were accustomed so to act.  What is needed is, first, a board of directors claiming and purporting to act as such; and, secondly, a pattern of behaviour in which the board did not exercise any discretion or judgment of its own, but acted in accordance with the directions of others.”

63.  This position was described even more fully by Harman J in Re Unisoft Group Ltd (No.3) [1994] 1 BCLC 609 at 620.  This is what he said:

“… that the shadow director must be, in effect, the puppet master controlling the actions of the board.  The directors must be (to use a different phrase) the ‘cat's paw' of the shadow director.  They must be people who act on the directions or instructions of the shadow director as a matter of regular practice.  That last requirement follows from the reference in the subsection to the directors being ‘accustomed to act'.  That must refer to acts not on one individual occasion but over a period of time and as a regular course of conduct.

In my view, there can be no way in which the acts of any one of several directors of a company in complying with the directions of an outsider could constitute that outsider a shadow director of that company.  Of course, if the board of the company be one person only and that person is a ‘cat's paw' for an outsider, the outsider may be the shadow director of that company.  But in a case such as this, with a multi-member board, unless the whole of the board, or at the very least a government majority of it— in my belief the whole, but I need not exclude a governing majority — are accustomed to act on the directions of an outsider, such an outsider cannot be a shadow director.  Further, there must be, as I say, more than one act and a course of conduct.”

64.  From this Mr Jarvis submits that to suggest that the Defendant was a shadow director is completely without foundation.  He says so for a number of reasons beginning with Mr Sutton's affidavit [A/11/243-244 para.19], he being one of the liquidators.  Mr Sutton says that the Moulin group were “substantially, if not entirely, controlled by members of the Ma family and one or two non-family members privy to the inner circle” and then in relation to the management of the group Mr Sutton went on to say that:

“21.     The Plaintiffs were also substantially controlled by members of the Ma family.  At all material times, MGET, Oaktree and Leadkeen shared the following common directors:

(a) B.K. Ma; and

(b) Cary Ma.

22.      In addition to sharing two common directors with Oaktree, at all material times, MGET and Leadkeen also shared the following common directors whom I note are B.K. Ma's brothers:

(a) Ma Bo Fung; and

(b) Ma Bo Lung

(Sutton [A/11/245  §§21-22)”

65.  Basing himself on these passages from Mr Sutton's affidavit and on a general survey of the Defendant's position as a non-executive director, Mr Jarvis submits that in circumstances where the Ma family were in control, there is no basis to allege that the directors of the 2^nd, 3^rd and 4^th Plaintiffs, which included a heavy concentration of Ma family members, were accustomed to act in accordance with the Defendant's directions or that she was able to exercise any real influence over the affairs of these three companies.  He further points out that there was nothing inherent in her position as a non-executive director of the 1^st Plaintiff and as a member of the audit and remuneration committees to place her in a position to exercise any real influence over the affairs of the 2^nd, 3^rd and 4^th Plaintiffs.  Also, when one considers the remit of these two committees there was little that she could do to hold sway over the other directors of these three companies.  She was no eminence grise and they were not her “cats-paw”.

66.  In my judgment, Mr Jarvis is overwhelmingly correct in this submission.  There is simply no evidence to support such a contention.  She was no more or less than professional “hired-help” to provide respectability to the membership of the Board of the 1^st Plaintiff, with very little say indeed in the way things were run.  Mr Sutton is absolutely right to suggest that the operations of the group were “substantially, if not entirely, controlled by member of the Ma family …”.

67.  For all of these reasons, any plea that the Defendant was a shadow director of these three companies is bound to fail.  This conclusion therefore means that any suggestion that she owed the three companies the duties that the amended statement of claim seeks to impose on her is also bound to fail.  More particularly, and I now return to the issue relating to Bye-law 166 of the 1^st Plaintiff's constitution, whilst this Bye-law is not part of the articles of the 2^nd, 3^rd and 4^th Plaintiffs and so cannot bind them, the fact that I have found that she cannot in any sense be considered to have acted as a shadow director of their's means that she cannot have ascribed to her any of the duties and obligations that are laid against her by these three Plaintiffs.  And so, whilst Mr Sheppard may be right in his submission on Bye-law 166 so far as these three Plaintiffs are concerned, the, in my view, unarguable fact remains that as she held no position in relation to these Plaintiffs and as a result owed them no duty, the claim against her brought by all three must fail.

68.  In these circumstances, the claim against her by these three Plaintiffs is unarguably bad and I propose to strike it out as against the 2^nd and 3^rd Plaintiffs and in the case of Leadkeen, I will refuse to allow the statement of claim to be amended because to do so would be a pointless exercise simply because the claim by Leadkeen would have no prospect of succeeding.

69.  Whilst I have rather rolled-up, Mr Sheppard's response to the argument on Bye-law 166 with the case based on shadow directorship as a means of dealing with his reply on Bye-law 166 which he correctly says would not directly affect the other three Plaintiffs, in doing so I have been able to demonstrate that this does not matter because the claim against the Defendant has no substance anyway by virtue of the fact that she owed these Plaintiffs no duty based on any appointment de facto or de jure.  She simply had none.

70.  From this I can now return to the effect of Bye-law 166 on the 1^st Plaintiff's claim against her.  Mr Sheppard's final point on the proper application of this Bye-law is that it should await trial when both parties can deploy expert evidence on Bermuda law as to how the Bye-law is to be applied.  It seems to me that this is not necessary.  The Defendant has put in the evidence of Mr Kessaram, who is very experienced counsel at the Bermuda Bar [A/10/224-231].  The Plaintiffs have chosen not to reply to it.  I accept Mr Kessaram's opinion as an accurate recital of the laws of Bermuda on this aspect.  The majority of his evidence relates to the Deed of Indemnity and its validity under section 98 of the Companies Act 1991 in Bermuda.  Whilst I have not felt able to uphold Mr Jarvis's submission on the Deed for the reasons that I have already given, those reasons are separate and do not detract from anything that Mr Kessaram has had to say in respect of the Bye-law.  His opinion on Bye-law 166 is one that I entirely accept and I propose to deal with this matter on the basis that the Bye-law is perfectly valid and that it protects the Defendant from any action by the company itself or by third parties.  I have already held that the case as pleaded against the Defendant is not one based on wilful negligence or wilful default but on the lower basis of what I have termed ordinary or mere negligence and breach of duty.  This being my view, she is able to take advantage of the Bye-law which provides her with an indemnity against any of the acts and omissions which have been pleaded against her.  In these circumstances, the Bye-law provides a complete answer to this action by the 1^st Plaintiff — the action would be circuitous on the authority of the decisions which I have already referred to in para.20 of this judgment.  Whilst these cases were being considered by me in relation to the Deed of Indemnity, they apply with equal force to the effect of the indemnity accorded to the Defendant by this Bye-law.  This being the case, the action is a pointless one — it is one that is bound to fail and it should therefore be struck, out which is the order that I propose to make.

The Remaining Arguments Put Forward by Mr Jarvis

71.  Bye-law 166 having put an end to the action for the reasons that I have just given, the other submissions put forward by Mr Jarvis become academic but in the event of an appeal, it seems to me that I ought to, albeit briefly, indicate how I would have dealt with these had I been put to it to do so.

72.  The principal element of Mr Jarvis's submission is based on a lack of proof that any negligence or breach of duty by the Defendant was causative of the losses claimed by the Plaintiffs.  The starting point on this aspect is that a Defendant is only liable for such loss caused by his breach of duty.  See South Australian Asset Management Corporation v York Montague Ltd [1997] AC 191 at 211H per Lord Hoffman.  The burden is on the Plaintiff to establish causation.  The Plaintiff must make the link between the Defendant's negligence and the relevant loss.  Glidewell LJ in Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360 at 1374G-1376B expressed the test in this way:

“… if a breach of contract by a defendant is to be held to entitle the plaintiff to claim damages, it must first be held to have been an ‘effective' or ‘dominant' cause of his loss.  The test in Quinn's case, that it is necessary to distinguish between a breach of contract which causes a loss to the plaintiff and one which merely gives the opportunity for him to sustain the loss, is helpful but still leaves the question to be answered, ‘How does the court decide whether the breach of duty was the cause of the loss or merely the occasion for the loss?'

The answer in my judgment is supplied by the Australian decisions to which I have referred, which I hold to represent the law of England as well as of Australia, in relation to a breach of a duty imposed on a defendant whether by contract or in tort in a situation analogous to breach of contract.  The answer in the end is ‘By the application of the court's common sense.”

73.  Having set out the court's approach in this situation, Mr Jarvis has embarked on a very close analysis of the nature of the evidence and the facts pleaded in the statement of claim which in turn are said to lead to the conclusion that the Defendant is responsible for the losses claimed by the Plaintiffs.  It seems to me that if a detailed analysis of this sort is required to demonstrate that a case has no substance and that it should be struck out as one that is bound to fail, this in itself is apt to demonstrate that the points raised are sufficiently arguable as a matter of fact and/or law to demand that they go over for trial rather than to have this draconian sanction applied to them on a mere consideration of the papers.  Whilst I have been able to strike out the action on what is a clean point of law as to the effect of Bye-law 166 in relation to the 1^st Plaintiff and in respect of the remaining Plaintiffs on the basis that on any view of the facts, there is no prospect whatsoever of concluding that the Defendant could be said to be a shadow director of their's, the same clear-cut analysis on the papers is not possible in respect of causation and on Mr Jarvis's consideration of the various claims and their bases.  This is an analysis that requires the judge to hear the evidence and to “sit down and think about it”.  The matters that Mr Jarvis has so strongly urged upon me may well succeed in the end but this is not the jurisdiction to circumvent consideration of live evidence which the trial process demands.  Notwithstanding the time and expense that a trial of an action such as this will require, I am unable to dispose of these points in the summary way that an application of this sort permits.  Mr Sheppard has responded to these issues in a way that clearly shows the need for the Defendant to provide her explanations on the documents and to be closely cross-examined on those explanations.  All of the matters raised by Mr Jarvis remain sufficiently arguable to defeat an application of this type.  And so, had I been put to it, I would have said that a strike out application based on these parts of the statement of claim would have had to be dismissed.

The Result

74.  I will therefore strike out the action by the 1^st Plaintiff on the basis of Bye-law 166 and against the 2^nd and 3^rd Plaintiffs on the basis that the Defendant owed them no duty of the type pleaded against her because it can never be shown that she was a shadow director of their's.  In respect of the application to amend the statement of claim so as to introduce Leadkeen as a 4^th Plaintiff, its case would have suffered the same fate as that of the 2^nd and 3^rd Plaintiffs in which circumstances it would have been a pointless exercise to allow amendments that were doomed to fail.  Accordingly, I decline to allow the statement of claim to be amended.  The result therefore is that the action will be struck out on the limited bases that I have referred to.

Costs

75.  These, I would have thought, must follow the event and so the Plaintiffs will pay the Defendant her costs of these summonses and of the action, as they will on the amendment summons.  These orders will be orders nisi.

76.  Finally, I would wish to say how grateful I am to all counsel and their solicitors for their very considerable assistance in a matter which has been far from straightforward.

Andrew Sheppard, instructed by Messrs JSM, for the 1^st, 2^nd and 3^rd Plaintiffs

John Jarvis, QC, John Scott, SC, and Linda Chan instructed by Messrs Fred Kan & Co., for the Defendant

HCA 167/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 167 OF 2008

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D E C I S I O N

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1.  This is an appeal by the Plaintiff from a decision of the Master, given on 20 June 2008, extending the time for filing and service of a Defence, pending the determination of a summons by the Defendant to strike out the proceedings.

2.  The Defendant, a solicitor, was formerly a director of the 1^st Plaintiff, a company incorporated in Bermuda.  She had been appointed a director in late 2000, and resigned the directorship in 2004.  Subsequently the company went into liquidation.  The 2nd and 3rd Plaintiffs are wholly-owned subsidiaries of the 1st Plaintiff.  The Defendant was not a director of those subsidiaries.

3.  A generally endorsed writ was issued on 29 January 2008.  The statement of claim was served on 15 February 2008.  The statement of claim is 55 pages long, of single spaced typescript, comprises 202 paragraphs, with a further 9 pages of annexes.  The claim is a claim in negligence, which alleges breaches of duty by the Defendant in her capacity as a director of the 1st Plaintiff, and allegations equated with professional negligence.  The amount of the claim exceeds $270 million.  The matters raised by the statement of claim go back as far as the year 2000, and cover a wide range of factual circumstances involving the Plaintiff companies and the other parties.  On any terms it is a highly complex and substantial claim.

4.  On 28 February 2008, the Liquidators agreed to a two-month extension for filing the Defence.  The defence was due to be filed on 15 April 2008.  On 14 April 2008, the Defendant sought, by Summons, a further extension of time to file the Defence, to 14 June 2008.  That application, I understand, was granted.

5.  On 13 June 2008, by Summons, the Defendant sought an order pursuant to O 18 r 19, that the Statement of Claim and the Writ of Summons be struck out, and the action dismissed.  At the same time, application was made to extend the time for filing the Defence pending the determination of the strike out application.  The substantive part of that Summons, that is the strike out, is set down for hearing over two days commencing 3 November 2008.  It is against the order extending time to file the Defence that this appeal is directed.

6.  In an affidavit filed on behalf of the Plaintiffs, assertions are made by a solicitor for the Plaintiffs that the application to extend the time; “does not bare the mark of a serious application” (sic), and; “smacks of picking whatever vague future event the defendant can think of to construct as much delay to these proceedings as possible”.  The assertion is made largely on the basis of the timing of steps taken by the Defendant and the extent of time sought. 

7.  I have already set out the nature of the statement of claim, (see para 3 above).  The claim involves factual circumstances going back to the year 2000, and the Defendant, has, perfectly reasonably, requested documents from her former law firm relating to the claim.  It is not surprising that there was some difficulty in obtaining those, neither is it surprising that there are 89 boxes of files which need to be examined.  These were not available to the Defendant by 10 July.

8.  The evidence from the Plaintiffs falls a long way short of substantiating an assertion that the application to strike out, or the application to extend time for the Defence are mere delaying tactics.  I reject that proposition entirely.  If there has been any delay it is arguably on the part of the Plaintiffs who appear to have waited nearly a whole year after bringing virtually identical proceedings against the auditors, before bringing proceedings against the Defendant.  In the course of that year they continued to seek “interviews” with her, without having told her that they were contemplating bringing proceedings against her.

9.  It is especially clear that the steps taken by the Defendant are not a delaying tactic when regard is had to the grounds upon which the strike out summons is based.

10.  Comprehensive grounds are set out in the strike out summons, but the primary ground upon which it appears the Defendant will rely is that contained in O 18 r 19(2) & (3), namely that the action is frivolous or vexatious, or is otherwise an abuse of process of the Court.  The factual basis for this assertion is an allegation that the commencement of the action is in breach of a covenant not to sue the Defendant, that covenant being contained in a Deed of Release and Indemnity made on 1 December 2000, between the 1^st Plaintiff and the Defendant, (the Deed).  It was a requirement by the Defendant that there be such an indemnity before she agreed to act as a director of the 1st Plaintiff.

11.  On the face of it, the Deed would appear to be a complete answer to the Liquidators’ proceedings against the Defendant.  It is important to note that the provisions of s 165 Companies Ordinance, Cap 32, which renders void any provision, whether in Articles of Association, or any contract with the company, exempting, or indemnifying an officer of the company against liability to the company that would otherwise attach in respect of any negligence or breach of duty, do not appear to apply to the 1^st Plaintiff, as it is not a company formed in Hong Kong, but an overseas company, formed in Bermuda, and accordingly not a company “formed and registered” under the Hong Kong Companies Ordinance.

12.  Mr Yeung said that it was relevant that the 1st Plaintiff was a “Part XI” company, that is, it was a company subject to the provisions of Part XI of the Companies Ordinance, which relates to companies incorporated outside Hong Kong.  But there appears to be nothing in Part XI which has the effect of applying s 165 to a company incorporated outside Hong Kong.  Certainly, other than describing the 1st Plaintiff as a “Part XI company”, Mr Yeung did not refer me to any provision within Part XI which would have the effect of applying s 165 to the 1st Plaintiff.

13.  Further, it appears that, in the circumstances of a Bermudian company, the quite the opposite position applies.  By s 98 Companies Act 1981, Bermuda, a Bermudian company is permitted to indemnify its officers in respect of negligence or breach of duty.  The only exception is fraud or dishonesty, which is not alleged in this statement of claim.

14.  This is a case where the Defendant has a very strong argument indeed to be able to say that she will succeed in stopping this action in limine, by the strike out application that she has filed.  The Defence that must be filed in an action such as this will necessarily be a careful and complex document.  To force the Defendant to file a Defence now will only be to produce a Defence containing simple admissions and denials, sufficient to “hold the fort” in the meantime.  That will only produce demands from the Plaintiffs for particulars, all of which will add to unnecessary expense.  This is plainly a case where, if it is to proceed, the Defence filed ought to properly identify the issues immediately, and not require repeated demands for particulars to narrow the issues down.  I have no reason to doubt that the Defence in the course of preparation does just that.

15.  If the Defendant is successful in the strike out summons, there will be no need to file a Defence and all parties will be saved costs, including the Liquidators who will not be required to give the document any consideration.  If the Defendant is unsuccessful in the strike out summons she will be given but a short time to file the Defence, having regard to the time that has already passed.

16.  In either event it is abundantly clear that the Master was quite right to extend the time as he did, and to make the costs order he did, that is, costs in the cause of summons, the application to extend time for the Defence being part of the strike out summons.

17.  For these reasons I dismissed the Plaintiffs’ appeal against the Master’s decision, with costs on the appeal to the Defendant.