FACV No. 23 of 2013

IpsofactoJ.com: International Cases [2014] Part 8 Case 4 [CFA]



Moulin Global Eyecare

Holdings Ltd

(in liquidation)

- vs -

Olivia S.M. Lee






17 JULY 2014


Chief Justice Ma

  1. I agree with the judgment of Mr Justice Gummow NPJ.

    Justice Ribeiro PJ

  2. I agree with the judgment of Mr Justice Gummow NPJ.

    Justice Tang PJ

  3. I agree with the judgment of Mr Justice Gummow NPJ. There is nothing I can usefully add.

    Justice Bokhary NPJ

  4. I agree with the judgment of Mr Justice Gummow NPJ.

    Justice Gummow NPJ

  5. This appeal, by leave, from the judgment of the Court of Appeal (Kwan, Fok, Lam JJA) dated 7 December 2012[1] raises four questions which have appeared at interlocutory stages in litigation instituted against the defendant by the liquidators of Moulin Global Eyecare Holdings (“Moulin”). The four questions were posed in the application for leave to this Court.

  6. Between 8 December 2000 and 1 November 2004 the defendant was a director of Moulin and, it is alleged, its principal legal adviser. The reasons of the Court of Appeal detailed the interlocutory disputes which led to that Court and thence to this appeal, and it will not be necessary fully to recapitulate what is recounted in those reasons.

  7. Moulin was incorporated in Bermuda in 1993 but the appeal has been argued without reference to the law in that jurisdiction as differing in any material respect from that in Hong Kong. Moulin was listed on the Hong Kong Stock Exchange and through its subsidiaries it conducted an apparently substantial and successful business of manufacture and distribution of eye-care products. However, on 23 June 2005 provisional liquidators were appointed to Moulin and on 5 June 2006 the Court of First Instance ordered the winding up of Moulin under Part X of the Companies Ordinance (Cap 32) (“the Companies Ordinance”). 

  8. The conduct of the chairman, treasurer, chief executive officer and others in the falsification of accounts of Moulin and its subsidiaries has since led in Hong Kong to their conviction and imprisonment for substantial terms.

    The course of the litigation

  9. The action against the defendant was commenced on 29 January 2008 by writ issued out of the Court of First Instance. The indorsement on the writ, the terms of which are critical for the resolution of the present appeal, sought “.... equitable compensation in respect of loss and damage suffered by the Plaintiff .... as a result of breaches of fiduciary .... duties and/or breaches of the duty of care and skill owed by the Defendant .... arising out of her role as director or employee of the Plaintiff” in the course of the preparation, auditing and certification of the Moulin accounts, the discharge by the defendant of her duties as a member of Moulin’s Audit Committee, and the provision by the defendant of professional advice and services to Moulin.

  10. The case as subsequently pleaded by Moulin, put broadly, is that

    1. Moulin was insolvent at various stages from about 2001,

    2. the defendant had the necessary knowledge or means of knowledge to be aware of fraudulent accounting practices concealing this state of affairs,

    3. she should have “blown the whistle” by alerting the board of Moulin, the Stock Exchange and the shareholders and had she done so, then by one or more of these means the fraudulent accounting practices would have ended well before the appointment of the provisional liquidators in June 2005 and

    4. the failure of the defendant was a direct and proximate cause of the categories of loss suffered by Moulin, identified below in these reasons as the “the Dividends Loss”, “the Convertible Notes Loss”, “the Share Repurchases Loss”, and “the IND Loss”.

  11. The interlocutory nature of this appeal is significant in several respects. First, counsel for the defendant rightly emphasised that at this stage there are but untested allegations against the defendant. Secondly, counsel for Moulin submits that the issue against the defendant is whether on the pleadings there is a reasonably arguable case which should be allowed to go to trial, and that it would be inappropriate to go further and to decide against Moulin difficult questions of law on the basis of assumed rather than decided questions of fact[2].

  12. The Amended Statement of Claim was filed on 13 May 2010, almost 6 years after the defendant ceased to be a director.  Moulin sought recovery of

    1. dividends amounting to more than HK$242m paid by Moulin between 31 March 2001 and 31 December 2004 out of capital, despite Moulin being insolvent (“the Dividends Loss”),

    2. amounts totalling US$15m and more than HK$98m paid by Moulin for the early redemption in 2002 (several years before the appointment of the provisional liquidators) by Moulin of convertible notes, identified as the Chishore Notes and the HSBC Notes, at times when Moulin was insolvent and the early redemptions avoided disclosure of breaches of covenant by Moulin (“the Convertible Notes Loss”), and

    3. amounts totalling more than HK$37m paid for share repurchases out of capital during the period 2000 to 2004 (“the Share Repurchases Loss”).

  13. On 27 June 2012, Barma J struck out the second and third of these claims[3]. However, on 3 July 2012 Barma J allowed an amendment to plead a claim quantifying Moulin’s loss as at least HK$1.23 billion by reference to the increase in its net deficiency from 31 March 2001 (the date of the first accounts after the defendant became a director), when Moulin contends provisional liquidators would have been appointed had the defendant discharged her duties, and the date of appointment of the provisional liquidators on 23 June 2005 (“the IND Loss”).

  14. On 7 December 2012, the Court of Appeal upheld the rulings of Barma J that:


    the Convertible Notes Loss claim be struck out because Moulin had suffered no loss from the discharge of its legal obligations to the noteholders; and


    both the Share Repurchases Loss and Convertible Notes Loss claims were “new claims” within the meaning of s 35 of the Limitation Ordinance (Cap 347) (“the LO”) and should not be allowed because they did not, within the meaning of s 35(6) of the LO, arise “out of the same facts or substantially the same facts” as the Dividends Loss claim.

  15. However, the Court of Appeal went further and held that the IND Loss claim also was a “new claim” within the meaning of s 35 and struck it out. This left standing only the Dividends Loss claim. This had been made in the original statement of claim, which had been filed shortly after issue of the writ.

  16. The relevant effect of s 35 of the LO is that where a “new claim” is sought to be made in the course of an action and such claim would otherwise be statute barred, it will be allowable only if it 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 proceeding. However, if the new claim would not be statute barred this restriction imposed by s 35 will not apply, and the new claim would be dealt with by a pleading amendment upon the discretionary grant of leave under O20 r5 of the Rules of the High Court (“the Rules”). Discretion aside, the critical question becomes: what is a “new claim” for the purposes of s 35?  Here, s 35(2)(a) defines a new claim as the “addition or substitution of a new cause of action”.[4]

    The issues

  17. There has been no issue in the course of the litigation as to whether amendment to plead the Convertible Notes Loss claim, the Share Repurchases Loss claim and the IND Loss claim should have been refused on discretionary grounds. Rather, the focus of argument was upon the phrase “substantially the same facts” and the avoiding thereby of the engagement of s 35 to bar the amendment. Further, in deciding the issues presented by s 35 there appears to have been little or no attention in the submissions to the significance of the terms of the writ indorsement.  That appears to have occurred only where the litigation reached this Court.

  18. The first question before this Court is whether the expiry of an applicable limitation period is to be assessed

    1. by looking to the terms of indorsement on a writ filed within time, or,

    2. exclusively by looking to the terms of the then current statement of claim, or

    3. by looking to both.

    Moulin contends for (i). The defendant contends for (ii), but would permit reference to the indorsement to assist interpretation of the statement of claim.

  19. For the reasons which follow in paras 22-37 proposition (i) is correct, and the Convertible Notes Loss claim, the Share Repurchases Loss claim and the IND Loss claim are within the purview of the indorsement, and so were not statute barred when introduced into the pleadings.  It appeared to be accepted by the parties for present purposes that the relevant limitation period was 6 years, and it is unnecessary here to pursue that subject further.

  20. These conclusions mean that s 35 of the LO is not in play. The consequence is that questions 2 and 3 before the Court, which concern the construction and application of s 35, do not arise.

  21. That leaves question 4. This poses an issue the identification of which varied significantly in the course of submissions on the appeal. It is sufficient at this stage to indicate that the question concerns the scope of the equitable duties of the defendant as director, and, in particular whether the Convertible Notes Loss claim was properly struck out because, as the defendant submits, even if she had been in breach of her equitable duties the early redemption of the Convertible Notes could not have given rise to any loss to Moulin and without that loss there could be no claim made out for equitable compensation for that breach.

    Question 1

  22. This is:

    For the purpose of determining whether an amendment constitutes a ‘new claim’ under s.35 of the Limitation Ordinance (Cap 347), is the identity of the causes of action on which a plaintiff relies to be ascertained


    by reference to the nature and scope of the claims identified and constituted by the indorsement on the writ of summons itself without regard to the statement of claim; or


    exclusively by reference to the statement of claim without regard to the indorsement on the writ?

  23. It is necessary to return to the terms of the indorsement as set out in para 9 above. O6 r2(a) of the Rules requires that before a writ is issued it must be indorsed with a statement of claim, or “with a concise statement of the nature of the claim made [and] the relief or remedy required in the action begun thereby”. The text of O6 r2 uses “or” rather than “and”, but it must be read as indicated. With respect to a corresponding text in the then Rules of the Supreme Court in England, Lord Denning MR so decided in Sterman v EW and WJ Moore[5]. Furthermore, O18 r15 throws light upon what is required by the indorsement, and its relationship to the statement of claim by stating:

    A statement of claim must not contain any allegation or claim in respect of a cause of action unless that cause of action is mentioned in the writ or arises from facts which are the same as, or include or form part of, facts giving rise to a cause of action so mentioned; but subject to that, a plaintiff may in his statement of claim alter, modify or extend any claim made by him in the indorsement of the writ without amending the indorsement.

    [emphasis supplied]

  24. The expression “cause of action” is not a term in the law of universal and fixed meaning and content. The relationship between O6 r2 and O18 r15 indicates that a “cause of action” may be “mentioned” in the indorsement even if the indorsement does not specify which has been called “the sequence of essential facts” which must be pleaded and proved in order to establish that cause of action[6]. The phrases in s 35 of the LO “a new claim”, “a new cause of action”, and “a cause of action in respect of which relief has already been claimed in the action” relevantly are concerned with the operation of time limits specified as periods of limitation in Part II (ss 3-21) of the LO.  The provisions of the LO then are to be read in harmony with any relevant Rules of Court which will indicate what is sufficient to stop time running for the purpose of the LO.

  25. However, the defendant submits that the effect of the Rules is that whilst the nature of the claims made by Moulin are described in the terms of the indorsement, there is sufficient “crystallization” to stop time running only when a statement of claim is filed. If a cause of action is not pleaded in the statement of claim as it then stands, a further claim sought to be added will be “a new cause of action” for s 35 of the LO, and the question whether it is being made out of time will not be answered by reference to the terms of the indorsement on the writ.

  26. This interpretation should not be accepted. It is at odds with the significance attached to the indorsement and to what may be seen as a principal purpose of the indorsement to stop the further running of limitation periods.

  27. The defendant accepted that rejection of the submission that it was the terms of the pleading which were the sufficient and decisive consideration would lead to an answer to Question 1 which was adverse to her case.

  28. For its part, Moulin relies for four propositions upon what was said, with reference to English authority, (including Cave v Crew[7], where the expression “within the purview of the writ” appears first to have been used) by Barwick CJ and McTiernan J in Renowden v McMullin[8]. The propositions are that:

    1. the issue of the writ will satisfy the statute of limitations with respect to all claims which fairly fall within the range or purview  of the indorsement,

    2. the indorsement is not in the nature of a pleading, does not form part of the pleadings, and should not be read as such; rather, the indorsement marks out the perimeter or range of the area within which the plaintiff may express its claim in a formal fashion in the statement of claim whether as originally filed or as sought to be amended,

    3. the circumstance that as first delivered a statement of claim does not exhaust the scope of the writ, does not mean that as a matter of law the plaintiff has abandoned all others claim within the scope of the writ,[9] and

    4. the allowance of an amendment to the statement of claim to set up a claim within the indorsement will be a matter of discretion under the applicable Rules of Court.

  29. The proposition that if a pleading first omits a claim within the purview of the indorsement on the writ this does not amount to abandonment of that claim, and does not have the consequence that a later amendment application must be refused, is consistent with Hong Kong authority. In her written case the defendant accepts that proposition and the concession was rightly made. In the reasons of the Court of Appeal in Komala Deccof & Co SA v Pertamina[10], Hunter JA said:

    I think that if a pleader omits a claim from a statement of claim all he is saying is that he is not pursuing that claim for the moment. That omission has no more permanent or irrevocable or irretrievable effect than any other pleading.

    His Lordship also rejected the argument that the question whether there was a “new claim” for a provision such as s 35 of the LO was answered by looking to the statement of claim as it then stood, with no regard to the scope of the writ.

  30. The propositions of law stated in paras 28 and 29 should be accepted as correct.

  31. For these reasons, Question 1 should be answered:

    By reference to the nature and scope of the claims within the purview of the indorsement on the writ.

    The indorsement in this case

  32. That returns one to consideration of the purview of the indorsement on the writ. As Tang VP observed in Ting Siu Wing v Chan Kwok Bun, formerly T/A Perfect Clean Mobile Care[11] how much detail is required of the “concise statement” in the indorsement may vary from case to case.

  33. An illustration is provided by Ericsson Ltd v KLM Royal Dutch Airlines[12]. The claim arose out of the alleged theft of goods carried by the defendant airline. The indorsement did not specify the Amended Warsaw Convention or the Guadalajara Convention, but Stone J held that the terms of the indorsement were in sufficiently broad terms to include Convention claims and thus that time had ceased to run before the subsequent amendment of the statement of claim.

  34. The indorsement in the present case identifies equitable compensation for breaches of “fiduciary duty” and also for breaches of the duty of care and skill owed by the defendant. Some reference here should be made to passages in the judgment of Millett LJ in Bristol and West Building Society v Mothew[13], which were adopted in Libertarian Investments Ltd v Thomas Alexej Hall[14].  Millett LJ explained that

    1. not every breach of duty by a fiduciary (such as a company director) is a breach of a fiduciary duty;

    2. it is inappropriate to apply the terms breach of fiduciary duty, for example, to the failure of a trustee or other fiduciary, such as a director, to use proper skill and care in the discharge of his duties and

    3. the circumstance that the source of this and other obligations of directors lies in equity does not make the obligations fiduciary duties. 

  35. However, in the indorsement the term “fiduciary” is used not in its strict sense, but more broadly to encompass the established or asserted equitable duties of a director to act bona fide in the interests of Moulin as a whole, to act fairly between different shareholders, and to consider the interests of creditors if Moulin be insolvent or of doubtful solvency.

  36. The obligations enforced by the fiduciary duties identified by Millett LJ in Bristol are proscriptive, and concern avoidance of conflict between duty and personal interest and liability to account for improperly derived gains. The proscriptive duties are, as the decision of the House of Lords in Regal (Hastings) Ltd v Gulliver[15] memorably showed, strictly enforced, even in the absence of the conscious wrongdoing. Where what is at stake is liability for failure by a director to discharge a non-proscriptive duty, such as that to act to bona fide in the interests of the company, a court of equity may be reluctant to intervene in the absence of sharp practice by the director. Of course, some breaches of an equitable duty may also be breaches of a proscriptive duty. The cases considered below at paras 46 and 47 are examples.

  37. However, none of the four claims against the defendant with which this appeal is concerned appear to involve breach by the defendant of a proscriptive fiduciary duty. What, as the argument proceeded in this Court, Moulin relies upon in particular are the alleged failures of the defendant in discharge of her equitable duty to act bona fide in the interests of Moulin as a whole. These failures are alleged to have occasioned loss and damage to Moulin for which the defendant must account by providing equitable compensation.

  38. For these reasons, the claims made by Moulin are within the purview of the indorsement.

    Question 4

  39. This is expressed in general terms, asking whether:

    a company [has] any remedy against a director acting in breach of fiduciary duty (eg for the recovery of equitable compensation) for sums paid away to one creditor at the expense of the other creditors of the company at a time when the company is insolvent?

    However, it is apparent that the question is designed to challenge the ruling of the Court of Appeal to affirm the decision of the primary judge to strike out the Convertible Notes Loss claim, on the ground that the payments for early redemption of the convertible notes discharged genuine liabilities of Moulin to the holders of the notes and could not have given rise to any loss to Moulin.[16]

  40. The Court of Appeal recorded that it was not disputed that when Moulin became insolvent its directors had owed a duty to have regard for the interests of creditors, and that the duty had been owed not to the creditors but to the company.[17] To the authority cited for those propositions may be added Spies v The Queen[18]. The Court of Appeal also set out a passage from Professor Sir Roy Goode’s work “Principles of Corporate Insolvency Law”.[19]

  41. Professor Goode pointed to one significant change in corporate governance upon the intrusion of insolvency. Purported approval or ratification by shareholders of a breach of duty by directors causing loss to the company will be ineffective because it is now the creditors who have the primary interest in the proper application of the assets of the company. The second significant change to which Professor Goode pointed is that when insolvency has arrived or is imminent the directors, in discharging their duty to act in the best interests of the company must allow for the circumstance that is now the creditors who have the primary interest just mentioned. This interest is mediated through the company, in particular through the pari passu rule in a subsequent winding up of the company. The result is that when the company becomes insolvent, or insolvency is imminent directors must consider the interests of creditors, ahead but not to the exclusion of members.

  42. Before the Court of Appeal Moulin appears, in effect, to have submitted that it was a reasonably arguable proposition to go to trial that if assets available for pro-rata distribution to the general body of creditors in the winding up were diminished as a result of the repayment of some creditors in full, albeit before the commencement of the preference period, and albeit with no breach of fiduciary duties in their proscriptive sense, the company had suffered loss recoverable from the directors for breach of their equitable duty to have regard to the interests of creditors when they had made the payments.

  43. Put shortly, the response of the Court of Appeal was that there could be no equitable compensation recoverable from the directors in such a case without ‘loss’ to the company and prejudice to the creditors proving in a liquidation was not a ‘loss’ to the company.

  44. In reaching that conclusion the Court of Appeal considered various decisions including Kinsela v Russell Kinsela Pty Ltd[20], West Mercia Safetywear Ltd (in liq) v Dodd[21], GHLM Trading Ltd v Maroo[22] and Continental Assurance Co of London plc (No. 4)[23]. In this Court, Moulin also relied heavily upon the judgment of Randall QC, as a Deputy High Court Judge in the Companies Court in Hellard v Carvalho[24]. This was delivered on 25 September 2013, after the Court of Appeal decision.

  45. Before proceeding further, it is convenient to consider the significance of these decisions for the case Moulin makes in this Court to challenge the adverse ruling of the Court of Appeal.

    The case law

  46. Kinsela concerned a family business and a conflict of duty and interest, namely a lease to directors of the business premises owned by the company which was granted by the company shortly before it went into liquidation. On the application of the liquidator to the Equity Division of the Supreme Court of New South Wales the primary judge declared that the lease was voidable and held that

    1. the lease had not been in the interest of the company and the directors had exercised their powers for an improper purpose and

    2. there had been an ineffective ratification by the shareholders, in the absence of full disclosure.

    The Court of Appeal, conscious that it had been the liquidator seeking to avoid the lease, upheld the result but on the basis that, in any event, “in an insolvency context” the shareholders did not have power to absolve the directors, whose duty to the company as a whole extended to not prejudicing the interests of creditors.[25]

  47. West Mercia was another case of breach by a director of a proscriptive fiduciary duty. He had guaranteed personally the bank overdraft of a related company. West Mercia owed the related company about £30,000. Shortly before both companies went into liquidation, the director of West Mercia instructed its bank to transfer £4,000 to the related company, thereby reducing its overdraft and his liability on the guarantee. On a misfeasance summons[26] the liquidator sought an order that the director repay the £4,000 with interest. The breach of duty by the director appears to have been put in two ways. First, he had procured the giving by West Mercia of a fraudulent preference to its creditor by reducing the debt of £30,000 by £4,000[27]. Secondly, the director had preferred his personal interest by obtaining a reduction in liability on his guarantee. In the Court of Appeal Dillon LJ described the case as one of “blatant misfeasance”[28], and ordered repayment by the director to West Mercia of the £4,000 plus interest. However, his Lordship added “administrative directions” to the liquidator respecting the consequent distributions, designed  to provide a “rough and ready” way of achieving justice between the director, the related company and other unsecured creditors of West Mercia[29].

  48. In neither Kinsela nor West Mercia was the court dealing with issues of the availability and scope of equitable compensation for breach of a non-proscriptive duty which are presented with respect to the early redemption by Moulin of the convertible notes.

  49. The decision of Park J in Continental Assurance primarily concerned a decision by the directors on 19 July 1991 that, despite its losses, the company was still solvent and should continue trading. The company went into liquidation on 27 March 1992. In 1997 the liquidators brought proceedings in the Chancery Division against eight directors claiming they were liable to contribute £3,569,000 for the increase in net deficiency alleged to have been caused by (i) wrongful trading, contrary to s 214 of the Insolvency Act 1986 (UK) and (ii) misfeasance by having operated, or allowing to be operated, defective financial and accounting systems which had caused the directors on 19 July 1991 to decide that the company should continue trading. The amount sought to be recovered represented the increase in the net deficiency (“the IND”) between a hypothetical liquidation on 19 July 1991 and the date of the actual liquidation on 27 March 1992.

  50. The legislative purpose of s 214 of the United Kingdom statute in imposing personal liabilities on directors has been described as seeking to discourage directors, when the company is in the vicinity of insolvency, from taking excessive risks by trading on in the hope of riding out the crisis, whilst knowing that if their gamble is unsuccessful the additional losses are likely to fall on the creditors[30]. There is no such statutory basis available to the liquidators of Moulin. However, there is some resemblance between the IND in the misfeasance claim by the liquidators in Continental Assurance and the IND Loss claim by Moulin.

  51. In Continental Assurance Park J considered that the IND basis was the proper starting point to calculate any damages for misfeasance. His Lordship regarded the misfeasance claim as one of breach of a “common law” duty of directors to exercise an appropriate level of care and skill in the performance of the functions[31].

  52. Park J concluded that the directors had behaved responsibly and conscientiously at all material times and dismissed the wrongful trading claim. He also dismissed the misfeasance claim on the evidence, but added that even if the directors had been in breach of duty the breach was not a cause of the loss formulated as the IND. The decision has no immediate bearing upon the Early Repayment Loss claimed by Moulin.

  53. The Court of Appeal also referred to another decision in the Chancery Division, that of Newey J in GHLM Trading Ltd v Maroo[32], for the proposition, in answer to Moulin’s case on the early redemption of the notes, that the discharge by a company of a genuine liability to which it already is subject does not cause any loss to the company. Newey J first emphasized that “questions of breach and remedy need to be distinguished”[33], and then said, as a matter of breach of duty, that “if a director acts to advance the interests of a particular creditor, without believing the action to be in the interests of the creditors as a class .... he will commit a breach of duty”. Where however, the company “has not entered an insolvency regime” there will be no “loss” to be remedied because “the company’s balance sheet position is likely to be unaffected”. 

  54. Thus, his Lordship was not considering the position where a liquidator was engaged in pari passu distribution between creditors. The defendant directors in GHLM, Mr and Mrs Maroo, had been removed at a general meeting of shareholders and the company no longer traded[34]. The company, which was not in insolvent administration, then sought to have declared void, or to avoid, a contract into which the defendants, in pursuit of their own interests, had caused the company to enter. The company succeeded in establishing that the contract was void.[35] The statements by Newey J referred to above thus do not bear directly on the case advanced by Moulin.

  55. There remains Hellard v Carvalho[36]. This also was a misfeasance case brought in the Chancery Division by liquidators against a director. A late application to add a preference claim had been refused. The company had been insolvent to the knowledge of the defendant, when in 2005 it had made payments totaling £697,063.21 to its largest creditor (“Engenharia”). The defendant was the dominant director at all relevant times and was held to have been in breach of his duty to act bona fide in the interests of the company and its creditors as a whole. The defendant’s substantial purpose in making the Engenharia payments had been to assist that company and he “was in effect choosing which creditors to pay, and which to leave exposed to a real risk of being left unpaid”.[37]  It is apparent from the reasons of the Deputy Judge that he regarded the relevant prejudice or “loss” to the company as assessed not by reference to the state of the balance sheet at the time of the payment, albeit this was the time when the breach of equitable duty occurred, but at the time of the insolvent administration by the liquidators. That conclusion as to the temporal dimension of “loss” is consistent with the case presented by Moulin but contrary to what in the oral submissions by counsel for the defendant in this Court appeared to be a primary submission. In Hellard an order for repayment to the company was made, subject to what was identified as the “West Mercia Proviso”.

    The reformulation

  56. In oral submissions, Moulin relied strongly on the decision in Hellard. Senior Counsel for Moulin accepted that if at trial Moulin succeeded on the IND Loss claim then it would be “not that likely” that it would need to rely on the Convertible Notes Loss claim. But, quite properly, counsel submitted that, against that possibility, the liquidators wished to keep on foot all viable claims. Counsel also emphasised that in the overwhelming majority of cases (of which Continental Assurance may be an example) any claim of breach of duty against the directors will fail because the decision to keep trading and to pay particular creditors was bona fide believed to be in the best interests of the company and was not unreasonable or capricious.

  57. Senior Counsel for Moulin, perhaps in response to the considerations regarding the strict enforcement of non-proscriptive equitable duties (which are noted above at para 36), then formulated eight propositions of law as encapsulated in question 4.  They are as follows:


    A director owes a duty to act bona fide in the best interests of the company. The duty is owed to the company.


    In an insolvency context the duty requires the director to take into account the interests of creditors.


    The duty may extend to not prejudicing the interests of creditors and preserving the assets of the company so that those assets may be dealt with in accordance with ordinary principles of insolvency law, including the fundamental principle of pari passu distribution of the company’s assets amongst all creditors.


    A director who knowingly causes a company to pay away company assets to a creditor (and who thereby dissipates those assets so that they are not available for pari passu distribution to all creditors) when he does not subjectively believe that the payment is in the best interests of the company may act in breach of duty.


    The company may pursue equitable remedies (such as equitable compensation) against the director to restore the company to the position that it was in prior to the breach of duty.


    The assets restored to the company are then available for pari passu distribution amongst all creditors.


    Equitable remedies are discretionary. The court has power to mould relief depending on the nature and facts and circumstances of the individual case. As a result, orders can be made to ensure that the company and the general body of creditors are not over-compensated.


    Nothing in 1-7 is said to apply to a breach involving a director’s duties to act with due care and skill.

  58. Having regard, in particular, to Hellard v Carvalho, a case framed consistently with those propositions is reasonably arguable, should not be struck out and should be allowed to go to trial.

  59. The question then arises whether the pleading of the Convertible Notes Loss claim which Moulin seeks to have this Court reinstate is so drawn as to be sufficiently consistent with the 8 propositions set out in para 57 above. Counsel for the defendant submitted that the answer should be “no” and that submission should be accepted.

  60. The immediately relevant passages of the Further Amended Statement of Claim (a document of 118 pages) are in section G3 (paras 79-127), headed “Insolvency – Breach of Convertible Note Covenants”, and in section N (paras 384-396, 399A) headed “Causation, Loss and Damage”.

  61. With respect to the Chishore Notes (para 98), and the HSBC Notes (para 124), it is alleged that the defendant “knew” of the breaches of covenant by Moulin and that the management of Holdings did not disclose this to the board of directors of Holdings, to the shareholders or to the Stock Exchange; it then is alleged (paras 125, 126, 127) that by not insisting on full and accurate disclosure to those parties the defendant breached of her duty to Holdings to act bona fide in its best interests and this breach was “an effective cause” of the losses which Holdings suffered throughout her term as director.

  62. Paragraph 384 alleges that the defendant was “aware” or “ought to have been aware” that Moulin as “insolvent or near insolvent or of doubtful solvency”; it is further alleged that had she complied with her duties to Holdings, including, an obligation, if other steps failed, to “blow the whistle”, then at least by the time of the publication of the Annual Report for the year ended 31 March 2001, Moulin would have been placed in liquidation (para 392). As to remedy, Moulin accepts that it will account to the defendant as to ensure there is no double recovery by Moulin (para 395).

  63. It may be accepted that references in the pleading to “knowledge” are to be read with an understanding that at trial actual (not merely constructive) knowledge of the existence of a fact or a state of affairs may be inferred if the party is found to have wilfully shut his eyes and consciously decided not to open them[38].

  64. Counsel for Moulin referred to para 156 of the Further Amended Statement of Claim, which appears in section I, headed “Overview of False Accounting and Defendant’s Breaches”. This perhaps comes closest to an allegation along the lines of Moulin’s proposition 4. But it does not plead in terms that the defendant, by not “blowing the whistle”, thereby “caused” Moulin to repay the notes, and “thereby” diminished the pool of assets available for pari passu distribution by the liquidators, when the defendant had not “subjectively believed” the early repayment to be in the interests of Moulin; nor does it plead that this failure by the defendant was a breach of duty to act in the interests of Moulin as a whole and generated an equity against the defendant requiring her to restore the note redemption payments.


  65. In the light of what has been said above in paras 57 and 58 it may be possible for Moulin to plead the claim in terms presenting a case to go to trial. However, there are several difficulties. The first is that as it now stands the pleading of the claim is, in the technical sense used in O18 r19 of the Rules, “embarrassing” to the fair trial of the action. The revelation of the terms in which the Convertible Notes Loss claim is pleaded should not be left for the persistent reader to assemble as if dealing with a jig-saw puzzle. The second difficulty is that in the text of the present pleading there appears entanglement between the various claims. This makes difficult, if not impossible, any surgical excision of the Convertible Notes Loss claim which does not do violence to the pleading of the remaining claims.

  66. In these circumstance, the better course is to:

    1. allow the appeal,

    2. set aside so much of the order of the Court of Appeal as struck out the IND Loss claim, and affirmed the striking out of the Shares Repurchases Loss claim, and the Convertible Notes Loss claim, but

    3. declare that as presently pleaded the Convertible Notes Loss claim does not plead a triable cause.

  67. That leaves it for Moulin, if so advised and in the light of what is said in paras 57 and 58 of these reasons, to seek leave to replead, subject to the discretion of the Court.

  68. Each side has had a measure of success in this Court. There should be an order nisi that no order be made as to the costs of the appeal. The order nisi will become absolute 21 days after the handing down of this judgment unless, within that period, either party serves on the other party, and lodges with the Court, written submissions seeking a different costs order. If so, the other party will have liberty to serve and lodge written submissions on costs within 21 days thereafter. Written submissions must not exceed 10 single-sided A4 pages of ordinarily legible print, and non-compliant submissions will not be accepted. Any further procedural directions that may be sought will be dealt with by the Registrar.

    Chief Justice Ma

  69. For the above reasons, the appeal is allowed and the Court makes the orders set out in para 66 above. The Court also makes an order nisi as to costs as set out in para 68 above.

[1] Moulin Global Eyecare Holdings v Olivia Lee Sin Mei [2013] 1 HKLRD 744

[2] See Altimo Holdings v Kyrgyz Mobil Tel Limited  [2012] 1 WLR 1804 at 1825 at [83]-[84]

[3] Moulin Global Eyecare Holdings Ltd v Olivia Lee Sin Mei [2012] 4 HKLRD 263

[4] Section 35(2)(b) also refers to the “addition or substitution of a new party”, but this is of no relevance to the present case.

[5] [1970] 1 QB 596 at 603

[6] See Roberts v Gill [2011] 1 AC 240 at 273-274 at [108]

[7] (1893) 62 LJ Ch (NS) 530 at 531

[8] (1970) 123 CLR 584 at 595-596

[9]  This proposition appears to have been the principal cause of disagreement in Renowden between Barwick CJ and McTiernan J on the one hand, and Kitto, Menzies and Owen JJ on the other.

[10] No 167/1986, 3 April 1987, unreported

[11] [2012] 5 HKC 87 at 89

[12] [2006] 1 HKLRD 584 at 600-603

[13] [1998] Ch 1 at 16-17

[14] (2013) 16 HKCFAR 681 at [55]

[15] [1942] 1 All ER 378

[16] [2013] 1 HKLRD 744 at [17] – [34]

[17] [2013] 1 HKLRD 744 at [25]

[18] (2000) 201 CLR 603 at [93] –[95]; [2000] HCA 43

[19] 3rd Ed (2005) at §14-20. See also at §14-19, and see further Matthew Berkahn “Directors Duties to ‘The Company’ and to Creditors : Spies v The Queen,” (2001) 6 Deakin Law Review 360

[20] (1986) 4 NSWLR 722

[21] [1988] BCLC 250

[22] [2012] 2 BCLC 369

[23] [2007] 2 BCLC 287

[24] [2013] EWHC 2876 (Ch)

[25] (1986) 4 NSWLR 722 at 732

[26] In Hong Kong this procedure is provided by s 276 of the Companies Ordinance

[27] In Hong Kong provision respecting fraudulent preferences is found in s 266 of the Companies Ordinance

[28] [1988] BCLC 250 at 254

[29] [1988] BCLC 250 at 255

[30] Davies and Worthington (eds) “Gower and Davies’ Principles of Modern Company Law” 9th Ed (2012) at §9-6

[31] [2007] 2 BCLC 287 at 441 at[393]

[32] [2012] 2 BCLC 369

[33] [2012] 2 BCLC 369 at 407-408 at [168]

[34] [2012] 2 BCLC 369 at 394 at [98]

[35] [2012] 2 BCLC 369 at 410 at [179]

[36] [2013] EWHC 2876 (Ch)

[37] [2013] EWHC 2876 (Ch) at [106]

[38] The English and Scottish Mercantile Investment Co v Brunton (1892) 2 QB 700 at 707-708; OBG Ltd v Allan [2008] 1 AC 1 at 30 at [41].


Robin Dicker QC and Charles Manzoni SC, instructed by Lipman Karas, and Jason Karas (Solicitor Advocate) of that firm, for the Appellant.

Alan Steinfeld QC, Paul Shieh SC and Janet Ho instructed by Carpio, Mak & To, for the Respondent.

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