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

CACV 109/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 109 OF 2009

(ON APPEAL FROM HCA NO. 167 OF 2008)

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J U D G M E N T

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Hon Rogers VP:

1.  This was an appeal from a judgment of Deputy High Court Judge Carlson given on 6 April 2009.  The matter before the judge was the hearing of a summons to strike out the claim by the plaintiffs’ liquidators against the defendant for damages and/or equitable compensation in respect of loss and damage which was alleged to have been suffered by the plaintiffs.

2.  The judge struck out the claim made by the first plaintiff (hereafter referred to as “the plaintiff”) on one of the grounds which had been advanced and struck out the claims in respect of the second and third plaintiffs.  On this appeal the plaintiff appealed against the striking out of its claim.  The defendant, for her part, has cross-appealed that the action should have been struck out on the basis upon which the judge did not hold in her favour on all grounds.  At the conclusion of the hearing of this appeal, judgment was reserved which we now give.

Background

3.  The plaintiff was incorporated in Bermuda.  Its business was established in 1960.  In October 1993 the plaintiff was listed on the Stock Exchange of Hong Kong.  At its height, it was a substantial company concerned in the manufacture of what were termed eyewear products.  Unfortunately, on 23 June 2005, provisional liquidators were appointed.  The plaintiff was ordered to be wound up on 5 June 2006.

4.  The defendant is a solicitor who was originally qualified in Canada and came to Hong Kong in 1977.  It is said that, starting in 1997, she provided legal services to the plaintiff.  On 8 December 2000 the defendant became a director of the plaintiff and was also appointed to the audit committee.  There is no dispute that prior to her becoming a director the defendant required the plaintiff to enter a Deed of Release and Indemnity (“DoI”) dated 1 December 2000 and also to take out Directors and Officers Liabilities Insurance which would cover her for, amongst other things, negligence.  The defendant resigned her directorship on 1 November 2004.  Shortly thereafter, the then auditors of the plaintiff resigned on 31 December 2004.

5.  The writ in this action was issued on 29 January 2008.  The statement of claim, which is extensive, alleges that the defendant was derelict in her duties both as a director and a member of the audit committee.  The primary claim was a claim in respect of dividends that had been paid amounting to more than $240 million.  There was also a claim in respect of tax which had been paid on the footing that the plaintiff had profits which in reality it had not and in respect of what was said to be circular trade finance.  Without, it is hoped, unduly summarising the nature of the case, it is said that there were a number of matters, which, if the defendant had carried out her duties as a director and member of the audit committee, would have come to attention and the payment of the dividends and the tax would not have occurred and the other losses would have been prevented.  Those matters might, for the most part, be categorised as asset stripping by members of the family that controlled the plaintiff.

The strike out application

6.  On 13 June 2008 the summons seeking to strike out the action was issued on behalf of the defendant.  The primary basis of that application was that the terms of the DoI rendered this action unsustainable.  As a further matter, it was also said that all claims which arose after the defendant’s resignation as a director and member of the audit committee on 31 October 2004 and those which arose on the basis of the unaudited consolidated accounts of the plaintiff for the year ended 31 December 2004 should be struck out as an abuse or because they were frivolous or vexatious.

7.  At the hearing of the application to strike out, reliance was also placed on the provisions of the plaintiff’s Bye-law 166, the Bye-laws being the equivalent of articles of association.  It was said that Bye-law 166 must have been incorporated as an implied term into the terms of engagement of the defendant as a director and that would also render the action unsustainable.  Furthermore, complaint was also made that the plaintiff had failed to keep in force the Directors and Officers Liabilities Insurance which would have indemnified the defendant in respect of any claim by the plaintiff.

8.  The judge considered the terms of the DoI and held that although, on its literal construction, the DoI would prevent the plaintiff maintaining the present action but, taking into consideration the background, specifically the email correspondence prior to the defendant becoming a director, the plaintiff’s case that the DoI did not assist the defendant was far from hopeless because it could be said that the parties had entered the DoI and arranged the insurance on the basis that they only related to claims by third parties.  The issues that were raised in respect of them should, therefore, go to trial.

9.  The judge then went on to consider the provisions of Bye-law 166.  He considered the situation was “on all fours with what Warrington LJ had said in Re City Equitable Fire Insurance Co. Ltd.” [1925] 1 Ch 407 at 520-1.  He, thus, reached the conclusion that it was beyond argument that Bye-law 166 was incorporated as an implied term into the terms of engagement of the defendant as a director of the plaintiff and that that Bye-law provided the defendant with immunity from the present suit by the plaintiff.  In doing so he also rejected an argument that the present action entailed allegations that amounted to wilful default or negligence, which was outside the terms of the immunity given by Bye-law 166.

This Appeal

10.  As already indicated, both parties have contested the findings in relation to which they were unsuccessful in the court below.  In addition, the plaintiff sought an order from the court for leave to file an amended statement of claim.  For reasons that will be referred to below, this court declined to consider the question of amendment; that matter has been left on the basis that the plaintiff can make application to amend the pleading in the usual way.

11.  Leaving aside a number of matters that were raised in argument, for example, that the DoI was required by the defendant, that it was drafted by the defendant, that the defendant was the plaintiff’s legal adviser at the time and that the plaintiff was not advised to seek separate legal advice on the terms of the DoI, I consider that there is clearly an argument, which must go to trial, that the terms of the DoI would not prevent the plaintiff bringing this action.

12.  For convenience I will set out the terms of the DoI that I consider important for the purposes of these proceedings.  As already noted, it was dated 1 December 2000 and made by the plaintiff in favour of the defendant (identified in the document as “OSL”).  The body of the DoI commences:

“1.  In consideration of OSL agreeing to act as a non-executive director and/or officer of the Company, the mutual covenants contained herein and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Company, intending to be legally bound, hereby irrevocably, absolutely and unconditionally guarantees to OSL:

(a) that the Company shall, upon demand, immediately pay to or reimburse OSL

(i)  of any and all amounts that OSL 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 of 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 OSL 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 OSL 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 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 (all amounts to be paid by the Company to OSL in accordance with this paragraph 1(a) are collectively referred to as the “Amounts”)

(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 of 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.

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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.

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7.    All payments under this Release and Indemnity shall be made in full without set-off or counterclaim or any restriction or conditions and free and clear (of) any of the Company’s present or future claims (if any) against OSL.

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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.” (emphasis added)

13.  I regret the length of the citation; it would appear to be in inverse proportion to the difficulty which might be thought to arise on the document.  The main argument on behalf of the defendant, which found favour with the judge below was that the reference to “anyone” in clause 1(a)(i), which is emphasised in the citation above, should be interpreted as including the plaintiff.  That, in itself, is a particularly tortuous construction because, if that is what the document was intended to mean, it would entail giving the clause a meaning that the plaintiff could bring an action but would be defeated by the concept of circuity of action because it would have to indemnify the defendant.  The same might be said of the provisions of clause 1(b), despite the fact, as emphasised by Mr Jarvis QC, who appeared on behalf of the defendant, that the wording, referring to events, acts or omissions which were in any way connected with the defendant and which arose from any matter cause or things whatsoever, was particularly wide.

14.  The matter, in my view is put beyond doubt, at least for the purposes of the present proceedings, because of the provisions of clause 7.  That wording, referring as it does to the plaintiff’s present or future claims against the defendant, would be inconsistent with clause 1(a) including claims by the plaintiff itself.  The wording of clause 7 would appear to be a strong indication that any claim by the plaintiff would be preserved.

15.  In reaching the conclusion that the DoI refers to claims by others and not those by the plaintiff the provisions of clause 3(a) have not been overlooked.  It is true that it was that clause that was referred to in the defendant’s summons which is the subject of these proceedings.  It was argued on this appeal that the object of bringing of these proceedings was precisely to impose a civil liability on the defendant.  In my view that argument is semantically wrong.  The bringing of proceedings does not impose liability.  The successful result of an action is the confirmation by a court, which puts the matter beyond any further dispute, that a liability exists and the grant of a remedy to rectify the situation.

16.  For my part, I do not consider it necessary to have recourse to the background facts in order to establish that the DoI meant that only third-party claims were covered by it.

The insurance policy

17.  This court’s attention was drawn to the terms of the insurance policy that was taken out as a result of the defendant’s requirements.  It is quite clear from the terms of the policy that it would cover claims made by the company against the defendant in respect of any wrongs amounting to mere negligence committed as a director.  The defendant’s complaint is that the liquidators permitted the insurance to lapse.  The consequence of that is that the claim in these proceedings was made after the policy had collapsed and hence the policy would not protect the defendant.  Assuming, for the purposes of the present proceedings that that is correct, the difficulty still arises that the extent of the cover is limited to an indemnity of US$10 million and it is by no means clear that that would be sufficient to cover all claims at present made on behalf of the plaintiff.

Bye-law 166

18.  Bye-law 166 provides that the plaintiff shall indemnify the directors in respect of anything done or omitted to be done as directors and gives the directors immunity from suit except in relation any wilful negligence, wilful default, fraud or dishonesty.  However, as Mr Kosmin QC, who appeared on behalf of the plaintiff, pointed out, the articles of a company (the Bye-laws being in this case the plaintiff’s articles) do not constitute a contract between the company and a third person, specifically not a contract between a director and the company.  This court’s attention was drawn to a number of cases and in particular to the judgment of Astbury J in Hickman v Kent or Romney Sheep-Breeders’ Association [1915] 1 Ch. 881 at page 900, which was clear to that effect.

19.  Mr Kosmin then took the court, briefly, through a line of cases which ended with the Court of Appeal decision in Re City Equitable Fire Insurance Co. Ltd.  As already noted, the judge considered that the decision in that case was parallel to the one that was before him.   In particular he relied upon the passage in the judgment of Warrington LJ at pages 520-1 which he cited in paragraph 36 of his judgment.  In that passage Warrington LJ referred to a case where auditors, in that case, were engaged without any special terms.  He considered that in such a case if the articles contained provisions relating to the performance of their duties, then it would be taken that the provisions of the articles applied.  When Warrington LJ referred to a separate document defining the conditions of the engagement, I do not consider that it should be taken that he was saying that it was necessary that there should be a contract of employment in writing specifically so called.  What he was referring to was the matter that he had referred to earlier, namely, whether there was engagement under specified terms.  For completeness, I set out the relevant passage from Warrington LJ’s judgment:

“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.”

20.  In my view, the question of implication of terms of engagement is a matter which is not easily susceptible to a summary decision.  That would be required if the defendant would to succeed on this ground.  Highly important in the present case are the provisions of the DoI.  That document was specifically prepared to make provision in relation to liability incurred by the defendant in the course of acting as a director.  Again, importantly for the purposes of this case, clause 14 of the DoI provides that it constitutes the entire agreement between the parties and supersedes, amongst other things, all implied understandings.

21.  I consider, furthermore, that there is considerable force in the submissions that there is no indication, at least at this stage, that the defendant was aware of the provisions of Bye-law 166 at the time of her appointment.  There was no reference to it in the pre-appointment exchanges of e-mails.  The defendant does not aver that she knew of it.  Considerable care was taken to put in place the DoI and the insurance policy.

22.  On these matters alone I do not consider that it is possible to say that the defendant must necessarily have a defence on the basis that the provisions of Bye-law 166 must be taken to have been incorporated as an implied term in the engagement of the defendant as a director.  In those circumstances it is not necessary to consider the public policy considerations urged by Mr Kosmin.  These are all matters which would have to be considered trial.

23.  Neither do I consider that it is necessary to determine whether the statement of claim as originally framed should be regarded as alleging that there has been wilful default or negligence that would take the allegations beyond that which would have been covered on the basis that Bye-law 166 had been part of the terms of engagement of the defendant.  There are clearly grounds for so considering and I would content myself with saying that I do not consider it necessary that the word “wilful” should be used in the pleading if it is clear on the allegations made that what is alleged falls within what is legally regarded as being wilful negligence or default.

24.  Mr Jarvis attempted to argue that the claim made by the plaintiff was inevitably bad.  He relied upon clause 3(b) of the DoI on the basis that it must be taken that the plaintiff was in breach of its undertaking to keep the defendant fully and accurately informed as to the most up to date financial conditions of the plaintiff.  He sought to argue that the allegations in the statement of claim amounted to mere negligence and certainly not wilful negligence; he also attempted to the show that the matters to which it is alleged the defendant had no regard existed at that time when the defendant became a director and, if anything, improved during the course of her directorship.  These matters are all not only fact sensitive, but highly contentious.  It would be impossible for this court on what is a summary application to be satisfied, for example, as to which accounts of the plaintiff are accurate.  Certainly, there are strong grounds for the court, at this stage, to approach the matter on the basis that the audited accounts were inaccurate.

The plaintiff’s application to amend the statement of claim

25.  Annexed to the supplementary notice of appeal dated 4 March 2010 was an amended statement of claim which clearly expanded upon the original claim both in terms of the claims made and in relation to the facts alleged.  It was said that the allegations made in this amended statement of claim were formulated as a result of consideration of documents which were only available to the liquidators after the hearing on the court below.

26.  It was made clear at the hearing that this court considered that it was not part of its function to allow amendments and that any amendment to pleadings would have to be made in the proper and normal way.  The difficulty which the plaintiff foresaw, if that course would be taken, was that there may be limitation problems, if there were any further delay.  It was pointed out that if what was said in the case of Welsh Development Agency v Redpath Dorman Long Ltd [1994] 1 WLR 1409 were correct, an amendment would only take effect for the purposes of the Limitation Ordinance once an order were made allowing the amendment.  Whether or not that approach is correct, this court suggested that the difficulty could be overcome if the plaintiff were to file a new action based on the new statement of claim and sought at a later stage to consolidate or otherwise amalgamate the two sets of proceedings.  On the court’s enquiry as to whether any objection of duplication of action would be taken if that course were to be adopted, Mr Jarvis indicated that the defendant would not take issue on any new writ, if issued by the plaintiff, on the grounds that there were already in place duplicate proceedings commenced by the plaintiff against the defendant.  That has since been confirmed in writing by the solicitors for the defendant.

Conclusion

27.  I would, therefore, allow this appeal and set aside the judgment in the court below.  I would make an order of costs nisi in favour of the plaintiff both here and below

Hon Tang VP:

28.  I agree.

Hon Le Pichon JA:

29.  I also agree.