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

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

_______________

J U D G M E N T

_______________

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. Ltd supra, 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 GWR Co. 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.