MOULIN GLOBAL EYECARE HOLDINGS LTD (IN LIQUIDATION) (formerly known as MOULIN INTERNATIONAL HOLDINGS LTD) v. OLIVIA LEE SIN MEI

HCA 167/2008

[2019] HKCFI 1715

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 167 OF 2008

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J U D G M E N T

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Introduction

1.  This is the trial of the Action.

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

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

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

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

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

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

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

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

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

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

Background

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

10.  Holdings’ 2 primary operating subsidiaries were:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“ Accounts Receivables in North America

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

…

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

…

Temporary payments and loan receivables

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

…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Overall summary

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

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

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

PARTICULARS

Dividends Claim

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

 Share Repurchases Claim

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

GRAND TOTAL

HK$463,627,185.89

Issues for determination

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

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

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

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

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

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

Issue 1 — falsification of financial statements

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Issue 2 — insolvency of Holdings and Moulin Group

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

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

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

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

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

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

47.  The adjusted consolidated Moulin Group financial statements show:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(2)   the lending criteria applied by the Group;

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

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

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

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

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

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

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

(1)   the purported Third Party Advances;

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

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

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

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

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

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

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

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

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

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

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

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

Issue 4 — Liability of the Defendant

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

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

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

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

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

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

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

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

…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Issue 5 — Quantum  

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

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

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

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

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

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

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

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

(b) a right to bring such an action,

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

…

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

(4) That period is either—

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

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

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

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

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

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

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

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

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

“ Attribution and the fraud exception: conclusions

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

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

…

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

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

(9) The fraud exception does not appear to have been even raised as a defence, still less successfully relied on, in a claim by a company against its auditors for failure to detect internal fraud (as in Duke and MAN) with the sole exception of the extreme “one-man” company case of Stone & Rolls (see that case at paras 175 and 176). Again, internal fraud was the “very thing” from which the auditors had a duty to protect the company.’

…

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

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

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

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

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

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

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

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

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

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

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

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

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

Disposition and costs order nisi

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

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

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