In Moulin Global Eyecare Holdings Limited (In Liquidation) & Ors v Olivia Lee Sin Mei (HCA 167/2008), the Court examined whether a director could be indemnified by the company for claims against herself by the company.

Director’s Duty of Care and Skill towards the Company

A director owes a duty of care and skill towards the company, breaching which may expose him to liability in negligence.  As illustrated in Re D’Jan of London Ltd [1994] 1 BCLC 561, a director’s conduct is judged against that of a reasonably diligent person having the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company.  If the director concerned has particular knowledge, skills, and experience, e.g. if a director is qualified as an accountant, lawyer, etc., his conduct may be judged in comparison with that of the relevant profession.

Courts have not recognised that a non-executive director (“NED”) should be subject to a lower standard of liability, though the extent of his liability will be ascertained against the role he is required to play in the company.  

Moulin Global Eyecare Holdings Limited (In Liquidation) & Ors v Olivia Lee Sin Mei

The facts of this case are not uncommon.  The Defendant is a lawyer, who provided legal advisory services to Moulin Global Eyecare Holdings Limited (the “Company”), a very substantial Hong Kong listed company incorporated in Bermuda.  In 2000, the Defendant was appointed as an NED and a member of the audit committee of the Company.  Before she took up the appointment, she requested the Company to execute a deed of release and indemnity (the “Deed”) in her favour; and to purchase a directors and officers (“D&O”) liability insurance policy against any liability in respect of negligence, default, breach of duty or breach of trust of which she may be held liable in relation to the Company and its subsidiaries.  

The Moulin Group of companies later went into liquidation and the liquidator brought an action against the Defendant for alleged breaches of duty as an NED and member of the audit committee of the Company for failure to make enquires and to take appropriate action to avoid the collapse of the Company.  

Grounds of Striking Out Application

The Defendant applied to strike out the liquidator’s claim on the ground that, inter alia, the action was precluded by the Deed.  She argued that the action was in breach of the Company’s covenant not to sue her under the Deed.   In addition, given that she was entitled to an indemnity from the Company under the Deed in exactly the same amount as she might become liable to the Company, the claim against her must fail for circuity of action.  Furthermore, the Defendant argued that she was entitled to rely on an indemnity under Bye-Law (Articles) 166 of the Company.  

Prohibition on Exclusion and Indemnity Clauses

The Plaintiff argued that the Deed and Bye-Law 166 should be void by virtue of section 165 of the Companies Ordinance (the “Ordinance”), which provides that any provision contained in the company’s articles or in any contract with the company, for exempting any officer of the company or its auditor from, or indemnifying him against, any liability for negligence, default, breach of duty, or breach of trust, of which he may be guilty in relation to the company or a related company, is void.  

Carlson J was satisfied that section 165 only applies to a “company”, which is defined under section 2 of the Ordinance as “a company formed and registered under this Ordinance or an existing company”.  This is intended to exclude companies registered under Part XI of the Ordinance.  As such, the Company, being a Bermuda incorporated company, is not subject to the restrictions under section 165.    The validity of the Deed and Bye-Law 166 were therefore upheld.  

Action Struck Out on the basis of Bye-Law 166

As the Court had to consider the factual matrix under which the Deed was entered into so as to ascertain the exact scope of the indemnity, Carlson J found himself unable to strike out the action merely on the ground of the Deed.

However, he is satisfied that the scope of Bye-Law 166 is clear enough to exempt the Defendant from liability. Accordingly, the action is struck out on this ground.

Implications

This case shows that the fate of directors of a Hong Kong company could be very different from that of a Bermuda company.  For Hong Kong companies, indemnity in favour of directors from claims by companies is generally invalid under section 165 of the Companies Ordinance, but not so for Bermuda companies. It is not unlikely that the Stock Exchange may look into this problem and propose reform in this regard.