We update the case of Moulin Global Eyecare Holdings Limited (In Liquidation) & Ors v Olivia Lee Sin Mei (HCA 167/2008) that we discussed in our earlier newsletter “Can a Director be Indemnified from Liability?” published in April 2009.  The liquidators proceeded to appeal against the decision of the Court of First Instance to strike out their claim.  The appeal has been allowed and the green light is now given to the liquidators to proceed to full trial.

Decision in the lower courts

The action taken out by the liquidators of the Plaintiffs against the Defendant was for negligence in the conduct of her duties as a non-executive director of the Plaintiffs.The Plaintiffs were associated companies where the first Plaintiff was a Hong Kong listed company incorporated in Bermuda.The Defendant applied to strike out the Plaintiffs’ claim before Deputy High Court Judge Carlson on grounds, inter alia, that the action was precluded by a deed of indemnity (“DoI”) executed by the first Plaintiff in her favour, that the first Plaintiff purchased directors and officers liability insurance for her, and that she was entitled to rely on an indemnity under the first Plaintiff’s Bye-law 166.

The deputy judge had little difficulty in striking out the claim of the second and third Plaintiffs as it could not be shown that the Defendant was a shadow director of them. As to striking out the claim of the first Plaintiff (hereinafter the “Plaintiff”), the deputy judge relied on the provisions of the Plaintiff’s Bye-law 166, being the equivalent of the articles of association which, in his view, must have been incorporated as an implied term into the terms of engagement of the Defendant as a director in the absence of a formal service contract between the Plaintiff and the Defendant.It then followed that the action was unsustainable.For details of the facts of the case and the findings of Carlson J, please refer to our earlier newsletter.

The appeal

The Plaintiff appealed against the striking out of its claim and the Defendant cross-appealed contending that Carlson J should have held in her favour on all grounds.

1. The Deed of Indemnity

The Court of Appeal (“CA”) examined the DoI at some length, and agreed with the lower court that the terms of the DoI did not bar the Plaintiff from suing the Defendant.The Court also observed that there was a strong indication in the wording of the DoI that any claim brought by the Plaintiff would be preserved.

2. The insurance policy

One of the Defendant’s complaints was that the liquidators of the Plaintiff had permitted the liability insurance, which would presumably cover the claim being pursued by the Plaintiff, that is, claims against the Defendant in respect of any wrongs amounting to mere negligence committed as a director, to lapse.The CA commented that even if the insurance policy was still in place and would protect the Defendant from the present claim, the extent of the cover was limited to an indemnity of US$10 million and was unlikely to be sufficient to cover all amounts claimed in the action.

3. Bye-law 166

It is on this ground of the Plaintiff’s Bye-law 166 that the CA departed from the lower court’s decision.The CA was of the view that the question of implication of the terms of engagement is a matter which is not easily susceptible to a summary decision.Specifically, articles of association do not constitute a contract between a director and a company, unlike the DoI which was a document specifically prepared to make provision in relation to liability incurred by the Defendant in the course of acting as a director.The CA also noted that the Defendant might not be aware of the provisions of Bye-law 166 at the time of her appointment which is contrasted with the considerable care taken to put in place the DoI and the insurance policy.

On the abovementioned reasons, the CA allowed the Plaintiff’s appeal and set aside the decision of the lower court to strike out the Plaintiff’s claim.In the circumstances, the Defendant would require leave to appeal against the CA’s decision to the Court of Final Appeal.As such application for leave is no easy hurdle to overcome and we expect the case to proceed to full trial.

We shall wait and see how the Hong Kong Courts will determine this issue of directors’ indemnity in the context of a Bermuda company.