New claims launched by the Plaintiff in Moulin Global Eyecare Holdings Limited v Olivia Lee Sin Mei [2013] 1 HKLRD 744 were struck out by the Court of Appeal. 

Introduction

Following from our previous newsletter article “Quantifying Director’s Liability for Loss Suffered by a Company for Prolonged Trading after it became Insolvent” in the Moulin case, this article discusses certain aspects of the Court of Appeal’s treatment of the case, including the issue of loss.

The Defendant was a former director of the Plaintiff and a member of its audit committee, and had provided legal advice as a solicitor to the Plaintiff before and after her appointment as a director. The liquidators of the Plaintiff sought to amend the statement of claim and added three new claims against the Defendant for breach of fiduciary duty. At first instance, Barma J. only allowed one new claim and rejected the other two. Both the Plaintiff and the Defendant appealed against the decision of Barma J.

Plaintiff’s appeal

The first new claim of the Plaintiff concerned the early redemption of certain convertible notes (“the Convertible Notes Claim”) on the basis that the notes were redeemed when the Plaintiff was insolvent, with the Defendant’s approval as director and legal adviser. The second claim concerned the Plaintiff’s repurchase of its own shares (“the Share Repurchases Claim”).

At first instance, however, Barma J did not agree that the Plaintiff had suffered loss in the Convertible Notes Claim. He further held that both claims were new causes of action and that the new causes of action were time-barred.

Discharging a genuine liability is no loss

The Plaintiff contended that where a company was insolvent, the interests of the company and the interests of its creditors became one since the company’s assets became the creditors’ assets. Accordingly, a director will breach her duty when she acts contrary to the interest of the general body of creditors. Since the assets available for pro rata distribution to the Plaintiff’s creditors had diminished due to the early redemption of convertible notes, the Plaintiff had suffered loss.

This argument was not accepted by the Court of Appeal. Firstly, directors owed a duty to consider the creditors’ interests when the company is insolvent. That duty, however, is not owed to the creditors but to the company. Such a duty required the directors to consider the impact of their actions on creditors’ interests ahead of shareholders, but not to the shareholders’ exclusion. Since the early redemption of convertible notes was the payment of a genuine liability of the company, the Plaintiff had suffered no loss. Loss was suffered by the general creditors, not the Plaintiff.

Every duty and its damage

The Plaintiff argued that the Share Repurchases Claim and the Convertible Notes Claim did not constitute new causes of action since its claim was all along based on the Defendant’s continuous breach of fiduciary duties which resulted in the Plaintiff’s loss. The two claims were additional heads or particulars of loss arising from the same claim – breach of fiduciary duties.

The Court of Appeal rejected this argument. It held that, in identifying a cause of action, one does not only look to the duty. Where the amendment pleads a different duty, it will normally raise a new cause of action; even so, in cases where no different duty is alleged, it is still necessary to look at the facts in the amendment alleging breach of duty and damage to see whether a new cause of action is pleaded. It was therefore wrong to characterise the Plaintiff’s cause of action as a single breach of duty with different heads of losses flowing from a single breach. It is never sufficient to simply ask if the Defendant owed the Plaintiff a duty of care. It is always necessary to determine the scope of that duty by reference to the kind of damage the Defendant must prevent causing the Plaintiff.

The Court of Appeal concluded that the Share Repurchases Claim and the Convertible Notes Claim were independent unconnected transactions involving a distinct breach and a different loss. The two claims therefore constituted new causes of action.

Defendant’s appeal

The Defendant’s appeal concerned the Plaintiff’s claim for an increase in net deficiency of HK$1.23 billion from the date that the Plaintiff would have ceased trading or gone into liquidation had the Defendant properly discharged her duties to the date it eventually did (“the IND claim”). At first instance, Barma J held that although the IND claim introduced a new cause of action (and therefore risked being time-barred), this new cause of action arose from substantially the same facts as those in the Amended Statement of Claim. Hence he granted leave to insert this new claim.

The Court of Appeal held that the IND claim should not be allowed on the strength of the Amended Statement of Claim, as the amendments allowed therein were limited to providing background. The Plaintiff could not use those amendments as a springboard to introduce the IND claim as a new cause of action. To do so would prejudice the Defendant who would, after the expiration of the limitation period, have to investigate facts she previously did not have to. Consequently the Court of Appeal allowed the appeal of the Defendant.

Be careful what (and when) you plead for

Liquidators need to carefully think through their Statement of Claim to plead all possible causes of action and the corresponding relevant facts; otherwise they run the risk of having their amendments struck out by the Court if they are found to have suffered no loss or if the amendments are brought after the limitation period.