Introduction

We have previously discussed the case of Moulin Global Eyecare Holdings Limited (In Liquidation) & Ors v Olivia Lee Sin Mei (HCA 167/2008) in our earlier newsletters “Moulin Global Case to Proceed to Full Trial” and “Can a Director be Indemnified from Liability?”, in which the Defendant’s applications to strike out the Plaintiff’s claim (on grounds relating to a Deed of Indemnity, bye-laws and insurance policy coverage of the Plaintiff) were refused by the Court of Appeal.

Another attempt was made by the Defendant to strike out the Plaintiff’s claim in whole or in part that was determined by Barma J (as he then was).  This newsletter discusses certain aspects of His Lordship’s judgment of Moulin Global Eyecare Holdings Limited (In Liquidation) & Ors v Olivia Lee Sin Mei  [2012] 4 HKLRD 263 dated 27 June 2012 in respect of quantifying loss suffered by a company for prolonged trading after it became insolvent.

Brief Background

This is an action of the liquidator of Moulin Global Eyecare Holdings Limited against the Defendant who was a former non-executive director of the Plaintiff company for breach of fiduciary duty.  It was alleged that the Defendant failed to have regard to information which should have brought the Defendant to the realisation that the Plaintiff’s financial statements had been the subject of serious misreporting.  As a consequence, the Defendant caused the Plaintiff to repurchase its own shares, to voluntarily redeem certain convertible notes prior to their due dates and pay out dividends which the Plaintiff was not in a position to pay.

Whether Loss Suffered by the Plaintiff

One of the matters before the Court was the Defendant’s application to strike out the Plaintiff’s whole claim on the ground that, even if the Defendant was in breach of her fiduciary duties to cause the Plaintiff to continue trading when she should have place the Plaintiff into liquidation, the Plaintiff had suffered no loss as a result of such breach.  To determine the matter, the Court was invited to rule on the method of quantifying loss in cases of prolonged trading of an insolvent company.  The other matters before the Court included application of the Defendant for discovery and application of the Plaintiff to re-amend the Amended Statement of Claim.

The Defendant’s Case

It was not disputed that the relevant time for calculating the Plaintiff’s loss is the period between the time when the Plaintiff should have been placed into liquidation, and the time when it actually went into liquidation (the “Relevant Period”). 

The Defendant submitted that the only correct approach to quantify loss was to have regard to whether or not there had been any increase in the net deficiency of the Plaintiff between the first and last day of the Relevant Period.  The Defendant contended that there were inflows of new capital during the Relevant Period, which should have offset any outflows incurred in that period.  The Defendant therefore argued that after the set-off, the Plaintiff should have suffered no loss and hence its claim against the Defendant should be struck out.

The Plaintiff’s Argument

The Plaintiff submitted that inflows of money during the Relevant Period would only be relevant in so far as they could be said to be logically or causally connected to the losses that were claimed.  The Plaintiff relied on cases of Hussey v Eels [1990] 2 QB 227, Needler Financial Services Ltd v Taber [2002] 3 All ER 501 and Primavera v Allied Dunbar Insurance Plc [2003] PNLR 12, all of which the court held that it was not necessary to take into account “benefit or profit received where the negligence or breach of duty complained of gave rise to the opportunity, or set the scene, for the receipt of the profit, but did not cause it directly”.

Further, the Plaintiff submitted that it was entitled to make claims in respect of each and every individual item of loss that the Plaintiff had suffered during the Relevant Period as a result of the Defendant’s breach of duty.  Despite the fact that the alleged breach of duty was a continuous breach, it was the Plaintiff’s submission that each loss suffered during the Relevant Period was an individual loss claimable from the Defendant. 

The Court’s Ruling

Barma J ruled in the Plaintiff’s favour.  His Lordship accepted the Plaintiff’s case as “well arguable” and agreed with the Plaintiff’s submission that the inflows of money during the Relevant Period do not have to be taken into account as an offset to the damages allegedly suffered by the Plaintiff, as the inflows were arguably not causally connected with, and did not flow from the damage suffered.

On this ground, the Court refused the Defendant’s application to strike out the whole claim.

Appeal to the Court of Appeal

The above position became slightly uncertain when the Defendant successfully relied on a procedural ground to appeal against Barma J’s decision as to the Plaintiff’s amended claim for increased net deficiency.  The Court of Appeal held that the amendment did not arise out of substantially the same facts (as it considerably broadened the scope of factual inquiry).  Also, the Plaintiff’s amendment was made outside the limitation period.  As a result, the Plaintiff had to give up its alternative claim for loss of HKD1.23 billion.

Conclusion: A Lesson to Directors

Directors do need to be aware of the financial status of their company, especially if there are hints that the company is insolvent.  A director having known, or ought to have known, that the company is already insolvent may still decide to continue trading in the hope that some miracles may happen.  From this Moulin judgment, even if there is such miracle the Court would allow an offset of outflows only if the inflows are causally connected with the outflows.