Legal News & Analysis – Asia Pacific – Hong Kong – Dispute Resolution

On 17 July 2014, the Hong Kong Court of Final Appeal gave judgment in the case of Moulin Global Eyecare Holdings Limited (in liquidation) (formerly known as Moulin International Holdings Limited) v Olivia Lee Sin Mei FACV No. 23 of 2013,providing helpful guidance on the expiry of applicable limitation periods.

Background

We have previously written on this blog about the decision of Moulin Global Eyecare Trading Limited (in liquidation) v The Commissioner of Inland Revenue FACV 5/2013 in which the Hong Kong Court of Final Appeal held that the fraudulent knowledge of directors regarding inflated profits could be attributed to a Moulin Global Eyecare subsidiary company.

The current case arose from the appointment of liquidators in June 2005 to the holding company, Moulin Global Eyecare Holdings Limited (in liquidation) (“Moulin“), following falsification of the accounts of Moulin group companies.

Olivia Lee Sin Mei (“Olivia Lee“) was a director of Moulin between 2000 and 2004 and also, allegedly, its principal legal advisor. Moulin’s liquidators brought an action against Olivia Lee by a writ issued in January 2008 for breach of her duties as a director, on the grounds that:

1. Moulin was insolvent at various stages from around 2001;
2. Olivia Lee had the necessary knowledge or means of knowledge to be aware of fraudulent accounting practices concealing this state of affairs;
3. Olivia Lee should have “blown the whistle” by alerting Moulin’s board of directors, the Stock Exchange and the shareholders and had she done so, the fraudulent accounting practices would have ended well before the appointment of the provisional liquidators; and
4. the failure of Olivia Lee was a direct cause of loss suffered by Moulin.

An Amended Statement of Claim was filed by Moulin in May 2010 (almost 6 years after Olivia Lee ceased to be a director) seeking recovery of various payments made by Moulin comprising:

1. dividends paid out of capital, despite being insolvent (“Dividends Loss“);
2. amounts paid for the early redemption of convertible notes, at times when Moulin was insolvent and the early redemptions avoided disclosure of breaches of covenant by Moulin (“Convertible Notes Loss“); and
3. amounts paid for share repurchases out of capital (“Share Repurchases Loss“).

At first instance, Barma J struck out the Convertible Notes Loss and Share Repurchases Loss claims but allowed Moulin to amend its pleading to claim for the increase in its net deficiency between the date of the first accounts after Olivia Lee became director and the date that liquidators were appointed (“IND Loss“).

The Court of Appeal upheld the ruling of Barma J that the Convertible Notes Loss claim should be struck out because Moulin had suffered no loss by discharging its legal obligations to the noteholders. The Court of Appeal also agreed that both the Share Repurchases Loss and Convertible Notes Loss claims were “new claims” within the meaning of section 35 of the Limitation Ordinance (Cap 347) (the “LO“) and should not be allowed because they did not arise “out of the same facts or substantially the same facts” as the cause of action in respect of which relief had already been claimed i.e. the Dividends Loss claim. In addition, the Court of Appeal held that the IND Loss claim should be struck out as it was also a “new claim” within the meaning of section 35 of the LO.

The relevant effect of section 35 of the LO is that where a “new claim” is sought to be made but would otherwise be statute barred, it will be allowed only if it arises out of “the same facts or substantially the same facts” as a cause of action “in respect of which relief has already been claimed” in the proceeding.

Decision

The first question to be decided by the Court of Final Appeal was accordingly whether the expiry of an applicable limitation period (and for the purpose of determining what constitutes a “new claim” under section 35 of the LO) is to be assessed:

(i)    by looking at the terms of indorsement on a writ filed within time,

(ii)   exclusively by looking at the terms of the then current statement of claim, or

(iii)  by looking at both.

The Court of Final Appeal held that option (i) above was the correct approach, proceeding then to examine the indorsement on the writ, which sought equitable compensation for loss and damage caused by breaches of fiduciary duty and breaches of the duty of care and skill by Olivia Lee, arising out of her role as director or employee of Moulin in preparing, auditing and certifying Moulin’s accounts. It found that Moulin’s Convertible Notes Loss, Share Repurchases Loss and IND Loss claims were all within the scope of the indorsement. Accordingly, these claims were not statute barred.

A further question relevant to the lower court’s decision to strike out the Convertible Notes Loss claim for not giving rise to any loss, was whether a company could pursue equitable remedies against a director who knowingly causes a company to pay away company assets to a creditor without subjective belief that the payment is in the best interests of the company. Although the Court of Final Appeal accepted that this could present a triable issue; it held that, as presently pleaded, the Convertible Notes Loss claim did not. It was therefore for Moulin to seek leave to re-plead this aspect of its case.

Comment

The judgment of the Court of Final Appeal provides a useful insight into how the Hong Kong courts will interpret applicable limitation periods and section 35 of the LO. In-house counsel and those managing litigation proceedings for their companies should bear this decision in mind when considering whether to make “new claims” in the course of existing proceedings under section 35.

Given the decision to reinstate Moulin’s IND Loss and Shares Repurchases Loss claims and to leave open the possibility of a re-pleaded Convertible Notes Loss claim, there will be further developments in this case to come.

For further information, please contact:

Dominic Geiser, Partner, Herbert Smith Freehills

[email protected]

Emily Soothill, Herbert Smith Freehills
[email protected]

Herbert Smith Freehills Dispute Resolution Practice Profile in Hong Kong