Moulin Global Eyecare Holdings Ltd (in Liquidation) and Others v. Olivia Lee Sin Mei

HCA 167/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 167 OF 2008

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J U D G M E N T

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Introduction

1.By these proceedings, Moulin Global Eyecare Holdings Limited (“Moulin”), acting through its liquidators, brings claims against Ms Olivia Lee Sin Mei (“Ms Lee”), a former director, arising out of alleged breaches of her fiduciary duties, and of her non-fiduciary duties of skill, care and diligence, owed to Moulin.

2.Prior to the appointment of provisional liquidators in June 2005, Moulin carried on, through its subsidiaries, the business of the manufacture and distribution of eye-wear products.  Moulin and the group of companies which it headed had an apparently substantial and successful business, and Moulin was listed on the Stock Exchange of Hong Kong (“the Stock Exchange”).

3.Soon after the liquidators were appointed, they discovered that there were serious issues with the financial statements of the Moulin group of companies.  It transpired that senior executives of the Moulin group, and employees acting on their instructions had falsified accounting records so as to create false sales on a substantial scale, so as to significantly overstate the Moulin group’s turnover and profitability.  Such false sales were the basis of applications for trade credit and financing, the proceeds of which were falsely represented to be assets of the Moulin group. As a result, total assets were overstated and liabilities understated.  A number of the Moulin group’s senior management and staff have been convicted of various criminal offences as a result.

4.Following the discovery of the false accounting in the Moulin group’s records, the liquidators have pursued litigation against various parties.  Litigation against Moulin’s former auditors has resulted in some recovery by way of settlement.  However, according to the liquidators, there remains a substantial deficit, and creditors have so far received dividends of less than 50% of the amount of Moulin’s indebtedness to them.

5.These proceedings are part of the litigation undertaken by Moulin to seek to recover its losses.

Background to these applications

6.Ms Lee was a director of Moulin from 8 December 2000 until 1 November 2004.  She was also a member of Moulin’s audit committee.  She had, prior to her appointment as a director, been a legal advisor to Moulin and its controlling shareholders, and continued in that role while a director.

7.In January 2008, Moulin commenced these proceedings against Ms Lee.  It served a detailed Statement of Claim on 15 February 2008, in which it was alleged that she was in breach of her contractual, common law and fiduciary duties, in failing to have regard to information which should have brought her to the realisation that a number of areas of Moulin’s financial statements had been the subject of serious misreporting, and failing to take steps which, if taken, would have brought Moulin’s true financial position to light.  In consequence, it was said, Moulin had paid out dividends of some HK$242,666,000 which it was not, in fact, in a position to pay (because far from having earned profits in the financial years in respect of which such dividends were paid, it had suffered losses), had paid tax on its purported profits of some HK$28,586,636 and had paid interest on circular trade finance transactions of some HK$73,803,159.  Each of these amounts was claimed as loss, damage or compensation for which Ms Lee was liable.

8.Ms Lee applied to strike out the claim against her on the basis that she was entitled to rely on indemnities which, she contended, exonerated her from any liability to Moulin.  Although she was successful at first instance, her application was dismissed in April 2010 on appeal by the liquidators.  At this stage, Ms Lee had yet to serve a defence to the claim against her.  It appears that during the course of the appeal, the possibility of Moulin extending its claims against Ms Lee to include claims in respect of payments for share repurchases and early redemption of convertible notes, as described in the next paragraph, was raised.  The possibility that such claims might be statute barred was mentioned by those representing Ms Lee.  In the event, Moulin issued a separate writ in April 2010 in respect of those claims.

9.Notwithstanding that a separate writ had been issued in respect of the further claims the previous month, in May 2010, before Ms Lee had served any defence, Moulin served an amended statement of claim, in replacement of its original pleading.  While the claim for damages or equitable compensation in respect of dividends paid remained, those in respect of tax and interest paid were dropped.  In their place, damages or compensation were sought in respect of some HK$37,232,000 paid by Moulin to repurchase its own shares between 2000 and 2004, and some HK$98,472,648 and US$15,000,000 (plus interest) paid to voluntarily redeem certain convertible notes (known as the Chishore Notes and the HSBC Notes respectively) prior to their due dates.

10.At the end of November 2010, Ms Lee filed her defence and counterclaim.  Moulin’s reply and defence to counterclaim was served in March 2011.  All of the pleadings are substantial documents, each running to hundreds of paragraphs over between 50 and 150-odd pages.

11.Since then, the parties have progressed the case towards trial, which is presently expected to take place in the latter part of 2013.  Moulin has served factual and expert evidence in which its case on the falsity of its audited accounts, and what it says was its true financial position, are expounded.

12.At this hearing, there were four applications to be dealt with.  These were (in chronological order):-

(1)  Ms Lee’s application by summons dated 9 September 2010 to strike out Moulin’s claim, or parts of it, on the basis that it discloses no reasonable cause of action, or is frivolous or vexatious or constitutes an abuse of process.  The application was subsequently amended by a summons dated 20 October 2011 to include an alternative application to disallow the amendments made to Moulin’s statement of claim without leave in May 2010, seeking an extension of time for the purpose of making such alternative application.

(2)  Ms Lee’s application by summons dated 7 September 2011 for discovery of settlement agreements entered into between Moulin and its former auditors.

(3)  Moulin’s application by summons dated 21 September 2011 for leave to re-amend the Amended Statement of Claim in accordance with a draft Re‑Amended Statement of Claim annexed to the summons.

(4)  Ms Lee’s application by summons dated 8 November 2011 seeking to expunge parts of the witness statement of Ms Catherine Williams dated 19 September 2011, on the grounds that the parts sought to be expunged are inadmissible as they contain:-

(a)  statements of information and belief in respect of which Ms Williams has no personal knowledge; and

(b)  expressions of opinion by Ms Williams, who is put forward as a factual, and not an expert, witness.

13.At the hearing, Moulin was represented by Mr Ashley Burns SC, while Ms Lee was represented by Mr Paul Shieh SC and Miss Janet Ho.

The discovery, amendment and expungement applications

14.In the event, it was possible to substantially dispose of the applications, other than the striking out application, at the hearing, as follows:-

(1)  So far as Ms Lee’s discovery summons was concerned, it was accepted by Moulin that the settlement agreements in question should be disclosed.  The only disagreement was as to the arrangements to be made to preserve the confidentiality of the settlement agreements, both as to the identity of the parties to them, and as to their terms, this being expressly provided for in the agreements themselves.  In the event, Moulin agreed to produce redacted copies of the settlement agreements for inspection, with the redactions being carried out on the basis of relevance (so that material of no relevance to these proceedings would be redacted).  Moulin would also provide a general explanation of the basis of redaction, and Ms Lee would be at liberty to make an application for inspection of the redacted parts if those advising her felt that there was a proper basis for doing so.  So far as preservation of confidentiality was concerned, at this stage, inspection of the settlement agreements would be limited to solicitors in the firm representing Ms Lee, and counsel instructed by them (but not trainee solicitors or pupil barristers), with the question of disclosure to expert witnesses for Ms Lee, and to her insurers, being left over for later determination.

(2)  Mr Shieh indicated at the beginning of the hearing that Ms Lee would not oppose the application for leave to re-amend the Amended Statement of Claim, save in respect of the proposed re‑amended paragraph 62.  However, he also indicated that if his client’s application to strike out were unsuccessful, the amendments to that paragraph would not be opposed either.  Thus, the only live issue in relation to the application for leave to re‑amend would stand or fall with the striking out application.

(3)  As for the application to expunge parts of Ms Williams’ witness statement, it emerged during the course of argument that the main concern on Ms Lee’s part was that it was (she contended) inappropriate for Ms Williams, as a purported factual witness, to express views as to whether particular transactions, assets or accounts of Moulin or the Moulin group were fictitious or false, or whether particular transactions or accounting practices were unusual or irregular.  In the event, the parties were able to agree that any such statements should be regarded, for the purposes of the proceedings, as no more than statements by Ms Williams of the view taken by her of such transactions, assets, accounts or accounting practices.

15.I should add that questions of costs in relation to the foregoing applications were not addressed at the hearing, and were stood over to be dealt with at a later date.

The striking out application

16.That left the application to strike out (or disallow) part or all of the amended statement of claim.  Initially, the application to strike out was based on the following grounds:-

(1)  The claims based on the Chishore and HSBC notes should be struck out because the early repayment of the notes did not cause any loss to Moulin.

(2)  If at least the claims in respect of the Chishore and HSBC notes were struck out, the whole claim should be struck out because, when inflows of funds arising from new capital raised by Moulin between 2000 and 2004 were taken into account, the net financial position of Moulin appeared to have improved, so that it had not in fact suffered any loss as a result of Ms Lee’s alleged breaches of duty.

(3)  The claims based on the share repurchases and on the Chishore and HSBC notes should be struck out (or the amendment introducing them disallowed) on the basis that these claims should not have been added to the existing claim because they were new claims which were introduced after the expiry of the relevant limitation period applicable to them.

(4)  The allegations of insolvency on Moulin’s part which underpinned the various claims being advanced were bad, in that on analysis, Moulin was not in fact (or could not be shown to be) insolvent, so that the claims (which depended on Moulin being able to establish that it was in fact insolvent) could not possibly succeed, and should be struck out.

17.At the hearing, however, Mr Shieh indicated at the outset that the fourth ground mentioned in the preceding paragraph would not be pursued.  The argument therefore proceeded in relation to the remaining three grounds, although Mr Burns laid down a marker that Moulin would, when questions of costs were dealt with, seek special orders as to costs in respect of what he said were substantial costs that had, as it turned out, unnecessarily, been expended in order to answer the suggestion that Moulin was not in fact insolvent.

Whether the striking out application should be entertained at all

18.At the start of the hearing, Mr Burns submitted that the court should decline to embark upon consideration of the striking out application and should simply dismiss it summarily.  In support of this contention, he drew my attention to the principles applicable to striking out applications set out in para 18/19/4 of Hong Kong Civil Procedure, which reiterates that the summary powers to strike out a pleading should only be exercised in plain and obvious cases, where the claim was obviously unsustainable and the claim could not possibly succeed, and that the jurisdiction to strike out should not be exercised where it calls for a minute and protracted examination of the documents and facts of a case.

19.Mr Burns also reminded me of the observations of Lord Templeman in Williams & Humbert Ltd v W & H Trade Marks (Jersey) Ltd [1986] AC 368 at pages 435-6, where he said that:-

“Where an application to strike out pleadings involves a substantial and serious argument, the court should as a rule decline to proceed with the argument unless, in the rarest of cases, he not only harbours doubts about the soundness of the pleading and considers it likely that he may reach the conclusion that the pleading should be struck out, in that the ultimate issue is quite simple, but is also satisfied that striking out the pleading would obviate the necessity for trial or will substantially cut down or simplify the trial as to make the risk of proceedings with the hearing sufficiently worthwhile.”

20.He submitted that even if I decided to embark on the hearing, I should consider permitting Mr Shieh to start his submissions, but keeping in mind the possibility of calling a halt to the proceedings in the event that it should become apparent that the points being raised were not susceptible to determination on a striking out application, as was done in Morris v Bank of America NT [2001] 1 BCLC 771.

21.However, having heard Mr Shieh in response, I concluded that in the circumstances of this case, it would be appropriate to allow the striking out application to continue, as the trial was still more than a year away, the arguments to be run on the striking out application were likely to take no more than about two days, did not require the court to consider disputed questions of fact, appeared to be fairly self-contained, and would (if I were with Mr Shieh on both the complaints in relation to the claim based on the Chishore and HSBC notes, and on the need to take into account receipts that came in through new share issues) potentially dispose of the whole action.  Further, as it was expected that a decision could be given within about six weeks to two months, it did not seem likely that there would be any significant adverse impact in terms of the ability to have a trial sometime in the third or last quarter of next year, particularly as I was prepared to fix a further case management hearing at which the position (and further steps to be taken in the litigation) could be considered in the light of my decision on the striking out application.  In the event, the further case management hearing was fixed for 3 July 2012.

Striking out the claims arising from early redemption – no loss to Moulin?

22.I shall deal first with the claims based on the early repayment of the Chishore and HSBC notes.  These are set out in paragraphs 79 to 127 of the Amended Statement of Claim, which is the relevant pleading to have regard to for the purposes of this argument.  In briefest summary (which is all that is necessary for present purposes) these claims run along the following lines:-

(1)  Moulin entered into contracts relating to the Chishore and HSBC notes respectively – in the case of the Chishore notes, the transaction was structured as a loan of HK$85 million, secured by 135 million shares in Moulin, which were charged to a company called Advent as security agent for Chishore; in the case of the HSBC notes, there were two tranches of convertible notes (totalling US$15 million in value) issued which were convertible into Moulin shares at a stated conversion price. Nothing turns, for present purposes, on the different structure as between the Chishore notes and the HSBC notes.  It is also to be observed that the Chishore notes (or loan) was not entered into by Moulin directly, but by a special purpose subsidiary – for present purposes, this is not relevant either (although Ms Lee does contend that the Chishore notes involve no liability on the part of Moulin itself, this is not something that needs to be addressed in the context of this application).

(2)  Each set of notes contained, among other provisions, an undertaking on the part of the issuer that Moulin’s interest expenses would not exceed 20% of its earnings before interest and tax (“the interest covenants”).

(3)  Ms Lee was aware of the terms of each set of notes, having advised on them.

(4)  In September 2001, a default notice was sent to Moulin in respect of the Chishore notes, alleging that the interest covenant in relation to the Chishore notes had been breached, and calling for early redemption in full of the Chishore notes.  Similar default notices in relation to the two tranches of HSBC notes were received by Moulin in April 2002 and April 2003 respectively.

(5)  Ms Lee was involved in advising Moulin as to the default notices, and obtained advice from counsel in relation to the Chishore notes, which suggested that there had indeed been a breach of the relevant interest covenant.

(6)  Settlements were eventually reached after extensive negotiations, whereby each set of notes was redeemed, with interest.  Chishore was paid HK$98,472,648 plus interest, and the holders of the HSBC notes were paid a total of US$15,000,000 plus interest.

(7)  In no case was the breach of the interest covenant disclosed to Moulin’s board, shareholders or the Stock Exchange.  Instead, the repayments in respect of the HSBC notes were described as voluntary early repayments.

(8)  It is alleged that this was done to conceal the breaches of the interest covenants, and to conceal the true financial position of Moulin (which is alleged to have been insolvent at the relevant times), and that had the breaches of the interest covenants, or the true financial position of Moulin been disclosed as Moulin contends they should have been, the repayments would not have been made.

(9)  It is then contended that, in consequence, Moulin has suffered losses in the amounts of the repayments plus interest.

23.For present purposes, I shall assume that Moulin will, at trial, be able to establish the matters mentioned in paragraphs 22(1) to (8) above.  Nonetheless, Mr Shieh submits, the proposition in paragraph 22(9) is simply wrong, and is fatal to the claims based on the Chishore and HSBC notes.

24.Mr Shieh’s argument is a simple one: as the liabilities under the Chishore and HSBC notes were genuine liabilities of Moulin, which were extinguished as a result of the repayments, Moulin can have suffered no loss for which Ms Lee could be required to compensate it, as the reductions in its assets (cash) caused by the various repayments were matched by reductions in its liabilities (under the notes), with the consequence that its net financial position remained unaltered.

25.In principle, this would appear to be right.  A company does not, on the face of it, suffer loss by paying off a liability to which it is subject.  The consequence would be that there would be no loss for which Ms Lee could be required to compensate Moulin as a result of the early redemption of the Chishore and HSBC notes, so that the claim for the amounts of the repayments and interest would be bound to fail, and so should be struck out.

26.However, Mr Burns submitted that the position was not so simple.  He relied on observations in a number of cases to the effect that where a company is insolvent, the duties of directors to the company are no longer owed to the shareholders (as would be the case where the company is solvent), but to its creditors.  In Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722, the question arose as to whether the entry into by a company (that was in financial difficulties) of a leasing agreement with its directors at a substantially undervalued rent involved a breach of duty and could be avoided on the application of the company acting through its liquidators, notwithstanding that it had been approved of by all the shareholders.  The New South Wales Court of Appeal held that it could not. Street CJ pointed out (at p.730A-C) that:-

“In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company’s assets. It is in a practical sense their assets and not the shareholders’ assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration.”

Later in his judgment (at p.733D-E), he stated that:-

“In the view that I hold the challenge by the company is made good and the defence advanced by the appellants must fail. The case presents an unusually straightforward factual pattern. The company was plainly insolvent at the date of the lease and its collapse on that ground was imminent; thus no occasion arises to analyse the degree of financial instability which may be necessary to impose upon directors the obligation to consider the position of creditors. Secondly the prejudice to the creditors was the direct and calculated result of the lease; its purpose was to place the company’s assets beyond the reach of the creditors; there is thus no occasion to examine on a value basis the commercial wisdom or unwisdom of the decision of the directors.”

27.That the interests of creditors intervene on insolvency, so that directors have to have regard to them in exercising their powers in relation to a company’s assets has been recognised in a number of other decisions as well.  One such decision on which Mr Burns placed particular reliance was the decision of the English Court of Appeal in West Mercia Safetywear Ltd v Dodd [1988] BCLC 250.  In that case, a director caused the company to transfer a sum of money to its holding company, of which he was also a director, and whose overdraft he had guaranteed, in partial repayment of amounts which it owed to the holding company at a time when both companies were on the verge of liquidation.  After both companies had gone into liquidation, the company’s liquidator applied for a declaration that the director was guilty of misfeasance and breach of duty, and for an order that he repay to the company the amount paid to the holding company.  It was held on appeal that once a company was insolvent, the interests of the creditors overrode those of the shareholders, and that since the company was known by the director to be insolvent when he caused the money to be transferred to its holding company, and the transfer was a fraudulent preference made solely to relieve the director of personal liability under his guarantee in disregard of the interests of the company’s creditors, he was guilty of a breach of duty and should be ordered to repay the amount transferred with interest.  A submission that the company had suffered no loss, and that in consequence no order for repayment should be made, was rejected.

28.Mr Burns contended that in the present case, having regard to the decision in West Mercia, it could not be said that the claim for recoupment of the amounts paid to redeem the Chishore and HSBC notes at a time when Moulin was (it was to be assumed for present purposes) insolvent was unarguable, or bound to fail.  He contended that notwithstanding that the making of the repayments might have no net effect on Moulin’s balance sheet, so that its overall deficiency of assets as compared to liabilities was no different both before and after the early repayment of the notes, it was still arguable that Moulin had suffered loss, in that where a company is insolvent, its liabilities exceed liquid assets, so that in reality, every dollar of liabilities was not the equivalent of a dollar of liquid assets.  He suggested that by paying a creditor in full, when the company is insolvent, the company suffers a loss in that the pool of assets available for distribution is diminished, and that the company is worse off because it has paid in full a claim which was in real terms worth only cents in the dollar.

29.Mr Shieh responded that where a company paid a genuine debt (whether it could be described as a trade debt or not), it suffered no loss, since there was no depletion of its net assets (or increase in its net deficiency, if it were insolvent).  In support of this proposition, he relied not only on its self-evident correctness as a matter of both principle and common sense, but also on a number of English first instance authorities in which, he said, this had been recognised.

30.The first case to which Mr Shieh referred was Knight v Frost [1999] BCC 819, in which Hart J rejected the proposition that a director who caused an insolvent company to pay a debt to one creditor in preference to its debt to another was liable to make good, to the company, the amount so paid away, saying (at p.834 D-E):-

“… In my judgment, the authorities relied on do not support that proposition. In both the West Mercia Safetywear and Washington Diamond Mining Co cases, the payment in question had been a fraudulent preference because it had been made within the relevant statutory period prior to the commencement of a winding up. They are not authority for the proposition that a director who for his own purposes causes the company to prefer one of its creditors over another outside that statutory period is liable to replace the money at the suit of the company. It is through the mechanism of liquidation that the creditors are protected and the plaintiff has in this case chosen to pursue a derivative action as a shareholder rather to petition, as creditor, for [the company] to be wound.”

31.The point was subject to more detailed analysis by Park J in Re Continental Assurance Co of London plc (No 4) [2007] 2 BCLC 287.  There, liquidators of the company brought proceedings for both misfeasance and wrongful trading against the former directors.  One issue for consideration (which will be of relevance to the second basis for striking out – that based on the contention that credit should be given for inflows of funds during the period when Moulin is said to have continued to trade when it should have already been placed into liquidation) was as to the starting point for these claims.  The rival contentions were two bases put forward by the liquidators which focussed on payments out by the company during the period during which it was said that it should have been, but was not, placed into liquidation, and that contended for by the directors, who suggested that the appropriate starting point was the increase in net deficiency on the company’s balance sheet between the date on which it should have been placed into liquidation, and the date on which it actually went into liquidation.  In an interim judgment given during the course of the trial, Park J held that the correct starting point was the increase in net deficiency.  However, in explaining his reasons for this, he also made certain observations as to whether or not it could be said that the company had suffered loss as a result of paying debts.  Thus, he said (at p.294c-d):-

“… The aggregate of payments away by the company during the interim period is not the same thing as the amount which it can be said to have lost through liquidating later rather than sooner. In that connection it is, in my view, relevant that all the payments away were in discharge of trading liabilities of the company, and that the payment by a company of a trading liability does not create a loss.”

32.Park J went on to deal with arguments very similar to those raised by Mr Burns in this case, to the effect that some creditors who were paid in full during the period when the company should have been placed into liquidation would have done better than others who were not, in that the latter would only receive a dividend in the liquidation.  He concluded that the correct means of redressing such a situation was to utilise the unfair preference provisions if they were available (see the interim judgment, at p.294h-295b).  He then went on to say this (at p.295c-296b):-

“(7) In this connection it does not to my mind make any difference if, during the period when Continental paid the debts of some creditors but not others, it ought not to have been trading at all. Payments were still made in the course of trade in discharge of genuine trading liabilities. They did not in themselves inflict any loss on Continental. To repeat a point made in (3) above [i.e. the point made in the extract cited in the previous paragraph], if a company has a true trading debt and pays it in full, it does not, by paying its debt, suffer a loss.

(8) With reference to this last point, I describe a simplified example which was much discussed in the argument and which in my judgment brings out the question of principle. Assume that a company ought to have stopped trading and gone into liquidation at one time (T1) but in fact did not. Instead it traded on to a later time (T2), ceased to trade then, and went into liquidation then. At T1 it had assets of 5 and liabilities of 10, of which 5 were owed to creditor A and 5 were owed to creditor B. If it had gone into liquidation at T1, then, ignoring the costs of liquidation, it would have paid 2.5 to A and 2.5 to B. It would thereafter have gone out of existence with a net deficiency of 5. Assume now that, between T1 and T2 when the company was still trading and had not gone into liquidation, it paid 5 to A in discharge of its debt to him but did not repay B. Assume also that in doing this it was not influenced by a desire to prefer A, so [the fraudulent trading provision] does not apply. Assume, finally, that in the period of continued trading from T1 to T2 the company broke even and paid all the trading debts which it incurred in that period. So when it went into liquidation at T2 it had no new creditors. It still owed 5 to B but it had no assets left. In the liquidation at T2, B receives nothing and the company goes out of existence with a net deficiency of 5.

(9)  What is the effect on the company of its trading on until T2, and going into liquidation then, instead of ceasing to trade at T1 and going into liquidation at that earlier time?  [Counsel for the liquidators] says that the company has made a loss of 2.5, because, whereas if it had gone into liquidation at T1 it would have been able to discharge 2.5 of its debt to B, on the actual facts of the going into liquidation at T2 it cannot discharge any of its debt to B.  I do not agree with [this] conclusion.  The company makes no loss by trading on.  On either date, that is to say T1 or T2, it would have gone out of existence with net liabilities of 5.  At the earlier date – T1 – those liabilities would have consisted of 2.5 owed to A, and 2.5 owed to B.  At the later date, T2, they consisted of 5 owed to B.  That difference in the make up of the creditors whom the company cannot pay does not mean that the company – by going into liquidation later rather than sooner – has made an extra loss of 2.5.  It is correct that, as a result of the company going into liquidation later, B makes a loss of 2.5, which is matched by a gain to A of 2.5, but it is B who makes the loss of 2.5, not the company.”

33.In his judgment delivered after trial, when dealing with the misfeasance claim against the directors, Park J reiterated (paragraph 419 of his judgment, at p.448d-e) the point that the discharge by a company of a liability to which it is already subject does not cause it any loss.

34.I have cited the views and reasoning of Park J at some length because it seems to me that they provide an entirely convincing exposition as to why no loss is suffered by a company in paying its proper debts.  It also deals comprehensively with the argument advanced by Mr Burns that there is a loss in that full payment is made of a debt that is “worth only cents in the dollar”.  As Mr Shieh pointed out, on full payment being made of the debts in respect of the Chishore and HSBC notes, those debts were fully extinguished.  They could not later revive, and in the circumstances, Moulin could have suffered no loss to itself by reason of such debts having been paid.

35.Finally, Mr Shieh referred to the decision in GHLM Trading Ltd v Maroo & others [2012] EWHC 61 (23 January 2012), in which Newey J said (at paragraph 169 of his judgment):-

“… the applicability of [the fraudulent trading provision] may have a bearing on what, if any, remedy is available in respect of a breach of duty. As Hart J said in Knight v Frost, the West Mercia and Washington Diamond cases “are not authority for the proposition that a director who for his own purposes causes the company to prefer one of its creditors over another outside [the relevant] statutory period is liable to replace the money at the suit of the company”. It seems to me that a company seeking redress in respect of a “preference” to which [the statutory provision] does not apply is likely to need to show (a) that it has suffered loss, (b) that the director has profited (so that the “no profit” rule operates) or (c) that the transaction in question is not binding on the company. In a typical case, the first of these may be impossible. If the “preference” involved the discharge of a debt, the company’s balance sheet position is likely to be unaffected. The second might well also be problematic if the company has not entered an insolvency regime …”

36.Mr Burns suggested that I should not place reliance on these authorities, as all were first instance English decisions which were not binding on me.  He also sought to suggest that they were distinguishable from the present case, as the Continental decision, in particular, involved the payment of what Park J considered to be ordinary trading debts, whereas the present case involved repayments of loans which (he submitted) could not properly be described as trading debts at all, and were effected in circumstances in which there had to be serious doubt as to the purpose of making the repayments – i.e. that they may well have been made for the purpose of continuing to conceal the true, and dire, financial position in which Moulin was at the time of the repayments.

37.With respect, I do not think that this submission is a good one.  It seems to me that in stating that repayments of genuine liabilities do not result in loss to the company, the decisions accord with both principle and common sense.  Moreover, in my view, it is the decisions in the Kinsela and West Mercia cases, on which Mr Burns relies, that are readily distinguishable from the present.  In Kinsela, there was clearly a loss to the company, in that its net assets were depleted as a result of the transaction being impugned – the grant of a lease at an undervalue necessarily involved the disposition of an asset for less than the company should have obtained, so that the amount coming in was less than the value of the asset it replaced, and the company’s net asset position would, as a result, be impaired.  In West Mercia, there was the element (not present here) that not only was the payment a fraudulent preference (in the present case, quite apart from the fact that the payments in respect of the notes were made well outside the preference period, there does not appear to be any reason to think they were preferences in the sense of being motivated by a desire to prefer the note holders, rather than being in response to serious demands for repayment), but that it also involved the obtaining by the director concerned of a personal benefit or advantage (which, again, is not suggested here).  Neither case suggests that liability to make good a payment arises in the absence of loss to the company, or profit or benefit to the director.

38.Although Mr Burns also suggested that I should not strike out the claims in respect of the Chishore and HSBC notes as this involved a developing area of the law, I am unable to see the respects in which it could be said the law might be developing so as to provide Moulin with a potentially viable argument that it has indeed suffered loss as a result of the repayment of a genuine liability owed by it.  Even if the GHLM decision is taken as suggesting that there may be circumstances in which a “preference” could give rise to a claim for recoupment by the company itself, the position in this case falls outside each of the three exceptional cases suggested by Newey J, and no other, further, exceptional case was suggested by Mr Burns, within which the present case might fall.

39.Thus, for all of the foregoing reasons, I am quite satisfied that it is plain and obvious that the early repayment of the Chishore and HSBC notes could give rise to no loss on the part of Moulin, so that there can be no question of Ms Lee being liable to make good any loss. The suggestion to the contrary is, in my view, unarguable.  I therefore conclude that it would be right to strike out the claims for alleged losses arising out of the early repayment of these notes, and I shall so order. However, I should make it clear that insofar as it is sought to rely on such matters as further particulars of Ms Lee’s knowledge of Moulin’s true financial position, it remains open to Moulin to do so, although I do not accept that this course would justify (as Mr Burns suggested) allowing the allegations of loss to remain until trial.

Striking out the whole claim – no loss when inflows taken into account?

40.I turn next to the second basis for striking out advanced by Mr Shieh.  This was that the whole of Moulin’s claim should be struck out because account should be taken of inflows of new capital in the period between the time when Moulin should, according to its case as pleaded in the Amended Statement of Claim (which is again, for this purpose, the relevant pleading to which to have regard), have been placed into liquidation, and the time when it actually went into liquidation some years earlier.

41.Mr Burns’ initial response to this argument was to suggest that inflows of new capital were irrelevant, and could not be relied upon to reduce the quantum of Moulin’s claim, as the new capital raised during the period when Moulin continued trading was in no sense connected to the losses which it suffered.  Mr Burns suggested that receipts needed only to be taken into account where they could be said to be logically or causally connected to the losses that were claimed.  It was not sufficient that Ms Lee’s negligence or breach of duty gave rise to the circumstances (i.e. continued trading) in which additional capital could be, and was raised.  For this proposition, Mr Burns relied on 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.  In each of these cases, the court held that it was not necessary to give credit for a 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.

42.In the course of Mr Shieh’s argument, however, there was a shift in the way in which his argument was put.  Rather than suggesting that the new capital raised was somehow causally connected to the breaches of duty, or the losses, alleged by Moulin, Mr Shieh submitted that the real point was that Moulin had failed to put its claim for loss and damage on a proper footing in focussing on individual transactions or items of loss (in the form of the dividends paid, payments for share repurchases, and early redemption of the notes).  Mr Shieh suggested that, fairly read, Moulin’s Amended Statement of Claim was to be understood as advancing a claim to the effect that, because of Ms Lee’s breaches of duty, Moulin was enabled to carry on trading for a significant period after it should properly have been put into liquidation, and that the only proper basis for assessment of loss in respect of such a claim was to focus on the increase (if any) in the net deficiency of the company between the time when the company should have been put into liquidation, and the time when it actually went into liquidation.  Mr Shieh stressed, however, that although this was the only correct approach, it was nonetheless just a starting point, from which adjustments might still fall to be made on the basis of causation issues.

43.Mr Shieh drew attention to various paragraphs in the Amended Statement of Claim that, he said, made this clear.  These included:-

(1)  paragraph 150, which states: “[Moulin] paid the unlawful dividends identified at paragraph 55 above when in fact it should have been placed in provisional liquidation and/or liquidation”;

(2)  paragraph 211, which states: “Had the Defendant diligently performed her duties … [Moulin] would have been placed in provisional liquidation and/or liquidation rather than continuing to operate through fraudulent trade finance arrangements…”;

(3)  paragraphs 392 and 393, where it was pleaded that had D complied with her duties to Moulin, by no later than the date on which Moulin’s annual report for the year ended 31 March 2001, Moulin would have been placed in provisional liquidation and/or liquidation, and that this would have brought an end to the payments made and losses incurred by Moulin.

44.Similar statements were also made in the skeleton argument lodged by Mr Burns, and a speaking note handed up during the course of the hearing in which his submissions in the course of argument were helpfully recorded.

45.Thus, in paragraph 15 of the skeleton argument lodged prior to the hearing, Moulin’s case against Ms Lee was said to be that:-

“15.1 in her roles as a director, audit committee member and solicitor, [she] became aware of facts and circumstances that indicated Moulin’s parlous financial state and accounting irregularities, which, in accordance with her duties as a director, she should have investigated further;

15.2 had [she] responded to these matters appropriately and in accordance with her duties as a director, she would have brought to light the massive falsification of the Moulin group’s financial statements by [its dishonest management], and in particular the overstatement of the Moulin group’s profits and reserves and brought these matters to the attention of Moulin’s board of directors, the [Stock Exchange] and Moulin’s shareholders;

15.3  as a result of [her] failure, the fraud remained undetected, Moulin was able to continue trading and loss was suffered as a result, in the form of dividends paid out of capital (HK$242.5 m), share repurchases out of capital (HK$37.2 m) and the early redemption of convertible notes (HK$98.5 m and US$15 m).”

46.And in the speaking note, dealing with the claim in respect of the early redemption of the Chishore and HSBC notes, it was said (at paragraphs 50 and 51) that:-

“50. Moulin’s case is that acting properly and in accordance with her fiduciary and other duties, [Ms Lee] should have “blown the whistle” on issues with Moulin’s accounts. This would have led to Moulin’s actual insolvent financial state becoming public. Provisional liquidation/liquidation would necessarily have followed …

51.  This should have happened long before the convertible notes were redeemed … The convertible notes would therefore not have been redeemed if [she] had not breached her duties.”

47.In my view, it is certainly possible to view Moulin’s claims as being advanced on the basis suggested by Mr Shieh, and as such, being claims based on the consequence of Ms Lee’s alleged breaches of duty being to prolong its continued trading, and being placed into liquidation much later than it should have been.  On this basis, Mr Shieh submitted, the only correct basis for quantifying loss was to have regard to whether or not there had been any increase in the net deficiency of the company between these two dates.  In consequence, it was necessary to have regard not just to outflows during this period (such as the items of loss claimed) but also to inflows, as the increase in net deficiency (if any), and not the outflows, were the true measure of Moulin’s loss.

48.However, Mr Burns said that this was not in fact the basis on which the claim was being pursued.  He contended that Moulin was, as it was entitled to, seeking to make claims in respect of individual items of loss that it had suffered as a result of Ms Lee’s breaches of duty.  Although such breaches of duty could be properly characterised as continuing breaches, continuing throughout the period during which she should have made investigations and brought the dire financial position of Moulin to the attention of its board, its shareholders or the Stock Exchange, each loss suffered during the period was an individual loss, claimable by Moulin in accordance with well established principles.  In particular, in respect of improper payments out of capital, such as dividends or share repurchases, directors responsible for such improper payments are under strict liability to make good such payments by way of equitable compensation or damages (see e.g. Holland v Commissioners for Revenue & Customs [2010] 1 WLR 2793 per Lord Hope at paragraphs 45-49, and Bairstow v Queens Moat Houses Plc [2001] 2 BCLC 531 per Robert Walker LJ (as he then was) at paragraphs 49-54).

49.Mr Burns also suggested that apart from the argument that there was no need to consider questions of set off of countervailing benefits in cases where the claim was for equitable compensation, even on common law principles applicable to the assessment of damages for negligence (mentioned in paragraph 41 above), it was open to a plaintiff to bring a claim for specific items of loss, where only benefits accruing to the plaintiff as a natural and necessary consequence of the loss suffered need be brought into account in reduction of the damages claimed.

50.Further, Mr Burns submitted that although Moulin’s claim was for the specific items of loss identified in the Amended Statement of Claim, it was open to Moulin to advance, as an alternative, a claim based on the increase in its deficiency arising from continued trading after it should have been placed into liquidation.  In support of this proposition, he relied upon the decision of the Full Court of the Supreme Court of South Australia in Sheahan v Verco [2002] SASC 68.  In that case, Lander J said, at paragraphs 99 to 103:-

“99. The plaintiff seemed to think that if it proved that the company was trading whilst insolvent it necessarily suffered loss or damage. In my opinion that is not correct. An insolvent company may continue to trade without suffering loss or damage. Indeed an insolvent company may trade its way out of insolvency.

100. If a company was insolvent at the commencement of a period it will suffer loss or damage if, by continuing to trade, its liabilities exceed its assets by a great sum at the conclusion of the period in question. If it was solvent at the commencement of the period it will suffer loss or damage if, by continuing to trade, its net assets decrease in value. …

101. Whether a company has suffered loss or damage over a period of time requires a valuation of its assets and liabilities at the commencement and end of the relevant period. All of the assets and liabilities must be valued and assessed.

102. That evaluation can give rise to quite complex evidence. … However, in my opinion, a number of matters … are not relevant in a valuation of the company’s assets and liabilities.

103.  It is not enough to say that the company suffered loss or damage because it borrowed money during that period of time.  Of course the borrowing of money increases the company’s liabilities but the borrowed money increases its assets by the same amount.  A loan by itself is no evidence of loss or damage … A company which borrows money will only suffer loss or damage if the borrowed moneys are lost.”

51.Mr Burns recognised that Sheahan v Verco was inconsistent with the decision of Park J in Re Continental, where it was held that increase in net deficiency was not claimable as compensation for breach of duty by a director.  However, he submitted that, while it might well be open to Moulin to make a claim for the increase in its net deficiency, it was nonetheless equally open to it to make a claim on the basis which it so far had done, on the basis of Ms Lee’s breaches of duty having resulted in the individual items of loss claimed.

52.I would accept that a claim on this latter basis is, to put it no higher, well arguable.  I would also accept that in relation to such a claim, it is at least arguable that new capital raised does not have to be taken into account as an offset to the damages allegedly suffered, as it is at least open to Moulin to contend that such inflows were not causally connected with, and did not flow from the damage suffered.  In these circumstances, while I can see why Mr Shieh might have characterised the claim being advanced as one for the increased net deficiency (which was not clearly quantified or particularised in the pleading), I am satisfied that the claims as explained by Mr Burns are open to Moulin on its Amended Statement of Claim, and that it is at least arguable that loss and damage has been suffered by Moulin, which is not extinguished by inflows for which credit must be given.

53.In these circumstances, I do not think that the Amended Statement of Claim should be struck out on this ground, and I decline to do so.

54.I should add that towards the end of the hearing, Mr Burns proffered a further amendment to the Amended Statement of Claim designed to advance, as an alternative, a claim for damages quantified by reference to Moulin’s increased net deficiency.  Mr Shieh objected to the amendment on the grounds that it was not the subject of any application by way of summons, and was, he said, not properly particularised as it should have been.  As it did not seem to me to be convenient, or fair to Ms Lee, to attempt to deal with the matter in the course of this application, I directed that Moulin should consider and formulate the precise amendment which they sought to make, and to make a formal application for leave to amend if necessary.

Striking out of “new claims” on time-bar grounds?

55.This leaves the third ground for striking out put forward by Mr Shieh.  This was that the claims based on the share repurchases and on the Chishore and HSBC notes should be struck out (or the amendment introducing them disallowed) on the basis that these claims should not have been added to the existing claim because they were new claims which were introduced after the expiry of the relevant limitation period applicable to them.

56.The argument here was that both the claims based on alleged losses arising from the share repurchases, and the claims based on the early redemption of the Chishore and HSBC notes, being based as they were on repurchases which took place between 1 April 2000 and 31 December 2003, and redemptions which took place in November 2002 and May 2003, were statute barred by 13 May 2010, when they were added to the existing claims by way of the amendment made at that time by the replacement of the original Statement of Claim with the Amended Statement of Claim.  In these circumstances, it was submitted for Ms Lee that the correct course to take was to strike out those claims (or disallow the amendments to the extent of those claims) and leave it to Moulin to assert the claims by way of fresh proceedings (which it had in any event issued in April 2010).

57.This was, it was said, the correct course to take in the light of the principle enunciated in Welsh Development Agency v Redpath Dorman Long Ltd [1994] 1 WLR 1409, which has since been applied in Hong Kong in the recent Court of Appeal decision in Sun Focus Investment Ltd v Tang Shing Bor [2012] 1 HKLRD 738.  That approach is to require that new claims which are time-barred at the date of the relevant application to amend (or in this case, the date of the amendment without leave) should not be added by way of amendment to existing pleadings if they were not time-barred at the date that the proceedings were originally commenced, unless the new claims complied with the requirements of sections 35(5) and (6) of the Limitation Ordinance (Cap 346) and RHC Order 20 rule 5(5).

58.The reason for this approach lies in the effect of section 35(1) of the Limitation Ordinance, which provides for new claims added by amendment to existing pleadings to be deemed to have been commenced on the same date as the original action.  This provision has become known as the “relation back rule”.  Its effect on limitation is that if the new claims were not time-barred at the date of the original action, the amendment will (if permitted) result in the new claims being deemed to be brought at a time when they were not time‑barred, notwithstanding that they were in fact (or at least arguably) time‑barred when they were first put forward in the application to amend.  The consequence of permitting the amendment to be made would thus be to deprive the defendant of an accrued limitation defence, which would have been available to him had the new claims been advanced in fresh proceedings. This would generally be regarded as unfair to the defendant.

59.Section 35 of the Limitation Ordinance is, so far as relevant, in the following terms:-

“(1) For the purposes of this Ordinance, any new claim made in the course of any action shall be deemed to be a separate action and to have been commenced –

(a) …

(b) in the case of any other new claim, on the same date as the original action.

(2) In this section a new claim means … any claim involving either –

(a) the addition or substitution of a new cause of action …

(3) Except as provided by section 30 or by rules of court, the court shall not allow a new claim within subsection (1)(b), other than an original set-off or counterclaim, to be made in the course of any action after the expiry of any time limit under this Ordinance which would affect a new action to enforce that claim.

(4) …

(5) Rules of court may provide for allowing a new claim to which subsection (3) applies to be made as there mentioned, but only if the conditions specified in subsection (6) are satisfied, and subject to any further restrictions the rules may impose.

(6) The conditions referred to in subsection (5) are –

(a)  in the case of a claim involving a new cause of action, if the new cause of action 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 action by the party applying for leave to make the amendment. …”

60.RHC Order 20 rule 5 provides for amendments to be allowed generally with the leave of the court.  Rule 5(5) provides that:-

“An amendment may be allowed [after any relevant period of limitation current at the date of issue of the writ has expired] notwithstanding that the effect of the amendment will be to add or substitute a new cause of action if the new cause of action 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 action by the party applying for leave to make the amendment.”

61.Mr Shieh contends that the claims for loss arising out of the share repurchases and early redemptions of the convertible notes are new claims, in that they involve the addition (or substitution) of causes of action to the existing claims in the original Statement of Claim (for dividends, tax and interest).  Accordingly, he says, they should not be permitted to be introduced by way of amendment in circumstances where they would have been statute barred at the time of the amendment (or application for leave to amend, where appropriate) but would not have been so barred as at the date of the original writ.  Otherwise, he submits, Ms Lee would be deprived, by the relation back rule, of an accrued limitation defence.  The only exceptions to this would be if Moulin could show that Ms Lee has no arguable limitation defence (which Mr Shieh suggests it cannot do), or if it were able to establish either that the additional claims for loss do not amount to new claims (or new causes of action), or that, if they were new claims, they arose out of the same or substantially the same facts as the claims already pleaded (which Mr Shieh also suggests is not possible here).

62.Mr Burns disagreed with this approach.  His starting point was that the amendments had been properly made without leave pursuant to RHC Order 20 rule 3, which permits a party to make one amendment to his pleadings (in this case, Moulin making an amendment to its statement of claim) without leave prior to the close of pleadings.  That having been done, Mr Burns submitted that it was for Ms Lee to have applied to disallow the amendment within 14 days, as provided for by RHC Order 20 rule 4.  As Ms Lee had not done so, unless the court were prepared to extend time for her to do this (which it should not do, no good grounds for doing so having been established), the effect was that the relation back rule had already come into effect, and the claims in respect of share repurchases and early redemption of convertible notes were to be deemed to have been brought on the date of the original action, so that no question of limitation arose.

63.Mr Burns also submitted that in any event, Moulin had an answer to Ms Lee’s limitation argument, as it was entitled to rely on the provisions of section 31 of the Limitation Ordinance, which extends periods of limitation for claims in negligence to three years after the date on which Moulin had the knowledge required for bringing an action for damages in respect of the relevant damage.  In the present case, Mr Burns said, Moulin did not have such knowledge until relatively shortly before the claims for damages arising out of the share repurchases and convertible note redemptions were pleaded, because of the late provision of documents and material on the part of Ms Lee and her firm.

64.Further, Mr Burns suggested that it would be preferable, as a matter of proper case management, to defer the question of limitation to the trial, by leaving it open to Ms Lee to seek an extension of time to disallow the amendments and argue the points at trial.

65.In addition, Mr Burns submitted that the claims for damages or compensation arising as a result of the share repurchases and early redemptions of the convertible notes were not “new claims”, in that they were not additional causes of action, but should be regarded as part of a broader cause of action based on Ms Lee’s failure to comply with her duties as a director of Moulin.  Alternatively, he said, even if they were to be regarded as “new claims”, they should be regarded as arising out of the same, or substantially the same, facts as the existing causes of action already pleaded.  For this purpose, as I understood it, Mr Burns suggested that the relevant comparator was the Amended Statement of Claim (excluding the parts objected to), rather than the original Statement of Claim.

66.Dealing first with the question of whether or not it is now open to Ms Lee to seek to challenge these amendments, having failed to do so within the two week period mentioned in RHC Order 20 rule 4, I am of the view that it is.  Mr Shieh submitted that it was an abuse of process to seek to introduce a time-barred claim into an existing pleading unless the claim was not a new claim, or arose out of the same or substantially the same facts as the existing claims.  It followed from this that it was not open to a party to use the “free amendment” under RHC Order 20 rule 3 for such a purpose.  I think that this is right as a matter of principle.  Section 35 of the Limitation Ordinance makes it clear that a new claim can only be introduced after the expiry of the relevant period of limitation if the conditions set out in sections 35(5) and (6) are complied with.  It does not seem to me that it can have been the purpose of RHC Order 20 rule 3 to provide a means for a party to circumvent the provisions of section 35, and I do not think that the rule should be construed as permitting such claims to be given substantive finality simply because no objection is made within the time specified in rule 4.  It is notable, in this connection, that RHC Order 20 rule 1, which deals with amendments to a writ made without leave, expressly excludes from its ambit amendments that introduce (inter alia) new claims.  The challenge is therefore one which it remains open to Mr Shieh to advance on behalf of Ms Lee.

67.Alternatively, insofar as it is necessary to do so, I would exercise my discretion in favour of extending the time for the making of a challenge under RHC Order 20 rule 4.  It is clear from the judgment of the Court of Appeal in the earlier striking out appeal that the question of time bar in respect of the (then) proposed claims for damages in respect of the share repurchases and early redemptions of the convertible notes was very much one of which all parties, including Moulin, were aware.  The issue by Moulin of the further writ in April 2010 is also evidence of their awareness of the possible limitation issues.  Moulin cannot seriously suggest that they have been taken by surprise by Ms Lee’s attempt to strike out (or disallow) these amendments notwithstanding that she did so late by some four months, after the point had again been signalled in her Defence (see paragraph 2.5 of that pleading).  There does not, therefore, seem to me to be any particular prejudice to Moulin in permitting the point to be taken now.  If necessary, it can proceed with the writ that it issued, or issue a fresh writ in respect of these claims.  In this way, Ms Lee will not suffer the prejudice of being deprived of an arguable limitation defence by a sidewind, and the limitation issue can be fully ventilated in the context of the new proceedings, which I have no doubt can be tried with at the same time as the existing proceedings, with little, if any, delay to the existing proceedings.

68.While Moulin may be able to establish that it is entitled to the benefit of an extended limitation period under section 31 of the Limitation Ordinance, there is not sufficient material before me at this stage to be able to say that it will certainly be able to do so, so that Ms Lee would not be deprived of an arguable limitation defence by the effect of the relation back rule.  It seems to me that the better course (assuming that the claims in question are new claims and do not arise out of the same or substantially the same facts as the existing claims) would be to allow the question of the applicability or otherwise of section 31 to be raised and determined in the other action.  Indeed, it seems to me that, contrary to Mr Burns’ suggestion, it would only be in the other action that the section 31 point can be engaged at all.  This is because the effect of allowing the claims to remain in the existing proceedings would mean that no limitation defence (in relation to the primary limitation period of six years) could be taken by Ms Lee at all, so that there would be no need for Moulin to even raise the extended limitation period under section 31 in response.

69.It also seems to me that it would be undesirable to leave the question of whether or not these amendments should be struck out or disallowed to the trial of these proceedings.  If this were done, and the conclusion were reached that they should be so struck out or disallowed, the other proceedings would have to be revived at that point only, presumably requiring a separate subsequent trial of the claims under the other writ.  This would not seem to be an efficient way of proceeding.  On the contrary, by determining the matter now, the parties will know where they stand in relation to this issue, and can proceed with all of their claims in the appropriate manner.

70.This takes me to the nub of the issue: are the claims in respect of the share repurchases and the early convertible note redemptions “new claims”? And if so, do they arise out of the same or substantially the same facts as already pleaded in relation to the existing claims?

71.I accept, as Mr Burns submitted, that in considering whether or not the additional claims advanced are new claims, or amount to additional causes of action, the matter should be approached at a high level of generality.  I also accept that the mere addition of further particulars does not result in there being a further cause of action pleaded. As the authorities demonstrate, though, the question of whether or not there is a new claim is necessarily to a large extent a matter of impression (see e.g. per Glidewell LJ in Welsh Development at p.1418D).

72.Mr Shieh submitted that on the basis of the claims expounded by Mr Burns in the context of the second part of the striking out argument, Moulin’s claims were for separate and distinct items of loss and damage, arising on each occasion on which a dividend was paid, a share repurchase was effected, or an early redemption of convertible bonds made, when it should not have been – either because Moulin did not have the necessary distributable profits out of which to make the dividend payment or share repurchase, or because its financial position at the time was such that the dividend payment, share repurchase or early redemption should not have been made at all.  Thus, said Mr Shieh, each of the allegedly wrongful payments constituted a separate claim, involving an examination of the position in relation to each such wrongful payment.  Although the broad facts in relation to Moulin’s financial position and Ms Lee’s knowledge of it might be similar (or even virtually identical) over the whole of the period covering the various payments complained of, each payment was an individual and separate claim for loss, and as such, was a separate cause of action, and the addition of the claims in respect of the share repurchases and convertible note redemptions were additions of further causes of action which had not previously been advanced.

73.I agree with Mr Shieh.  Although Mr Burns contended that Moulin’s claim was a single claim of breach of duty by Ms Lee, involving her failure to make the necessary investigations that would have revealed Moulin’s alleged insolvency and bring that to the attention of the board, shareholders or Stock Exchange, resulting in various items of loss and damage being suffered, such that each item of loss was merely a particular of loss rather than a separate claim, it seems to me that to put the case in this way is in effect to advance the claim that Moulin should, but for Ms Lee’s breach of duty, have been placed into liquidation at an earlier date than it in fact was – a claim which Mr Burns disavowed as being the claim put forward in Moulin’s pleadings.

74.It also seems to me to be quite appropriate to regard the separate dividend payments, share repurchases and convertible note redemptions as separate and distinct claims.  None were, on the face of it, connected with each other.  Even if Ms Lee were to be regarded as being in continuous breach of her obligations from some particular point in time, this would not, in my view, render the distinct claims in relation to each item of loss a single claim for limitation purposes, even though there may well be some overlap in respect of the facts that might be relied on to establish that Ms Lee was in breach of her duties at the relevant time in the context of each individual claim.

75.If, as I think, each of the claims should be regarded as separate and distinct, it follows, in my view, that the additional claims in respect of share repurchases and convertible note redemptions cannot realistically be said to arise out of substantially the same facts as those pleaded in support of the existing claims.  In order for the additional claims to be advanced, the critical facts that need to be pleaded include (at least) the payments for share repurchases, and the amounts paid by way of redemption of the convertible notes, without which there would be no damage, and no completed cause of action in respect of those claims.  Given the importance of these facts to the additional claims advanced, I am of the view that they cannot be said to arise out of the facts already pleaded, whether wholly or substantially.  In this respect, I consider that the relevant comparator is the original Statement of Claim, and it is clear that the facts necessary to support the claims in relation to the share repurchases and convertible note redemptions are nowhere to be found in that document.

76.I am therefore satisfied that the appropriate course to take in relation to these further claims is to strike them out (or disallow them to be included in the Amended Statement of Claim), and to leave Moulin to pursue them in separate proceedings, either under the writ issued in April 2010, or some other proceedings, which can no doubt in due course be consolidated with this action.  However, to the extent that allegations in relation to these matters are sought to be relied on as further particulars of Ms Lee’s knowledge (or the knowledge she should have had) as to Moulin’s financial position at the relevant times, such allegations may remain in this action for that purpose only.

Conclusion and costs

77.In the result, while I am not satisfied that it would be proper to strike out the whole of the action, I shall order that the claims in relation to the share repurchases be struck out on the basis that they are new claims, which do not arise out of the facts already pleaded, in respect of which Ms Lee has an arguable limitation defence, and that the claims in relation to the convertible note redemptions be struck out on the same basis, and also on the basis that there is no arguable case that Moulin has suffered loss in consequence of them.  It follows that, to the extent that Moulin wishes to pursue the writ issued in April 2010 (or a fresh writ), the claims thereunder must be limited to the claims in relation to the share repurchases.

78.So far as the costs of this and the other applications are concerned, these can be dealt with at the hearing scheduled for 3 July 2012, if that can conveniently be done, or alternatively at a later hearing to be arranged for this purpose.

Please refer to CACV155/2012 & CACV161/2012 for the relevant appeal(s) to the Court of Appeal.