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

CACV155/2012 and CACV161/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NOS. 155 AND 161 OF 2012

(ON APPEAL FROM HCA NO. 167 OF 2008)

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BETWEEN

Before: Hon Kwan, Fok and Lam JJA in Court

Dates of Hearing: 18 and 19 September 2012

Date of Judgment: 7 December 2012

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J U D G M E N T

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Hon Kwan JA:

Introduction and background

1.The two appeals before us are against the decisions of Barma J on 27 June 2012 ([2012] 4 HKLRD 263; “the June Decision”) and 3 July 2012 (“the July Decision”).  The decisions are in respect of the striking out of certain claims or the disallowance of certain amendments in the statement of claim.

2.The defendant, Olivia Lee Sin Mei, was a former director of the plaintiff, Moulin Global Eyecare Holdings Limited, from 8 December 2000 to 1 November 2004 and a member of its audit committee during her tenure as a director.  She had also provided legal advice to the plaintiff as a solicitor, before and after her appointment as a director.  This action was commenced against her in 2008 by the plaintiff’s liquidators for breach of duties.  In the original statement of claim filed on 15 February 2008, the only claim of the plaintiff[1] was for dividends in the sum of HK$242 million odd (“the Dividends Claim”) and tax and bank fees amounting to HK$102 million odd, on the basis that these sums would not have been paid had the defendant complied with her duties and the plaintiff’s true financial position had been identified.

3.In June 2008, the defendant applied to strike out the whole of the statement of claim and succeeded before Deputy Judge Carlson in April 2009 ([2009] 3 HKLRD 265).  The plaintiff’s appeal was allowed and its claim was reinstated by the Court of Appeal on 30 April 2010 ([2010] 2 HKLRD 1096).  Following the reinstatement of this action, the plaintiff filed and served an amended statement of claim (“the ASOC”) on 13 May 2010.  This was done without leave pursuant to Order 20 rule 3 of the Rules of the High Court.

4.The ASOC is a wholesale replacement of the original pleading.  The claim for tax and bank fees was abandoned.  Two further claims were introduced, which gave rise to the applications before Barma J and these appeals.

5.Firstly, there is a claim for HK$37,232,000, being the sums paid by the plaintiff to repurchase its own shares between the year ended 31 March 2001 and the year ended 31 December 2003 (“the Share Repurchases Claim”).  It was alleged that the defendant was involved in advising the plaintiff on the propriety of the share repurchases, and was in breach of her duties as a director and member of the audit committee by permitting the plaintiff to repurchase its shares when the plaintiff and the Moulin group were insolvent at the time.  If the defendant had acted properly and the plaintiff’s true financial position had become known, the plaintiff could not have repurchased its own shares as it did not in fact have any retained earnings, and the plaintiff therefore suffered loss in the amount claimed being the total payments made for this purpose.

6.The other claim is for HK$98,472,648 and US$15 million with interest, being payments made in 2002 and 2003 for the early redemption of certain convertible notes known as the “Chishore Notes” and the “HSBC Notes” (“the Convertible Notes Claim”).  The plaintiff’s case is that these notes were redeemed at a time when the plaintiff was insolvent, with the defendant’s active approval and involvement as a director and legal adviser to the plaintiff, in order to conceal breaches of interest covenants on the notes that confirmed the plaintiff was in serious financial difficulty.  If the defendant had acted properly and the plaintiff’s true financial position had been identified, these early redemptions would not and could not have been made.  The plaintiff therefore suffered loss in the amounts paid for the early redemption of the notes plus interest.

7.By the time the ASOC was filed on 13 May 2010, more than six years had elapsed since the early redemption of the notes and the share repurchases.  Before filing the ASOC, the plaintiff had issued a writ against the defendant in a new action on 23 April 2010 making the Share Repurchases Claim and the Convertible Notes Claim, in line with the suggestion of the Court of Appeal at the hearing in April 2010 ([2010] 2 HKLRD 1096 at paras 25 to 26).

8.The defendant applied to strike out the ASOC by summons dated 9 September 2010, as amended on 25 October 2011.  This was heard by Barma J in a three-day hearing in April 2012.

9.By the June Decision, Barma J held that:

(1) the Convertible Notes Claim should be struck out on the grounds that:

(a) the plaintiff had suffered no loss by virtue of its early redemption of the notes; and

(b) the claim was in any event a “new cause of action” for the purpose of section 35 of the Limitation Ordinance, Cap 347 and Order 20 rule 5 of the Rules of the High Court, which was time-barred at the time of the filing of the ASOC and did not arise out of “the same or substantially the same facts as a cause of action in respect of which relief has already been claimed in the action”; and

(2) the Share Repurchases Claim should be struck out on the ground in (1)(b).

10.The plaintiff was left to pursue the Share Repurchases Claim in the separate action commenced under the writ in April 2010, which is to be consolidated in due course with this action.  To the extent that allegations in relation to the Share Repurchases Claim and the Convertible Notes Claim are sought to be relied on for the remaining Dividends Claim of HK$242 million odd as further particulars of the defendant’s knowledge or knowledge she should have had as to the plaintiff’s financial position at the relevant times, the judge allowed such allegations to remain in the ASOC for that purpose only.

11.The plaintiff appealed against the holdings in (1)(a), (b) and (2).  It also appealed against the decision to grant extension of time to the defendant to object to the amendments in the ASOC made without leave, notwithstanding that she had failed to do so within 14 days from the filing of the ASOC, as provided for in Order 20 rule 4. This is CACV 161 of 2012.

12.In the course of the hearing before Barma J in April 2012, the plaintiff proffered a further amendment to the ASOC to advance, as an alternative to the Dividends Claim, the Convertible Notes Claim and the Share Repurchases Claim, a claim for damages quantified by reference to the plaintiff’s increased net deficiency (“IND”).  The defendant objected to the amendment on the grounds it was not the subject of any application by summons and it was not properly particularised.  The judge directed that the plaintiff should consider and formulate the precise amendment it sought to make and to issue a summons for leave to amend if necessary.

13.On 4 June 2012, the plaintiff duly issued a summons to amend the ASOC to add a new paragraph 399A to a draft further amended statement of claim (“the FASOC”).  The draft FASOC was first put forward in a summons to amend the ASOC in September 2011.  The proposed amendment in the additional paragraph was to advance an alternative claim for IND of HK$1.23 billion, being the loss suffered by the plaintiff as a result of the defendant’s breaches of duty.  Barma J heard this summons on 3 July 2012 and gave his decision on the same day.  By the July Decision, the judge held that the alternative claim for IND introduced a new cause of action for limitation purpose but this new cause of action arose out of substantially the same facts as those pleaded in the ASOC in support of the existing relief claimed.  He gave leave to amend. Paragraph 399A was then added to the FASOC and it is in these terms:

“Further and in the alternative to paragraph 397 above, Holdings [i.e. the plaintiff] suffered loss of at least HK$1.23 billion constituting the increase in the net deficiency of Holdings from at least 31 March 2001 until the date of appointment of the Provisional Liquidators on 23 June 2005, an increase from a net deficiency of HK$745 million had Provisional Liquidators been appointed as at 31 March 2001 to the actual net deficiency in the winding up of Holdings of HK$1.98 billion.”

14.The defendant appealed against the July Decision giving leave to amend by adding paragraph 399A.  This is CACV 155 of 2012.  The plaintiff filed a respondent’s notice to contend that the judge had erred in holding that the alternative claim for IND introduced a new cause of action.

The issues in the two appeals

15.Thus, the broad issues to be resolved in these appeals are as follows:

(1) if no loss was suffered by the plaintiff on the facts alleged in the Convertible Notes Claim;

(2) if the Share Repurchases Claim and the Convertible Notes Claim were new causes of action for limitation purpose;

(3) if the Share Repurchases Claim and the Convertible Notes Claim arose out of the same or substantially the same facts as those pleaded in support of the existing claim;

(4) if extension of time should be granted to object to the amendments in the ASOC made without leave;

(5) if the alternative claim for IND was a new cause of action for limitation purpose; and

(6) if the claim for IND arose out of the same or substantially the same facts as those pleaded in support of the existing claim.

16.They will be discussed in the above order.

If loss was suffered from early redemption of convertible notes

17.The plaintiff entered into contracts with independent third party creditors in 1998 and 1999 to issue convertible notes in respect of loans granted to the plaintiff and a special purpose subsidiary.  There is no dispute that these were genuine loans.  For present purpose, it is unnecessary to differentiate between the liabilities of the plaintiff and the special purpose subsidiary.  Each of the Chishore and HSBC Notes contained an undertaking on the part of the issuer that the plaintiff’s interest expenses would not exceed 20% of its earnings before interest and tax.  In 2001, 2002 and 2003, default notices were sent to the plaintiff in respect of various convertible notes calling for early redemption in that the interest covenant had been breached.  The defendant was involved in advising the plaintiff as to the default notices and had obtained counsel is advice in relation to the Chishore Notes, which suggested that there had been a breach of the interest covenant.  After extensive negotiations, settlements were reached by which each set of notes was redeemed with interest in 2002 and 2003.  The breach of the interest covenant was not disclosed to the plaintiff’s board, the shareholders or the Hong Kong Stock Exchange.

18.It is the plaintiff’s case that had the breach of the interest covenant or its true financial position been disclosed, the repayments would not have been made and the plaintiff had thereby suffered losses in the amounts of the repayments made plus interest.

19.As noted by the judge, the argument of Mr Shieh, SC for the defendant for striking out the Convertible Notes Claim on the ground that the plaintiff had suffered no loss is a simple one.  As the liabilities under the notes were genuine liabilities, which were extinguished as a result of the repayments made in the settlements, the plaintiff could have suffered no loss for which the defendant could be required to compensate it, as the reductions in the plaintiff’s assets caused by the repayments were matched by reductions in its liabilities, with the result that the plaintiff’s net financial position remained unaltered and the plaintiff had not been any worse off.

20.The judge accepted this argument and adopted the reasoning in the English authorities at first instance cited by Mr Shieh in support of it[2] (Knight v Frost [1999] BCC 819 at 833H to 834E; Re Continental Assurance Co of London plc (No 4) [2007] 2 BCLC 287 at 294 to 296 and 448, para [419]; and GHLM Trading Ltd v Maroo & Ors [2012] EWHC 61 at paras 168 and 169).  The discharge by a company of a genuine liability to which it is already subject does not cause any loss to the company.  The cases cited accord with both principle and common sense.  If some creditors were paid during the period when the company should have been placed into liquidation and other creditors were not paid, the correct means of addressing this was by the statutory provisions of unfair preference through the mechanism of liquidation.

21.Mr Burns, SC argued before the judge and repeated his arguments before us that in an insolvency situation, the interests of creditors are paramount and a director owes a duty to the company to administer its affairs in such a way as to ensure that the assets available for pro-rata distribution to the general body of creditors ought not be diminished.  In an insolvency situation, he contended that the effect on the company’s net assets should not be the correct reference point against which damages are assessed.  Rather, it is the value of assets available to meet the claims of creditors.  As assets available for pro-rata distribution to the general body of creditors were diminished as a result of the repayments of some of the creditors in full, the plaintiff had suffered loss.  At the very least, he submitted that this is a reasonably arguable proposition that should go to trial.

22.In support of his arguments, Mr Burns relied mainly on Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722 at 730 and 733; West Mercia Safetywear Ltd v Dodd [1988] BCLC 250 at 252 to 253; Keay, Directors’ Duties, 2009 ed, paras 13-15 and 13-44; McPherson’s Law of Company Liquidation, 2^nd ed (2009), paras 11.085, 11.091 and 11-092; Roy Goode, Principles of Corporate Insolvency Law, 4^th ed, para 14-20.

23.In an elaborate submission in reply, Mr Burns made these points:

(1) The plaintiff was not seeking to recover from the defendant the payment of a pre-existing trading debt of the plaintiff made in the ordinary course of carrying on business.  The payments made for the early redemption of convertible notes were of a “special and extraordinary nature” and were outside the ordinary course of business.  They were improper in that they were contrary to the best interests of the plaintiff and they were entered into “for the purpose of concealing [the plaintiff’s] breaches of covenant and insolvency from its general body of creditors”.

(2) The plaintiff claimed equitable compensation on the basis that a loss had been suffered by it and the “precise measure of loss and equitable compensation” payable by the defendant would be a question for trial, after the facts have been fully examined.  The compensation claimed was “referable to the losses suffered by the general body of creditors as a result of [the defendant’s] improper participation in the improper transaction that resulted in the improper payments”.

(3) In considering whether loss has been caused to a company in circumstances of insolvency or near insolvency, the correct analysis is to examine only the asset position of the company.  As the company was not a going concern, its net asset position should not be considered in determining whether it had suffered a loss.  Once insolvent, the interests of the company are “at one” with the interests of the general body of creditors and the interests of the latter were unquestionably “worse off” as a result of the improper payments.

(4) The true ratio of West Mercia was to approve the statements in Kinsela which established that where a company is insolvent, the interests of the general body of creditors intrude and the assets of the company are in a practical sense the creditors’ assets, so a director will breach his duty when he acts contrary to the interest of the general body of creditors.  It was held in West Mercia there was blatant misfeasance of the director and the company had suffered loss.  The references to fraudulent preference in West Mercia were immaterial.  The present case is on all fours with West Mercia.

(5) The fraudulent preference regime is not the exclusive means of recovery in these circumstances.  The liquidator may pursue a statutory remedy and a remedy for damages or equitable compensation based on a breach of duty of a director to take into account the interests of creditors.

(6) The present case is factually distinct from the facts in Continental Assurance. In that case, it was held that there was no breach of duty of the directors in making the payments in the specific misfeasance claim and the payments impugned were genuine trading debts – unlike the present case.  Park J’s statement at para [419] that no loss was caused to the company by the payment to discharge its liabilities to two of the creditors is contrary to the accepted proposition that the interests of the company reflect the interests of the general body of creditors in circumstances of insolvency.

(7) Knight v Frost and Continental Assurance are inconsistent with Kinsela and West Mercia (these cases were quoted with approval in Tradepower (Holdings) Ltd v Tradepower (HK) Ltd (2009) 12 HKCFAR 417 at paras 128 to 130 for the principle of the overriding interests of creditors in insolvency).  Knight v Frost and Continental Assurance are also inconsistent with GHLM Trading.  Insofar as Newey J had said in GHLM Trading at para 169 that the company would not have suffered loss if the payment was for discharge of a debt, this was an “offhand remark”.  Besides, Newey J was not addressed on loss as the plaintiff in that case accepted at para 178 the sale which should be set aside would not have worsened the balance sheet of the plaintiff.

24.I do not agree with Mr Burns’ submissions and his reading of the cases.

25.There is no dispute with the principle that directors owe a general duty to have regard for the interests of creditors when the company is insolvent.  That duty is owed not to the creditors but to the company (Yukong Line Ltd of Korea v Rendsburg Investments Corporation of Liberia (No 2) [1998] 1 WLR 294; Stone & Rolls Ltd v Moore Stephens [2009] 1 AC 1391 at paras 237 and 238). As stated in Roy Goode, Principles of Corporate Insolvency Law, at para 14-20:

“Loss suffered by individual creditors is not recoverable directly under this head. Their loss and that of other creditors is simply a reflection of the loss caused to the company and the consequent diminution in the assets available for distribution, and their protection lies in the principle of law which (the company being in or near insolvency at the time of or in consequence of the breach of duty) recognises their status as the real owners of the company and thus: (i) requires directors to consider the impact of their actions on the interests of creditors ahead of, although not to the exclusion of, shareholders; and (ii) denies effect to a purported ratification by the shareholders of the conduct constituting breach of duty. If creditors could sue directly, this would breach both the collective procedure of insolvency and the pari passu rule.”

26.In arguing that once insolvent, the interests of the company are “at one” with the interests of the general body of creditors and the interests of the latter are worse off as a result of the payment to some creditors, Mr Burns has conflated the relevant legal principles.  And in contending that only the asset position should be looked at in considering whether loss was caused to the company, he has equated loss suffered by the general body of creditors with the loss to the company.

27.Outside the regime of unfair preference, for a company to seek redress against a director for breach of duty in failing to take account of the interests of creditors, the company would need to bring itself within one of three situations: (a) 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 (GHLM Trading, para 169).  It was not suggested by Mr Burns that (b) or (c) would apply to the present case. He put his case on the basis that loss was suffered by the plaintiff.

28.As the cases of Knight v Frost, Continental Assurance and GHLM Trading have clearly demonstrated, loss was not caused to the company by the discharge of a genuine liability to a creditor notwithstanding that the assets available for pro-rata distribution to the general body of creditors were diminished, as the reduction in its assets was matched by a reduction in its liability.  Loss was suffered by the general creditors, not by the company.

29.Mr Burns made much of the fact that the payments for early redemption of the convertible notes were not trading debts in the ordinary course of business, unlike the situations considered in Knight v Frost and Continental Assurance.  I do not think that is a material distinction, for the same reason given by the judge[3].  There is no dispute that the convertible notes represented genuine loans granted by independent third party creditors to the plaintiff and its special purpose subsidiary.  The early redemption of the notes was in discharge of a genuine liability of the plaintiff.

30.I note also it was not pleaded in the ASOC or the draft FASOC that the payments for early redemption were made “for the purpose of concealing [the plaintiff’s] breaches of covenant and insolvency from its general body of creditors”.  What was alleged was that the plaintiff’s management did not disclose “to the Board or to the [Stock Exchange of Hong Kong]” there had been a breach of the interest covenants of the notes and that the defendant did not disclose the breach of the interest covenants to the Board, the shareholders or the Stock Exchange (see paras 97, 98, 117, 123, 124, 125 of the pleading).  And there was no specific allegation that the early redemption was made for the purpose of concealment.

31.Mr Burns made the point that the judge was incorrect to state that there is no suggestion of personal advantage to “the director concerned” in the present case[4].  If “the director concerned” was meant to refer to the defendant, I do not think there was any error.  Mr Burns suggested this could refer to the plaintiff’s chairman, who had guaranteed the Chishore Notes and the chairman had a personal advantage as a result of the early redemption.  But there was no allegation in the pleading that the early redemption payments were made with the desire to benefit the chairman in that respect, let alone any breach of duty on the defendant’s part arising therefrom.

32.I reject Mr Burns’ submission that the present case is on all fours with West Mercia.  That was a misfeasance action brought under section 333 of the Companies Act 1948 (equivalent to section 276 of the Companies Ordinance, Cap 32).  For such an action to succeed, an applicant must establish actionable wrongdoing by the respondent independently of the statutory provision, which is essentially procedural (McPherson’s Law of Company Liquidation, para 11.092).  It was held by the English Court of Appeal that misfeasance was established in that there was fraudulent preference (at 252d).  Dillon LJ went on to hold that there was also a breach of duty of the director and approved of what Street CJ had said in Kinsela (from 252e to 253c).  When the court came to exercise its discretion over the matter of relief, it was done within the rubric of a winding-up administration as if the fraudulent preference exercise had never happened (see 253c to d, 254h to 255b).

33.As stated by Hart J in Knight v Frost at 834D, West Mercia was not an authority for the proposition that a director who for his own purposes caused an insolvent company to prefer one of its creditors over another outside the statutory period for unfair preference was liable to replace the money at the suit of the company.  Properly read, Knight v Frost and Continental Assurance are not inconsistent with Kinsela, West Mercia, Tradepower and GHLM Trading.

34.The judge is correct in holding that it is plain and obvious that the payments for early redemption of the convertible notes could not give rise to any loss of the plaintiff and that the Convertible Notes Claim should be struck out.

If the Share Repurchases and Convertible Notes Claims were new causes of action

35.It is strictly unnecessary to consider if the Convertible Notes Claim should also be struck out on limitation grounds.  I would consider this any way as submissions have been made to us.

36.As mentioned earlier, the Share Repurchases Claim and the Convertible Notes Claim were sought to be added to the statement of claim after the limitation period had expired.  If the effect of the proposed amendments is to introduce a “new claim”, the defendant would be deprived of an accrued limitation defence owing to the relation back rule in section 35(1)(b) of Cap 347.  A “new claim” for present purpose is defined in section 35(2) to mean “any claim involving … the addition or substitution of a new cause of action”.  For leave to amend to be granted, the plaintiff would need to establish that the Share Repurchases Claim and the Convertible Notes Claim do not constitute new causes of action.  Failing that, the plaintiff would need to bring itself within sections 35(5) and (6) and Order 20 rule 5 of the Rules of the High Court, the effect of which is that a new cause of action may be allowed by amendment 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 action by the plaintiff.

37.Guidance on the legal principles as to how to identify a new cause of action for limitation purpose may be obtained from the judgment of Robert Walker LJ (as he then was) in Smith v Henniker-Major & Co [2003] Ch 182[5].  Having referred to the much quoted definitions of “cause of action” by Brett J in Cooke v Gill (1873) LR 8 CP 107 at 116 (“every fact which is material to be proved to entitle the plaintiff to succeed”) and by Diplock LJ in Letang v Cooper [1965] 1 QB 232 at 242 to 243 (“simply a factual situation the existence of which entitles one person to obtain from the court a remedy against another person”), he went on to say as follows:

“95. I have to say that in the context of section 35 of the Limitation Act 1980 I am uneasy about the process of lifting either of these classic definitions out of the legal lexicon, as it were, and reading them into the language of section 35(5)(a). The notion of “a factual situation” which “arises out of the same facts or substantially the same facts” as another set of facts is not an easy one to grasp. Probably the answer lies in Millett LJ's observation, in Paragon Finance plc v D B Thakerar & Co [1999] 1 All ER 400, 405: “The selection of the material facts to define the cause of action must be made at the highest level of abstraction.”

96. So in identifying a new cause of action the bare minimum of essential facts abstracted from the original pleading is to be compared with the minimum as it would be constituted under the amended pleading. But in applying section 35(5)(a) the court is concerned on a much less abstract level with all the evidence likely to be adduced at trial: see Goode v Martin [2002] 1 WLR 1828, 1838, approving Hobhouse LJ's observation in Lloyds Bank plc v Rogers The Times, 24 March 1997; Court of Appeal (Civil Division) Transcript No 1904 of 1996: “The policy of the section is that, if factual issues are in any event going to be litigated between the parties, the parties should be able to rely upon any cause of action which substantially arises from those facts.” ”

38.In identifying a cause of action founded on breach of duty for present purpose, it is also helpful to have regard to the words of May LJ in Steamship Mutual Underwriting Association Ltd v Trollope & Colls (City) Ltd & Ors (1986) 33 BLR 77 at 98:

“In the light of the definitions of a cause of action already referred to [Cooke v Gill; Reed v Brown (1889) 22 QBD 128; and Letang v Cooper], I do not think one can look only to the duty on a party, but one must look also to the nature and extent of the breach relied upon, as well as to the nature and extent of the damage complained of in deciding whether, as a matter of degree, a new cause of action is sought to be relied upon.”[6]

39.Mr Burns submitted that the Share Repurchases Claim and the Convertible Notes Claim did not constitute new causes of action and the judge had adopted an overly narrow approach in holding otherwise[7]. His argument was along these lines:

(1) The plaintiff’s claim was founded on breach of fiduciary duties and/or equitable duties of care and skill of the defendant as a director and a member of the Audit Committee of the plaintiff.

(2) The defendant was in continuous breach of those duties by failing to give proper consideration to various facts and circumstances that she was aware of or should have been aware of as a director and the principal legal adviser to the plaintiff, which indicated that the plaintiff’s accounts had been falsified and that the plaintiff and the Moulin group were, from at least 31 March 2001, insolvent or near insolvent.  She failed to alert the board of directors of the plaintiff, its shareholders and/or the Stock Exchange to the precarious financial position during the period of her tenure as a director and member of the Audit Committee.

(3) As a result of the defendant’s breach, the plaintiff continued to trade and there was a substantial delay in its being wound up in that provisional liquidators were only appointed on 23 June 2005. During the period from 31 March 2001 to 23 June 2005, the plaintiff suffered loss, both by reason of the specific payments which would not otherwise have been paid had its true financial state been identified (i.e. the Dividends Claim, the Share Repurchases Claim and the Convertible Notes Claim) and by reason of an increase in net deficiency (i.e. the alternative claim for IND).

(4)             Taking the plaintiff’s claim at “the highest level of abstraction”, in advancing the Share Repurchases Claim and the Convertible Notes Claim, the plaintiff was merely relying on the original cause of action (breach of fiduciary duties and/or equitable duties of care and skill) which had caused loss.  They were not new or different causes of action, just new and additional heads or particulars of loss arising from the same underlying allegation of breach of duty – that had the defendant acted properly and in accordance with her duties, the specific payments could not or would not have been made.  This is similar to the situation considered in Aldi Stores Ltd v Holmes Builders plc [2005] PNLR 136 at para 26.

(5) The plaintiff’s case in the Share Repurchases Claim was in all material respects identical to the Dividends Claim in that the ability to repurchase shares was subject to the same requirement the plaintiff must have distributable profits to be utilized for this purpose.

(6) An alternative analysis is to ask “whether if, without any question of limitation, the proposed amendments had been made the subject matter of a fresh action after the conclusion of the first action, the plaintiff could have been met with a successful plea of res judicata.  If he could, that was a clear sign that there was only the one cause of action” (Steamship Mutual Underwriting Association at 95, cited with approval in Murray Film Finance Ltd v Film Finances Ltd [1996] EMLR 539 at 550 to 551).  Applying that test, if the plaintiff should obtain judgment on its claim for breach of fiduciary duties and/or equitable duties of care and skill, cause of action estoppel would preclude the plaintiff from bringing further proceedings to recover further losses in the Share Repurchases Claim and the Convertible Notes Claim.

40.I do not accept the above submissions.  As stated by May LJ in Steamship Mutual Underwriting, in identifying a cause of action for this purpose, one does not only look to the duty.  Where the amendment pleads a different duty, it will usually raise a new cause of action.  If there is no allegation of a different duty, 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 (Darlington Building Society v O’Rourke James Scourfield & McCarthy at 370D to E).  In this connection, it is helpful to bear in mind these statements of May LJ, albeit in the context of a duty of care in negligence, in Rice v Secretary of State for Trade and Industry [2007] ICR1469 at para 6:

“Damage is the essence of a cause of action in negligence and the critical question in a particular case is the composite one, that is whether the scope of the duty of care in the circumstances of the case is such as to embrace damage of the kind which the claimant claims to have suffered. As Lord Bridge of Harwich said in Caparo Industries plc v Dickman [1990] 2 AC 605, 627:

“It is never sufficient to ask simply whether A owes B a duty of care. It is always necessary to determine the scope of the duty by reference to the kind of damage from which A must take care to save B harmless.”

Lord Oliver of Aylmerton emphasised the same point in Murphy v Brentwood District Council[1991] 1 AC 398, 486, when he said:

“The essential question which has to be asked in every case, given that damage which is the essential ingredient of the action has occurred, is whether the relationship between the plaintiff and the defendant is such … that it imposes upon the latter a duty to take care to avoid or prevent that loss which has in fact been sustained.”

Accordingly, the bare question whether a defendant owes a claimant a duty of care, without defining the scope of the duty with reference to the injury orloss for which the claimant claims damages, is conceptually questionable.”

41.In the present context of a claim based on breach of fiduciary duties and/or equitable duties of care and skill, the scope of the duty must likewise be defined with reference to the loss which the plaintiff claimed to have suffered.  And a breach of duty does not exist in the abstract.  As Mr Shieh has submitted, every allegation of duty, breach and damage must involve (1) a duty to prevent “what”; (2) a breach by causing or not preventing “what”; and (3) damage which was caused or not prevented by the act or omission in (2), which a defendant had committed in breach of the duty in (1).

42.On a proper analysis, even though the material facts selected to define the cause of action should be made at the highest level of abstraction, it is 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.  Although the broad facts in relation to the plaintiff’s financial position and the defendant’s knowledge of it might be similar over the whole period covering the various payments complained of, each of the payments was made in an independent transaction unconnected to each other and involved a distinct breach of duty and a different loss.  In respect of each of the Dividends Claim, the Share Repurchases Claim and the Convertible Notes Claim, the relevant breach of duty alleged is the defendant’s failure to take steps that would have led to a situation that the specific transaction would not have occurred, and the alleged loss lies in the consequences of that transaction.  The facts and circumstances relevant and material to each of the plaintiff’s specific claims are necessarily different, depending on the nature of the specific transaction, and the point in time that transaction took place.  Each was an individual and separate claim for loss.

43.The present case bears no resemblance to Aldi Stores Ltd or Berezovsky v Abramovich [2011] EWCA Civ 153, another case relied on by Mr Burns.

44.I agree also with Mr Shieh that it is unhelpful to apply the test of res judicata to ascertain if the proposed amendment would constitute a new cause of action.  Res judicata in the wider sense of Henderson v Henderson (1843) 3 Hare 100 would not assist in determining if there is re-litigation of a claim for present purpose.  The rationale for res judicata is to prevent abuse of the legal process by precluding a litigant from re-litigating a claim which could and should have been brought in an earlier action.  The statutory provisions on limitation that we are concerned with serve a very different purpose.  They are to avoid causing prejudice to litigants by requiring them to investigate new factual matters not contemplated under the existing claims after the limitation period has expired.

45.The judge has rightly held that the Share Repurchases Claim and the Convertible Notes Claim were new causes of action for limitation purposes.

If the Share Repurchases and Convertible Notes Claims arose out of the same or substantially the same facts

46.Mr Burns submitted that the judge was wrong to hold that the Share Repurchases Claim and the Convertible Notes Claim did not arise out of the same or substantially the same facts pleaded in respect of the Dividends Claim in that the judge had taken a view that was too narrow[8].  He reminded the court of the dictum of Litton VP (as he then was) in Leung Kin Fook & Ors v Eastern Worldwide Co Ltd (No 2) [1997] 1 HKC 524 at 528C to D: “The words in O 20 r 5(5) are not to be narrowly construed: they should be given a broad and liberal interpretation in order to attain the objective of the rules.” The policy of the statutory provisions was described by Hobhouse LJ in Lloyds Bank plc v Rogers, Court of Appeal (Civil Division) Transcript No 1904 of 1996 in these terms:

“Section 35 contemplates that the introduced cause of action will be time barred. The policy of the section is that, if factual issues are in any event going to be litigated between the parties, the parties should be able to rely upon any cause of action which substantially arises from the same facts. There is no indication in the drafting of the Act that there should be a further limitation on section 35. If there is any relevant prejudice to the party opposing the amendment, it can and should be had regard to on the exercise of the court’s discretion whether or not to allow the amendment.”

47.Colman J discussed what could be relevant prejudice in this context in these decisions: Goode v Martin [2001] 3 All E R 562 at 566g to h[9]; P & O Nedlloyd B V v Arab Metals Co [2005] 1 WLR 3733 at para 42[10]; and BP plc v Aon Ltd [2006] 1 Lloyd’s Rep 549 paras 52 to 55.  I quote from the relevant passages in the last two cases:

“42.     … The concept involved in “substantially the same” in CPR r 17.4(2) must, in my judgment, involve something going no further than minor differences likely to be the subject of inquiry but not involving any major investigation and/or differences merely collateral to the main substance of the new claim, proof of which would not necessarily be essential to its success.” (P & O Nedlloyd B V v Arab Metals Co)

“52. At first instance in Goode v Martin [2001] 3 All E R 562 I considered the purpose of section 35(5) in the following passage:

“Whether one factual basis is ‘substantially the same’ as another factual basis obviously involves a value judgment, but the relevant criteria must clearly have regard to the main purpose for which the qualification to the power to give permission to amend is introduced. That purpose is to avoid placing a defendant in the position where if the amendment is allowed he will be obliged after expiration of the limitation period to investigate facts and obtain evidence of matters which are completely outside the ambit of, and unrelated to those facts which he could reasonably be assumed to have investigated for the purpose of defending the unamended claim.”

…

54. The substance of the purpose of the exception in subsection (5) is thus based on the assumption that the party against whom the proposed amendment is directed will not be prejudiced because that party will, for the purposes of the pre-existing matters [in] issue, already have had to investigate the same or substantially the same facts.

55. It follows that if that party would not previously have had to investigate the same or substantially the same facts for the purposes of a pre-existing claim because he never had been party to such a claim, the prejudice which the exception assumes not to exist does indeed exist. If the amendment is allowed that party has to embark upon investigating a claim against him which arises out of facts which he would not previously have been concerned to investigate. Accordingly, in my judgment neither CPR 17.4(2) nor section 35(5) can be construed to have as wide a scope as that contended for by the Claimants. …” (BP plc v Aon Ltd)

48.Thus, in considering whether the Share Repurchases Claim and the Convertible Notes Claim arose out of the same or substantially the same facts as a cause of action in respect of which relief has been claimed, I should consider whether the new facts required for these new causes of action would go no further than introducing “minor differences likely to be the subject of inquiry” and would not involve any “major investigation” which would not already have been undertaken in respect of the Dividends Claim.

49.There is one other legal question I need to resolve before turning to the facts.  This is the question of the relevant “comparator” or the pleading the court should look at for the purpose of deciding whether the new claims arose out of the same or substantially the facts as a cause of action already pleaded.  The judge decided that the comparator for this purpose is the original statement of claim[11].  Mr Burns submitted he was in error and contended that the relevant comparator should be the ASOC (which was amended without leave pursuant to Order 20 rule 3 on 13 May 2010) or at least the ASOC with the amendments which were allowed by the judge in the June Decision (which would include all the new facts pleaded in relation to the Share Repurchases Claim and the Convertible Notes Claim but limited to the purpose of giving further particulars of the defendant’s knowledge as to the plaintiff’s financial position at the relevant times in respect of the Dividends Claim[12]).

50.This gives rise to what was called the “piggy back” argument, which may be stated as follows.

51.In short, Mr Burns argued that in considering whether the new claims arose out of the same facts, the judge should not be confined to looking at the pleading in its existing state but should take into account any permissible amendments for which leave has been or will be given, citing the decision of Deputy High Court Judge Sheldon, QC in Dhillon v Siddiqui [2007] EWHC 2936(Ch) at paras 28 to 35.  So the new facts pleaded in support of the defendant’s knowledge in respect of the existing claim would be part of the factual matrix against which the facts of the new claims would be compared.

52.Mr Shieh submitted that this approach is impermissible, as this would be to use the permissible amendments as an opportunistic springboard for further “piggy back” amendments which would result in the admission of new claims after the limitation period.  He referred us to the relevant passages in the decision of Warren J in Harland & Wolff Pension Trustees Ltd v Aon Consulting Financial Services Ltd at paras 120 to 127.

53.Warren J agreed with Dhillon v Siddiqui that as a matter of jurisdiction, he could take account of the amendments which he would allow in deciding whether a new claim arose out of the same or substantially the same facts as a claim already pleaded.  But he would not have exercised his discretion to allow an amendment to include the new claim as this would be an unjust result on the facts of the case before him.  He pointed out that in Dhillon v Siddiqui, the first amendment dealt with by the judge (the basis for the “piggy back” amendment) was made within the limitation period. In contrast, the amendment which Warren J was prepared to allow to introduce the new claim (which was based on the original breach of duty and pleaded as consequential loss, held not to give rise to a new cause of action) was made long after the expiry of the limitation period.  It was one thing to allow an amendment to add a further head of loss based on the original breach of duty.  It was quite another to allow the plaintiff also to rely on a further breach of duty by way of a “piggy back” claim.  There was no reason why the defendant in that case should have to suffer the prejudice in not being able to run certain arguable defences in relation to an entirely different claim brought many years after the expiry of the limitation period, simply because it would have to investigate the relevant facts anyway because of the limited amendment that would be allowed.

54.That seems to me an entirely proper exercise of the court’s discretion.  Mr Burns submitted that what Warren J had said about the exercise of discretion was obiter.  I do not agree.  The judge held for the reason he gave in para 123 that the case did not fall within section 35(5)(a) of the Limitation Act 1980 (equivalent to our section 35(6)(a)), but if he were wrong about that he would not in his discretion have allowed the amendment for the reason he gave in paras 124 to 127.  The judge had given two reasons for his decision.  Both were the holdings of the judge.

55.I agree with Mr Shieh it does not matter whether this question is called the relevant comparator or the exercise of discretion.  It is just a matter of semantics.  If we were to exercise the discretion afresh, I would decline to exercise my discretion to allow the plaintiff to make use of the amendment – itself made after the expiry of the relevant period – and allowed for a limited purpose in support of an existing claim, as a springboard for amendments which would result in new claims.

56.Mr Burns submitted whether the new cause of action arose out of substantially the same facts as that already pleaded is “substantially a matter of impression” (Welsh Development Agency v Redpath Dorman Long Ltd [1994] 1 WLR 1409 at 1418D).  I would respectfully agree with Millett LJ (as he then was) in Paragon Finance plc v D B Thakerar & Co at 418g to h this may be so in borderline cases.  In others, it must be a question of analysis.

57.It seems to me to be a question of analysis in the present case.

58.Mr Burns argued that the underlying allegations of breach for the Share Repurchases Claim are indistinguishable from the underlying facts for the Dividends Claim, as both turn on the allegation that but for the defendant’s breach of duty, it would have been identified that the plaintiff did not have retained earnings or profit to pay dividends or repurchase its own shares.  The only additional allegation in relation to the Share Repurchases Claim is the fact that the shares were repurchased.  Pleading this indisputable fact did not substantially change the underlying factual matrix to the Share Repurchases Claim.

59.Notwithstanding that additional facts were pleaded regarding the defendant’s knowledge of the circumstances of the early redemption for the Convertible Notes Claim, Mr Burns submitted that this new claim still arose from substantially the same facts as the Dividends Claim, in that the new claim was just a further instance of loss arising out of the same allegations of the defendant’s breach of duty in failing to identify the true financial state of the plaintiff.

60.I do not accept his submissions. I have already rejected his contention that it is appropriate to treat the Share Repurchases Claim and the Convertible Notes Claim as further heads of loss arising from the same breach of duty.  Each of the transactions in the new claims took place at different points in time under different factual circumstances, separate and distinct from those relating to the Dividends Claim.  New allegations of breach of duty and losses were made in respect of each of the new claims.  New allegations were raised as to the defendant’s knowledge of and involvement in the plaintiff’s decision to proceed with early redemption of the notes, and the defendant’s knowledge of and involvement in advising the plaintiff’s management on certain proposed general mandates for the issue of shares and repurchase of securities.  Allegations were made for the first time that the defendant was in breach of her duties by not insisting upon full and accurate disclosure to the board of directors, the shareholders and the Stock Exchange of the breaches of interest covenants with respect to the notes.

61.These new factual allegations in support of the new claims could not be said to go no further than introducing “minor differences likely to be the subject of inquiry”.  As each of the transactions took place at different points in time under different factual circumstances, whether the defendant could be regarded as having been in breach of duty in failing to prevent them from having occurred at those points in time would hinge on the consideration of distinct sets of facts.  These new allegations give rise to different and wide-ranging matters which the defendant could not have anticipated she would need to investigate and respond to in her defence of the Dividends Claim.  The defendant should not be prejudiced by being required to investigate such matters which were clearly not contemplated under the plaintiff’s existing claim.

62.I would uphold the judge’s decision that the Share Repurchases Claim and the Convertible Notes Claim did not arise out of substantially the same facts pleaded in respect of the Dividends Claim.

If extension of time should be granted to object to amendments

63.Mr Burns submitted that the judge was wrong to allow the defendant to raise the limitation objections at all.  The statement of claim was amended without leave on 13 May 2010 pursuant to Order 20 rule 3.  Following service of the pleading on the defendant, she had 14 days to object to the amendment under Order 20 rule 4.  As she had not raised any objection within time, all the allegations in the ASOC were deemed to have been included in the claim from the outset by virtue of the relation back rule in section 35(1) of Cap 347.  There was no proper basis for the judge to exercise his discretion to extend time for the defendant to object to the amendments.

64.He contended further that the judge was wrong to hold it was an abuse of process for the plaintiff to amend under Order 20 rule 3 to seek to introduce a time-barred claim into an existing pleading when the new claim was a new cause of action and did not arise out of substantially the same facts as the existing claim[13].  The onus lies on the defendant to object to the amendment within time.  The judge’s ruling and the exercise of his discretion to extend time for making a challenge to the pleading amended without leave introduced significant unwarranted uncertainty to the status of the pleading and undermined the time limit of 14 days to raise objection stipulated in Order 20 rule 4.  The judge also failed to have regard to the fact that the defendant had not provided explanation for the failure to object in time.  The objection was some four months late.

65.I agree with the judge it is an abuse of process to seek to introduce a new claim which is time-barred into an existing pleading when the conditions in sections 35(5) and (6) are not met, and Order 20 rule 3 cannot be used to circumvent the provisions of section 35 and confer finality on an amendment which contravene sections 35(3), (5) and (6) just because no objection is raised to the amendment within the time stipulated.  I see no reason to differ from the judge on the proper exercise of his discretion to extend time for the defendant to raise challenge to the amendment under Order 20 rule 4[14].

66.This ground of appeal fails.

If the claim for IND was a new cause of action

67.The claim for IND was put forward as an alternative basis of the plaintiff’s claim.  As a result of the defendant’s breaches, the plaintiff continued to trade instead of being placed in liquidation and as a consequence of its continued trading it suffered loss, not only by reason of the specific payments which would not otherwise have been paid (the subject of the Dividends Claim, the Share Repurchases Claim and the Convertible Notes Claim), but also by virtue of the increase in net deficiency, between the date the plaintiff would have ceased trading or gone into liquidation had the defendant properly discharged her duties (from at least 31 March 2001) and the date it eventually did cease trading and went into liquidation (23 June 2005).  The IND between those dates was alleged to be at least HK$1.23 billion.

68.As in the Share Repurchases Claim and the Convertible Notes Claim, the plaintiff’s contention here was that the judge had adopted an overly narrow approach in holding that the claim for IND constituted a new cause of action.  It was argued that the defendant was in continuous breach of duty and the claim for IND was just a further alternate formulation of the loss flowing from the breach already pleaded.  For the reasons given in the earlier part of my judgment, I reject this contention.  The breach of duty and the damages in the claim for IND are clearly different from the breach of duty and the loss in the Dividends Claim (being the only claim in the ASOC that should be allowed to be made).  The words of Warren J in Harland & Wolff Pension Trustees Ltd v Aon Consulting Financial Services Ltd at para 65 are particularly apposite here: “The nature of damage may show that there must be a new cause of action because it could not fall within a cause of action already pleaded.”

69.Further, as submitted by Mr Shieh, the issues requiring investigation in each case are very different.  The Dividends Claim requires an inquiry as to whether and when the defendant discovered or should have discovered that the plaintiff had no distributable profits or was otherwise not in a position to pay dividends at the material times, and the steps the defendant should have taken so that such payments would not have been made by the plaintiff.  The IND claim would require an inquiry as to whether and when the defendant should have discovered that the plaintiff was no longer fit to continue trading, and the steps she should have taken to bring the true financial position of the plaintiff to the attention of the board of directors, the shareholders and the Stock Exchange, which would have resulted in the plaintiff being placed into liquidation much earlier.

70.I would also uphold the judge’s decision that the claim for IND was a new cause of action for limitation purpose.

If the claim for IND arose out of the same or substantially the same facts

71.The judge held that the claim for IND arose out of substantially the same facts as have already been pleaded.  He ruled that the relevant comparator for this purpose is the pleading in its current state, that is, the ASOC with the Share Repurchases Claim and the Convertible Notes Claim struck out but with the amendments that were allowed in for the limited purpose to establish knowledge of the defendant as to the plaintiff’s financial position at the relevant times in respect of the Dividends Claim[15].

72.On the basis of that pleading, the judge came to the view that the essential facts as to the defendant’s duty and the breach of her duty that would support a claim for IND are, for the most part, already pleaded[16], such as the allegations that the plaintiff was insolvent at various points in time, the defendant’s knowledge or means of knowledge of insolvency, and the steps she should have taken in consequence.  The only additional fact that was pleaded in the proposed amendment, and which was necessary for this alternative claim, related to the amount of the loss, being the increase in the net deficiency of the plaintiff between the relevant dates.  This new fact did not render the claim for IND to be a claim not arising out of substantially the same facts as have already been pleaded in support of the existing relief claimed[17].

73.On appeal, Mr Burns sought to support the judge’s decision by contending that no new allegations of breach were introduced by the amendment in para 399A of the FASOC.  The amendment only pleaded an alternate quantification of loss that is based on matters entirely outside of the defendant’s personal knowledge.  No prejudice would be caused to the defendant as the outcome of an earlier hypothetical winding up of the plaintiff will necessarily be the subject of expert opinion and evidence concerning the plaintiff’s financial position which has always been necessary.  Similarly, the actual outcome of the winding up of the plaintiff is a fact that should not be controversial.  It would not be unfair to allow the amendment to claim IND, taking into account such further work the defendant may be required to undertake in preparation for trial to respond to this new claim.

74.I have already discussed the relevant legal principles in the earlier part of my judgment.

75.On the question of the relevant comparator or the exercise of discretion whether to permit reliance on the amendments in the ASOC, I decline to exercise my discretion to allow the plaintiff to make use of the amendments in the comparison exercise for the reason I have given earlier.  The judge was in error in this respect.  He had failed to take into account the fact that the amendments, which formed the basis for the “piggy back” amendment, were made outside the limitation period.  Further, he had failed to have regard to the manner in which the matters pleaded in the permissible amendments was deployed.  The allegations relevant to the defendant’s knowledge of the plaintiff’s insolvency were made by way of background to the Dividends Claim and the defendant could not reasonably be expected to investigate these allegations in as detailed and precise a manner as she would be required to respond to the claim for IND.  Averments which were innocuous as background matters in the existing claim would assume significance when deployed for a very different purpose in the new claim.  It would be unjust to allow the plaintiff to make use of the amendments limited for a particular purpose for a claim which was not time-barred as a springboard for further amendments to support a cause of action which was time-barred.

76.Mr Burns drew our attention to the judgment of the English Court of Appeal in Society of Lloyd’s v Laws [2003] EWCA Civ 1887, in which the court commented at para 52 regarding the comparison between the old and new claims under the rubric of “substantially the same facts” required by CPR r 17.4(2):

“That balancing exercise was very much a matter for the judge and, in our view, this court should not interfere with his conclusion unless he erred in principle or was plainly wrong. We should not simply substitute our view for his, even if we would have reached a different conclusion if sitting at first instance.”

77.With respect to the judge, I think he has erred in principle.  He has failed to have proper regard to the policy of the statutory provisions described in Lloyds Bank plc v Rogers and the relevant prejudice in this context to the party opposing the amendment as discussed in the decisions of Colman J.  A pertinent consideration is to avoid placing a defendant in the position where, if the amendment is allowed, he will be obliged after the expiration of the limitation period to investigate matters which are unrelated to those he could reasonably be assumed to have investigated for the purpose of defending the existing claim.

78.On a proper analysis of the nature of the new and existing causes of action, it cannot be said that the facts required for the new cause of action in the claim for IND would go no further than introducing minor differences likely to be the subject of inquiry and would not involve any major investigation which would not already have been undertaken in respect of the Dividends Claim.  Whilst the judge recognised that the allegation of the increase in net deficiency between the two relevant dates “is undoubtedly a new fact”[18], he failed to have regard to the impact of the introduction of this new fact, including the far-reaching effect it would have on the new areas of investigation the defendant would be required to undertake in order to respond to the IND claim.

79.Mr Burns argued that even though it would be sufficient for the Dividends Claim for the plaintiff to prove that it had in fact no distributable reserves, this does not mean the insolvency of the plaintiff is not a critical issue in the case and the issue of the plaintiff’s true financial state would need to be addressed at the trial regardless.

80.I do not agree with his argument.  Investigation of the issues raised in the Dividends Claim would not have involved ascertaining the net deficiency position as at the two relevant dates, namely, 31 March 2001 and 23 June 2005.  To respond to the new claim for IND, the defendant would need to conduct investigations in respect of the plaintiff’s financial position as at the two relevant dates.  For the net asset deficiency as at 31 March 2001, adjustments[19] were made to the figure of HK$286.2 million said to be the plaintiff’s true financial position on the books[20], to arrive at the figure of HK$745 million alleged to represent the plaintiff’s actual financial position[21].  Investigations would need to be made to determine if the adjustments are justified.  Further, it would be necessary to consider the factors which would explain the increase in net deficiency, as a mere comparison of the financial position as between the two relevant dates is insufficient in a claim for IND (Re Continental Assurance Co of London plc (No 4) at paras 332 to 335).  As for the net asset deficiency as at 23 June 2005, the existing pleading contained no averment as to the financial position of the plaintiff beyond 31 December 2004, so the defendant would need to conduct investigations by examining the financial affairs of the plaintiff after 31 December 2004.

81.Furthermore, under the original claim it has not been contemplated that there would have to be a minute and precise investigation of the plaintiff’s accounts and financial position as at the two relevant dates, or of the movement of the quantum of the plaintiff’s precise net deficiency over the years.  The allegations regarding the plaintiff’s insolvency were made by way of background to support the allegation that the payments of dividends would not have been made.  In the claim for IND, it is an essential and crucial averment that there was an increase in net deficiency between the two relevant dates.  Precision is essential in assessing the movement of the net deficiency over the years as every dollar counts towards the quantum and recoverability of the claim against the defendant.

82.Despite the seeming brevity of para 399A, considerable factual inquiry would need to be made into new factual issues which are material to the claim for IND.  The judge was in error in finding that the claim for IND arose out of substantially the same facts as have already been pleaded in support of the Dividends Claim.  If the amendment to add a claim for IND is allowed, the defendant would be prejudiced by being required, after expiration of the limitation period, to embark on major investigation of facts which she previously would not have had to undertake in respect of the existing claim.  The judge had wrongly exercised his discretion to grant leave to amend in this situation.

Conclusion and orders

83.For the above reasons, I would dismiss the plaintiff’s appeal in CACV 161 of 2012 and allow the defendant’s appeal in CACV 155 of 2012.  I would set aside the judge’s order on 3 July 2012 granting leave to the plaintiff to further amend its amended statement of claim by adding paragraph 399A to the pleading.

84.Costs in the appeals should follow the event.  I would make an order nisi that the plaintiff is to pay the defendant’s costs of both appeals, with a certificate for two counsel.

Hon Fok JA:

85.I agree with the judgment of Kwan JA.

Hon Lam JA:

86.I agree with the judgment of Kwan JA.

Mr Ashley Burns SC, instructed by Karas Lawyers, for the plaintiff (appellant in CACV 161 of 2012 and respondent in CACV 155 of 2012)

Mr Paul Shieh SC and Ms Janet Ho, instructed by Fred Kan & Co, for the defendant (appellant in CACV 155 of 2012 and respondent in CACV 161 of 2012 )

Please refer to FACV23/2013 for the relevant appeal(s) to the Court of Final Appeal.