The decision itself is currently under appeal but more generally, in the current economic climate, D&O insurers may expect an increase in claims made under D&O policies and that such claims will be pursued with increased vigour, especially by liquidators.
The nature of the allegations
The decision handed down on 6 April 2009 in the case of Moulin Global Eyecare Holdings Limited (in liquidation) & Ors v Lee related to a strike out application brought by the sole defendant to the action, Olivia Lee. The claim against Ms Lee was brought by the liquidator of four companies in the Moulin Group, a relatively large designer, manufacturer and distributor of eyewear products in Asia. Ms Lee is a solicitor and a partner in the Hong Kong office of an international law firm.
The liquidator alleged Ms Lee was negligent in her role as a non-executive director and member of the audit committee for the first plaintiff, Moulin Global Eyecare Holdings Limited ("MGEH"), and as an alleged shadow director of the other plaintiff companies for failing to make enquiries and/or take appropriate action to prevent the Moulin Group from being dishonestly run into the ground.
Ms Lee's defence
The first ground supporting the application was that MGEH entered into a deed of release and indemnity and took out a D&O policy at Ms Lee's request prior to her being appointed as a non-executive director and audit committee member. Ms Lee argued that the deed protected her in respect of any proceeding "that may be taken by anyone, including and not limited to... any other private or public third party" which included the present claims by the Moulin Group and that the taking out of the D&O policy was consistent with this. Ms Lee argued that the claims against her should be struck out on the basis of circuity of action.
The liquidator argued that the deed only provided indemnity for third party claims and not for claims made by the Moulin Group. To support this point, the liquidator relied on an email from Ms Lee to the managing director of MGEH setting out the requirement for the deed of indemnity and D&O policy as a commonly used "mechanism to protect a public company's directors from potential claims or lawsuits made by third parties". The liquidator argued that Ms Lee's email showed that she intended the deed to apply to third party claims only.
The judge initially held that the wording of the deed was drafted so widely as to provide an indemnity from suit against all-comers, including the Moulin Group. However, the judge determined, after analysing the background factual matrix, that the reference to third party claims only in Ms Lee's email and the lack of any reference to claims by the Moulin Group in the deed was sufficient to decline to strike the claims out as it was arguable that Ms Lee had intended the deed to apply to third party claims only.
The second ground supporting the application was that MGEH's Bye-laws provided that directors and officers were to be indemnified and secured harmless against all actions and losses incurred while performing their duties other than for wilful negligence, wilful default, fraud or dishonesty. The Bye-law also provided that MGEH agreed to waive any claim or action it might have against any director in relation to a failure of the director to perform their duties.
MGEH was a Bermudan incorporated company but listed on the Stock Exchange of Hong Kong. As a matter of Bermudan law, companies are permitted to indemnify their directors and officers against liability in their Bye-laws in certain circumstances pursuant to the Bermuda Companies Act 1981. By contrast, there is a blanket prohibition against such indemnities under the Hong Kong Companies Ordinance.
Ms Lee argued that the Bye-law must be a term of her appointment as a non-executive director of MGEH due to the lack of a service contract, that the Bye-law provided her with an indemnity for MGEH's claim of common negligence which must fail for circuity of action, and that MGEH breached the waiver in the Bye-law by commencing the claim. In relation to the claims by the other plaintiff companies, Ms Lee argued that she was not a director of those companies and owed them no duty.
In response, the liquidator submitted that the Bye-law was void as the indemnity was prohibited under s165(1) of the Hong Kong Companies Ordinance. The liquidator argued that, even if the Bye-law was not void, it would still not provide an indemnity to Ms Lee as the allegations against her were of wilful negligence and wilful default. In relation to the remaining plaintiff companies, the liquidator argued that while Ms Lee was not a non-executive director of these companies, she was a shadow director.
The court's judgment
In reviewing the competing submissions, the judge accepted that the Bye-law should be implied into the terms of Ms Lee's appointment in the absence of a service contract and that, as a Bermudan incorporated company, MGEH was permitted to indemnify its directors and officers against liability in the way it had done under the Bermuda Companies Act. He also determined that the statement of claim only made allegations of common negligence against Ms Lee and that any allegations of wilful negligence, wilful default, fraud or dishonesty should have been (but were not) specifically pleaded. On that basis, he struck out MGEH's claim against Ms Lee.
In relation to the claims by the remaining plaintiff companies, the judge was of the view that there was no evidence to suggest that Ms Lee was a shadow director especially as the liquidator had filed an affidavit that said the Moulin Group companies were controlled by the Ma family and made no mention of Ms Lee. He reached the view that the claim by the remaining plaintiff companies against Ms Lee was so "unarguably bad" that he had no choice but to strike it out as Ms Lee clearly did not owe these companies a duty of care.
The decision, while fact specific, does contain some points of interest for insurers. Ms Lee's alleged failure to investigate or take any action to prevent the alleged dishonest management of the Moulin Group represents a significant expansion of the traditional grounds for claims against directors which usually arise as a result of a director's personal actions or inaction. It is also worth noting that the allegations against Ms Lee closely mirror the allegations made by the liquidators against the auditors of the Moulin Group in separate proceedings. As such, the claim against Ms Lee effectively amounts to an alleged failure to supervise the auditors.
The decision is currently under appeal. While the decision does not discuss the vexed question of Ms Lee's alleged duty of care due to the claim being struck out on the basis of the indemnity, the opportunity for this issue to be addressed may arise if the appeal succeeds and the case proceeds to trial.
Insurers might also take note of the determined approach of the liquidators in pursuing the claim. Such an approach seems surprising given that even if the decision is overturned on appeal in relation to the indemnity and the case proceeds to trial, the liquidators will still have to overcome the hurdle of convincing the court that the established grounds of directors' liability should be extended quite apart from the burden of proving breach, causation and loss.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.