Negligence Claims Against Former Directors: Recent Developments on the Doctrine of Attribution and the Applicability of the Special Time Limit

Kevin Kee and Christina Lo

When management control of a company changes, for example, with the appointment of a liquidator or a new Board of Directors, the new management may wish to scrutinise the actions of the old management and hold them accountable for any wrongdoing.

A potential difficulty confronting the new management bringing an action against the old management is the expiry of the relevant limitation period, which operates as an absolute bar to recovery. The limitation period for an action in tort is generally six years from the date of accrual. Under this rule, a claim brought by the new management in the company’s name would be time-barred where the first damage suffered as a result of the alleged wrongdoing of the old management occurred more than six years before the commencement of the action.

Where the usual six-year time limit has expired, a company bringing a negligence action may seek to rely on a special time limit under section 31 of the Limitation Ordinance (Cap. 347) (“Limitation Ordinance”). The special time limit extends the normal six-year time limit, so that a negligence action may be brought within three years from the time the company first acquired the requisite knowledge to bring an action against the old management.

However, whether the special time limit will assist the company will depend on when the company first acquired the requisite knowledge to bring an action against the old management. The old management may argue that they possessed the requisite knowledge at the time the damage was suffered by the company, and this knowledge should be attributed to the company. If this argument were accepted, the company would not be assisted by the special time limit because it would have first acquired the requisite knowledge more than three years before the action was commenced.

The recent decision of the Hong Kong High Court in Re Wah Nam Group Ltd (in compulsory liquidation) [2017] HKCFI 1602 (5 September 2017) clarifies this issue. The Court decided, among other things, that the knowledge of the plaintiff companies’ former shadow or de facto directors regarding their own alleged wrongdoing should not be attributed to the Plaintiffs for the purpose of determining whether the Plaintiffs had the requisite knowledge for the special time limit to begin to run with respect to a negligence action against those shadow or de facto directors. In doing so, the Court approved the reasoning of the U.K. Supreme Court on the issue of attribution of knowledge in Bilta (UK) Limited (in liquidation) and Others v Nazir and Others (No. 2) [2016] A.C. 1 (“Bilta”).

Background

On 30 April 2015, Great Strategy Properties Limited and Crystal Services Limited, the subsidiaries of Wah Nam Group Ltd (in compulsory liquidation) (the “Plaintiffs”) commenced an action against six defendants, including the Plaintiffs’ former shadow or de facto directors (the “Defendants”), for damages allegedly suffered by the Plaintiffs as a result of the Defendants’ alleged wrongdoing between 2006 and 2007.

In the Defendants’ application to strike out the statement of claim, the Defendants argued that the Plaintiffs’ action was time-barred on the following grounds:

  • the Plaintiffs filed the writ long after the six-year primary limitation period;
  • the special time limit under section 31 of the Limitation Ordinance would not assist the Plaintiffs because the knowledge of the Defendants, as shadow and/or de facto directors of the Plaintiffs, should be attributed to the Plaintiffs, such that the three-year special time limit would have also expired before the Plaintiffs commenced their action.

Section 31 of the Limitation Ordinance

A crucial date for the operation of section 31 of the Limitation Ordinance is the earliest date on which the plaintiff first acquired the knowledge required to bring an action in respect of the damage caused by the defendant’s negligence or had a reasonable way of discovering this information (the “Date of Knowledge”).

Section 31 of the Limitation Ordinance applies if the Date of Knowledge occurred after the date on which the cause of action accrued. This provision operates to allow a plaintiff to bring a negligence action within the later of (a) six years from the date on which the cause of action accrued, or (b) three years after the Date of Knowledge.

The Court’s Decision

In holding that the special time limit was applicable with respect to the Plaintiffs’ negligence action, the Court rejected the Defendants’ contention that the negligence claims were time-barred on the following bases:

i. The Defendants did not have the requisite knowledge

The Court held that the Defendants did not have the requisite knowledge during the time they were shadow or de facto directors of the Plaintiffs for the purposes of section 31 of the Limitation Ordinance. In particular, the Court held that it was “impossible” for the Defendants to have known that they were liable for the damage suffered by the Plaintiffs. The Court pointed to the fact that the Defendants’ own substantive defence against the Plaintiffs’ negligence claim was that the Defendants had not committed any negligent acts. In effect, the Court held that the Defendants could not adopt a position in their strike-out application (that is, that they knew their own negligent acts caused damage) that was inconsistent with their substantive defence (that they had not committed any negligent acts).

Therefore, the Court held there was a strong argument that the special time limit did not start to run until sometime after the Defendants were removed as shadow or de facto directors of the Plaintiffs.

ii. The Defendants’ knowledge should not be attributed to the Plaintiffs for the purposes of section 31 of the Limitation Ordinance

Due to the Court’s finding that the Defendants did not have the requisite knowledge under section 31 of the Limitation Ordinance, it was not necessary for the Court to decide whether the Defendants’ knowledge should be attributed to the Plaintiffs. Despite this, the Court held that even if the Defendants had the requisite knowledge, that knowledge should not be attributed to the Plaintiffs.

In coming to this decision, the Court cited with approval the U.K. Supreme Court’s ruling in Bilta regarding when a director’s knowledge should be attributed to a company. Bilta also concerned claims brought by an insolvent company against the defendant directors for breaches of fiduciary duty and dishonest assistance. The defendant directors had allegedly used the plaintiff company as a vehicle to commit tax fraud. The defendant directors sought to strike out the plaintiff company’s action on the basis that the plaintiff company was a party to the illegality. To make out this defence, the defendants needed to convince the Supreme Court that their illegal acts should be attributed to the plaintiff company.

In broad terms, the Supreme Court held that the defendant directors’ knowledge should not be attributed to the plaintiff company as the directors should not be allowed to rely on their own wrongdoing to raise a defence to a claim against them by the company in respect of that wrongdoing. The Supreme Court held that that the illegality defence was not available to the defendants.

Applying Bilta to the present case, the Hong Kong Court held that the Defendants could not establish a time limitation defence to the Plaintiffs’ claim by attributing the Defendants’ own knowledge of their wrongdoing to the Plaintiffs.

iii. Factual issues for the determination of the applicability of the special time limit under section 31 of the Limitation Ordinance were complicated and not appropriate for a striking-out procedure

Finally, the Court took into account comments made by the Court of Final Appeal in Kensland Realty Ltd v. Tai, Tang & Chong (2008) 11 HKCFAR 237. There it was observed that the question of the applicability of the special time limit in section 31 of the Limitation Ordinance was a complicated one, involving mixed issues of law and fact and a consideration of all the circumstances of the case. The Court therefore held that it was inappropriate to determine these issues in a strike-out application in circumstances where the Court did not have all the facts.

In view of the above reasons, the Court held that the Plaintiffs’ negligence claims should not be struck out because of limitation issues.

Conclusion

An important point to emerge from this case is that the three-year special time limit for a company’s negligence actions against the former directors will often arguably not begin to run until some time after those directors were removed from office. Therefore, the former directors could find themselves subject to a negligence action that is not time-barred, even though the action relates to conduct occurring in the distant past, so long as the former directors were in control of the company for the entire intervening period.

The Limitation Ordinance provides that the special time limit is subject to a long-stop date of 15 years from the occurrence of the conduct said to constitute the negligence or damage attributable to the negligence. Even so, this means that hypothetically speaking, a former director removed from office in 2018 might find themselves subject to a negligence action with respect to their conduct in 2003 that is not time-barred.

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