Notorious cases of “dissipation”
One of the questions frequently asked by a desperate creditor is whether they can go after the ultimate owner / monitor of the debtor company rather than the debtor himself. In most cases, the answer is No because:-
- By virtue of the “contractual link”, only the contracting party can be sued for breach of contract. When there is a written contract, a party is usually bound by its terms after signing. A party is not allowed to claim that there are contracting parties other than those mentioned in the contract, in particular where the application of the Contracts (Third Party Rights) Ordinance has been expressly excluded.
- A company is recognized by law as a separate âlegal personalityâ capable of acting on its own, and which can also be sued and become liable on its own. In the case of a limited liability company, the liability of a shareholder is limited to the extent of his investment in the company.
- It is only in very exceptional circumstances (such as fraud) that the court would âlift the corporate veilâ. But even in cases of fraud, the Supreme Court of the United Kingdom once pointed out in VTB Capital plc c. Nutritek International Corp  UKSC 5 that it is wrong to treat the people behind as contracting parties to hold them contractually responsible.
In view of the cardinal principles above, a crafty owner / controller may designate a limited liability entity as the borrower / contracting party, thus protecting themselves from personal liability. These owners / controllers may also voluntarily drain the finances of the business or, in more drastic cases, they may even try to siphon off the assets of the business to their related parties. In the latter scenario, since it is not uncommon for such controllers to loan money to the company through shareholder loans, these controllers may even actively pursue the liquidation of the company with the ultimate goal of appointing a liquidator over whom they can exercise influence.
The options of creditors in such an unfortunate circumstance are limited. The creditor may attempt to obtain a Mareva injunction against the debtor company, which is, however, preventive in nature and would be of no use if dissipation has already occurred. In such a situation, what has always been under-explored, if not neglected, is the crime as recognized in Lumley vs. Gye  EWHC QB J73, or what is modernly called the offense of causing a breach of contract. As we will see below, this offense has recently been revitalized (in particular in the cases of Marex Financial Limited v. Carlos Sevilleja Garcia  EWHC 918 (Comm) and Palmer Birch v. Lloyd  EWHC 2316 (TCC)) to cover shareholders / directors (and even ultimate beneficial owners and shadow directors) of a company who, by dissipation, have emptied the pocket of the company to deprive it of the means to carry out payments to its contractual counterpart. This may seem a little ironic, because while commercial lawyers have always tried to use the operative part of the contract to avoid having to establish a “duty of care” in the event of subsequent litigation, it is tort law that is the law. comes to the rescue when no effective means can be found in the execution of a contract. On the other hand, as we will analyze below, it cannot be overemphasized that a contract nevertheless plays an important role here because the tort is based on the existence of a contract and on a breach of the latter (which in turn depends on the existence, scope, legality and applicability of a contractual clause). Seen from this angle, the existence of the Lumley vs. Gye tort highlights the importance of the drafting technique of a commercial lawyer.
The elements of Lumley v. Gye Tort
The basic elements of Lumley vs. Gye tort are as follows:
- At least there has to be a contract.
- At least there must be breach of contract.
- There must be an element of participation (which must be more than just prevention) on the part of the shareholder / director / controller in causing the termination of the contract.
- The shareholder / director / controller must also have intended to cause the contract to be terminated by his participation. By implication, they must also have known of the existence of the contract.
- The claimant must have suffered prejudice.
In view of the elements of the offense, it is then not difficult to understand why such an offense can be a useful weapon in a dissipation case against the controllers of the company where a breach of contract has already taken place. By definition, these controllers control the business, so it is usually difficult for them to isolate themselves from the dissipation. On the other hand, being close to the business of the company, they cannot really deny their knowledge of the contract. As for the fifth element, the non-payment under the contract is the damage suffered.
We can immediately see that if the Lumley vs. Gye Tort liability appears to have ‘circumvented’ the doctrine of separate legal figures, it does not deny and in fact relies on the recognition of the separate legal figures of a company and its controllers (so that they can be properly regarded as some thirds). Therefore, there is no established political reason to exclude a claim against the controllers once the elements of the offense are satisfied. The debtor in Palmer Birch tried to argue that the entire claim was an impermissible attempt to pierce the corporate veil, but that argument failed.
As shown in the Supreme Court judgment of Sevilleja v. Marex Financial Ltd  UKSC 31, a claim based on the Lumley vs. Gye tort liability is permitted even when the company is in liquidation. The thoughtful no-loss rule does not preclude such a claim. A general creditor may therefore be in a more advantageous position since he could have a direct recourse against the supervisors by circumventing the problems of inferior rank to the secured or ranking creditors. pari passu with the claims of other general creditors.
Is there an offense of knowingly inciting or provoking the culpable violation of a judicial debt?
Under the merger doctrine, upon obtaining a judgment, the contractual debt has âmergedâ into the judgment and the plaintiff can no longer rely on the original contractual debt. The question then is whether the creditor can still avail himself of the Lumley vs. Gye tort when the non-payment concerns a judicial debt arising from a contractual debt? This is the scenario encountered by the English Court in Marex Financial, where at trial Knowles J. held at an interlocutory application hearing that there was a offense of knowingly inciting or provoking the culpable violation of a judicial debt, thus extending the application of the Lumley vs. Gye tort to cover such a judgment debt. Although this case was subsequently appealed to the Supreme Court on other points, the ruling on this point remains unchanged.
The decision of Marex Financial however leaves another problem unresolved. Since the original Lumley vs. Gye misdemeanor recognizes contractual interests only as a specific class of assets worthy of its protection, it remains to be seen whether the tort of knowingly inducing or provoking the unlawful breach of a judicial debt can be extended to judicial debts based on legal debts. ‘other causes of action (for example, a pecuniary judgment obtained solely on the basis of a tort claim).
Even if the tort of inducing or knowingly obtaining the culpable breach of a judicial debt is kept within its present limits, it still represents an outlier in the common law world, as a cause of action is generally considered to be completed at the time of the granting of the judgment. that the debtor’s failure to settle a judicial debt would not give rise to another cause of action, and the obligee is left with traditional enforcement actions and liquidation proceedings. By this special tort, the creditor can now bring a new action against the shareholder / director / controller of the debtor company when the judgment debt (which is to be derived from a contractual debt) remains unsatisfied.
Comparison with other economic crimes
the Lumley vs. Gye Tort liability also has the following advantages over other economic crimes:
- No fraud needs to be proven as in the case of a deception offense. Keep in mind that fraud is a serious allegation and it is difficult to prove fraud in a business context.
- No illegality needs to be proven as in cases of conspiracy of illegal means and unlawful interference.
- Unlike the conspiracy, only one wrongdoer (other than the contract breaker) is sufficient in the Lumley vs. Gye offense.
the Lumley vs. Gye Tort liability also appears to be exceptionally useful against shadow directors who act outside of the incorporation of the company. Paradoxically, this can deprive them of the exception of “act of good faith within the framework of its powers” conferred on it by the company whereas such a defense is generally open to a de jure director. It is therefore no coincidence that the main defendant in both cases Marex Financial and Palmer Birch is a ghost director.
On the other hand, in cases of dissipation, what the claimant requires is initial proof that there has been a dissipation of the assets of the business. This financial information is not normally accessible to outsiders and, as the applicant cannot seek evidence, he may be required to obtain such evidence through other legal channels. These avenues may include contractual clauses allowing access to financial information (which is typically included in trade agreements), as well as disclosure orders incidental to a Mareva injunction.
The two cases of Marex Financial and Palmer Birch have not been reviewed by Hong Kong courts as part of a Lumley vs. Gye offense. It therefore remains to be seen whether the two cases will be followed by the Hong Kong courts, especially when the flexible use of the Lumley vs. Gye The effect of tort has the effect of circumventing many of the long-standing common law principles described above. However, as an experienced litigator can see, there is often no better way to put pressure on the other side than to sue the natural persons behind, and for that reason alone the possibility of bringing an action based on the Lumley vs. Gye wrong is worth exploring.