YIFUNG DEVELOPMENTS LTD v. LIU CHI KEUNG RICKY AND OTHERS
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HCA 3020/2015
[2019] HKCFI 2246
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO 3020 OF 2015
______________
| BETWEEN | ||
| YIFUNG DEVELOPMENTS LTD | Plaintiff | |
and | ||
| LIU CHI KEUNG RICKY | 1st Defendant | |
| HO SING CHUNG ROBERT | 2nd Defendant | |
| CHOY SIU FUNG REBECCA | 3rd Defendant | |
and | ||
| HIDEMOTO KAWAI | Third Party | |
___________
| Before: | Hon K Yeung J in Chambers |
| Date of Hearing: | 26 June 2018 |
| Date of Decision: | 10 September 2019 |
________________________
D E C I S I O N
________________________
The application
1. Mr Hidemoto Kawai (“Kawai”) is the Third Party herein. This is his application by summons dated 29 June 2017 (the “Summons”) for an Order that the Third Party Notice filed by the defendants (“D1”, “D2”, “D3” and collectively “Ds”) dated 19 September 2016 (the “TP Notice”) be struck out, and the action against him dismissed, on the grounds that the TP Notice does not disclose any reasonable cause of action, and/or is frivolous and vexatious and/or otherwise constitutes an abuse of process of the Court.
The affirmatory evidence
2. On 29 June 2017, Kawai filed his affirmation in support of the application (“Kawai/#1”). Ds each filed an affirmation in opposition (“D1/#5” [1], “D2/#1” and “D3/#1”). Kawai has filed one affirmation in response (“Kawai/#2”).
3. Ds have separately taken out an application for an Order that the Writ of Summons and the Amended Statement of Claim herein be struck out. The affirmations filed by Ds in support of that application of theirs have also been placed before me (“D1/#6”, “D2/#2” and “D3/#2”).
The background facts
4. D1 owned directly Able Mind Investments Ltd (“Able Mind”), which in turn wholly owned Wonder Earn Group Ltd (“Wonder Earn”), Yifung Properties Ltd (“YPL”) and Capital Metro Group Ltd (“Capital Metro”). Capital Metro was the registered owner of a property at Shun Feng International Centre (the “Property”). All of them were companies incorporated under the laws of the British Virgin Islands (“BVI”).
5. Wonder Earn and YPL were the parent companies of the plaintiff (“YDL”), each holding 40% and 60% of the shares in YDL respectively. YDL was itself also a BVI company.
6. YDL in turn had a wholly owned subsidiary. It was called Yangjiang Fungi Properties Ltd (“WFOE”). WFOE was a company incorporated in the Mainland, and was the owner and developer of a property development project in the Mainland (the “Project”).
7. Manchester Securities Corp (“MSC”) was a company organized under the laws of the state of New York. It carried on the business of making investments. Elliott Advisors (HK) Limited (“EAHK”) was incorporated in Hong Kong, and carried out investment management/advisory functions. Both MSC and EAHK were part of Elliott, an international investment firm.
8. Mr James Nicholas Barrie Smith (“Smith”) was the Managing Director of EAHK, and Kawai an employee.
9. On 10 September 2010, MSC and YDL entered into a facility agreement (“FA”):
(a) The FA was executed by MSC as lender, YDL as borrower and obligor, Able Mind, YPL and Wonder Earn as obligors, and [D1] as sponsor. It was for a loan facility of US$39 million (the “Loan”);
(b) The Loan was to be repaid in 3 tranches: (a) US$10 million within 24 months (“1st Tranche”), (b) US$14.5 million within 36 months (“2nd Tranche”), and (c) US$14.5 million within 42 months (being the maturity date) (“3rd Tranche”);
(c) Pursuant to Clause 6.2 of the FA, YDL was entitled in certain circumstances to extend repayment date by 6 months;
(d) Clause 7.4 of the FA stipulated that:
“ The Borrower may not repay or prepay all or any part of the Loan with proceeds obtained by it, any member of the Group or any Obligor pursuant to the incurrence of any Financial Indebtedness save and except in the case of either (i) any payment or repayment with amounts obtained from offshore financial institutions to facilitate the payment of an amount equal to the relevant Repayment Amount pursuant to Clause 6.2(a)(i)(2), or (ii) any payment or repayment in accordance with Clause 7.1 (Illegality).”
10. Also on 10 September 2010, and alongside the FA, the parties entered into three other agreements:
(a) The Investor Rights Deed (“IRD”):
(i) The IRD was executed by YDL, WFOE, YPL, Wonder Earn, Able Mind, MSC and D1;
(ii) The IRD regulated the business and affairs of YDL and WFOE, and provided MSC with the right to receive a “profit‑linked bonus” out of YDL’s available profits;
(iii) Clause 3.2 of the IRD gave MSC the right by notice in writing to require the appointment of one director to each of the Board of Directors of YDL and WFOE. The director so appointed has been referred by the parties as the “Lender Director”, and those other directors as “Ordinary Directors”. I will adopt those terms;
(iv) The duties of the Lender Director were limited by the IRD. According to Clause 3.9 of the IRD [2]:
“ Save and except that the prior written consent of the Lender Director is required for the purposes set out in Clauses 4.1 and 4.2 (it being agreed that Clauses 4.1 and 4.2 shall take precedence over this Clause 3.9), the Lender Director shall not otherwise be entitled to vote with respect to the executive management of the operation of the Business of the Group, including but not limited to decisions in respect of the profit distribution of the WFOE and the remittance of funds to the Borrower by the WFOE”;
(v) The structure of Clauses 4.1 of the IRD was rather convoluted. Its effect was however this, that with reference to Schedule 4 of the IRD, which set out a list of “Restricted Matters”, the parties agreed that those Restricted Matters should not be undertaken without the prior specific written consent of the Lender Director;
(vi) One of the Restricted Matters set out in Schedule 4 of the IRD (at paragraph (m) thereof) was “The incurrence of any Financial Indebtedness, other than Permitted Financial Indebtedness”. Regulation 13.1(m) of the Articles of Association of YDL was to the same effect;
(vii) It is convenient to set out here the identities of the Ordinary and Lender Directors at the material times, which were as follows:
(b) Two equitable share mortgages:
(i) Two share mortgages each by Wonder Earn and YPL as mortgagor and MSC as mortgagee were executed (the “Wonder Earn Share Mortgages”, the “YPL Share Mortgages”, and collectively the “Share Mortgages”);
(ii) The Share Mortgages were executed in respect of the shares in YDL which Wonder Earn and YPL respectively held, and were offered as securities for the Loan;
(iii) Pursuant to the Share Mortgages, Wonder Earn and YPD were primary obligors to pay and discharge the monies due under the FA.
11. Subsequently on 1 November 2010, Capital Metro entered into a mortgage (the “Property Mortgage”) and mortgaged the Property to MSC. The Property was offered as further security for the Loan.
12. Because of the Share Mortgages and the Property Mortgage, YPL, Wonder Earn and Capital Metro have been referred to by the parties collectively as the “Mortgagors”. I will adopt that term.
13. On 2 April 2013, after an extension pursuant to Clause 6.2 of the FA, YDL repaid the 1st Tranche to MSC with interest.
14. On 15 September 2013, the 2nd Tranche was due to be repaid. Following an extension requested by YDL, the repayment date was extended to 17 March 2014.
15. On 2 October 2013, Kawai was appointed by MSC as a Lender Director of YDL in place of Kenneth Ng.
16. On 17 March 2014, the 2nd Tranche and the 3rd Tranche (both plus interest) (the “Outstanding Sum”) became due. No extension for repayment of the 3rd Tranche was sought. YDP failed to effect any repayment.
17. Consequential upon the non‑repayment, MSC by letter dated 18 March 2014 declared an event of default (the “Event of Default”). On the same day, MSC appointed receivers (the “Receivers”) over the shares of YDL and the Property pursuant to the Share Mortgages and Property Mortgage.
18. On 4 June 2014, MSC exercised its rights under the Share Mortgages and caused the removal of Ds as Ordinary Directors of YDL. The Receivers were appointed in their place. Kawai also resigned as the Lender Director.
19. The Outstanding Sum has remained unpaid.
Previous High Court Actions
20. On 16 July 2014, YDL acting under its new directors commenced HCA 1341/2014 (the “1341 Action”) against Ds as its former Ordinary Directors. It sought, amongst others, a mandatory injunction directing Ds to deliver up YDL’s company records or to grant access thereto. An application for an interlocutory injunction to that effect was made.
21. On 18 July 2014, the Mortgagors commenced HCA 1359/2014 (the “1359 Action”) against MSC, the Receivers and EAHK in an attempt to challenge the Event of Default declared, validity of the Receivers’ appointment and the propriety of their acts in seeking to seize control over YDL and WFOE. They sought also an interlocutory injunction to restrain the Receivers from exercising their powers.
22. The hearing for both sets of interlocutory injunctions came before Au‑Yeung J in September 2014 [3]. The case then run by the Mortgagors and Ds, as summarized by her Ladyship in her Ladyship’s Decision of 17 November 2014, went like this:
“ 14. It is alleged that in August 2012, [Smith] (on behalf of MSC) invited YDL to consider obtaining refinancing to prepay the outstanding balance under the FA and MSC’s entitlement under the IRD, which MSC assessed to be US$25m.
15. In about November 2013, MSC increased the total amount payable by YDL to approximately US$97m (being US$50m under the FA + US$47m under the IRD) (collectively “the Settlement Sums”).
16. Whilst Ricky Liu (for YDL) was finding the necessary funding for the Settlement Sums, [Smith] allegedly gave certain assurances to him. Allegedly relying on the same, YDL did not make any payment under the FA in March 2014, or seek extension of time for payment of the 3rd installment.
17. The Mortgagors assert that:
(1) The transactions under the FA and the IRD are unenforceable for contravening section 24 and/or section 25 of the Money Lenders Ordinance, Cap 163 (“MLO”) (“the MLO Point”);
(2) Even if the FA and the IRD were enforceable, MSC was estopped from declaring an Event of Default on 18 March 2014 as a result of the assurances given by MSC (“the Estoppel Point”); and
(3) The Receivers, being agents of the Mortgagors, acted in breach of their duties to the Mortgagors who are parties interested in the equity of redemption in the mortgaged assets (“the Agency Point”).
18. The ex‑directors assert that the Receivers have no basis to seek the injunctions in the 1341 Action.
19. It is the case of the Mortgagors and the ex‑directors that these points form serious issues to be tried.
…
63. According to Ricky Liu, MSC (through Mr Smith) told him (of YDL) that YDL should continue to seek investors to finance a prepayment of the Settlement Sums. MSC would not insist on YDL’s payment of the Outstanding Balance (probably covering both instalments) on its due date and would not declare an Event of Default should YDL delay in repayment under the FA. Mr Smith assured Ricky Liu that “So long as YDL was sincere about repaying the Settlement Sums, and was actively seeking additional finance for such purposes, it was unnecessary for YDL to write to MSC again to extend the relevant due/repayment dates under clause 6.2 of the FA.” (“the Assurance”).”
23. In the end, Au‑Yeung J dismissed the Mortgagors’ application in the 1359 Action for lack of serious issue to be tried. YDL’s application in the 1341 Action was on the other hand largely successful. In dismissing the Mortgagors’ application, Au‑Yeung J observed that:
“ 78. The case on the Assurance was so contradicted by contemporaneous documents (which all pointed one way) and so inherently improbable that it was demurrable on its face.
…
148. Viewed against the contemporaneous documents, the grounds in opposition to MSC’s enforcement actions were but desperate attempts by a debtor to resist an impossible situation. The MLO point, the Estoppel Point and the Agency Point are demurrable on their face. There are no serious issues to be tried to justify an injunction…”
24. Subsequent attempts by the Mortgagors for leave to appeal against those Decisions had been unsuccessful both before Au‑Yeung J and the Court of Appeal.
25. On 8 December 2014, MSC and the Receivers applied to strike out the Statement of Claim and have the 1359 Action dismissed. At the same time, YDL also applied to strike out part of the defence of the defendants in the 1341 Action.
26. By her Decision dated 19 October 2015, Au‑Yeung J granted both strike‑out applications [4]. In allowing both applications, Au‑Yeung J observed at §26 of her Decision that:
“ Assuming that Ricky Liu’s camp had genuinely thought that it had a viable claim when the writ was first filed, having gone through 2 levels of court in the injunction proceedings, it should have known that there was no substance in the 3 Points. Ricky Liu’s camp might have been keen to avoid the consequences of default in repayment rather than harassing the other side. However, had it seriously considered the 3 Decisions [5], it would have known that its causes of action were so manifestly misconceived that they could have no prospect of success: ET Marler Ltd v Robertson. This is particularly so since I have held that the proposed causes on the MLO Point and Agency Point would have been struck out for being frivolous and vexatious (§123 of the Decision) when I refused leave to amend the writ. The resistance to the striking out is thus another “try on” with the same arguments. It is frivolous and an abuse of process.”
27. Subsequent attempts by Ds and the Mortgagors to appeal against those Decisions had again been unsuccessful.
28. On 2 November 2015, YPL and Wonder Earn commenced HCA 2539/2015 (the “2539 Action”) against Smith and EAHK. On 2 December 2015, Smith and EAHK applied for an order that the writ and statement of claim therein be struck out. By his Decision dated 22 May 2017, Deputy High Court Judge Yee allowed the application. In doing so, the learned Deputy Judge ruled that “the present action is frivolous, vexatious and an abuse of process”.
The present Action
29. On 18 December 2015, YDL, under the control of the new directors, commenced the present actions against Ds for breach of director’s duties [6]. In gist, it is YDL’s case, as summarized by Mr Maurellet SC [7] (who together with Mr Ross Li appeared for Kawai) that:
(a) it was the Mortgagors’ and Ds’ case in the 1359 Action that the Mortgagors and WFOE had sufficient funds to discharge the Outstanding Sum, and that YDL and WFOE could have procured the same to discharge the Outstanding Sum for YDL, but for the alleged Assurance by Smith;
(b) The Courts have ruled in the 1359 Action that the alleged Assurance did not exist;
(c) In such circumstances, the failure to procure the Mortgagors and WFOE to repay the Outstanding Sum by YDL constituted a breach of director’s duties by Ds which has caused loss and damage to YDL.
30. On 15 March 2016, Ds took out an application to strike out the Statement of Claim herein and the Action. The hearing of that application came before G Lam J on 23 August 2016. Having heard parties, his Lordship dismissed the application. His Lordship’s Reasons were handed down on 29 August 2016 (the “G Lam J Strikeout Decision”), which I respectfully refer to for the background and the full nature of YDL’s claim herein against Ds.
31. On 20 October 2016, Ds filed their Defence and Counterclaim (“D&C”). Their pleaded defence, as summarized by Ms Linda Chan SC [8] (who together with Mr David Chen appeared for Ds), is that:
(a) YDL was an investment holding company with nominal capital and a small amount of cash. It had no fund of its own;
(b) YDL and WFOE required the Lender Director’s prior specific written consent before it could lawfully incur any Financial Indebtedness. No such consent was given to YDL and WFOE;
(c) The Mortgagors and [D1] were separate and distinct from YDL, their assets were not a source of assets which YDL could have utilized;
(d) MSC did not accept that YDL had any valid ground to extend the repayment date of the 3rd Tranche.
32. On 19 September 2016, Ds issued the TP Notice against Kawai. Whilst they maintain their denial of YDL’s claim, they say that if Ds were liable to YDL as directors in respect of the repayment of the Loans, so should Kawai, as he was also a director at the material times who owed the same duties as Ds did to YDL. Ds pleaded therein that:
(a) Kawai was the Lender Director between 2 October 2013 and 4 June 2014 (§1);
(b) Whilst a director of YDL, Kawa owed YDL the same duties which YDL claimed Ds did [9] (§2);
(c) Kawai knew or ought to have known of certain matters. Amongst various such matters which Ds have pleaded are:
(i) YDL’s paid‑up capital was US$10.00, and that it was necessary for YDL to borrow funds, whether from WFOE, the Mortgagors or from external sources to repay the Loan on 17 March 2014 (§3(a));
(ii) Regulation 13.1(m) of the Articles of Association of YDL and Clause 7.4(f) of the FA (§§3(b) and (c));
(iii) §3(d), that:
“ YDL and WFOE’s respective financial positions (as shown in their financial audited statements and management accounts) as well as their business and operations;”
(iv) requirement of MSC’s consent in respect of various matters, and certain related matters (§§3(e) to (i));
(v) that the Outstanding Sum would be due on 17 March 2014 (§3(j));
(vi) §3(k), that:
“ WFOE had, or was in a position to access the available funds to discharge the Second Tranche of the Loan on 17 March 2014;”
(vii) The 3rd Tranche could have been extended (§3(l));
(d) At §(4), that:
“(4) If, which is denied, [Ds] failed:
(a) to procure WFOE to assess the available cash or obtain finance by way of a non‑recourse factoring agreement or otherwise to enable YDL to discharge the outstanding liabilities under the Loan;
(b) to take steps to procure the Mortgagors to utilize their available resources to discharge the outstanding liabilities under the Loan; and/or
(c) to formally exercise YDL’s right to extend the repayment date for the 3rd Tranche by 6 months pursuant to clause 6.2(a)(iii) of the FA (collectively the “said Steps”).
as pleaded in paragraph 41(3) of the SOC, then [Kawai] also failed to take the said Steps.”
(e) On the above basis, and as summarized by Ms Chan [10]:
“ If (which is denied) the said Steps led to the occurrence of the event of default under the FA on 17 March 2014 and [Ds’] failure to take the said Steps constituted breaches of duties, then Kawai would likewise be in breach of his duties to YDL for his failure:
(a) to take the same Steps (i.e. the Breach of Duty Claim); and/or
(b) to give the requisite specific prior written consent to YDL to enable YDL to raise finance to repay the Outstanding Sum (§5)) (i.e. the Prior Written Consent Claim).”
Applicable legal principles on striking out
33. The applicable legal principles were not in dispute. I remind myself that it is only in plan and obvious cases that the court should exercise its summary power to strike out, that disputed facts should be taken in favour of the party sought to be stuck out, that the court should not decide difficult points of law in striking out proceedings, and that the claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out [11].
The two claims against Kawai
34. As can be seen from §21.3 of Ms Chan’s submissions, she grouped Ds’ third party claim against Kawai under two headings: (1) the Breach of Duty Claim, and (2) the Prior Written Consent Claim. I will consider them in turn.
The Breach of Duty Claim
35. There are two limbs to the Breach of Duty Claim:
(a) alleged failure to procure WFOE to assess its available cash and obtain finance to enable YDL to discharge the outstanding liabilities under the Loan (the “WFOE Limb”); and
(b) alleged failure to take steps to procure the Mortgagors to utilize their available resources to discharge the outstanding liabilities under the Loan (the “Mortgagors Limb”).
I look at the two limbs separately.
The Breach of Duty Claim — the WFOE Limb
36. The most important plank of the WFOE Limb is that “WFOE had, or was in a position to access the available funds to discharge the 2nd Tranche of the Loan on 17 March 2014”, and that Kawai knew or ought to have known that [12].
37. In the 1359 Action, D1 had filed a number of affirmations. In his 3rd one (dated 18 August 2014, “D1/1359#3”), at §5 [13], he said:
“ I refer to paragraph 13(2)(c) of my 2nd Affirmation, where I stated that WFOE had sufficient assets to enable YDL to make a repayment in March 2014. I have now obtained the following documents to substantiate this point.
(1) …WFOE maintains several accounts with BOC in the PRC. It can be seen that in account number 726360331719, which is a saving deposit account, there was over RMB103 million as of 21 March 2014;
(2) …it can be seen that as of 15 March 2014, WFOE had receivables in excess of RMB129 million from the sale of flats in the Riviera Project. WFOE could have easily obtained financing (e.g. by way of a factoring agreement) to enable YDL to discharge its outstanding liabilities under the FA in March 2014.
…”
38. D1 subsequently admitted that what he said therein in respect of the alleged deposit of RMB103 million with BOC “was an inadvertent mistake”, and that it could not have been used for repayment of the Loan:
(a) In D1/#6, he said at §5 [14] that
“ I also confirm that the RMB103 million deposited with BOC…was used as a security deposit, and could not have been withdrawn by WFOE at the time in March 2014. I overlooked this point when I made my 3rd Affirmation in [the 1359 Action]. It was an inadvertent mistake on my part in 3rd Affirmation in [the 1359 Action]. In my 6th Affirmation dated 14 January 2015 in the said 1359 Action, I did not refer to the RMB103 million deposit with the BOC again as an available source to repay the [Outstanding Sum].”
(b) Further details on that RMB103 million deposit were provided by D2. Having made reference to what D1 had alleged in respect of that deposit, D2 said at §30 of D2/#2 [15] that:
“ That is not entirely correct. As pointed out by Matthew Puhar (the solicitor acting for MSC and Elliott Advisors) in his 2nd Affirmation dated 21 August 2014…the RMB103 million deposit maintained with BOC…had been used as a security deposit for a loan made by BOC…in Hong Kong to YDL under a process known as ‘內保外貸’…This security deposit could not be withdrawn until YDL had discharged its offshore bank loan owed to BOC…and, therefore, could not be utilized by WFOE to assist YDL to repay the [Outstanding Sum]…”
(c) In D3/#2, at §4 [16], D3 confirmed that the RMB103 million was used as a security deposit and could not be withdrawn or used by WFOE or YDL at the time in March 2014.
39. What D1 said in D1/1359#3 in respect of “the receivables of WFOE in excess of RMB129 million” were also not accurate given (1) the fact that they were only “receivables” and (2) the restrictions under Clause 7.4(f) of the FA. At §§31, 32 and 37 of D2/#2 [17], D2 said that:
“ 31. …WFOE only had about RMB129 million in receivables with which it could have, subject to compliance with the prevailing relevant government rules and regulations, obtained finance by way of a factoring agreement. However:
(1) First, the receivables were not cash available to WFOE’s use.
(2) Second, the receivables could not readily be converted into a loan, let alone dollar for dollar. In general, the loan amount under a factoring agreement would be less than the amount of receivables, assuming WFOE were able to find a lender which was willing to accept the receivables as security for the loan. The amount of discount depends on a number a factors… As a result, lending banks normally applied a substantial discount on factor financing so that the loan funds ranged from only about 35% to 75% of the receivables. In the PRC real estate industry, the normal discount was about 25% to 50% of the receivables. Thus, WFOE’s RMB129 million in receivables would only have generated between RMB65 million and RMB97 million in loan proceeds.
32. More importantly, the loan proceeds from factoring the receivables could not, in any event, be used to repay the [Outstanding Sum]. Under clause 7.4(f) of the FA, YDL is prohibited from repaying any part of the Loan ‘with proceeds obtained by it, or any member of the Group or any Obligor pursuant to the incurrence of any Financial Indebtedness’. ‘Financial Indebtedness’ is defined in the FA to include ‘receivables sold or discounted’.
…
37. To summarize, YDL would not be able to establish causation between [Ds’] alleged breaches of directors’ duties (which are denied) and YDL’s alleged loss (which is denied) because:
(1) WFOE’s deposit of RMB103 million with BOC could not be utilized to assist YDL to repay the [Outstanding Sum].
(2) WFOE’s receivables of RMB129 million would generate, at most, RMB97 million in loan proceeds…WFOE/YDL, however, could not have used such proceeds to repay the [Outstanding Sum] by reason of the prohibition under clause 7.4(f) of the FA.
(3) Even taking into account the Mortgagors’ assets, YDL did not have sufficient resources to repay the 2nd Tranche…together with interest…, let alone the full [Outstanding Sum] of over US$50 million…”
40. In the light of the evidence, Ms Chan accepted [18] that “Taking Kawai’s submission on this issue to its highest, TP Notice §(3)(k) ought to be struck out ”. She however went on to suggest that “It does not affect the other parts of the TP Notice, in particular §§(4)‑(6)”.
41. Given the evidence, I accept Mr Maurellet’s submissions[19] that Ds’ plea in the TP Notice at §(3)(k) that “WFOE had, or was in a position to access the available funds” to discharge the Outstanding Sum is contradicted by Ds’ latest evidence, that such plea is therefore frivolous and vexatious, and is liable to be stuck out. I add that I also accept Mr Maurellet’s submission that it was disingenuous of D1 to proceed to plead §3(k) of the TP Notice (dated 19 September 2016) despite having had notice of his “inadvertent mistake” by the time he filed his 6th Affirmation in the 1359 Action on 14 January 2015.
42. I order §3(k) of the TP Notice to be struck out.
43. In this regard, I do not accept that the other parts of the TP Notice were not affected. In my view, §(4)(a) of the TP was also affected, and is equally liable to be struck out. I so order.
The Breach of Duty Claim — the Mortgagors Limb
44. The focus of the concern here is the absence of any knowledge on the part of Kawai of the affairs of the Mortgagors. He held no office with any of the Mortgagors. At §§71 to 74 of Kawai/#1, Kawai said:
“ 71. I note that one of the complaints against me was that I failed to take steps to procure the Mortgagors to utilize their available resources to discharge the Loan. This complaint is totally absurd.
72. Unlike [D1], who is the ultimate beneficial owner of the Mortgagors, I have no relationship to any of them. I have never held any offices in any of the Mortgagors. As such, I have no control over the Mortgagors and could not have procured them to discharge the Loan for YDL.
73. Further, as I know nothing about the operations or financial status of the Mortgagors, I could not have ascertained if the Mortgagors were capable of repaying the Loan. Indeed, given that I had always been led to believe by [D1] that the Loan would be repaid, it simply did not occur to me that I should make enquiries of the Mortgagors’ ability and willingness to provide funds.
74. Even from a common sense perspective, I could not have owed YDL a duty to procure the Mortgagors to repay the Loan.”
45. In this regard, I accept Mr Maurellet’s submissions [20] that there is neither any plea in the TP Notice, nor any evidence adduced by Ds to suggest that Kawai had knowledge that the Mortgagors had funds available for repaying the Outstanding Sum.
46. In response, Ms Chan [21] highlighted what she submitted to be the absurdity of YDL’s suggestion that Ds should have procured the Mortgagors and D1 to use their personal assets to discharge the Outstanding Sum. She also stressed that the Mortgagors and D1 were separate and distinct entitles who had no obligation to repay the Outstanding Sum or any part thereof for YDL. None of those can however counter the problems relating to Kawai’s knowledge which I have identified above.
47. For the reasons above, I accept Mr Maurellet’s submissions that this Limb of the Breach of Duty Claim is also liable to be struck out, and I so order.
The Prior Written Consent Claim
48. In respect of the Prior Written Consent Claim, there is no dispute between the parties that:
(a) Kawai’s power to vote was limited by Clause 3.9 of the IRA and Regulation 9.8 of the Articles of Association of YDL;
(b) the consent of Kawai as the Lender Director of YDL was required before YDL and WFOE could incur Financial Indebtedness to repay the Outstanding Sum; and
(c) Not such consent from Kawai had ever been sought.
49. In respect of the absence of any request from Kawai for such consent, G Lam J observed at §§24‑25 of the G Lam J Strikeout Decision found and observed that:
“ 24. It is common ground that the prior written consent of MSC and the Lender Director was required by the two documents, and that neither had given such consent in relation to the outstanding balance of the loan as at 17 March 2014. But that is not to the point. In my view the crucial matter is whether such consent would have been refused had it been requested, so that it could be said that it would have been pointless for the directors of YDL to try to secure financing to discharge the outstanding liabilities, and that the failure to do so could not in any way be said to have caused the occurrence of the event of default.
25. The evidence suggests that there had been no actual request to MSC at the relevant time for the requisite consent for YDL or WFOE to incur Financial Indebtedness to repay the second and third tranches of the loan. For the purpose of repaying the first tranche of the loan in April 2013, YDL had obtained a loan from Bank of China, which was unanimously approved by the then board of directors of YDL, including the MSC‑appointed Lender Director at the time. Further, the evidence filed by YDL for this application is that MSC was, at all material times, willing to be commercial and cooperative in its dealing with YDL. There is in my view nothing in the evidence sufficient to establish a plain and obvious case that MSC would in any event not have given its consent for Financial Indebtedness to be incurred by the relevant entities for the purposes of repaying the second and third tranches.”
50. To address the absence of any request for any consent from Kawai, Ms Chan put forward a case of breach of duties on the part of Kawai by failure to actively give such consent. She submitted that given (1) the matters which Kawai was alleged by Ds to have knowledge of, and (2) Kawai’s duties owed to YDL, including his duty to act in the best interests of YDL and to act with reasonable care, skill and diligence:
“ 50. …it is at least arguable that Kawai ought to have given such consent to YDL, with or without [Ms Chan’s own emphasis] any requests from [Ds]. Kawai’s consent (if given) would have enabled YDL and WFOE to obtain or incur Financial Indebtedness to repay the Outstanding Sum, thereby avoiding the event of default under the FA.
51. Consequently, it is at least arguable that Kawai’s failure to give consent to YDL to incur Financial Indebtedness constitutes a breach of his director’s duties owned to YDL.
52. Again, whether the scope of Kawai’s director’s duty required him to actively give such consent, and whether Kawai was in breach of such duty, are fact sensitive issues which cannot be determined in a strike-out application.” [Ms Chan’s own emphasis]
51. As submitted by Mr Maurellet [22], it was not just that no consent has been sought from Kawai. No refinancing proposal had been put forward to him for his approval. At §40(d) of Kawai/#1, he said that:
“ For completeness, YDL never sought any consent from me or MSC for any proposed debt financing arrangement involving a third party. To the extent that any of the defendants wishes to contend otherwise, they will no doubt need to provide proper evidence of that request.” [Kawai’s original emphasis]
52. The contemporaneous documents in fact suggest that it was Kawai who had been pressing for information on any plan to repay the Loan. As summarized by him at §60 of Kawai/#1:
“ In the premises, I have all along had very limited proper knowledge of YDL, or the WFOE’s financial status. As the Maturity Date was approaching, I asked the other board members about the financial position of YDL and the WFOE and the latest plan for repaying the Outstanding Amount but was again denied such information. There is now produced and shown to me marked “HK‑1…” copies of my emails from 18 February 2014 to 7 March 2014 to inter alios [D3] before and after the YDL and WFOE board meetings on 4 March 2014:
(a) In my email dated 18 February 2014, I specifically requested the following items to be added to the agenda for the YDL board meeting:
“ 1. The current and forecast financial positions of YDL and the WFOE, including the current cash levels and borrowings.
2. What is the latest plan for YDL to pay the amounts which will shortly be payable to [MSC] under the loan agreement, and what needs to be done before YDL is in a position to meet its payment obligations.”
(b) In her email reply dated 25 February 2014, [D3] simply said that since the Borrower is YDL, the WFOE directors do not consider it appropriate to discuss the subject of repayment at the upcoming WFOE board meeting.
(c) It is clear from the above exchanges that, as of 18 February 2014, I was pushing the other board members to provide me with information about the forthcoming payments due to MSC on the Maturity Date.
(d) After the board meeting on 4 March 2014, I sent further emails to [D3] complaining about the low level of information being provided to me on 5 March 2014…and 7 March 2014…In the latter email I stated that, “Even at this late stage, with payment due on 17 March, I have no clarity as to how YDL is going to be able to make the single largest payment which it has had to make in its recent history…” ”
53. No authority has been submitted to me in support of the proposition that a director in the position which Kawai was in was obliged to actively give his consent under the terms of the IRD and Articles of Association of YDL. I would in fact be surprised if there were any such authority. No refinancing proposal had been put forward to Kawai. Any consent that Ds argue Kawai ought to have given would if given, have been given in a vacuum. The existence of such a duty, or any attempt to give consent in such circumstances, makes no commercial sense to me. It would indeed have been wrong in my view for any Lender Director to have given such consent in such a vacuum.
54. I note also that it is not Ds’ pleaded case against Kawai that the reason why no refinancing proposal had been put forward was because of the failure on the part of Kawai to give any active consent, that the absence of such active consent had prevented YDL from initiating and pursuing any refinancing proposal, and that had such active consent been given, they would have pursued such a course, that one would have been reached, and that the Event of Default could have been avoided.
55. In my view, the Prior Written Consent Claim now sought to be put forward by Ds is frivolous and vexatious, obviously unsustainable, unarguably bad, and is impossible to succeed.
56. For the above reasons, I also strike out the parts of the TP Notice which seek to put forward the Prior Written Consent Claim.
Disposition
57. For the reasons set out above, I allow Kawai’s Summons, order the TP Notice be struck out, and the Action against Kawai be dismissed.
58. I make a costs order nisi that Ds should bear the costs of the Summons. Any party who seeks any variation or summary assessment should lodge their submissions within 14 days from the date hereof, response within 14 days upon receipt, and reply within 7 days thereafter.
| (Keith Yeung) | |
| Judge of the Court of First Instance | |
| High Court |
Linklaters, for the Plaintiff, attendance excused
Ms Linda Chan, leading Mr David Chen, instructed by Li, Wong, Lam & W I Cheung, for the 1st to 3rd Defendants
Mr José-Antonio Maurellet SC, leading Mr Ross Li, instructed by Akin Gump Strauss Hauer & Feld, for the Third Party
[1] D1 had previously filed 4 affirmations in this Action, but in relation to matters this Court is not directly concerned with.
[2] And Regulation 9.8 of the Articles of Association of YDL was to the same effect.
[3] See the Decision of Au-Yeung J dated 17 November 2014.
[4] See the Decision of Au-Yeung J dated 19 October 2015.
[5] i.e. the Decision of Au-Yeung J dated 17 November 2014, and the 2 subsequent Decisions of her Ladyship and the Court of Appeal refusing leave to appeal.
[6] The Writ and Statement of Claim were first filed on 18 December 2015, and subsequently amended and refiled on 22 September 2016 (the “ASoC”).
[7] At §6 of his written submissions.
[8] At §20 of her written submissions.
[9] As pleaded by YDL at §40 of the ASoC, namely duty to act in the best interest of YDL, and duty to exercise reasonable care, skill and diligence.
[10] At §21.3 of his written submissions.
[11] See Hong Kong Civil Procedure 2019, §18/19/4.
[12] §3(k) of the TP Notice.
[13] [B6/1395].
[14] [B1/264].
[15] [B1/273].
[16] [B1/279].
[17] [B1/273-275].
[18] At §42.7 of her written submissions.
[19] At §24.
[20] At §27 of his written submissions.
[21] At §43.2 of her written submissions.
[22] §17 of his written submissions.