YIFUNG DEVELOPMENTS LTD v. LIU CHI KEUNG RICKY AND OTHERS

CACV 476 /2019

[2021] HKCA 1641

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 476 OF 2019

(ON APPEAL FROM HCA NO 3020 OF 2015)

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J U D G M E N T

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Hon Kwan VP (giving the Judgment of the Court):

1.  On 10 September 2019, K Yeung J handed down his decision (“the Decision”) in which he ordered the third party notice to be struck out and the action against the third party be dismissed. This is the defendants’ appeal.

Background

2.  The relevant background matters were set out in the Decision at §§1 to 32 and may be stated as follows.

3.  The main action (HCA 3030/2015; “the 3020 Action”) arose out of a loan of US$39 million (“the Loan”) advanced by Manchester Securities Corp (“MSC”) to Yifung Developments Ltd (“YDL”).

4.  MSC and an affiliated entity Elliott Advisors (HK) Limited (“EAHK”) were part of an international investment group. James Smith (“Smith”) was the managing director of EAHK and Hidemoto Kawai (“Kawai”; the third party in the third party action) was an employee of EAHK.

5.  YDL established a subsidiary, Yangjiang Fungyi Properties Limited, in the Mainland as a wholly foreign-owned enterprise (“WFOE”). WFOE was the developer of a real estate project in Yangjiang City, Guangdong Province.  The shares in YDL were held by Wonder Earn Group Limited (“WEG”) as to 40% and by Yifung Properties Ltd (“YPL”) as to 60%. Capital Metro Group Ltd (“Capital Metro”) was the owner of a commercial property in Hong Kong.  WEG, YPL and Capital Metro were wholly owned by Able Mind Investments Ltd (“Able Mind”) and the sole owner of Able Mind was Ricky Liu Chi Keung, the 1^st defendant herein (“D1”).

6.  On 10 September 2010, the facility agreement (“the FA”) in respect of the Loan was executed by MSC as the lender, YDL as the borrower and obligor, Able Mind, YPL and WEG as the obligors and D1 as the sponsor. On the same day, YPL and WEG executed two equitable mortgages over their shares in YDL as security for the Loan.  On 1 November 2010, Capital Metro, YDL and MSC executed a land charge by which Capital Metro mortgaged its property in Hong Kong to MSC as further security for the Loan.  WEG, YPL and Capital Metro are referred to in this judgment collectively as “the Mortgagors”.

7.  Also on 10 September 2010, the parties to the FA as well as WFOE executed the Investor Rights Deed (“the IRD”), which regulated the affairs of YDL and WFOE and provided MSC with the rights to receive a “profit-linked bonus” out of YDL’s available profits.  Clause 3.2 gave MSC the right to require the appointment of one director to each of YDL and WFOE (“the Lender Director”).  Clause 4.1 provided that save with the prior specific written consent of the Lender Director, each of YDL and WFOE shall not undertake any of the matters specified in the “Restricted Matters” in Schedule 4.  One of the “Restricted Matters” was “incurrence of any Financial Indebtedness, other than Permitted Financial Indebtedness”.

8.  Until MSC exercised its right under the share mortgages on 4 June 2014 to remove the directors, the directors of YDL were D1, the 2^nd and the 3^rd defendants herein (“D2”, “D3”). D1 and D2 were two of the directors of WFOE until their removal in June 2014.

9.  Kawai was appointed by MSC as the Lender Director of YDL and of WFOE on 2 October 2013, in place of the former Lender Director.  He resigned on 4 June 2014.

10.  Under the FA, the Loan was to be repaid in three tranches. The 1^st tranche of US$10 million was payable on 15 September 2012, the 2^nd and 3^rd tranches of US$14.5 million each was payable on 15 September 2013 and 17 March 2014^[1] respectively.  The FA provided in clause 6.2 that YDL may give notice to extend the repayment date by six months, on the ground that a change in the law, governmental policy or regulation on the Mainland had occurred which would in the opinion of YDL or WFOE impact on the business of the group and the ability of YDL to meet its payment obligations.

11.  YDL gave notice under this provision to extend the repayment date of the 1^st tranche to 15 March 2013.  The 1^st tranche was repaid with interest on 2 April 2013.

12.  YDL also gave notice to extend the repayment date of the 2^nd tranche to 17 March 2014. On that day, both the 2^nd and 3^rd tranches fell due. The total outstanding amount of US$50.13 million (US$29 million in principal plus interest of US$21.13 million; “the Outstanding Sum”) was not paid and has remained unpaid.

13.  On 18 March 2014, MSC declared an event of default under the FA and appointed receivers over the shares in YDL and the property held by Capital Metro.  On 4 June 2014, MSC exercised its rights under the share mortgages and removed D1, D2 and D3 as directors of YDL.  The receivers were appointed in their place.  YDL under the control of the receivers took steps on 5 June 2014 as the shareholder of WFOE to remove and replace the directors and the legal person’s representative of WFOE.

14.  A number of actions in the High Court have arisen as a result. Two of them are relevant. 

15.  On 16 July 2014, YDL acting under its new directors issued the writ in HCA 1341/2014 (“the 1341 Action”) against D1, D2 and D3 seeking among other things an order requiring them to deliver up YDL’s books and records and a declaration that the defendants had no right to hold themselves out as directors of YDL.

16.  On 18 July 2014, the Mortgagors issued the writ in HCA 1359/2014 (“the 1359 Action”) against MSC, EAHK and the receivers seeking among other things a declaration that there was no event of default under the FA and a declaration that MSC’s appointment of receivers over the shares in YDL was invalid.  One of the main contentions of the Mortgagors was that MSC was estopped from enforcing its strict legal rights under the loan and security documentation because of a verbal assurance given by Smith to D1 that so long as YDL was sincere about paying MSC the settlement sums (ie the profit-linked bonus and the outstanding balance under the FA) and was actively seeking new sources of finance for such purposes, it was unnecessary for YDL to write to MSC to seek an extension of the repayment dates under the FA (“the Assurance”).

17.  Interlocutory injunctions were sought by YDL in the 1341 Action and by the Mortgagors in the 1359 Action.  They were heard by Au-Yeung J who handed down her decision on 17 November 2014.  Au-Yeung J dismissed the Mortgagors’ application for lack of serious issue to be tried and granted the injunctions sought by YDL against D1, D2 and D3^[2].

18.  In December 2014, the defendants in the 1359 Action applied to strike out the writ and statement of claim in that action and YDL applied to strike out parts of the defence of D1, D2 and D3 in the 1341 Action, as being unarguable in light of the decision of 17 November 2014.  Both applications for striking out were dealt with by Au-Yeung J who handed down her decision on 19 October 2015.  She granted both striking out applications^[3].

19.  The writ of the present action (the 3020 Action) was issued by YDL on 18 December 2015 with a statement of claim.  The defendants filed a summons on 15 March 2016 to strike out the claim in this action on the grounds that the claim is frivolous and vexatious, the action constituted a Henderson v Henderson^[4] type of abuse of process and issue estoppel. The application was dismissed by G Lam J (as he then was) on 23 August 2016.  In dismissing the ground of issue estoppel, G Lam J said in his reasons for decision on 29 August 2016:

“52. It may perhaps be said that by her Injunction Decision and her Strike-out Decision, Au-Yeung J had decided that the alleged assurance did not exist and was not given, and that [D1] did not rely on it. But her Ladyship certainly did not expressly decide, and no fair reading of her decisions can suggest that she necessarily by implication decided, that either (i) WFOE or the Mortgagors had no accessible resources at the time that could have been used to help YDL discharge its liabilities under the loan, or (ii) if requested, MSC would not have given consent for YDL or any other relevant entities to incur Financial Indebtedness for that purpose. …

53. Accordingly, I had no hesitation in rejecting the contention stated in [D1’s] affirmation in support of the present application that Au-Yeung J had “effectively rejected the contention that WFOE had sufficient resources to enable YDL to discharge its then-existing liabilities”. ”

20.  On 19 September 2016, the defendants in the 3020 Action issued the third party notice against Kawai.  On 15 December 2016, Kawai filed a defence to the third party notice.  The defendants filed a reply to the third party defence on 9 February 2017.

21.  On 29 June 2017, Kawai filed the present summons to strike out the third party notice under Order 18 rule 19(1) of the Rules of the High Court and the inherent jurisdiction of the court.

22.  On 27 March 2018, the defendants in the 3020 Action issued a second application to strike out the claim in this action on the grounds that the claim was bound to fail because there was no causation between the defendants’ breaches of duty and YDL’s loss and for circuity of action in that YDL was obliged under the articles of association to indemnify the defendants of their liabilities in this action.  This application was dismissed by the decision of Deputy High Court Judge Field on 22 February 2019.

23.  As the defendants have failed twice to strike out the 3020 Action, the claim of YDL in this action would have to be tried.

YDL’s claim in the 3020 Action

24.  It is important to note how YDL’s case against the defendants was pleaded in the amended statement of claim.

25.  In §37 it was pleaded that “It is the Mortgagors’ pleaded case and [D1’s] evidence in the 1359 Action” that:

(1) Smith gave the Assurance to D1.

(2)     As of 15 March 2014, WFOE had receivables in excess of RMB 129 million from the sale of flats.  But for the Assurance, YDL and WFOE could and would have utilised the WFOE receivables to obtain finance by way of a non-recourse factoring agreement to enable YDL to discharge its outstanding liabilities under the FA in March 2014.

(3) WFOE maintained several bank accounts with Bank of China (“BOC”) with a balance of over RMB 103 million in March 2014, as well as funds in other bank accounts aggregating several millions in RMB.  YDL and WFOE could and would have utilised those funds to enable YDL to discharge its outstanding liabilities under the FA in March 2014.

(4) Capital Metro had funds in its bank account of HK$26 million which could have been used to discharge part of YDL’s outstanding liabilities under the FA in March 2014.

(5) D1 could have used his own assets, in particular, funds held in his bank account in the order of “at least eight figures” to enable YPL or WEG to discharge part of YDL’s indebtedness under the FA.

(6) YDL had the contractual right in clause 6.2 of the FA to extend time for payment of the 3^rd tranche.  But for the Assurance, YDL could and would have exercised that right to extend time for repayment of US$14.5 million for six months, leaving only the 2^nd tranche due and payable in March 2014.

(7) But for the Assurance, it would have been open to the Mortgagors to discharge, and in fact the Mortgagors would have discharged, YDL’s liabilities under the FA to avoid the occurrence of an event of default.

(8) Instead, in reliance on the Assurance, YDL inter alia (a) did not make or attempt to make any repayment under the FA by 17 March 2014, and (b) did not give notice to MSC to extend the repayment date of the 3^rd tranche by six months.

(9) MSC was therefore estopped from declaring an event of default on 17 March 2014.

26.  The amended statement of claim went on to plead in §41:

“41. The Defendants were and are jointly and severally in breach of the aforesaid duties [to act in the best interests of YDL and exercise reasonable care and diligence] in that:

(1) In or around March 2014 and at all material times, each of the Defendants knew or ought to have known that:-

(a) the outstanding balance of the Loan would be due on 17 March 2014 …;

(b) YDL and the WFOE had the funds, assets and ability to raise finance as hereinbefore pleaded [i.e. §37] which would have enabled YDL to discharge the Loan fully or in part;

(c) Capital Metro’s funds as hereinbefore pleaded [i.e. §37] were available to YDL and YDL could have accessed those funds to enable YDL to discharge the Loan fully or in part;

(d) [D1] was able and willing to discharge the Loan fully or in part with his own personal assets or assets under his control, and thus, inter alia, [D1’s] funds as hereinbefore pleaded [i.e. §37] were available, directly or indirectly, to YDL and YDL could have accessed those funds to enable YDL to discharge the Loan fully or in part;

(e) further or alternatively, the Mortgagors were able to discharge the Loan on YDL’s behalf; and

(f) the time for repayment of the 3^rd Tranche could have been extended by exercise of YDL’s contractual right;

(2) Further, they knew or ought to have known that Mr Smith had never made the Alleged Assurance; or had otherwise failed to clarify with Mr Smith as to the existence of the same.

(3) In the premises, the Defendants failed to take the following steps or cause YDL to do so:-

(a) procure that the WFOE access its funds as hereinbefore pleaded [i.e. §37] and obtain by way of a non‑recourse factoring agreement or otherwise to enable YDL to discharge the outstanding liabilities under the Loan;

(b) access and/or take all necessary or reasonable steps to access Capital Metro’s funds as hereinbefore pleaded [i.e. §37] which were available to YDL to discharge the outstanding liabilities under the Loan;

(c) access and/or take all necessary steps to procure [D1] to utilise his personal assets and assets under his control which were available to YDL to discharge the outstanding liabilities under the Loan;

(d) take all necessary or reasonable steps to procure the Mortgagors to utilise the available resources to discharge the outstanding liabilities under the Loan; and/or

(e) formally exercise YDL’s right to extend the repayment date for the 3^rd Tranche by 6 months pursuant to clause 6.2 (a) (iii) of the FA.

(4) Such failures led to the occurrence of an Event of Default under the FA on 17 March 2014.”

The defendants’ defence in the 3020 Action and the third party notice

27.  In summary, the defendants pleaded in the amended defence that:

(1) YDL was an investment holding company with nominal capital and a small amount of cash.  It had no funds of its own.

(2) 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.

(3) The Mortgagors and D1 were separate and distinct from YDL, their assets were not a source of assets which YDL could have utilised.

(4) MSC did not accept that YDL had any valid ground to extend the repayment date of the 3^rd tranche.

28.  In the third party notice, the defendants claimed against Kawai to be indemnified against YDL’s claim in the 3020 Action or contribution of 100% or such extent as may be just and equitable on these grounds:

(1) Kawai was the Lender Director of YDL between 2 October 2013 and 4 June 2014.

(2) As the Lender Director, Kawai owed fiduciary and other duties to YDL, including but not limited to the duties pleaded in the amended statement of claim as regards each of the defendants.

(3) Kawai knew or ought to have known the following matters:

(a) YDL’s paid-up capital was US$10 and that it was necessary for YDL to borrow funds, whether from WFOE, the Mortgagors or external sources to repay the Loan on 17 March 2014.

(b) and (c)   Regulation 13.1(m) of the articles of association of YDL (which prohibited YDL from incurring any Financial Indebtedness without the prior written consent of the Lender Director) and clause 7.4(f) of the FA (which prohibited YDL and the Mortgagors to incur any Financial Indebtedness).

(d) YDL and WFOE’s respective financial positions as shown in their financial audited statements and management accounts, as well as their business and operations.

(e) and (f)    The consent of MSC and Kawai’s prior written consent were required for YDL to obtain financing to pay the Outstanding Sum on 17 March 2014, and for YDL and the Mortgagors to obtain financing to pay the amount required by MSC to terminate the IRD.

(g) to (i)     Kawai was the only director authorised by the articles of association to provide the necessary prior written consent. MSC had since August 2013 made clear that its consent was required to obtain financing to repay the Loan and would require an additional US$25 million to give consent to YDL. MSC all along insisted its consent was required before YDL could incur any Financial Indebtedness.

(j) The Outstanding Sum would be due on 17 March 2014.

(k) “WFOE had, or was in a position to access the available funds to discharge the Second Tranche of the Loan on 17 March 2014”. (§(3)(k))

(l) The 3rd tranche could have been extended for six months.

(4) “If, which is denied, the Defendants 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 3^rd 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 [amended statement of claim], then [Kawai] also failed to take the said Steps.” (§(4))

29.  On the above basis, if, which is denied, the Said Steps led to the occurrence of the event of default on 17 March 2014 and the defendants’ failure to take the said Steps constituted breaches of duties, it was pleaded in §(5) of the third party notice that Kawai was also in breach of his duties to YDL for his failure:

(a) to take the same Steps (“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 (“the Prior Written Consent Claim”).

The Decision

30.  As the judge had summarised, there are two limbs to the Breach of Duty Claim:

(1)  alleged failure to procure WFOE to access its available cash and obtain finance to enable YDL to discharge the outstanding liabilities under the Loan (“the WFOE Limb”); and

(2)  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”).

31.  The judge held that the third party proceedings should be struck out on these bases:

(1) the WFOE Limb is contradicted by the latest evidence of the defendants and is therefore frivolous and vexatious;

(2) as for the Mortgagors Limb, there is no plea or evidence to suggest that Kawai had knowledge that the Mortgagors had funds available to repay the Outstanding Sum; and

(3) for the Prior Written Consent Claim, no consent had ever been sought from Kawai, and there was no duty on Kawai to actively give his consent.

32.  Mr Bernard Man, SC, who appeared for the defendants on appeal^[5], took issue with all three bases.

Breach of Duty Claim – the WFOE Limb

33.  The judge first decided to strike out §(3)(k). He took account of the following evidence:

(1) D1’s evidence filed in August 2014 in the 1359 Action that:

(a) “WFOE maintains several accounts with BOC in the PRC.  It can be seen that in … a saving deposit account, there was over RMB103 million as of 21 March 2014”;

(b) “as of 15 March 2014, WFOE had receivables in excess of RMB 129 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.”

(2) The subsequent evidence of the defendants filed in March 2018 in the 3020 Action in support of their second application to strike out the claim:

(a) D1 said:

“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 3^rd Affirmation in [the 1359 Action]. It was an inadvertent mistake on my part in 3^rd Affirmation in [the 1359 Action]. In my 6^th 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) D2 said:

“That is not entirely correct. … 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) D3 also 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.

34.  The judge also noted that what D1 said in his affirmation filed in August 2014 in the 1359 Action in respect of “the receivables of WFOE in excess of RMB 129 million” was not accurate, in light of the subsequent affirmation of D2 filed in March 2018 in the 3020 Action which stated as follows:

“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 2^nd Tranche…together with interest…, let alone the full [Outstanding Sum] of over US$50 million…”

35.  The judge noted the submission of the defendants’ former counsel that “Taking Kawai’s submission on this issue to its highest, TP Notice §(3)(k) ought to be struck out”, although she went on to submit that “It does not affect the other parts of the TP Notice, in particular §§(4) to (6)”.  He accepted the submissions of Mr Maurellet, SC, who appeared for Kawai throughout^[6], that the defendants’ plea at §(3)(k) that “WFOE had, or was in a position to access the available funds” to discharge the Outstanding Sum is contradicted by the defendants’ latest evidence, and that such plea is therefore frivolous and vexatious, and liable to be stuck out^[7]. He rejected the submission of the defendants that the other parts of the third party notice were not affected and took the view that §(4)(a) was also affected and equally liable to be struck out^[8].

36.  Mr Man submitted on appeal that the judge is plainly wrong in doing so as his holding is wrong in law.  The defendants’ claim against Kawai in the third party notice is premised on YDL’s case against the defendants in the main action being accepted at the trial, and the defendants’ case and evidence being rejected.  If the defendants’ case and evidence are accepted at trial, the main action would be dismissed and the defendants’ claim for an indemnity or contribution against Kawai in the third party notice would become academic.  The fact that the third party notice is contradicted by the defendants’ evidence filed in support of their application to strike out the claim in the main action is entirely irrelevant and should not, as a matter of principle, have been taken into account.

37.  We think that must be right.

38.  Mr Maurellet argued on appeal that it is not permissible for the defendants to make “positive assertions” about (1) the available financial resources of WFOE as a matter of fact and YDL’s right to seek extension of repayment of the 3^rd tranche and (2) Kawai’s actual knowledge of the matters in (1), because these positive factual assertions which underpin the defendants’ case against Kawai are at odds with the defendants’ contention which is premised entirely on YDL’s evidence being accepted by the court.

39.  We do not agree with him.

40.  The confusion in this instance probably arose on account of YDL adopting as part of its case in the main action the Mortgagors’ pleaded case and D1’s evidence in the 1359 Action (§§37 and 41 of the amended statement of claim) and the defendants have subsequently resiled from such evidence alleging an “inadvertent mistake”.  The defendants are at liberty to rely on their new position as part of their defence to the claim in the main action, even though this has contradicted their earlier stance in the 1359 Action.  They are also entitled to bring third party proceedings premised on YDL’s case in the main action being accepted at the trial, which happened to be the case and evidence they have resiled from.  The cases cited by Mr Maurellet that a party may not be permitted to make inconsistent alternative pleas in a pleading in certain circumstances^[9] have no application to the situation of third party proceedings.

41.  Nor do we think the defendants’ former counsel had made any concession that §(3)(k) of the third party notice ought to be struck out, when that part of her submission is read in context and as a whole, albeit that she could have made her position clearer to avoid any possible misunderstanding.  She did make clear there is no contradiction or inconsistency in the defendants’ submission and evidence in the context of the third party proceedings, as this is premised on the defendants’ case in the main action not being accepted by the court, and hence they pleaded in the third party proceedings that if they were held liable to YDL, Kawai should be held liable as well.

42.  The judge is wrong in law to hold that §§(3)(k) and (4)(a) of the third party notice should be struck out on the ground that these pleas are contradicted by the defendants’ latest evidence.  He is also wrong to strike out the other parts of the third party notice as a result.  As pointed out by Mr Man, §§(4) and (5) of the third party notice are prefaced by the words “If, which is denied”, making it clear that the assertions in those paragraphs are made on the premise that the defences in the main action have failed.  There is no impermissible inconsistency in this situation.

43.  Mr Man also argued that the WFOE Limb should not be struck out as there is an arguable case against Kawai on the facts.  In light of our above conclusion, it is not necessary to deal with this or another ground that §(3)(k) was concerned only with the 2^nd tranche and not the Outstanding Sum.  Besides, these grounds were not the judge’s basis for striking out the WFOE Limb.

Breach of Duty Claim – the Mortgagors Limb

44.  The judge struck out the Mortgagors Limb on the sole basis that there is neither any plea in the third party notice nor any evidence adduced by the defendants that Kawai had knowledge that the Mortgagors had funds available for repaying the Outstanding Sum^[10].  He took into account that Kawai held no office with any of the Mortgagors and Kawai’s evidence:

“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.  Mr Man submitted that Kawai’s assertions in §73 of his affirmation must at least be triable as Kawai did know that the Mortgagors had mortgaged their assets to secure the indebtedness of YDL under the FA.  He contended that an ordinary man facing a potential event of default under a loan agreement would have made enquiries with his fellow associates for assistance, even if he did not know whether they were able or willing to help.  He also made the point that D2 and D3 are in the same position as Kawai in that they were not directors of the Mortgagors and were not involved in the management of the Mortgagors, and it was held in the two decisions refusing the defendants’ striking out applications that YDL’s claim on the Mortgagors Limb is arguable as against D2 and D3.

46.  We do not agree with Mr Man.  We think the judge is entitled to the view that on the available evidence, and the defendants have had ample opportunity over the years to adduce all relevant evidence, it is plain and obvious that Kawai did not act in breach of his duties to YDL by reason of his lack of knowledge of the operations or financial resources of the Mortgagors.  The fact that he knew the Mortgagors had mortgaged their assets to secure the indebtedness of YDL under the FA is plainly insufficient.  Mr Maurellet is right that it is simply unrealistic to suggest that Kawai would be obliged to approach the Mortgagors for financial assistance without any understanding of the financial status or nature of their respective businesses.

47.  As for the alleged similarity of the positions D2 and D3 to Kawai vis-à-vis the Mortgagors, the first application to strike out the claim that D2 and D3 failed to procure the Mortgagors to utilise their resources to discharge the outstanding indebtedness was made on the basis that the Mortgagors and YDL are separate and independent legal entities and the directors of YDL owed no duty as a matter of law to procure other legal entities to use their own resources to repay the liabilities of YDL.  This contention was rejected by G Lam J^[11]. The second application to strike out the claim concerning the Mortgagors Limb also failed because, among other reasons, DHCJ Field agreed with G Lam J that it does not follow from the independent status of the Mortgagors that it could never be within the scope of the duties of the directors of YDL to approach the Mortgagors and other third parties for financial assistance^[12].  It was not part of the grounds of D2 and D3 for striking out the claim concerning the Mortgagors Limb that, not being the directors of the Mortgagors, they had no knowledge or the understanding of the financial status or nature of the businesses of the Mortgagors.

48.  For the above reasons, we reject Mr Man’s contention that the judge was in error in striking out the Mortgagors Limb of the Breach of Duty Claim.

Prior Written Consent Claim

49.  It is not in dispute that the prior specific written consent of Kawai as the Lender Director of YDL was required before YDL and WFOE could incur “Financial Indebtedness” to repay the Outstanding Sum. There is also no dispute that YDL had never sought such consent from Kawai.

50.  The defendants’ contention before the judge was that there was a duty on the part of Kawai to “actively give such consent”^[13]. The judge rejected this contention.  On the evidence, he found that no refinancing proposal had been put forward to Kawai for his approval^[14]. Hence, “any consent that Ds argue ought to have given would if given, have been given in a vacuum” and the existence of such a duty would make “no commercial sense”^[15]. The judge also noted that it is not the defendants’ pleaded case in the third party notice the reason why no refinancing proposal had been put forward was because of Kawai’s failure to give any “active consent”, and the Prior Written Consent Claim sought to be advanced by the defendants’ counsel is unarguably bad and should be struck out^[16].

51.  Mr Man’s contention on appeal is that it is arguable that Kawai owed a duty to YDL to “actively give consent” in this situation.  He submitted that this is a fact sensitive issue which should go to trial.  He also argued that the judge misapprehended or failed to take into account a “financing proposal” from an external investor Shikumen Capital, which was presented to MSC on 12 March 2014. 

52.  Mr Man’s arguments are untenable.  The judge is clearly right that there was never a refinancing proposal presented to MSC.  The document presented to MSC on 12 March 2014 was merely a one-page letter of intent from Shikumen Capital, without any proposed terms whatsoever.  We agree with the judge it would make no commercial sense to impose a duty on the Lender Director to “actively give consent” in a vacuum.

Conclusion and costs

53.  For the above reasons, we conclude that the judge was in error in striking out the WFOE Limb of the Breach of Duty Claim and we uphold his decision in striking out the Mortgagors Limb of the Breach of Duty Claim and the Prior Written Consent Claim.  We therefore allow the defendants’ appeal in part.

54.  Mr Man and Mr Maurellet are in agreement which paragraphs of the third party notice should be struck out if we should reach the above conclusion as indicated to them in argument.  We set aside the judge’s order in striking out the entirety of the third party notice and dismissing the action against the third party.  In lieu thereof, we order to be struck out §§(4)(b) and (5)(b) of the third party notice.

55.  We make the following costs orders which are orders nisi.

56.  We set aside the costs order made by the judge and substitute this with an order that the defendants are to pay two-thirds of the costs of the third party, with certificate for two counsel.

57.  As for the costs of this appeal, we order the third party to pay 50% of the defendants’ costs, with certificate for two counsel.

58.  Any application to vary the above orders nisi should be made within 14 days of the handing down of this judgment, and would be dealt with on paper.