YIFUNG DEVELOPMENTS LTD v. LIU CHI KEUNG, RICKY AND OTHERS

HCA 3020/2015

[2019] HKCFI 388

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3020 OF 2015

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JUDGMENT

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1.  The Defendants apply to strike out the Writ and Amended Statement of Claim on the grounds that they disclose no reasonable cause of action and/or are frivolous and vexatious and/or constitute an abuse of process of the Court.

2.  The Defendants advance two distinct arguments: (i) the whole of the claim of the Plaintiff (“YDL”), a BVI company, is bound to fail because YDL cannot establish that the breaches of duty alleged against the Defendants caused the pleaded loss (“the causation argument”); and (ii) YDL’s claim is bound to fail because the Defendants have an unanswerable defence of circuity of action founded on regulation 15.1 in YDL’s Articles Association that provides that the directors of YDL are entitled to be indemnified by YDL against all expenses, including legal fees and all judgments if made party to any proceedings by reason of the fact that they were directors of YDL (“the indemnity argument”).

3.  For its part, YDL applies to strike out that part of the Defence and Counterclaim founded on regulation 15.1 on the basis that the pleaded entitlement to an indemnity discloses no defence.

4.  The background to these applications is unedifying tit for tat litigation arising out of YDL’s default in repaying a US$39 million loan advanced by Manchester Securities Corporation (“MSC”) to be used in financing a property development project in Yangjian City undertaken by a wholly foreign owned enterprise subsidiary of YDL (“the WFOE”). The loan was secured by, inter alia, equitable mortgages over the shares held in YDL by Yifung Properties Limited (“YPL”) and Wonder Earn Group Limited (“WEG”) and by a mortgage granted over a commercial property situated in Hong Kong by Capital Metro Group Limited (“Capital Metro”). Under the security arrangements for the loan, the Defendants, who were directors of YDL, signed undated letters of resignation from the YDL board, which letters were then held by MSC against the possibility that it might take control of YDL in the exercise of its rights under the equitable mortgages.

5.  The 1^st Defendant (“Mr Liu”) indirectly owns and controls YPL, WEG and Capital Metro.

6.  Under the Facility Agreement governing the loan (“the FA”), repayment had to be made in three tranches. The first such tranche was due to be paid on 15 September 2012 but it was only paid on 2 April 2013 following service by YDL of a notice extending the repayment date to 15 March 2013 under Clause 6.2 (a) (B) (iii) of the FA. That provision entitled YDL as Borrower to extend the repayment date by 6 months if, after the inception of the FA, there was a recent change of governmental policy or regulation which in the opinion of the Borrower would impact its ability to meet its payment obligations under the agreement.

7.  The second and third repayment tranches were originally due to be repaid on 15 September 2013 and 17 March 2014 respectively. Pursuant to a notice issued by YDL under Clause 6.2 (a) (B) (iii), the repayment date for the second tranche was extended to 17 March 2014, on which date the third tranche was also payable. Come 17 March 2014, however, YDL failed to repay the outstanding balance of the loan and accrued interest (US$50,136,152.07) and on 18 March 2014 MSC declared an event of default and appointed receivers over the mortgaged shares in YDL and other security that had been provided in connection with the loan.

8.  On 4 June 2014 MSC moved to remove the Defendants as directors of YDL and appointed two receivers in their place. On 5 June 2014, MSC caused YDL to remove and replace the directors of the WFOE.

9.  On 16 July 2014, YDL (now under the control of the receivers) commenced action HCA 1341/2014 against the Defendants seeking interlocutory orders designed to allow the receivers unrestricted access to YDL’s premises and the delivery up of all of YDL’s assets including the books and records, seals and chops and the certificates for the shares in the WFOE.

10.  Then, on 18 July 2014, YPL, MEG and Metro Capital (collectively “the Mortgagors”) brought suit in HCA 1359/2014 against, inter alios, MSC and the receivers contending that no event of default had occurred under the FA and seeking interlocutory injunctions restraining the receivers from exercising their powers on the ground that their appointment was invalid. The Plaintiffs in this action pleaded and it was Mr Liu’s evidence that:

(1)  Mr James Smith on behalf of MSC had represented to Mr Liu that:

(a) YDL should continue to seek investors to finance a repayment of the sums due under the loan and MSC would not insist on YDL’s repayment of the outstanding balance (probably covering both the 2^nd and the 3^rd tranches) on the due date and would not declare an event of default should YDL delay in repayment under the FA; and

(b) so long as YDL was sincere about repaying the sums due and was actively seeking additional finance for such purposes, it was unnecessary for YDL to write to MSC again to extend the relevant repayment dates under Clause 6.2 of the Facility Agreement.

(2)  But for Mr Smith’s aforesaid assurance, YDL would have extended time for the repayment of the third tranche of the loan under Clause 6.2 of the FA and would have paid off the total due by having recourse to:

(i) receivables owned by the WFOE in excess of RMB 129 million in order to obtain financing under a non‑recourse factoring agreement;

(ii) RMB 103 million held by the WFOE in several bank accounts with Bank of China;

(iii) HK$26 million held by Capital Metro in its account with Maybank; and

(iv) Mr Liu’s own assets, in particular funds held by him in the order of at least eight figures.

(3)  By reason of the foregoing, MSC was estopped from declaring an event of default on 18 March 2014.

11.  The interlocutory injunction applications made in HCA 1341/2014 and HCA 1359/2014 were heard by Au-Yeung J who dismissed the Mortgagors’ application but granted the injunctions applied for by YDL (now controlled by the receivers). Both her Ladyship and the Court of Appeal refused leave to appeal.

12.  On 19 October 2015, Au-Yeung J struck out the Statement of Claim and dismissed the action in HCA 1359/2014. Her Ladyship’s decision was upheld by the Court of Appeal. Leave to appeal the Court of Appeal’s decision to the Court of Final Appeal was refused by both the Court of Appeal and the Court of Final Appeal.

13.  On 18 December 2015, the instant proceedings were commenced by YDL against the three defendants in which YDL pleads that the Defendants breached their duties as directors of YDL to act in the best interests of YDL and exercise reasonable care and diligence by failing to pay off the Loan by utilising the resources the Mortgagors themselves had pleaded in HCA 1359/2014 that YDL had access to. As a result of these breaches of duty, YDL suffered loss in the form of Enforcement Costs, Default Interest and Cash Interest for which the Defendants were liable to compensate YDL.

14.  The resources pleaded and attested to by Mr Liu in HCA 1359/2014 are pleaded in paragraph 37 of YDL’s Amended Statement of Claim. They are set out in paragraph 8 (2) of this judgment. The outstanding balance of the Loan on 17 March 2014 was US$50,136,152.07 (approximately RMB 309.8 million).

15.  Given the nature of the Defendants’ causation argument, it is necessary to set out paragraphs 41 and 42 of the Amended Statement of Claim.

“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 (being the first business day after the Maturity Date);

(b) YDL and the WFOE had the funds, assets and ability to raise finance as herein before pleaded [para 37] which would have enabled YDL to discharge the Loan fully or in part;

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

(d) Mr Liu 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, Liu’s funds as hereinbefore pleaded 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 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 which were available to YDL to discharge the outstanding liabilities under the Loan;

(c) access and/or take all necessary steps to procure Mr Liu 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 causation argument

16.  Defendants’ strike-out causation argument as formulated in their written submissions is that YDL’s claim is bound to fail for each of the following reasons:

(1)  YDL’s claim wrongly assumes that Clause 6.2 (a)(iii) of the FA gives YDL a unilateral right to extend the repayment date for a Tranche by 6 months but this is not so since the clause requires a recent change in PRC law, policy or regulation which would impact YDL’s ability to meet its payment obligations and there was no such change in PRC law, policy or regulation at the material time in early 2014.

(2)  Taking YDL’s case at its highest, the assets available were about RMB 260 million whereas the outstanding amount due under the FA as at 17 March 2014 was about RMB 309.8 million and therefore YDL would be bound to fail to establish that the Defendants’ alleged breaches of duty caused YDL’s pleaded loss.

(3)  In any event, YDL did not have RMB 260 million to use as at 17 March 2014 for the following reasons: (i) there is no dispute that the WFOE’s bank balance at the Bank of China (Yangjiang Branch) (“BOC”) was used as a security deposit and could not have been withdrawn at the material time (which was MSC’s evidence filed in HCA 1359/2014; see Puhar WS 2^nd, para 6); (ii) a non-recourse factoring agreement in respect of the WFOE’s receivables of RMB 129 million would involve a discount of between 25% and 50%; and (iii) YDL’s contention that the Defendants were under a duty to utilise Capital Metro’s assets and Mr Liu’s personal assets to repay the Loan is unarguable.

(4)  Thus on YDL’s pleaded case, and disregarding the assets to which YDL had no entitlement, YDL only had potential access to the WFOE’s RMB 129 million (about US$15.7 million) in March 2014 which would have been insufficient to repay the 2^nd tranche (US$14.5 million) plus interest of US$21.3 million), let alone the whole outstanding balance including the 3^rd tranche (US$14.5 million).

17.  The Defendants’ strike-out application is not their first attempt to strike out YDL’s claim. As long ago as 23 August 2016, they mounted a strike-out application before Godfrey Lam J contending, inter alia that: (i) the steps YDL alleges in the Amended Statement of Claim should have been taken to procure the WFOE to access its assets or obtain finance on the back of its receivables could not have been taken because these would have required the written consent of MSC under the FA and YDL’s articles of Association and no such consent had been given; (ii) it cannot have been a breach of duty to fail to procure the Mortgagors to utilise their resources to pay off the Loan because the Mortgagors were legal entities that were separate from and independent of YDL; (iii) the alleged failure to procure YDL to extend the repayment date of the 3^rd tranche by 6 months did not cause the occurrence of an event of default because the 2^nd tranche could not be further extended and the non-payment of that tranche, by itself, would constitute an event of default; (iv) the present action was an abuse of process of the Henderson v Henderson type because the claims in this action could and should have been brought in HCA 1341/2014; (v) the present action was an abuse of the process because it was launched to put pressure on the former directors and in retaliation against Mr Liu for procuring YPL and WEG to bring HCA 2539/2015 and/or because YDL was pleading and relying on facts and matters that had already been considered and rejected in the injunction decision of Ah-Yeung J.

18.  For reasons set out in a judgment delivered on 29 August 2016, Godfrey Lam J dismissed the Defendants’ application. There was no attempt to appeal this decision.

19.  Mr Bartlett SC for YDL submitted that the Defendants’ strike-out summons should be dismissed on the ground that it is an abuse of the process of the Court of a Henderson v Henderson type. This type of abuse was recognised by the Court of Final Appeal in Ko Hon Yue v Chiu Pik Yuk (2012) 15 HKCFAR 72 at [82]-[84]. It arises where, in a previous proceeding between the same parties, one of the parties could and should have raised contentions that it later seeks to raise in subsequent proceedings and thereby unfairly vexes the other party and/or unfairly and unjustifiably calls on the limited resources of the court system. An example of such abuse is to be found in the recent decision of the Court of Appeal in Yifung Properties Limited and Wonder Earn Group Limited v James Nicholas Barrie Smith and Elliott Advisors (HK) Limited [2018] HKCA 866 where it was held that a claim brought by YPL and WEG in the wake of the strike-out of HCA 1359/2014 should be dismissed as an abuse since, although the cause of action advanced in the later action was misrepresentation of authority which was different from that relied in the earlier action, both claims were based on the same factual matrix. Balancing all the relevant interests in the circumstances of the case, the Court of Appeal found that the later claim should have been advanced in HCA 1359/2014 and it was an abuse to vex the 2^nd Defendant and Mr Smith for a second time with a claim based on the same negotiations that were relied on in the earlier claim.

20.  The burden of establishing an abuse of the Henderson v Henderson type is on the party seeking dismissal of a claim on the ground of such abuse and it is a reasonably heavy one because a party ought not lightly to be deprived of the right to bring a serious claim. What the Court is concerned to do is to balance the interests of litigants before it and to have regard to the other interests involved in the administration of justice, see Ma CJ in Ko Hon Yue at [83(2)] and [83(5)].

21.  In my judgment, YDL has amply established that the Defendants’ causation argument should be dismissed as an abuse of the Court’s process. That argument is closely allied to a number of the arguments advanced by the Defendants in support of their first application and, as Ms Chan SC for the Defendants was constrained to accept, it was an argument that could have been mounted during the first strikeout application that was dismissed by Godfrey Lam J on 23 August 2016. In my view, following Godfrey Lam J’s decision, YDL was entitled to conclude that its pleaded case would go to trial and it ought not now to be vexed with another strike-out application issued 18 months later founded on the causation argument.

22.  Even if the causation argument were not an abuse of the process, I would not have been persuaded to strike out YDL’s claim on the basis of this argument. This is because, firstly, the sum due to be paid on 17 March 2014 would be less than the US$50.2 million due on a full whack basis if the defendants had sought to extend the payment date of the 3^rd tranche (including the interest thereon) as YDL pleads they should have done, a plea that is immune to strike out because the essential plea is that the Defendants should have attempted such a postponement and YDL’s evidence suggests that MSC would have adopted a stance of “non‑resistance” to such an approach. On this basis the sum due on 17 March 2014 would be would be US$25.1 million if payment of the principal amount of the 3rd tranche, plus the interest related to thereto, were extended by six months and US$35.7 million if the payment date for only the principal amount of the 3^rd tranche were extended by six months. Secondly, the financial assets available to discharge the sum due on 17 March 2014 include not only the WFOE’s receivables of RMB 129 million but also Capital Metro’s HK$26 million (US$3,313,310), Mr Liu’s personal funds of “at least eight figures” and, according to what Mr Liu says in paragraph 8 of his 3^rd affirmation, unencumbered WFOE funds “in other bank accounts aggregating millions in RMB”. The fact that Metro Capital and Mr Liu are legal persons independent of YDL does not mean that these sources of assets are of no account. As Godfrey Lam J held on the defendants’ first strike out application[1], it does not follow from the independent status of Metro Capital that it could never be within the scope of the duties of the directors to approach the Mortgagors and other third parties for financial assistance. In my opinion, this reasoning applies also to Mr Liu whose own sworn evidence was that he would have had recourse to his personal funds to avoid an event of default but for the Defendants’ reliance on Mr Smith’s assurance. Thirdly, it is not possible at this stage to postulate the precise value of the available assets because of the uncertainty as to the level of the WFOE’s funds held in other bank accounts, what discount rate would have been applied if the WFOE had raised finance by concluding a non-recourse factoring agreement and because the actual figure for Mr Liu’s personal funds is not known. The actual value may be as low as the Defendants now suggest. But it is equally conceivable in my view that: (i) the discount rate might be found to be much lower than the rates put forward by Ms Chan (25% - 50%); (ii) the funds available to Mr Liu amounted to the equivalent of say US$10 million plus; (iii) the WFOE funds in other bank accounts amounted to several million US dollars, in which event it could turn out at trial that the available assets were sufficient to pay off the sum that would have been due on 17 March 2014 if the defendants had procured a six-month extension of the payment date for the 3^rd tranche including the interest due on that tranche.

23.  Further, and in any event, YDL seeks as damages not only the Enforcement Costs, Default Interest and Cash Interest pleaded in paragraphs 42 – 44 of the Amended Statement of Claim, but also, in the alternative, “damages and/or equitable compensation for breaches of fiduciary duties and/or negligence to be assessed”, the recovery of which would not depend on YDL showing that an event of default could have been avoided but rather that YDL’s indebtedness to MCS could have been reduced to the extent that the available assets were paid in partial payment of the sums owed to MCS.

The Indemnity Argument

24.  In dealing with the Defendants’ indemnity argument I put to one side YDL’s application to strike out the Defendants’ case based on regulation 15.1 on the ground that their pleading discloses no reasonable cause of action.

25.  I do not accede to Mr Bartlett’s submission that the indemnity argument is also an abuse of the Henderson v Henderson type. I take this view because: (i) unlike the causation argument, the indemnity argument is founded on a cross-claim and is completely different from the arguments advanced on the first strike-out application; and (ii) the Defence and Counterclaim in which the indemnity claim is pleaded was served after the first strike-out application was heard and the affirmations of Mr Jones and Mr Levy were only affirmed on 2 July 2018 and 3 October 2018 respectively.

26.  Regulation 15 of YDL’s Articles of Association reads (in relevant part):

“15.1 Subject to the limitations hereinafter provided the Company shall indemnify against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings any person who:

(a) Is or was a party or is threatened to be made a party to any threatened, pending or completed proceedings, whether civil, criminal, administrative or investigative, by reason of the fact that the person is or was a director of the Company …

15.2 The indemnity in Sub-Regulation 15.1 only applies if the person acted honestly and in good faith with a view to the best interests of the Company and, in the case of criminal proceedings, the person had no reasonable cause to believe that their conduct was unlawful.

…

15.8  If a person referred to in Sub-Regulation 15.1 has been successful in defence of any proceedings referred to in Sub‑Regulation 15.1, the person is entitled to be indemnified against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred by the person in connection with the proceedings.”

27.  The totality of the Defendants’ pleaded indemnity defence consists of relating the terms of regulation 15.1 and 15.2 in paragraph 10 of the Defence and then pleading as follows in paragraph 40 of the Counterclaim:

“If, which is denied, the Defendants are held liable for any of the breaches of duties alleged by YDL, the Defendants are entitled to and do claim against YDL an indemnity under regulation 15.1 of the Articles for any damage which they may be found liable to pay YDL in this action.”

28.  Each side has served an expert opinion provided by English Queen’s Counsel on the meaning and effect of regulation 15 under BVI law. Mr Robert Levy QC is the Defendants’ expert and Mr Philip Jones QC is YDL’s expert.

29.  Mr Levy, citing, inter alia, Molineaux v London Birmingham and Manchester Insurance Company Ltd [1902] 2 KB 589; In re Anglo- Austrian Printing and Publishing Union [1892] 2 CH 158; In re Brazilian Rubber Plantations and Estates Ltd [1911] 1 CH 425; In re City Equitable Fire Insurance Company Ltd [1925] 1 Ch 407, is of the view that the Defendants, having accepted the office as directors of YDL when the Articles contained regulation 15, are entitled to enforce the indemnity contained therein. He is also of the opinion that the regulation 15 indemnity applies both to claims brought against directors or former directors by a third party and claims brought by the company itself. In Mr Levy’s view, this is the clear meaning and effect of regulation 15 and section 132 of the BVI Business Companies Act (“BCA”) on which regulation 15 is based. Amongst the authorities cited by Mr Levy in support of this opinion is the decision of the Court of Appeal of Guernsey in Emerald Bay Worldwide Limited v Barclays Wealth Directors (Guernsey) Limited et al Judgment 02/2014 of 9 January 2014. Here, the plaintiff (“Emerald”) was a BVI company whose articles of association provided in regulation 14 for an indemnity in favour of its directors in terms essentially identical to those found in regulation 15 in YDL’s articles. Emerald sued its directors for negligence in respect of a loss-making contract they had caused the company to conclude. The directors defended the claim relying on regulation 14. The Guernsey Court of Appeal upheld the decision of the Deputy Bailiff that the regulation 14 indemnity constituted an effective defence to Emerald’s claim.

30.  Mr Levy gave expert evidence in the Emerald proceedings on behalf of the defendant directors.

31.  Mr Jones, who gave expert evidence in the Emerald proceedings on behalf of Emerald, disagrees with the opinion of Mr Levy.

32.  Mr Jones says in his affirmation that a director can only enforce a provision in a company’s articles if he can establish the existence of a contract between himself and the company into which the provision in the articles has become incorporated. Citing John v Price Waterhouse [2002] 1 WLR 953 at para 26 and Globalink Telecommunications Ltd v Wilmbury [2003], he accepts that in many circumstances relatively little may be required for an indemnity in the articles to be impliedly incorporated into such a contract, but goes on to observe that the defendants do not assert in their pleading any contract and do not claim under any contract. In his opinion, the Defendants’ claim to an indemnity under regulation 15 discloses no cause of action under BVI law.

33.  Mr Jones also expresses the view that, since a claim for an indemnity contained in a company’s articles of association requires a contract in which the terms of the relevant article have been incorporated, the indemnified party would not be able to enforce the indemnity if he has committed a repudiatory breach of the contract which has been accepted by the counterparty.

34.  In Mr Jones’s opinion, Emerald was wrongly decided. In his view, regulation 15 and section 132 of the BCA when properly construed provide an indemnity only in respect of claims brought by third parties. He opines that this is so because in the context of civil claims, regulation 15 indemnifies against “judgments” (plus the costs incurred in the proceedings), which rules out claims brought by the company because such a claim will not result in a judgment if the indemnity applies to the claim.

35.  The experts agree that the effect of regulation 15 (2) is that the indemnity in Sub-Regulation 15.1 only applies if the person acted honestly and in good faith and with a view to the best interests of the Company.

36.  Relying on the opinion of Mr Levy, Ms Chan submitted that the Defendants had a cast-iron defence of circuity of action, in consequence of which YDL’s claim should be struck out in its entirety. She argued that it was beyond dispute that the Defendants had accepted their appointment to YDL’s board at a time that YDL’s articles contained regulation 15 and accordingly, pursuant to the authorities cited by Mr Levy that are listed in paragraph 28 above, the Defendants are entitled to enforce the regulation 15 indemnity. Further, and in any event, she relied on the evidence of the 2^nd Defendant in paragraph 13 of his 3^rd affirmation that, “each of the Defendants consented to act as a director of YDL only after reviewing YDL’s articles, including regulation 15. It was understood between the parties that as a YDL director, each Defendant would receive an indemnity against all expenses and against all judgments fines and amounts in connection with legal proceedings. Each of the Defendants relied on regulation 15 in consenting to act as a YDL director.”

37.  In addition, Ms Chan contended that Mr Levy’s opinion that the indemnity applied to the claim brought by YDL ought plainly to be preferred to Mr Jones’s opinion to the contrary.

38.  In my judgment, Ms Chan’s indemnity argument must be dismissed. If, as is common ground, a company’s articles of association are not themselves a contract between the company and its directors, as distinct from a contract between the company and its members, it seems to me that is reasonably arguable that the Defendants must establish a contractual entitlement to enforce the regulation 15 indemnity and that, notwithstanding the authorities cited by Mr Levy, for the necessary contract to be established in the absence of a synallagmatic contract incorporating regulation 15, the Defendants must prove that they had actual knowledge of the existence and terms of regulation 15 at the time they accepted their appointment to YDL’s board. In my view, this approach is supported by what Lindley and Bowen LJJ had to say in Carlill v Carbolic Smoke Ball Company [1893] 1QB 256 on the question whether the plaintiff, Miss Carlill, had given consideration in exchange for the promise made in the defendant’s advertisement:

“Lindley LJ

But there is another view. Does not the person who acts upon this advertisement and accepts the offer put himself to some inconvenience at the request of the defendants? Is it nothing to use this ball three times daily for two weeks according to the directions at the request of the advertiser? Is that to go for nothing? It appears to me that there is a distinct inconvenience, not to say a detriment, to any person who so uses the smoke ball. [Emphasis supplied]

Bowen LJ

Can it be said here that if the person who reads this advertisement applies thrice daily, for such time as may seem to him tolerable, the carbolic smoke ball to his nostrils for a whole fortnight, he is doing nothing at all — that it is a mere act which is not to count towards consideration to support a promise (for the law does not require us to measure the adequacy of the consideration). Inconvenience sustained by one party at the request of the other is enough to create a consideration. [Emphasis supplied]”

39.  I have recorded in paragraph 36 above what the 2^nd Defendant deposes in his 3^rd affirmation dated 4 January 2019 about the state of the Defendants’ knowledge of regulation 15 when they accepted their appointment as directors of YDL. In my opinion, this evidence falls far short of rendering unarguable the contention that the Defendants have failed to establish a contractual right to enforce the regulation 15 indemnity. It follows that there must be a hearing at which YDL will have the opportunity of challenging the 2^nd Defendant’s evidence in cross- examination with the benefit of discovery of all relevant documents.

40.  I am also of the clear opinion that Mr Jones advances an arguable case that has at least a real prospect of success that under BVI law, if the regulation 15 indemnity is enforceable by the Defendants as a contractual entitlement, it applies only where directors or former directors are sued by a third party other than the company. It follows, in my judgment, that there must be a trial in which both the experts on BVI law are cross- examined.

41.  There is also at least one other reason why there should be a trial. YDL pleads in paragraph 33 of its Reply and Defence to Counterclaim that by reason of the matters pleaded in paragraphs 24 to 45 of the Amended Statement of Claim, the Defendants acted in a manner that was wilful and reckless and/or irrational and/or commercially unacceptable and thereby failed to act in good faith and with a view to the best interests of YDL. It may be that this plea should be taken in the Amended Statement of Claim rather than in the Reply, but it is plea that YDL intends to pursue and I can see no grounds for any objection to it being introduced to the Amended Statement of Claim by amendment. I accordingly proceed on the basis that there is a real issue between the parties whether the cumulative three-fold conditions contained in regulation 15.2 can be satisfied by the Defendants and obviously the determination of that issue will require a trial.

YDL’s application to strike out the Defendants’ indemnity defence on the ground that the pleading of that defence discloses no reasonable cause of action.

42.  The manner in which the Defendants plead their regulation 15 defence and cross claim is set out in paragraph 27 above. Mr Bartlett’s submission was short and sweet. The regulation 15 indemnity can only be enforced by the Defendants if they can establish that there was a contract between them and YDL that incorporated regulation 15. The Defendants have failed to plead that there was any such a contract. It follows that the Defendants’ claim to an indemnity under regulation 15 discloses no cause of action under BVI law.

43.  I find Mr Bartlett’s approach to be over technical and, as such, rather out of date. It was inevitable in my view that the Defendants’ pleading would be followed by expert opinions on the enforceability of the regulation 15 indemnity in BVI law and, if pending the production of such opinions, YDL was genuinely puzzled as to how the Defendants were putting their indemnity case, the proportionate step to have taken in terms of costs and time was for YDL to serve a request for further particulars of the Defendants’ indemnity case.

44.  For these reasons, I propose to dismiss YDL’s strike-out application on terms that the Defendants amend their Defence and Counterclaim within 21 days to plead out with full particulars the basis for contending that the Defendants have a legal entitlement to enforce the indemnity in regulation 15.1.

Conclusion

45.  For all the reasons stated above, I will make the following orders:

(1)  The Defendants’ summons and the Plaintiff’s summons are each dismissed.

(2)  There will be an order nisi that:

(a) The Defendants should pay the Plaintiff’s costs to be taxed, if not agreed, on the indemnity basis in respect of the Plaintiff’s opposition to the Defendants’ causation argument and on the standard basis in respect of the Plaintiff’s opposition to the Defendants’ indemnity argument.

(b) There should be no order as to costs on the Plaintiff’s summons.

(c) I propose to make the indemnity costs order in respect of the causation argument because that argument was a flagrant abuse of the Henderson v Henderson type. The proposed order that there be no order as to costs on the Plaintiff’s summons reflects the fact that hardly any time was taken up on that summons, whereas a substantial amount of time was taken up with the Defendants’ indemnity argument that failed.