BLUESUN CAPITAL LTD v. TEWOO GROUP FINANCE NO 3 LTD AND OTHERS

HCA 1428/2020

[2021] HKCFI 2040

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1428 OF 2020

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DECISION

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1.  This is an application by the 1^st and 2^nd defendants to set aside a default judgment granted on the basis that no notice of intention to defend was given by the 1^st and 2^nd defendants.

A.   The Bonds

2.  The plaintiff (“BlueSun”) is a limited company incorporated in the British Virgin Islands (“BVI”).  The 1^st defendant is also a limited company incorporated in the BVI.  It is an indirect wholly-owned subsidiary of the 2^nd defendant.  The 2^nd defendant is a company incorporated in the People’s Republic of China (“PRC”).

3.  Pursuant to a Trust Deed dated 6 April 2017 between the 1^st defendant as Issuer, the 2^nd defendant as Guarantor and the 3^rd defendant as Trustee (“the Trustee”), the 1^st defendant issued US$300,000,000 guaranteed bonds, with an interest rate of 4.625 percent, due on 6 April 2020 (“the Bonds”).

4.  The Bonds are constituted by the Trust Deed and are represented by a Global Certificate held by the Trustee as the registered holder of the Bonds.  Individual Bondholders are able to trade bonds in the Euroclear or Clearstream, or other clearing systems, and are entitled to individual definitive certificates under the Trust Deed, representing their individual interest in the Bonds.

5.  There are the following relevant terms of the Trust Deed:

5.1   By Clause 1.1 the word “outstanding” was defined to mean (relevantly):

““outstanding” means, in relation to a series of Bonds, all the Bonds of such series issued… Provided that for the purposes of… (2) the determination of how many Bonds of such series are outstanding for the purposes of Conditions 9, 12(a), and 14 of the relevant series of Bonds and Schedule 3…… those Bonds of such series which are beneficially held by or on behalf of any of the Issuer, the Guarantor or any of their respective Subsidiaries and not cancelled shall (unless no longer so held) be deemed not to remain outstanding”

5.2   By clause 2.1:

“Covenant to Pay: The Issuer will, on any date when any series of Bonds become due to be redeemed, unconditionally pay to or to the order of the Trustee in US dollars in immediately available funds in the principal amount of the relevant series of Bonds becoming due for redemption on that date…”

5.3   By clause 6.1 (the “waterfall clause”):

“Declaration of Trust: All monies received by the Trustee or any Agent acting as agent of the Trustee in accordance with clause 4.1 of the Agency Agreement in respect of a series of Bonds or amounts payable under this Trust Deed or a Deed of Guarantee will, despite any appropriation of all part of them by the Issuer or the Guarantor, be held by the Trustee on trust to apply them (subject to clause 6.2):

(i) first, in payment of all costs, charges, expenses and liabilities properly incurred by the Trustee…

(ii) secondly, in payment of any amounts owing in respect of such series of Bonds pari passu and rateably;

(iii) thirdly, in payment or satisfaction of all fees, costs, charges…

(iv) fourthly, in payment of any balance to the Issuer…”

5.4   By clause 10.20:

“Enforcement: The Trustee may at any time, at its discretion and without notice, take such proceedings and/or other steps as it may think fit against or in relation to the Issuer and/or the Guarantor to enforce the terms of this Trust Deed, the Deeds of Guarantee, the Agency Agreement and the Bonds. However the Trustee shall not be under any obligation to take proceedings against the Issuer or the Guarantor to enforce payment of the Bonds after the Bonds have become due and payable nor to declare the Bonds due and payable unless it shall have been indemnified and/or secured and/or pre-funded to its satisfaction and unless it is directed to do so by the holders of the Bonds by Extraordinary Resolution or is requested in writing by Bondholders holding the requisite percentage of principal amount of Bonds specified in the Conditions.”

5.5   By Clause 18.3:

“Service of Process: Each of the Issuer and Guarantor irrevocably appoints Tewoo Group (Hong Kong) Limited (at its registered office currently at 23F AXA Centre, 151 Gloucester Road, Wanchai, Hong Kong) as its authorised agent or service of process in Hong Kong. If for any reason such process agent ceases to be able to act as such or no longer has an address in Hong Kong, the Issuer and the Guarantor irrevocably agrees to appoint a substitute process agent and shall, as soon as practicable and in any event within 30 days of such process agent ceasing to be able to act as such or to have an address in Hong Kong, notify the Trustee in writing of such appointment. Nothing shall affect the right to serve process in any other manner permitted by law.”

6.  Under the Conditions of the Bonds, set out in Schedule 2 to the Trust Deed:

6.1   By Clause 14:

“At any time after the Bonds become due and payable, the Trustee may, at its discretion and without further notice, institute such proceedings against the Issuer and/or the Guarantor as it may think fit to enforce the terms of the Trust Deed and the Bonds and/or the Deed of Guarantee but it need not take any such proceedings unless (a) it shall have been so directed by an Extraordinary Resolution or so requested in writing by Bondholders holding at least 25 per cent. in principal amount of the Bonds then outstanding, and (b) it shall have been indemnified and/or secured and/or pre-funded to its satisfaction. Bondholders may not proceed directly against the Issuer or the Guarantor unless the Trustee, having become bound so to proceed, fails to do so within a reasonable time and such failure is continuing.”

7.  BlueSun has purchased Bonds in the amount of US$14,500,000, and those Bonds are held by the 4^th defendant (“BMO”) who acts as BlueSun’s custodian, nominee and registered holder for the Bonds purchased by BlueSun.

8.  By an Exchange and Tender Offer Memorandum dated 22 November 2019 Tianjin State-Owned Capital Investment and Management Co., Ltd. (“the New Exchange Bonds Issuer”), made offers to the holders of the Bonds to exchange some or all of their Bonds for a series of new bonds to be issued by the New Exchange Bonds Issuer, or alternatively to tender some or all of their Bonds for purchase by the New Exchange Bonds Issuer for cash.

9.  Various Bondholders took up one or other of the offers from the New Exchange Bonds Issuer, such that the New Exchange Bonds Issuer now holds an aggregate principal amount of US$251,828,000 of the Bonds.

10.  However, BlueSun did not take up either of the offers made by the New Exchange Bonds Issuer, and continues to hold US$14,500,000 of the Bonds.  Other Bondholders also declined the offers of the New Exchange Bond Issuer, and the total amount of the Bonds currently outstanding which are not held by the New Exchange Bond Issuer amounts to US$48,172,000.

11.  BlueSun contends that there have been two Events of Default under the Bonds;

11.1   A Cross Default has occurred under clause 1.1 of the Trust Deed and Condition 9(c) of the Conditions as a result of a default in payment of different bonds, issued by a different company within the same group as the 1^st and 2^nd defendants, which had also been guaranteed by the 2^nd defendant.

11.2   A failure to redeem the Bonds at their principal amount on 6 April 2020, in breach of Clause 1.1 of the Trust Deed and Condition 9(a) of the Conditions, and Clauses 2.1 and 2.2 of the Deed of Guarantee.

12.  The Trustee has notified Bondholders that an Event of Default has occurred but has indicated that it does not intend to take any further action. 

13.  BlueSun contends that it is a holder of more than 25% of the outstanding Bonds (as defined within the Trust Deed).  It has requested the Trustee to take enforcement action, but the trustee has not done so.  It also contends that it has requested BMO to take action against the Trustee so as to force the Trustee to take action against the 1^st and 2^nd defendants but BMO has failed to do so.  BlueSun contends that both BMO and the Trustee are grossly negligent, and acting in breach of their obligations by failing to take the action which BlueSun has demanded, and consequently BlueSun now contends that it is entitled to commence these proceedings against the 1^st and 2^nd defendants as a double derivative action (on behalf of BMO and the Trustee).

B.   The Proceedings

14.  It has been made clear in the statement of claim, which is dated 24 August 2020, that this is a double derivative action and is brought on behalf of the Trustee and BMO.   For example the heading of section D of the statement of claim states:

“Double Derivative Action (on behalf of the Trustee and PMO) against the Issuer and the Guarantor”.

15.  Paragraph 30 of the statement of claim contends that BlueSun is entitled to bring the present claim “as a derivative action on behalf of BMO”. 

16.  Paragraph 32 of the statement of claim is in the following terms:

“In the premises, the Issuer and the Guarantor are jointly and severally liable to the Trustee (for and on behalf of the holders of the Bonds, including in particular BMO as custodian, nominee and bare trustee of BlueSun) for the outstanding principal amount of and accrued interest on, the Bonds (including in particular the US$14.5 million Bonds held by BMO as custodian, nominee and bare trustee of BlueSun and accrued interest thereon) and the Trustee is entitled to (and BlueSun for and on behalf of the Trustee and BMO does) claim from the Issuer and the Guarantor for the same.”

17.  Paragraph 34 of the statement of claim is in the following terms:

“Further to the claims made for and on the half of the Trustee and BMO as pleaded in paragraphs 32 and 33 above, BlueSun seeks a consequential direction that the Issuer and/or the Guarantor do make payment directly to BlueSun the principal amount of US$14,500,000 and interests accrued thereon at 4.625 percent per annum (or alternatively interest pursuant to section 48 of the High Court Ordinance (Cap 4).”

18.  Paragraph 39 of the statement of claim is in the following terms:

“Further to paragraph 38 above, BlueSun (as beneficial holder of the US$14.5m Bonds and beneficiary vis-a-vis BMO bringing the claim on behalf of BMO) seeks consequential directions that the Issuer and the Guarantor be bound by the determinations in this Action insofar as the Issuer and/Guarantor’s liabilities towards the Trustee in respect of the Bonds are concerned.”

19.  The prayer in the statement of claim as against the 1^st and 2^nd defendants reads as follows:

“AND THE PLAINTIFF, ON BEHALF OF THE THIRD AND FOURTH DEFENDANTS, CLAIMS AGAINST THE 1^ST AND 2^ND DEFENDANTS:

(1) The outstanding aggregate principal amount of the Bonds;

(2) Accrued and outstanding interest thereon at the rate of 4.645% per annum for the period from 6 April 2017 to the date of judgment or any period as the Court deems fit;

(3) Alternatively, interest pursuant to section 48 of the High Court Ordinance (Cap 4);

(4) Consequential direction (s) as pleaded in paragraph 34 above or, alternatively, those as pleaded in paragraph 39 above;

(5) Costs;

(6) Further and/or other relief.”

20.  By an affirmation of Wan Kwok Chung dated 15 September 2020 BlueSun made an application for a default judgment against the 1^st and 2^nd defendants on the basis that neither of them had filed any acknowledgement of service or any notice of intention to defend. 

21.  In that affirmation BlueSun informed the court that the writ of summons, together with the statement of claim, had been served on 24 August 2020 at the 1^st and 2^nd defendant’s “agent for service of process” namely Tewoo Group (Hong Kong) Limited, at 23/F AXA Centre, 151 Gloucester Road, Wanchai, Hong Kong.  BlueSun referred to Clause 18.3 of the Trust Deed and Clause 7.3 of the Deed of Guarantee to justify that service.

22.  By a defence dated 5 October 2020 the Trustee has defended the proceedings and denies that it has acted in any manner which is inappropriate.  Of particular relevance, it contends that BlueSun is not the holder of more than 25% of the Outstanding Bonds because it does not accept that the New Exchange Bonds Issuer holds those Bonds which it purchased on behalf of the 1^st defendant.  Therefore, it does not accept that BlueSun is, or was, entitled to require it, as Trustee, to take enforcement action against the 1^st and 2^nd defendants.  It also contends that the preconditions for taking action have not been fulfilled, in that BlueSun has not indemnified it to its satisfaction, nor pre-funded it to take action.

23.  By a defence dated 5 October 2020 BMO takes a very similar position to the Trustee.

24.  On 30 October 2020 Final judgment against the 1^st and 2^nd defendants was entered in the following terms:

“No Notice of intention to defend having been given by the 1^st and 2^nd Defendants herein, and the Plaintiff having abandoned the following claim against the 1^st and 2^nd Defendants as sought in prayer (4) of the Statement of Claim dated 24 August 2020, IT IS THIS DAY ADJUDGED that the 1^st and 2^nd Defendants do pay:

1. the Plaintiff the sum of US$14,500,000 of the Hong Kong Dollar equivalent at the time of payment, being the outstanding aggregate principle amount of the Bonds, together with interest thereon at a rate of 4.625% per annum from 6 April 2017 to the date hereof and thereafter at judgment rate until payment; and

2. fixed costs of HK$11,545.00.”

25.  The Plaintiff abandoned the claim set out in paragraph 4 of the prayer for relief as a result of a requisition made by the Registrar on 6 October 2020, which was in the following terms:

“Please indicate in the draft judgment if the Plaintiff abandons the claim as sought in prayer 4 of the Statement of Claim.”

26.  The 1^st and 2^nd defendants say that they did not know anything about the proceedings until after the default judgment was entered because the service agent had assumed that the writ was wrongly served on it, and did not inform the Defendants.

C.   The Parties’ Contentions

27.  The 1^st and 2^nd defendants contend that:

27.1   The judgment is an irregular judgment because a default judgment cannot be given in respect of something which is not pleaded.  The essence of the proposition is that the pleading makes a claim on behalf of the Trustee for the full outstanding amount which, the 1^st and 2^nd defendants contend, is approximately US$300 million plus interest, or even if the New Exchange Bond Issuer has retired those Bonds which it purchased, the outstanding amount would be at least US$48,172,000.

27.2   The 1^st and 2^nd defendants have at least two good defences to the action.  First, that the plaintiff is not the holder of more than 25% of the outstanding Bonds, and hence is not entitled to require the Trustee to bring an action for recovery.  As a result, the 1^st and 2^nd defendants say that no form of derivative, let alone double derivative, action is available to the plaintiff.  Further in the light of clause 14 in the Conditions the plaintiff is not entitled to bring any action on its own behalf.

27.3   Further, a payment of US$14,500,000 directly to the Plaintiff would breach the waterfall clause in the Trust Deed, and that is not appropriate.  The Plaintiff needs to apply all proceeds in accordance with the waterfall clause, which requires payment to the Trustee of its costs first, then on a pari passu basis to be distributed to the individual Bondholders.

27.4   Service of the writ by the plaintiff on the process agents identified in the Trust Deed does not amount to good service in the context of this action.  The plaintiff is not a party to the Trust Deed and is not entitled to rely upon the service agent’s authority, which is limited to accepting service for disputes under the Trust Deed.  To the extent that the plaintiff is reliant upon the double derivative nature of the action and therefore the proposition that it effectively stands in the shoes of the Trustee, there was at the very least serious material non disclosure because it ought to have been brought to the attention of the court that the plaintiff was not a party to the Trust Deed and, by the latest 5 October 2020, the plaintiff was well aware that the Trustee and BMO were both disputing its standing and ability to bring a derivative action.  These points are not simply points on the merits of the defence.  They go to the standing and locus of the plaintiff to bring the action, and to serve the writ in the manner that was employed.  Hence they are matters which are highly relevant to whether a default judgment should be granted.

28.  The Plaintiff makes the following points in response:

28.1   The judgment is regular.  The only reading of the default judgment which is permissible is that the abandonment of the claim in prayer 4 of the Statement of Claim is limited to an abandonment of the consequential directions referred to in paragraph 39 of the statement of claim.  The judgment is a judgment in favour of the plaintiff pursuant to the consequential directions sought in paragraph 32 of the Statement of Claim.  It cannot be said that the court read the abandonment in any other way because such a reading is the only basis upon which the court could have given judgment in favour of the plaintiff, rather than in favour of the Trustee.

28.2   The Bonds that were purchased or exchanged by the New Exchange Bond Issuer are effectively held for the benefit of the 1^st defendant as Issuer, because they have been expressly purchased so as to reduce the total financial leverage of the Issuer, and maintain its overall economic stability. As a result, under the definition of “outstanding” in clause 1.1 of the Trust Deed, those Bonds are deemed not to remain outstanding.  Consequently the plaintiff is a holder of more than 25% of the outstanding Bonds, is entitled to require the Trustee to bring an action for recovery and, in the light of the Trustees refusal to do so is entitled to bring this action on a derivative (or double derivative) basis.

28.3   The correspondence demonstrates that the plaintiff was prepared to indemnify and pre-fund the Trustee, such that the Trustee’s and 1^st and 2^nd defendants defence based upon a failure to indemnify and pre-fund is misplaced.

28.4   The plaintiff is entitled to stand in the shoes of the Trustee on the basis that the action is a double derivative action, and that was made expressly clear within the statement of claim.  Hence service was valid and no further disclosure was required.

D.  Analysis

29.  In my view this judgment is irregular.  There is no doubt that default judgment can only be obtained for the relief which is pleaded in the statement of claim. The statement of claim in this action is expressly pleaded on the basis that it is a double derivative action and that the relief is claimed on behalf of the Trustee and BMO.  Paragraph 32 of the statement of claim expressly states that:

“the Issuer and the Guarantor are jointly and severally liable to the Trustee (for and on behalf of the holders of the Bonds, including in particular BMO as custodian, nominee and bare trustee of BlueSun).”

30.  The prayer for relief is expressly on the basis that the relief in prayer (1), (2), (3), (5), and (6) is claimed only on behalf of the 3^rd and 4^th defendants (i.e. the Issuer and the Guarantor). 

31.  Prayer (4) of the relief is a claim for consequential directions as pleaded in paragraph 34 or alternatively 39 of the statement of claim, and it is only under those paragraphs (and in particular paragraph 34) that the plaintiff could seek a direction that it is entitled to be paid the US$14.5 million directly.

32.  Yet in answer to the requisition by the court, the plaintiff expressly abandoned any claim under prayer 4.  Consequently, on the remaining claims pleaded, there is no basis on which the plaintiff is entitled to judgment for payment directly to it, as no relief is claimed.

33.  Therefore judgment in favour of the plaintiff for US$14.5 million is simply not a relief claimed in the statement of claim.  On that basis, the judgment must be irregular.

34.  I do not accept the plaintiff’s proposition that the abandonment of the relief in prayer 4 is limited to the consequential directions sought in paragraph 39 of the statement of claim, or that the judgment was given pursuant to the consequential directions sought in paragraph 32 of the statement of claim.

35.  There is no such limitation on the face of the abandonment.  The abandonment is clear and I do not consider that it can be read in the manner suggested by the plaintiff.   

36.  The Plaintiff urged on me that the court must have understood the abandonment in the way it contends, because it is the only way in which the statement of claim, the default judgment and the abandonment could be construed consistently.   I must assume, it says, that the court did not make an error, and therefore I must construe the abandonment in this manner, as otherwise I would be accepting that the court erroneously entered a judgment it was not entitled to enter. 

37.  I do not agree with the plaintiff in this respect.  The court is not immune from making errors.  Indeed that is part of the rationale for a structure in which orders can be set aside and appeals can be made, with judges of increasing seniority looking at the decisions made below in order to assess whether errors have in fact been made.  So I do not accept the proposition that I must strive to construe what has happened in a way which justifies it.  As the 1^st and 2^nd defendants contend, I must look objectively at what has happened, and make an assessment of those facts.  If, in my view, the court entered a judgment that it ought not to have entered, then I must set it aside. 

38.  That is indeed what has happened in my view.  The court has entered a judgment in favour of the plaintiff on its own behalf when there was no such claim pleaded in the statement of claim.

39.  As the 1^st and 2^nd defendants point out, there was a good reason for requisitions made by the court and the abandonment by the plaintiff of the consequential directions.  Those directions would likely have the effect of taking the judgment sought out of a liquidated claim, and into the category of “other claims” as identified in the Rules of the High Court.  Without an abandonment of “other claims”, the plaintiff would not have been entitled to a default judgment as a result of one or more RHC Order 13 Rule 6(1) and/or Order 19 rule 7.  Hence, even if there was some doubt as to the possible construction of the abandonment, and even if I was to look for a justification for the actions taken by the court, I see justification in seeking an abandonment, and for that abandonment being construed as an abandonment of all consequential directions.  The error (if there was an error) then lay in failing to recognise that judgment could not be given in favour of the plaintiff without qualification, as the nature of the claim was a derivative claim such that any money was to be recovered only on behalf of the Trustee and BMO.

40.  In the circumstances I am satisfied that the judgment is an irregular judgment and must be set aside ex debito justitiae.  Strictly speaking therefore I do not need to go on to decide the other points raised by the parties, however in case I am wrong, and in order to make some assessment of whether terms ought to be imposed upon the setting aside, I shall consider those other points.

41.  I accept that the 1^st and 2^nd defendants have a real likelihood that they will succeed in their defence that the plaintiff does not hold more than 25% of the outstanding Bonds.  There is, therefore, a real likelihood that the plaintiff was not entitled to require the Trustee to take enforcement action, and hence no basis for a claim against BMO in this respect.  It is also clear that the plaintiff is not entitled to bring the claim in its own right as a result of clause 14 of the Conditions.

42.  The plaintiff’s argument is that the Bonds held by the New Exchange Bond Issuer, which is a sister company to the Issuer are, to quote the definition of “outstanding”:

“beneficially held by or on behalf of any of the Issuer, the Guarantor or any of their respective Subsidiaries and not cancelled [and are hence] deemed not to remain outstanding.”

43.  The plaintiff relies upon three matters:

43.1   The 1^st and 2^nd defendants and the New Exchange Bonds Issuer are all beneficially owned and controlled by the Tianjin SASAC and share common economic and strategic interests.

43.2   The stated rationale for the Exchange and Tender Offers was that:

“The New Exchange Bonds Issuer is conducting the Offers to fulfil its mission as a supply-side structural reform platform by assisting state-owned companies to reduce their total financial leverage, maintaining economic stability, maximising the social and economic effects of state-owned capital, invigorating state-owned companies and enhancing their competitiveness.”

43.3   The Exchange and Tender Offers were made on 22 November 2019, which was less than a month before the cross-default and shortly before the due date of the Bonds.

44.  In my view the 1^st and 2^nd defendants have a real likelihood of succeeding in showing this proposition to be wrong.  First, whether the Bonds held by the New Exchange Bonds Issuer are in fact held beneficially for the Issuer is a question to be determined by reference to the intention of the New Exchange Bonds Issuer and the Issuer as at the time when the Bonds were acquired.  It will be for the plaintiff to establish that intention, and the clear evidence in the affidavits submitted on behalf of the 1^st and 2^nd defendants are that there was no such intention.  I accept that those statements will be the subject of close scrutiny at any trial and will need to be tested as against all the contemporaneous documents, but at this stage I accept that there is a real likelihood of the 1^st and 2^nd defendants being able to defeat the claim on this basis.

45.  As part of that consideration, I am conscious that if the intention of the New Exchange Bonds Issuer was indeed to maintain economic stability of the Issuer it would make little sense to hold the Bonds beneficially for the Issuer.  If they were held beneficially, the Bonds they held would not be considered to be outstanding and hence a different bondholder, such as the plaintiff, may well be able to dictate to the Trustee the action that the Trustee should take. Instead of maintaining economic stability of the Issuer, that would in fact be placing the economic stability of the Issuer in the hands of entities that would otherwise simply be minority bondholders. 

46.  Hence there is a far greater rationale for the New Exchange Bonds Issuer not to hold the Bonds beneficially for the Issuer, but instead to hold them for its own benefit, and thereby (assuming that it was able to obtain a 75% majority) to dictate any action which the Trustee may take.  That ability to dictate if and when enforcement action is taken would provide a much greater level of economic stability than would be achieved by holding the Bonds beneficially for the Issuer.

47.  Hence in my view there is a real prospect that the 1^st and 2^nd defendants are correct that the plaintiff does not hold greater 25% of the outstanding Bonds.

48.  Further, I am satisfied that there is a real prospect that the 1^st and 2^nd defendants will succeed in their proposition that the plaintiff did not indemnify and pre-fund the Trustee as was required as a pre-condition to the Trustee taking action.

49.  I shall not recite all the correspondence in detail, but suffice it to say that on 29 June 2020 the Trustee sent to the plaintiff an indemnity form and requested the plaintiff to confirm that it was willing to sign it.  Further, the Trustee requested pre-funding in the amount of US$75,000 for the purposes of obtaining a London QC opinion on the question of whether the plaintiff was a holder of more than 25% of the outstanding Bonds.  It also said it would normally require US$300,000 as pre-funding for enforcement action in Hong Kong, but as other Bondholders were likely to dispute any action taken, it asked the plaintiff for its proposals as to an appropriate pre-funding arrangement in the light of those issues and risks, together with detailed information as to the assets of the BlueSun entity which intended to enter into the Deed of Indemnity. 

50.  There was no response to that letter from the plaintiff, despite the plaintiff having previously indicated its willingness to both indemnify and pre-fund.  Hence, the plaintiff:

50.1   Did not indicate its willingness to sign the specific indemnity form that the Trustee required;

50.2   Did not provide the pre-funding requested in the sum of US$75,000;

50.3   Did not make any proposals as to a suitable pre-funding arrangement in the light of the known risks and issues surrounding its standing to require enforcement action to be taken;

50.4   Did not provide details of the assets of the BlueSun entity that would sign the Deed of Indemnity.

51.  In the circumstances I am satisfied that the 1^st and 2^nd defendants have a real likelihood of success in relation to this defence as well.

52.  As to the question of service, if the action is a derivative action, I accept that the plaintiff would step into the shoes of the Trustee (through BMO if it is a double derivative), and in those circumstances would be entitled to rely upon the service clause in the Trust Deed.  But there are two problems for the plaintiff:

52.1   The plaintiff sought judgment directly in its favour.  It is at least arguable (although the plaintiff says nonetheless wrong) that it required a judgment in favour of the Trustees.  At the very least money payable under a derivative action would have to be received by the Trustee both in terms of the procedure applicable in a derivative action, and as a matter of substantive rights under the waterfall clause.  Therefore arguable the plaintiff had no locus to seek judgment in its favour.

52.2   It is at the least arguable and relevant that it was not entitled to rely upon the service clause in the Trustee Deed in circumstances where the Trustee and BMO were both contesting its standing to bring a derivative action at all.

53.  As a matter of practice it is clear that a material non disclosure is sufficient to set aside a default judgment.  Generally speaking the plaintiff would not have to make disclosure of possible defences to the underlying action, because those defences are generally not relevant to a default judgment.  But the matters to which I have alluded go beyond simply being a defence to the action.  They relate to the plaintiff’s standing and locus to bring the action, and to the validity of the service that the plaintiff relied upon.

54.  In my view, particularly after 5 October 2020, when both the Trustee and BMO had served defences disputing the plaintiff’s entitlement to bring the action, the plaintiff was under an obligation to bring to the attention of the court the fact that it might be said against the plaintiff that it had no standing to bring the action, and that the service it relied upon was not good and effective service in the circumstances.

55.  These disclosures could have been done in many ways, and I do not make any suggestions as to the form in which they might have been addressed.  For the reasons that I have already highlighted above, it is likely that the court was somewhat alive to the fact that consequential directions were inappropriate and could not be the basis of a default judgment.  But by not addressing the matter fairly in the affidavits, even when the court raised its requisition, which was after the defences had been served by the Trustee and BMO, the plaintiff was guilty of a serious and material non disclosure.  I have little doubt that had the issues which have now been raised been brought to the attention of the court, it would not have granted a default judgment.

E.   DisposiTIon

56.  In all the circumstances, and having regard to these matters, I am satisfied that the default judgment should be set aside, and no terms should be imposed.

57.  In the light of what I have set out above, I make a costs order nisi that the plaintiff is to pay the 1^st and 2^nd defendants’ the costs of this application.  If either party wishes to seek a variation of this order nisi it should apply in writing within 7 days of handing down judgment, limited to 5 pages.  The other side will have a right of response, within 7 days thereafter, limited to 5 pages, and the applying party has a right of reply 3 days thereafter limited to 3 pages.