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SATURN INVESTMENTS SARL v WAH BON CHING EDMOND & ORS
2016 SCJ 5
Record No: Co 01 (PWS)/11
IN THE SUPREME COURT OF MAURITIUS(COMMERCIAL DIVISION)
In the matter of
Saturn Investments SARL
Plaintiff
v.
1. Mr Edmond Wah Bon Ching
2. Sydney Ah Yoong
3. Citic Capital Finance Limited
4. Citic Capital China Mezzanine Fund Limited
5. Bridge Property Investments Pty Limited
6. Global Mart Limited (now in receivership)
Defendants
JUDGMENT
Saturn Investments SARL, the Plaintiff, is an investor company based in Luxembourg
and has acquired a number of Convertible Notes which have been issued by Global Mart
Limited, Defendant no. 6, a company incorporated under the laws of Mauritius and holding a
Global Business Licence Category 1 (GBL 1) which has been issued by the Financial Services
Commission, (the ‘FSC’)
The Plaintiff in its plaint with summons as amended and restated (the ‘Plaint’) has
prayed for a number of Orders and for damages in tort in the sum of USD 50 million against the
defendants. The Defendants nos. 1 to 5 are represented by Counsel and Attorney whereas
Defendant no. 6 has left default after filing its plea.
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The Plaintiff has called several witnesses to give testimonial evidence at the hearing,
including its representative, Mr. Farkas and has produced a bundle of documents to support its
case.
The Defendants have called only one expert witness, Mr. Xie Yoong on the relevant law
of the People’s Republic of China (PRC), as to which he has also produced extracts from the
relevant legal texts to support his contention.
Facts
Most of the facts of the case are based on documentary evidence made up of contracts
and agreements. In order to properly understand the issues in the present case, it is essential to
understand the timeline and nature of the contracts and agreements which provide the objective
and incontrovertible matrix of facts that underlie the claims of the parties.
GML
Global Mart Limited (GML), the Defendant no.6 is a private company limited by shares
incorporated under the laws of Mauritius and holds a Global Business Licence issued by the
FSC.
The object of Defendant no.6 is to hold investments as stated in paragraph 7 of the
Plaint and it held shares in 5 companies (the ‘PRC Subsidiaries’) in the People’s Republic of
China (PRC).
The Defendant no. 6, through its PRC Subsidiaries carried on distribution business
operating retail hypermarkets, supermarkets and department stores in the PRC. Its original
investments were raised in the form of equity capital and shareholders’ loan. The rights of the
original shareholders under their loan to GML were subordinated to those of the Defendants
nos. 3 to 5 when they entered into the “Mariner loan” to support Defendant no. 6 as borrower.
The loan facility with the Defendant no. 3, (the ‘Mariner Loan’)
When further investment was required to finance inter alia the PRC Subsidiaries and
acquisition by them of suburban supermarkets in PRC, Defendant no. 6 entered into a set of
finance documents for a loan facility of USD $25,000,000 with Citic Capital Finance Ltd, the
Defendant no. 3, (also referred to as CITIC), Citic Capital China Mezzanine Fund Limited, the
Defendant no. 4, and Bridge Property Investments Pty Limited, the Defendant no. 5. In this
respect the main agreement is the loan agreement (the ‘Loan Agreement’) (Exhibit 11- Doc
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P23 refers) to which is annexed a number of security documents. The loan facility of USD
$25,000,000 is also referred to as the Mariner Loan.
The lenders under the Loan Agreement are Citic Allco Investments Limited (now
renamed Citic Capital China Mezzanine Fund Limited), a Cayman Island based company
(Defendant no. 4) and Bridge Property Investments Pty Ltd, an Australian based company
(Defendant no. 5). Citic Capital Finance Limited, a company based in Hong Kong (Defendant
no. 3) acts as their Facility Agent under the Loan Agreement. It is to be noted that at that time
the Plaintiff company did not even exist.
Defendant no. 6 made representations and gave certain warranties and undertakings under
the Loan Agreement. As a condition precedent to the loan facility, Defendant no. 6 was
required to provide evidence that “filings, registrations and other formalities have been or will be
completed in order to ensure that the finance documents are valid and enforceable and to
preserve Defendant no. 3’s priority under any security documents (the ‘Security Documents’).
The Security Documents comprise of the following (Clause 3.1(e)-(i) of Exhibit 11, Doc P23 refers):
(a) the assignment of PRC subsidiary loans;
(b) the debenture and all other documents pursuant thereto;
(c) the guarantee duly executed by the guarantors for the Borrower;
(d) the share pledge by the original shareholders of the Defendant no. 6 (under the law of
Mauritius); and
(e) the subordination deed.
Assignment of the PRC subsidiary loans dated 22 May 2007
The assignment of the PRC subsidiary loans (the ‘Assignment’) (Exhibit 12, Doc P24) is
given in favour of Defendant no. 3 as a condition precedent to the effectiveness of the loan
facility and as security for the secured indebtedness. Under the Assignment, Defendant no.6
assigns all its rights, title, interest and benefit in and to the shareholders’ loans to CITIC as
agent for the lenders as a continuing security for the due and punctual payment of the Secured
Indebtedness as defined under clause 2.1 of the Assignment.
The Debenture dated 22 May 2007
The Debenture provides for (i) first fixed charge on the Charged Account (a special bank
account opened at the Standard Chartered Bank Mauritius into which moneys from the PRC
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Subsidiaries are paid); and (ii) a first floating charge over all the undertaking, property and
assets of GML into which all income from the PRC subsidiaries was to be paid.
It is to be noted that clause 4 of Doc P25 makes it a continuing security to be in full
force and effect “notwithstanding the insolvency or liquidation or any incapacity…of the
Borrower.”
The guarantee agreement dated 22 May 2007
It is a condition precedent of the loan facility available to the Borrower that the original
shareholders of GML at the time of the term loan facility, guarantee jointly and severally the due
and punctual payment of the secured indebtedness of GML (Clause 2.1 of Doc P27, Exhibit 15 refers).
The share pledge agreement dated 01 June 2007
The share pledge agreement (the ‘Share Pledge’) (Exhibit 14, Doc P26) has been
created under the laws of Mauritius as the shares pledged are those of a Mauritius company,
namely Defendant no. 6. The Share Pledge Agreement provides for the appointment of a
receiver and contains a power of attorney to realise the enforcement of the Share Pledge
(Clauses 7 and 9 of Exhibit 14, Doc P26 refers).
The subordination deed
The shareholders of Defendant no. 6 also entered into a subordination deed (Doc D7 refers) to subordinate all their rights and claims against the Defendant no. 6 to the payment of
the secured indebtedness under the loan facility granted by the lenders, Defendants no. 3 to 5.
Restrictions on future borrowings
The Loan Facility and its range of security documents not only provide a wide range of
charges and security interest on the assets of the Defendant no. 6 but imposed restrictions upon
the Defendant no. 6, its shareholders and guarantors on future actions that may involve further
raising of funds, loan capital or issue of shares, or in creating further indebtedness by Defendant
no. 6.
Issue of convertible notes
About 9 months after the Term Loan Financing from the Defendant no. 3 under the Loan
Agreement, Defendant no.6 decided to raise fresh financing. Apart from the Mariner Loan,
Defendant no.6 needed further funds to maintain its working capital, finance its development
and boost up its financial position.
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Babcock and Brown Securities Pty Ltd, a member of a very large investment bank called
Babcock and Brown structured a deal to invest USD 30 million into Defendant no. 6 and as per
the evidence in chief of Mr. Farkas “[…] of its 30 million, 21 million was invested directly by
Babcock and Brown and $ 9 million was invested by certain Co-Investors which Babcock and
Brown introduced to this transaction. Babcock and Brown was a large investment bank, and it
marketed this opportunity to invest in supermarkets in China and $ 9 million was raised from Co-
Investors, including from Saturn Investments…”
On 15 November 2007, Defendant no. 6 issued convertible notes to Babcock and Brown
Securities Pty Ltd (B&B). Defendant no. 6, the existing shareholders and B&B entered into an
original subscription agreement (Doc P38 refers) and an original shareholders and noteholders
agreement which were subsequently amended and restated on 28 February 2008 when further
convertible notes were issued. (Doc P13 refers to the Amended and Restated Shareholders and Noteholders Agreement).
At about the same time, that is, November 2007, the Plaintiff was incorporated in
Luxembourg. A nominee agreement dated 19 November 2007 (Doc P16 refers) (the ‘Nominee
Agreement’) in relation to the B&B Convertible Notes was entered into between B&B and the
Plaintiff.
Clause 5.1 of the Nominee Agreement provides the acknowledgment of the Plaintiff that
“it shall have no proprietary interest in the benefit of the Subscription Agreement or any other
relevant agreement other than such rights as may arise as a consequence of the beneficial
ownership of B&B Convertible Notes and/or “Conversion Shares”.
Clause 5.2 of the Nominee Agreement contains the confirmation that the Plaintiff is
“solely responsible for making its own independent appraisal and/or investigation into, the
financial condition, credit-worthiness, affairs, status and nature of the [GML]”.
Agreements connected with the issue of the convertible notes
The agreements which are connected with the issue of the convertible notes include the
Subscription Agreement (Doc P38) and the Amended and Restated Shareholders and
Noteholders Agreement (Doc P13).
The Subscription Agreement
As a condition precedent to the Subscription Agreement, the Defendant no. 6 and its
shareholders were to obtain the consent of the Defendant no.3 to allow the issue of the
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convertible notes under the terms of the Subscription Agreement, clause 3(c) of the
Subscription Agreement which provides that:
“The BB Convertible Notes Completion is subject and conditional upon-
(c) Mariner approving in writing the entry into and performance of this Agreement by the
Company and the transaction contemplated therein, and waiving its right to make contribution
to the Company and the Parties, and Mariner entering into the Mariner Side Letter.”
In accordance with clause 3(c) of the Subscription Agreement, without the written
approval of Mariner and the execution of the Mariner Side Letter, the Subscription Agreement
could not come into effect and had no binding force on B&B and the other parties.
The Subscription Agreement makes provisions for extensive indemnities to be provided
by the Defendant no. 6 and the existing shareholders to B&B. Any payment of indemnity to
B&B by Defendant no. 6 and its shareholders would potentially undermine the repayment and
the security under the Mariner Loan and its security documents.
Under clause 6A.9 B&B agrees with the other parties that its right under the Indemnity
Clause 6A and those of its affiliates and nominees are “held subject to the Mariner Side Letter”.
Similarly the rights of B&B and its affiliates and nominees under the Guarantee Clause
6B of the Subscription Agreement is made subject to the Mariner Side Letter (Clause 6B.8 of the Subscription Agreement refers)
Under clause 6C the Subscription Agreement imposes an obligation to use best
endeavors to persuade the Defendant no. 3 to admit any eventual security interest to be taken
by B&B.
According to Defendants nos.1 to 5, the consents to grant B&B any security interest
were never procured nor was any agreement entered into between the Defendant no. 3 and
B&B as contemplated in the clauses of the Subscription Agreement.
The issue of the convertible notes was consented to by Defendant no. 3 but all the terms
of issue were made subject to the Mariner Side Letter which subordinates all claims under the
convertible notes to the rights of repayment to Defendants nos. 3 to 5 under the Loan
Agreement.
The Amended and Restated Shareholders and Noteholders Agreement (the ‘ARSNA’)
I take note that the original shareholders and noteholders agreement has not been
produced during the court hearing and it was agreed that the ARSNA is for the purposes of the
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present case as good as the original except that it caters in addition for the subscription of Great
Summit International to the convertible notes.
The objective of clause 3 of the ARSNA is to regulate the relationship of the
shareholders and noteholders.
Defendants nos.1 to 5 have averred in their plea that the ARSNA is contractual in
nature, and binding upon the parties to it but does not bind Defendant no. 3 which is not a party
to it; therefore the non-compliance of Defendant no. 3 with the provisions of the ARSNA cannot
impact on its rights as a secured creditor.
The Mariner Side Letter (Doc P28 refers)
In connection with the issue of notes and the subscription agreement of November 2007
and the corresponding original shareholders and noteholders agreement, a side letter dated 13
November 2007 was issued by Defendant no. 6 ( the ‘Side Letter’; Doc P28 refers). The Side
Letter is a letter of consent given by Defendant no. 3 as agent of Defendants nos. 4 and 5 as a
condition precedent to the issue of the convertible notes.
The Side Letter refers explicitly to the Mariner loan documents (which it defines as
including the Term Loan Agreement, its Security Documents, that is the Share Pledge
Agreement, the Deed of Subordination, the Debenture, the Assignment of PRC Subsidiary
Loans and the four PRC Equity Pledges).
Clause 2.4 gives prevalence to the Side Letter over the Subscription Agreement or the
Shareholders and Noteholders Agreement.
Clause 3 of the Side Letter subordinates the rights of B&B under clauses 6 and 6B of
the GML Subscription Agreement to the rights of Mariner as against the Existing Shareholders,
and gives Mariner a first right of recourse against the existing shareholders.
Clause 4 sets out the overriding rights of Mariner (CITIC) in the event of default.
Defendants nos.1 to 5 have submitted that the critical point about the Side Letter is that
even if Defendants nos.3 to 5 did not hold any security, and that all their security documents are
tainted and are unenforceable as the Plaintiff has argued, the fact remains that the Plaintiff’s
claim ranks below that of the lenders. The Mariner Loan takes precedence over the repayment
of the Noteholders since the terms of the Convertible Notes are made subject to the repayment
preference in the Mariner Side Letter.
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Defendants nos. 3 to 5 have also submitted that the Plaintiff has no locus standi to claim
that its unsecured debt ranks equal to the claim of the Defendants nos. 3 to 5 under the Mariner
Loan.
Notice of default on Defendant no. 6
Around the middle of 2008 Defendant no. 6 showed signs of financial stress. On 03
March 2009 a formal notice of event of default (the ‘Notice of Default’; Doc P30 refers) was
served on Defendant no. 6 by Defendant no. 3.
On 20 May 2009, Defendant no. 3 appointed receivers over the charged assets of
Defendant no. 6 pursuant to the various Security Documents, which appointment was revoked
on 27 May 2009 (Doc P37 refers).
Defendant no. 3 later requested Defendant no. 6 to comply with its contractual
obligations to provide enforceable charges on its assets (Letter of the Defendant no. 3 dated 16
October 2009; Doc P31 refers)
The Plaintiff has admitted that its rights under the Convertible Notes do not give it any
security on the assets of Defendant no. 6, such that it is arguably an unsecured creditor. The
plaintiff contends that all the charges and pledges of Defendants nos. 3 to 5 on the assets of
Defendant no. 6 are not valid and that Defendants nos. 3 to 5 are therefore unsecured creditors
of Defendant no. 6. The plaintiff has further averred that the debts of Defendants nos. 3 to 5
should rank pari passu (on an equal basis, or at par) with that of the plaintiff. The Defendants
claim that the declaratory orders prayed for from this Court aim at stripping Defendants nos. 3 to
5 of the benefit of their position as secured creditors.
The Plaintiff has further made a claim in tort against all the defendants on the ground
that they have “abused its good faith” and caused it to lose its entitlement to the assets of
Defendant no. 6.
Defendants nos. 3 to 5 are lenders to Defendant no. 6 with whom they have entered into
the Loan Agreement. The Loan Agreement was supported by a number of security documents
to secure the repayment of the loan, including a debenture (the ‘Debenture’) which contains a
fixed and floating charge under the Mauritian law (the ‘Charge’). Defendants nos.1 and 2 were
appointed by the lenders as joint receivers (the ‘Receivers’) of the assets of Defendant no. 6
when Defendant no. 6 defaulted on its repayment obligations under the Loan Agreement.
The present case in essence turns upon:
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(a) the attack by the plaintiff as a third party against the validity of the security interests of
Defendants nos. 3 to 5 as the lenders under the Loan Agreement and its attending
security documents backing up the loan to Defendant no. 6; and
(b) the locus standi of an unsecured creditor of Defendant no. 6, under the Convertible
Notes, which is not in winding up or liquidation proceedings to make a claim for
damages in tort against other creditors (secured or unsecured) of the same debtor jointly
with the Receivers appointed by those creditors.
The Pleadings and burden of proof
The Defendants have claimed that the original plaint with summons, and even the plaint
as amended and restated, (the Plaint) particularly with respect to the claim in tort, reveals a lack
of willingness to set in clear terms the cause of action that the plaintiff is pursuing or to state
with certainty and clarity the hinges on which the whole case rests.
It is the contention of the defendants that (a) the demand of particulars which have been
filed by the defendants to clarify the allegations made in the Plaint has met with a uniform
persistent refusal to disclose anything more than what is averred in the Plaint; (b) the plaintiff
disregarded the need of the defendants to know in advance the case that they have to meet, as
when asked to clarify certain issues during the hearing, the plaintiff’s representative referred
back to the averments in the Plaint; (c) the Plaintiff has failed to provide any particulars of the
alleged fraud; (d) the applications for particulars have been flatly turned down; (e) the material
facts to sustain the Plaintiff’s cause of action are not disclosed in the pleadings, causing
embarrassment to the opposing parties; and (f) with respect to the display of evidence, the
Defendants are of the view that the order in which the witnesses were called by the Plaintiff did
not help in maintaining the case on its proper rails.
The Defendants have thereby submitted that there has been a systematic approach
backed up by a tactical game in the conduct of the case by the Plaintiff in order for the case to
remain vague and elusive about the faute if any committed by the Defendants and the charge
that they need to meet.
In support of their arguments on the issue of pleadings and burden of proof, the
Defendants have referred to the Australian case of R v Associated Northern Collieries (1910) 11 CLR 738 in which Isaacs J stated the essential requirement of procedural fairness that the
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plaint and the particulars describe clearly and distinctly the particulars of the cause of action as
follows:
“I take the fundamental principle to be that the opposite party shall always
be fairly appraised of the nature of the case he is called upon to meet, shall be
placed in possession of its broad outlines and the constitutive facts which are said
to raise his legal liability. He is to receive sufficient information to ensure a fair trial
and to guard against what the law terms “surprise” but he is not entitled to be told
the mode by which the case is to be proved against him”.
The case of Mc Philemy vs Times Newspaper Ltd [1999] 3 All ER 775 has also been
referred to in which it was stated that:
“Pleadings are still required to mark out the parameters of the case that is being
advanced by each party. In particular they are still critical to identify the issues and the
extent of the dispute between the parties. What is important is that the pleadings should
make clear the general nature of the case of the pleader.”
The Defendants further referred to the cases of Mirbel Marie Jean Nelson & Ors v State of Mauritius & Ors (2009) UKPC 16 and Premchand I & Ors v Jagoo A.R. & Ors [2013
SCJ 184].
In the case of Bruce v Odhams Press, Limited (1936) 1 KB 697 Scott LJ stated:
“The function of “particulars” is to fill in the picture of the plaintiff’s cause of action
with information sufficiently detailed to put the defendant on his guard as to the case he has
to meet and to enable him to prepare for trial.”
In Maxo Products v Swan Insurance Co Ltd [1996 SCJ 55] the Supreme Court of
Mauritius held that: “it is the cardinal principle of pleading where fraud is intended to be charged,
it must be distinctly charged, and its details are specified. General allegations, however strong,
are insufficient to amount to an averment of fraud of which any Court ought to take notice.” The
Court also quoted with approval the remarks of Lord Denning M.R. in Associated Leisure Ltd (Phonographic Equipment Co. Ltd v Associated Newspapers Ltd (1970) 2 Q.B. which
provides as follows:
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“the pleading ought to be scrutinized closely. The defendants ought to give proper
particulars. They ought not to be allowed to put in a loose, ineffective pleading at the last
hour.”
The Defendants’ stance is that they have no case to meet either in law or on the facts,
the main reason being that the issues from the Plaint have not been dealt with by the provisions
of the documents which have been produced during trial. The Defendants have further
submitted that they have had no obligation to submit themselves to cross examination and the
legal issues raised and the state of the evidence did not warrant any oral deposition on behalf of
the Defendants nos. 1 to 5.
As rightly stated by the Defendants’ Counsel, the onus is on the Court to assess the
weight of the evidence which have been produced during the hearing and that the Court will
have to be satisfied on a balance of probabilities that the case of the Plaintiff has been
established.
I shall refer to the case of Poussin v Fillon [1991 MR 281] where it was observed that:
The first submission stems from a misconception in terms.
When it is said that the burden which rests on a party to a suit in a civil
case is that of showing that, on a balance of probabilities, his case has
been made out, this elementary rule of the law of evidence does not
apply only where both parties have led evidence.
In the case of Poussin (supra) the case of the Marie v Lowtee [1963 MR 188] was
referred to where the trial judge had concluded that “[…] even though no evidence was led for
the defendant, the plaintiff had not made out a prima facie case on the ground that his testimony
was full of contradictions.”
Although the pleadings and the burden of proof are not strictly in issue in the present
case, I shall nevertheless consider the Defendants’ submissions in relation to those issues.
The onus was on the plaintiff to adduce evidence and prove its case on a balance of
probabilities thereby making out a prima facie case, notwithstanding the fact that no evidence
was called on behalf of the Defendants nos. 1 to 5. In order to determine whether the plaintiff
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has indeed proved its case as per the required standard of proof, I shall consider the issues set
out in the Plaint and the evidence provided in support of its averments.
Prayers of the plaintiff
Pursuant to paragraph 58 of the plaint as amended and restated, the Plaintiff is praying,
inter alia, for declaratory orders, namely:
a) to declare that the purported written resolution dated 20 October 2009, the Resolution
creating the charge over the assets of Defendant no. 6 is ultra vires;
b) to order that the fixed and floating charge dated 21 October 2009 and registered on 23
October 2009 be declared null and void;
c) to declare Defendants nos. 3, 4 and 5 as unsecured creditors and to rank “pari passu”
with the plaintiff;
d) ordering the Defendants nos. 1 and 2 to furnish to the plaintiff all statutory reports, on the
state of the affairs with respect to property in receivership of Defendant no. 6, required to
be filed by them whilst holding the office of Receiver/Manager of Defendant no. 6;
e) ordering the Defendants nos. 1 to 6 to pay to it the sum of USD 50,000,000 as damages
for the prejudice suffered, together with interest at the legal rate as from date of entry of
this present plaint with summons till the date of final payment;
f) ordering Defendants nos. 3, 4,and 5 to refrain from acting on purported charges which
do not comply with Mauritius law;
g) in the event that the Defendants nos. 1 to 6 have effected a sale of the assets of
Defendant no. 6, either in pursuance of the equity pledges as referred to, at paragraph
53 of the Plaint, or otherwise, then ordering the said defendants to cause proceeds of
sale to be deposited in an escrow account to be distributed to all the creditors;
h) for any other order/s as this Court may deem fit and reasonable in the circumstances.
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The gist of the Plaintiff’s case is (i) to assert its rights as an unsecured creditor of
Defendant no. 6, GML; (ii) to deny that the Defendants nos. 3, 4 and 5 are secured creditors
firstly under a fixed and floating charge under the Mauritius laws and secondly under certain
share pledge agreements governed by the PRC law which granted them a pledge on the assets
of GML in PRC; and (iii) consequently, in the view of the Plaintiff, to require the Defendants nos.
1 to 5 to put in escrow the money received on disposal of assets of GML in realizing the PRC
pledges for eventual distribution pro rata among all the creditors of GML, including the Plaintiff,
presumably whenever a winding up order should be made on GML.
In addition to the declaratory orders being sought, the Plaintiff proffers a claim in tort for
damages in the sum of USD 50,000,000 irrespective of whether the declaratory orders are
granted or not.
As rightly suggested by the Defendants’ Counsel, the prayers in the Plaint may be
examined under three focal nodes, namely:
(a) the validity of the fixed and floating charge under the Mauritian Law;
(b) the validity of the Chinese pledges under the Chinese law; and
(c) the alleged joint liability of the Defendants in tort.
I shall first consider those main issues in relation to the set of orders prayed for by the
Plaintiff as per the submissions of the Defendants, which are as follows:
First Group of prayers (Group A)
The prayers under paragraphs 58 (a), (b) and (e) of the Plaint turn in effect firstly
around the validity or enforceability of the Charge. They concern the events that lead to the
signature and execution of the Charge by the Defendant no.6 before the notary, Mr. Constantin.
It is the plaintiff’s case that the directors’ written resolution dated 20 October 2009 was
invalid and in breach of the provisions of section 158 of the Companies Act 2001, sections 4, 7 of the Eighth Schedule of the Companies Act 2001 and section 71(4)(a) & (b) of the
Financial Services Act 2007.
Second Group of prayers (Group B)
The Group B prayers under paragraph 58 (c) and (g) of the Plaint deal with the
occurrence of events in PRC in relation to the share pledge agreement under the PRC law
relating to the shares of four Chinese subsidiaries of Defendant no. 6 belonging to Defendant
no. 6 and which constitutes its sole assets. According to the Plaintiff, those share pledges are
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not valid and so is the Charge (under Mauritian law). The Plaintiff further contends that the
lenders rank as unsecured creditors. Consequently the Plaintiff argues that whatever is realised
from the sale of the pledged shares of the PRC Companies should be brought into an escrow
account for eventual distribution between the creditors of Defendant no. 6 in equal proportion.
Third Group of prayers (Group C)
The last prayer under paragraph 58 (f) of the Plaint relates to the claim in tort which is
laid against all the Defendants. The Plaintiffs’ contention is that its good faith has been abused
by Defendants nos. 1 to 5 as a result of which it has suffered immense prejudice.
The Defendants have submitted that the prayer does not indicate whether the liability is
jointly and in solido and there is no presumption in law that it is so. According to the Defendants
it is not clear from the Plaint what specific faute is alleged against each of them or whether they
should be considered as being co-authors in each and all the potential causes of action. The
Defendants have further invoked the meaning of the term “cause of action” as referred to by
Lord Esher M.R in Read v Brown (1888) 22 Q.B.D. 128 as follows:
“It has been defined in Cooke v Gill (Law Rep. 8.C. P.107) to be this: every fact which it
would be necessary for the plaintiff to prove, if traversed, in order to support his right to the
judgment of the Court. It does not comprise every piece of evidence which is necessary to
prove each and every fact, but every fact which is necessary to be proved.”
Plea of the Defendants
The plea of Defendants nos. 1 to 5 is an outright denial of the accusations of the Plaintiff
that they have in any way acted unlawfully and fraudulently. The Defendants nos. 3, 4 and 5
have averred that (i) they are secured creditors under the Mauritius law charges, the PRC law
Chinese pledges and under the Loan Facility Agreement and the Side Letter which give them
priority in ranking to the repayment of the debt over the noteholders; (ii) they were entitled to
enforce and have properly enforced their security in the PRC on the assets of Defendant no. 6,
GML; (iii) they have not abused their rights as creditor in enforcing their security.
As secured creditors, they were entitled to exercise their security on the Chinese
pledges without regard to the claim of the Plaintiff as unsecured creditor who did not have any
enforceable right whatsoever in these assets or any asset of Defendant no. 6, GML.
According to the Defendants, as long as Defendant no. 6 is not in winding up, the
Plaintiff has no proprietary right in its assets and the pari paru principle of creditors is not
triggered and does not come into operation.
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Defendants nos. 3, 4 and 5 aver that:
(a) the Charge is a valid obligation and security against Defendant no. 6 and against the
noteholders including the Plaintiff, as third party creditors of GML, and state that they
have acted legitimately and bona fide in making the appointment of the receivers when
GML defaulted on its repayment under the Loan Agreement;
(b) the Chinese Pledges are valid under the PRC laws and together with the powers of
attorney give effect to their property rights opposable erga omnes. They have been
properly enforced under PRC laws under which they were realised independently of the
Receivers and of the Mauritius law Charge; and
(c) they effectively and bona fide realised the Chinese Pledges under the PRC law by
disposing of the shares in the Chinese companies as they were entitled to do under the
Chinese Share Pledge Agreements.
Defendants nos. 1 to 5 have further denied in their plea that they are liable in tort for
having committed any “faute” or any abuse of rights and they claim that they have acted
legitimately in accordance with the law to enforce their rights and powers, and that in so doing
they have not acted disproportionately nor committed any abuse of their rights.
Defendants nos. 1 to 5 further claim that they held the PRC Shares as pledges for the
repayment of the Mariner Loan which they were entitled to realise and appropriate the sale
proceeds in repayment of the outstanding secured indebtedness of Defendant no.6.
In order to determine the present case, it is necessary to consider the versions of both
the Plaintiff and the Defendants with respect to the issues raised under the three sets of prayers
as mentioned above. I shall first consider the facts established on the evidence adduced in
relation to the issues raised under the Group A Prayers.
Validity of the resolution of the Defendant no.6 dated 20 October 2009 (the ‘Resolution’)
Version of the plaintiff
On 20 October 2009, a written resolution was entered into to create a fixed charge for
USD 3,000,000 over the assets of Defendant no. 6. Mr. Adil Kumar was purportedly authorized
to sign the fixed and floating charge in favour of Defendant no. 3.
The Plaintiff is challenging the validity of the Resolution on three main grounds, namely:
(a) the Resolution was not signed by all the directors;
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(b) the Board was not properly constituted; and
(c) the Resolution is ultravires.
The Plaintiff’s written submissions with respect to the invalidity of the Resolution:-
(i) The plaintiff’s claim is that only 3 directors signed the written resolution and not all the
directors were made aware of the request of Citic.
(ii) The written resolution creating the charge in favour of Defendant no. 3 was not signed by
directors Messrs. Matthew David Perrin, Amar Bheenick and Dharmesh Nayeck at the time
that it was executed.
(iii) The Plaintiff’s claim is that the directors Messrs. Amar Bheenick and Dharmesh Nayeck had
resigned as directors on 20 October 2009 at 09.00 hrs and they were not directors at the
time of the resolution and execution of the resolution.
(iv) The Plaintiff has further averred that the directors Messrs. Amar Bheenick and Dharmesh
Nayeck had resigned as directors on 20 October 2009, the very date of the signature of the
resolution.
(v) The Plaintiff avers that the written resolution was passed in contravention of section 158, and paragraphs 4 and 7 of the Eighth Schedule of the Companies Act 2001.
(vi) It is the Plaintiff’s case that because the 2 resident directors, Messrs. Amar Bheenick and
Dharmesh Nayeck have not signed the resolution and have not executed it, the resolution is
in contravention of sections 71(4)(a) & (b) of the Financial Services Act 2007(the ‘FSA’).
(vii)The Plaintiff has relied upon the evidence of Mr. Nayeck (Page 37 additional brief 7) that
GML was a client of OCRA (a Management Company) and he was personally a resident
director of GML and Mr. Bheenick was the other resident director. Further Mr. Nayeck has
admitted in Court that both he and Mr. Bheenick had resigned as resident directors as they
were not happy “[…] with the transaction going ahead” whereby they had been asked to sign
a document, the Charge, Doc P1 without a legal opinion. Mr. Nayeck further stated that he
“[…] asked for a Charge Document that they say “transaction”. We said we wanted to see
more of the transaction. We did not get any other documents and we decided to resign”.
17
(viii) The Plaintiff further submitted that Defendant no. 6 not having the required quorum, could
not transact any business and besides Mr. Nayeck as a director, was not served any notice
of meeting prior to the meeting of the Board purporting to give authorization to vote upon
the resolution creating the Charge.
(ix) The Plaintiff further relies on the evidence of the Chief Examiner of the Financial Services
Commission, Mr. Vishal Nowruttun who has deponed to the effect that Defendant no. 6,
being a Global Business Company had to have 2 locally resident directors who had to be of
appropriate caliber and of an independence of mind. He also stated that the absence of the
2 resident directors prejudices the validity of the Global Business Licence.
(x) Mr. Nowruttun has further stated that OCRA, the management company of Defendant no. 6
had informed the FSC by letter dated 22 October 2009 that the 2 resident directors had
resigned on 20 October 2009 (Doc P12 refers). He explained that the global business
licence of Defendant no. 6 has lapsed since 01 July 2002.
(xi) In cross examination, Mr. Nowruttun agreed that the company could operate from 20
October 2009 to the extent that is should ensure that it has two locally resident directors and
that without such resident directors the company would not be able to transact, or enter into
an agreement for the day to day conduct of its business. Mr. Nowruttun has laid emphasis
on the fact that the legislator has specified in the Financial Services Act 2007 that Global
Business, Category 1 companies should have at least 2 resident directors.
(xii)The plaintiff’s representative Mr. Farkas, referred to Exhibit 21 which is a letter dated 16
October 2009 whereby Defendant no. 6 was urged to subscribe to a fixed and floating
charge to perfect the existing debenture agreement of 22 May 2007 in respect of the loan of
USD 25 million (Doc P31). Mr. Farkas further explained that Citic was thereby admitting it
did not have a valid fixed and floating charge and according to the plaintiff this indicates a
conspiracy between Citic and Global Mart and that they have resorted to the written
resolution dated 20 October 2009 which is not valid, the reasons being that:
1. There was not a notice of meeting served on all the directors; and
18
2. The 2 resident directors had resigned and not signed the resolution creating the Charge
and the resolution necessitated the approval of material shareholders as provided by the
Shareholders Agreement. (Section 158, and paragraphs 4 and 7 of the 8th Schedule of the Companies Act 2001).
3. At the time of the resolution passed on 20 October 2009 Defendant no. 6 was insolvent
and yet granted a charge of USD 30 million in favour of Citic.
4. The two directors who signed the resolutions creating the Charge, had conflicting
interests with Defendant no. 6 as they had given their personal guarantee to Citic for
repayment of Citic’s loan by Defendant no. 6 in the sum of USD 25,000,000 which
became USD 30,000,000 by the said resolution. The remaining two directors, Mr.
Grenville and Mr. Nathan Thynne have preferred Citic to the other creditors because
they had an interest to free themselves of their personal guarantee in relation to the Citic
loan to Defendant no. 6.
5. The third director, Mr. Soo Jin Goh took up employment with a private equity investment
company following his departure from Defendant no.6 and thought of handing an
investment transaction to his new employer.
At paragraph 28 of the Plaint, the Plaintiff has stated the following:
“Section 158 of the Companies Act 2001 and section 7 of Eighth
Schedule of the Companies Act 2001 states that the resolution in writing, signed
or assented to by all directors then entitled to receive notice of a Board meeting,
is as valid and effective as if it had been passed at a meeting of the Board duly
convened and held. The absence of the signatures of Messrs. Matthew David
Perrin, Amar Bheenick and Dharmesh Naik on the written resolution of 20
October 2009 therefore renders the written resolution to create the fixed and
floating charge in favour of CITIC null and void.”
Version of the Defendants
The Defendants have denied this averment and stated that firstly the content of section 158 of the Companies Act 2001 is not as averred by the Plaintiff. Section 158 reads as
follows:
19
“Subject to the Constitution of a company, the provisions set out in the
Eighth Schedule shall govern the proceedings of the Board.” (Emphasis added).
The Defendants further claim that counsel for the Plaintiff never touched on any specific
provisions of the Constitution of the Defendant no. 6 on the Resolution in his examination of his
witnesses.
Paragraph 7 of the Eighth Schedule of the Companies Act 2001 read as follows:
“A resolution in writing signed or assented to by all directors then entitled
to receive notice of a Board Meeting, is as valid and effective as if it had been
passed at a meeting of the Board duly convened and held.”
According to Defendants nos.1 to 5, the questions of Counsel for the Plaintiff on notice
being given before circulating the Resolution are therefore irrelevant to the validity or otherwise
of the Resolution.
In their plea, the Defendants have averred that the Resolution was signed by all the
directors then in office and entitled to receive notice of meeting, and therefore was valid
because at the relevant time the only directors who were entitled to receive notice of the Board
meeting were Messrs. Nathan Lambert Thynne, Grenville Matthew Thynne and Soo Jin Goh.
Therefore, the argument of the Plaintiff was whether Messrs. Nayeck, Bheenick and Perrin were
at the relevant time directors of the Defendant no.6 who were entitled to receive notice of a
Board meeting, and whether Mr. Soo Jin Goh was conflicted and should not have voted on the
Resolution.
The Defendants referred to the material witnesses who have deponed lengthily on the
above issues including Mr. Nayeck, Managing Director of OCRA Ltd and former director of
GML. The Defendants have submitted that the fact that the examination of Mr. Nayeck was
done twice, once in his own name, and once as a representative of OCRA Ltd, is a most
deplorable manner of conducting an examination in chief of a witness for the Plaintiff.
The Defendants have relied on the statement of Mr. Farkas, a representative of the
Plaintiff company, during his examination which reads as follows:
“Well I would now have to say that if Messrs. Bheenick and Nayeck were
not directors at the time that this resolution was passed because they resigned
earlier in the morning on the day on which the resolution was passed, then the
absence of their signatures on the written resolution would not make the
20
resolution null and void because they were not directors at the time that the
resolution was passed.”
According to the Defendants, the only remaining objections to the validity of the written
resolution are (i) Mr. Matthew Perrin did not sign the resolution; and (ii) Defendant no.6 did not
have any resident director.
The Defendants have claimed that after much debate and examination of witnesses,
particularly Mr. Nayeck, it was not disputed that Mr. Perrin was declared bankrupt as it is clear
that the company and its secretary were aware of the bankruptcy of Mr. Perrin. According to the
Defendants, the matter is governed by section 133 of the Companies Act 2001 which
provides that:
“no person shall be appointed, or hold office, as director of a company if
he is a person who is…(c) an undischarged bankrupt”
It is the contention of the Defendants that there is evidence that Mr. Perrin was declared
bankrupt (though not in Mauritius) before 20 October 2009, which is the date of the Resolution.
Moreover, the Defendants have relied upon the statement of Mr. Nayeck who admitted during
proceedings at the hearing that “[…] on the file, there is a lot of documents that relate to Mr.
Perrin’s bankruptcy”.
The Defendants therefore submitted that the status of bankrupt, like legal capacity,
attaches to the person irrespective of the jurisdiction in which he is acting. Hence, in this
respect, the Defendants further submitted that there were only 3 persons remaining as directors
of the Defendant no. 6 and those 3 persons were all the directors of the company who were
entitled to receive notice of meeting and their unanimous consent to the resolution of 20
October 2009, gives the Resolution the full force and validity as if it was a resolution passed at a
duly convened meeting of the Board of directors of Defendant no. 6.
In relation to the Plaintiff’s arguments that the Board of directors of Defendant no. 6 (i)
was not properly constituted on 20 October 2009; (ii) did not comprise of the persons named in
the Shareholders and Noteholders Agreement (as amended and restated in the ARSNA); and
(iii) was not composed of the 2 resident directors (paragraphs 9, 10 and 27 of the Plaint refer), the Defendants have submitted the following:
(a) In law, the fact that the composition of the Board of directors does not meet the
contractual requirements of the Shareholders and Noteholders Agreement does not
21
affect Defendants nos.1 to 5 who are not party to that agreement nor does it in law
render the resolution of the directors invalid;
(b) The requirement of the 2 local resident directors is not enshrined in the provisions of the
Companies Act 2001 but is a condition which is attached to the Global Business
Licence Category 1 granted to Defendant no. 6. The absence of the 2 local resident
directors is a breach of one of the conditions of the GBL1 licence but does not render the
resolution of the Board invalid or the company defunct as explained by Mr. Nowruttun.
The Defendants therefore contended that the prayer under paragraph 58 (a) of the Plaint cannot be granted since there is nothing to show from the evidence and especially from
the Constitution of Defendant no. 6 that the resolution that was passed is beyond the legal
capacity of Defendant no. 6. It was within the powers of Defendant no. 6 to provide a charge
over its assets, and it was already an obligation under the Mariner Security Documents for the
Defendant no. 6 to give that form and extent of security over its assets in consideration for the
loan provided.
Validity of the fixed and floating charge
Version of the Plaintiff
As seen above, on 20 October 2009, a written resolution was entered into to create the
Charge (Exhibit 23 and Doc P33 refer) over the assets of Defendant no. 6. The Plaintiff has
challenged the validity of the Charge and contested the appointment of Mr. Aadil Koomar to act
as agent and proxy of Defendant no. 6. Moreover, the Plaintiff has challenged the authenticity
of the signatures in the notarial deed.
The Plaintiff has averred in its Plaint that: “the purported creation of the charge on 20
October 2009 tantamounts to a fraud in as much as all the three directors did so from a position
of personal conflict and in order to further their personal ends…Defendant no. 6 was insolvent at
the time of the written resolution that was purportedly passed to create the charge in favour of
CITIC” (paragraphs 32 and 35 of the Plaint refers)
With respect to the issue of conflict of interests, according to the Plaintiff, the 2 directors
who signed the resolutions creating the Charges, had conflicting interests with Defendant no. 6
as they had given their personal guarantee to Citic for repayment of Citic’s loan by Defendant
no. 6 in the sum of USD 25,000,000 which became USD 30,000,000 by the said resolution. The
remaining two directors, Messrs. Grenville Matthew Thynne and Nathan Thynne have preferred
Citic to the other creditors because they had the interest to free themselves of their personal
22
guarantee in relation to the Citic loan to Defendant no. 6. The third director, Mr. Soo Jin Goh
took up employment with a private equity investment following his departure from GML and
thought of handing an investment transaction to his new employer. The Plaintiff’s
representative, Mr. Farkas maintained the averments in paragraph 32 of the amended plaint inasmuch as the purported creation of the charge dated 20 October 2009 amounts to a fraud
and with respect to paragraph 33 of the amended plaint, he maintained that Messrs. Grenville
and Nathan Thynne who were among the directors who signed the charge in favour of Citic, had
provided a deed of guarantee (Exhibit 15-Document P27 refers) to Citic. He further explained
that in 2007 when Citic made the loan to Defendant no. 6, Citic sought guarantees from the
existing shareholders of Defendant no. 6. Defendant no. 6 borrowed $ 25 million from Citic. Mr
Matthew Perrine was a well-known businessman in Australia and at that time he operated and
held his shares in Defendant no. 6 through an entity called M.D.P Consolidated which appears
as one of the parties which provided a guarantee to Citic. M.D.P Consolidated was the
company of Mr. Matthew Perrine as per the Plaintiff’s witness. The other persons who provided
guarantee were several Thynne people namely, Messrs. Grenville Matthew Thynne, Nathan
Thynne and Benedict Joseph Thynne who gave guarantees in a personal capacity. The
Plaintiff’s witness stated that the Thynne family and Matthew Perrine who were shareholders in
Defendant no. 6 guaranteed repayment of the loan that Citic made to Defendant no. 6 and by
virtue of that guarantee, if Defendant no. 6 could not repay the loan, Citic would be entitled to
call upon the guarantors to make good the repayment of the loan. The Plaintiff’s witness
therefore believes that there is a conflict between Mr. Thynne, the 2 Thynne directors who were
wearing the hat of directors of Defendant no. 6 and they are also wearing the hat of people who
gave a guarantee to Citic if Defendant no. 6 does not repay the loan. With respect to the third
director Mr. Soo Jin Goh, the Plaintiff’s witness maintained that he used to work for B&B and
when B&B started to get into financial trouble, Mr. Soo Jin Goh became an employee of
Defendant no.6 and he was effectively running its day to day business and he was aware of the
financial difficulty of Defendant no. 6. Mr. Farkas indicated that there were discussions between
the noteholders and the shareholders as to how they could rescue Defendant no. 6 and Mr. Soo
Jin Goh went to work for a private investment company in Singapore. Additionally he explained
that the company Mr. Soo Jin Goh went to work for was in discussion with Defendant no. 6
about purchasing Defendant no. 6 or its assets and if Citic was the holder of a charge, then Citic
could simply effect a sale to this investor without having to go through a liquidator/receiver. Mr.
Farkas further referred to the register of directors whereby it was noted that the day after the
resolution to grant the charge was passed by Defendant no.6, Mr. Soo Jin Goh, resigned as a
director of Defendant no. 6 on 21 October 2009.
23
In relation to the issue of the insolvency of Defendant no. 6, the Plaintiff maintained that
at the time of the creation of the charge, Defendant no. 6 was insolvent and by creating the
Charge, it contravened the provisions of paragraph 2 of the Terms and Conditions of the Convertible Notes (Exhibit 6) and the creation of the Charge therefore constituted an event of
default. In addition to paragraph 35 of the Plaint, the Plaintiff further avers at paragraph 46 that Defendant no. 6 was fully aware that at the time of the purported creation of the Charges in
favour of CITIC on 20 October 2009, the assets of the company would not be enough to repay
all its creditors in full and referred to Doc P22.
Version of the Defendants
The Defendants have on the other hand considered the evidence adduced by the
Plaintiff in relation to the issue of fraud. According to the Defendants, the evidence of Mr.
Farkas on this issue is that the self-interest of the directors is that they gave personal
guarantees to CITIC under the Mariner Loan and that Mr. Soo Jin Goh was expecting a job with
the Defendant no. 3. It has been submitted that (i) the nature of the evidence proffered by Mr.
Farkas is not precise and convincing and is based more on conjectures than solid facts, the
moreso that cogent evidence is required when fraud is alleged; (ii) the allegations do not evince
a real and serious conflict that would render the resolution invalid; (iii) the allegations do not
amount to the “interest” referred to in section 147 of the Companies Act 2001; and (iv) even if
the allegations amount to “interest” under section 147 of the Companies Act 2001, section 148 (4) provides that:
“(4) A failure by a director to comply with subsection(1) shall not affect the validity of a
transaction entered into by the company or the director.”, and section 148 (1) of the Companies Act 2001 reads:
“(1) A director of a company shall, forthwith after becoming aware of the fact that he is
interested in a transaction or proposed transaction with the company, cause to
be entered in the interests register where it has one, and, where the company has more
than one director, disclose to the Board of the company -
(a) where the monetary value of the director's interest is able to be quantified,
the nature and monetary value of that interest; or
24
(b) where the monetary value of the director's interest cannot be quantified, the
nature and extent of that interest.
It is the Defendants’ contention that any alleged conflict would not invalidate the decision
of the Board, and deprive third parties dealing with the company of their rights.
With respect to the insolvency of Defendant no. 6, the Defendants claim that the
evidence of the Plaintiff entertains a “wispy assimilation” of the financial state of insolvency and
the legal declaration of insolvency. The Defendants referred to the oral evidence of Mr. Farkas
who produced the letter that CITIC sent to GML dated 03 March 2009 (Exhibit 18; Doc P30 refers) and the Defendants submitted that nowhere in the letter nor anywhere else is there an
indication that CITIC was calling back its loan under the Mariner Loan Documents on the ground
that Defendant no. 6 was insolvent. The Defendants further submitted that during the
examination in chief of Mr. Farkas, when he tried to explain why the Plaintiff served a notice of
default, he merely provided his “inference” and his “presumption”.
The Defendants submitted that there is no reliable evidence of insolvency at the time of
creation of the Charges and there is no evidence to assert that the Defendant no. 6 has been
declared insolvent. The Defendants claim that the Plaintiff’s representative has tried to blur the
issue between his opinion about the insolvency of Defendant no. 6 and a formal declaration of
its insolvency and a consequent order of winding up of the company. In this respect the
Defendants submitted that a company is bound by its contracts irrespective of its financial state,
whether solvent or insolvent, until winding up proceedings have been ordered.
Moreover the Charge (Exhibit 23; Doc P33) was executed before Mr. Notary Constantin
by the duly appointed representatives of CITIC and Defendant no. 6, and was made under the
Mauritius Civil Code. The Defendants contend that the prayer under paragraph 58 (b) of the
Plaint cannot be granted and accordingly the prayer under paragraph 58(e) of the Plaint ordering the Defendants nos. 3, 4 and 5 to refrain from acting on the purported charges that
allegedly do not comply with the laws of Mauritius also cannot be granted. It is to be noted once
again that CITIC created charges with the power to appoint Receivers under at least two
Mariner Finance Documents, that is the Debenture dated 22 May 2007 (Exhibit 17;Doc P29 refers) and the Charge dated 21 October 2009 (Exhibit 24; Doc P34 refers).
25
The Defendants’ case is that the Charge, which has been signed before Mr. notary
Constantin by a duly authorized agent, Mr. Aadil Koomar, and inscribed with the Conservator of
Mortgages is perfectly valid and enforceable against all parties and third party creditors,
including the Plaintiff; the Charge created is a valid first ranking charge on all the assets of the
Defendant no. 6 so that the claim of the Defendants nos. 3,4 and 5 cannot rank pari passu with
the unsecured claim of the Plaintiff which itself holds neither a privilege, mortgage nor any other
secured claim. The Defendants have submitted that in the same vein, the appointment of the
Receivers is valid (see Atelier Etude Limousin & Ors v BPCE International et Outre Mer & Anor [2014 SCJ 166]).
The Defendants have stated that by creating the Charge the intention of the Defendant
no. 6 was no more than repeating the Debenture that was claimed to be unenforceable by the
Plaintiff under the Mauritius law (paragraph 41(b) of the Plaint refers). The Defendants
further argued that whether the legal advice obtained by it was wrong is not relevant to the
Defendants’ case but the argument of the Plaintiff that the Charge gave a preference to the
Defendants nos 3 to 5 is incorrect, the reasons being (i) the Charge was never used to enforce
the Chinese Pledges; (ii) the Receivers who were appointed under that Charge did not in fact
manage to take control of the assets of Defendant no. 6 and so could not have committed any
trespass on property; (iii) no harm could have been caused to the Plaintiff by reason of the
creation of that Charge; and (iv) it does not lie with the Plaintiff, a third party, outside insolvency
proceedings to avoid a transaction, since that is a special power conferred on the Official
Receiver or Liquidator under section 313 of the Insolvency Act 2009.
In addition, as established by the Defendants, Mr. Farkas’s only evidence to support his
presumption that Defendant no. 6 was insolvent, is the paper whose origin he was unable to
establish, being unable to explain how he got it himself and presented it as a Management
Account at paragraph 35 of the Plaint. The allegations of fraud on behalf of the Plaintiff have
been mere statements with no cogent evidence to substantiate such allegations.
Validity of the Chinese Pledges
The second group of prayers of the Plaintiff, Group B Prayers as set out in paragraphs 58(c) and (g) focus on the sale of the assets in the People’s Republic of China (PRC), namely
the shares of the PRC subsidiaries.
26
It is to be noted that the Convertible Notes evidenced only the lending to Defendant no.
6 on unsecured terms, whereas the Mariner Loan was backed up by documents ranging from
personal guarantees by the shareholders of Defendant no. 6, the pledges of the shares of the
PRC subsidiaries, the charge on bank account, assignment of receivables, and fixed and
floating charge through a debenture governed by English Law and the Charge under the
Mauritius Law.
The Loan Agreement defines the equity pledges as being the four equity pledges to be
executed by the borrower over its ownership interest in each of the PRC subsidiaries.
Defendant no. 6 entered into the four pledge agreements granting pledges over the shares
which were issued to it in full ownership by the 4 PRC subsidiaries as a condition precedent to
the loan facility. All the 4 pledge agreements are similarly worded and are governed by the laws
of the PRC.
The validity of the PRC charges has been discussed in each of the Chinese legal
opinions on behalf of the Plaintiff and of Defendants nos. 3 to 5.
Version of the plaintiff
It has been noted that neither the original plaint nor the amended and restated plaint
bears any reference to the invalidity of the PRC charges. The only mention of the invalidity of
the PRC charges appear in the plea of the Defendants which is copied at paragraph 19(g) of
the Plaint, whereby the ground invoked for the invalidity of the PRC charges is the fact that no
approval from the Chinese authorities had been obtained.
However I have considered that Counsel for the Plaintiff has conceded that those
averments are hearsay and it has been agreed that such averments in the Plaint is not evidence
of the truth of the statements made but only of the fact that they were made.
Mr. Ma from DeHeng Law Shanghai Office issued a legal opinion (the ‘DeHeng Opinion’)
to the Plaintiff with regards to the pledge of the shares held by Defendant no. 6 in Global Mart
(Hunan) Co Ltd (‘Whacko’) and Hunan Joindoor Hypermarket Company Ltd (‘Joindoor’).
27
The DeHeng Opinion is to the effect that the Chinese equity pledges of Whacko and for
Joindoor are not valid and unenforceable (Doc P3, paragraph 3(a) and (ii) refer) and,
irrespective of their validity or otherwise, have never been enforced by Defendant no. 3.
Mr. Ma further explained that the 3 year period as being a limitation period under the
PRC law applies to a cause of action and not to the registration of a pledge which is not in itself
a cause of action.
The second ground upon which the Plaintiff challenged the validity of the PRC Equity
Pledge Agreement is that CITIC did not in fact enforce the pledges and it was argued that it was
not a “forced sale” but a “voluntary equity sale by GML”, Defendant no. 6.
Version of the Defendants
The Plaint does not mention anything about the invalidity and unenforceability of the
PRC Equity Pledges or about the grounds for the invalidity under the laws of the PRC. The
issue became live and known to the Defendants after their plea was filed and the matter was
fixed for hearing.
The Defendants are of the view that the legal opinion produced by the Plaintiff seems
like an afterthought to support a ready-made conclusion rather than an objective analysis of the
PRC law.
Defendants nos. 1 and 2, the Receivers had received legal opinions from All Bright
Offices, under Mr. Liu Zhibin (Doc D1 refers) under which the following was advised:
(i) the pledge of equities in GMK Hunan and Hunan Joindoor is valid, binding and
enforceable on all parties and remains in effect until the Finance Parties have been
repaid their principal and interest in full;
(ii) Defendant no. 3, as the registered pledgee shall be entitled to enforce the equity pledge
in accordance with the PRC law;
(iii) under the PRC laws the right of the pledgee over the pledged interests or shares of a
company are rights in rem;
28
(iv) the pledge of equities shall remain in full force notwithstanding the insolvency or
liquidation or any incapacity or change in the constitution or status of the pledger; and
(v) the Agent (for and on behalf of the Finance parties) in its absolute discretion has the
priority to apply the proceeds received from the disposal (of the pledged shares) to pay
off its debts and any costs, charges and expenses incurred by the Agent in connection
with the exercise of any rights in the equity pledges.
The Defendants have submitted that in accordance with the general principles of the
Civil Law of the PRC, (Doc P44 refers), the limitation period does not extinguish a right to
register a pledge with the administrative authorities to render it enforceable, and hence the
ground of objection based on the limitation period raised by Mr. Ma on the validity of the PRC
equity pledge agreement does not stand.
In relation to the second ground upon which the Plaintiff challenged the validity of the
PRC equity share pledge it was submitted by the Defendants that the argument of the Plaintiff
does not challenge the validity of the first rank security that was in the hands of the Defendant
no. 3 as pledgee but rather the manner of enforcing the power of sale.
It was further submitted that there was no legal or statutory rule that was put forward for
the proposition that a pledge cannot be enforced through a direct sale to a third party of the
pledged shares and there is no issue of “forced sale” in the present case. The Defendants
argued that that was the reason why Defendant no. 3 was granted from the very beginning all
the powers and authority to act as agent for the Pledgor, Defendant no. 6, in the PRC equity
pledge agreements, to realise the sale in the event of default. The Defendants affirmed that
such power of attorney is common and referred to Article 91 of the Mauritius Code de Commerce on “Gage Commercial”, Article 2129-6 of the Mauritius Civil Code, and section 185(2) of the Insolvency Act 2009, in support of their arguments.
The Defendants further claimed that there is nothing which suggests that under the PRC
law a pledge could not be realised through private sale as obtains for a “gage” under our Code
de Commerce (Articles 91-93 of the Mauritius Code de Commerce).
In support of the argument that the PRC equity pledges are valid, the Defendants have
relied upon the opinion of Mr. Xie of Jin Mao Law Offices. I have taken note that the opinion of
Mr. Xie has covered a wider area of the PRC law than the opinion of Mr. Ma. Mr. Xie has
provided his views on the following issues:
29
(a) Governing law
Mr. Xie has opined that the PRC Law recognizes the choice of law of the parties to the
equity pledge agreements and there is no dispute that PRC law is the applicable law as to the
validity and to the enforcement of the agreement, as well as to the property law aspects of the
pledges. According to Mr. Xie, the PRC Courts would have jurisdiction over the disputes arising
from the validity and the enforcement of the agreements.
However, according to the Defendants, as is common in accordance with the general
principles of Private International Law in many countries including Mauritius, the legal capacity
of a corporate body like Defendant no. 6 to contract is a matter for the domestic law of the
company, and in the present case, it is the law of Mauritius. The Defendants’ argument is that
under the Mauritius law, a company in receivership does not lose its legal capacity to contract,
as the concept of receivership is different from liquidation or winding up and hence the opinion
of Mr. Ma is wrong inasmuch as the Defendant no. 6 has the capacity to be a party to the sale of
the shares in enforcement of the PRC equity pledge agreements.
(b) The Property Law of the PRC
The Property Law of the PRC operates a distinction between the contract to establish a
pledge and the establishment of the pledge itself. Under the provisions of the Supreme
People’s Court on Several Issues concerning the Trial of Disputes involving foreign funded
enterprises (an enactment of declaratory nature), the pledge agreement becomes effective upon
being signed by the parties, irrespective of the registration of the pledge with the administrative
authorities.
Contrary to the opinion of Mr. Ma, Mr. Xie has opined that the fact that the pledges under
the PRC equity pledge agreements were registered much later after the agreements were
signed, does not make the contracts or the pledges invalid. The contracts or pledges become
enforceable once the administrative formalities of the approval by the Ministry of Commerce and
the registration are obtained, and there is no dispute that those approvals were obtained before
the Share Transfer agreements of the pledges were entered into.
According to Mr. Xie’s opinion, the effect of the registration of the pledges with the
Ministry of Commerce is an act of perfection which renders the pledge opposable to the whole
world and the Defendants are of the view that in this respect, no analogy can be drawn with the
common feature of “la publicité” under Mauritian law.
(c) The enforcement of the PRC equity pledges and the repayment of the proceeds
30
Mr. Xie opined that the enforcement of the PRC equity pledges and the repayment of the
proceeds from such enforcement to CITIC for the satisfaction of the part of the loan as recorded
in the Share Transfer agreements are in conformity with the PRC laws.
The Defendants have submitted that the opinion of Mr. Xie should be accepted and that
the equity pledge agreements were valid and enforceable, as a result of which, conferred upon
CITIC not only a first rank pledge on the Whacko and Joindoor shares, but made it a secured
creditor who could exercise its pledges in priority to all unsecured creditors in satisfaction of the
outstanding indebtedness under the Loan Facility.
The Defendants further submitted that in the absence of any surplus from a settlement of
the debt, there was no money left to be transferred back to Defendant no. 6, the Pledgor, or to
be kept in escrow for the claim of the Plaintiff or even for potential creditors of Defendant no. 6.
Appointment of the Receivers
The Defendants nos. 1 and 2 were appointed as Receivers in relation to the assets of
the debtor, Defendant no. 6, pursuant to section 183 of the Insolvency Act 2009, that is, on
the basis of an “instrument that confers on a charge the power to appoint a receiver”.
Section 183(2) of the Insolvency Act 2009 provides that “An instrument that creates a
change in respect of property and undertaking of a company may confer on the chargor the
power to appoint a Receiver or a Receiver and Manager of the property and undertaking or of
that part which is secured by the charge.”
A charge is defined under section 2 of the Insolvency Act 2009 and includes a fixed
and floating charge.
Version of the Plaintiff
(a) Appointment of Receivers
The Plaintiff has contested the appointment of the Receivers averred in paragraph 40(i) of the Plaint that “as per section 208(2) of the Insolvency Act 2009, the Court may declare on
the application of a creditor of the chargor (Defendant no. 6) now in receivership, whether or not
a receiver was validly appointed in respect of any property or validly entered into possession or
assumed control of any property.”
The Plaintiff has challenged the appointment of the Receivers on the ground that the
instrument under which they were appointed, that is, the Charge, was invalid under the laws of
Mauritius.
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(b) Disqualification of the Receivers
The Plaintiff’s argument is that the Receivers were disqualified for appointment because
on 20 March 2009 they were appointed as Receivers to Defendant no.6 and on 27 May 2009
the appointment was terminated. The argument of the Plaintiff is that they had been appointed
less than 3 years before as receivers under the Debenture dated 22 May 2007 contrary to
section 184(1) of the Insolvency Act 2009 which provides that no person shall be appointed
as receiver who is not qualified to be a liquidator. In addition, under section 109(1) “a person
other than the Official Receiver who is appointed provisional liquidator or liquidator shall not be
qualified for appointment where he…(d) has been a receiver of the company during the
preceding 3 years”.
The Plaintiff therefore argues that the Defendants nos. 1 and 2 were not qualified to be
appointed as receivers over the shares of the PRC subsidiaries.
(c) Proceeds of sale
It is noted that although the Plaintiff admits in its Plaint that the Receivers were not
aware of the perfection of the PRC equity pledges by CITIC, yet it is suggested that they did not
stop the sale of the Whacko and Joindoor shares and did not recoup the proceeds of sale for
the benefit of the Plaintiff and the other creditors.
Version of the Defendants
(a) Appointment of Receivers
The Defendants have submitted that to the extent that the Charge is invalid, then the
appointment of the Receivers is invalid and as a result, the Plaint should be dismissed against
the Defendants no.1 and 2 on all counts including the claim for damages in tort.
(b) Disqualification of the Receivers
The Defendants submitted that the Plaintiff’s argument is flawed in that section 184(1) of the Insolvency Act 2009 does not refer explicitly to section 109 of the Insolvency Act 2009 for the qualifications of the liquidator and there is no organic link between the two.
The Defendants explained that section 184(1) of the Insolvency Act 2009 referred to
the personal qualifications of the person appointed and this explains why the paragraph refers
to a liquidator in general without specifying a liquidator for that or any particular company. On
the other hand, section 109 of the Insolvency Act 2009 refers to circumstances in which a
person is disqualified for appointment as Receiver or Receiver Manager.
32
In support of their argument the Defendants have referred to the Consultative Paper on the Proposed Insolvency Legislation released by the Ministry of Finance and Economic
Development in September 2007 which enclosed the draft of the Insolvency legislation.
Section 321 provides that “[…] no person may be appointed as a receiver- (a) who is
not qualified under sub-paragraphs (a),(b) and (c) of s.192(1) to be a liquidator.
Section 192 further provides that “A person other than the Official Receiver who is
appointed provisional liquidator or liquidator shall not be qualified for appointment if he is … (d)
a receiver of the company or has been during the preceding three years.” The Defendants
noted that the reference was not present in the draft of section 321 relating to the qualification
of a receiver. The Defendants further claimed that such restriction was not present in section 189 of the Companies Act 1984, the preceding corresponding legislation on the issue of
qualification for such appointment as Receiver or Receiver Manager.
According to the Defendants, the first appointment on 20 March 2009 under the
Debenture has been ineffective if as the Plaintiff averred, the Debenture had been invalid and in
such a case the appointment is rescinded ab initio as if it were never made. The Defendants
suggested that in any case, the defect is not absolute as the Court has the power to cure the
defect under section 184 of the Insolvency Act 2009.
(c) Proceeds of sale
It is suggested by the Defendants that the argument of Plaintiff with respect to the
evidence that the Receivers in PRC assisted in the sale is too tenuous to be credible. The
Defendants put forward that what is missing in the Plaint is a clear averment as what is being
reproached of the Receivers with regard to the disposal of assets of the Defendant no. 6.
There was no judicial authority shown by the Plaintiff to support the view that
Receivership organised under a foreign law was recognized by PRC laws and the manner in
which the PRC courts of law could give effect to the powers of such Receivers. The Defendants
claimed that the argument stone crashes with the production of the ruling of the Shanghai No. 2
Intermediate People’s Court dated 30 June 2014 (Doc D5A) which had set aside the civil
complaint which was entered on 27 June 2014 and which provided that there is no asset
receiver as a legal concept whether in substantive or procedural laws in China and although the
plaintiff who appeals to the court obtained the position as asset receiver in accordance with the
laws of Mauritius, the plaintiff is not entitled to file a lawsuit in its own name.
33
The Defendants’ views are that the judicial ruling is conclusive evidence that
receivership is not a concept recognized in PRC and that Defendants nos. 1 and 2 could not act
as such in PRC to obtain any order from the courts of PRC to allow them to take control or
possession of the assets of Defendant no. 6 in PRC.
In this regard, the Defendants submitted that all the prayers for declaratory orders under
the Group A and the Group B prayers should be set aside.
Damages alleged in tort
The damages allegedly sustained by the Plaintiff is a financial loss which is calculated
on the basis of the investment made on purchasing the convertible notes issued by Defendant
no. 6 together with the accumulated interest payable and the sum was rounded off in the end to
USD 50 million.
Version of the Plaintiff
First Limb of the element of “faute”
As per the averments of the Plaintiff the first limb of the element of “faute” is to be
established on the basis that Defendants nos. 1 to 6 have colluded to give CITIC and Mariner
lenders a priority claim to the assets of Defendant no. 6 and in so doing have deprived the
Plaintiff of a possibility to recover any part of its loan under the convertible notes from the assets
or the sale proceeds of the assets of Defendant no. 6 in that:
(a) Defendant no. 6 has approved a fixed and floating charge and caused it to be executed
in favour of Defendant no. 3 for the purpose of giving undue preference to the Mariner
lenders;
(b) Defendant no. 3 has appointed the Receivers to take control and dispose of the assets
of Defendant no. 6 again to defeat the chances of the Plaintiff to recover repayment of its
loan from the assets of Defendant no. 6; and
(c) Defendant no. 3, the Receivers and Defendant no. 6 colluded in the perfection of the
pledge on the shares of the PRC subsidiaries and subsequently, in the sale of the
shares of the PRC subsidiaries and the repayment of the Mariner loan to the detriment
of the Plaintiff with the result that the Plaintiff has no chance to recoup its loan
repayment from the assets of Defendant no. 6.
Second limb of the Defendants’ “faute”
34
The Plaintiff has averred that its good faith has been abused by all the Defendants
acting jointly in that:
(a) the Defendants have led the Plaintiff to believe that CITIC had a security over its assets
when in fact it had none, since Defendant no. 6 itself challenged it in the Plaint of March
2009; and
(b) the Defendants have acted abusively in exercising their rights, committing an “abus de
droit” with regards to the Plaintiff or in any case wrongfully committed the acts mentioned
above.
Version of the Defendants
The Defendants contention is that the Plaintiff is an unsecured creditor of Defendant no.
6 Company, who has neither a proprietary interest in the assets of Defendant no. 6 nor any
claim of whatsoever nature on those assets.
The Plaintiff’s claim under the convertible notes which it holds can only be a claim in
contract against Defendant no. 6 in personam and brings up the principle against reflective loss.
The Defendants have submitted that the principle applies to the present case inasmuch
as the Plaintiff is an unsecured creditor, an investor or lender and it bears under the terms of the
convertible notes the credit risk for its investment or loan. The Defendants’ view is that as long
as Defendant no. 6 does not make a voluntary application to be wound up or is not declared by
the Bankruptcy Division of the Supreme Court to be in liquidation, the Plaintiff as an unsecured
creditor has no right on the property of Defendant no. 6 but only on an eventual claim for
repayment of its advance monies under the Convertible Notes.
The Defendants are of the opinion that the principle of reflective loss debars the Plaintiff
from claiming a loss which, if at all, is in effect a loss to the company and not to the Plaintiff.
The principle of reflective loss in its application to the present case does not only stop this action
by the Plaintiff who does not have the locus for a claim in tort for its reflective loss but also
marks the lack of causal link between “faits reprochés” and the damage claimed which is an
essential element for an action in tort to succeed. According to the Defendants the loss being
claimed by the Plaintiff is a “prejudice hypothétique” or a “prejudice éventuel” which is not
adequate to ground a claim in tort.
The Defendants stated that the principle of reflective loss deprives the Plaintiff of an
“intérêt juridiquement protégé” to maintain the claim in tort under Article 1382 of the Mauritius Civil Code.
35
The principle of reflective loss has been explained by Lord Justice Millett in Johnson v Gore Wood & Co [2002] 2 AC 1 referred to by learned counsel for the defendants, as follows:
“The position is… where the company suffers loss caused by the breach of a duty owed
both to the company and to the shareholder. In such a case the shareholder’s loss, in so far as
this is measured by the diminution in value of his shareholding or the loss of dividends, merely
reflects the loss suffered by the company in respect of which the company has its own cause of
action. If the shareholder is allowed to recover in respect of such loss, then either there will be
double recovery at the expense of the defendant or the shareholder will recover at the expense
of the company and its creditors and other shareholders. Neither course can be permitted. This
is a matter of principle; there is no discretion involved.”
Further, in Prudential Assurance Co Limited v Newman Industries Limited (No 2) [1982] Ch 204 it was held that “ A shareholder cannot… recover damages merely because the
company in which he is interested has suffered damage. He cannot recover a sum equal to the
diminution in the maret value of his shares, or equal to the likely diminution in dividend, because
such a ‘loss’ is merely a reflection of the loss suffered by the company. The shareholder does
not suffer any personal loss. His only ‘loss’ is through the company, in the diminution in the
value of the net assets of the company, in which he has (say) a 3 per cent shareholding.”
The principle of reflective loss also applies to creditors of the company as well as to its
shareholders. In Gardner v Parker [2004] EWCA Civ 781 the Court was “[…] concerned with
the extent to which a shareholder or creditor of a company who has suffered loss, as a result of
a breach of duties owed to him and to the company by a defendant, is nonetheless debarred
from recovering that loss because that breach of duty also caused the company loss which it is
or was entitled to recover from the defendant.” In Johnson (supra) Lord Millett further affirmed
that “[…] it is hard to see why the rule should not apply to a claim brought by a creditor (or
indeed, an employee) of the company concerned, even if he is not a shareholder.”
First limb of “faute”
The Defendants are of the view that the assumption of the Plaintiff that the financial
distress of Defendant no. 6 opens up a legal regime in which an unsecured creditor has some
mystical rights over the assets of the borrower even if those assets are already pledged, is
incorrect and totally flawed.
The Defendants have submitted that the financial distress of the pledger outside a
winding up, does not give rise to any special status to an unsecured creditor in the position of
36
the Plaintiff so that the pledgee, in the circumstances of the Mariner Lenders, were denied a
right to exercise their pledges.
According to the Defendants, the Plaintiff is wrong in its submissions in failing to make a
distinction between the legal regime governing Defendant no. 6 and its creditors in a pre-
liquidation situation on the one hand, and post declaration of winding up and liquidation, on the
other.
The Defendants have referred to Rehman v Michael Chamberlain [2011] EWCH 2318 (Ch) at paragraph 33, where it was explained that as long as a company is a going concern, an
unsecured creditor who had lent money could not intervene to prevent payment being made to
the lender even if the lender’s charge was not registered. Nor could such unsecured creditor
have prevented the creation of a new charge duly registered, to take the place of the
unregistered charge. It is only when the company has gone into liquidation that the unsecured
creditor becomes interested in all the assets of the company, since the liquidator is bound to
distribute the net proceeds pari passu among the unsecured creditors subject to the claims of
preferential creditors.
The Defendants have relied upon the case of Biltah(UK) Ltd v Nazir [2012] EWHC 2163 wherein it was stated:
“[…] I do not suggest that creditors of a company not in liquidation have any proprietary
interest in the assets of the company, but their interests as creditors are within the scope of the
duties of directors at least where the company is or may become insolvent. S.172 of the
Companies Act 2006 is statutory recognition of the principle to that effect recognized by Dilon LJ
in West Mercia Safetywear Ltd (in liquidation) v Dodd [1988] BCLC 250”.
Furthermore, the Defendants’ case is that the receivers are not in the same position as
directors of a company who have a special duty to have regard to creditors when the company
is insolvent or is near insolvency.
In relation to the issue of undue preference, the Defendants have submitted that the
Insolvency Act 2009 makes special provision that is only exercisable by the liquidator when a
company is in winding up and that it does not apply in pre-liquidation situations, as a result of
which a creditor has no standing to apply to the Court to avoid a transaction for undue
preference.
In addition in the case of Geneva Finance Ltd v Resource & Industry Ltd & Anor [202] WASC 121 it was affirmed that the right to avoid the preference is personal to the
37
liquidator or receiver and it is essential that he be the applicant for the relief to set aside the
preference, and not the insolvent company alone and the right to recover proceeds of such
preference is a special right personal to the liquidator which does not form part of the pre-
liquidation assets of the company.
The Defendants are of the opinion that there is no duty in law in the circumstances of
their case that requires Defendants nos. 3 and 5 not to perfect their pledge and to proceed to
foreclosure and to pay themselves out of the proceeds of the sale to the extent of their
outstanding debt. There is no evidence of any concerted action on the part of the Defendants.
Defendants nos. 3 and 5 acted in their capacity as lenders against the Defendant no. 6 to obtain
repayment under the Mariner loan and as they were entitled to do, they appointed the
Defendants nos.1 and 2 as receivers.
Duties of receivers if their appointment was valid
The Defendants have averred that the receivers cannot be liable for the mere fact of
being wrongly appointed (paragraph 18 of Aquachem v Delphis Bank Ltd & Ors [2008] UKPC refers), assuming that they were wrongly appointed.
Learned Senior Counsel for the Defendants has submitted that the concept of
receivership in Mauritius can be defined as a remedy solely available to a creditor possessing
security for its debt, be that in the form of a debenture or a charge. It is by nature a proprietary
enforcement remedy possessed by one creditor as opposed to a collective procedure which is
the hallmark of an insolvency proceeding as explained in Buchler v Talbot [2004] UKHL 9 that
the “[…] winding up of a company is a form of collective execution by all of its creditors against
all of its available assets. The resolution or order for winding up divests the company of its
beneficial interest in its assets” (see Ayerst (Inspector of Taxes) v C & K (Construction) Ltd [1976] AC 167).
As generally commented, the primary duty of a receiver is to realise the company’s
assets in the interests of the debenture holder by whom he was appointed (re B Johnson & Co (Builders) Ltd [1995] Ch 634) and in so doing the receiver owes no duty to act in the best
interests of the company’s unsecured creditors.
Pursuant to the case of Gomba Holdings UK Ltd v Homan [1986] 1 WLR 1301,
receivers are appointed to realise the security of the appointor and their primary duty is to
realise the assets in the interest of the debenture holder. It was further provided that their
management powers are ancillary to that duty. The Defendants are of the view that a receiver
is therefore under no obligation to continue to trade a business to see if it can be rescued and
38
need only act in good faith in exercising a power of sale but it does not mean that a receiver
should in all circumstances obtain the best possible price (Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] 2 All ER 633, CA).
The Defendants have relied upon several authorities to state that in law a receiver owes
a duty of skill and care to the company (Medforth v Blake [1999] 3 All ER 97), to other secured
creditors (Midland Bank Ltd v Joliman Finance Ltd (1967) 203 Estates Gazette 1039) and to
a guarantor (Standard Chartered Bank v Walker (1982) 1 WLR 1410). Furthermore the
decision in the Northern Development (Holdings) Ltd v UDT Securities [1977] 1 All ER 747,
shows that there is no general duty owed to the unsecured creditors.
The Defendants’ counsel has further referred to the statement of Sir Neil Lawson in
Lathia v Dronsfield Bros Ltd [1987] BCLC 321 in which he held that receivers primarily owe a
duty to the general body of creditors; to contributors, to officers of the company, their members
and to guarantors there is only a secondary liability. He further states that “[…] it is clear on the
authorities, and no authority has been cited to the contrary, that the receivers do not owe a duty
to the unsecured creditors of the company or the contributors”.
On the basis of the case of Downsview Nominees Limited and Russell v First City Corporation and Anor [1993] 3 All ER 626 where the issue was about the duty owed by a
Debenture Holder towards another debenture holder, not an unsecured creditor, the Defendants
have submitted that the Privy Council has held that the law does not allow the unsecured
creditor to claim in tort against defendants like Defendants nos. 3 to 5 or against Defendants
nos.1 and 2 (the receivers) in dealing with the assets of Defendant no. 6.
Under our law, section 197(5)(a) of the Insolvency Act 2009 reads as follows:
“A receiver who exercises a power of sale of property in a receivership owes a duty to
the chargor to obtain the best price reasonably obtainable as at the time of sale.”
In accordance with section 197(5)(a) of the Insolvency Act (supra) the Defendants
have submitted that there is no duty owed by Defendants nos.1 to 5 to the Plaintiff, who is not
the chargor in the present case and they cannot be made liable in tort for the reason invoked in
the Plaint.
Second limb of “faute”: Abuse of good faith
The Plaintiff’s contention is that its good faith has been abused by the concerted acts of
the Defendants, indiscriminately. The Defendants are of the view that it is difficult to link up the
consequential damages of the alleged abuse of good faith as averred in the Plaint, to the
39
Plaintiff’s loss of its prospect to recover on the convertible notes against the assets of Defendant
no. 6.
With respect to the Plaintiff’s claim that it would not have entered into the subscription of
the convertible notes if it knew that CITIC had a first priority security over the assets of
Defendant no. 6 under the Mariner loan, the Defendants claim that the Plaintiff had been
professionally advised by its representative Mr. Farkas and by Babcock & Brown, which
structured the financing for Defendant no. 6, and entered into the deal for the subscription of the
convertible notes. The Defendants have further submitted that the Plaintiff of its own accord
purchased more of the convertible notes from the other noteholders.
In relation to the suggestion of the Plaintiff that the Charge tricked the good faith of the
Plaintiff, the Defendants put forward the following arguments:
(a) as Mr. Farkas demonstrated, all the directors appointed by the noteholders, including the
plaintiff under the ARSNA had resigned from the board of Defendant no. 6;
(b) the Receivers, that is, Defendants nos. 1 and 2, were then not even appointed and
surely had nothing to do with the execution of that document;
(c) Mr. Farkas, in his evidence did not hint that the Receivers were involved in the execution
of the Charge;
(d) Defendants nos. 3 and 5 were entitled to claim from Defendant no. 6 that it fulfils its
promise under the Loan Agreement to provide good and valid security;
(e) there can be no expectation that the Mariner lenders should give up on their rights under
the loan agreement with Defendant no. 6 and to give way to a pari passu ranking claim
from the Plaintiff; and
(f) there is no evidence or averment that Defendants nos. 3 and 5 made any
representations or promises to the Plaintiff leading the latter to believe they would
relinquish their charge on the assets of the borrower (Defendant no. 6) as security for
their loan.
With regards to the perfection and the enforcement of the pledges, the Defendants
submitted that there is not the slightest suggestion that the Defendants nos. 1 and 2 had any
involvement in those.
Arbitration and abuse of good faith
Version of the plaintiff
40
The Plaintiff has averred that the Defendants and their counsel have procrastinated on
the court process by proposing an arbitration arrangement which was later not proceeded with,
and therefore abused of the Plaintiff’s good faith. The Plaintiff’s argument is that the court
process was manipulated by Counsel for Defendants nos. 1 to 5 to give time to CITIC to perfect
the pledges in PRC and to obtain a sale of the pledged shares and use the proceeds of sale for
repaying the Mariner loan in preference to the recovery of the loan under the convertible notes.
Version of the Defendants
The Defendants have submitted that the argument is preposterous and was barely dealt
with in the evidence of Mr. Farkas.
The Defendants have referred to the six legal suits entered by the Plaintiff alone or with
other noteholders to show that (a) at no time did Counsel for the Defendants prevaricate or
provoke undue delay in the 6 legal cases entered by the Plaintiff against Defendants nos. 1 to 5
and in fact everything that was done, was under the supervision of the Court and with the
concurrence of the Plaintiff’s counsel and attorney; and (b) the Plaintiff has exploited all the
means under the Mauritius civil law process in a bid to embarrass Defendants nos. 3 to 5 from
exercising their legitimate security interests to recover on the loan to Defendant no. 6 but
adamantly refused to take any single action before the PRC courts to seek any remedy in PRC
where the sale of the pledged shares was taking place.
The Defendants have stated that no reason was given for the refusal and the inference
is clearly that the Plaintiff knew that it did not have any locus or cause of action under the PRC
laws to stop the realisation of the pledge and the payment from the proceeds of the sale of the
shares to CITIC for the Mariner Loan.
The purpose of putting forward the court records is to show to the Court that parties on
both sides of the present case with the active involvement of their respective legal advisers,
counsel and attorneys had agreed to explore the possibility of having recourse to arbitration as
an alternative means of settling their dispute.
Group A and Group B prayers
The prayers encapsulated in Group A and Group B aim at (a) striking down the effect of
the Charge under the Mauritius laws; and (b) the enforcement of the PRC pledges through the
sale of the pledged PRC shares.
I shall analyse the declaratory orders prayed for by the Plaintiff in accordance with the
facts of the case and the evidence adduced by both the Plaintiff and the Defendants.
41
In relation to the Resolution, I have taken note of the submissions of the Plaintiff and the
Defendants. I have taken into account the provisions of the section 158 and paragraph 7 of the Eighth Schedule of the Companies Act 2001 as referred to by the Defendants. I have also
considered the provisions of section 71(4) (b) of the Financial Services Act 2001 (the ‘FSA’)
which reads as follows:
“(b) In determining whether the conduct of business will be or is being managed and
controlled from Mauritius, the Commission shall have regard to such matters as it may
deem relevant in the circumstances and without limitation to the foregoing may have
regard to whether the corporation –
(i) shall have or has at least 2 directors, resident in Mauritius, of sufficient
calibre to exercise independence of mind and judgement;”
I therefore hold that the provisions of the Companies Act 2001 are sufficiently clear
inasmuch as the fact that a meeting of the board of directors duly convened and held is not a
requirement so as to make a written resolution of the directors valid and effective, as long as the
written resolution has been signed or assented to by all the directors of the company entitled to
receive notice of the meeting. However, in the present case, it has been established that not all
the directors of Defendant no. 6 had signed or assented to the written resolution which is an
essential condition for the validity of the written resolution.
An extract from Palmer’s Company Law, Twenty- Fourth Edition, Note 61-05 reads
as follows:
“It is not, however, essential for the validity of a director’s resolution that the
determination should be embodied in a formal resolution…”
Moreover irregularities such as failure to provide notice of board meeting do not prohibit
directors from transacting business on behalf of the company (see Note 61-03, Palmer’s Company Law, 24th Edition). Note 61-03 further provides that “In such a case, the rule in
Royal British Bank v Turquand applies, and outsiders will not, as a general rule, be prejudiced
by such irregularities. Moreover their position is further secured by section 35. They are not
concerned to see to the internal regularity of the company’s proceedings- its “indoor
management” as Lord Hatherey termed it- and are entitled to assume that everything has been
properly done.” There is therefore, in that regard, the presumption of regularity.
42
Section 29 of our Companies Act 2001, provides that any defect in the internal process
of a company cannot be asserted against any person dealing with the company or with a person
who has acquired property, rights or interests from the company.
As confirmed in the 19th Edition of Mayson, French and Ryan on Company Law, Note 15.8.1, procedural informality is acceptable when all the directors agree to a decision.
In the light of the oral evidence adduced during the hearing I am of the view that (i) the
fact that Messrs Nayeck and Bheenick had resigned after taking cognizance of the transaction
under the resolution and prior to the Resolution being signed; and (ii) Mr. Perrin was disqualified
by reason of his bankruptcy pursuant to evidence of Mr. Perrin’s bankruptcy as confirmed by Mr.
Nayeck, those 3 directors were not directors entitled to receive notice of a board meeting.
There remained only Messrs Nathan Lambert Thynne, Grenville Matthew Thynne and Soo Jin
Goh as effective directors who could vote as directors on the Resolution.
Furthermore, with respect to the issue of conflict of interests alleged by the Plaintiff in
order to aver that the directors of a company are interested in a transaction, pursuant to section 147(1) of the Companies Act 2001 it has to be shown that the director:
“(a) is party to, or shall or may derive a material financial benefit from the transaction;
(b) has a material financial interest in or with another party to the transaction;
(c)is a director, officer, or trustee of another party to, or person who shall or may derive a
material financial benefit from the transaction, not being a party or person…;
(d) is the parent, child or spouse of another party to, or person who shall or may derive a
material financial benefit from the transaction; or
(e)is otherwise directly or indirectly materially interested in the transaction.”
Pursuant to the provisions of section 147 of the Companies Act 2001, when alleging
that a director is interested in a transaction, there should have been evidence of any material
financial interest or benefit which has been incurred by the relevant director. In the present
case, it is apposite to note that the Plaintiff did not adduce any evidence of such material
interest or benefit with regards to any of the directors who have assented to the Resolution.
43
To the extent that evidence had been adduced that the directors were interested in the
transaction, in accordance with section 148 (4) of the Companies Act 2001, the failure to
disclose such interest will not invalidate the transaction entered into by the company or the
directors, as rightly submitted on the Defendants’ behalf.
In addition, the allegations of fraud made by the Plaintiff, have been mere statements
and no cogent evidence has been adduced with respect to such allegations. Pursuant to the
case of Premchand I & Ors v Jagoo A R &Ors [2013 SCJ 184], in cases of fraud, general
allegations, however strong they are, would not suffice and sufficient particulars should be
averred. Hence I find that no cause of action of fraud has been established by the Plaintiff.
After having considered all the evidence adduced during the present court proceedings, I
am of the view that the Plaintiff has failed to adduce sufficient evidence to substantiate its
averments of conflict of interests and that the evidence of the Plaintiff in this regards amounts to
mere speculation.
With respect to the requirement of the 2 resident directors under the FSA, I agree with
the submissions of learned Counsel for the Defendants, inasmuch the breach of such
requirement is in contravention of the conditions attached to the Global Business Licence and
the onus is on the FSC to either provide a direction to the relevant company to cease business
or take such remedial action as it thinks fit. The fact that Defendant no. 6 did not have resident
directors at the time of the acquiescence to the Resolution does not render it invalid.
In the light of the above I am of the view that the Resolution is indeed valid inasmuch as
(a) it had been signed by all the directors entitled to receive notice of a board meeting; (b) there
is no cogent evidence on behalf of the Plaintiff on the allegations of conflict of interests; and (c)
the requirements of the 2 resident directors pursuant to section 71(4)(b) of the FSA, is a breach
of one of the conditions of the Global Business Licence and a breach of such condition does not
render the Resolution invalid.
In relation to the validity of the Charge, I am of the view that the Plaintiff has made an
attempt against Mr. Aadil Koomar, barrister at Appleby and Mr. Constantin, the Notary, with a
view to find an invalidating feature in the execution of the Charge by challenging the
appointment of Mr. Koomar as proxy on the basis that Appleby prepared the resolution adopted
by Defendant no. 6. I consider that nothing in the evidence adduced by the Plaintiff supports
the contention of the Plaintiff on this issue.
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The Plaintiff has no locus standi to challenge the validity of the Charge per se as the
agreement for the Charge is contractual in nature and therefore is binding upon the parties to
the agreement. The Plaintiff being a third party to such agreement cannot challenge the validity
of the agreement and can merely claim that the agreement is not opposable to it (article 1165 of the Civil Code: effet relative des contrats- Cass 3e civ 16 sept 2003, no 62-12.425-JurisData no 2003-020238; Cass soc, 18 nov 2009, no 18-19.419- JurisDatta no 2009-050372, Bull Civ 2009, V, no 259, RDC p575 Note de Y M Lathier). However, the issue of
“opposabilité” is not relevant to the present case as the Plaintiff has failed to bring up any
reason and evidence as to why the agreement should not be opposable to the Plaintiff.
Moreover, I have noted that the Plaintiff does not hold any “titre exécutoire” as rightly
established by the Defendants, which would enable the Plaintiff to successfully apply for an
execution against the assets of the debtor. In this respect I find that the Plaintiff has no locus
standi to pray for the invalidation of the Charge.
In relation to the PRC pledges, it is apposite to note that the Plaintiff has not challenged
the validity of the PRC Pledges nor their enforcement. The Plaintiff has merely contested the
manner of the sale and of the distribution of the proceeds thereof, in that the sale was done
consensually, inferring that the Receivers (Defendants nos. 1 and 2) acted jointly to cause harm
to the Plaintiff and focused on the distribution of the proceeds of the sale. It is to be noted that
the PRC pledge agreements were entered into well before the incorporation of the Plaintiff
company and the only effect of the sale of the pledges was the disposal of the ownership rights
of Defendant no. 6 in the pledged shares. Moreover, as seen above, the Plaintiff, being an
unsecured creditor outside the insolvency proceedings, has no right whether contractual or
proprietary in the disposal of the pledged shares.
I shall now consider the prayer of the Plaintiff under paragraph 58(c) of the Plaint, that
Defendants nos. 3, 4 and 5 be declared as unsecured creditors, ranking pari passu with the
Plaintiff. Throughout the proceedings, the Plaintiff has relied on the assumption that the alleged
economic insolvency of Defendant no. 6 gives rise to a special right accruing to the unsecured
creditor: namely, an actual proprietary right on the assets of the failing company either for itself
or for the whole body of creditors, and because of that proprietary right, the capacity to act
against the assets and the charges on these assets. However, as seen above, in law, there is
no such right which is vested in an unsecured creditor. The Plaintiff is appropriating of rights
which belong to liquidators under statutory legislation, when a declaration of winding up is made
and the company is put into liquidation.
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As rightly submitted by Learned Senior Counsel for the Defendants in his written
submissions, the declaration of winding up triggers some fundamental changes in the regime
governing a company. Pursuant to section 101(2) and (4) of the Insolvency Act 2009 the
declaratory order of the Court or the resolution for voluntary winding up or the creditors’ winding
up resolution should state the date and the time of the declaration. These have legal
consequences on the company and immediately the liquidator shall take into his custody or
under his control all the property to which the company is entitled (section 112 of the Insolvency Act 2009). The appointment of the liquidator suspends the rights of any creditor to
take action or proceedings against the company except with the leave of the Court (section 145 of the Insolvency Act 2009). The aim of the liquidator is to realise and distribute the assets of
the company applying the principle of pari passu distribution among the creditors in satisfaction
of its liabilities subject to the preferences and priorities as established by law (section 146 of the Insolvency Act 2009) and although the assets remain in the ownership of the company,
they are said to be held on trust for the creditors.
As explained in the case of Buchler v Talbot [2004] UKHL 9 referred to by Counsel for
the Defendants, liquidation is a collective procedure and winding up is a form of collective
execution. In contrast, contractual claims are pursued in individual creditor proceedings and
each creditor fends for himself irrespective of the financial state of the debtor. The shift from
individual enforcement of claims in pre-insolvency period to the collective enforcement is
marked by the very formal declaration of winding up or of administration.
I shall further consider what has been stated in Corporate Insolvency: Law and Practice 3rd Edition by Edward Bailey and Hugo Groves, paragraph 1.1 of which reads as
follows:
“The law relating to corporate insolvency is concerned not with the factual state of the
company’s finances but with the technical state of the company as a legal entity…The law has
no concern with any definition of financial insolvency. The law of insolvency applies to any
company when certain specific procedural requirements have been met; and a company against
which the specified procedures have been completed becomes subject to whichever insolvency
law regime has been implemented, irrespective of the actual state of its balance sheet, or
indeed its ability to pay those creditors who are pressing their debts.”
It is an undisputable fact that Defendant no. 6 has never been put into winding up or
liquidation and at the time that the Plaint was entered, Defendant no. 6 was not in liquidation or
winding up. In relation to the “factual state” of Defendant no. 6’s finances, the Plaintiff has relied
on a presumed management account to suggest that Defendant no. 6 is insolvent and has
46
argued that as a creditor, it has a sufficient interest in the assets of Defendant no. 6 to seek an
order to place in escrow the sale proceeds of the PRC pledged shares and to require its
distribution pari passu among creditors. Pursuant to what has been said in BNY Corporation v Eurosail [2013] UKSC 28 where the Law Lords had viewed the issue of interposing the
concepts of “cashflow deficiency” and “balance sheet insolvency”, it can be understood that the
legal analysis of insolvency does not automatically give way to accountancy workings of
insolvency. Hence the determination of “legal insolvency” of a company cannot be reached by
an extrapolation on the balance sheet of a company.
I therefore agree with the submissions of the Defendants that the assumption of the
Plaintiff that it has a right to the assets of Defendant no. 6 is incorrect in law from the
perspective (i) of the legal status of Defendant no. 6 as a company; (ii) of the application of the
test for determining “legal insolvency”; (iii) of the legal standing of the creditors; and (iv) of the
legal nature of the assets.
Group C Prayers
I have taken into account the six cases and the winding up petitions of the Plaintiff
wherein the claims of the Plaintiff have been thoroughly analysed, however, the Plaintiff has not
taken action where it should have, namely in the PRC, for the preservation of the assets of
Defendant no. 6 as per the judgment of Honourable R. Mungly-Gulbul, Judge.
In order to determine the prejudice and damages caused to the Plaintiff, 3 elements had
to be established by the Plaintiff, namely: (i) the faute of the Defendants; (ii) the prejudice
suffered by the Plaintiff; and (iii) the causal link between the faute and the damages suffered by
the Plaintiff.
The present claim in tort is against the 6 defendants, and the onus was upon the Plaintiff
to prove the faute of each of the Defendants that caused the alleged prejudice to the Plaintiff.
However, for all the reasons given above such evidence as has been adduced by the Plaintiff
falls short of establishing any actionable “faute”. Its claim in tort also has therefore not been
established by the Plaintiff Company, which is consequently not entitled to any of the group C
prayers.
For all the above reasons, all the claims of the plaintiff having failed, the Plaint with
Summons is dismissed, with costs.
A. Hamuth
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Judge
11 January 2016
For Plaintiff: Mr. Attorney C. Mallam Hassam & B. SewrajMr. Y. Mohamed, S.C.
For Defendants: Mr. Attorney G. NoelMr. I. Rajaballee, S.C.