Basab Inc. Appellant v [1] Accufit Investment Inc. [2] Double Key International Ltd Respondents

• Jurisdiction: British Virgin Islands
• Judge: Gonsalves JA,Justice of Appeal [Ag.],Justice of Appeal,Anthony E. Gonsalves, QC,Davidson Kelvin Baptiste,Louise Esther Blenman
• Judgment Date: 09 November 2015
• Judgment citation (vLex): [2015] ECSC J1109-1
• Court: Court of Appeal (British Virgin Islands)
• Docket Number: BVIHCMAP2014/0020
• Date: 09 November 2015

[2015] ECSC J1109-1

THE EASTERN CARIBBEAN SUPREME COURT

IN THE COURT OF APPEAL

Before:

The Hon. Mr. Davidson Kelvin Baptiste Justice of Appeal

The Hon. Mde. Louise Esther Blenman Justice of Appeal

The Hon. Mr. Anthony E. Gonsalves, QC Justice of Appeal [Ag.]

BVIHCMAP2014/0020

In The Matter Of Accufit Investments Inc.

and

In The Matter of Section 184C of The BVI Business Companies Act, 2004.

Between:

Basab Inc.

Appellant

and

[1] Accufit Investment Inc.

[2] Double Key International Limited

Respondents

Appearances:

Mr. David Fisher and Ms. Monique Peters for the Appellant

Mr. Timothy Harry and Mr. David Welford for the First Respondent

Interlocutory appeal – Derivative proceedings – Whether shares in subsidiary company of 1st respondent sold at an undervalue – Application made by appellant in court below to bring proceedings on behalf of and in name of 1st respondent company – Whether learned judge erred in refusing application – Interpretation of s. 184C(2)(c) of BVI Business Companies Act, 2004 (as amended) – Meaning of 'likely' in wording 'whether the proceedings are likely to succeed' – Appeal against findings of fact made by learned judge

The first respondent ("Accufit"), is the wholly owned subsidiary of the appellant ("Basab"). Accufit owned 131 million shares ("the Sale Shares") in the company Kith Holdings Limited ("KHL"), which shares carried, roughly, a 51% stake in KHL. In September 2012, the company Superb Glory Holdings Limited ("Superb Glory") lent HK$140 million to Accufit and on the same day Accufit charged the Sale Shares in support of the loan. Basab guaranteed the debt and, in February 2013, granted a fixed and floating charge over all its assets, including its 100% interest in Accufit.

Superb Glory called in the debt in April 2013 and the following month, appointed Accufit company directors Mr. Fok Hei Yu ("Mr. Fok") and Mr. John Howard Batchelor ("Mr. Batchelor") (together, "the Directors") as receivers of Basab under the Basab debenture. Mr. Fok, in his capacity as receiver, voted Basab's shares in Accufit to appoint himself and Mr. Batchelor as directors of Accufit and removed Basab from the Board. In December 2013, the Directors caused Accufit to sell the Sale Shares to the second respondent, Double Key International Limited ("Double Key") for HK$49,780,000.00, approximately HK$0.38 per share. Superb Glory consented to the completion of the sale, and released its security to enable the sale to proceed. The sale was effected by Mr. Fok and Mr. Batchelor, not in their capacity as receivers of Basab, but rather, as directors of Accufit. The appellant alleged that the Directors had failed to market the Sale Shares properly or at all and had sold the shares at an undervalue. Accordingly, it sought leave, pursuant to section 184C(2)(c) of the BVI Business Companies Act, 2004 (as amended) 1 ("the BCA") to commence derivative proceedings in the name and on behalf of Accufit against: (1) Mr. Fok and Mr. Batchelor in their capacity as directors of Accufit, for damages for breach of fiduciary duty arising out of the sale of the Sale Shares; (2) Double Key, for an order setting aside the sale and transferring the Sale Shares back to Accufit on the grounds that Double Key was guilty of knowing receipt, alternatively for damages on the ground that Double Key dishonestly assisted the directors in the breach of their fiduciary duty; and (3) Superb Glory, for an order that Accufit be entitled to redeem the charge of the Sale Shares to Superb Glory, together with consequential relief.

The learned judge refused the appellant's application for leave. In arriving at a decision on the matter, the judge focused on section 184C(2)(c) of the BCA which states that one of the matters that the court must take into account in determining whether to grant leave to a member of a company to bring derivative proceedings or intervene in proceedings to which the company is a party, is 'whether the proceedings are likely to succeed'. The learned judge held that that the intention and effect of section 184C(2)(c) is that for a claim to be 'likely to succeed' it must be obvious, without any substantial consideration of or debate on the merits that it is likely to succeed. He further held that the intention and effect of subsection (2)(c) is that the proposed claim must appear to the court to be self-evidently strong without conducting an inquiry; the application for leave under s. 184C was not an

occasion for painstaking analysis of valuation or other evidence. He ultimately concluded that the proceedings were not likely to succeed.

On appeal, the appellant challenged the learned judge's interpretation and application of section 184C(2)(c) of the BCA as well as his analysis of the valuation evidence adduced by the appellant.

Held: dismissing the appeal and ordering that costs be awarded to the respondent in the court below, to be agreed within 21 days, and in default thereof to be assessed pursuant to CPR 65.12; and also, that costs be awarded to the respondent in this court, to be calculated at 50% of two-thirds of the costs in the court below, that:

• 1. The correct meaning of the phrase 'whether the proceedings are likely to succeed' in section 184C(2)(c) of the BCA is 'whether it is more probable than not that the proceedings will succeed'. Accordingly, the applicant is not required to demonstrate that success is an absolute certainty, nor that the probability of success is very strong. The learned judge's interpretation of the phrase 'whether the claim is likely to succeed' seemed to suggest a higher threshold – he appeared to be moving into the realm of requiring a strong likelihood, or almost requiring certainty that the proceedings would succeed for leave to be granted under section 184C(2)(c). This interpretation was incorrect, and the learned judge therefore erred in this regard.

  Cream Holdings Limited and Others v Banjeree and Others [2004] UKHL 44 applied.

• 2. In any case, at an application stage, whether and to what extent an examination of the proposed case on the merits is required, must certainly depend on the applicable threshold, and the evidence before the court. With regard to the level of examination of the evidence required in the present case, the threshold for the grant of leave to bring derivative proceedings – 'whether it is more probable than not that the proceedings will succeed' – would require a full and proper examination of the evidence then before the court. The potential nature of derivative claims, especially those that may be both complex and defended, do not predispose themselves to a cursory review and require the court to evaluate the evidence before it and the arguments advanced by both parties in order to determine 'whether the proceedings are likely to succeed'. Therefore, in the present case, the learned judge erred in stating that the court should not attempt to conduct an inquiry, or in implying that the court should not conduct an evaluation of the material currently before it (assuming that in relation to an applicant's proposed pleadings, a viable claim in law has first been disclosed). Furthermore, the learned judge did not, in fact, undertake an evaluation of the material before him, in coming to the conclusion that the evidence adduced by the appellant was no basis for the allegation that the Sale Shares were sold at an undervalue. It therefore falls to the appeal court to evaluate the material which was before the court below.

  American Cyanamid Co. v Ethicon Ltd. [1975] AC 396 cited; Cameron v Coleman CIV-2010-485-2151 [2011] NZHC 724 (22 ^nd June 2011, unreported) (High Court of New Zealand) cited.

• 3. It is insufficient that an expert merely supplies his/her conclusion on a matter in issue between the parties. It is necessary for him/her to also present the analytical process by which he/she reached the conclusion. In the present matter, the appellant's expert only gave his conclusion on the issue of whether KHL would have been able to satisfy the requirements to be listed on the Hong Kong stock exchange. He failed to present to the court the analytical process by which he had arrived at his conclusion.

  Pacific Recreation Pte Ltd. V S Y Tecchnology Inc and Another Appeal [2008] SGCA 1 applied.

• 4. The evidence adduced by the appellant to show that the true market value of the Sale Shares was higher than what they were sold for, provided no independent factual basis for it to be concluded on a balance of probability that, on the date that the shares were sold, KHL would have been able to maintain its listed status on the Hong Kong stock exchange. KHL not being listed would cause the value of the Sale Shares to be between HK$113 million and HK$130 million subject to the expectation of a discount, rather than between HK$288 million and HK$305 million, as was contended by the appellant. The burden was on the appellant to provide evidence to the court that the further discount would not have resulted in a reduction to bring the market price in line with the price that the Sale Shares were actually sold for. The appellant not having done this, it therefore failed to show that, on the evidence before the court, it was more probable than not that it would succeed in proving that the Sale Shares were sold at an undervalue.

1 Gonsalves JA [AG.]: This case centres on an allegation of a sale of 131,000,000 shares ("the Sale Shares") in Kith Holdings Limited ("KHL"), owned by the first respondent ("Accufit"), by Accufit company directors, Mr. Fok Hei Yu ("Mr. Fok") and Mr. John Howard Batchelor ("Mr. Batchelor"), at an undervalue. The appellant ("Basab") sought permission under section 184C of the BVI Business Companies Act, 2004 (as amended) 2 ("the BCA") to bring derivative

proceedings in the name of and on behalf of Accufit, its wholly owned subsidiary, against the respondents. The...