Stuart Mackellar (as liquidator of Smart Plus International (Holdings) Ltd Appellant v [1] Khoo Kin Yong (aka "Alice") [2] Pengiran Hajid Mohd Ayub [3] The Authorised Legal Representative Appointed in the Estate of Pengiran Anak Hajah Damit (Deceased) Respondents

• Jurisdiction: British Virgin Islands
• Judge: Baptiste JA,Justice of Appeal,Davidson Kelvin Baptiste,E. Ann Henry, QC,Justice of Appeal [Ag.],Ola Mae Edwards
• Judgment Date: 04 April 2016
• Neutral Citation: VG 2016 CA 4
• Judgment citation (vLex): [2016] ECSC J0404-3
• Court: Court of Appeal (British Virgin Islands)
• Docket Number: BVIHCMAP2013/0008
• Date: 04 April 2016

[2016] ECSC J0404-3

EASTERN CARIBBEAN SUPREME COURT

IN THE COURT OF APPEAL

Before:

The Hon. Mr. Davidson Kelvin Baptiste Justice of Appeal

The Hon. Mde. Ola Mae Edwards Justice of Appeal [Ag.]

The Hon. Mde. E. Ann Henry, QC Justice of Appeal [Ag.]

BVIHCMAP2013/0008

Between:

Stuart Mackellar (as liquidator of Smart Plus International (Holdings) Limited

Appellant

and

[1] Khoo Kin Yong (aka "Alice")

[2] Pengiran Hajid Mohd Ayub

[3] The Authorised Legal Representative Appointed in the Estate of Pengiran Anak Hajah Damit (Deceased)

Respondents

Appearances:

Mr. Mark Forte, with him, Ms. Rosalind Nicholson for the Appellant

No appearance for the Respondents

Civil appeal — Insolvency proceedings — Sections 254 and 256 of the Insolvency Act, 2003 — Misfeasance — Whether learned trial judge erred in holding that company never suffered a loss — Whether learned trial judge erred in refusing to hold the respondents personally liable for breach of agreement

Smart Plus International (Holdings) Limited ("Smart Plus") and Coffee Bean Tea Leaf ("CBTL") entered into an Investment Agreement with the undertaking that Smart Plus would invest up to 7.5 million in CBTL by way of share and loan capital. At the time at which Smart Plus entered into this agreement it had no assets. Smart Plus failed to fulfil its undertaking. CBTL commenced proceedings against Smart Plus for damages as a result of non-performance by Smart Plus of the Investment Agreement. Judgment was entered against Smart Plus in the sum of £46,911,793.00 plus costs in the sum of $208,747.13. An application to set aside that judgment was filed by the second respondent and was granted on the terms that Smart Plus pay the sum of £10,000,000.00 into court. No such payment was forthcoming and final judgment was entered in the stated amount. On the strength of that judgment, CBTL filed an application for the appointment of a liquidator and an order was made to that effect appointing Mr. Stuart MacKellar ("Mr. MacKellar") as liquidator.

Mr. MacKellar filed an application for relief against the respondents under sections 254 and 256 of the Insolvency Act, 2003. The learned judge refused to grant relief holding that the damages to be paid by Smart Plus were not a loss within the meaning of section 254. He was also not satisfied that the respondents were guilty of insolvent trading and refused to make an order under section 256. The appellant has appealed alleging that the learned judge erred in his interpretation of both sections 254 and 256 of the Insolvency Act, 2003.

Held: dismissing the appeal, that:

• 1. Section 254 of the Insolvency Act, 2003 provides a summary procedure to make persons, including directors, liable to compensate the company for misfeasance, breach of fiduciary duty or other duty to the company. To hold a director accountable under this section it must be shown that he was guilty of misfeasance or breach of his fiduciary duty or other duty in relation to the company or that he has misapplied or retained or become accountable for any money or other assets of the company.

  Section 254(1)(b) of the Insolvency Act, 2003 applied.

• 2. Loss to the company is a requisite element of misfeasance and or breach of other duty within the meaning of section 254. In order to establish loss, it is imperative that there must have been a misapplication of assets, whether that loss consists of a depletion of the company's previously held assets or a diversion of profits or property which would otherwise have been available. It is not enough to simply show breach of duty. Loss must be to the funds and assets of the company. Smart Plus never had any assets at any point, before or after they entered into the Investment Agreement with CBTL. A judgment for damages was awarded against Smart Plus. This was in the form of a liability caused as a result of Smart Plus' failure to perform its obligations under the Investment Agreement. Accordingly, the learned trial judge was correct to hold that the respondents cannot be fixed with personal liability as envisioned under section 254.

  The Right Hon. G. A. F. Cavendish Bentinck M.P. v Thomas Fenn (1887) 12 App Cas 652 applied; Re Canadian Land Reclaiming and Colonizing Company Coventry and Dixon'sCase (1880) 14 Ch D 660 applied; QEB Metallics Limited (by its Joint Liquidators, David Ingram and Kevin Murphy v Aslam Peerzada et al [2009] EWHC 3348 distinguished; In Liquidator of West Mercia Safetywear Ltd. v Dodd & Anor (1988) 4 BCC 30 distinguished; Malcolm Cohen et al v Gerald Selby et al [2002] BCC 82 applied.

• 3. To proceed under section 254 the position would have to be the same as it would be if the company had brought an action in its own name. In this case, there was no credit that was incurred by the respondents in the name of the company. As Smart Plus never had in its balance sheet the sum awarded in the judgment and which sum had been depleted and or misapplied by the respondents and or the respondents were guilty of misfeasance or breach of other duty, it could not have brought an action in its own name against the respondents. Further, there was no evidence that the respondents performed their duties to the company in a manner that was not honest, not in good faith and not in what they believed to be in the best interests of Smart Plus. They also did not retain or became accountable for any money or other assets of the company.

  Section 254(1) of the Insolvency Act, 2003 applied; Malcolm Cohen et al v Gerald Selby et al [2002] BCC 82 applied; The Right Hon. G. A. F. Cavendish Bentinck M.P. v Thomas Fenn (1887) 12 App Cas 652 applied.

• 4. Section 256 is designed to cause directors who incur credit during a period when they ought to have realised there was no chance that the company would avoid going into insolvent liquidation make a contribution to the assets. An insolvent company is one where either the value of the company's liabilities exceeds its assets or the company is unable to pay its debts as they fall due. Smart Plus had no assets and no liabilities. It went into liquidation as it was unable to pay the judgment awarded against it. Smart Plus could not have been an insolvent company before that period. Further, there is no evidence which showed that liquidation proceedings were contemplated or could occur as a result of some action or inaction on the part of the respondents. The respondents could not have reasonably taken steps to minimise loss to Smart Plus' creditors as they never existed until judgment was awarded against Smart Plus for breach of the Investment Agreement. Accordingly, the learned judge was correct in refusing to award relief under section 256 of the Insolvency Act, 2003.

  Malcolm Cohen et al v Gerald Selby et al [2002] BCC 82 applied; Re Hawkes Hill Publishing Co Ltd (in liq) [2007] BCC 937 applied; Re Produce Marketing Consortium Ltd (1989) 5 BCC 569 distinguished.

Baptiste JA

1 This is a judgment of the Court. This appeal arises from a decision of Bannister J [Ag.] in which he dismissed an application by the appellant for relief under sections 254 and 256 of the Insolvency Act, 2003.1

Background

2 A brief background would provide some valuable insight into this appeal so as to place it within context. In December 2001, Heads of Terms and a Term Sheet were signed by the first respondent reflecting that Smart Plus International (Holdings) Limited ("Smart Plus") 2 was an investor in the company Coffee Bean Tea Leaf ("CBTL"). The Term Sheet recorded the intention that Smart Plus would invest up to £7.5million in CBTL by way of share and loan capital. Approximately four months later, no such monies having been invested in CBTL and communications having broken down between the respondents and Mr. Mark Burby ("Mr. Burby"), the director of CBTL, Mr. Burby, in his personal capacity, initiated legal proceedings in Singapore against the respondents. In February 2003, the parties agreed to adjourn the Singapore proceedings to enter into negotiations. The negotiations gave birth to the Investment Agreement between Smart Plus and CBTL which had as its objective to "maximise returns to shareholders of CBTL". The Term Sheet and the Investment Agreement had the same undertaking. At the time at which Smart Plus entered into this agreement it had no assets. Under the terms of the stay of the Singapore Proceedings £300,000.00 was to be paid by Smart Plus to CBTL by 15 ^th March 2003. In September 2003, no payment having been received, Mr. Burby reinstated the Singapore proceedings.

3 The respondents succeeded in their defence of the Singapore proceedings on the basis that since the investment in the proposed project was to be through their

corporate vehicle, Smart Plus, they could not be held personally liable for breaches of the Investment Agreement.

4 CBTL then commenced proceedings against Smart Plus in the BVI for damages as a result of non-performance by Smart Plus of the Investment Agreement. Judgment was entered on 22 ^nd December 2004 in the sum of £46,911,793.00 plus costs in the sum of $208,747.13. However, an application to set aside that judgment was filed by the second respondent and was granted on the terms that Smart Plus pay the sum of £10,000,000.00 into court. No such payment was forthcoming and final judgment was entered on 4 ^th October 2005 in the stated amount. On the strength of that judgment, CBTL filed an application for the appointment of a liquidator and an order was made to that effect on 17 ^th October 2005 appointing Mr. Stuart MacKellar ("Mr. MacKellar") as liquidator.

Application before Bannister J [Ag.]

5 Mr. MacKellar filed an application before Bannister J [Ag.] for relief against the respondents under sections 254 and 256 of the Insolvency Act, 2003 which sections deal with summary remedy against delinquent officers (officers who have been guilty of any misfeasance or breach of any...