SHENZHEN HONEYCOMB SYSTEM CO LTD v. HCT TECHNOLOGIES (HONG KONG) CO LTD

HCCT 47/2017

[2018] HKCFI 1877

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 47 OF 2017

______________

______________

______________

_________________________

REASONS FOR DECISION

__________________________

1.  Applications for leave of the Court to enforce arbitral awards, whether made in or outside Hong Kong, are made ex parte, under section 84 of the Arbitration Ordinance (“Ordinance”) and Order 73 rule 10 (1) (e) RHC.

2.  These proceedings were commenced on 7 September 2017 for leave of the Court to enforce a Mainland arbitral award, pursuant to section 92 of the Ordinance.  Section 84 of the Ordinance applies to enforcement of Mainland awards, by virtue of section 92 (1) (b).

3.  Practitioners should not lose sight of the fact that as for all ex parte applications, an applicant for leave to enforce an arbitral award bears the important duty to make full and frank disclosure, applicable to all cases when the Court is called upon to decide on a matter without hearing the other side - which is an exception to the general rule that entitles both parties to be heard, fairly and openly.  The applicant must proceed “with the highest good faith” (Schmitten v Faulkes [1893] WN 64, per Chitty J).

4.  It is trite, that the material facts required to be disclosed are all matters which are material for the judge to know and which are necessary to enable him to exercise his discretion properly.  A plaintiff should bring to the attention of the court any points that could have been made by the defendant, even if not yet made at the time of the ex parte application. Materiality is to be decided by the court, and not by the assessment of applicants or their legal advisers.  Material facts include not only facts known to the applicant but also any additional facts which would have been known if proper inquiries had been made.  An applicant has the duty to inform the court as soon as he becomes aware that the court has been misinformed or given incomplete information at the time of the ex parte application.  Any order made on ex parte application at which material facts were withheld and not disclosed with the highest good faith is liable to be discharged.  In exercising its discretion whether to discharge an order for material non-disclosure, the court will consider such facts as whether the non-disclosure was innocent or deliberate, the reason for the material non-disclosure, and the importance of the omitted fact to the issues which were decided by the judge, in particular whether the non-disclosure would have resulted in the original order not being made in the first place. 

5.  The above principles should be well known to all practitioners and they have been consistently applied by the courts.  (See for example para 29/1/51, Hong Kong Civil Procedure 2018)

6.  In this case, on 7 September 2017, Shenzhen Honeycomb System Co Ltd (“Applicant”), a Mainland company, applied ex parte to this Court (“Subject Application”) for leave to enforce an award made on 20 June 2017 by the Shenzhen Arbitration Commission (“Award”), against HCT Technologies (Hong Kong) Co, Limited (“Respondent”).  Such application was supported by an affirmation of Jin Zhe (“Jin”) signed on 17 August 2017, in which Jin deposed to his being the Legal Representative of the Applicant, and being duly authorized by the Applicant to make his affirmation in support.  Jin further deposed to the existence of the arbitration agreement between the Applicant and the Respondent, the arbitration before the Shenzhen Arbitration Commission, the Award, the Respondent’s failure to comply with the terms of the Award, and the fact that no application for enforcement of the Award had been made on the Mainland.

7.  The Subject Application was granted on 8 September 2017 by an order of the Court (“Leave Order”), whereby the Applicant was given leave to enforce the Award in the same manner as a judgment of the Court, to the effect that the Respondent was to pay to the Applicant US$2,295,496.75, interest, and costs, as ordered by the tribunal.

8.  Judgment was entered in terms of the Award on 19 October 2017 (“Judgment”). In January 2018, a garnishee order to show cause was made by the Master on the Applicant’s application (also ex parte), in respect of the Respondent’s bank account in Hong Kong. 

9.  On 8 February 2018, the Respondent issued a summons (“2/18 Summons”), under Order 2 rule 2 RHC and the inherent jurisdiction of the Court, for a declaration that all acts done by LIMS Solicitors (“LS”) on behalf of the Applicant in this action are void for lack of proper authorisation from the Applicant, and for the Leave Order and the Judgment to be set aside, and the application for garnishee order to be dismissed.

10.  Evidence was filed by the Respondent in support of the 2/18 Summons in March 2018, evidence in opposition was filed by the Applicant in April 2018, and evidence in reply was filed in June 2018.  The evidence filed by the parties included expert evidence on PRC law.

11.  I accept the Applicant’s submissions, that the 2/18 Summons is in effect an application to dispute and challenge the lack of authority on the part of the Applicant in the institution of these proceedings, which application was rightly made to invoke the inherent jurisdiction of the Court, and is governed by the principles set out by A Cheung J (as the Chief Judge then was) in Kammy Town Ltd v Glory Corporation Ltd, HCA 3524/2013, unreported, 14 January 2005.  The point of authority should be taken by a defendant at the earliest opportunity, and should not be raised as a point of defence, to be dealt with at trial. 

12.  Applying those principles to the present case, the issue of the Applicant’s authority, or lack thereof, should be dealt with before any substantive hearing of any application to set aside the Leave Order on the grounds set out in section 93 of the Ordinance, that enforcement of the Award should be refused.  Indeed, the 2/18 Summons made it clear that it was not an application made under Order 73 rule 10 (6) RHC.

13.  The procedural defects alleged by the Applicant in opposition to the 2/18 Summons, in reliance on Order 73 rule 10 (6) and (6A), do not exist.  As this Court indicated in the course of the hearing, the 2/18 Summons had not at any time prior to the hearing on 9 August 2018 been treated as an application to set aside under rule 10 (6), and the directions given by the Court on 15 March 2018 were given on the basis that the 2/18 Summons was not an application made under Order 73 rule 10 (6).

14.  In substance, the Respondent claims that Jin had been removed as a director of the Applicant and as the Legal Representative of the Applicant, respectively by a shareholders’ resolution of the Applicant made on 23 August 2017, and by a board resolution of the Applicant made on 4 September 2017.  At the material time in August and September 2017, the Applicant and the Respondent had common shareholders.  Qu Zeyang (“Q”), Wang Guiying (“W”), and He Tingzhong (“H”) together held 53.71% of the shares in the Applicant, with the remaining 46.29% being held by Jin and his nominees.  Q, W and H at the same time held 100% of the shareholding in the Respondent.  There would appear to be disputes between the shareholders of the Applicant, with Jin (and his nominees) on the one side and Q, W and H on the other side.  Jin used to be a director of the Applicant, and was also appointed as the Applicant’s Legal Representative, and registered as such in the records of the relevant statutory authority on the Mainland, namely 市場監督管理局商事主體登記處 (“Registry”).  At a shareholders’ meeting of the Applicant, it was resolved that Jin be removed as a director, and W was appointed to the board.  A board meeting of the Applicant was held on 4 September 2017, and by a resolution of the directors passed at the meeting, Jin was removed as the Legal Representative and replaced by Q, and Jin was further removed as general manager of the Applicant, with H appointed in his stead. 

15.  Jin apparently challenged the legality of the resolutions passed by the shareholders and the directors of the Applicant, and refused to cooperate in signing the necessary documents to effect the change of the registration of the Legal Representative of the Applicant, as recorded in the Registry.  Proceedings were commenced on the Mainland in relation to the validity of the resolutions and the appointment of the new directors.  This apparently resulted in a judgment of the Shenzhen Bao’An District People’s Court dated 10 April 2018 (“SZ Judgment”), declaring that Q was the Legal Representative of the Applicant since 4 September 2017, and that Jin and the Applicant should assist in the registration procedure for effecting the change of the Legal Representative with the relevant authority.  This judgment is being appealed by Jin.

16.  Jin accordingly maintains that he remains to be the Legal Representative of the Applicant, as registered and recorded at the Registry, that his registered status as such is valid and conclusive, and that he at all material times had the authority to instruct LS on behalf of the Applicant to commence proceedings in Hong Kong to enforce the Award against the Respondent. 

17.  According to Q’s evidence filed in these proceedings, the board of directors of the Applicant (as constituted on 23 August 2017), and Q as the Legal Representative appointed by the Applicant on 4 September 2017, did not have notice of the proceedings instituted in Hong Kong on 7 September 2017 for enforcement of the Award, and they object to such proceedings being instituted.

18.  The Mainland law experts disagree as to whether the registration of the status of a legal representative is binding and conclusive for all purposes, and whether the records of such status as maintained at the Registry are absolute for all purposes such that they cannot challenged.  An authority (Case No 20 of 2014) was cited and relied upon by Mr Hu, the expert instructed by the Respondent, but this was distinguished by Counsel for Jin.  According to Mr Wong, the court decided in Case No 20 of 2014 that for disputes involving third parties, the records of the Registry govern the status of the legal representative, but for internal disputes between the shareholders or between the company and its shareholders, the resolution of the shareholders and the internal decision of the company as to the identity of the legal representative is binding and have effect.

19.  Leaving aside the question of whether Jin can still be regarded under Mainland law as the Legal Representative of the Applicant after 4 September 2017, vis-à-vis third parties such as LS or the public, and vis-à-vis Q, W and H as the majority shareholders of the Applicant, I consider that Jin was duty-bound to disclose, at the ex parte Subject Application, the fact that his position and status as the registered Legal Representative of the Applicant had been challenged, and had been purportedly removed by the board of directors of the Applicant at the meeting held on 4 September 2017.

20.  On the evidence, after the board meeting of the Applicant held on 4 September 2017, Jin was informed of the resolution and asked to cooperate in effecting the change of the registration of the Legal Representative.  When Q and his camp learned of the enforcement proceedings in Hong Kong, they instructed their solicitors to write to LS on 2 February 2018 (“2/2 Letter”), to inform them that Jin had been removed as a director and as the Legal Representative of the Applicant by the resolutions of 23 August 2017 and 4 September 2017, and that Jin had no authority to instruct LS either to commence the enforcement proceedings in Hong Kong, or to act further on behalf of the Applicant.  In the 2/2 Letter, Jin and LS were informed that the current directors of the Applicant demanded LS to cease taking any action on behalf of the Applicant.

21.  It is pertinent that Jin made his affirmation in Hong Kong on 17 August 2017, and stated that his affirmation was made in support of his application under section 92 of the Ordinance and Order 73 rule 10 (1) (d) RHC for an order granting leave to enforce the Award, and to enter judgment in terms of the Award.  At that time, it may be argued on his behalf that he had not yet been removed as a director of the Applicant, nor as its Legal Representative.  Such removal only took place on 23 August 2017 and 4 September 2017 respectively.

22.  However, the Subject Application and Jin’s affirmation were only filed in Court on 7 September 2017, when the ex parte Originating Summons was issued.  At that time, both the meetings of the shareholders and directors had already taken place, and Jin was already removed as a director, and as the Legal Representative.  According to the minutes of the shareholders’ meeting, Jin was in attendance, and was aware of the resolution proposed, and passed, for the appointment of Q, W and H only as directors.  When the Subject Application was made on 7 September 2017, Jin was bound by his duty of full and frank disclosure to inform the Court, by a further affirmation if necessary, that by that time, he was no longer a director of the Applicant, and further, that he was no longer the Legal Representative, as he had represented in the affirmation signed on 17 August 2017.

23.  Up to the hearing on 9 August 2018, Jin has not offered any explanation as to why he had failed to disclose the fact of his having been removed as a director on 23 August 2017 and as the Legal Representative of the Applicant on 4 September 2017.  It is not his case that he was not aware of the shareholders’ meeting having been held, or his directorship having been removed. His case is simply that he did not recognize the validity and legality of the shareholders’ and the directors’ meeting, and that as the registered Legal Representative, he was still entitled to instruct LS to commence the enforcement proceedings.

24.  The capacity in which Jin made his affirmation in support of the Subject Application, as to whether he was authorized to apply for the Leave Order, are matters which are relevant and material to the Court’s decision as to whether or not to grant leave to the Applicant to enforce the Award against the Respondent.  An application made in the name of a company by someone not authorized by the company would not generally be granted by the Court.  Even if Jin or his advisers consider that the challenge made by the Q camp of shareholders is without basis, or that the resolutions are invalid (in Jin’s view), Jin should have informed the Court of the fact that the shareholders’ meeting had been held since the making of his affirmation on 17 August 2017, that a resolution had been passed by the shareholders whereby a new board of directors excluding himself had been appointed, that a directors’ meeting had been on 4 September 2017 whereby he was removed as legal representative, and that his capacity to act on behalf of the Applicant, and to give instructions to LS to commence legal proceedings in Hong Kong and to make the Subject Application, might be challenged by the Q camp and the new board of directors.

25.  Jin refrained from stating in his affirmation whether he was a director of the Applicant.  However, he described himself as being “duly authorized by the Applicant” to make the affirmation and the Subject Application, and as being the Legal Representative of the Applicant.  These statements are misleading, if not incorrect, certainly as to the state of affairs on 7 September 2017 when the Originating Summons was filed, and ought to have been corrected by disclosure of the fact of the shareholders’ meeting having been held on 23 August 2017, of Jin no longer being a director of the Applicant, and of his having been removed on 4 September 2017 as the Legal Representative. 

26.  On the ground of material non-disclosure, I consider that the ex parte Leave Order should be discharged. 

27.  Jin and the Applicant did not ask for the Court to exercise its discretion to re-grant the Order.  Bearing in mind the fact that Jin has never explained the reason for his non-disclosure, such non-disclosure must have been deliberate.  On the evidence, there was no excuse for the deliberate and material non-disclosure.  Even if I had been asked to exercise my discretion to re-grant the Leave Order, I would have refused to do so. 

28.  Secondly, notwithstanding any debate between the experts as to whether the status of Jin as the registered Legal Representative of the Applicant is conclusive, the SZ Judgment handed down on 10 April 2018 has declared Q to be the Legal Representative of the Applicant since 4 September 2017, and that Jin should assist in the procedure for changing the legal representative registration.  Although this judgment is under appeal, I see no reason why it should not be regarded as a relevant factor in this Court’s consideration of whether these proceedings should be allowed to be continued in the interim. 

29.  Thirdly, on the evidence filed by W, the board of directors of the Applicant (namely, W, Q and H) object to the present proceedings being instituted against the Respondent in Hong Kong.

30.  In any event, bearing in mind that (as held in Kamy Town) the burden is on Jin and the Applicant (acting through Jin) in this case to establish that these proceedings were commenced with the authority of the Applicant, I am not satisfied on a balance of probabilities that Jin, simply as being the registered Legal Representative, was authorized by the Applicant to commence these proceedings and to make the Subject Application.  I am not persuaded that the distinction sought to be made by Mr Wong, as to the validity of Jin’s registered status vis-à-vis the public including LS, serves any real purpose on the facts of this case.  As the Mainland court decided in Case No 20 of 2014, the resolutions of the shareholders and directors of the Applicant will bind Jin as shareholder, and Q’s status as the newly appointed Legal Representative is valid vis-à-vis the former director and shareholders of the Applicant including Jin.  It is precisely Q, W and H who are disputing Jin’s authority as the Applicant’s Legal Representative in this case, as evidenced by (inter alia) W’s affirmation reflecting the stated position of the board of directors of the Applicant.  I also fail to see how the act and decision of the registered legal representative of a company can override the decision of the board of directors of the company as to whether legal proceedings should be continued.

31.  For all the above reasons, I set aside the Leave Order, the Judgment and the garnishee order to show cause.  Once the Leave Order is to set aside for material non-disclosure, the consequence is that the Judgment and the garnishee order cannot stand and should be set aside.  Setting aside these orders are the appropriate and inevitable remedy, upon deciding that the action was not authorized and should be brought to an end. 

32.  The costs of and incidental to the 2/18 Summons are to be paid to the Respondent by Jin, who purported to act on behalf of the Applicant.  LS were informed by the 2/2 Letter as to Jin’s lack of authority and the resolutions of 23 August 2017 and 4 September 2017.  LS and Jin are to pay, jointly and severally, the costs of the Respondent incurred after 2 February 2018.