LEAD GOOD GROUP LTD v. CREDITLAND GROUP LTD AND OTHERS

HCCT 2/2024

[2025] HKCFI 3646

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS NO. 2 OF 2024

____________________

______________________

____________________

________________

D E C I S I O N

________________

1.  This is the appeal of the 2^nd Respondent (“Royue”) against the Charging Order absolute (“CO”) made by Master Matthew Leung on 9 December 2024 in favour of the Applicant (“Lead Good”) in respect of Royue’s beneficial interest in 1,890,826,000 shares (“Shares”) in Zhenro Properties Group Ltd (“Zhenro”), a Hong Kong listed company. The Shares represent approximately 43.29% of Zhenro’s issued shares.

Issues

2.  There is common ground on the issues before the court :

(1)  Whether foreign insolvency proceedings against Royue, which have not been recognised in Hong Kong, may be relied upon to resist Lead Good’s application for a charging order absolute.

(2)  Whether there is “undue prejudice” to other creditors of Royue if Lead Good obtains a charging order absolute.

(3)  If the court is to consider that unrecognised foreign liquidation would tilt the balance in favour of Royue’s case, whether there are exceptional circumstances that would justify the court in making the order absolute nonetheless.

Background

3.  The relevant background facts may be succinctly stated. Royue was incorporated in the BVI on 28 June 2017. On 8 December 2023, Lead Good obtained an arbitral award against, inter alia, Royue in the sums of US$43,499,218.68 and RMB 2,715,480 plus interest (“Award”). On 11 January 2024, leave for Lead Good to enforce the Award against the Respondents was granted by Mimmie Chan J.

4.  On 29 May 2024, Lead Good applied for a Charging Order nisi over the Shares. On 23 July 2024, Master Lam granted the Charging Order nisi.

5.  On 4 June 2024, Royue applied to the BVI court for the appointment of joint provisional liquidators (Mr Glenn Harrigan and Ms Ivy Chua Suk Lin) (“JPL”) for the purpose of restructuring its debts by reason of its insolvency both on balance sheet and cash flow basis.

6.  The hearing of Lead Good’s application for a charging order absolute took placed on 23 December 2024. Royue objected to the application because (a) in view of its probable insolvency, pari passu distribution should be preferred; and (b) making an order absolute would directly interfere with its provisional liquidation commenced before the BVI Court.

7.  There was before the court an application by Royue to adduce additional evidence in the form of an affirmation of Ms Chua dated 28 November 2024 (“1^st Summons”) which deposed to, inter alia, the lack of progress of the restructuring exercise; an application to appoint liquidator for Royue was to be heard on 17 February 2025; and her belief that winding up order would likely be made against Royue on the basis of insolvency. The evidence was received de bene esse at the hearing but was subsequently rejected with the making of the CO.

8.  By a Notice of Appeal filed on 23 December 2024, Royue appeals against the CO made on 9 December 2024. On 3 July 2025, Royue filed a summons to adduce further evidence in this appeal (“2^nd Summons”). The further evidence was set out in the 2^nd affirmation of Ms Chua which referred to, inter alia, the failure of restructuring and the grant of a winding up order against Royue by the BVI Court on 14 April 2025 (“WU Order”).

9.  It is common ground that Royue had attempted to take steps to apply for recognition of the BVI insolvency in Hong Kong[1]. It was opposed by its creditors, including Lead Good. To date, no application for recognition has been made.

Discretion of the court

10.  There is no dispute that granting a charging order absolute is a matter of discretion of the court. However, the discretion is not at large. It is circumscribed by at least s.20(3)(b) of the High Court Ordinance, Cap 4, which governs the court’s power to impose charging order. The court shall consider all the circumstances of the case and, in particular, any evidence before it as to :

“whether any other creditor of the debtor would be likely to be unduly prejudiced by the making of the order.”

See British Arab Commercial Bank plc v Algosaibi and Bros Co

[2011] 2 CLC 736, Flaux J (as he then was), [54]

11.  Further, I believe that in exercising its discretion the court should abide by well-established case law in the absence of good reason not to do so, so as to maintain consistency in the law.

12.  For the purpose of this appeal, which is by way of re-hearing, it is common ground that this court exercises its discretion afresh based on the material currently before it.

Issue (1)

13.  To begin with, Mr Chiu, who appeared for Lead Good, (a) took a neutral stance in respect of the 1^st and 2^nd Summonses and (b) did not dispute that Royue is balance sheet or cash flow insolvent in light of the WU Order. The position taken by Lead Good is no doubt the result of realistic assessment of the case, and is helpful to the court in weeding out the unnecessary disputes.

14.  If the WU Order was one made by Hong Kong court, the established rule is that the court will decline to make a charging order absolute: see, eg, United Asia Finance Ltd v Yiu Tsz Ngar [2015] 2 HKLRD 189, DHCJ Le Pichon. The rationale of the rule is that pari passu distribution should be preserved for all the creditors of the debtor in question and no creditor should be allowed priority over the others.

15.  What is the position in the case of foreign insolvency (sometimes referred to as non-statutory insolvency[2])? Where the foreign insolvency has been recognised in Hong Kong, the same rule as applied to domestic insolvency would be applicable: see Re CEFC Shanghai International Group Ltd [2020] 1 HKLRD 676, Harris J, [16] at p.685.

16.  In the present case where there is no recognition of the BVI insolvency, the court has been referred by Mr Chiu to 2 English authorities for assistance. First, British Arab Commercial Bank, supra. In that case, HSBC and other banks had obtained interim charging orders to enforce their judgments against the defendants who were members of a Saudi Arabian family and their companies. The hearing was to determine priority between HSBC and certain other banks in relation to the interim charging orders. It was common ground that the defendants were insolvent but the English insolvency and bankruptcy regimes did not apply to them because they were not domiciled or incorporated within the jurisdiction. A bankruptcy process was apparently available in Saudi Arabia, but it would not result in pari passu distribution of assets. The other banks disputed HSBC’s application for a final charging order, arguing that it would give HSBC priority in enforcing its judgment, which would be unfair and prejudicial to the other banks.

17.  The provisions of s.1 the English Charging Orders Act 1979 were similar to those of s.20 of the High Court Ordinance, Cap 4, in that it required the court to consider “whether any other creditor of the debtor would be likely to be unduly prejudiced by the making of the order” (British Arab Commercial Bank, [16]).

18.  After a comprehensive survey of authorities at [21]-[51], Flaux J observed that “only limited assistance can be gained from the authorities …, precisely because they are all ones where on one basis or another, the statutory insolvency regime of distribution pari passu between all the unsecured creditors applies” [52].

19.  Where the statutory insolvency regime applies, “[Roberts Petroleum v Bernard Kenny Ltd [1983] 2 AC 192] was the case which finally established the principle that, where the judgment debtor was insolvent, so that the statutory insolvency regime (whether the judgment debtor was a company or an individual) came into force either before a charging order was made or between the making of an interim order and an application to make the order final, that was without more ‘sufficient cause’ for not making a charging order final” [27].

20.  However, Flaux J, agreeing with Cooke J in FG Hemisphere Associates LLC v Democratic Republic of Congo [2005] EWHC 3103 (Comm), that “in non-statutory insolvency regime cases, the general rule is that the principle of ‘first past the post’ applies” [53].

21.  The second case is OOO Nevskoe v UAB Baltijos [2023] BCC 689, Master McCloud. It was a case involving unrecognised non-statutory insolvency. The court applied British Arab Commercial Bank in respect of the principles, and said the following as regards the priority which would be gained by the claimant if its interim third-party debt order was made absolute (the order absolute was subsequently granted) [57] :

“…What of the other creditors? This would have the effect of prioritising the debt due to this creditor over others. However they themselves could have taken the steps which [the claimant] has taken to enforce, and in a commercial setting they have chosen to place their ‘eggs’ in the overseas insolvency basket: I do not see that this court has a duty to protect overseas creditors proving in an unrecognised insolvency overseas. I do not feel that either side has engaged in ‘sharp practice’ such as might lead to a departure from a starting point that the diligent creditor may harvest its fruits …”

22.  I next turn to a Hong Kong case relied upon by Ms Yu, who appeared for Royue, CCIC Finance Ltd v Guangdong International Trust & Investment Corp [2005] 2 HKC 589. Ms Yu submitted that formal recognition is unnecessary before this court gives effect to foreign insolvency.

23.  In that case, the claimant sought a garnishee order absolute against the judgment debtor (GITIC), which was a Mainland state owned enterprise and registered in Hong Kong as an overseas company. GITIC opposed the application and sought a stay on the basis that it was in an insolvency process in the Mainland. Deputy High Court Judge Gill :

(1)  Referred to the “… rule of international law that where there is already pending a process of universal distribution of a bankrupt’s effects in a foreign jurisdiction, the local court should not allow steps to be taken within its jurisdiction which would interfere with that process …” [56].

(2)  Took the view that the same principle applied to corporate insolvency [57].

(3)  Believed that it was “necessary to examine the nature of the winding up of GITIC in PRC and in particular whether that liquidation has extra-territorial effect or not; that is whether the … PRC [enterprise] bankruptcy law, is intended or purports to apply to extra-territorial assets of GITIC, so as to subject them to the liquidation regime in the PRC” [60].

(4)  Held that (a) the CITIC’s liquidation was pursued on the basis of universal collection and distribution of assets, and the creditors worldwide were to be paid pari passu; (b) making absolute the garnishee order would interfere with that process and the applicant would achieve an unfair preference; and (c) the application was refused [60], [84] and [90].

24.  I acknowledge that there is tension between CCIF Finance on one hand and British Arab Commercial and OOO Nevskoe on the other in that the former suggests that formal recognition is not required before Hong Kong court will give effect to foreign insolvency.

25.  However, I agree with Mr Chiu that for the present purpose CCIF Finance does not assist Royue because it is provided by the WU Order ([7]) that Royue’s Liquidators may apply for recognition of their appointment in any foreign country. Thus, it cannot be said that the Royue’s BVI insolvency is intended to have extra-territorial effect automatically or without recognition.

26.  Further, it is a fact that Royue’s creditors (including Lead Good) had refused to apply for recognition in Hong Kong. It must be said that prejudice cuts both ways. Not to grant an order absolute would mean that despite having been obtained in December 2023, the Award remains unsatisfied.

27.  Ms Yu seeks to distinguish British Arab Commercial and OOO Nevskoe on the facts. Difference in facts is commonplace. However, I am unable to see any true distinction which may render the principles of these authorities inapplicable.

28.  I am of the respectful view that the analysis and the principles adumbrated in British Arab Commercial, as well as the dicta of OOO Nevskoe cited above, are sound and consonant with commercial common sense. Those principles should be followed by this court.

29.  In the premises, Issue (1) is decided against Royue.

Issue (2)

30.  The arguments here draw upon the analysis in British Arab Commercial on “undue prejudice” :

(1)  The expression “unduly prejudiced” recognises that a charging order in favour of one creditor would almost certainly, in one sense, prejudice other creditors, because it gives that creditor security against which to enforce his judgment which the other creditors do not have, but it is only where that prejudice is “undue” that the court should consider not making a charging order absolute [54].

(2)  In other words, the mere fact that making a charging order absolute would give one creditor priority over other creditors is not undue prejudice, because such security and priority are inherent in the making of a charging order. This is a prejudice which the other creditors would “inevitably suffer” [55]. If this constitutes undue prejudice, it would be a serious hurdle for any charging order absolute to be made in cases of insolvency.

(3)  The question is whether the other creditors will suffer “some prejudice over and above the prejudice they would inevitably suffer, if an order is made in favour of the judgment creditor” [55].

(4)  If there is “sharp conduct” by the judgment creditor, that may amount to exceptional circumstances resulting in undue prejudice so that it would be appropriate for the court to exercise its discretion not to make a charging order absolute [56].

(5)  Examples of sharp conduct include (a) the applicant putting other creditors off the scent by purporting to agree to forego immediate pursuit of a claim; (b) undue haste in obtaining a preferred position, and (c) unfair use of special knowledge [56].

31.  It appears that this point had not been the focus of, and probably not argued in, the Hong Kong cases. Rather, it seems to have been assumed that getting priority over other creditors and overcoming the pari passu scheme is per se undue prejudice to other creditors: see, eg, Tsui Yun Bun v Law Wan Tung [2019] HKCFI 2955, Recorder Stewart Wong SC, [56].

32.  With respect, I find the analysis in British Arab Commercial compelling and I agree with the same. This brings me to Royue’s argument that Lead Good is guilty of sharp conduct.

33.  The sharp conduct complained of is as follows :

(1)  Knowing that the JPL were of the view that a winding up order should be made on the basis of Royue’s insolvency during the hearing on 17 February 2024 (see para 7 above), 2 days before the hearing Lead Good objected to the grant of winding up order and proposed to adjourn it pending the investigation of Royue’s solvency.

(2)  Shortly thereafter, on 25 February 2025, Lead Good took out proceedings to enforce the CO.

(3)  At all material times, Lead Good was aware of the application for winding up order before the BVI Court in respect of Royue and that the order was expected to be granted on 17 February 2025. However, Lead Good chose to raise an objection before the BVI Court to delay the grant of the order, and in turn took out enforcement action in Hong Kong. Such conduct amounted to undue haste which justifies the departure from the principle of first past the post.

34.  First of all, the threshold for establishing sharp conduct must be one of stringency. This is self-evident from the fact that to justify not applying the general rule of first past the post, exceptional circumstances have to be established (see para 30(4) above). It should be added that the court should be vigilant not to allow what should be a simple application for order absolute to be turned into a full scale legal battle.

35.  Second, pursuing a step or steps allowed under the rules of litigation cannot, per se, be regarded as sharp conduct. On the other hand, pursing such step knowing that it is without merits for the purpose of causing obstruction or delay to the other side is abusive of the rules and can constitute sharp conduct.

36.  Third, I do not believe that Lead Goods should have simply accepted the view taken by the JPL on Royue’s solvency without question. The appointment of the JPL was caused by Royue. In the context of adversarial litigation, Lead Good was entitled to come to its own view on the issue of Royue’s solvency. That issue was contested before the Master, and the court was not satisfied on the evidence adduced by the parties that Royue was insolvent. This demonstrates that the matter was not clear cut.

37.  Finally, I agree with Mr Chiu that, firstly, “undue haste in obtaining a preferred position” (see para 30(5) above) cannot be equated with acting with urgency to enforce the Award. Lead Good was acting within its rights, and it may be said to be the whole point of “first past the post” – acting quickly to obtain priority under a charging order.

38.  Secondly, Royue has no complaint of sharp conduct on the part of Lead Good in obtaining the CO. Rather, its complaint concerns the subsequent steps by Lead Good to enforce the CO, which had not been stayed and was valid and enforceable. There was no sharp conduct to speak of.

39.  In the premises, I am unable to accept that there was any sharp conduct on the part of Lead Good. Issue (2) is resolved against Royue.

Issue (3)

40.  In light of this court’s view on Issue (1), Issue (3) does not arise.

Disposition

41.  For the foregoing reasons, this appeal is dismissed with costs to Lead Good. I make an order in terms of the 1^st and 2^nd Summonses. The costs of the 1^st Summons be in the cause of this appeal. The costs of the 2^nd Summons have been provided for therein.

42.  The costs of this appeal are summarily assessed at HK$150,000, which are reduced from over HK$220,000 claimed in Lead Good’s statement of costs. The amount of costs claimed is close to doubling that of Royue’s costs of this appeal. Whilst counsel instructed by Lead Good is more senior, I am unable to see that the difference in fees is sufficiently justified by the difference in experience.

43.  Lastly, I am grateful to counsel for their assistance.