SUZHOU QUAM-SND VENTURE CAPITAL ENTERPRISE AND ANOTHER v. GREAT EAST PACKAGING INTERNATIONAL LTD AND OTHERS

HCA 98/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 98 OF 2013

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BETWEEN

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D E C I S I O N

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The factual background:

1.  On 2 March 2010, Suzhou and China Door entered into a share subscription agreement with other parties including Great East Packaging.  The share subscription agreement related to a company called Hangzhou Great East Packaging Company Ltd.  A-Tsan Guy Chung and Stetson Chung were not personally parties to this agreement.

2.  On the same day, those same parties, and Guy Chung and Stetson Chung entered into a document known as an “Agreement on Additional Issues” (AAI).  By this document, Great East Packaging granted a put option to Suzhou and China Door in respect of shares in Hangzhou Great East Packaging. In that document A-Tsan Guy Chung and Stetson Chung were defined collectively as the Ultimate Controller.  Both were parties to the agreement.

3.  The AAI contained the following provision:

“1.7 Ultimate Controller

In the event (Great East Packaging) is not in compliance with this Agreement and such non-compliance continues for more than sixty (60) calendar days, (A-Tsan Guy Chung and Stetson Chung) shall be jointly and severally liable for the obligations and liabilities of (Great East Packaging) under this Agreement, including but not limited to (Great East Packaging’s) obligations and liabilities of purchasing the Investor A Shares and Investor B Shares and/or paying the price for such shares according to Clause 2.1, and paying indemnification, compensation for breach of this Agreement and any other amounts.”

4.  On 23 March 2012, pursuant to the put option, a put notice was served on Great East Packaging by Suzhou and China Door.  On 11 May 2012, Suzhou and China Door entered to a share transfer agreement with Great East Packaging.  Under that agreement Great East Packaging was obliged to buy shares in Hangzhou Great East Packaging from Suzhou and China Door, and to pay them the sums of RMB26,086,334.56 and RMB39,183,524.59.

5.  On 21 September 2012, Great East Packaging, A-Tsan Guy Chung and Stetson Chung entered into an acknowledgement of debt whereby they jointly and severally acknowledged indebtedness to Suzhou and China Door of those sums together with interest at the rate of 10% compound annually from 23 July 2012 until payment.

6.  It was not necessary for A-Tsan Guy Chung and Stetson Chung to enter into the acknowledgement of debt to create the liability for the principal sums due.  That liability had arisen in any event under clause 1.7 of the AAI, 60 days having passed with non-payment on the part of Great East Packaging.  However, as will be seen, the acknowledgement of debt constitute an admission of liability.

7.  The AAI contains dispute resolution and arbitration provisions.  They are as follows:

“3.16 Dispute Resolution

If any party is in material breach of this Agreement, the non-breaching party shall be entitled, within 20 Business Days of its becoming aware of the breach, to require the commencement of good faith negotiations by notice to the other party in order to reach agreement on the measures to be taken by the other party. If the other party does not, within 20 Business Days after the notice, provide a reasonable proposal and does not take remedial measures in accordance with that proposal, or if the relevant breach is in substance incapable of remedy, the non-breaching party may institute arbitration proceedings in accordance with clause 3.16 of this Agreement in respect of the breach; provided that this clause 3.15 shall not apply where the delay caused by negotiations would be likely to prejudice the non-breaching party’s rights in respect of injunctive relief or otherwise.

3.17 Arbitration

Disputes arising from or in connection with this Agreement shall be finally settled by arbitration at the Hong Kong International Arbitration Centre (HKIAC) in Hong Kong in accordance with the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules (1976).  The arbitration shall be held in Hong Kong before a panel of three arbitrators to be selected from the panel of arbitrators of the HKIAC, all of whom shall be fluent in English and Chinese.  (Suzhou and China Door) shall jointly appoint one arbitrator, and (Hangzhou Great East Packaging and Great East Packaging) shall jointly appoint one arbitrator.  The third arbitrator, who shall act as the chairman of the arbitral tribunal, shall be chosen by the two arbitrators appointed by or on behalf of the parties.  If he is not chosen by the two arbitrators within 14 days of the appointment of the latter of the two party appointed arbitrators, he shall be appointed by the HKIAC.  The arbitration proceedings shall be conducted and the award shall be rendered in English.  The cost of the arbitration shall be borne by the losing party unless the arbitral tribunal otherwise determines.  Any arbitration award obtained in accordance with this paragraph shall be final and binding upon the Parties and shall be enforceable in any court of competent jurisdiction in accordance with the terms of such award.  The Parties agree to waive any right of appeal against any arbitration award obtained in accordance with this paragraph.”

NB: the references to clause 3.16 and 3.15 in clause 3.16 are plainly in error, and have not been adjusted following the assertion of any additional clause earlier in the document.  They should read 3.17 and 3.16 respectively.

Proceedings are commenced:

8.  Notwithstanding their obligation to pay pursuant to clause 1.7 of the AAI, or the acknowledgement of debt, neither A-Tsan Guy Chung or Stetson Chung have made payment of the amount due to Suzhou and China Door.  Consequently, on 17 January 2013, a writ was issued by Suzhou and China Door against Great East Packaging and A‑Tsan Guy Chung and Stetson Chung. 

9.  The statement of claim first pleads the fact that Suzhou and China Door each exercised the put option.  It then pleads the acknowledgement of debt entered into by each of Great East Packaging, A-Tsan Guy Chung and Stetson Chung.  It asserts that the defendants have failed to provide a debt repayment proposal acceptable to Suzhou and China Door.  It then pleads that in breach of the acknowledgement of debt each of the three defendants have failed to pay the sums due.  The final paragraph claims interest.  The prayer for relief is for the sums due pursuant to the acknowledgement of debt.

10.  In simple terms, the cause of action in the statement of claim is founded upon the acknowledgement of debt.

11.  Great East Packaging have taken no steps, and on 22 March 2013, final judgment was entered against that company.

12.  On 12 April 2013, A-Tsan Guy Chung and Stetson Chung applied for a stay of proceedings pending arbitration.  The issue now before the court is whether that stay should be granted.  Suzhou and China Door now proceed only against Stetson Chung, A-Tsan Guy Chung having been adjudged bankrupt. 

The cause of action:

13.  Before I deal with the application for stay is necessary to consider the cause of action upon which Suzhou and China Door rely.

14.  Mr Au submitted that the cause of action pleaded, that of reliance upon the acknowledgement of debt alone did not constitute a cause of action in itself.  The proper cause of action, he said, was to play the obligation that had arisen under the AAI. 

15.  This argument was mounted, undoubtedly with the intention of bringing the AAI itself into play and enabling him to rely upon the arbitration provision in the AAI to found the basis for the stay.  Equally, it was undoubtedly with the intention of Mr Neo in pleading not the AAI, but the in order to avoid the arbitration provision and the inevitable application for a stay.

16.  It is not without significance that Mr Au did not apply under RHC O 18 r19(1)(a) to contend that the statement of claim disclosed no reasonable cause of action, and should therefore be struck out.

17.  Mr Au relied upon the old authority of Busch v Stevens [1963] 1 QB 1 for his proposition.  That was a case in which a limitation issue arose, and the plaintiff sought to amend the pleading by pleading an acknowledgement more than six years previously, but within six years of the issue of the writ.  The headnote in the report contains the statement:

“That an acknowledgement of a statute-barred debt did not raise a new claim or a new cause of action, but was the accrual of the right of action to recover the debt.”

18.  In the judgment, at p 6, referring to s 23(4)^[1] of the Limitation Act 1939, Lawton J put it this way:

“It seems to me as a matter of syntax that the right which shall be deemed to have accrued is a right of action to recover any debt or any other liquidated pecuniary claim. The subsection does not change the nature of the right; it provides that in the specific circumstances of an acknowledgement or payment the right shall be given a notional birthday and on that day, like the phoenix of fable, it rises again in renewed youth - and also like the phoenix, it is still itself.”

19.  He goes on to cite the following passage from Spencer v Hemmerde [1922] 2 AC 507, per Lord Sumner:

“I find that the great preponderance of the cases is against regarding the promise as a new cause of action, and it seems to me that reason also is against it. Surely the real view is, that the promise, which is inferred from the acknowledgement and ‘continues’ or ‘renews’ or ‘establishes’ the original promise made in the declaration, is one which corresponds with and is not a variance from or in contradiction of that promise…. If so, there is no question of any fresh cause of action.”

20.  The judgment of Lawton J also records, at p 5 the following:

“The plaintiff’s counsel pointed out that in the current edition of Bullen & Leake’s Precedents of Pleadings (the 11^th) at p 884, and Halsbury’s Laws of England 3^rd ed., vol. 24, para 376, p.208, accept that the facts as to an acknowledgement can be pleaded in a reply. Bullen & Leake says that ‘the facts as to acknowledgement or part payment should be expressly pleaded in the statement of claim or reply’.”

21.  Halsbury’s Laws of Hong Kong, 2^nd ed, says at vol 37, (Limitation of Actions), para 254.152:

“Where any right of action has accrued to recover any debt or other liquidated pecuniary claim,…., and the person liable or accountable for it acknowledges the claim or makes any payment in respect of it, the right is deemed to have accrued on and not before the date of the acknowledgement or last payment.”

Busch v Stevens is cited in the footnote as authority for the proposition that when a debt is acknowledged, the cause of action, if already existing, accrues afresh, but there is not a new cause of action.

22.  The current edition of Bullen & Leake & Jacob’s Precedents of Pleadings, 17^th ed, does not contain any draft statement of claim for a cause of action based upon an acknowledgement of debt.  The question of acknowledgement is dealt with only in respect to personal injury claims, and there under the index title “accrual”, where a draft reply to a defence of limitation is set out at para 81-W53.  There is no reference to a draft statement of claim for a cause of action based upon an acknowledgement of debt in the current edition of Atkin’s Encyclopaedia of Court Forms in Civil Proceedings.

23.  I am satisfied that an acknowledgement of debt, in itself, does not provide a cause of action.  It is the underlying obligation giving rise to the acknowledgement of debt that is the cause of action.  Had Mr Au applied under O 18 r 19(1)(a) to strike out the pleading as disclosing no reasonable cause of action, I would have reached the foregoing conclusion, but would not have struck out the claim.  Instead I would have adjourned the proceedings to allow the plaintiffs time to file an amended statement of claim pleading the obligation arising under the AAI.

24.  Mr Neo had filed a summons for default judgment against Stetson Chung.  In the hearing he acknowledged that that summons should not proceed but that Stetson Chung should have seven days which to file a defence if he wishes. 

25.  The plaintiffs will have seven days from the date of this decision to file an amended statement of claim, and the defendant’s seven days thereafter to file a defence.  Mr Neo will have to consider his position in respect of the default judgment obtained against Great East Packaging.

26.  As the whole of the question of a stay for arbitration was argued before me it is appropriate that I should set out my view of that application.

The relevant law as to a stay:

27.  The law on the requirement for the grant of stay of proceedings pending arbitration is clear.  The authority usually cited is the decision of Ma J (as he then was) in Tommy Sze & Co Ltd, & Anor v Li & Fung Trading & Ors, unreported, 28 October 2002, HCCT of 2002. There are four questions that need to be answered:

(i) Is the clause in question an arbitration agreement?

(ii) Is the arbitration agreement null and void, inoperative or incapable of being performed?

(iii) Is there in reality a dispute or difference between the parties?

(iv) Is the dispute or difference between the parties within the ambit of the arbitration agreement?

28.  The first, third and fourth question must be answered “yes”, the second question must be answered “no”.  If the contrary answer arises to any question, there can be no stay.

Question 1:

29.  There is no dispute that clause 3.17 is an arbitration clause.  The argument mounted by Mr Neo is that by virtue of clause 3.16, the right of arbitration is granted only to the “non-defaulting Party”. I reject the argument.  There is nothing in the arbitration clause, 3.17, which might restrict it in that way. 

30.  It is true that under clause 3.16 a non-breaching party has a right to require the commencement of good faith negotiations, but that right is not an obligation.  That it is a right, and not an obligation arises from the use of the expression: “the non-breaching party shall be entitled”.  The use of the word “entitled” demonstrates that the opportunity to commence negotiations is an option that the non-breaching party may take, but that party is not obliged to take that option. 

31.  There is nothing in clause 3.17 that requires that the dispute resolution procedure in clause 3.16 must first be followed. Clause 3.17 is a free standing, all-encompassing arbitration clause in usual form.

32.  I am satisfied that the clause in question is an arbitration agreement.  The answer to the first question is “yes”.

Question 2:

33.  There is no suggestion that the arbitration agreement is null and void, inoperative or capable of being performed.  Mr Neo makes no argument in that respect.

34.  The answer to the second question is “no”.

Question 3:

35.  The principal question in these proceedings is whether or not there is, in reality, of a dispute between the parties.   A dispute will exist unless there is a clear and unequivocal admission, not only of liability but also of quantum: Tai Hing Cotton Mill Ltd v Glencore Grain Rotterdam BV [1996] 1 HKC 363, CA, a decision on Article 8 of the Model Law, the precise provision now incorporated into the AO by s 20, and relied upon by Stetson Chung.  Numerous other authorities were cited for this proposition by Ma J at §51 in Tommy Sze.

36.  On 21 September 2012, Great East Packaging, A-Tsan Guy Chung and Stetson Chung each signed an acknowledgement of debt in which they acknowledged indebtedness, first to Suzhou in the sum of RMB26,086,334.56 plus interest at a rate of 10% compounded annually since 23 July 2012, in full payment pursuant to a Put Option for 5 million shares, and second to China Door in the sum of RMB39,193,524.59 plus interest at a rate of 10% compounded annually since 23 July 2012, in full payment for a Put Option for 7,500,000 shares.  There is a typing error in the acknowledgement of debt in that the latter number of shares is incorrectly stated in words.  Nothing turns on that error.

37.  The acknowledgement of debt also contains the following provision:

“We further jointly and severally agree to provide a debt repayment proposal acceptable to (Suzhou) and (China Door), which shall include without limitation, sufficient collateral as well as a timetable for periodic cash payments. Such proposal shall be finalised and signed off by all parties or before 15^th of October 2012.”

38.  Thus, the question arises as to whether or not the acknowledgement of debt constitutes a clear and unequivocal admission not only of liability but also of quantum. 

39.  Mr Au says, in reliance upon an affidavit by Stetson Chung, that the acknowledgement of debt was entered into under pressure.  The affirmation of Stetson Chung does not condescend to any particulars at all in respect of the allegation of pressure.

40.  It is right that an acknowledgement which has been obtained by undue influence is of no effect and cannot be relied upon by the creditor: see Halsbury’s Laws of Hong Kong, Vol 37, Limitation of Actions, §245.154. But if an allegation of pressure or undue influence is to be made it needs to be particularised if any weight is to be given to it.  This mere assertion, in the absence of evidence, cannot be a basis to detract in any way from the acknowledgement of debt.

41.  Second, Mr Au says that a sale and purchase agreement subsequently entered into between various parties as vendors, including A-Tsan Guy Chung and Stetson Chung, and a company called Allied Great Corporation Ltd as purchaser contains the following provision:

“The consideration for the sale by the Vendor under this Agreement shall be the sum of RMB FIFTEEN MILLION (15,000,000.00), which may at the absolute discretion of the Purchaser be paid by way of procuring a set-off against the indebtedness set out in the Acknowledgement of Debt made by Great East Packaging International Ltd, the (Stetson Chung) and (A-Tsan Guy Chung) dated 21^st of September 2012 acknowledging their indebtedness to (Suzhou and China Door) for an amount equivalent to the Consideration on a pro rata basis.”

42.  As neither Suzhou nor China Door parties to the so-called set-off there is no basis at all upon which it might be raised in proceedings based upon the acknowledgement of debt.  It may well be that both, or their shareholders, have some involvement with one of the parties with whom the agreement for sale and purchase is made.  But that is not sufficient to entitle A-Tsan Guy Chung and Stetson Chung to raise the provision against Suzhou and China Door.

43.  Neither the allegation of pressure nor the so-called set-off can now be raised against the acknowledgement of debt.

44.  Neither does the agreement in the acknowledgement of debt to provide a debt repayment proposal detract from the unequivocal nature of the admission contained in the acknowledgement of debt.  In Surrenda Overseas Ltd v Government of Sri Lanka [1977] 2 All ER 481 at 486e‑490d, Kerr J reviewed the requirements of an acknowledgement of debt, and the nature of the defences available to an acknowledgement of debt claim.  In the course of that review he cited the following passage from Lord Denning in Good v Parry [1963] 2 QB 418 at 423:

“Nowadays, as a result of the new (Limitation) Act, there is no necessity look for a promise, express or implied. There need only be an acknowledgement of a debt or other liquidated amount. That means, I think, that there must be an admission that there is a debt or other liquidated amount outstanding and unpaid. Even though the debtor says in the same writing that he will never pay it, nevertheless it is a good acknowledgement.”

45.  The promise to provide a repayment proposal falls within the same category as a statement in an acknowledgement of debt that the debtor will never pay the sum due.  It does not detract from the value of the acknowledgement which constitutes an admission of liability.  It is plain that the sum is for a liquidated amount, the amount itself is stated, as is the agreement to pay interest.

46.  I accordingly conclude that there is in reality no dispute between the parties which might go to arbitration, because Stetson Chung has unequivocally admitted, by way of an acknowledgement of debt, the amount due to Suzhou and China Door.

47.  The answer to question 3 is NO.

48.  Stetson Chung is accordingly not entitled to a stay of these proceedings.

Costs:

49.  Having regard to the whole of the way in which the case has developed, with the need for the plaintiffs to amend their pleadings, but the failure of the Stetson Chung to get an order staying the proceedings for arbitration I am of the view that there should be no order as costs.  There will be an order nisi accordingly.