CREDIT LYONNAIS v. SK GLOBAL HONG KONG LIMTIED

HCA1156/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.1156 OF 2003

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D E C I S I O N

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1. This is the defendant's application for stay of execution of the judgment entered herein on 19 May 2003. At the conclusion of counsel's submissions, I granted, on condition, a stay until 20 June 2003 with liberty to apply. My reasons appear below.

Background

2. By a Facility Letter dated 2 January 2003, the plaintiff agreed to grant to the defendant banking facilities up to the limit of US$20 million. As one of the securities for the facilities, SK Global Co. Ltd, Korea ("SK Global Korea"), which is the defendant's parent company, executed a Guarantee and Indemnity in favour of the plaintiff.

3. Pursuant to the Facility Letter, the plaintiff had made several advances to the defendant in January and February 2003. On 7 March 2003, the plaintiff exercised its overriding right to request repayment and demanded repayment of the outstanding amount.

4. On 28 March 2003, the plaintiff commenced these proceedings claiming for repayment of US$8,011,537.55 and accrued interest of US$1,603.79 together with interests and costs. A holding Defence was filed on 23 April 2003. On 19 May 2003, Master Lung entered summary judgment, unopposed, against the defendant as claimed.

5. At the hearing of the application for summary judgment, the defendant applied orally for a stay of execution, which was opposed by the plaintiff. Master Lung adjourned the application for arguments before a judge and ordered a stay in the interim. Affidavits had been filed by both sides in respect of the application.

The application

6. The application for stay is made both under Order 47, rule 1 of the Rules of the High Court and under the inherent jurisdiction of the court. It is made on the ground that the defendant is in the process of dealing with all of its creditors' claims through a restructuring and that it is neither just nor expedient for the plaintiff to obtain full and immediate satisfaction of its claim whilst the majority of the creditors are forbearing to enforce their claims and working on a restructuring. The restructuring involves SK Global Korea and is intended to be for the benefit of all the creditors of the SK Global Group.

7. The defendant by this application seeks a stay until 18 June 2003, the date to which the Korean bank creditors of SK Global Korea have agreed to standstill in the restructuring process, with liberty to apply. It is anticipated that the creditors will vote either upon any restructuring proposal or the extension of the standstill period for one more month.

Issues

8. Two issues arise for consideration in this application. The first relates to the jurisdiction of the court to grant the application. The second concerns the exercise of the court's discretion. I shall deal with them in turns.

Jurisdiction

9. There is no dispute between counsel that there is power under the Rules of the High Court to stay the execution of a judgment. It is also common ground that Order 47, rule 1 is relevant to the present application. The limitation with Order 47, rule 1 is that it can only stay the execution by Writ of fieri facias. It is therefore insufficient for the purpose of the defendant in that the stay granted will not prevent the plaintiff from enforcing the judgment by other means, including presenting a winding-up petition.

10. Accordingly, the defendant also seeks to invoke the court's inherent jurisdiction. Mr Reyes, SC submits that the court has an inherent jurisdiction to stay the execution of a judgment albeit limited its extent. Mr Barlow, on the other hand, contends that the court's jurisdiction to grant stay of execution is regulated by the Rules of the High Court such that any antecedent inherent jurisdiction has now been ousted by the Rules.

11. In London Permanent Benefit Building Society v. de Baer [1969] 1 Ch.321 at 332, Plowman J referred to a passage in Halsbury's Laws of England, (3rd Edn), Vol.16, para.49 at p.34, which states that the court "has an inherent jurisdiction over all judgments or orders which it has made, under which it can stay execution in all cases either for definite or unlimited period", and criticized it as too widely stated. As to whether there is an inherent jurisdiction to stay execution above and beyond that conferred by statutes or the Rules of the Court, albeit in limited form, Plowman J did not consider it necessary to decide the point in the case.

12. The fourth edition (Reissue) of Halsbury's Laws of England, Vol.17(1), para.195 acknowledges the criticism of Plowman J and states :

"The court does not, however, have an inherent jurisdiction over all judgments or orders which it has made under which it can stay execution in all cases. On the contrary, the court's inherent jurisdiction to stay the execution of a judgment or order is limited in its extent, and can only be exercised on grounds that are relevant to a stay of the enforcement proceedings themselves, ..."

13. In my view, it is within the inherent jurisdiction of the High Court, being a superior court, to regulate its own process, including the process of execution after judgment. This inherent power of the court may be exercised in a number of ways, including under the Rules of the Court and the statutes. The fact that Rules of the Court have been enacted to deal with the exercise of the power in certain specified circumstances does not mean that the inherent power has been ousted. These powers are not necessarily exclusive in their operation. In addition to the jurisdiction under statutes and the Rules, there is an inherent jurisdiction to stay the execution of judgment. The inherent power is to supplement the power conferred by statutes or the Rules. The inherent power is not to side-step the Rules or statutes. It would follow, for instance, that where a stay is sought pending appeal, the exercise of the court's power to stay will be regulated by Order 59, rule 14 and not by the inherent jurisdiction of the court.

Extent of the jurisdiction

14. Mr Barlow submits that the defendant's present application is effectively asking the court to rewrite the legislative codes so as to bring in provisions and mechanisms akin to Chapter 11 of the Bankruptcy Code of USA or administration order proceedings provided by the Insolvency Act in the U.K.

15. Mr Reyes, SC does not contest that the present application does have the effect of an administration order in the U.K. But he contends that the modern judicial trend is to recognize the facilitation of corporate rescue as a rationale for exercising its jurisdiction. He refers to the recent judgment of Deputy Judge Barma, SC in Re I-China Holdings Ltd [2003] 1 HKLRD 629 as an instance of such judicial trend. In that case (at 637G), Deputy Judge Barma, SC referring to the decisions of Yuen J (as she then was) in Re Keview Technology (BVI) Ltd [2002] HKLRD 290 and of Kwan J in Re Luen Cheong Tai Investment Holdings Ltd [2002] 3 HKLRD 610, accepted that the facilitation of a corporate rescue is a permissible ground for appointment of provisional liquidators.

16. As Mr Barlow points out, Deputy Judge Barma SC, Yuen J and Kwan J were all exercising the jurisdiction of the Companies Court whereas this court is presently exercising a general civil jurisdiction. The focus of the courts must necessarily be different. In the context of a winding-up petition, for instance, one of the court's concerns is to maximize the recovery of all the creditors of the company. In the context of the present application, the court must give due weight to the rights of the judgment creditor to enforce the judgment of the court. That said, however, I do not accept that the court in enforcement proceedings cannot properly take into account the prospect of a corporate restructuring and its probable consequences on the parties to the proceedings and to arrive at a conclusion that is just and equitable. What the court must not do in the process is to subject the legitimate interests and rights of the judgment creditor to the mere wishes of the non-party creditors of the judgment debtor to have a restructuring.

Exercise of the court's discretion

17. The starting point in the exercise of the court's discretion is to recognize that the successful judgment creditor is entitled to enjoy the fruits of his litigation so that his legal rights to enforce his judgment should not be suspended unless there are special or compelling reasons for so doing. In deciding whether special circumstances exist, the court is entitled to take into account the fact that the judgment debtor is in the process of seeking corporate restructuring and to have regard to its probable consequences on both the judgment creditor and the judgment debtor.

18. In this context, Mr Reyes, SC submits that five matters are relevant :

(1) the judgment debtor is insolvent;

(2) there is a reasonable prospect of the judgment debtor undergoing restructuring;

(3) there is evidence to show that the restructuring proposal is likely to be sanctioned by the majority of the creditors;

(4) the balance of convenience : this involves weighing the potential detriment of the stay to the judgment creditor against the advantages that the restructuring may confer on the parties; and

(5) any other special circumstances or relevant considerations.

I accept that these would be relevant considerations when an ongoing restructuring involving the judgment debtor is being put forward as special circumstances justifying the court exercising its inherent jurisdiction to grant a stay.

19. In the present case, the evidence shows that the defendant is insolvent consequential upon the restatement of the defendant's accounts. The defendant is indebted to 34 banks and also bond holders and the total indebtedness is approximately US$536 million. As to restructuring, restructuring proceedings involving SK Global Korea had started in Korea in March 2003 with the Korean creditors agreeing to suspend the repayment obligations of SK Global Korea until 18 June 2003. Since April 2003, the foreign creditors of SK Global Korea had set up a steering committee with Standard Chartered Bank as the leading bank. The Korean and foreign creditors of SK Global Korea are also creditors of the defendant. The restructuring contemplated will also involve the defendant. A due diligence report on SK Global Korea and its subsidiaries had been undertaken by Pricewaterhouse Coopers and was released on 19 May 2003. Restructuring proposals would be made on the basis of this report. All the other creditors of the defendant are exercising forbearance. Over 85% of them support a stay of execution of the plaintiff's judgment. It is fair to say that although the precise terms and details of the restructuring have yet to be finalized, there is majority support for a restructuring in principle.

20. On the balance of convenience, the amount owed to the plaintiff under the judgment herein amounts to less than 2% of the defendant's total financial indebtedness. With the defendant evidently insolvent, if no stay is imposed, the plaintiff is likely to proceed to wind up the company. On the evidence thus filed, there is no prospect of the plaintiff recovering the entire judgment sum in winding-up. The distribution to the plaintiff in the event the defendant is wound up is probably less than what it may stand to get under a successful restructuring. A successful restructuring is therefore prima facie beneficial to the plaintiff. On the other hand, if the plaintiff is permitted to enforce the judgment, one of the creditors, Arab Banking Corporation, has indicated that it would immediately seek the appointment of provisional liquidators to the defendant. Mr Isherwood of Standard Chartered Bank also deposed that this would have a hindering effect on the restructuring process. Mr Reyes, SC also submits that this would create a domino effect and may possibly jeopardize the prospect of restructuring. Given that the basic principles upon which the restructuring process operates includes fair treatment and an agreement among the creditors to exercise forbearance, it is reasonable to infer that if no stay is granted and with the plaintiff proceeding to enforcement, the other creditors may be less prepared to continue with or will terminate the restructuring process.

21. It is true that even with the presentation of a winding-up petition or the appointment of provisional liquidators, it is still possible for a restructuring to be carried out. But that will clearly entail greater costs and expenses thereby reducing the returns to the creditors.

22. Thus analysed, there is obvious advantage to be gained by a successful restructuring not only by the general creditors, but more significantly also by the plaintiff. It stands to gain less from proceeding to enforce the judgment by having the defendant wound up. The balance of convenience lies in favour of a stay.

23. The plaintiff has raised several matters in opposition to the grant of a stay. It is firstly argued that the court should not intervene on behalf of non-parties to this action. I readily accept that the other creditors of the defendant are not entitled to have their interests protected by this court through the grant of a stay. This court's primary regard remains with the plaintiff who has a judgment in its favour. But the court in exercising its discretion, is entitled to consider the viability of the defendant to survive consequential upon enforcement being undertaken, and to take into account the positions taken by the defendant's creditors in arriving at a conclusion that is just and expedient to the plaintiff and the defendant.

24. Secondly, the plaintiff emphasizes that while the other creditors are at liberty to forbear, that is their choice, they cannot impose it on the plaintiff and the plaintiff is entitled to choose to enforce its rights. In answer to this, the defendant refers to guidelines issued by the Hong Kong Association of Banks and the Hong Kong Monetary Authority on "Hong Kong approach to corporate difficulties" in November 1999. The guidelines state as a matter of principle that banks should act in a co-operative and expeditious manner in order to agree a restructuring plan : paragraph 2(d). In particular, the guidelines provide that no bank should try to obtain a preferred position after there is a request for standstill and that there should be fair treatment to all banks in terms of repayment of principal or obtaining of security or the like : paragraph 3(v). Compliance with the guidelines is voluntary but they are strongly recommended by the Hong Kong Association of Banks and the Hong Kong Monetary Authority as representing the accepted practice of the banking community. The plaintiff being a member of both organizations is expected to use their best endeavours to follow them.

25. No doubt the plaintiff is under no legal duty to forbear, but as a member of the banking community, it is expected to use its best endeavours to avoid obtaining a preferred position. Accordingly, while the other creditors cannot impose their wishes on the plaintiff, it is not unjust for the court to have regard to the fact that the defendant is contemplating a restructuring and that all other creditors have agreed to a standstill and also to note the probable consequences of the enforcement of the judgment herein on the restructuring process.

26. Thirdly, it is pointed out that the financial position of the defendant has been brought about by the imprudent and improper management of the defendant or its parent company. It is said that there has been misrepresentation on the financial position of the defendant or SK Global Group. Mr Barlow submits that such conduct disentitles the defendant from discretionary relief. The evidence filed in this application shows that until the discovery of irregularities in the accounts of SK Global Korea in March 2003, the defendant was on its accounts solvent. The defendant's ability to discharge its liabilities however depends on the recoverability of amounts due from other companies in the SK Global Group. Consequential upon the discovery of irregularities in the accounts of its parent company, the defendant had restated its accounts and is now insolvent. While the evidence suggests mismanagement on the part of SK Global Korea, it cannot be inferred that there was mismanagement within the defendant or misrepresentation on its part. At the hearing, the defendant also through counsel offers to pay interests on the unaccelerated principal during the period of stay.

27. There are also several other complaints raised by Mr Fontaine in his 2nd affirmation filed on behalf of the plaintiff. They had been addressed by Mr Kim in his 4th affirmation filed on behalf of the defendant. It is not necessary to repeat them here.

Conclusion

28. For the reasons aforesaid, I am of the view that there should be a stay to await further development of the restructuring. Although the Korean creditors of SK Global Korea will vote on whether to continue with restructuring on 18 June 2003, to allow time for the defendant's solicitors to act, I agree that the stay should go up to 20 June 2003.

29. Accordingly, I order that there be a stay on the execution of the judgment herein until 20 June 2003 with liberty to apply on condition that the defendant pays the plaintiff the interests on the unaccelerated principal. The costs of this application, including the costs reserved, will be to the defendant against the plaintiff, to be taxed if not agreed.

Remarks: