COMPANY A AND ANOTHER v. COMPANY C

HCCT 60/2024

[2024] HKCFI 3505

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 60 OF 2024

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REASONS FOR JUDGMENT

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Background

1.  This is the Plaintiffs’ application pursuant to section 45 of the Arbitration Ordinance (Cap 609) (“AO”) for relief in aid of an ongoing arbitration (“Arbitration”) in the International Centre for Dispute Resolutions of the American Arbitration Association (“Tribunal”) against the Defendant, Company C, and its wholly owned subsidiary, XXXXXXXXXXXXXXXX (“XXX SZ”).

2.  By Originating Summons dated 27 May 2024 (“OS”), the Plaintiffs apply for:-

(1)  an injunction restraining the Defendant from transferring its assets to XxX SZ or its associated entities (“Disposal Injunction”); and

(2)  a worldwide Mareva injunction restraining the Defendant from disposing of its assets up to US$55,506,138.62 (“Mareva Injunction”); (collectively, “Injunctions”)

pending (a) the final arbitration award; or alternatively (b) interim measures granted by the Tribunal in favour of the Plaintiffs.

3.  At the conclusion of the hearing on 22 October 2024, I granted the orders sought by the Plaintiffs and these are my reasons.

The dispute

4.  The dispute between the parties concerns the alleged breach of a settlement agreement under which the Defendant reaffirmed its commitment to support the initial public offering of the 2^nd Plaintiff’s shares. The Plaintiffs as Claimants in the Arbitration claim damages for breach of around US$55 million, whereas the Defendant counterclaims for around US$2 million.

5.  The Arbitration took place in January 2024 for over 8 days.

6.  On 13 April 2024, whilst the Arbitration was still ongoing, XXX SZ issued an announcement on the Shanghai Stock Exchange that it intended to dispose of its 51% equity interest in the Defendant, which in turn held a 44% stake in the 2^nd Plaintiff, to XXXXXXXXXXXXXXXX for a consideration of US$10,008,894.01 (being 51% of the book value of the 2^nd Plaintiff’s long-term equity investments held by the Defendant). Importantly, the transaction would include the transfer or disposal of the Defendant’s existing business operations and assets to XXX SZ and/or other companies connected to XXX SZ.

7.  On 25 April 2024, XXX SZ issued an announcement stating that the resolution pertaining to the disposal of the Defendant was passed in the EGM dated 24 April 2024.

8.  The Plaintiffs believed that, in light of the aforesaid, the Defendant intended to fraudulently divest its assets to render itself judgment proof, which would render any potential arbitral award to Plaintiffs nugatory.

9.  The merits of the dispute between the parties are for the determination by the Tribunal in the Arbitration.

Before the Tribunal - Emergency Relief Application

10.  On 3 May 2024, the Plaintiffs took out an application before the Tribunal to seek emergency relief to prevent the alleged fraudulent transfer (“Emergency Relief Application”). The application was for (1) an order restraining the Defendant from completing the transfer of assets from the Defendant to XXX SZ and (2) an order that the Defendant do deposit security in an escrow account in the amount of USD$55,506,138.62 (“Escrow Relief”).

11.  The Tribunal directed the parties to file submissions in support of and opposition to the Emergency Relief Application, but did not order any interim-interim stop-gap measure. However, the Tribunal agreed that the Plaintiffs could seek emergency interim relief from the Hong Kong Courts to stop the transfer whilst the Tribunal considered the matter further.

Before the Court – Ex Parte Injunction Application and OS

12.  In the premises, the Plaintiffs, with the knowledge of the Tribunal, sought assistance from the Hong Kong Court.

13.  On 24 May 2024, the Plaintiffs made an ex parte (on notice) injunction application. On even date, Keith Yeung J granted the Injunctions, on interim basis, until the inter-partes hearing on 31 May 2024.

14.  On 27 May 2024, the Plaintiffs took out the present OS. The terms of the Injunctions sought by the OS mirror the two relief sought under the Emergency Relief Application.

15.  On 31 May 2024, the Defendant offered undertakings not to, inter alia, (1) transfer, whether directly or indirectly, any of its assets to XXX SZ or any associated entity; and (2) not to remove from Hong Kong any of its assets up to the value of USD$55,506,138.62 (“Undertakings”), pending the Tribunal’s grant or refusal of the Emergency Relief Application in the Arbitration.

Procedural Orders of the Tribunal

16.  Whilst the above interim orders were granted by the Hong Kong Court, things were progressing in tandem before the Tribunal.

17.  On 9 May 2024, the Defendant proffered 3 guarantees from the transferees of the Defendant’s assets, who claimed that they would protect the Plaintiffs’ interests (“Guarantees”).

18.  The Tribunal did not find the Guarantees to be sufficient protection, and as early as on 28 May 2024, it had indicated that it was prepared to grant a preliminary injunction in favour of the Plaintiffs. The Tribunal invited the Plaintiffs to submit a draft order, and the Defendant to submit objections.

19.  Thereafter, the main area of disagreement between the parties related to the terms of the Escrow Relief to be granted by the Tribunal, and such disagreement had not been resolved by the time of the hearing in October 2024.

The opposition to the OS

20.  The Defendant’s opposition to the continuation or grant of the Injunctions sought under the OS is that firstly, the Tribunal has already disposed of and granted the interim measures sought by the Plaintiffs in the Arbitration, such that the relief now sought in the OS (pending the order of the Tribunal) is unnecessary. Further, the Defendant contends that the Court should not exercise its power under section 45 of the Ordinance, and should decline to grant the relief by virtue of section 45(4), as the interim measure is currently the subject of the Arbitration before the Tribunal. The Defendant contends that it is neither appropriate for the matter to be dealt with by the Court, nor is it just or convenient for the Court to grant the relief sought by the Plaintiff.

21.  Section 45(7) of the Ordinance sets out the reminder that:

“In exercising the power under subsection (2) [ie to grant an interim measure] in relation to arbitral proceedings outside Hong Kong, the Court must have regard to the fact that the power is-

(a) ancillary to the arbitral proceedings outside Hong Kong; and

(b) for the purposes of facilitating the process of a court or arbitral tribunal outside Hong Kong that has primary jurisdiction over the arbitral proceedings.”

22.  It is accordingly correct that the Court should pay heed to section 45 in this case, since the Plaintiffs’ application for interim measures, in the form of the Injunctions and for the Escrow Relief, had already been made to and heard by the Tribunal. The Court should consider whether it is “more appropriate” (under section 45(4)(b)) for the Tribunal to deal with the Plaintiffs’ present application for the Injunctions to be granted or continued by the Court, pending the issue of the award in the Arbitration.

23.  On behalf of the Defendant, Counsel has highlighted the judgments in Leviathan Shipping Co Ltd v Sky Sailing Overseas Co Ltd [1998] 4 HKC 347, and in A v B [2023] 1 HKLRD 144, and the court’s ruling that its jurisdiction to grant interim measures should be exercised “sparingly”, and only where there are special reasons to utilize the power, with emphasis on the court’s policy of minimal curial intervention in arbitrations, and the need to recognize the autonomy of the arbitral process. These principles are all indisputable.

24.  However, it is precisely because the power of the Hong Kong court to grant interim measures is for the purposes of facilitating the process of the arbitral tribunal outside Hong Kong (as stated in section 45(7)(b) of the Ordinance) that the orders sought by the Plaintiffs in the OS should be granted in this case, in order to support the Tribunal and to facilitate the orders the Tribunal has so far made in the Arbitration.

25.  On the facts, the history of the case and the progress of the Emergency Relief Application before the Tribunal can best be described as procrastination, and frustration.

26.  As described above, the initial application made by the Plaintiffs to the Tribunal for emergency relief was on the basis that the Defendant had engaged in a fraudulent transfer of assets, which would leave the Defendant judgment-proof and render any award in favor of the Plaintiffs in the Arbitration meaningless. The Defendant denied that there was any fraudulent intent on its part in its transfers, but the Tribunal had indicated as early as 28 May 2024 that it was prepared to grant an injunction in favor of the Plaintiffs.

27.  It is pertinent that on 14 June 2024, the Tribunal issued a Procedural Order No 32 (“PO 32”), whereby it found that it had jurisdiction to issue relief to prevent the disposal, transfer, movement or dissipation of the Defendant’s assets, in order to preserve the Tribunal’s ability to render meaningful relief in the Arbitration. The parties were directed by PO 32 to “confer in good faith”, taking into consideration the Tribunal’s findings and observations made at a hearing on 12 June 2024: “to agree upon the terms and language of an escrow account arrangement or, alternatively, a bank guarantee arrangement, to address (the Plaintiffs’) concerns about (the Defendant’s) transfer and intended transfer of assets and the (Plaintiffs’) ability to collect on any net award.” The parties were directed to submit a report to the Tribunal by 19 June 2024, including the text of a jointly agreed escrow account agreement or bank guarantee document.

28.  On 19 June 2024, the parties reported to the Tribunal that they had reached agreement that cash and non-cash assets would be made subject to escrow arrangements. Thereafter, various proposals and counter‑proposals were made by the parties concerning the terms and details of the escrow arrangement, and competing draft escrow agreements were submitted by the parties, with different contentions as to the amount of cash to be placed in escrow, and the amount to be held back to defray ordinary business and legal expenses. Issues were raised by the Tribunal, and responded to by the parties.

29.  In its Procedural Order No 35 of 11 July 2024 (“PO 35”), the Tribunal ordered that the parties should immediately confer over the terms and wording of the escrow agreement, which should include terms specified by the Tribunal (including the deposit of cash and non-cash assets up to the amount of US $55 million), and further, that the parties were to confer and jointly agree upon the items to be considered “ordinary business expenses”. Under PO 35, the Tribunal’s order was that the escrow agreement was to include a specific term that XXX SZ, the indirect 100% owner of the Defendant, was to place various of its assets in escrow, and that the assets were only to be released in accordance with the instructions from the Tribunal upon the issue of the final award in the Arbitration. XXX SZ was a party to the Share Purchase Agreement and the Shareholders Agreement the subject matter of the dispute between the Plaintiffs and the Defendant in the Arbitration.

30.  In Procedural Order No 36 of 19 August 2024 (“PO 36”), the Defendant was directed to deposit US $22,585,456.19 cash in escrow, and to withhold the amount of US $100,000 per month for ordinary business expenses and another US $150,000 per month for legal fees. To the extent that the Defendant did not have sufficient cash assets to make the cash deposit, XXX SZ was ordered under PO 36 to make up the shortfall. Under PO 36, the parties were, again, directed to negotiate in good faith over the remaining disputed wording of their respective escrow agreements.

31.  Further dispute then arose between the parties in September 2024, as to whether the Defendant’s Undertakings to the Court had been fully discharged upon the Tribunal’s grant of PO 35 and PO 36, and whether the Defendant would be entitled to utilize the funds in its bank account. The Plaintiffs sought clarification from the Tribunal on PO 35 and PO 36, and as to whether the Undertakings had been discharged, as claimed by the Defendant.

32.  On 11 September 2024, the Tribunal issued Procedural Order No 37 (“PO 37”). It referred to the correspondence exchanged between the parties’ lawyers in relation to the Undertakings, including the letter dated 4 September 2024 from Wellington Legal LLP, the solicitors for the Defendant, and noted at paragraph 13 of PO 37, as follows:

“13. The Tribunal reads the letter from Wellington Legal LLP as extremely unartfully worded, conveying a current intent to take immediate action without regard for the wording of Procedural Order Nos. 35 and 36. Although Mr. Turrill’s September 9 email is somewhat reassuring and appears consistent with Mr. Turrill’s prior commitments to this Tribunal in his June 5, 2024 Declaration that ‘no action may be taken to dispose, transfer or move any (Company C’s) assets,’ Wellington Legal’s unartful wording requires clarification from this Tribunal.

14. The Tribunal is now considering the Defendant’s Objections and will rule on them in due course and, if appropriate, will issue a modified Procedural Order governing the escrow agreement. This will require further thought and conferring among the arbitrators.

15. In the meantime, the Undertakings by the Defendant have not been discharged and the obligations set out in Procedural Order Nos. 35 and 36 by this Tribunal have not been discharged or amended in anyway. Unless and until the parties enter into the escrow agreement contemplated by Procedural Order No. 36 and comply with its terms, or into an escrow agreement modified by the Tribunal after consideration of the Defendant’s Objections and comply with the terms of any modified Procedural Order No. 36, the Defendant is obligated to comply with the Undertakings and said obligations and to not dispose, transfer or move any of the Defendant’s assets.

16. The Tribunal finds that Wellington Legal’s extremely unartful language has caused unnecessary work, and that the Defendant must pay the attorney’s fees incurred by the Plaintiffs in connection with Plaintiffs’ September 4, 2024 application for clarification of the Defendant’s obligations arising from Wellington Legal LLP’s September 4, 2024 letter.

17. Nothing in this order or in prior procedural orders is intended to indicate how the Tribunal will rule on the merits of the arbitration.”

33.  The orders made by the Tribunal in PO 37 were that:

“The Undertakings of the Defendant and the obligations set out in Procedural Order Nos. 35 and 36 have not been discharged. The Undertakings and said obligations will not be discharged unless and until the Tribunal states so clearly, in connection with the entry of an appropriate escrow agreement.”

(Emphasis added)

34.  After PO 37, there was further debate as to XXX SZ’s liability for the legal costs in the Arbitration. By Procedural Order No 41 dated 7 October 2024 (“PO 41”), which was stated to supersede the rulings made in PO 36, the Defendant was directed to deposit all of its cash and non-cash assets into an escrow account within 2 weeks of the order, and to the extent that the cash deposited by the Defendant into the escrow account does not meet US $20 million, XXX SZ was directed to deposit enough cash into the escrow account to make up a total of US $20 million each. The Tribunal further ordered the parties to (inter alia) negotiate in good faith over the remaining disputed wording of their respective escrow agreements, and stated that:

“If the parties are not able to reach final agreement on terminology within one week from this Order, the parties will submit on that day their respective draft escrow agreements to the Tribunal, and the Tribunal will select the draft that best reflects the Tribunal's rulings and is otherwise fair to both sides. The parties may include a written submission explaining why their draft escrow agreement is more reasonable than the terminology chosen by the other party. The parties are encouraged to negotiate in good faith over the wording of the escrow account agreement in order that Tribunal intervention will not be necessary to bring closure to the wording of the escrow agreement.”

35.  After a lapse of 5 months, and at least until the hearing of the OS in Hong Kong on 22 October 2024, the escrow agreement had still not been signed as the parties had not been able to agree on the terms and contents.

36.  It is clear from the Procedural Orders made by the Tribunal since PO 32 that the execution of an escrow agreement had all along been envisaged and directed by the Tribunal. The escrow agreement was to contain the terms directed by the Tribunal and set out in PO 35.

37.  Despite the claims made by the Defendant in September 2024, that its Undertakings had already been discharged upon the Tribunal’s grant of interim measures (which claims were maintained in the submissions filed by the Defendant’s Counsel for the hearing before this Court, that interim measures have already been granted by the Tribunal and that the Injunctions from this Court should be declined), it is clear from the contents of the Procedural Orders made since PO 32 (in June 2024) that the Tribunal has still to rule on the Plaintiffs’ application for the interim relief sought, and that the escrow agreement which the Tribunal had intended the parties to sign has yet to be finalized for the Tribunal’s acceptance. These interim measures as sought by the Plaintiffs cannot be said to have been finalized already, when the order for the measures had (even on the day of the hearing before this Court) yet to be approved, and made by the Tribunal.

38.  I accept the submissions made for the Plaintiffs, and agree that the Tribunal had made the position clear in PO 37, when it stated that the Defendant’s Undertakings had not been discharged. The Undertakings were expressed to be valid “until the granting of interim measures in favor of the Plaintiffs by the Tribunal as sought”, or alternatively, 7 days after the application for interim measures is refused by the Tribunal.

39.  Even if the Defendant is right, that the Tribunal had already granted the interim measures, by ordering the Defendant’s payment of its cash and non-cash assets into an escrow account, coupled with an order for the execution of an escrow agreement (on terms to be agreed or finalized), it is clear beyond peradventure that the Tribunal’s directions for the parties to negotiate and to finalize an escrow agreement have fallen on deaf ears, and have not been complied with by the Defendant despite the lapse of over 4 months from June 2024 when PO 32 was issued.

40.  In my judgment, such delay and non-compliance on the part of the Defendant should not in any event be condoned by any court, when the object and aim of the Ordinance is for the Court to facilitate the fair and speedy resolution of disputes by arbitration without unnecessary expense (under section 3 (1) of the Ordinance), and when section 45 expressly states that the power of the Court to order interim measures is for the purposes of facilitating the process of the arbitral tribunal.

41.  In the light of the procrastination and obstruction by the Defendant to the execution of the escrow agreement as directed by the Tribunal, it is in my Judgment appropriate, just and convenient for this Court to grant the relief in the terms of the Injunctions sought by the Plaintiffs, in order to preserve the status quo pending the Tribunal’s further and final orders and award in the Arbitration.

42.  Further, and as indicated by this Court before and in the course of the hearing, to the extent that any order for interim relief has already been made by the Tribunal by its PO 36 and PO 41, I consider that it is appropriate and just for this Court to grant leave to enforce these orders under section 61 of the Ordinance, as an order or direction of the Court. The emphasis made by Counsel for the Defendant, that PO 36 and PO 41 are temporary measures, and fall within the definition of “interim measures” set out in Article 17(2) of the Model Law, does not make any distinction which can assist the Defendant in this case against the grant of the Injunctions by the Court.

43.  The Plaintiffs consider that an order from this Court to enforce PO 36 and PO 41 is not sufficient to afford adequate protection for the Plaintiffs in view of the Defendant’s obstructive and un-cooperative attitude towards compliance with these orders of the Tribunal. I accept their submissions and agree that to best facilitate the Tribunal, to preserve the status quo pending the Tribunal’s final orders on the Plaintiffs’ applications before the Tribunal, and pending the issue of the final award, orders should be made in terms of the draft orders submitted by Counsel for the Plaintiffs, along the lines of the relief sought in the OS.

44.  Orders were made at the conclusion of the hearing for the costs of and occasioned by the OS, including all costs reserved, to be paid by the Defendant to the Plaintiffs.