QUIKSILVER GREATER CHINA LTD v. QUIKSILVER GLORIOUS SUN JV LTD AND ANOTHER

HCCW 364/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 364 OF 2013

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REASONS FOR DECISION

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Introduction

1.  On 20 December 2013 Quiksilver Greater China Limited (“Quiksilver”) issued two winding up petitions.  They were in respect of Quiksilver Glorious Sun JV Limited (“Quiksilver Glorious Sun JV”) and Quiksilver Glorious Sun Licensing Limited (“Quiksilver Glorious Sun Licensing”) respectively.  Both these companies are owned equally by Quiksilver and Glorious Sun Overseas Company Limited (“Glorious Sun”). Quiksilver is a wholly owned subsidiary of Quiksilver Inc., which is listed on the New York Stock Exchange.  Quiksilver Inc. and its subsidiaries own the Quiksilver casual wear and surfing related products brand, which they design, manufacture, distribute and retail internationally.  Glorious Sun is a wholly owned subsidiary of Glorious Sun Enterprises Limited which is listed on the Main Board of The Stock Exchange of Hong Kong Limited.  The Glorious Sun Group is involved in the manufacture, wholesale trading and retailing of clothing primarily in the Mainland and Hong Kong.

2.  Quiksilver Glorious Sun JV and Quiksilver Glorious Licensing were established pursuant to a joint venture agreement made on 11 March 2003 between Quiksilver and Glorious Sun (“JVA”). The JVA is a sophisticated agreement.  It deals comprehensively with the establishment, operation and possible termination of a joint venture, the commercial purpose of which is described in the following way in the JVA:

“RECITALS

C) Quiksilver and GS desire to form a joint venture to develop, own and operate a chain of Quiksilver Boardriders Club retail stores (the “Stores”) in PRC. This joint venture shall consist of a group of companies each of which shall be beneficially owned by the Parties in equal shares. All these companies are referred to in this Agreement individually as a “Venture Company” and collectively as the “Venture” or the “Venture Companies”.

….

E) In connection with the formation of the Venture, Quiksilver Sub, a wholly-owned subsidiary of Quiksilver Inc shall enter into a licence agreement (the “Licence Agreement”) with LICo, one of the Venture Companies as defined in Section 2.3 hereof under which LICo shall have the exclusive right to grant licences to the Venture and its franchisees in PRC to manufacture, distribute and retail apparel and other products under Quiksilver Inc’s trademarks and trade names, particulars of which are set out in Schedule A hereof (these trade marks and trade names are collectively referred to in this Agreement as the “Marks”).

AGREEMENT

1. Purpose and Scope of Venture

1.1 The purpose of the Venture is to bring the boardriding lifestyle, sports and products to PRC primarily through the “Stores”.

1.2 The scope of the Venture is to set up and equip factories and manufacturing plants in PRC for the production of Quiksilver brand products and to develop and open a chain of Stores in PRC, to operate the Stores itself or franchise the operation to third parties, to merchandise the Stores, to market the Quiksilver brands and the Marks in PRC and to take any other actions that may be incidental or necessary to carry on the foregoing business of the Venture in PRC.

1.3 When it is feasible and desirable, GS shall take over or otherwise cause to be taken over the manufacturing operation of the Venture at the initial set-up cash price so that the Venture can concentrate on the development of its Stores operations in PRC.”

3.  Clause 4.3 of the JVA refers to a budget and business plan that the parties had jointly developed and is contained in schedule 4.3 to the JVA.  The parties anticipated that by 2009 Quiksilver Glorious Sun JV would have established 290 stores in the Mainland and Macau, and would generate an annual turnover of US$40,300,000 with a pre-tax net profit of US$10,600,000.

4.  The joint-venture envisaged by the JVA was to last indefinitely (clause 3) or until the mechanisms which result in its termination provided in clauses 9 and 10 are engaged.  Clause 9 is not relevant.  Clause 10 provided a mechanism for the termination of the joint venture at the instigation of one of the parties.  Clause 10.4.1 provides:

“In order to provide a mechanism for resolution for any serious disagreement between GS and Quiksilver, and in addition to the other provisions of this Agreement, GS and Quiksilver agree that with respect to their interests in the Venture each shall have the buy‑sell right set forth in this Section 10.4.”

5.  It is clear from the language that this clause was intended as a mechanism to resolve disputes arising between the parties by one party buying the shares of the other.  It is explained how this would operate in clause 10.4.2:

“At any time during the term of this Agreement, either GS or Quiksilver (the “Initiating Party”) may provide the other party (the “Receiving Party”) with written notice (“Buy-Sell Notice”) that it is initiating the buy-sell procedure. The Buy-Sell Notice shall reference this Section 10.4 and shall set forth a cash price at which the Initiating Party shall, at the option of the Receiving Party, either sell all, but not less than all, of its interests in the Venture, or buy all, but not less than all, of the interests in the Venture of the Receiving Party. The purchase price shall be stated in terms of the price attributed to 100% of the Venture, with the actual price to be paid (“Purchase Price”) being equal to the 100% price multiplied by the seller’s interests in the Venture pursuant to Section 5.1. The Receiving Party shall be obligated, within thirty (30) days of its receipt of the Buy‑Sell Notice, to elect either to purchase all the interests of the Initiating Party or sell all its interests in the Venture to the Initiating Party at the Purchase Price. Failure of the Receiving Party to elect within the 30-day period to purchase the interests of the Initiating Party shall be conclusively deemed to be an election to sell all its interests in the Venture to the Initiating Party.”

The recipient of a Buy-Sell Notice, therefore, had the option to sell or buy as it saw fit.

6.  Clause 14.4 contained an arbitration clause:

“Any controversy arising under or relating to this Agreement, and any amendment thereof, or any breach thereof, shall be determined and settled by arbitration, (a) if instigated by Quiksilver, in Hong Kong in accordance with the provisions then in effect of the Arbitration Ordinance, Chapter 341 of the Laws of Hong Kong and (b) if instigated by GS, in the State of California, USA in accordance with the rules then in effect of the American Arbitration Association. Any award rendered therein shall specify the findings of fact of the arbitrators and the reasons for such award, with reference to and reliance on relevant law. Any such award shall be final and binding on both Parties and their successors in title and judgment may be entered thereon in any court having jurisdiction thereof.”

7.  The terms of the arbitration clause suggest some reservations on the part of both parties about having to arbitrate in the other party’s domestic jurisdiction.  However, the mechanism for addressing this concern was, in the event of a dispute arising, inclined to encourage each party to delay serving a notice of arbitration in the hope that the other did so first giving the recipient home advantage.  Perhaps surprisingly the JVA does not contain a governing law clause.

8.  In addition to the JVA the parties also signed on 11 March 2003 a trademark licence and manufacturing agreement (“Licence Agreement”).  This was a royalty free licence granted by Quiksilver to Quiksilver Glorious Sun Licensing allowing it to use its trademarks in the People’s Republic of China.  Clause 13 provided that the rights to use the trademarks would terminate following the termination or cancellation of the JVA. Clause 13 also provided that in the event that Glorious Sun acquired Quiksilver's interest in the joint-venture Quiksilver would grant a new licence "on mutually acceptable and commercially reasonable terms based on similar licensing relationships in the Territory." Clause 17.1 of the licence provided that Quiksilver had the right to terminate the licence in the event of a number of specified matters occurring including the following: “(c) upon termination of the Venture Agreement or the dissolution of the Venture for any reason; provided, however, if the dissolution of the Venture results from or in GS or any of its affiliates buying all of Quiksilver's Sub’s interest in the Venture, the Company agrees that it will enter into a replacement licence agreement with GS or its affiliate on commercially reasonable terms to be negotiated by the parties and consistent with comparable international licence agreements at that time.”

9.  By later 2010 Quiksilver had concluded that the joint venture was not developing as it had hoped and indicated to Glorious Sun that it would like to buy its shares.  On 1 March 2012  Quiksilver gave notice to Glorious Sun that it considered that it would be in the parties’ best interests to go their separate ways. Quiksilver offered to buy Glorious Sun's shares or sell its own for US$ 12.5 million and enclosed its replacement licence term sheet.  On 23 March 2012 Glorious Sun elected to purchase Quiksilver's interests with the terms of the necessary replacement licence to be negotiated in accordance with the License Agreement. On 17 April 2012 Quiksilver sent a letter to Glorious Sun headed "China Joint Venture Buy‑Sell Notice" stating "this letter shall constitute the Buy-Sell Notice under section 10.4.2 of the (J V Agreement)" and explained that the valuation of US$ 25 million was the enterprise value for 100% of the joint‑venture, so that the amount less debt owed to Glorious Sun, Quiksilver and third parties equaled an equity value of HK$68,999,000 and the amount payable by the buying shareholder would be HK$34,449,500 plus the cash necessary to repay the outstanding loan to the selling shareholder plus or minus working capital adjustment. On 10 May 2012 Glorious Sun confirmed its election to purchase Quiksilver's interest but stated that the terms of the replacement licence agreement would have to be the subject of separate negotiation conducted in accordance with License Agreement.  On 23 May 2012 Glorious Sun confirmed its agreement to purchase Quiksilver's interest, but stated that completion was premised on reaching agreement on a mutually acceptable and commercially reasonable replacement licence.

10.  Clause 10.5 of the JVA provided that completion was to take place 60 days after the date of the receipt by the Receiving Party’s of the Buy‑Sell Notice.  The 60 day period expired on 16 June 2012. The parties had not by that date agreed the terms of a replacement licence and completion did not take place.  On 11 July 2012 Quiksilver commenced proceedings in California seeking, amongst other things, a declaration that its replacement licence term sheet fully met its contractual obligations under the Licence Agreement.  In a letter to Glorious Sun of the same date Quiksilver explained its reasons for commencing the legal proceedings.  In the penultimate paragraph of that letter Quiksilver says this: “we would prefer to resolve our differences amicably and, without prejudice to our legal rights expressed in the Complaint, would be willing to consider any reasonable proposal you may have in that respect. As we have discussed, the terms on which we are proceeding on the Buy-Sell process include the terms of the replacement licence and thus the Buy-Sell process cannot be completed until a determination of the replacement licence terms has been completed."

11.  The Californian Court stayed the proceedings to arbitration on 2 November 2012.  Quiksilver issued a notice of appeal on 28 November 2012.  Quiksilver requested 3 extensions of time for filing the necessary papers giving as the reason attempts by the parties to agree the terms of a replacement licence.  Such attempts as the parties did make to do so were unproductive and their relationship deteriorated further. On 11 October 2013 Quiksilver withdrew its appeal and on 27 November 2013 Glorious Sun served a notice to commence arbitration proceedings in California.  The notice is a comprehensive summary of the subject matter of the arbitration and runs to some 25 pages.  It is Quiksilver’s case that the notice of arbitration was only issued by Glorious Sun after its directors sitting on the board of Quiksilver Glorious Sun JV had been told that Quiksilver intended to issue a winding-up petition and that it can be inferred that it was done in an attempt to thwart the impending Petitions which were issued on 20 December 2013. 

The application

12.  On 29 January 2014 Glorious Sun issued summonses in both proceedings seeking orders that the Petitions be struck out or stayed pending the outcome of the arbitration.  At the hearing before me Glorious Sun was represented by Mr. Benjamin Yu SC and Eva Sit and Quiksilver by Mr. Barrie Barlow SC.  The application is important as it is the first case in Hong Kong which requires the Court to consider the extent to which it is permissible or appropriate to stay or dismiss a petition issued by a shareholder of a solvent company to wind up a company on the just and equitable ground and require the underlying dispute to be determined in the first instance in accordance with an arbitration agreement in a shareholders agreement between the petitioner and the respondent shareholders.  Put shortly it is Glorious Sun’s case that the Hong Kong courts should adopt a similar approach to that taken by the English Court of Appeal in Fulham Football Club (1987) Ltd v Richards[1]. I say “similar” because certain of the material statutory provisions differ between England and Hong Kong, but not to an extent, so argues Mr. Yu, as to be material to the ultimate decision I am required to make. 

13.  Glorious Sun’s case can be summarised as follows:

(1) A petition by a shareholder to wind up a company is the exercise of a class right.  This is the case whether the petition is brought by a creditor alleging insolvency or a shareholder seeking a just and equitable winding up because of the conduct of the affairs of the company ;

(2) Because of the nature of that right the shareholder has an inalienable right of access to the Companies Court and the determination by it of a petition that a company is wound up.

(3) Section 20 of the Arbitration Ordinance does not apply to a winding-up petition.

(4) There is no residual inherent jurisdiction that justifies the Companies Court staying a winding-up Petition and require, at the request of one of the parties, that those complaints relied on to found the petition that are covered by an arbitration agreement are determined by arbitration; in other words in accordance with the mechanism for resolving them agreed by the parties.

The argument

14.  It is common ground that the relief that is sought in the Petitions, winding-up orders, cannot be granted by an arbitrator regardless of what the arbitration clause says.  A company incorporated in Hong Kong is a creature of statute.  It is created through the use of the mechanism provided by the Companies Ordinance, formerly Cap. 32 and since March 2014 Cap. 622, and its liquidation and ultimate dissolution can only be affected through the mechanism provided by the Ordinance, which in the context of a shareholders’ dispute section 169(1) of Cap. 32 provides is either by presentation of a petition to the court for a winding-up order (pursuant to section 177(1)(f)) or voluntarily by the company resolving by special resolution that the company be wound up (section 228(1)(b)). As I have already noted an arbitrator cannot make a winding-up order, although the question of whether or not the conduct of a shareholder is inconsistent with the terms of a shareholders’ agreement clearly can be determined by an arbitrator and to that extent the determination of the facts and matters which found a petition to wind up a company are arbitrable. 

15.  It was the view of Patten LJ in Fulham Football Club [2] that an arbitration agreement could extend to determining whether the presentation of a petition was justified and that it was only after such a determination had been made by the arbitrator that it was permissible for a shareholder to present a petition to wind up the company in question.  The arbitration clause in the present case, clause 14.4, provides that “any controversy arising under or relating to this Agreement” shall be determined and settled by arbitration.  In my view this is sufficiently wide to allow Quiksilver to seek a determination from an arbitrator that matters have occurred which justify Quiksilver seeking a winding-up order.  Mr. Barlow did not argue otherwise or that for some other reason this is not a determination that an arbitrator could make.  Mr. Barlow’s argument is rather different as indicated in my summary of his submissions in earlier paragraphs.

16.  In paragraph 5.2 of Mr. Barlow’s submissions he describes Quiksilver’s Petition as “a class proceeding concerning the actual or contingent rights of persons other than the named parties.”  Mr. Barlow cites five Hong Kong authorities to support this proposition.  Three of those authorities concern petitions to wind up a company on the grounds of insolvency[3]. The other two were just and equitable petitions[4]. Although these two petitions concern applications to stay the petitions to arbitration they turn on the construction of the arbitration clause and do not consider the argument that Mr. Barlow advances, namely, that even if an arbitration clause covers the subject matter of the dispute in the winding‑up proceedings a stay should not be ordered because the petitioner is exercising a class right.

17.  It is correct that a petition issued by a creditor to wind up a company on the grounds of insolvency invokes a class right available to all creditors, which results, if the petition is successful, in a winding-up order that engages the statutory regime for the liquidation of companies for the benefit of all creditors and, if it transpires the company is solvent, its  shareholders.  Lord Hoffman described the purpose and effect of bankruptcy proceedings in Cambridge Gas Transportation Corp v Official Committee of Unsecured Creditors of Navigator Holdings plc [5]:

“The purpose of bankruptcy proceedings, on the other hand is not to determine or establish the existence of rights, but to provide a mechanism of collective execution against the property of the debtor by creditors whose rights are admitted or established. That mechanism may vary in its details. For example, in personal bankruptcy in England, the assets of the bankrupt are vested in a trustee of the realisation and distribution to creditors. The mechanism operates by divesting the bankrupt of his property. In corporate insolvency, on the other hand, the insolvent company continues to be owner of its property but holds it in trust for the creditors in accordance with the provisions of the Insolvency Act 1986: see Ayerst v C&K (Construction) [1976] AC 167. In the case of personal bankruptcy, the bankrupt may afterwards be discharged from liability for his pre-bankruptcy debts. In the case of corporate insolvency, there is no provision for discharge. The company remains liable but when all its assets have been distributed, there is nothing more against which the liability can be enforced: see Wight v Eckhardt Marine GmbH [2004] 1 AC 147, 155-156. At that point, the company is usually dissolved.”

18.  Commonly a winding-up petition issued on the grounds of insolvency relies on a statutory demand to prove insolvency.  If it does so in order for the company to defeat the petition it must demonstrate that it has a bona fide defence on substantial grounds to the claim for the underlying debt.  That determination is undertaken by the court. The petition will not be stayed to arbitration if the debt arises under an agreement which contains an arbitration clause: see the decision of Yuen J (as she then was) in Sky Datamann (Hong Kong) Limited [6]. This is consistent with the nature of winding-up proceedings.  The creditor does not seek to recover the sum due to him under the agreement containing the arbitration clause; rather he seeks to put an insolvent company into liquidation for the benefit of all its creditors.

19.  The position in the case of a just and equitable petition issued by a shareholder is different.  A shareholder must demonstrate a sufficient interest in the winding up.  Commonly this is satisfied by the shareholder asserting that the company is solvent and that he will be entitled to a distribution following the liquidation of its assets by a liquidator, but the interest could take some other form[7]. This question should be addressed in the petition.  The two petitions before me do not do so, but it seems tolerably clear that at least at the time they were issued it was assumed that the two joint venture companies were solvent.  This being the case, and it would normally be the case in shareholder disputes, the “class” interested in the Petitions is limited to the two shareholders both of whom are parties.  It does not, as Mr. Barlow argued, effect persons other than the parties.  There is nothing in my view in the nature of the right that Quiksilver seeks to exercise that justifies the conclusion that the right is inalienable and that the underlying dispute between the parties is not arbitrable.

20.  The third element of Mr. Barlow’s argument is that section 20 of the Arbitration Ordinance does not apply to winding-up proceedings.  Section 20 of the Arbitration Ordinance, Cap. 609, incorporates article 8 of the UNCITRAL Model Law and provides that “a court before which an action is brought” shall, if the conditions referred to in the article are satisfied, refer the parties to arbitration.  It is correct that winding‑up proceedings are not an action: Sky Datamann [8] and the Court is not required by section 20 to refer the parties to the Petitions to arbitration.  In this respect the statutory regime in Hong Kong is different from that in England.  Section 9(1) and (4) of the Arbitration Act 1996 provides:

“(1) A party to an arbitration agreement against whom legal proceedings are brought (whether by way of claim or counterclaim) in respect of a matter which under the agreement is to be referred to arbitration may (upon notice to the other parties to the proceedings) apply to the court in which the proceedings had been brought to stay the proceedings so far as they concern the matter.

….

(4) on an application under this section the court shall grant a stay unless satisfied that the arbitration agreement is null and void, in operative, or incapable of being performed.”

21.  In Fulham Football Club the Court of Appeal proceeded on the basis, which does not appear to have been contentious, that “legal proceedings” included the petition[9]. The Court of Appeal held that notwithstanding this the provisions of the Arbitration Act left open the possibility of a challenge to an application to a stay on the ground of arbitrability.  The Court of Appeal concluded that a petition under section 944 of the Companies Act 2006 for relief for unfair prejudice did not invoke a class right that could only be determined by the court.  The difference in the wording between section 20 of the Arbitration Ordinance and section 9 of the Arbitration Act does not of itself impact materially on the issue before me as Mr. Barlow accepted that the Court has a discretionary jurisdiction to stay the Petition[10], but argued that it was not a discretion that could properly be exercised given the inalienable right which Glorious Sun has to seek a winding-up order from this Court.  The determinative issue arising from the way in which Mr. Barlow put Quiksilver’s case is whether or not the substantive dispute between the parties is arbitrable.  By substantive dispute I mean the commercial disagreement, which they wish to have resolved.  This is not the same as the relief that one party seeks.

22.  I have already rejected the objection that because of its nature a just and equitable winding-up petition cannot be stayed to arbitration. I have also explained why the fact that the precise relief sought in a petition is not available from an arbitrator is not a critical consideration, although it is relevant.  In my view the correct approach is to identify the substance of the dispute between the parties and ask whether or not that dispute is covered by the arbitration agreement.

23.  In the present case the dispute between the parties concerns the basis upon which the joint venture is to end. In broad terms Glorious Sun says that Quiksilver should sell its shares and grant a new licence in respect of the trademarks.  Quiksilver say, although only recently, that Quiksilver Glorious Sun JV and Quiksilver Glorious Sun Licensing should be wound up.  These issues can be determined by arbitration. If the arbitrators conclude that Quiksilver is correct an application can then be made to the Court for winding-up orders.  As Petitions have already been presented this will only require that the stays of the Petitions that I have ordered be lifted.  This Court will not need to rehear the substantive arguments.  In my view it is both permissible for the Court to stay the winding-up Petitions pending the outcome of the arbitration.  It is also practical and desirable.  The arbitration is underway and it is undesirable that two sets of proceedings continue in parallel.  The arbitration can address both claims and make an award, which gives the successful party what it wishes, although in the case of Quiksilver an award in its favour will require the stay to be lifted and the Court invited to make a winding-up order.  The Court cannot deal with Glorious Sun’s claim.

Conclusion

24.  For these reasons I have ordered that both Petitions are stayed pending the outcome of the arbitration.  I order that the costs of the applications are paid by Quiksilver to Glorious Sun and there be a certificate for two counsel.