FRESH GAIN LTD v. CHINA VOCATIONAL EDUCATION CO., LTD AND OTHERS

HCCT 45/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 45 OF 2011

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BETWEEN

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D E C I S I O N

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1.  This is an inter partes summons brought by the plaintiff for the continuation of an ex parte injunction granted on 7 October 2011 made under section 45 of the Arbitration Ordinance, Cap 609 which restrained the defendants from removing any assets from Hong Kong up to the value of US$33.8 million. It is a Mareva injunction made under the Arbitration Ordinance.

2.  In a nutshell the case concerns a lump sum investment of US$33.8 million made by the plaintiff to the 1^st defendant. The parties entered into a Share Purchase Agreement (“SPA”) in April 2011. It is the plaintiff’s case that the timing of the SPA and the amount of the investment was, in part, based on financial reports prepared by Price Waterhouse Cooper on instructions from the 1^st defendant and other related corporate entities.  The claim is based on the allegation that the financial reports were misleading and false on crucial issues.  The heads of claim are breach of the representations and warranties set out in the SPA, fraudulent inducement and fraudulent concealment.

3.  Had the inter partes summons been fully ventilated and contested it would have been necessary to set out, in much more detail, the complex corporate structure of all the companies involved, the relevant clauses of the SPA, the personalities involved and the accounting details from the financial reports which pre-dated and post-dated the SPA.  The case has already generated a considerable amount of paper and legal costs.  The Tribunal for the arbitration has been appointed but the commencement of the hearing has yet to be scheduled.

4.  After some discussion during the morning of the hearing of this inter partes summons the 1^st to 3^rd defendants offered an undertaking, which the plaintiff very properly accepted, which rendered a full hearing of the issues relevant to the continuation of the ex parte order, unnecessary.

5.  The undertaking given and accepted was as follows:

“UNDERTAKING FROM THE 1^ST TO 3^RD DEFENDANTS TO THE COURT

1.   The 1^st to 3^rd Defendants undertake not to dispose of, deal with or otherwise diminish the sums standing in the following bank accounts:-

Account Holder	Account No.	Bank
The 1st Defendant	44706823667 44717827251	Standard Chartered Bank (Hong Kong) Limited (“SCB”)
The 2nd Defendant	44706823713	SCB
The 3rd Defendant	44717827308 44706892707	SCB

without the consent of the Plaintiff or order of the arbitrators in the arbitration the reference whereof is HKIAC/A11141.

2.   The 1^st to 3^rd Defendants undertake to provide to the Plaintiff via email and fax (particulars of which to be provided by the Plaintiff) a copy of the bank statements relating to the bank accounts referred to above within 7 days of receipt of the same by the said Defendants, such undertaking to continue until the final award in the said arbitration, the agreement of the parties or as the arbitrators shall direct.

3.   There be liberty to apply to the arbitrators upon reasonable notice for amendment, modification or withdrawal of the above undertakings.”

6.  The only matter which was not resolved was the question of the appropriate order for costs on the inter partes hearing.

7.  After some discussion it was agreed that the court should order one of three possible alternatives on costs. Mr Benjamin Yu, SC leading Mr Victor Dawes for the plaintiff submitted that the appropriate order was that the costs of and arising from the inter partes summons be to the plaintiff in any event.  Mr John Scott, SC leading Mr Norman Nip for the defendants argued that the order should either be costs reserved to the arbitration or costs reserved to this court not to be decided until after the conclusion of the arbitration proceedings.

8.  I propose to dispense with one of those three at the outset.  I do not think that the question of these costs should be determined in the arbitration.  It is uncertain whether the arbitrators would have jurisdiction to do so in any event.  Even if they did, I do not regard it as appropriate for the issue of whether or not the injunction should have been brought or not, to be added to the issues for the arbitrators to resolve.  The injunction proceedings are wholly within this court and this court should exercise its discretion as to the proper costs order.

9.  Had the parties agreed that the costs of this inter partes summons been “costs in the cause of arbitration” that would have been different.  In those circumstances the outcome of the arbitration would have determined the outcome of this costs argument.  It would not have been an additional issue for the arbitrators to consider.

10.  Thus, this court will determine the costs issue.  The question is, when?

Plaintiff’s submission

11.  In the limited time available Mr Yu, SC outlined the key features of his case, as set out in the plaintiff’s skeleton argument, in order to demonstrate the plaintiff’s entitlement to an injunction even though they had accepted, quite rightly, an undertaking from the defendants on the morning of the hearing.

12.  He referred the court to the documents and affirmation evidence in support of his case that the financial figures in two reports (the “February” report and the “April” report) prior to the signing of the SPA were inflated and deliberately so.  In particular, he identified documents which purported to show that a substantial debt (of RMB67 million) to the company was in fact a “bad debt”.  And, in similar vein, that another substantial debt originally said to be owed by an individual to the company turned out to be the reverse, namely a liability to that individual.  He submitted that the plaintiff was easily able to demonstrate that they had a good arguable case and that there was a real risk of assets in Hong Kong being dissipated. 

13.  He submitted that this court is fully equipped to determine the issue of costs now.  No issues will arise in the future, either in the course of the arbitration or otherwise, which will affect the correctness of a costs order in the plaintiff’s favour provided the court is now satisfied that the injunction proceedings have been properly brought.

14.  Had my decision been that costs be to the plaintiff now, it would have been necessary to consider in a little more detail the plaintiff’s submission in this regard — to determine here and now whether all the requirements for making a Mareva injunction have been met.  The fact that, as will be seen hereafter, I have decided to postpone the question of costs is not to be regarded as a poor reflection on the plaintiff’s submission.  It may well be that in due course this court will decide that the Mareva proceedings were properly instituted.  It may well be, in due course, that this court expresses its agreement with the plaintiff’s submissions.  However, there is no hardship or prejudice, in my judgment, in adopting the proposal made by Mr Scott, SC on behalf of the 1^st to 3^rd defendants.  

15.  Before I move on briefly to outline Mr Scott’s position I should emphasis that the decision to postpone reflects nothing about the merits either way.  A decision to award costs now could not be regarded as an extra trump card in the plaintiff’s hand and, conversely, the decision not to deal with costs now leaves the defendants in exactly the same position as before.  It is neutral.

Defendants’ submission

16.  Mr Scott submits that a determination on costs now would be premature.  The safer course is to wait until after the arbitration.  This is a complex matter and many of the issues which are at the core of the plaintiff’s application are directly relevant to the pre-requisites of granting a Mareva injunction and can only safely be answered at a later date.  Moreover, the complexity of the issues is another reason to exercise caution.  If this were, for example, a simple injunction to keep open a right of way, the costs could and should be dealt with at the time.  If however, as here, the bigger picture is both factually and legally complex and keenly disputed throughout, it is another reason to wait. 

17.  Mr Scott accepts that even if he were to be the successful party in the arbitration, the plaintiff could still be entitled to their costs on this inter partes injunction.  However, if a costs order is made now the risk of it being an unjust one is greater.  There is no prejudice to either party by postponing the costs order.  Even if the arbitration settles, this issue can be still be restored before this court.

Decision

18.  It is of course true that when deciding on costs the court should consider the merits of the application and not the possible outcome of the arbitration.  However, in this case, I cannot exclude the possibility that matters will come to light which will be relevant to the merits of the application.  I do not agree that all relevant matters must already be within the court’s knowledge.

19.  I accordingly defer the court’s decision on costs until after the conclusion of the arbitration.

20.  An issue remains as to how and when this matter should be restored.  In order to assist in the future management of these proceedings I will say two things.

21.  First, it would be preferable but not essential to list the postponed costs issue before the same judge.

22.  Secondly, if, as would be preferable, it is to be relisted before me on some future occasion, I would propose, if the parties consent, to deal with the matter “on paper”.

23.  The majority (may be even all) of the arguments and submissions have already been made.  However, each side may at a later date serve written submissions (of no more than 7‑8 pages) entitled “additional submissions relevant to the merits of the injunction proceedings to be taken into account on the question of the appropriate costs order”.