THE EXPORT IMPORT BANK OF CHINA v. LIU QINGPING

HCMP 1684/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1684 OF 2015

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D E C I S I O N

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1.  This is an application for:

A. Interim Mareva injunction pursuant to s.21M of the High Court Ordinance (“HCO”);

B. Service out of jurisdiction; and

C. Sub-service of the summons on the defendant’s last known address.

BACKGROUND

2.  The plaintiff is a licensed bank in the Mainland.  It has entered judgment in the Beijing No.4 Intermediate People’s Court (“the Mainland judgment”) against the defendant for a sum of RMB 100m (principal amount) with interest for about RMB 3.96m at as the date of the judgment.

3.  The judgment debt arose out of a written agreement under which the plaintiff extended export credit to Taifeng Textile Group Co Ltd (“TTG”) for a sum not exceeding RMB100,000,000, secured by assets of TTG and a guarantee provided by the defendant.

4.  The present proceedings issued under s.21M of the High Court Ordinance are in aid of the Mainland proceedings seeking to restrain the defendant from disposing of assets up to the value of the judgment sum.

5.  The defendant is the chairman of the board and executive director of China Taifeng Beddings Holdings Limited which is listed on the Main Board of the Hong Kong Stock Exchange (“the Listco” and together with its subsidiaries (“the Group”)).  He holds 16,234,000 shares of the Listco under his name and is indirectly interested in another 75,000,000 shares held by Fu Sun Development Limited (“Fu Sun”).  These shares form the specific subject matter of the Mareva injunction.

6.  In addition, the defendant holds 480,000,000 shares in the Listco through Harvest Sun Enterprises Limited, which coupled with Fu Sun’s shares formed 55.5% shareholding.

7.  Before reorganization of the Group for the listing in 2010, TTG and the Group had common controlling shareholders and common directors including the defendant.  As such TTG was a related party.

A. Mareva injunction pursuant to s.21M of HCO

8.  The originating summons, present summons and supporting affidavit have been couriered and emailed to the defendant.  The present summons is dealt with on ex parte on notice basis. 

9.  The legal principles applicable under s.21M have recently been summarized by Madam Justice Mimmie Chan in Ming Hsieh v Xu Zhe & ors, HCMP 3072 of 2014, 10 April 2015, §§9-10:

“9. The applicable legal principles are not in dispute.  Under s 21M of the Ordinance, the Court may grant interim relief in relation to proceedings which have been or are to be commenced in a place outside Hong Kong, and which are capable of giving rise to a judgment which may be enforced in Hong Kong.  This is so notwithstanding that the subject matter of the proceedings outside Hong Kong would not, apart from s 21M,  give rise to a cause of action over which the Hong Kong Court would have jurisdiction.  Under s 21M (4), the Court may refuse the application for interim relief if, in the opinion of the Court, the fact that it has no jurisdiction apart from s 21M in relation to the subject matter of the proceedings concerned makes it “unjust or inconvenient” for the Court to grant the application.

10. In exercising the power under s 21M, the Court is required to abide by the general principles governing interim relief.  In the context of a Mareva type of relief, the plaintiff must show a good arguable case (Pacific King Shipping Holdings Pte Ltd v Huang Ziqiang HCMP 2462/2012, 4 April 2014 & CACV 94/2014 15 January 2015), as well as the risk of dissipation.”

10.  In considering the question of convenience, there are five main considerations (Motorola Credit Corpn v Uzan (No.2) [2004] 1 WLR 113, §115:

(i) whether the making of the order would interfere with the management of the case in the primary court, eg whether the Hong Kong order would be inconsistent/overlap with the primary court’s order;

(ii) whether it is the policy of the primary court not to make worldwide freezing/disclosure orders;

(iii) whether there was any danger that the orders made would give rise to disharmony or confusion and/or risks of conflicting, inconsistent or overlapping orders in other jurisdictions, in particular the courts of the state where the person enjoined resides or where the assets affected are located;

(iv) whether at the time the order was sought there was likely to be a potential conflict as to jurisdiction making it inappropriate and inexpedient to make the order;

(v) whether, in a case where jurisdiction was resisted and disobedience was to be expected, the court would be making an order which it could not enforce.

11.  The court, in deciding whether to grant relief under s 21M should make a separate exercise of judgment rather than simply accepting the decision of the foreign court:Compania Sud Americana De Vapores SA v Hin-Pro International Logistics Limited, CACV 243/2014, 11 March 2015, at para 32.

Good arguable case

12.  The plaintiff’s claim against the defendant was a straight forward debt recovery claim.  The Mainland judgment was based on a written loan contract and guarantee.  The judgment was entered after notice was given to the defendant but he persistently failed to answer the proceedings.  The same judgment would likely have been given were the claim dealt with by the Hong Kong court.  The plaintiff has a good arguable case.

13.  The Mainland judgment would have been registrable in Hong Kong by virtue of the Mainland Judgments (Reciprocal Enforcement) Ordinance, Cap 597.  In the loan agreement and guarantee (entered into after Cap 597 was commenced), the parties had chosen a court in the Mainland in case there is a dispute between them: s. 5(2)(a)(i) and 5(2)(b) of Cap 597.  The judgment is a final and conclusive first instance judgment given by the Beijing No. 4 Intermediate People’s Court (ss. 5(2)(a)(i) and 6(1)(b)) given within 2 years (s.5(1) and 5(7)). The 15 days for appeal has expired (s.6(1)(a)(ii)) and the defendant has not lodged any appeal.  The plaintiff is now awaiting the administrative process to be completed for the relevant certificate to be issued by the originating court certifying that the judgment is final and enforceable in the Mainland (s.6(2)), such that an action may be instituted in Hong Kong under Cap 597 to enforce the Mainland judgment.

14.  None of the concerns expressed in paragraph 10 would apply on the evidence before me.  Although the Mainland court could not have made the asset preservation order against the Listco shares (which are outside the Mainland), there is no reason why the Hong Kong court should not render its assistance. It is not unjust or inconvenient to grant the application.

Risk of dissipation of assets

15.  Mr Jonathan Wong, counsel for the plaintiff relies on 3 matters.

16.  First, at the time the loan was applied for, the loan was granted by the bank on the security of the defendant’s disclosed shareholding in Shandong Taifeng Textiles Co Ltd (“Shandong Taifeng”).  In fact he had misrepresented his beneficial ownership in Shandong Taifeng, which indirectly came through 2 layers of corporate vehicles outside the Mainland.  Accordingly, the Mainland court was not able to issue an asset preservation order against the shares in Shandong Taifeng.

17.  I do not find this to be evidence of risk of dissipation in itself.  The plaintiff’s cause of action in the Mainland was not in fraud or misrepresentation.  In any case, the Mainland had no jurisdiction to grant an asset preservation order against assets outside the Mainland. 

18.  Secondly, there was a pattern of evasiveness or unwillingness on the part of the defendant to participate in the Mainland proceedings.  The Mainland court commented that after proper summons, the defendant refused to enter an appearance without proper reasons.  He only answered one out of 40 calls by the Mainland court. 

19.  Mr Wong relies on a passage in Gee on Commercial Injunctions (5^th ed) §12.039(9):

“The defendant’s behaviour in response to the claimant’s claims: a pattern of evasiveness, or unwillingness to participate in the litigation or arbitration, or raising thin defences after admitting liability, or total silence, may be factors which assist the claimant.”

20.  The learned author has not cited any authority in support.  I do not think mere evasive attitude towards litigation is enough to show risk of dissipation.

21.  Thirdly (and recently), the plaintiff discovered from announcements of the Listco dated 2 and 25 June 2015 respectively that:

(i) The Listco’s auditors identified a problematic area in “the reasonableness of the expenses in respect of the Group’s channel restructuring plan carried out during the year and the sales and corresponding trade receivables for the year.

(ii) The auditors had tendered their resignation due to, amongst others, the professional risks associated with the audit of the Group for the year ended 31 December 2014.

(iii) A Special Investigation Committee has been established.

(iv) In the first half of 2014 (when the litigation which eventually led to the Mainland judgment was on foot), the investing public was told of gross profits being RMB 67.5 million.

(v) Yet a year later on 21 May 2015, the investing public was informed of delay in publication of 2014 annual results.  The management accounts enclosed with the announcement showed that the loss before tax was RMB 1.24 billion.  The net loss was RMB 1.18 billion in 2014 (compared to a profit of RMB 297 million in 2013).  The total net assets reduced by 50% from RMB 2.32 billion in 2013 to 1.13 billion in 2014.

22.  The trading of Listco shares has been suspended on 26 February 2015 and the closing price then was $1.08 per share.  There is a acquisition agreement pending publication of the 2014 annual results of the Listco.  The Long Stop Date has been extended to 30 September 2015. 

23.  The defendant is the chairman of the Listco “responsible for strategic planning, business development and overall management of the Group”.  With his deemed beneficial interest, he owns over 55.5% shares of the Listco.

24.  From what is disclosed in paragraph 21 above, the way the defendant ran the Listco as a chairman was alarming.  Assets of the Listco have been whittled down for reasons that were not apparent or not said to be related to market conditions.  Accordingly, the value of shares held and/or beneficially owned by the defendant is reflectively reduced.  The drop in total net assets happened after the loan to TTG and before the time when the plaintiff sued the defendant in the Mainland.

25.  The totality of the evidence under the third point made by Mr Wong suggests the defendant to be a person of low commercial morality: Honsaico Trading Ltd v Hong Yiah Seng Co Ltd [1990] 1 HKLR 235; Hong Kong Civil Procedure, Vol 1, para 29/1/70.  Taking also into account his misrepresentation to the plaintiff about his ownership of the Shandong Taifeng shares under paragraph 16, this court finds that there is risk of the defendant’s dissipation of assets in order to frustrate his judgment creditor. 

Balance of convenience

26.  Damages would be adequate remedy to the plaintiff’s claim.  On the other hand, the grant of an injunction would not cause irreparable harm to the defendant that cannot be compensated for in damages.

27.  The known assets of the defendant (a house worth about RMB 22 million) are not enough to meet the liability under the Mainland judgment.

28.  The plaintiff may, of course, realize the security (factory properties in a remote region in Laiwu) given to it by TTF, but it may take 3-5 years to obtain payment.  Those properties are also heavily encumbered.

29.  The plaintiff, being a licensed bank, is in a position to give an undertaking as to damages.

30.  The balance lies in favour of the grant of an injunction.

Terms of the Mareva injunction

31.  I will grant the Mareva injunction as per the draft order save that the court cannot freeze the Listco shares held by Fu Sun directly.  It is trite law that a company does not hold assets on behalf of a shareholder.

B. SERVICE OUT OF JURISDICTION

32.  This is an appropriate case for service out of jurisdiction under Order 11, rule 1(1)(oc), being a claim for interim relief under s.21M of the Ordinance.  There is a real issue to be tried which the plaintiff may reasonably ask the court to try and the plaintiff has a good cause of action against the defendant based on the Mainland judgment.    I grant an order for service out of the jurisdiction of the originating summons, this order and the summons for interim injunction.  The return date for the summons will be 21 August 2015.

C. SUBSTITUTED SERVICE

33.  With the best of intention, the plaintiff’s lawyers wanted to seek a substituted service order in relation to the present summons so that the defendant will be notified of the proceedings as soon as possible.  In my view it is not necessary since I have given a longer return date.  The defendant can apply to set aside the Mareva injunction on good grounds at any time.  I thus make no order on this aspect of the summons.

CONCLUSION

34.  I grant a Mareva injunction sought by the plaintiff, save that the specific item of shares held under the name of Fu Sun is deleted from the order.  Costs of the plaintiff’s summons will be reserved.  The return date of the summons shall be 21 August 2015.  I also give leave to serve the originating summons, the summons and this order on the defendant out of jurisdiction.

35.  I thank Mr Wong for his assistance.