BRIGHT SHIPPING LTD v. CHANGHONG GROUP (HK) LTD

HCAJ 3/2018

[2024] HKCFI 821

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ADMIRALTY ACTION NO 3 OF 2018

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BETWEEN

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DECISION

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1.  This is the hearing of the Plaintiff’s Summons filed on 5 September 2023 (“Summons”). Much of the relief sought in the Summons had been dealt with by the Court on 4 October 2023. What remain are paras 9 and 10 of the Summons, namely :

(1) Within 14 days, the Defendant pay into Court the sum of HK$1,134,188.25 (“Sum”) together with interest accrued thereon. The Sum represents the total liability under various costs orders made against the Defendant in this action. They are identified in para 9 of the Summons. The costs orders had been taxed or assessed by the Court or agreed by the parties;

(2) Unless the Sum and accrued interest are paid into Court within 14 days, the Plaintiff shall be discharged from all liability under para 3 of the Order dated 4 October 2023, namely, the Plaintiff’s obligation to pay 70% of the Defendant’s costs incurred in determining liability in this action.

2.  Given that there is no dispute that the Sum is due and owing for some time (the first unpaid costs order was made on 20 September 2019 and taxed on 27 May 2022), the burden is squarely on the Defendant to demonstrate why it (with the accrued interest) should not be paid into Court.

3.  The Defendant relies on one main ground to resist this application, namely, the risk of secondary sanctions by the US Government under the Iranian Transaction and Sanctions Regulations (“Sanctions”), which were made by the executive branch of that government.

4.  Before giving a brief summary of the Sanctions, it should be pointed out that it is accepted by the Defendant that this Court’s jurisdiction and powers are not in any way constrained by the Sanctions. Quite rightly, the Defendant accepts that this Court has the jurisdiction to make the order sought by the Plaintiff.

5.  According to the evidence filed by the Defendant, the Sanctions were re-activated in November 2018 after the US had withdrawn from an accord reached between Iran and, inter alia, the 5 permanent members of the UN Security Council under which the former was relieved from various international sanctions.

6.  The Sanctions prohibit US persons and foreign entities owned or controlled by US persons from engaging in transactions and activities with Iran and/or the Government of Iran.

7.  The Defendant is a company incorporated in Hong Kong. Its insurer, Skuld (“Insurer”), is a Norwegian P&I Club. The Insurer is neither a party to these proceedings, nor is liable for the Sum (it may have a contractual obligation to indemnify the Defendant against the payment of the Sum). In respect of the Plaintiff, it is a company incorporated in Belize. It is not a sanctioned entity, and the vessel “SANCHI” it used to own (it was sunk by the collision with the Defendant’s vessel) had been removed from “Specially Designated Nationals List” (“SDNL”) kept by the US Department of Treasury’s “Office of Foreign Assets Control” (“OFAC”). On the other hand, the uncontradicted evidence of the Defendant is that the Plaintiff was indirectly owned by the National Iranian Tanker Co (“NITC”), which was also the ship manager and operator of SANCHI at the time of collision. At that time, it was loaded with a cargo of natural gas condensate which originated from the National Iranian Oil Co (“NIOC”). Both NITC and NIOC are understood by the Defendant to be Iranian companies ultimately owned by the Iranian Government.

8.  The Defendant says the Sanctions authorise the US Secretary of Treasury to impose sanctions on a person (not expressly limited to US persons or foreign entities controlled by US persons) if they materially assist or provide financial support for persons on the SDNL, which includes NITC and NIOC.

9.  On the evidence, I accept that the Defendant (and the Insurer) is genuinely concern with the possibility of secondary sanctions, and has been trying its best to obtain a “specific licence” from the US Government for approval to honour its obligations to the Plaintiff since 16 June 2021. However, it was rightly pointed out by Mr Sussex SC, who appeared for the Plaintiff, that the Defendant’s evidence did not provide any explanation on how the Sanctions may have any effect on it, which is a Hong Kong company. The evidence directed almost exclusively to the potential effect on the Insurer. The exchanges between the Defendant’s solicitors and the US Department of Treasury or OFAC show much procrastination on the part of the US Government.

10.  Whilst this Court accepts that the Defendant’s concern is genuine, the concern has to be scrutinized a little closer to evaluate its quality and to see if it can balance out the Plaintiff’s undoubted entitlement to the Sum.

11.  To begin with, Mr Sussex rightly made the point that the Plaintiff is not a sanctioned entity and SANCHI had been removed from the SDNL. The costs orders represent a debt owed by the Defendant to a Belize entity. It is trite law that a shareholder, or any other person with a controlling interest in a company, has no interest whether legal or equitable in the assets of that company. There is no reason demonstrated that the US Government would ignore clear principles of law.

12.  Mr Glover, who appeared for the Defendant at the adjourned hearing, made the point that the Sanctions were designed to lift the corporate veil in achieving the desired effect. Whilst the point may have some force, the evidence before the Court does not show why or how the discharge of costs liability to the Plaintiff will infringe the Sanctions.

13.  Further, the costs orders arose from the Plaintiff’s entitlement to bring proceedings to remedy the wrong committed by the Defendant in sinking its ship. It is difficult to understand how they can be characterised as material assistance or financial support for Iranian entities on the SDNL.

14.  The Defendant says that payment of the costs orders is likely to be viewed by the OFAC as material support “because such a payment would reduce the financial obligations or liability of the SANCHI interests”. First, the proposition that payment of costs ordered against the Defendant would reduce the financial obligations or liability of the SANCHI interests is not easy to understand, and not one which the Court can simply rely upon to further delay the discharge of the Defendant’s liabilities. If the proposition is that the “SANCHI interests” have a liability to pay their solicitors and the payment into court would reduce such liability, then unless the Court ignores the fact that SANCHI was owned by the Plaintiff, this action was brought by the Plaintiff and the work done by its solicitors in this action must be payable by the Plaintiff, the argument cannot get off the ground. There is no reason why the Court should ignore the facts.

15.  In Fortenova Grupa v LLC Shushary Holding [2023] EWHC 1165 (Ch) at [37], [40]-[43], the Court permitted the claimant to redeem loan notes held by a subsidiary of a Russian bank which was subject to international sanctions, by making a payment into court (see also Celestial Aviation Services Ltd v Unicredit Bank AG [2023] EWHC 663 (Comm), at [175]). It is important to note that the redemption was indisputably unlawful in that case, which is a distinguishing feature with the present where there is no lawfulness in the payment of outstanding costs order. Perhaps more importantly, I agree with the Mr Sussex that a payment into court cannot be regarded as payment to any person. It is only at the stage where payment out of court is ordered that the payment would be made to a specific entity. In the circumstances of this case, it appears that payment into court is a legitimate way in which an innocent party may seek relief from the risk of sanctions.

16.  Further, as pointed out by Mr Sussex, it is inherently unlikely that any sanctions would be imposed upon an entity for compliance with a court order. The Court is entitled to assume that the US Government will not conduct itself unreasonably.

17.  In respect of the Defendant’s belief that “it is possible that a positive response will be received from the OFAC in the near future”, I cannot see the support for such optimism from the correspondence. It is therefore little more than speculation.

18.  It should be added that during the adjournment of this hearing various efforts were made by the Defendant and the Insurer to press OFAC to expedite the processing of the application for “specific licence” as a matter of urgency. The matter remains unresolved after almost 3 years.

19.  As regards the Defendant’s contention that the Plaintiff has the liability to pay 70% of its costs incurred on liability, which exceed the Sum and accrued interest owed to the Plaintiff, such costs of the Defendant are yet to be taxed. Further, there is no evidence on the amount of the costs or their reasonableness. Mr Sussex submitted that the Defendant’s costs entitlement are limited given that the trial was conducted in Shanghai and much of the work done for the purpose was adopted by the Defendant in this action.

20.  Furthermore, there are other outstanding costs orders in favour of the Plaintiff. The taxation of the same are on foot. The bills of costs amount to nearly HK$ 3 million in total. The costs owed to the Defendant must be balanced against such further liabilities to the Plaintiff on its part.

21.  The Defendant also contends that the sanction for non-compliance with the unless order sought by the Plaintiff is excessively harsh (see para 1(2) above). It must be right that the unless order should be backed by sanction. Mr Glover was asked by the Court what effective alternative sanction there may be, and none was identified. There is no evidence that the Defendant (and/or the Insurer) is financially incapable of paying the Sum. Therefore, the sanction needs not come into effect.

22.  I am unable to accept the Defendant’s submission that there is no prejudice to the Plaintiff by reason of delay in receiving the Sum. Money due and not paid is itself a prejudice. It is the deprivation of an entitlement.

23.  Finally, I am unable to agree with the Defendant that the Court is being used as a debt collection agency by the Plaintiff. First, the payment into court would serve to alleviate the Defendant’s concern about secondary sanctions (see Fortenova Grupa, supra). Second, it would not be a sensible deployment of the Court’s resources to decline this application with the knowledge that a different application will likely be made by the Plaintiff to enforce the costs orders.

24.  For these reasons, I do not believe that the Defendant has demonstrated a well-found concern of secondary sanctions or any good reason to resist the relief in question. I make an order in terms of paras 9 and 10 of the Summons. The costs of and occasioned by this application be paid by the Defendant, to be taxed if not agreed.

25.  I am grateful to counsel and Mr Glover for their assistance.