EASTMAN CHEMICAL LTD v.HEYRO CHEMICAL CO LTD

HCMP 1859/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1859 OF 2011

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J U D G M E N T

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THE APPLICATION BEFORE THE COURT

1.  Before the court is an application by Summons dated 22 November 2011 by the applicant, Eastman Chemical Limited (“Eastman”), against the respondent, Heyro Chemical Company Limited (“Heyro”), to have (1) these miscellaneous proceedings (“the Injunction Proceedings”) and (2) the arbitration proceedings commenced by Eastman against Heyro by a Notice of Arbitration dated 27 September 2011 (“the Arbitration”) temporarily stayed pending the determination of Eastman’s petition for the winding-up of Heyro in HCCW346/2011 (“the Winding-up Petition”), but with the ex parte Mareva injunction granted against Heyro by Mr Justice Yam herein on 23 September 2011, as varied and extended by the inter partes Order made by Mr Justice Sakhrani herein on 30 September 2011, continued on the same terms until further order.

THE DISPUTE AND PROCEEDINGS BETWEEN THE PARTIES

2.  By a Distributor Contract dated 1 January 2009 (“the Contract”)[1] Heyro was appointed an official but non-exclusive distributor of Eastman’s products (cellulosic plastics) for a term of 2 years ending 31 December 2010[2].  The distribution of Eastman’s products has been Heyro’s sole business.

3.  Insofar as it is material, clause 17 provided for the governing law of the Contract to be the laws of the United States and of the State of New York, United States and for the resolution of any dispute or difference arising out of or in connection with the Contract by arbitration at the Hong Kong International Arbitration Centre in accordance with the UNCITRAL Arbitration Rules.

4.  The parties continued to deal with each other after the expiry of the 2-year term of the Contract on 31 December 2010.  However, they did not sign any further written distributorship agreement.  According to Eastman, this is so because it had, in about November 2010, entered into a joint venture (“the Joint Venture”) with one Mazzucchelli 1849 SPA for the manufacture of cellulose acetate products for China and the Asia Pacific region in Shenzhen, the PRC as well as the direct sale and marketing of such products in Hong Kong and the PRC by Eastman on behalf of the Joint Venture.  It was therefore decided by Eastman that once the Joint Venture became fully operative which was expected to be in July 2011, it would no longer need to use Heyro as its distributor for cellulose acetate products (or indeed any other of Eastman’s products) but that it would in the meantime continue Heyro’s distributorship for 7 months from 1 January to 31 July 2011 on the same terms and conditions as contained in the Contract.  It is Eastman’s case that this was communicated to and accepted by Heyro.  On 14 June 2011, Eastman sent to Heyro by email a letter (wrongly dated 1 June 2011) to inform Heyro that the Contract would not be further renewed after 31 July 2011.

5.  Eastman’s claim against Heyro is for the price of various types and quantities of cellulosic plastics sold and delivered by Eastman to Heyro pursuant to 15 orders which, with the exception of the one dated 31 March 2010, were all placed by Heyro after 31 December 2010, more particularly, between 5 April and 9 June 2011.

6.  It is Eastman’s case that payment became due on various dates between 12 July and 8 September 2011 (both dates inclusive) upon the expiry of a credit period of 60 days from the dates of the original bills of lading and that as at 8 September 2011, Heyro owed Eastman a principal sum of US$1,569,540.14.

7.  Eastman started to chase for payment since 18 July 2011.  According to Eastman :

(1)  Negotiations regarding Heyro’s outstanding account took place between the parties from August to September 2011 to no avail.

(2)  At no time has Heyro denied that the sum claimed by Eastman is owed.

(3)  Instead, Heyro provided a myriad of excuses as to why it is unable to make payment, all of which point to Heyro’s insolvency.

8.  Eastman became worried that with Heyro’s sole business operation coming to an end upon the expiry of the Contract, as extended to 31 July 2011, unless restrained by a Mareva injunction, Heyro would have strong motives for dissipating and/or moving its assets to put them beyond the reach of Eastman.

9.  Eastman has taken various recovery and protective proceedings that have since progressed and developed as follows.

10.  Taking these steps in a chronological order, on 23 September 2011, Eastman commenced the Injunction Proceedings against Heyro by originating summons, claiming for a Mareva injunction up to the limit of US$1,569,540.14.

11.  On the same day, by an ex parte application made before Mr Justice Yam, Eastman obtained an Order (“Injunction Order”) :

(1)  restraining Heyro from removing or in any way disposing of or dealing with or diminishing the value of any of its assets which are within Hong Kong[3] up to the value of US$1,569,540.14 until the return date of 30 September 2011 (paragraph 1); and

(2)  requiring Heyro to disclose to Eastman at once all its assets and those assets of an individual value of HK$25,000 or more in Hong Kong and to serve on Eastman within 7 days a verifying affidavit (paragraph 2).

12.  The application before Yam J was put on the basis that Eastman intended to recover the sum of US$1,569,540.14 from Heyro through arbitration proceedings in accordance with clause 17 of the Contract and that a Mareva injunction was sought in aid of such intended arbitration.  Consequently, the Injunction Order was made upon Eastman’s undertakings to the court to, inter alia, issue a notice of arbitration with all due haste (“the Undertaking”)[4].

13.  The Injunction Order provided for the usual exceptions in respect of ordinary and proper business expenses and reasonable legal costs (but without specifying any cap).  It also made clear to Heyro and anyone notified of such order that they may apply to the court at any time to vary or discharge the same upon notice to Eastman’s solicitors. 

14.  Eastman has served copies of the Injunction Order on Heyro and its known customers.

15.  On 26 September 2011, Eastman took out an inter partes Summons to have the Injunction Order continued (“Eastman’s Injunction Summons”).

16.  On the same day, Eastman also served on Heyro a statutory demand (“the Statutory Demand”) under s 178(1)(a) of the Companies Ordinance (Cap 32), demanding for payment of US$1,611,336.55 (ie US$1,569,540.14 plus US$41,796.41 being contractual interest at 1.5% per month).

17.  On 27 September 2011, in compliance with the Undertaking, Eastman issued to Heyro a Notice of Arbitration.

18.  Eastman’s Injunction Summons came before Mr Justice Sakhrani J on 30 September 2011. Upon Heyro’s indication of objection to the continuation of the Injunction Order and intention to apply for the discharge of the same, Sakhrani J gave directions for the filing and service of affidavit evidence in opposition to/support of Eastman’s Injunction Summons as well as for the hearing of the same.  In the meantime, the Injunction Order is to be continued up to and including the hearing of Eastman’s Injunction Summons subject to the following variations :

(1)  that the time for compliance with paragraph 2 (regarding disclosure of Heyro’s assets) be extended until the adjourned hearing of Eastman’s Injunction Summons; and

(2)  that Heyro be not prevented from spending HK$200,000 in respect of legal advice and representation, with liberty to apply.

19.  Heyro’s evidence in opposition to the continuation of the Injunction Order and in support of its discharge was, after a few extensions of time from its original due date of 28 October 2011, filed on 25 November 2011.  In broad terms, Heyro has been advised and appreciates that the threshold on merits for the grant of a Mareva injunction (ie a good arguable case) is relatively low.  It however contends that Eastman has not shown that there is any real risk that Heyro would dissipate its assets and that there has been material non-disclosure by Eastman on its ex parte application before Yam J such that the Injunction Order ought to be discharged.  Eastman’s evidence in reply was served on 5 January 2012.  I have been told that the substantive hearing would take place on 14 March 2012 with one day reserved.

20.  In the meantime, Heyro did not comply with the Statutory Demand.  On 26 October 2011, in reliance on the presumption of insolvency provided for in s 178(1)(a), Eastman presented the Winding-up Petition.  As at the date of presentation, Eastman’s claim against Heyro including further contractual interest since the date of the Statutory Demand stood at US$1,634,879.65.  At the hearing of the Winding-up Petition on 11 January 2012, Heyro indicated its intention to oppose the same and directions for filing and service of affidavit evidence by the parties were given.  Heyro’s affidavit evidence in opposition has not yet been filed, the same being not due until 8 March 2012.  No date has yet been fixed for the substantive hearing of the Winding-up Petition.  Eastman estimates that the Winding-up Petition will be determined within the next 4 to 6 months.

21.  Turning back to the Arbitration, the arbitral tribunal was convened 16 January 2012, after some initial disagreement as to the number of arbitrators to be appointed and who should be appointed as arbitrator.

22.  To complete the picture, I have further been told that the parties have recently expressed interest in scheduling a mediation to resolve their differences.

THE PRESENT APPLICATION

23.  The present application was made by Summons filed on 22 November 2011, ie before compliance by the parties with Sakhrani J’s directions for the filing and service of evidence in respect of the continuation/discharge of the Injunction Order and before the arbitral tribunal was convened on 16 January 2012.

JURISDICTIONAL BASES FOR THE APPLICATION

24.  Eastman prays in aid :

(1)   s 16(3) of the High Court Ordinance (Cap. 4) which reads :

“Nothing in this Ordinance shall affect the power of the Court of Appeal or the Court of First Instance to stay any proceedings before it, where it thinks fit to do so, either of its own motion or on the application of any person, whether or not a party to the proceedings.”

(2)   Order 1B, rule 1(2)(e) of Rules of High Court (Cap 4A) which provides :

“1(2) Except where these rules provide otherwise, the Court may by order—

(e)  stay the whole or part of any proceedings or judgment either generally or until a specified date or event; …”

25.  With regard to the latter, it is suggested that the following underlying objectives set out in Order 1A, rule 1 would be achieved by the stay sought :

(1)  to ensure that a case is dealt with as expeditiously as is reasonably practicable (rule 1(b));

(2)  to promote a sense of reasonable proportion and procedural economy in the conduct of proceedings (rule 1(c));

(3)  to ensure fairness between the parties (rule 1(d));

(4)  to facilitate the settlement of disputes (rule 1(e)); and

(5)  to ensure that the resources of the court are distributed fairly (rule 1(f)).

EASTMAN’S GROUNDS FOR A STAY

26.  Eastman’s application is predicated upon the following factual propositions :

(1)  Heyro is insolvent as evidenced by its failure to pay Eastman and by its failure to satisfy, or respond in any way to, the Statutory Demand, thereby giving rise to a presumption of insolvency.  To date, Heyro has not evinced any viable grounds for opposing the Winding-up Petition.

(2)  Nor has Heyro indicated any viable defence to Eastman’s claim in the Arbitration.

(3)  Heyro’s application to discharge the Injunction Order is wholly frivolous.  There is no real prospect of the Injunction being discharged. 

(4)  Heyro applies to discharge the Injunction Order and defends Eastman’s claim in the Arbitration solely to thwart and delay Eastman’s recovery actions.

(5)  Permitting Heyro to continue to pursue such courses of action until such time when its solvency is established and/or the Winding-up Petition has been disposed of will only serve to deplete assets available for creditors (including Eastman) on its prospective winding-up, which would be manifestly unfair to Heyro’s creditors (including Eastman).

(6)  A stay would also avoid the court’s valuable time and resources being consumed by Heyro’s futile application to set aside the Injunction Order.

APPLICABLE PRINCIPLES

27.  Neither party can point to any authorities canvassing the grant or refusal of a stay of proceedings sought in these circumstances.

28.  Approaching the matter as one of principle, I agree with Mr Mark West, appearing for Eastman, that the lis alibi pendes-type principles[5] applied by Ma J (as he then was) in Linfield Ltd v Taoho Design Architects Ltd[2002] 2 HKC 204 at paragraph 14, as indorsed with modification by Sakhrani J in Intel Corp v Via Technologies Inc [2002] 3 HKC 650 at paragraphs 18-19, are equally applicable to an application for a stay in circumstances such as these.  In Linfield Ltd v Taoho Design Architects Ltd and Intel Corp v Via Technologies Inc, the multiple proceedings did not involve the same parties.  In contrast, in the present case, the Injunction Proceedings, the Arbitration and the Winding-up Petition, while involving the same parties, are concerned with different issues.  However, that is not to say that the determination of one would have no impact upon the other.  The most obvious is that a winding-up order under the Winding-up Petition would trigger the operation of s 186 of the Companies Ordinance to automatically stay the Injunction Proceedings and the Arbitration.

29.  In summary, the relevant principles are :

(1)  The court must consider what would serve the ends of justice between the parties to the litigation and the administration of justice generally;

(2)  A stay should not cause an injustice to the plaintiff/claimant;

(3)  The applicant for a stay must satisfy the court that continuing the proceedings would be unjust; and

(4)  Where a plaintiff commences proceedings as of right, he should not be deprived of the right to continue those proceedings in the absence of very good reasons to the contrary.

Of course, these principles were formulated in the context where the application was made by a defendant to stay proceedings against him.  However, I can see no reason in principle why they cannot be adapted to apply to the case where the plaintiff seeks to stay proceedings he himself has commenced.

ANALYSIS

Eastman’s submissions

30.  Eastman points out that should Heyro be adjudged insolvent and ordered to be wound up, by the operation of s 186 of the Companies Ordinance, it would be for the provisional liquidators/liquidators to determine what further (if any) action ought to be taken in the Injunction Proceedings and the Arbitration, having regard to the interests of Heyro’s creditors including Eastman.  It is conceivable that their view would differ from that of Heyro’s current management whose actions are, in Eastman’s view, clearly vengeful.  Heyro’s remaining assets would be preserved and substantial legal costs and disbursements would not be squandered pursuing hopeless applications driven by mala fide ulterior motives.

31.  Prejudice would be caused to Eastman in the absence of a stay as it would be forced to invest further resources to defend Heyro’s application to discharge the Injunction Order and to prosecute the Arbitration, not all of which would be recoverable as party-and-party costs especially if Heyro be adjudged insolvent and subject to a winding-up.

32.   On the other hand, if Heyro should be adjudged solvent or should the Winding-up Petition be dismissed, it will then be free to pursue its application to set aside the Injunction Order and defend the Arbitration if it still so desires.  In the meantime, it is protected by Eastman’s cross-undertaking as to damages, which is fortified by the fact that Eastman is listed on the New York Stock Exchange with a US$3.7 billion asset base.

The Injunction Proceedings

33.  While Eastman’s submissions may at first glance appear to be superficially attractive, I agree with Mr Jose Antonio Maurallet, counsel for Heyro, that on proper analysis, they should not be acceded to.

34.  The only outstanding matter in the Injunction Proceedings is Heyro’s opposition to the continuation, and application for the discharge, of the Injunction Order.  Such order was granted by Yam J on an ex parte application, with the benefit of just Eastman’s evidence.  Although applications for Mareva injunction are for obvious reasons routinely made ex parte, going for any form of relief ex parte is still a departure from the norm: Slik Hong Kong Company Limited v Gerald Merlyn Rhoslyn Evans, HCA1424/2005, unreported, 25 July 2005, Lam J. That the defendant can at any time, on notice to the plaintiff, make an application for discharge or variation is an integral element of the court’s jurisdiction to grant an interlocutory injunction on an ex parte application.  It is a matter of right.  This is particularly so where the injunction is a Mareva injunction, one of the law’s nuclear weapons.  Having a Mareva injunction, notice of which has been given to third parties, hanging over one’s head is bound to prejudicial one way or another, especially for a defendant in financial difficulty.  The plaintiff’s cross-undertaking as to damages, while offering some comfort, is unlikely to provide full cover as the precise loss and damage suffered by a party as a result of being subjected to a Mareva injunction may be hard to identify, prove and/or quantify.  The court should therefore not deprive a defendant of the right to apply to have a Mareva injunction discharged or varied and to have such application heard and determined without any unnecessary delay in the absence of very good reasons. 

35.  In this regard, Eastman is driven by a desire to prevent Heyro from depleting the assets available for distribution among its creditors by wasting money in seeking to discharge the Injunction Order (or to defend Eastman’s claim in the Arbitration).  However, Eastman[6] is already protected to a significant extent by the $200,000 cap on the expenditure on legal advice and representation allowed in the Injunction Order itself.  More importantly, with the Winding-up Petition pending, should Heyro be ordered to be wound up, s 182 of the Companies Ordinance would apply to avoid any disposition of property made by Heyro after the presentation of the Winding-up Petition unless the court otherwise orders.  That is to say, any payments made by Heyro on account of the costs and disbursements of the Injunction Proceedings (and the Arbitration) after 26 October 2011, like any other types of expenses, would be scrutinized, and avoided unless validated, by the court. 

36.  In any event, the savings in costs in the Injunction Proceedings sought to be achieved by a stay is in reality utterly illusory.  As noted above, both parties have in fact complied with all the directions given by Sakhrani J for the filing and service of affidavit evidence for determining whether the Injunction Order should be continued or discharged.  On this, I have been reminded by Mr West that the stay summons preceded Heyro’s affidavit evidence.  However, the mere issue of a summons does not operate as an immediate stay.  Hence, at the time when Eastman issued the stay summons, it should and would expect the parties to continue to prepare for the 14 March 2012 hearing.  Indeed, a 14-day extension of time had just been granted to Heyro with Eastman’s consent on 17 November 2011, ie 5 days before Eastman took out the stay application.  Prior to a determination of the stay application in Eastman’s favour, Heyro was bound by the procedural timetable laid down by Sakhrani J.  Hence, even at that early stage, the only costs that might potentially be saved should Eastman succeed in obtaining a stay in time would be the costs of the hearing on 14 March 2012.  I am afraid I simply do not see the logic of savings the costs of the 14 March 2012 hearing by incurring the costs of an application to stay that hearing.  Leaving aside for the moment the costs of the paperwork entailed by such an application (which appears to me to be not insignificant having regard to the affidavit evidence filed in support/opposition), in Mr West’s words, at the hearing of the stay application, Eastman is necessarily inviting this court to conduct a ‘whistle-stop’ review of the background to this dispute, the parties’ affidavit evidence filed in support of and in opposition to the Injunction Order and Eastman’s affidavit filed in support of the Winding-up Petition.  That being the case, I cannot believe that the costs or use of court time occasioned by the hearing of the stay application could or would be less than that required by the 14 March 2012 hearing in any meaningful sense.  In my opinion, the false economy upon which this application is premised frustrates, rather than fulfilling, the underlying objectives of the Civil Justice Reform spelt out in Order 1A, and should be discouraged by the court.   

37.  For these reasons, Eastman’s application for a stay of the Injunction Proceedings should be dismissed. 

38.  For the sake of completeness, I should mention that detailed submissions have been made both in writing and orally on behalf of Eastman on the merits/demerits of Eastman’s application to continue, and Heyro’s application to discharge, the Injunction Order and on the solvency or otherwise of Heyro.  I have considered and had regard to those submissions.  However, in view of my above reasons for refusing to stay the Injunction Proceedings, it is unnecessary for me to go into them. Nor is it appropriate for me to do so having regard to the fact that Heyro’s application to continue/Heyro’s application to discharge the Injunction Order will be heard by another judge.

The Arbitration

39.  Section 16(3) of the High Court Ordinance applies only to “proceedings before it [ie the court]” and hence would not apply to the Arbitration.  Likewise, the case management powers contained in Order 1B, rule 1 cannot be exercised in respect of proceedings not before this court. 

40.  Now that the arbitral tribunal has been convened, Eastman accepts that the proper forum for an application to stay the Arbitration is the arbitral tribunal itself.  What causes concern on Eastman’s part is that it should not be accused of breaching the Undertaking or its implied obligation to progress with the Arbitration diligently by applying to stay the same, without the permission of this court.  The short answer to this is that an otherwise properly made application for a stay of the Arbitration is not and should not be regarded as a breach of the Undertaking or implied obligation of diligence.  No doubt, the arbitral tribunal would consider Eastman’s application, as and when it is made, with regard to all material circumstances, including the fact that Eastman had obtained the Injunction Order, upon the Undertaking, in aid of the Arbitration.    

ORDER

41.  For the foregoing reasons, I dismiss Eastman’s Summons dated 22 November 2011.

42.  I also make an order nisi that Eastman should pay Heyro’s costs, to be taxed if not agreed, with a Certificate for Counsel.