BLUEGOLD INVESTMENT HOLDINGS LTD v. KWAN CHUN FUN CALVIN

HCA 1492/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1492 OF 2015

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D E C I S I O N

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1.  This is the Defendant’s application under s 20 of the Arbitration Ordinance (“Ordinance”) for a stay of these proceedings instituted by the Plaintiff, and for the dispute between the parties to be referred to arbitration.

2.  The Plaintiff claims against the Defendant as guarantor under a Deed of Guarantee dated 30 June 2010 (“Guarantee”), for the principal sum of US$10 million, with interest claimed to be due and payable pursuant to the Guarantee. 

3.  The Plaintiff is a BVI company, whereas the Defendant is the founder and director of Accelstar Enterprises Limited (“Company”), also incorporated in the BVI.  On 3 June 2010, the Plaintiff, the Defendant and the Company entered into a Subscription Agreement.  Other parties to the Subscription Agreement were the subsidiaries of the Company, namely, Ganzhou Dingsheng Water Technologies Co Ltd (“PRC Subsidiary”), Marvel Associates Group Limited (“BVI Subsidiary”) and Eaton Holdings Limited (“HK Subsidiary”).  The PRC Subsidiary, the BVI Subsidiary and the HK Subsidiary are collectively referred to hereinafter as “Subsidiaries”.

4.  The Subscription Agreement recites that the Company was to issue convertible notes of an aggregate principal amount of US$10 million (“Notes”). Under the Subscription Agreement, in consideration of the Plaintiff’s subscription of the Notes, the Company was also to issue to the Plaintiff a warrant (“Warrant”) to subscribe for shares in the Company (“Shares”), at an initial subscription price of US$194.4 per Share in accordance with the terms and conditions of the Warrant.  The Notes were to be subscribed for by the Plaintiff and issued by the Company at closing, for a consideration of US$10 million. 

5.  Under clause 7 of the Subscription Agreement, the Defendant as Founder, the Company, and each of the Subsidiaries, all as “Warrantors”, gave various covenants to the Plaintiff.  Under clause 7.16, the Warrantors covenanted and agreed with the Plaintiff that if a listing vehicle of the Company, the Subsidiaries and their group (“ListCo”) should conduct a public offering of its securities, each of the Warrantors shall take all action necessary to effect a restructuring and public offering of ListCo’s securities (“ListCo Restructuring”).  Under clause 7.17 of the Subscription Agreement, the Warrantors covenanted and agreed with the Plaintiff that the Defendant and each of the Subsidiaries shall use their best endeavors to conduct a Qualified IPO as soon as possible, but within 3 years of the Closing Date (as defined in the Subscription Agreement).  “Qualified IPO” is defined in the Subscription Agreement as the closing of ListCo’s first share offer in a firm commitment underwritten initial public offering, that results in such securities being listed or registered on a qualified exchange, with a pre-listing value of not less than US$235 million.

6.  It is not disputed that pursuant to the Subscription Agreement, the Company issued Notes to the Plaintiff on 30 June 2010.  Under the Note Certificate, the Company promised to pay the Plaintiff as holder of the Notes such amounts as shall become due and payable in respect of such Notes, and to comply with the provisions of the conditions of the Notes (“Conditions”). The Notes are expressed to be convertible into fully paid ordinary shares of US$0.1 each of the Company, at the conversion prices as stipulated and provided for in the Notes.  Under the Conditions, the Notes bear interest from the date of issue, and the Company as issuer agreed to redeem each Note on its maturity date (29 June 2015), at the Redemption Amount as stipulated and defined under the Conditions.  In brief, the holder of each Note has the right to require the Company to redeem all or part of the Notes, on the occurrence of various relevant events.  In particular, under clause 9.3 (c) of the Conditions, if the Qualified IPO does not occur within 3 years of the date of the issue of the Notes, the Company is liable to redeem the Notes at a specified rate of return.

7.  The Notes are expressed to be “unconditionally and irrevocably guaranteed by” the Defendant.   Clause 4.1 of the Note Conditions provides as follows:

“The Guarantor will unconditionally and irrevocably guarantee the due payment of all sums expressed to be payable by the Issuer under the Notes when the same shall become due in the event of the (Company)’s failure ...  to pay said amounts when due, and other obligations of the (Company) and other Group Companies to perform the Subscription Agreement, the Investor’s Rights Agreement and the Warrant (collectively, the “Guaranteed Obligations”).”

8.  It is not disputed that on 30 June 2010, the Defendant executed the separate Guarantee in favor of the Plaintiff.  This provides, in clause 1:

“The Guarantor, hereby unconditionally and irrevocably guarantee, for the benefit of (the Plaintiff) ...  as a continuing obligation, as primary obligor and not merely as surety, the due and punctual performance by (the Company) and other Group Companies, of their obligations under (the Subscription Agreement) on 3 June 2010, the Investor’s Rights Agreement, the Warrant and in particular, the due payment of all sums payable by (the Company) under the Notes under the Terms and Conditions (the “Guaranteed Obligations”).” (Emphasis added)

9.  So far as governing law and dispute resolution are concerned, the Subscription Agreement provides as follows, under clause 10.13 (a):

“Any dispute, controversy or claim arising out of or relating to this Agreement, or the interpretation, breach, termination or validity thereof, shall be submitted to arbitration. The arbitration shall be conducted in Hong Kong under the auspices of the Hong Kong International Arbitration Centre (the “Centre” or “HKIAC”). The number of arbitrators shall be three (3)...” (Emphasis added).

10.  The Guarantee provides, in clause 12, as follows :

“This Guarantee and the rights and obligations of the parties hereunder shall be governed by and construed in accordance with the laws of Hong Kong without regard to the principle of conflicts of laws, and the Guarantor irrevocably submits to the non-exclusive jurisdiction of the Hong Kong courts.” (Emphasis added)

11.  In turn, the Note Certificate also has its own governing law and dispute resolution clause, which provides:

“This Note Certificate is governed by, and shall be construed in accordance with, Hong Kong law, without giving effect to principles of conflicts of law. The dispute resolutions provisions in Section 10.13 of the Subscription Agreement shall be applicable with respect to this Note Certificate.” (Emphasis added)

Clause 19 of the Note Conditions further states as follows:

“These Conditions shall be governed, construed and interpreted in accordance with the laws of Hong Kong, without giving effect to principles of conflicts of law. The provisions of Section 10.13 of the Subscription Agreement (Dispute Resolution) shall apply in respect of the resolution of any dispute, controversy or claim arising out of or relating to these Conditions.”

12.  There is no serious dispute as to the applicable legal principles to an application for stay such as this.  Under  s 20 (1) of the Ordinance, Article 8 of the Model Law has effect and Article 8 (1) provides :

“A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer to the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.”

13.  The approach to be taken by the Court in dealing with an application for stay has been clearly set out in Tommy CP Sze & Co v Li & Fung (Trading) Ltd.  There are 4 questions for the court.  (1) Is there an arbitration agreement between the parties? (2) Is the clause in question capable of being performed? (3) Is there in reality a dispute or difference between the parties? (4) Is the dispute or difference between the parties within the ambit of the arbitration agreement?

14.  The authorities are clear that the onus on the applicant for stay is only to demonstrate that there is a prima facie case that the parties were bound by an arbitration clause.  Unless the point is clear, the Court should not attempt to resolve the issue and the matter should be stayed in favor of arbitration (PCCW Global Ltd v Interactive Communications Service Ltd [2007] 1 HKLRD 309).  When there is a dispute as to whether there was an arbitration agreement or clause, the onus on the applicant for stay is to prove that there is a good prima facie or plainly arguable case, predicated on cogent, and not dubious or fanciful, evidence that an arbitration clause or agreement existed (Pacific Crown Engineering Ltd v Hyundai Engineering & Construction Co Ltd  [2003] 3 HKC 659).

15.  The dispute between the parties in this case is whether the action commenced by the Plaintiff is brought “in the matter which is the subject of an arbitration agreement”.  The action before the court must be “in” the same matter that is the subject of the arbitration agreement, and not “related” to it or “involved” in it (HM Holtzmann & J Neuhaus, A Guide to the UNCITRAL Model Law).  The question is whether the Plaintiff’s claim made in this action against the Defendant under the Guarantee is in the same matter that is the subject of the Subscription Agreement made between the Plaintiff, the Defendant and the Company.  In ascertaining the “matter”, the court should consider the substance of the controversy as it appears from the circumstances in evidence, and not just the particular terms in which the claimant has sought to formulate its claim in court (Merkin, Arbitration Law, para 8.20 and the cases cited therein).  The focus is on the substance of the dispute, and not the pleadings.

16.  It was argued on behalf of the Plaintiff that the Guarantee is a separate agreement from the Subscription Agreement.  Emphasis has been put on the fact that under the Guarantee, the Defendant assumed obligations as a primary obligor (as expressly provided for under clause 1).  Counsel also stressed that the Guarantee has its own governing law and jurisdiction clause, under which the Defendant irrevocably submits to the non-exclusive jurisdiction of the Hong Kong courts.  This, it was argued, shows that the parties had expressly provided for their intention that claims under the Guarantee should be litigated in the courts, instead of by arbitration as the agreed mode of dispute resolution provided for under the Subscription Agreement.  The Plaintiff highlighted the fact that the Defendant’s obligations which are sought to be enforced by the Plaintiff in these proceedings do not arise under the Subscription Agreement, but under the Guarantee, which secures the Notes and the Defendant’s obligations thereunder.

17.  First, it is not entirely correct to say that the Plaintiff’s claims against the Defendant do not arise under the Subscription Agreement.  Under the Subscription Agreement, the parties (which include the Defendant) agreed that the Defendant’s Guarantee was to secure the Company’s obligations under the Notes as well as the performance of the obligations of the parties (including the Company) under the Subscription Agreement.  The event which is claimed by the Plaintiff to give rise to the alleged breach of obligation and which calls for payments to be due from the Defendant under the Note and the Guarantee is the Qualified IPO not occurring within 3 years of the issue of the Note.  The Subscription Agreement deals with the matter of the parties’ obligations and rights in relation to the Company’s issue of the Notes, and the Plaintiff’s subscription of the Notes and being given rights to convert the Notes into fully paid up shares of the Company, it being contemplated that there would be a public offering of ListCo’s securities. The Subscription Agreement contains the Defendant’s express covenant (clause 7.17) that he shall use his best endeavors to conduct a Qualified IPO within 3 years.

18.  Under the Guarantee, the Defendant guarantees the due and punctual performance by the Company of its obligations under the Subscription Agreement, which include the Company’s obligations to use its best endeavors to conduct the Qualified IPO within 3 years, as well as the due payment of all sums payable under the Notes.

19.  To substantiate its claims against the Defendant as guarantor, it is for the Plaintiff to establish that there had been breach by the Company, and the Defendant, of their obligations under the Subscription Agreement to secure the Qualified IPO within 3 years, and of their obligations under the Notes to make the payments due.  Whether there is a breach of the Guarantee necessitates a determination of whether there was a breach of the Subscription Agreement, in particular, whether there was a Qualified IPO within 3 years.  The Defendant, as guarantor, is entitled to rely on any set-off or counterclaim which the Company could raise against the Plaintiff on the guaranteed debt, if there was no breach of the Subscription Agreement and/or the Note as alleged by the Plaintiff.

20.  Significantly, although the Plaintiff sought to argue that the Guarantee is independent of, and separate from, the Subscription Agreement, the Plaintiff has not disputed that the obligation sought to be secured by the Guarantee, and the default in payment now relied upon by the Plaintiff, is the Company’s obligation to make payment of sums due under the Note, and the Company’s failure to make such payment.  Clause 18 of the Conditions of the Note expressly applies the dispute resolution clause of the Subscription Agreement, ie Clause 10.13 and the arbitration agreement relied upon by the Defendant.  I therefore do not agree that it is clear and obvious that the Plaintiff and the Defendant had provided for a method of dispute resolution which is clearly contrary to the intention expressed in the arbitration clause in the Subscription Agreement.  The decision in CPC Construction Hong Kong Limited v Harvest Engineering (HK) Limited, unreported, HCA 2096/2013 2 July 2014 is distinguishable, on the basis of there being a clear dispute resolution clause under the guarantee in that case, which provides for the non-exclusive jurisdiction of the Hong Kong courts, and also on the basis that the claims made by the plaintiff against the guarantor in CPC were for loans which were guaranteed but separate from the works under the sub-contract  between the creditor and the company.  Further, it would appear from the decision in CPC that the guarantor was not even a party to the arbitration agreement contained in the sub-contract.

21.  The decisions relied upon by the Plaintiff, in Alfred McAlpine Construction Ltd v Unex Corporation Ltd 38 ConLR 63 (10 February 1994)and in Classic Maritime Inc v Lion Diversified Holdings Berhad and Lombungan Makmur Sdn Bhd [2009] EWHC 1142 (Comm) were decided by the English court’s exercise of its discretion to stay proceedings, on case management and other grounds.  By contrast, under s 20 of the Ordinance, it is mandatory for the Court to order a stay if it is established that the action is brought in a matter which is the subject of an arbitration agreement. 

22.  It is clear from the Court of Appeal’s decision in PCCW Global Ltd v Interactive Communications Service Ltd [2007] 1 HKLRD 309 that unless the point is clear, the Court should not decide the matter, but should refer the parties to arbitration, for the Tribunal to determine its own jurisdiction.  Considering the provisions of the Subscription Agreement, the Note and the Guarantee, I am not satisfied that the existence of Clause 12 of the Guarantee is sufficient to exclude or displace the intention of the Plaintiff and the Defendant, expressed in clause 10.13 of their Subscription Agreement and clause 18 of the Note Conditions, that their dispute as to the obligations for payment under the Note in the event of breach of the Company’s obligations under the Note and the Subscription Agreement, are to be resolved by arbitration.  There is a prima facie case that there is an arbitration agreement between the parties, and that the action herein is brought in the same matter which is the subject of that arbitration agreement, the validity of which has not been disputed. 

23.  It is arguable that the non-exclusive jurisdiction clause in the Guarantee and its reference to the jurisdiction of the Hong Kong Court can operate in parallel with the arbitration provisions of the Note and the Subscription Agreement.  In Paul Smith Ltd v H & S International Holding Inc [1991] 2 Lloyds LR 127, Steyn J held that an English law clause whereby the parties submitted to the exclusive jurisdiction of the English courts is not inconsistent with the arbitration clause in the same agreement, in that the clause specifies the law governing the arbitration.  In AXA Re v Ace Global Markets Ltd [2006] EWHC 216 (Com), Gloster J likewise held that a clause providing for English law to be the governing law and for any dispute thereunder to be referred to the jurisdiction of the English courts operates in parallel with the arbitration provisions of the agreement, by fixing the supervisory court of the arbitration.

24.  The arbitration clause in the Subscription Agreement, which applies to the Note as well, is widely drafted, to include any dispute, controversy or claim arising out of or relating to the Subscription Agreement and the Note Conditions.  It is wide enough to include the present claim as to whether there was a breach by the Defendant as Guarantor to make payment under the Note, in the event of there being no Qualified IPO within 3 years of the relevant date under the Subscription Agreement.

25.  For the above reasons, I am satisfied that the Defendant has established a prima facie and plainly arguable case that the parties are bound by an arbitration clause, and that a stay of proceedings is justified.  I accordingly make an order in terms of the Defendant's Summons issued on 14 October 2015. 

26.  I further make an order nisi that the Plaintiff should pay the Defendant’s costs of the Summons (including the costs reserved at the hearing of 18 November 2015) on an indemnity basis (A v R (Arbitration: Enforcement) [2009] 3 HKLRD 389, Gao Haiyan v Keenyeye Holdings Ltd (No 2) CACV 79/2011, 12 January 2012, Chimbusco International Petroleum (Singapore) Pte Ltd v Fully Best Trading Ltd HCA 2416/2014, 3 December 2015).