NCS CO LTD v. BAO HARVEST HOLDING LTD

HCCT 31/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 31 OF 2012

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BETWEEN

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J U D G M E N T

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Introduction

1.  This is an application by the defendant (“Bao Harvest”) to discharge a worldwide Mareva injunction which was obtained by the plaintiff (“NCS”) against it on an ex parte application made on 5 July 2012 (“the Injunction”).  The Injunction was continued (with modifications) by an order dated 13 July 2012.  In the alternative, Bao Harvest applies to have the undertaking as to damages, which supports the Injunction, fortified by NCS. 

Background

2.  The material facts can be succinctly stated. Both NCS and Bao Harvest are in the shipping business^[1]and they started dealing with one another in 2009.  On 10 September 2010, NCS as owner and Bao Harvest as charterer entered into a charterparty for the carriage of 50,000 metric tons (plus or minus 10%) of nickel ore fines from Konawe, Indonesia to Tianjin, China. 

3.  Whilst the vessel was waiting to be loaded in October 2010, dispute arose as to the need for a “PSC Inspection Certificate” (PSC stood for Port State Control).  For the present purpose, it suffices to note that due to the absence of a PSC Inspection Certificate the loading was abandoned by Bao Harvest.  In due course, NCS took the position that Bao Harvest had repudiated the charterparty and the repudiation was accepted.  To mitigate its loss, a substitute charterparty was entered into by NCS with third parties.  However, financial loss was suffered by NCS as a result of the situation in the sum of around US$1 million.  On 15 April 2011, NCS commenced arbitration proceedings against Bao Harvest to recover such loss (“Arbitration”).

4.  The Arbitration appears to have proceeded normally.  Submissions were closed on 1 February 2012.  Exchange of witness statements was completed on 26 June 2012.  It was followed by a specific discovery application by Bao Harvest which was disposed of on 26 July 2012.  Trial is to take place from 10 to 12 September 2012 (3 days)^[2].

NCS’s case on the Injunction

5.  It cannot be over emphasized that a worldwide Mareva injunction belongs to the “nuclear arsenal” of the court and such jurisdiction must not be lightly invoked.  I must confess to being somewhat perplexed by the making of the ex parte application for the Injunction in the circumstances of this case as summarised above. 

6.  However, the impetus of NCS’s application was made up of statements made by a representative of Bao Harvest and its lawyer (“the Statements”). I shall examine those statements in a little more detail later on, after dealing with the less controversial matters.

7.  It is undisputed that NCS was required to demonstrate three things in order to succeed in obtaining the Injunction:

(1) A good arguable case on the substantive merits;

(2) That Bao Harvest had no sufficient assets within the jurisdiction, but had assets outside the jurisdiction; and

(3) A real risk of dissipation of those assets, such that any judgment or award would then go unsatisfied.

See Hong Kong Civil Procedure 2012, vol 1, §29/1/76

8.  I have no difficulty accepting that NCS has a good arguable case on merits.  It is unclear to me why there was an obligation on NCS to produce a PSC Inspection Certificate at the material time.  This will be the central issue in the Arbitration. 

Bao Harvest’s assets

9.  I have considerable difficulty with this part of NCS’s case.  The case put before the leaned ex parte judge was as follows (extracted from NCS’s skeleton argument dated 5 July 2012 (“S/A”)):

“13. The only evidence in relation to the Defendant’s assets is the Defendant’s paid up share capital of HK$10,000 [26]. Nevertheless, it is not unreasonable to assume that the Defendant has further assets in Hong Kong, and possibly in other jurisdictions. After all, the Defendant purports to be in the shipping business and maintains bank account(s) for the payment and receipt of monies. Indeed, the Defendant had previously made sizeable remittances to the Plaintiff from its bank account with Standard Chartered Bank (New York) […].

14.    Needless to say, the HK$10,000 alone is hardly sufficient to protect the Plaintiff’s position given its claim of over US$1m.  This case therefore calls for worldwide Mareva relief.”

10.  Pausing here, I should make a point concerning the timing of NCS’s ex parte application.  The Statements were made on 5 April and 8 June 2012.  It was said that the audio record and the transcript relating to the 5 April 2012 Statement were only available on 30 May 2012.  Further, after the 8 June 2012, NCS had to consider the matter and obtain legal advice before the Injunction application was made on 5 July 2012.  However, the position was that there was sufficient time for NCS to make inquiries as to what assets were held by Bao Harvest in Hong Kong and, if thought necessary, overseas.  Plainly, no such inquiries were made.  Further, NCS cannot simply argue that had any inquiries been made they would have yielded no result.  That is a matter which should be established by evidence. 

11.  I should add that such inquiries might also impact upon the issue of dissipation of assets, because Bao Harvest might have assets and/or business operation which would be difficult to liquidate.

12.  The picture currently before the court (evidence adduced by Bao Harvest) is very different.  Since its incorporation in Hong Kong in 2008, Bao Harvest has been engaged in the mineral resources business.  The scope of business includes exploration and trading, and the range of products includes iron ore, nickel ore and coal.  Bao Harvest’s business operation extends to many countries around the world.   As an example of the scale of its business, the iron ore business involves 5 million metric tons per annum.  As a reflection of its business, Bao Harvest enjoys the financial support of many banks in Hong Kong.  By the end of this year, it is anticipated that the total credit facilities from the banks will reach US$500 million.  According to audited reports produced by Bao Harvest, its total assets were valued at US$22.26m and US$49.15m in respectively 2010 and 2011. Profits for those years were US$12.04m and US$2.9m (I agree with Bao Harvest that the fact that these reports were prepared by Mainland accountants is not a relevant consideration for the present purpose.).  Bank records show that Bao Harvest had no less than US$2m to 3m in one of its bank accounts in Hong Kong every month from January to July 2012. 

13.  In light of the above, and despite the criticisms of Ms Tam SC, who appeared with Mr Lam and Mr Chen on behalf of NCS, on some of the details of Bao Harvest’s evidence, I believe that a compelling case has been made out that it is highly unlikely that Bao Harvest would destroy its business in Hong Kong by dissipation of assets for the sake a potential liability of US$1m or US$1.4m taking into account the NCS’s legal costs (said to be “incurred and expected”^[3]).

14.  In any case, in light of the evidence, there is no justification at all for a worldwide injunction because Bao Harvest’s Hong Kong assets well exceed NCS’s claim (the limit of the Injunction was set at US$1.4m).

Real risk of dissipation

15.  NCS’s ex parte application was, in this regard, based almost entirely on the Statements which were made during two conservations which took place on 5 April and 8 June 2012^[4].  In addition, there was a suggestion that Bao Harvest lacked commercial mortality (see Honsaico Trading Ltd v Hong Yiah Seng Co Ltd [1990] 1 HKLR 235) based on two allegations – (i) Bao Harvest attempted to temper with the transcript of the first conversation and (ii) its defence in the Arbitration was a “sham”.

16.  The conversation of the 5 April 2012 took place during a meeting between, inter alia, Mr Jia (“Jia”), a former employee of NCS, and Mr Su (“Su”) at the office of Bao Harvest’s parent company, Shandong Wanbao Group.  Towards the end of the meeting, Su remarked that since Bao Harvest was just an off-shore company, it was unnecessary for it to negotiate with NCS at all (“the 1^st Statement”).  It was explained in NCS’s evidence that Bao Harvest was regarded as an “off-shore” entity vis-à-vis the Mainland.  NCS’s case is that the 1^st Statement constituted an implicit suggestion that Bao Harvest was prepared to dissipate its assets so as to defeat an arbitral award in favour of NCS. 

17.  Further, it is said that Bao Harvest had attempted to conceal the 1^st Statement from the arbitrator whilst relying on the transcript of the conversation.  For this purpose, Ms Tam SC has taken the court to the material evidence.  However, to counterbalance the argument, it is undisputed that the transcript was available to both sides and therefore it was unlikely for Bao Harvest to try to perform a futile exercise by hiding any of the contents of the conversation.  

18.  The conversation of the 8 June 2012 took place over the telephone between Mr Qiu (“Qiu”), manager of the legal department of North China Shipping Holdings Co (a company associated with NCS), and Mr An (“An”), a Mainland lawyer acting for Bao Harvest in the Arbitration.  In the course of the conservation, remarks were made by An to the effect that if an award was made in favour of NCS, Bao Harvest would at worst abandon the company or run away (“the 2^nd Statement”).  NSC contends that the 2^nd Statement gave rise to the same implicit suggestion referred to in para 16 above. 

19.  In respect of NCS’s case on lack of commercial morality, it has been expanded in the arguments before this court. However, it is very much based upon the 1^st and 2^nd Statements and the alleged concealment of the former.  In addition, it is said that Bao Harvest has no bona fide defence in the Arbitration and that Bao Harvest had delayed in making a costs payment of HK$25,000.  The payment arose out of a costs award made on 26 July 2012.  There was a direction by the arbitrator for payment to be made by 9 August 2012 and it was only made on 16 August 2012. 

20.  Expectedly, Bao Harvest disagrees with NCS’s case.  Bao Harvest contends that the sound recording of the 1^st Statement is unclear.  In truth, Su was merely repeating a comment previously made by Jia and what Su said had been misunderstood by NCS.  Bao Harvest also denies having concealed the 1^st Statement. 

21.  As regards the 2^nd Statement, Bao Harvest contends firstly that it was made in the course of a without prejudice settlement negotiation and should not have been relied upon by NCS.  Secondly, as I understand from Bao Harvest’s evidence (see bundle A, p 88, §24), the 2^nd Statement was made as a kind bluff by its lawyer but it had no intention to dissipate its assets.

22.  With respect, I do not believe that it is appropriate or necessary for this court to resolve the factual issues concerning the 1^st Statement.  Taking NCS’s case at the highest, I do not see how it can properly support a case on risk of dissipation, especially when one considers the value of Bao Harvest’s business and the size of NCS’s claim.  At worst, the 1^st Statement might constitute a bluff by Su.  There is substance in the submission of Mr Wong, who appeared with Ms Ling for Bao Harvest, that if Bao Harvest had intended to dissipate with its assets, it was unlikely that the intention would be made clear to NCS.  On must assess this piece of evidence in the context of the undisputed facts. There is no indication that Bao Harvest will run away from its liability.  I am unable to see a real prospect that Bao Harvest will terminate its business and remove its assets from Hong Kong to avoid a US$1.4m liability.  Also, it has to be said that the Arbitration has not been concluded, ie, whether NCS’s claim will succeed and the amount of damages it can recover (see below) are unknown. 

23.  Further, Mr Wong has made a valid point concerning the chronology.  After the 1^st Statement was made, further steps were taken in the Arbitration by Bao Harvest – witness statements were filed on 8 and 26 June 2012 and a specific discovery application was made on 27 June 2012.  In addition, the parties tried to negotiate a settlement on 8 June 2012.  These matters militate against the suggestion that Bao Harvest intended to dissipate with its assets. 

24.  In respect of the 2^nd Statement, the transcript of the telephone conversation^[5] clearly demonstrates that it was a settlement negotiation conducted by lawyers on both sides^[6].  Prima facie, the contents of the negotiation cannot be relied upon under the without prejudice rule (see The Law of Privilege, Thanki, 2^nd ed, §7.07 & 7.09). 

25.  Ms Tam SC has argued that NCS can rely upon an exception to the without prejudice rule – unambiguous impropriety, relying on the unreported English Court of Appeal authority of Dora v Simper, 15 March 1999.  In short, this exception may be invoked where the without prejudice rule is used as a cloak for blackmail.  It appears from Dora (p 3-4) that this exception should only be applied where the impropriety is clear, lest the value of the without prejudice rule be seriously impaired.  With respect, I do not believe that it would be appropriate for this court to resolve this issue in this interlocutory application.  However, what is not, I believe, open to doubt is the fact that the conversation of the 8 June 2012 was a settlement negotiation and the without prejudice rule would prima facie apply to the contents of the same.

26.  In my view, much of the observations made in paras 22 and 23 above may be applied here, perhaps with greater force because An said that he would only provide the advice to Bao Harvest who would then have to decide whether to run away^[7].  I shall return to the 2^nd Statement when I deal with non-disclosure.

27.  In the premises, I am not persuaded that the 1^st Statement whether considered on its own or in conjunction with the 2^nd Statement (ignoring the issue of admissibility) can properly support a case on risk of dissipation. 

28.  Further, the alleged lack of commercial morality is unconvincing and, in truth, adds little to the 1^st and 2^nd Statements.  There may be a tendency for ex parte applicants to overplay this argument.  In this case, the fact is that Bao Harvest is a substantial company and it has done nothing to suggest any real risk of dissipation.  It may be the case that it has no real defence in the Arbitration but it has the right to defend those proceedings both on liability and quantum.  There is a quantum leap between having a sham defence and dissipation of assets. 

29.  On this ground alone (no real risk of dissipation), the Injunction must be discharged.  However, for completeness, I shall deal with the remainder of the arguments.

Non-disclosure

30.  It must be said yet again that ex parte applications are contrary to fundamental notion of justice and the duty to make full and frank disclosure of all matters relevant for the consideration by the judge is an essential measure to mitigate the unfairness to the defendant who is deprived of an opportunity to be heard.  I cite with wholehearted agreement the dicta of Chung J in Tiong King Sing v Sam Boon Peng Yee & Anr, unrep, HCMP 1289/11 at p 4N to 6S:

“Duty of Full and Frank Disclosure

11. The grant of an ex parte injunction order implies the grant of legal relief without the party against whom the relief is sought having the opportunity to be heard: Hong Kong Civil Procedure 2011, Vol 1, para 29/1/39.

12. The first short-coming of such a course is that, to certain extent, it is an inroad into a litigant’s entitlement to a right to be heard, such entitlement being set out, for example, in Art 10, Hong Kong Bill of Rights Ordinance (Cap 383). The other short-coming is the temptation for an applicant to try to get a “head-start” in the litigation by obtaining an ex parte order.

13. One of the tools employed by the courts to eliminate (or mitigate against) any abuse of this “unconventional” remedy is the requirement that the applicant must proceed “with the highest good faith” (Schmitten v Faulkes [1893] WN 64).

14. The requirement has many facets:-

(a) the applicant must make proper inquiries before making the ex parte application;

(b) “material” means all matters which are material for the ex parte judge to know and which are necessary to enable him to exercise his discretion properly;

(c) an applicant has a continuing duty to inform the court as soon as he becomes aware that the court has been misinformed or given incomplete information earlier;

(d) there is also a duty to disclose any material change of circumstances while the proceeding remains ex parte; and

(e) the disclosure should be made in the affidavit (and/or the skeleton submissions) and not in the exhibits (this is to ensure the ex parte judge will not overlook the matters which require disclosure, ex parte applications being usually urgent (so the judge usually has little reading time) and ex parte hearings are often short).

15. Where there is material non-disclosure by the applicant, the court will ensure that he is deprived of any advantage derived from his breach of duty: Hong Kong Civil Procedure 2011, Vol 1, para 29/1/39; Commercial Litigation: Pre-emptive Remedies (2005) para A1-458, p 175, citing Bank Mellat v Nikpour (Mohammad Ebrahim) [1985] FSR 87, 91.

16. There are two purposes for the court to do so:-

(1) to deprive the wrongdoer of an advantage improperly obtained; and

(2) to serve as a deterrent to ensure that applicants realize that they have a duty of disclosure and the consequences if they fail in that duty.

17. Chu Hung Ching v Chan Kam Ming and Others, CACV 46/2001 (9 February 2001) was an instance where a Mareva injunction order was discharged where the plaintiff had failed to make full disclosure of changed circumstances, despite strong evidence of likely dissipation of assets.

18. Nonetheless, the court retains a discretion not to discharge the ex parte order, or to make a new order on terms. A typical example where the discretion will be so exercised is:-

(i) the non-disclosure is innocent; and

(ii)   an injunction would still have been granted even had the facts been properly disclosed.”

31.  A number of complaints have been made by Bao Harvest under this head.  I find merits in three of them.  Firstly, it is unacceptable for NCS to have made an ex parte application without even attempting to make inquiry as to Bao Harvest’s financial position.  The picture presented to the ex parte judge was quite misleading. 

32.  Secondly, Bao Harvest had failed to disclose to the ex parte judge that the 2^nd Statement was made in the course of a settlement negotiation.  Even if a view had been taken that the contents of the negotiation could be relied upon under an exception to the without prejudice rule, that was a matter which should have been made clear to the ex parte judge so that he could make an informed decision.  The 2^nd Statement was a key element of NCS’s application.  This failure was a serious breach of its duty.  With respect, I am surprised that those advising NCS had failed to insist that this matter be brought to the attention of the ex parte judge. 

33.  I have been informed by Ms Tam SC (who did not appear for NCS in the ex parte application) that in the course of the ex parte application the judge was taken to part of the transcript of the 8 June 2012 conversation.  I do not consider this to be an answer to the non-disclosure complaint.  The matter should not be left in doubt considering its importance.  The points (the without prejudice rule, exception relied upon and basis for the reliance) must be brought to the notice of the judge fairly and squarely.

34.  Thirdly, it was again fundamental for NCS to bring to the attention of the ex parte judge what defence Bao Harvest might have in answer to its claim.  NCS should have but failed to disclose that Bao Harvest had a dispute with the quantum of its claim.  According to the submissions filed by Bao Harvest in the Arbitration, it contends that NCS’s loss was only US$26,000 as opposed to the claimed sum of US$760,000^[8]. It is trite law that an applicant in an ex parte application cannot shift the burden to the court by simply exhibiting the relevant material and hoping that the pertinent points would be picked up by the judge.  I have looked at the relevant part of Bao Harvest’s submissions and do not find the quantum dispute to be straight forward.  It was therefore all the more important for NCS to explain the quantum dispute to the ex parte judge and, if it took the view that such dispute had no merits, justify its position. 

35.  I am quite prepared to discharge the Injunction on the strength of any one of the above non-disclosure. 

36.  Last but not least, I should mention that I have some misgivings over the failure by NCS to adduce any evidence before the ex parte judge to justify the legal costs of US$400,000.  However, there is something to be said that it was a matter which could be inferred from the evidence concerning the Arbitration.  On balance, I would not be prepared to discharge the Injunction on this ground alone. 

Conclusion

37.  The Injunction is discharged for the reasons given above.  I make an order nisi that the costs of and occasioned by the discharge application be to Bao Harvest to be taxed if not agreed.