廣東順德展煒商貿有限公司 v. SUN FUNG TIMBER CO LTD

HCCT 25/2019

[2021] HKCFI 2407

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 25 OF 2019

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REASONS FOR DECISION

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Background

1.  Against the background of these proceedings for enforcement of an arbitral award is what is undoubtedly a shareholders’ dispute.

2.  Sun Fung Timber Company Limited (“Company”) was incorporated in Hong Kong in October 1989.  50% of the shares are held by Simon Tsang (“ST”) and 50% held by New Intertrade Foods Co Ltd (“NI”). Dany Lee (“DL”) is the major shareholder and director of NI.  ST and DL are the only 2 directors of the Company.

3.  Shop C on the lower ground floor and open yard of 174‑178 Wellington Street (“Property”) was until August 2017 registered in the name of the Company.  The Company carried on a timber retail business at the Property.  It is not in dispute that the daily operation of the timber business was at all material times entrusted to ST.

4.  On 14 April 2017, a contract for the sale and purchase of marble stones (“Contract”) was entered into by the Company, for the Company’s purported sale of marble to the Applicant, Guangdong Co (“GD”), a company incorporated on the Mainland.  The Contract was signed by ST on behalf of the Company, and by Stanley Wu (“W”) on behalf of GD.  The Contract was dated 14 April 2017, for the sale of marble at the price of RMB 220 million for delivery by 20 April 2017.  A sum of RMB 22 million was required under the Contract to be paid by GD as purchaser, as a “deposit” for the price of the goods, but the Contract states that GD’s obligation to make payment of the said deposit was to be regarded as to have been discharged upon the Company’s receipt from GD of a cheque for the sum.  There is no dispute that the cheque was received by the Company, but was never presented for payment.

5.  GD claims that the Company was in breach in failing to deliver the goods in accordance with the Contract.  The first batch of the marbles delivered by the Company were allegedly rejected by GD on about 19 April 2017. It was suggested that this was the reason why the cheque for the deposit of RMB 22 million was not presented.

6.  Not long after the date for delivery of the marble under the Contract (20 April 2017) passed, on 15 May 2017, GD commenced arbitration on the Mainland (“Arbitration”) in reliance upon the arbitration clause contained in the Contract.  With admirable speed, on 19 May 2017, the Zhanjiang Arbitration Commission (“Tribunal”) issued an award in favour of GD, whereby the Company was to pay RMB 59 million to GD, with costs (“Award”). The Award recorded that the parties to the Arbitration had mediated their dispute before the Tribunal and had entered into a Mediation Agreement, under which the parties acknowledged that the Company was unable to comply with its obligations to supply goods under the Contract, was in breach, and agreed to pay damages to GD of RMB 59 million within 30 days.

7.  Following the Award on 19 May 2017, a series of steps were taken by the Company and GD.  On 31 May 2017, the Company entered into an agreement to sell the Property at HK$50 million, the sale of which was completed on 31 August 2017.  On about 14 August 2017, the Company further assigned to GD the Company’s rights under a contract valued at HK$7.5 million, in partial satisfaction of the Award.

8.  On 19 October 2017, GD presented a petition in Hong Kong to wind up the Company (“Petition”), on the basis of the debt due from the Company under the Award.  This was opposed by the shareholder, NI, when NI received notice of the Petition from the office of the Official Receiver.  At the directions hearing on 23 April 2018, Harris J expressed concerns as to the Contract, and directed further evidence to be filed to explain the authority of ST to represent the Company in relation to both the Contract and the Award.

9.  The Petition was dismissed by the Court on 19 December 2018.  The Court held that there was a bona fide case that the Company had entered into a sham transaction with ST, to harm the Company by depriving the Company of valuable assets.  The Court found that the documents presented by GD displayed “some rather unusual (perhaps even disturbing) features”.

10.  On 11 March 2019, the Court in HCMP 360/2018 granted leave to NI to commence a derivative action against ST.  This was on NI’s claim that ST was (inter alia) in breach of his duties as a director of the Company, and had acted dishonestly in procuring the Company to enter into the Contract, all against the best interests of the Company.  NI sought in the derivative action an account of profits, damages and delivery up of the Company’s assets in respect of ST’s breach of duties.

11.  On 30 April 2019, unbeknownst to NI, GD applied under HCCT 25/2019 for leave to enforce the Award (“Enforcement Proceedings”). Following the usual and standard course, the application for enforcement was made ex parte (“Enforcement Application”), supported by the affirmation of W made and filed on 29 April 2019 (“W1”).  In the affirmation, W referred to the Arbitration and the Award made.  He referred to the fact that GD had presented the Petition for winding up the Company, and that the Petition was opposed by NI, on the basis that the Contract was a “sham arrangement” and that the Award was invalid, as ST had not been duly authorized to handle the Arbitration on behalf of the Company.  W stated that the Petition had been dismissed, but that GD was appealing against the judgment, and that the Court had applied the test of a “bona fide dispute” when dismissing the Petition.

12.  In W1, W stated that if leave was to be granted, GD would serve a copy of the order granting leave on both ST and NI (as shareholders of the Company).

13.  On 6 May 2019, this Court directed GD to issue an inter‑partes summons for the Enforcement Application (as the court has power so to do under Order 73 rule 10 (1) and (2) RHC).  GD accordingly issued its summons on 10 May 2019 (“Summons”).  No further evidence was filed and the same affirmation of W was relied upon. 

14.  Prior to the hearing of the Summons, GD’s solicitors wrote to the Court on 27 May 2019, to seek directions as to whether the Summons and the documents filed in the Enforcement Proceedings should be served on ST and NI. The solicitors referred to the fact that NI had been given leave to bring derivative proceedings against ST, and inquired as to whether NI and ST should be served so that they could decide whether they wish to participate at the hearing of the Summons. The Court directed as follows, on 28 May 2019:

“Applicant may send copies of the Summons and evidence in support to (ST) and (NI) for them to consider their position. Ultimately, it is a decision for the Applicant.”

15.  At the hearing of the Summons on 28 June 2019, the Company was not represented.  On the evidence filed, the Court granted leave to enforce the Award, as sought in the Summons (“Enforcement Order”).  It is pertinent that at the hearing of the Summons on 28 June 2019, the Court clearly indicated to GD that the purpose of the Summons being ordered was to “ensure” that the respondent (ie the Company) would be given notice of the application for the Enforcement Order, and since the Summons had been served on the Company and an affirmation of service had been filed, but the Company had failed to appear to oppose the application, the Enforcement Order would be granted. The only matter raised by GD at the hearing of the Summons was when the legal representative of GD asked whether the Court required service of the Enforcement Order on the shareholders.  The Court indicated that this was a matter for GD to decide, but pointed out that GD had indicated in W1 that it would effect service of the relevant order on both NI and ST, and that it should “go ahead” with that.

16.  On 5 August 2019, Judgment in terms of the Award was entered by GD against the Company (“Judgment”).  Thereafter, by way of enforcement of the Judgment, garnishee orders and charging orders were obtained by GD. Under a garnishee order of 2 October 2019, GD was able to obtain payment of a sum of HK$32.9 million, which represented the sale proceeds of the Property paid into the Company’s bank account with DBS.  GD was also able to obtain a charging order against the Company’s interests in another landed property in Tsuen Wan (“TW Property”), and thereafter applied for sale of the TW Property.

17.  On NI’s case, the Contract and the Award only came to its notice in the context of the Petition, when it was notified by the Official Receiver’s Office of the winding up proceedings.  This was because all the documents relating to the Arbitration and the Award which were based on the Contract, including the Originating Summons, W1 and the Enforcement Order, were only served at the Property, which served as the registered office address of the Company, and continued as the registered office notwithstanding the sale of the Property in August 2017.  Upon being notified of the Award in the winding up proceedings, NI had immediately requested ST to pass a board resolution to change the registered office address of the Company to the office of the company secretary, but to no avail.

18.  According to NI, it had no notice of GD’s Enforcement Proceedings until the charging order was brought to its attention in March 2020, which charging order referred to the Judgment on the Award.  There is no evidence that either the Summons or the Enforcement Order had been served on NI.  In March 2020, NI summoned a meeting of the directors of the Company to discuss the Enforcement Proceedings, and also demanded for particulars and documents relating to the debt claimed to be due to GD in the Enforcement Proceedings. ST did not attend the board meeting summoned, and failed to provide the documents and information sought.

19.  In April 2020, NI applied for leave to intervene in the Enforcement Proceedings and to set aside the Award against the Company.  It finally obtained such leave from the Court in March 2021.

20.  On 26 March 2021, NI issued its summons to set aside the Enforcement Order (“Setting Aside Application”), on the grounds that the arbitration agreement in the Contract was invalid (“Invalid Agreement Ground”), that the Company had not been given proper notice of the appointment of the arbitrator or of the Arbitration (“Notice Ground”), that enforcement of the Award would be contrary to public policy (“Public Policy Ground”), and on the ground of material non-disclosure on the part of GD when it applied for the Enforcement Order (“Disclosure Ground”).

21.  On the Invalid Agreement Ground, the essence of the complaint made by NI on behalf of the Company is that ST had no authority to enter into the Contract for the Company, as there was never any board resolution passed to authorize him to sign or enter into the Contract, and he had neither actual nor apparent authority. It is also claimed that the Contract is a sham transaction wrongfully procured by ST in breach of his duties owed as a director, for the purpose of defrauding the Company and depriving it of its assets.  DL referred to many unusual and suspicious features of the Contract and the purported transaction of the Company’s sale of a substantial amount of marble to GD, a company which had only been incorporated 3 months before the Contract, for an extraordinary sum of RMB 220 million, equivalent to 62 times larger than the Company’s entire sales revenue in 2015, for delivery within 4 days, and in respect of which the Company was liable under a penalty clause in the Contract, for up to RMB 2.2 million for each day of delay in delivery.  DL pointed out that the annual business turnover for the Company was in the range of HK$5.7 million in 2011 HK$4.3 million in 2015, with an average monthly turnover of no more than HK$360,000.  The cash and bank balances maintained by the Company over the years had been less than HK$12,000.  It was also highlighted that the deposit of RMB 22 million which GD was supposed to pay to the Company, as a deposit of the price payable for the marble, was not even deposited or banked in by the Company.

22.  On the Notice Ground, which is also linked to the Public Policy and the Disclosure Grounds, the gist of the complaint made by NI on behalf of the Company is that all notices and documents relating to the Arbitration, the Petition, the garnishee proceedings, the charging order proceedings and the Enforcement Proceedings were all served at the registered office of the Company at the Property, but that to the knowledge of both ST and GD, the Property had been sold since August 2017, such that documents served at the Property would not have properly been brought to the notice and attention of the Company after August 2017.  When applying for the Enforcement Order, W and GD failed to discharge the duty of full and frank disclosure and withheld from the Court the material fact of the sale of the Property, and that the Company would not be given adequate notice of the Enforcement Proceedings.

23.  In response to the Setting Aside Application, GD applied by its summons of 3 May 2021 for security under Order 73 rule 10A RHC (“Security Application”), as a condition for the further conduct of the Setting Aside Application.

24.  After directions were given by the Court for the filing of evidence, the hearing of the Setting Aside Application was fixed for 30 August 2021, whereas the hearing of the Security Application was fixed for 13 August 2021, being the earliest dates available from this Court.

25.  After hearing the parties on the Security Application on 13 August 2021, I refused to make any order for security to be furnished by the Company. The following are the reasons for my decision.

Application of legal principles

26.  There is no dispute between the parties, that the principles set out in Soleh Boneh International Ltd v Government of the Republic of Uganda [1993] 2 Lloyd’s Rep 208, referred to in X v Jemmy Chien [2019] HKCFI 2172 apply.  The Court is to consider, first, the strength of the argument that the Award is invalid, as perceived on a brief consideration by the court, and then, the ease or difficulty of enforcement of the Award, and whether it will be rendered more difficult if enforcement is delayed.

27.  Having considered the arguments and the evidence available, I cannot conclude that the Award is manifestly valid, such that there should be either an order for immediate enforcement or an order for substantial security.  It suffices to say that the Company has a real prospect of success, in establishing that the Enforcement Order should be set aside on either the Invalid Agreement Ground, or the Notice Ground, or the Disclosure Ground.

28.  Most obvious is the fact that in its ex parte application for the Enforcement Order, GD failed to disclose that the Property had already been sold in August 2017, a matter of which DL/NI had complained in the Petition filed by GD, and by its request to change the registered office address of the Company from the Property to the address of the company secretary.  There can be no question that W and GD were aware of the complaint as to the registered office address, and of the dispute as to the validity of the service of documents at the Property, and whether documents served there after the sale of the Property and the cessation of the Company’s business there could properly be brought to the notice of the Company/DL/NI.  W1 only referred the Court to NI’s opposition to the Petition on the ground that the Contract was a sham and that ST was not an authorized person to attend the Arbitration.

29.  Although the Court directed the inter partes Summons to be issued by GD, and the Company did not appear at the hearing on 28 June 2019, that was presumably because the Summons had only been served at the Property as the registered office address of the Company.  To put matters beyond doubt, the Court had stated at the hearing on 28 June 2019 that the reason for the Summons was to “ensure” that the Company would be given notice of the Enforcement Proceedings and the application for the Enforcement Order. The Court was misled that by service at the registered office address, the Company and those responsible for the Company would be given due notice of the Summons and the hearing. It now transpires that the purpose of the Summons was not in fact achieved, but at the hearing on 28 June 2019, those acting for GD did not explain the entire factual situation to the Court, nor did they correct the Court’s misunderstanding.

30.  Pertinently, GD did not serve the Enforcement Order on NI ‑ despite the claim made at paragraph 18 of W1, that in the event that the Court should grant leave to GD to enforce the Award, GD would serve a copy of the order granting leave on both ST and NI as shareholders of the Company.

31.  GD argued that it had sought the directions of the Court, both before and at the hearing of the Summons, as to the service of the Enforcement Order and the papers in the Enforcement Proceedings, and that the Court had indicated that this was for GD to decide.

32.  First, as pointed out above, the Court had in fact explained at the hearing the whole purpose of the Summons - which was to ensure that the Enforcement Proceedings would be brought to the notice of the Company.  The sale of the Property (which was not disclosed by GD and hence not known by the Court) brought this into question, but was not addressed by those acting for GD.  Secondly, it is of course up to a party in the proceedings and those advising it to decide on the manner of conduct and service, as only the parties know of the relevant facts and which facts are in dispute, and what should appropriately be done in the context of those facts.  This is particularly in the case of an ex parte application, when the Court has only heard one side.  Material to the issue of non-disclosure is what facts were disclosed to the Court, and not what the Court directed or ordered, on the facts disclosed. Thirdly, the Court had also pointed out at the hearing, that GD had already stated in W1 that it would be effecting service of the Order on both ST and NI, the shareholders, and that GD should “go ahead” (and effect such service).

33.  Further, it is trite, that it is not sufficient for a party in an ex parte application to exhibit documents, and to expect the Court to be able on its own to gather all the relevant facts from the documents exhibited. It is therefore no answer to say that GD had already exhibited the affirmations and the Judgment in the winding up proceedings, and to claim that the Court should have been made aware of all the facts referred to and the allegations made in the dispute between ST and NI, including any possible dispute as to the registered office being situated at the Property, or that the Property had been sold and that the business conducted there had ceased.

34.  I cannot agree that GD’s non-disclosure of the sale of the Property was not material.  It was a matter relevant to the Court’s exercise of discretion, as to whether the Enforcement Order should be made on 28 June 2019. In all the circumstances, the non-disclosure was deliberate, and amounted to misleading the Court.

35.  The Disclosure Ground is relevant to the Notice Ground.  In that context, it has to be borne in mind that for an award to be recognized, what is required is that the party should have been given “proper notice” of the arbitration and the appointment of arbitrators.  The fact that a document is served at an address which is registered as the office address of a company at the Companies Registry is one but not the only factor to be considered in deciding whether the company had proper notice of the documents.

36.  As for the other grounds relied upon in the Setting Aside Application, and if it should be necessary to consider them, the highly unusual features of the Contract which had been noted by Harris J and Chung J as causing them concern, and the facts relating to the settlement of the claims made in the Arbitration, are all too obvious to be dismissed by this Court with ease. It is correct, as Leading Counsel for GD has sought to emphasize, that fraud, collusion, dishonesty and misappropriation are all serious allegations made, and must be proved by cogent evidence, such that the mere existence of suspicious circumstances cannot be sufficient to set aside the Contract and the Award based thereon (Nina Kung v Wong Din Shin (2005) 8 HKCFAR 387). That is the only reason I have not concluded, at this stage, that the Award is manifestly invalid, but it is certainly arguable to the point of having realistic prospects of success, that ST did not have authority to enter into the Contract which was arguably not in the nature of the Company’s usual small-scale business of selling timber, and/or that the Contract was a sham. These issues will be considered in detail at the hearing of the Setting Aside Application.

37.  What is material to my decision refusing to order security is that I am not satisfied on the evidence that NI would be in a position to cause or procure the Company to dissipate its assets or to act in a way to defeat the Judgment or the Award.  It is clear from the evidence that the Company has been in the control and under the management of ST, rather than NI or DL.  These Enforcement Proceedings have only been instituted with leave of the Court, after NI successfully intervened to apply to set aside the Award.

38.  The hearing of the Setting Aside Application is scheduled for 30 August 2021, slightly over 2 weeks after the hearing of the Security Application.  There is no evidence of how NI can procure the Company to dispose of, or dissipate the assets of the Company, and no evidence to show how such assets are otherwise in jeopardy under NI or DL.

39.  Since the date of the Award, GD has been successful in taking enforcement proceedings against the Company, essentially through ST’s control of the Company, by taking over the sale proceeds of the Property, and applying for the sale of the TW Property.  It has been able at least to secure payment of over HK$32.9 million, in addition to the payment of HK$7.5 million as a result of the assignment to it of a contract of the Company.

40.  I am not satisfied that any delay which has been occasioned so far has been caused by NI.  Significantly, I am not satisfied that it will be more difficult for GD to enforce the Award by reason of any delay caused by the Setting Aside Summons being heard on 30 August 2021.

41.  The Security Application is accordingly dismissed.  Having heard the arguments on costs, I am of the view that it was unreasonable for GD to insist on the Security Application to be heard in the circumstances of this case, and in the light of the merits and the evidence filed.  Since GD is not successful on the Security Application, it should pay the costs thereof and incidental thereto, on indemnity basis, with certificate for 2 Counsel.