GDH LTD v. CREDITOR CO LTD

CACV 353/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 353 OF 2008

(ON APPEAL FROM HCA 1462 OF 2006)

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BETWEEN

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J U D G M E N T

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Hon Stone J:

This appeal

1.  By Notice of Appeal dated 26 November 2008 the plaintiff by counterclaim, Creditor Co. Limited, appealed from the judgment of Deputy Judge To (as he then was) dated 24 October 2008, whereby the learned judge allowed the appeal of the 2^nd, 3^rd and 4^th defendants by counterclaim, and formally set aside service of a concurrent writ of summons which had been issued out of the jurisdiction against these three defendants.

2.  On 10 December 2008 the 2^nd and 4^th defendants by counterclaim filed Respondents’ Notices, and on 18 December 2008 a Respondent’s Notice was filed by the 3^rd defendant by counterclaim.

3.  At first blush this appeal presents as an argument involving application of the principles of leave to serve out of the jurisdiction under Order 11, RHC; in reality, however, the case before the court bears greater resemblance to a construction summons, in this instance the meaning of a provision (or provisions), and the arguable implication of contractual terms, within a Debt Restructuring Agreement (‘DRA’) signed on 22 December 2000 in, amongst other places, Hong Kong.

The factual background

4.  In factual terms this case is larded in detail, but at bottom the issue is tolerably straightforward, and involved the restructuring of a debt which was owed by a French subsidiary of Guangdong Enterprise (Holdings) Ltd. (‘GDE’) ‑ the investment vehicle of the Guangdong Provincial Government ‑ named GD Invest SARL (‘GDI’).

5.  In his judgment below, the learned judge has provided a detailed explanation of the factual situation, and in the following brief outline of events I gratefully take advantage of his exposition.

6.  In 1992 GDI had entered into an agreement, termed a “Credit Bail Immobilier” (‘the Immobilier’), with the 2^nd, 3^rd and 4^th defendants by counterclaim (hereinafter ‘the French banks’) in order to finance the acquisition of a Parisian hotel.

7.  Effectively this took the form of a ‘lease and purchase agreement’ under which the French banks acquired the hotel and leased it to GDI with an option to purchase; this agreement was governed by French law, and, as the judge below crisply observes in his judgment, this “was an entirely French transaction entered into in France among French parties.”

8.  The primary liability of GDI under the Immobilier was guaranteed by GDE under a First Demand Guarantee dated 21 July 1992 (‘the Guarantee’).

9.  However, in 1998 the financial viability of GDE and its many subsidiary companies (‘the GDE Group’) began to collapse; in fact, there was a cumulative debt default of in the order of US$4.9 billion.

10.  This debt default included GDE’s contingent liability to the French banks under the GDI Guarantee. The judge records that it is common ground that financial impropriety led to the collapse of the GDE Group, and the Guangdong Provincial Government feared that failure to restructure the Group would impact adversely upon foreign lending in China and on the Hong Kong banking sector; the Government also was keen to avoid any investigation into the circumstances which had led to the collapse of the GDE Group.

11.  Against this backdrop, the Guangdong Government, the GD Group and their creditors entered into debt restructuring arrangements.

12.  Integral to such arrangements was the contribution by the Guangdong Government, via its wholly owned vehicle, GDH Limited (‘GDH’), to a significant asset pool which was to be made available for distribution to creditors of those members of the GDE Group which were being restructured.

13.  This injection of funds was termed the ‘Restructuring Consideration’, and the judge records that at the time of the negotiations leading to the debt restructuring it was envisaged that the creditors would be entitled to share pari passu in these funds. He also records that failure by any creditor to agree to the restructuring arrangement and to the ensuing claim procedure would mean that it would be unable to benefit from this fund pool as thus made available by the Guangdong Government.

14.  It is this anticipated method of sharing pari passu, together with the manner of participation (or, more precisely, non-participation) in the relevant claim procedure, which effectively forms the thrust of the present appeal.

15.  The DRA was finalized in haste (“at breakneck pace” as the judge records), and on 22 December 2000 the document was signed; among the signatories were the defendant by original action, Creditor Co Ltd, the French banks, and GDH.

16.  The DRA, which I understand was worked upon by teams of lawyers and financial experts, is a considerable document of detail and complexity. It runs to 84 pages, 27 Schedules, and has 41 pages of signatories.

17.  The ‘Restructuring Consideration’, that is, funds contributed by the Guangdong Government, together with certain other categories of assets of creditor companies, were transferred to and held by Creditor Co Ltd qua custodian, and claims to any part of these monies as thus deposited were to be vetted by the appointed Claims Assessor, the accountants Pricewaterhouse Coopers (‘PwC’).

18.  Given the time constraints within which the arrangement had been put together, it then had not proved possible accurately to assess the amount of unadmitted unsecured claims which at the date of the signing of the DRA either constituted contingent or unascertained liabilities which might be levied against the pool of funds so accumulated; hence the assessment of the size of such liabilities was made by PwC and GDH.

19.  Pressure of time also meant that the liability represented by the claims of the French banks – who were treated as unadmitted unsecured claimants for the purpose of the restructuring, the pool of funds for this category of creditors being held in ‘General Reserve D’ ‑ was assessed on a ‘worst case scenario’ basis, including a default penalty for early termination of the Immobilier, and thus the sum of US$15.5 million notionally was set aside from the pool of funds for the purpose of meeting the French banks’ claim of about US$23 million, albeit the maximum loan amount outstanding at that time in favour of these banks, excluding default penalties, was in the order of US$13 million.

20.  There is no dispute that for the purpose of making claims the French banks were to be treated as unsecured contingent creditors, and that any claims which were to be put forward by them were to be classified under the DRA as ‘Unrelated Guarantee Claims’ because the claims were based on a guarantee where the guarantor (GDE) was a company involved in the restructuring, but the primary obligor (GDI) was not.

21.  What occurred next forms the gravamen of the current dispute.

22.  On 5 March 2002, GDH approached the 2^nd defendant bank, Finamur, and by a strictly private and confidential letter sought to discuss a possible and immediate settlement of the obligations of GDI; in this context GDH insisted that the French banks should not submit a proof of claim as required by the contractual claims procedure provided for in the DRA.

23.  To cut a long story short, the upshot of this initial approach was that on 27 March 2002 the French banks reached agreement (‘the French banks’ agreement’) with GDI and GDH under which GDI was to bring forward its purchase of the hotel from the French banks under the Immobilier, and in turn GDH would pay a revised purchase price on behalf of GDI; inter alia, this involved an immediate payment of Euro 3.5 million to the French banks, and in return the banks agreed not to submit any proof of claim under the DRA.

24.  As the learned judge observes (at paragraph 12 of his judgment), in so agreeing the French banks disentitled themselves from receiving any Restructuring Consideration under the DRA in respect of their entitlement under the guarantee which had been executed in their favour. Effectively, therefore, the French banks had entered a private and confidential compromise with the primary obligor, GDI ‑ which entity was not the subject of restructuring ‑ that GDI was to arrange for an early discharge of its obligations via the offices of GDH.

25.  It followed that, having thus compromised their claim with and in respect of GDI, the French banks had no reason to claim under the DRA; accordingly they filed no Proof of Claim pursuant to the DRA.

26.  In purely monetary terms, the advantage of this arrangement to the Guangdong Provincial Government was that it was able to ‘claw back’ some US$15.5 million from the Restructuring Consideration hitherto set aside for the claims of the French banks, thereby making a saving of about US$10 million.

The commencement of this litigation: the ‘shape’ of the case

27.  This private collateral compromise with the French banks stimulated fervent complaint.

28.  Creditor Co took the view that the French banks had entered into an illegitimate ‘side deal’ with GDH, and therefore refused to return to GDH the sum of US$15.5 million which in the Restructuring Consideration pool had been set aside to cater for the anticipated claims of the French banks.

29.  Consequent upon this refusal, on 11 July 2006 GDH commenced the original action in HCA 1462 of 2006 against Creditor Co for breach of the DRA, the Statement of Claim following on 11 September 2006.

30.  In this original action GDH sought an order that the defendant, Creditor Co Ltd., do transfer to GDH the relevant sums from the Restructuring Consideration, alternatively damages, and a consequential order for payment of all sums found due to the plaintiff together with interest and costs.

31.  For its part, Creditor Co Ltd, the defendant by original action, denied it was in breach of the DRA, and counterclaimed against both GDH and the three French banks, which are named as the 2^nd, 3^rd and 4^th defendants to the counterclaim, the cause of action against the banks being pleaded both in contract and tort. For convenience, I shall hereinafter refer to Creditor Co Ltd, the plaintiff by counterclaim, simply as ‘the plaintiff’.

32.  The contractual cause of action was premised on the fact that, as parties to the DRA, by settling their claims with GDH the French banks were in breach of express or implied terms of the DRA by failing to comply with the claims procedure and to submit a ‘Nil Proof’ of Claim to PwC; had the ‘Nil Proof’ procedure been adopted, it would have enabled the US$15.5 million hitherto in ‘General Reserve D’, which had been set aside for the French banks’ claim, to be distributed by the plaintiff to other creditors on the pari passu basis identical to that employed in a true liquidation scenario.

33.  As to the cause of action in tort, the plaintiff alleged that by entering into this private collateral agreement and by not submitting any Proof of Claim under the DRA, the French banks were in breach of the DRA and thus had conspired with GDH to use unlawful means to injure the plaintiff.

34.  Hence, the relief sought by the plaintiff in terms of its Re‑Amended Defence and Counterclaim against GDH and the French banks, dated 16 April 2007, was a claim for damages for breach of contract and/or interference with contractual relations and/or the tort of conspiracy in the current value of the Restructuring Consideration, alternatively in a sum to be assessed, together with interest and costs, and in addition a declaration that the plaintiff “is not obliged to transfer the Restructuring Consideration assets together with all its accretions thereto to the plaintiff”.

35.  In addition, rectification of another agreement, the ‘Creditor Accession Agreement’, was sought, but this element of the counterclaim is not relevant to the present appeal.

The Order 11 proceedings

36.  On 11 June 2007, Master Wong granted leave to the plaintiff by counterclaim to serve out of the jurisdiction under Order 11, subrules 1(1)(c) [“necessary or proper party”], (d)(i) [relief in respect of a contract made within the jurisdiction] and (f) [tort committed within and damage sustained in the jurisdiction].

37.  It was the application by the French banks, that is, the 2^nd, 3^rd and 4^th defendants, to set aside this Order of the Master which precipitated the appeal to the judge at first instance.

38.  In the course of his wide-ranging judgment Deputy Judge To rehearsed the well-known principles relating to leave to serve out under these heads, and for an application to set aside such leave, and noted (at paragraph 22) that he considered that an alternative application by the French banks for a ‘Spiliada stay’ in the event of failure to set aside the leave as granted effectively had been abandoned.

39.  In the event, upon the issue of ‘good arguable case’, the learned judge took the view (at paragraph 29) that he was “well satisfied” that the plaintiff by counterclaim had shown that Order 11, rule 1(1)(c) was engaged, as was his like conclusion regarding (1)(d)(i) and (1)(f): (at paragraphs 32 and 36 respectively).

40.  However, as to the concomitant issue of whether there was a ‘serious issue to be tried’ between these parties, given that he was satisfied that the case otherwise fell within the appropriate Order 11 sub-heads, the judge took a different view; his judgment then condescended to the real issue between the parties (at paragraphs 38-41), and he concluded, in my view correctly, as follows:

“41.  Thus, the issue is what is the true and proper construction of the DRA, in particular clause 10.1(c), or more precisely, whether the French Banks have shown that the construction as contended by Creditor Co is so unarguable that its counterclaim ought to be struck out.”

41.  In evaluating this issue the judge considered the relevant provisions of the DRA, and thereafter moved to its ‘true and proper construction’ (at paragraphs 44-69), in the course of which he outlined the arguments of respective leading counsel, Mr Chua SC for the plaintiff, and Mr Manzoni for the 2^nd and 4^th defendant banks ‑ leading counsel whom this court also has had the advantage of hearing on this appeal – together with Mr Alfred Chan, who also represented the 3^rd defendant bank both here and below.

42.  In the event, Deputy Judge To came to the considered conclusion (at paragraph 70) that:

“the construction of the DRA and the terms sought to be implied by Creditor Co is simply unarguable.  I am satisfied that the French Banks have shown that there is no serious issue to be tried under the contractual counterclaim”

and further (at paragraph 71):

“…in view of my conclusion that Creditor Co’s contractual counterclaim is unarguable, it must necessarily follow that the French banks were not guilty of having engaged in any unlawful means against Creditor Co.  Creditor Co’s counterclaim in conspiracy must also fall with its counterclaim for breach of contract.  It is likewise unarguable.”

43.  Accordingly, the appeal against the Order of Master J Wong was allowed, and service of the concurrent writ out of the jurisdiction set aside, with costs to be taxed if not agreed.

44.  With this result the plaintiff was and remains dissatisfied ‑ hence the present appeal.

The appellate argument

45.  With minor variations the scope of the argument on this appeal differs little in substance from that in the court below, albeit on one point new case-law is cited which was not placed before the judge below.

46.  For the plaintiff, Mr Chua SC basically runs the argument that in essence the DRA represented an insolvency composition whereby categories of assets and liabilities, together with a shareholder contribution (from GDH), were ‘pooled’, and that it was a fundamental tenet under this restructuring scheme, as detailed in the DRA, that all the GDE group’s creditors would be entitled to share in cash, debt and equity ‑ cumulatively termed the ‘Restructuring Consideration’ ‑ pari passu or “rateably”, and that the ‘Claims Procedure’ for all Accepting Creditors (including contingent creditors such as the French banks) required submission of Proofs of Claim.

47.  Leading counsel thus asserted that there was a contractual obligation, albeit to be implied within the terms of the DRA, to file a Proof of Claim, and that for the French banks deliberately not to do so, and by means of a “a secret side-deal” to deal directly with GDH in terms of the ‘French banks agreement’, effectively facilitated the illegitimate diversion to GDH of a significant portion of the Restructuring Consideration, which diversion was done at the expense of the general body of creditors ‑ thereby producing a result that could neither have been intended nor envisaged by the body of creditors who had agreed to be parties to the contractual composition as had been worked out under the DRA.

48.  In this connection, Mr Chua’s construction of the particular provision within the section dealing with claims procedure in the DRA, namely Clause 10(c), which specifically provides for what was to happen in instances when the holder of an unadmitted unsecured restructuring claim had not submitted a Proof of Claim ‑ that is, that such part of the relevant Restructuring Consideration be transferred back to GDH ‑ was to assert that this provision only came into play when such non-submission of a Proof of Claim had been inadvertent, and that such qualification necessarily must be implied in the context of the broad aim of the DRA.

49.  Mr Chua further stressed that the French banks expressly had agreed not to submit Proofs of Claim to PwC and not to take any measures to “exclude or hinder…the transfer to GDH” of the Restructuring Consideration, with the bottom line that GDH (wholly owned by and representing the Guangdong Government) effectively had obtained a “windfall” sum of US$15 million; it followed that as the result of this stratagem the French banks would be paid “in full”, unlike all other Accepting Creditors who had submitted proofs of claim under the contractual ‘Claims Procedure’ set out in the DRA.

50.  The unfortunate result of the judgment below, Mr Chua submitted, was that the learned Judge in effect had “sought to try the counterclaim”, and that his correct conclusion that there was a ‘good arguable case’ under the Order 11 subheads was a proposition which could not stand with his equal and opposite (and incorrect) conclusion that there was no serious issue to be tried, given his view the plaintiff’s counterclaim was “wholly unarguable”.

51.  Mr Chua firmly asserted that the Deputy Judge’s consideration of the DRA contained fundamental flaws of interpretation, and that in rejecting the construction of the plaintiff, which construction obliged parties to file Proofs of Claim, the judge thereby was “condoning unprincipled and unlawful behaviour by a shareholder and the French banks which secretly prejudiced the rights of other creditors who signed the DRA”.

52.  Thus, leading counsel continued, in his whole approach to this case the learned judge had fallen into serious error in that he had failed to discern that a plaintiff will have established a serious question to be tried if, as was the position, its affidavits (in this instance in particular the affidavits of Mr Williams, a director of the plaintiff) “disclose a case which appears to merit consideration at trial”, to employ the language used in Seaconsar Ltd v Bank Markazi [1994] 1 AC 438 [HL].

53.  Properly construed and understood, said Mr Chua, the DRA obliged all Acceding Creditors to refrain from taking steps which would prejudice other creditors, all of whom required to be treated equally, and to act in good faith, and that deliberately to omit to file Proofs of Claim under the Claims Procedure was a breach of the obligations held by the banks to the other creditors; on a fair and proper reading of the DRA, he argued, it was not possible for the French banks simply to avoid their obligation to file Proofs of Claim, whether such proofs claimed sums specific or, simply, were in the form of ‘Nil claim’ proofs.

54.  Moreover, he continued, the judge not only had failed to appreciate the dominance of the pari passu principle in insolvency situations, but also had failed to appreciate the necessity of an implied term within the DRA which must be taken to have required the necessary co‑operation between the parties thereto, the better to preserve the nature of the DRA as a “commercial compromise”.

55.  Mr Chua buttressed his extensive argument with reference to established and well-known insolvency principles enshrined in the case‑law, and stressed that in insolvency situations there could be no doubt but that specific norms were to apply, and that, in effect, the pari passu principle was sacrosanct and should be applied ‘over the board’.

56.  On the opposite side of the fence, Mr Manzoni, appearing for the 2^nd and 4^th bank defendants by counterclaim, mounted a strong argument, the essential gist of which was that the plaintiff unashamedly was attempting to reformulate the clear contractual provisions of the DRA, so that the provisions of this document effectively were to be rewritten to fit the plaintiff’s wishes and to conform to established (and fundamentally uncontentious) insolvency principles, notwithstanding that in the particular circumstance of this case such principles manifestly had no application. The key, he said, lay in the true construction of the DRA, in particular clause 10(c); quite simply, counsel contended, the plaintiff had to get around the effect of this clause, but it could not do so in the present case.

57.  Mr Manzoni further submitted that the plaintiff properly could not imply into this most detailed and complex of contractual documents the terms which it now wished to be implied, given that the DRA provided in the clearest of language (namely, in clause 10(c)) specifically what was to happen if a party did not file a Proof of Claim, namely, that the money notionally arrogated to that party’s claim within the ‘asset pool’ which made up the Restructuring Consideration was to go back to GDH (which had provided it), and not to the general body of creditors, and that there was nothing within the language of the DRA which required that situation to be avoided; to the contrary, all parties expressly had agreed that it could and should happen. Thus, it followed, he said, that the DRA, as a purely contractual document, expressly excluded the pari passu principle of distribution upon which Mr Chua so heavily had relied for the success of his argument.

58.  In this case, said Mr Manzoni, there could be no doubt as to what had happened, and it could not be asserted that there was a lack of factual transparency: pursuant to the ‘French banks’ agreement’ of 27 March 2002 the Banks, GDI and GDH simply had agreed to bring forward the purchase under the Immobilier, GDH would make payment for the hotel on behalf of GDI, with GDH making early payment to the French banks of Euro 3.5 million as security for early termination of the lease, with such payment to be credited to GDI on final payment of the purchase price. As part of the consideration for this agreement, the French banks had agreed with GDH that they would not submit a Proof of Claim under the DRA, and in so agreeing disentitled themselves from receipt of any part of the Restructuring Consideration under the DRA. Thus, he said, it was difficult to comprehend how or why the French banks could be said to be guilty of any conspiracy to use unlawful means to cause damage in such circumstances, and that, as with the contractual claim, the pleaded claim in conspiracy also was wholly unarguable.

59.  As to the issue of loss, which formed the subject of the Respondents’ Notice, Mr Manzoni submitted that no loss was caused to the appellant, Creditor Co, and that if and in so far as any loss had been suffered, it could only be a loss to the other creditors because the appellant, Creditor Co, was obliged to pay out the money, and would either pay out to GDH (were the banks’ construction of the DRA to be upheld), or it would pay to the other creditors (according to the appellant’s view of the proper meaning and construction of the DRA).

60.  Mr Manzoni’s stance on behalf of the 2^nd and 4^th defendants by counterclaim was followed and adopted by Mr Alfred Chan, counsel for the 3^rd defendant by counterclaim, Oseo Financement, who in his helpful skeleton argument, outlined the factual role of his client, as deposed in the affidavit evidence of Mr Hunsworth, and how it came to be involved in signing up to the DRA.

61.  For his part Mr Chan also adopted the position that the plaintiff’s claim against his client was “unarguable”, and took the opportunity to re-emphasise that the arrangement to which all parties came under the DRA neither was a winding-up nor a court-sanctioned Scheme of Arrangement, so that the DRA remained a contractual document, and hence the principles of pari passu distribution and good faith obligation(s) applicable in those situations only could apply in so far as the parties to the DRA did in fact so agree, so that ultimately the case inevitably returned to the appropriate and correct construction of the DRA against what was a largely uncontentious factual matrix.

Decision

62.  Perhaps unavoidably this case contains a profusion of detail, which in turn has given rise to vigorous and contentious argument, but at the end of the day the fundamental issue seems to me to be straightforward: as earlier observed, this case bears greater resemblance to a construction summons than to an extended debate over circumstances which may, or may not, provide grounds for leave to serve out of the jurisdiction.

63.  The learned judge below realized this, and kept his eye firmly upon that part of the DRA which was central to the argument. This is Clause 10(c), which appears under the subhead of ‘Claims Procedure’, and reads thus:

“If a holder of an Unadmitted Unsecured Restructuring Claim has not submitted a Proof of Claim (as defined in the Claims Procedure) in respect of such a claim in accordance with the Claims Procedure on or prior to 31^stMarch, 2002, the Restructuring Consideration transferred to Creditor Co in respect of such Unadmitted Unsecured Restructuring Claim and all accretions thereon shall be transferred to GDH and, save as otherwise agreed between GDE and GDH, may be distributed at the discretion of GDH to the Accepting Creditor with the Unadmitted Unsecured Restructuring Claim or otherwise applied by GDH for its own use and benefit.”

64.  In my view the essential question for decision is whether the DRA permits a contracting party thereto not to file a Proof of Claim thereunder? Or, to put the issue another way, is there a contractual obligation so to file?

65.  If there is no such contractual obligation, express or implied, then that must be an end of it, because, as Mr Manzoni has pointed out, each and every cause of action as is pleaded against the French banks is reliant on the proposition that a Proof of Claim must be filed, and that the DRA simply does not permit a contracting party not to file a Proof of Claim.

66.  However, the assertion as to a pre-existing obligation so to file a Proof seems to me to be a difficult argument to mount because, as can be seen from its terms, clause 10(c) of the DRA legislates in terms for what is to happen if a contracting party does not put in such a Proof of Claim.

67.  Accordingly, as Mr Manzoni submitted, in order to get home on the fundamental ‘obligation to file’ issue, the plaintiff has to reformulate the provisions of the DRA to provide that non-filing of a Proof of Claim must not be the result of a deliberate decision but solely to cover instances of inadvertent failure to file, so that on the plaintiff’s case the vital issue of construction thereby becomes not:

‘Does the DRA permit a party not to put in a proof of claim?’

but, to the contrary:

Does the DRA permit a party not to put in a Proof of Claim other than by inadvertence?

68.  With due respect to Mr Chua’s strenuous efforts to convince otherwise, in my judgment such contrary formulation simply will not wash. Clause 10(c) is clear on its face: it identifies what is to happen if a contracting party does not put in a Proof of Claim, which is that the money which contingently has been set aside for an unadmitted unsecured party’s potential claim is remitted back to the company which provided those funds (in this instance, the shareholder, GDH), rather than remaining in the pool for distribution among the other creditors.

69.  Nor is there anything in the DRA requiring any party to avoid this occurrence; to the contrary, it is clear that all parties thereto expressly have agreed that this could happen, since Clause 10(c) says so in terms. In fact, as we now know, the French banks settled with the primary obligor, which was GDI, and as a result had no claim to make under the DRA; there is no provision for submission of a ‘Nil claim’ in this document, and thus once no claim was filed, under the contract GDH became entitled to avail itself of Clause 10(c).

70.  In support of his argument as to the positive contractual obligation of the French banks to file a Proof of Claim by 31 March 2002, Mr Chua also drew attention of the court to the provisions of Schedule 14, in particular paragraphs 1 and 2 thereof.

71.  Schedule 14 is concerned with the Claims Procedure, and deals with how claims are to be filed, processed, and if possible, agreed. Whilst counsel made considerable play out of the word “shall” where it appears on two occasions in paragraph 2 of Schedule 14, in my view this refers to (and indeed emphasizes) the form and manner in which a claim is to be proved if a party decides to submit a Proof, and does not and cannot impose a duty/obligation on a party to file a Proof of Claim. In fact, this proposed interpretation of Schedule 14 itself is inconsistent with the terms of Clause 10(c) of the DRA, which, as has been noted, not only provides for the very possibility that a claimant may not file a Proof, but goes on to elucidate how the reserve is to be dealt with in precisely such a case.

72.  In any event, it strikes me that there could be entirely legitimate reasons why a putative claimant may not wish to file a Proof; for example, as the court was reminded by Mr Chan, the claim in question may have been satisfied between the signing of the DRA in December 2000 and the deadline for the filing of a Proof of Claim by end March 2002; alternatively a claimant may have been content with the prospect of a Non-Restructuring Company debtor’s ability ultimately to repay the debt in question, and thus may not wish to become involved with this contractual restructured debt procedure.

73.  For my part, therefore, I am wholly unconvinced by the proposition that the express wording of Clause 10(c) may be interpreted to mean that it should cover an instance wherein a claimant inadvertently (as opposed to advertently) has failed to file a Proof. With respect, if such an interpretation were to be adopted, I fail to see why inadvertence per se should form a dividing line. For example, the reductio ad absurdum of this argument would also produce the result that in a situation where any claimant chose (for whatever reason) not to prove its claim and thus did not file a Proof, then on the basis of the plaintiff’s current argument as to an obligation so to do, the party which does not thus file would be in contractual breach and, following strictly upon the argument of Creditor Co, would be liable in damages therefor.

74.  In my view, the argument that the contract in its present form can be interpreted so as to provide for an “obligation” on any claimant to file a Proof of Debt, alternatively that Clause 10(c) relates only to inadvertent failure, does not, with respect, attract any enthusiasm. In fact, I go so far as to say that it does not get off the ground.

75.  This conclusion may be something which irks the plaintiff, but the short point is that this contract says what it means and means what it says, no more and no less, and there is no claim or plea for rectification, which is unsurprising given that the DRA evidently represents the product of thousands of hours of intensive professional legal effort. Thus, when it comes to interpretation, at the end of the day the short (and conclusive) point is that the contract cannot be rewritten at the behest of the plaintiff to ‘fit’ a situation the consequences of which the plaintiff may not have envisaged and clearly does not like.

76.  As a factual postscript, it seems that in any event the interpretation as urged upon the court on behalf of the plaintiff is not one which necessarily is shared by the Claims Assessor, PwC. In this connection, in the course of his submission Mr Manzoni drew attention to the terms of a letter dated 7 March 2002 sent by PwC to the French banks, whereby PwC requested that a ‘Nil claim’ form be submitted, but then went on to observe that “should you not complete any form by 31 March 2002 the restructuring consideration previously reserved for you will be paid to the Guangdong Government.” This prompted leading counsel to observe, with some justification, that the effect of this letter was to represent to the French banks that the submission of any claim form was optional, and that it was only subsequent to that letter (and that representation) that there had been entry into the ‘French banks’ agreement’ of 27 March 2002. Thus, he concluded, this provided another reason underpinning the assertion that any contractual claim or claim in conspiracy to cause damage by unlawful means simply did not get off the ground.

77.  I am constrained to agree.

78.  The foregoing has focused on the plaintiff’s argument as to the proper interpretation of the contract on its face, and I have not yet touched upon the correlative submission by Mr Chua that, if and in so far as the primary arguments do not get the plaintiff home, then in the event terms may be implied into the DRA which will ensure success.

79.  Once again I am unsympathetic with Mr Chua’s strong submission that in the circumstances of the present case ‑ in which there is no real doubt as to the prevailing factual matrix – lends itself to the implication of contractual terms.

80.  The pleaded formulation (at paragraph 6(3) of the Re‑Amended Defence and Counterclaim) of the terms now sought to be implied, and upon which the plaintiff’s present claim appears premised, is in the following terms:

6.1  That each party shall do all such things as are necessary on its part to enable the other parties to have the benefit of rights under the DRA.

6.2  That each party shall refrain from conduct prejudicing the other parties’ benefit to rights under the DRA.

and, most saliently in light of the present argument:

6.3  That each Accepting Creditor who holds an Unadmitted Unsecured Restructuring Claim agrees to: (a) to use all reasonable endeavours to file a Proof of Claim on or prior to 31^st March 2002, and/or (b) act in good faith at all times in respect of such Unadmitted Unsecured Restructuring Claim.”

81.  As to the implication of contractual terms generally, the court’s attention has been drawn to the sage observations of Waller LJ in Ultraframe (UK) Ltd v Tailored Roofing Systems [2004] BLR 341, wherein the learned judge, after noting that the bases on which terms may be implied into commercial contracts are well-known, and adopting and quoting the summary of the position by Lord Bingham MR in Philips Electronique Grand Public SA & Anr v British Sky Broadcasting Ltd, stated as follows (at 345):

“The court’s usual role in contractual interpretation is, by resolving ambiguities or reconciling apparent inconsistencies, to attribute the true meaning to the language in which the parties themselves have expressed their contract.  The implication of contract terms involves a different and altogether more ambitious undertaking: the interpolation of terms to deal with matters for which, ex hypothesi, the parties themselves have made no provision.  It is because the implication of terms is so potential intrusive that the law imposes strict constraints on the exercise of this extraordinary power.

There are of course contracts into which terms are routinely and unquestioningly implied.  If a surgeon undertakes to operate on a patient the term will be implied into the contract that he exercises reasonable care and skill in doing so…But the difficulties increase the further one moves away from these paradigm examples….It is much more difficult to infer with confidence what the parties must have intended when they have entered into a lengthy and carefully-drafted contract that has omitted to make provision for the matter in issue.  Given the rules which restrict the evidence of the parties’ intention when negotiating a contract, it may well be doubtful whether the omission was the result of the parties’ oversight or of their deliberate decision; if the parties appreciate that they are unlikely to agree on what is to happen in a certain not impossible eventuality, they may well choose to leave the matter uncovered in their contract in the hope that the eventuality will not occur.

The question of whether a term should be implied, and if so what, almost inevitably arises after a crisis has been reached in the performance of the contract.  So the court comes to the task of implication with the benefit of hindsight, and it is tempting for the court then to fashion a term which will reflect the merits of the situation as they then appear.  Tempting, but wrong……” (emphasis added)

82.  It is with this broad cautionary statement firmly in mind that any argument relating to the implication of terms must be evaluated. The rules regarding the circumstances in which contractual terms may be implied are well-known and fall within the ambit of that time-honoured epithet ‘trite law’: to quote from the time-honoured formulation of Lord Simon in the Privy Council (cited by Sir Thomas Bingham in Ultraframe, op cit.) in BP Refinery (Westenport) Pty Ltd v President, Councillors and Ratepayers of Shire of Hastings (1978) 52 ALJR 20, at 26:

“Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express.  In their view, for the term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express term on the contract.”

83.  With respect, it is difficult to see how these criteria are satisfied in the present case.

84.  The DRA works as well without the proposed terms as with it, and it is difficult to appreciate how it makes any difference to the operation of the DRA whether an Accepting Creditor uses all reasonable endeavours to submit a Proof of Claim or not. As Mr Manzoni has pointed out, the DRA is unconcerned with anything that happens up to submission of a claim, and is concerned solely with the consequences of the submission, or non-submission of a claim. Thus ‘business efficacy’ does not require the use of all reasonable endeavours by, or the good faith of, an Accepting Creditor; all that occurs in the event of the non-submission of a Proof of Claim is that the relevant part of the Restructuring Consideration is paid to a party different to the one to which it would have been paid had a Proof been filed. Thus the DRA provides for one consequence in one event (payment to a proving creditor in the event of a claim) and a different consequence in another (in the present instance payment to GDH, pursuant to Clause 10(c), in the event of no proving creditor).

85.  Moreover, given that the evidence is that the DRA took two years to negotiate and compile, and wherein all parties were represented by financial and legal advisers, one cannot conceive of there being room for the implication of terms, given that the document must represent (and be taken as representing) the common intention of the parties. And if it be said that the express terms do not represent the common intention, and that such intention is different to that which has been expressed, then it bears repeating that there is no claim for rectification, and that the terms as are expressed in the DRA specifically run counter to the proposed ‘reasonable endeavours’ implied term, whilst if there was an “obligation of good faith” (whatever that may mean in the context of a contract as detailed as the DRA ) then such no doubt would have been set out in detail.

86.  Notwithstanding such conceptual difficulties in his path, however, Mr Chua, with his usual forensic skill, seeks to infuse the issues both of interpretation and that of the implication of contractual terms by placing very substantial reliance upon the ‘pari passu’ principle as applied in liquidations, and it is this element of the argument that also should briefly be addressed.

87.  In essence, Mr Chua’s thesis, which emerged very early in his submission, is that a party “cannot contract out of fundamental insolvency principles”, of which, of course, the pari passu principle is one such guiding element.

88.  In support of his argument he cited the CFA case of Tradepower (Holdings) Ltd v Tradepower (HK) Ltd. [2010] 1 HKLRD 674, a case involving proceedings brought by the liquidators of the respondent company pursuant to section 60 of the Conveyancing and Property Ordinance to set aside a disposition made with intent to defraud creditors, wherein there appeared to have been no proper regard for insolvency principles, including that of pari passu distribution on insolvency. By the same token Mr Chua also laid considerable emphasis on dicta in Cadbury Schweppes v Somji [2001] 1 WLR 615 wherein the English Court of Appeal held that basic historical principles of equality and good faith between creditors had not been abandoned under the new Insolvency Act 1986, and that a debtor’s proposal for a voluntary arrangement with his creditors had to be characterized by complete transparency and good faith.

89.  With due respect, I do not consider that Tradepower or Cadbury Schweppes op cit., assists him in any way in the context of the current debate. I certainly have no difficulty with recognition of appropriate and well-established principle in liquidation regimes; my difficulty lies in the submission that such principles are to be regarded as applicable ‘across the board’, and can override what otherwise would be the clear effect of specific contractual provisions, and irrespective of whether or not the factual matrix justifies their application. In any event the facts of Tradepower and Cadbury Schweppes are far from the pure contractual composition that represents the situation in the present case.

90.   Cadbury Schweppes, for example, involved facts wherein majority approval of an individual voluntary arrangement (‘IVA’) as proposed by the debtor had been obtained by secret collateral payments made with the debtor’s knowledge to two other dissentient creditors, and perhaps unsurprisingly the petitioner, another dissentient creditor, was dissatisfied that the negotiation of the IVA thus was tainted, and duly applied under the 1986 Act for approval of the arrangement to be revoked ‑ hence the Court of Appeal, in upholding the judge at first instance to the effect that the secretly negotiated deal had influenced the vote approving the arrangement, went out of its way to emphasise that the 1986 statute had left standing time-honoured equality and good faith principles; in particular Robert Walker LJ (at para 19 of his judgment) approved the citation by the first instance judge of Malins V-C in McKewan v Sanderson (18750 LR 20 EQ 65, at 72, of the observation that equality was an essential principle and that if one creditor, unknown to the general body of creditors enters into an arrangement by which he gets for himself from the debtor a collateral advantage over and above the other creditors, then that is a fraud upon the other creditors.

91.  This of course is correct, and to its proposition there could be no valid demur, but with respect it is miles away from the situation with which the learned judge below was dealing in the present case, when, after lengthy negotiation accompanied by extensive legal and financial advice, the extensive and complex contractual document entitled the ‘Debt Restructuring Agreement’ emerged blinking into the light, and when Clause 10(c) thereof in express terms permitted to happen what in fact happened ‑ hence the proposition that the argument in this case is one of construction of a contract, and not an example of the application of otherwise wholly unexceptional liquidation/equitable principles.

92.  True it is in the present instance that the monies thus ‘clawed back’ by GDH consequent upon the non-submission of a claim by the French banks were not distributed on a pari passu basis to the general body of creditors, but the short and ineluctable point is that this is because the specific contractual provision within the DRA, namely Clause 10(c), expressly permitted such money to return to GDH in the absence of the filing by the French banks of a Proof of Claim. In other words the pari passu principle cannot simply be asserted as a form of conceptual ‘band‑aid’ in a situation which is not a liquidation (and cannot be construed as such) but represents a contractual debt restructuring pursuant to the terms of the DRA, which is a contractual document to the terms of which all contracting parties have signed up. The alternative in the present case would be to restrict the applicability of clause 10(c) only to situations involving inadvertence ‑ a conclusion that, for reasons outlined above, is both wrong and commercially nonsensical.

93.  This, with respect, seems to me to be the short answer to the substantive point, whether it be employed as an aid to the implication of contractual terms or as an aid to contractual interpretation.

94.  It is also worth mentioning at this stage that there is persuasive authority to the effect that the pari passu principle “is not in itself a canon of construction or means of altering the true construction of a contract in insolvency”, to quote the words of Mance J (as he then was) who was the first instance judge in Charter Reinsurance Co Ltd v Fagan, his judgment being reported at [1997] AC 313, at 351.

95.  It follows from the foregoing, therefore, that for my part I have little hesitation in rejecting that which I perceived as the tripartite contention on behalf of the appellant that (a) there was a fundamental obligation under the DRA to file a Proof of Claim; (b) that a term can and should be implied into the DRA as per the pleaded formulation, thereby impressing upon the DRA the terms which the plaintiff now desires to ‘fit’ the current situation ; and (c) that the pari passu principle of distribution of assets in liquidation situations informs either of the foregoing issues in the plaintiff’s favour.

96.  It must also follow that in my judgment there is and can be no ‘serious issue to be tried’ in terms either of breach of contract or in the tort of conspiracy to cause loss by unlawful means, which latter cause of action must fall with the contractual claim, and rejection of the alleged implied term. Indeed, at the outset of the argument on this appeal Mr Chua SC fairly accepted that if the judge below was correct in his conclusion as to the lack of a ‘serious issue to be tried’, this would be the end of this appeal, and the end of his client’s efforts to persuade the Hong Kong courts, in their discretion, to exercise jurisdiction over the French banks.

97.  Accordingly, I take the view that the conclusion of the learned judge below as to the construction of the DRA was correct, and that in all the circumstances it was entirely appropriate for him to have decided the matter at this stage and to hold that there was no serious issue to be tried either in contract or in tort, as opposed to leaving the matter for determination at trial.

98.  On the basis of the appellant’s arguments alone I would dismiss this appeal.

Respondents’ Notices

99.  In light of the conclusion to which I have come solely upon the basis of the appellant’s arguments, there is no necessity formally to rule (and I do not so do) upon the merits of the argument in the Respondents’ Notices as have been filed on this appeal by the 2^nd and 4^th defendants by counterclaim on 10 December 2008 and by the 3^rd defendant by counterclaim on 18 December 2008.

100.  There are several additional issues raised by the Respondents’ Notices, albeit all defendants by counterclaim take the point regarding the absence of loss on the part of the plaintiff, Creditor Co Ltd, in the circumstances of this case.

101.  On this point I am inclined to the view is that this submission is well-founded, and that in effect the plaintiff is in effect impermissibly bringing this action for and on behalf of those parties to the DRA which otherwise, pursuant to the provisions of Clause 10(c), would have been in receipt of the monies had the French banks filed a Proof of Claim.

102.  In other words, if any loss has been suffered, it would have been a loss to the other creditors, because in any event the appellant was obliged to pay out the money, and whether GDH was paid (as it was) or whether the other creditors had been paid (which they were not), in each instance the money in question would not have remained in the hands of the appellant. Thus, were the claim otherwise to be well-founded (which in my view it is not) all that could be awarded to the plaintiff would be nominal damages, which presently I am minded to think would not give rise to a ‘serious question to be tried’ for the purpose of exercising this court’s long-arm jurisdiction over the defendants by counterclaim by virtue of the provisions of Order 11, RHC.

103.  For present purposes, however, I wish to leave to another occasion any decision upon whether, as Mr Chua persuasively suggested in reply that his client’s pursuit of declaratory relief and/or whether the costs of resisting potential claims by other Accepting Creditors and/or whether the loss of management time and costs incurred by reason, for example, of Creditor Co’s bona fide (if mistaken) refusal to accede to the claim of GDH, would suffice individually or cumulatively to constitute such ‘loss’.

Costs

104.  As to costs, I would make an order nisi that the costs of this appeal should follow the event, such costs to be taxed if not agreed, and a further order nisi that the costs of the action by counterclaim be to the 2^nd, 3^rd and 4^th defendants by counterclaim, such costs to be taxed if not agreed.

Hon Ma CJHC:

105.  I have read in draft and agree with the judgment of Stone J.

106.  For these reasons, the appeal is dismissed. There will also be an order nisi as to costs in the terms proposed by Stone J.