ZHANG RUI KANG AND ANOTHER v. TUNGHSU GROUP CO LTD

CAMP 322/2023, [2024] HKCA 361

On Appeal From [2023] HKCFI 1866

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 322 OF 2023

(ON AN INTENDED APPEAL FROM HCA NO 1391 OF 2021)

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J U D G M E N T

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Hon G Lam JA (giving the Judgment of the Court):

Introduction

1.  This is a renewed application by the defendant, made by summons dated 10 October 2023, seeking leave to appeal against the decision of DHCJ M K Liu dated 21 July 2023 (“Decision”).[1] By the Decision, the judge inter alia dismissed the defendant’s application for setting aside the leave obtained by the plaintiffs to serve the Amended Writ of Summons in HCA 1391/2021 out of jurisdiction on the defendant.  The judge refused leave to appeal in a subsequent decision dated 26 September 2023.[2]

Background

2.  The factual and procedural background has been set out at [1] – [28] of the Decision.

3.  In short, the plaintiffs were holders of bonds (“Notes”)  issued by Tunghsu Venus Holdings Limited (“TVHL”), a BVI company wholly owned by the defendant which is a company incorporated in Mainland China.  The defendant provided a guarantee for TVHL’s repayment obligations under the Notes (“Guarantee”).  The Notes and the Guarantee are contained in an indenture which specifies that the governing law is New York law.

4.  Upon default on the Notes by the defendant and TVHL, the plaintiffs obtained a judgment against the defendant in New York on 1 September 2021 (“New York Judgment”)  and issued proceedings by way of writ in HCA 1391/2021 to enforce it in Hong Kong.

5.  On 27 September 2021 the plaintiffs obtained leave from Master S H Lee to serve the writ out of the jurisdiction on the defendant under Order 11, rule 1(1)(m)  of the Rules of the High Court (Cap 4A)  (“RHC”)  (“gateway (m)”).  That rule provides:

“ (1)  service of a writ out of the jurisdiction is permissible with the leave of the Court if in the action begun by the writ … (m)  the claim is brought to enforce any judgment or arbitral award.”

6.  By summons dated 15 June 2022, the defendant applied to have the Master’s order set aside on the ground that the applicable test under gateway (m)  was not satisfied, or alternatively, for a declaration that the court should not exercise any jurisdiction it may have over the defendant.

7.  A similar application was taken out by the defendant and its directors in a related action, HCA 1359/2021, which is not the subject matter of the present application for leave to appeal.

8.  Both summonses in the two actions were heard by the judge at the same time.  The judge ruled against the plaintiffs in HCA 1359/2021 and set aside leave to serve the writ therein out of jurisdiction, but ruled in favour of the plaintiffs in HCA 1391/2021 and refused to set aside leave to serve out on the defendant.  Hence this application for appeal to appeal.

The Decision

9.  The parties did not dispute the principles for granting leave to serve proceedings out of jurisdiction under gateway (m)  before the judge.  In particular, there is no dispute that the central question is whether there is a real prospect of a legitimate benefit to the plaintiffs if leave to serve out of the jurisdiction is granted: Motorola Solutions Credit Co LLC v Kemal Uzan (HCA 2232/2013, 16 April 2014), per Zervos J at [27].  The key dispute between the parties revolved around that question: see [30]-[32] of the Decision.

10.  The defendant argued that it had no assets, presence or business operations in Hong Kong.  As regards prospective benefit, its position was that it is mere speculation that the defendant may have assets in Hong Kong in the future and that is insufficient to create a “real prospect” of a legitimate benefit to justify service out.  Further, the defendant argued that the plaintiffs could not rely upon methods of and aids to enforcement as a legitimate benefit to justify service out.  See: Decision, [33(1)-(7)].

11.  The judge rejected the defendant’s arguments and held that there existed a real prospect of benefit.  First, as to benefits arising from real prospects of there being assets in Hong Kong, he held at [34] (footnotes omitted):

“  (1)  As to whether the Company has any assets in Hong Kong, as pointed out by Mr Chua, it is worth to note the following:

(a)  The Company has continuously maintained the business registration of the 8 subsidiaries in Hong Kong.  This would only be necessary if the 8 subsidiaries are carrying on business in Hong Kong.

(b)  As to whether the Hong Kong Companies only have negligible balances in their Hong Kong bank accounts, only a snapshot showing the bank accounts’ balances on a particular date is produced.  This is not a piece of meaningful evidence, as money can be moved in and out of an account very quickly. Meaningful evidence would be the bank statements covering a reasonable period of time.  However, these have not been produced by the Company.

(c)  The Company has not filed any evidence saying that the Company does not use the international banking system in Hong Kong or transfer funds through Hong Kong bank accounts.

   (2)  Mr Chua has aptly drawn my attention to Fonu, in which Clarke MR said:

‘ 40. Mr. Demirel has been involved in business in Turkey on a very large scale indeed. He … has made use of the international banking system … It seems to us that, if free to do so, he might use other parts of the international banking system of which London is now a central part. It is we think a reasonable possibility that one of these days Mr. Demirel will have assets in London, either in the form of physical assets or claims against other institutions…’

   (3)  As submitted by Mr Chua, there is every possibility that the Company’s assets would pass through Hong Kong, especially when:

(a)  The Company received the proceeds raised by the Notes via Hong Kong.

(b)  The Company has a history of using its HK subsidiaries as paying conduits.

(c)  The Company is continuously using the services of Hong Kong advisers and lawyers. By necessity, the Company would need to pay these Hong Kong professionals.”

12.  The judge agreed, based on the evidence, that there existed a real possibility of there being assets of the defendant in Hong Kong now or in future: Decision, [34(5)].

13.  Secondly, the judge rejected the defendant’s submission that service out can only be justified by a prospective benefit where fraud or dissipation of assets is involved, and held at [34]:

“ (4)  Having considered the authorities cited by Mr Wong, with respect, I do not think that there is a principle in those cases only allowing service out by relying upon prospective benefit if fraud or dissipation is involved. In any event, according to Ps’ case in HCA 1359/2021, the Company’s default in performing its obligations under the Guarantee is caused by the Outbound Cash Flow, which in turn is caused by the wrongful acts of the Directors. P s’ claim against the Directors will be explored in an action at the appropriate forum. With the big picture in mind, there is no reason not allowing Z&L to rely upon prospective benefit in support of the service out.”

14.  As to indirect or prospective benefits which are not directly monetary or tangible in nature (which in this case refers to investigating and locating the defendant’s assets), the judge held at [34(6)-(8)] as follows (footnotes omitted):

“ (6)  Further, I agree with Mr Chua that another possible benefit is investigating and locating the assets. As said in Fonu:

‘ 43. There is a further consideration. If [the plaintiff] obtains a judgment in England it can properly make use of the various methods of and aids to enforcement, including an oral examination of the judgment debtor as to the nature and whereabouts of his assets at the time, which is not of course now but when the English judgment is obtained (if it is).’

(7)  The Hong Kong Court has jurisdiction to allow service out of examination orders in appropriate circumstances.

   (8)  As submitted by Mr Chua, there is a benefit to Z&L if they have a judgment recognized in Hong Kong and can enforce it by way of seeking examination of the directors of the Company.  If the directors comply with the examination order, they would have to disclose information concerning the properties and means of the Company, and some assets of the Company may be located for the satisfaction of the Hong Kong Judgment as a result.  If the directors refuse to comply with an examination order issued by the Hong Kong Court, they could be liable for contempt and could be under a warrant of arrest in Hong Kong.  This in turn would restrict the ability of the Company and the directors to use Hong Kong’s legal-financial services, including with no realistic chance to successfully list the Company in Hong Kong in the future.  The commercial leverage generated is another sufficient benefit.”

15.  The judge also agreed with the plaintiffs’ observation that the fact that the defendant was spending substantial time and costs to resist the enforcement of the New York Judgment in Hong Kong “speaks louder than mere words”: Decision, [34(9)].

Grounds of the intended appeal

Ground 3

16.  Three main grounds have been put forward for the intended appeal.  We shall take Ground 3 first, which is that the judge was wrong to hold that there is a real possibility of the defendant’s assets being in Hong Kong whether now or in future, as there was no basis and it was not open for the judge to make such findings in view of the evidence.

17.  The evidence shows that the Notes were promoted in various jurisdictions including Hong Kong, that they were sold to the plaintiffs mostly through the Hong Kong branches of various banks, that TVHL received the funds raised from the Notes via Hong Kong, that the defendant has a history of using its Hong Kong subsidiaries as paying conduits, and that it has continuously been using the services of Hong Kong advisers and lawyers who would need to be paid.  A number of the defendant’s subsidiaries have bank accounts in Hong Kong.  There was no evidence to suggest that the international banking systems and fund transfer systems in Hong Kong would not be utilized by the defendant.

18.  In our judgment, the judge’s view that there was every possibility that the defendant’s assets would pass through Hong Kong cannot be said to be one reached without evidential basis or was in any way clearly erroneous.

19.  It is submitted that in assessing the evidence relating to the defendant’s present or future assets, the judge failed to consider “what effect of allowing HCA 1391/2021 would be on the asset position of the defendant in Hong Kong.”

20.  As noted by the judge at [10(4)] of his decision refusing leave to appeal, the defendant has clarified that its position is not that it would dissipate its assets in Hong Kong to frustrate any judgment, but only that the defendant never had assets in Hong Kong to dissipate in the first place.  But there is no evidence of any decision by the defendant that because of the existence of the action, it would henceforth not use the banking and fund transfer systems in Hong Kong and would prevent its assets from entering Hong Kong even for payment of services received.  If there were such a statement by the defendant, it could be dealt with by the court on its merits.  In the absence of actual evidence from the defendant it is not something that the judge can fairly be criticised for not positively inferring.  We do not think that the court should assume that with this action on foot, the defendant would be deterred from holding assets or processing any funds in Hong Kong.  Despite the risk of enforcement of a judgment, a reputable company may simply continue to operate in accordance with its customary practices and the commercial standards to which it adheres.  It may be noted that in Fonu, even though judgment was obtained in Turkey on the basis that Mr Demirel was guilty of fraud, the English court did not infer, in the absence of express evidence, that he would henceforth refrain from allowing his assets to enter the UK if the English action for the enforcement of the Turkish judgment could proceed.  The court there said at [40]:

“  Mr Demirel has been involved in business in Turkey on a very large scale indeed.  He has not kept his assets in Turkey and, perhaps naturally, he has made use of the international banking system.  Through a company he calls Merrill Lynch International he has procured the setting up of trusts to shelter his assets in the Cayman Islands.  It seems to us to be not unlikely that, if free to do so, he might use other parts of the international banking system of which London is now a central part.  It is we think a reasonable possibility that one of these days Mr Demirel will have assets in London, either in the form of physical assets or in the form of claims against other institutions.  In these days of global business we should, in our opinion be somewhat less parochial than once we were.”

21.  As rightly pointed out by the plaintiffs, whether the defendant has plans to expand its business in Hong Kong is not the same issue as whether it would change its position and practice regarding the flow of assets through Hong Kong, as an international financial centre particularly important for Renminbi business, due to the present action.  Further, the court has already considered the defendant’s contention that it had no plans to expand its business in Hong Kong.  To suggest that this is a direct result of the action is a new point that should not be permitted on appeal.

22.  Accordingly, the defendant has not shown that the judge’s decision was wrong in this respect.  Given this conclusion, the remaining grounds are of little consequence since the real possibility of there being assets in Hong Kong is sufficient to satisfy the requirement of a real prospect of legitimate benefit for the plaintiffs.  We shall nevertheless discuss Grounds 1 and 2 below.

Ground 1

23.  This ground says that the judge was wrong in holding that the mere prospect of discovering where a party’s assets are located, in the absence of fraud or dissipation, is sufficient to constitute a real prospect of a legitimate benefit for gateway (m).

24.  The defendant argues that if this prospect suffices, gateway (m)  would be invariably satisfied in every single case because all plaintiffs may rely on methods of and aids to enforcement as a “legitimate benefit”.  This argument was rightly rejected by the judge in his decision refusing leave to appeal at [11(2)].  It was not the judge’s holding that investigation could be a ground in support of an application for leave to serve out in any case, but that on the facts of this case, it constitutes a real prospect of legitimate benefit.  The judge had correctly highlighted the proper approach in the Decision at [32(2)], referring to Shandong Chenming v Arjowiggins HKK 2 Ltd (2022)  25 HKCFAR 98, per Fok PJ and Lam PJ at [54] – [56]:

“ Accordingly, the Court should apply a ‘pragmatic approach’. The benefit ‘will vary from case to case depending on its facts’, and ‘need not be monetary or tangible in nature’. It is satisfied if there is ‘some useful purpose serving the legitimate interest’ of a party.”

25.  There is no basis for the defendant’s argument that the prospect of discovering where a party’s assets are located cannot suffice to constitute a real prospect of a legitimate benefit – which goes to the other extreme opposite to that criticised by the defendant.  As the judge pointed out in his decision refusing leave to appeal at [11(3)], the possibility of investigating and locating relevant assets through oral examination has been recognised in the authorities as sufficient, on the facts of those cases, to satisfy the requirements of gateway (m): see Fonu at [43]; Caterpillar Financial Services (Dubai)  Ltd v National Gulf Construction LLC [2022] EWHC 914 (Comm)  at [11].

26.  The judge concluded that based on the context and evidence of this case, possible oral examination of the defendant’s directors would be a legitimate prospective benefit for service out.  There is no valid ground put forward for impugning this conclusion on the facts of this case.

Ground 2

27.  The defendant contends that the judge was wrong to hold that the creation of “commercial leverage” was sufficient to constitute a real prospect of a legitimate benefit for the purposes of gateway (m).

28.  The Judge’s reasoning was set out at [34(8)] of the Decision quoted above.  The defendant argues that the case of Shandong Chenming is confined to situations where a company is compelled to make payment to avoid the consequences of a winding up order.  We see no reason to confine the concept of commercial leverage so narrowly.  As stated in §64 of the Court of Final Appeal’s judgment in Shandong Chenming, “leverage is always in the background of any instance of civil litigation …”  It is a matter of fact and evidence in the individual case whether this can amount to a potential benefit that enlivens gateway (m).  The strength of the commercial leverage generated would obviously depend on the practical impact of the enforcement steps taken in this jurisdiction.

29.  The defendant argues that there is no factual basis to suggest that there is any commercial leverage generated insofar as the defendant may be restricted from using Hong Kong’s legal services, as the defendant has no business operations in Hong Kong or plans for expansion to Hong Kong.  The judge referred to the fact that the defendant’s directors may be liable for contempt upon failure to comply with examination orders.  It is noted that two of them, Guo Xuan and Li Wenting, have also been directors of other companies incorporated or with business registration in Hong Kong.  In the circumstances, enforcement steps may well have an impact on the ability of the defendant and its directors to use Hong Kong’s legal and financial services.  We do not think that the defendant has shown any reasonable ground to contend that the judge fell into error.

Conclusion

30.  For the above reasons, we see no reasonable prospect of success in the intended appeal and therefore decline to grant leave to appeal.  The defendant’s summons is dismissed.  On a nisi basis, costs will be to the plaintiffs with a certificate for two counsel, to be summarily assessed based on a statement of costs to be submitted by the plaintiffs within 14 days and written objections by the defendant within 14 days thereafter.

31.  We also make an order under Order 59 rule 2A(8)  that the defendant may not ask for its application to be reconsidered at an inter partes oral hearing.