A1 AND ANOTHER v. W1 AND ANOTHER

HCCT 14/2022

[2022] HKCFI 3637

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 14 OF 2022

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D E C I S I O N

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1.  On 17 October 2022, this Court handed down a Decision, granting the Plaintiffs’ application for security to be furnished by the Defendants, pending the hearing of the Defendants’ application to set aside the order made by the Court on 9 March 2022 granting leave to enforce two arbitral awards. On 31 October 2022, the Defendants applied for leave to appeal against the Decision.

2.  The nomenclature used in the published version of the Decision is adopted herein and below.

3.  The grounds of the intended appeal are that the Court erred: in focusing on the wrong question, and had ignored the undisputed expert evidence on PRC laws which are applicable; in finding that the Defendants were not forthright in their disclosure of assets; and had wrongly attributed low commercial morality to the Defendants, and erroneously conflated the separate legal entities involved. It was argued that it was due to these errors that the Court had concluded that security should be ordered.

4.  The intended appeal is against an exercise of the Court’s discretion and case management powers to order security by reason of the delay in the interim of the determination of the Defendants’ application to set aside the Enforcement Order. The threshold for such an appeal is high.  As Kwan JA reiterated in the case of Mimi Kar Yee Hung v Severn Villa Limited, HCMP 2192/2011, 12 January 2012, at paragraph 31, an appellate court will not generally interfere with a judge’s exercise of discretion unless the judge has misunderstood the law or the evidence, or the exercise of his/her discretion was plainly wrong such that it was outside the generous ambit within which reasonable disagreement is possible.  On appeal, the appellate court is not asked to re-exercise the discretion on the facts of the case.

5.  In the more recent case of DP World Djibouti FZCO and ors v China Merchants Port Holdings Company Limited [2022] HKCA 84, the Court of Appeal highlighted again (at paragraph 22 of the Judgment) the fact that an appellate court adopts a cautious approach in relation to the weight given by the judge to facts taken into account when exercising its discretion. The fact that the appellate court would have given more weight than the judge to one of the many factors to be taken into account in the exercise of the discretion is not a ground for interfering.

The alleged error concerning tax determination

6.  The Defendants seek to argue that the Court had focused on the wrong “litmus question” when dealing with the merits of the application to set aside the Enforcement Order. The wrong “litmus question” considered by the Court is claimed by the Defendants to be “whether or not the Tribunal has deprived the relevant Mainland tax authority of its right to charge or rule on any tax payable, or to relieve a party from any liability for tax, by virtue simply of the Awards”. Correctly read, that was not the question asked and answered by the Court in the Decision in determining the applications.

7.  In dealing with the strength of the argument that the Awards are invalid (the first factor for consideration as identified in Soleh Boneh International Ltd v Government of the Republic of Uganda [1993] 2 Lloyd’s Rep 208), the Court pointed out clearly at paragraph 9 of the Decision that:

(1)     It was not disputed in the Arbitration that the 1^st Plaintiff had made payment to the Mainland tax authority on behalf of the Target Company (which is the 2^nd Defendant), on a without prejudice basis, and as agreed between the parties to the SPA.

(2)     The tax paid had been determined by the relevant Mainland tax authority, and paid pursuant to demands made by the tax authority on the Target Company.

(3)     The tax authority had confirmed in writing to the Target Company that it had become entitled to reduced tax liabilities under PRC law.

(4)     The Tribunal found on the above basis that a tax benefit had crystallized as a result of the 1^st Plaintiff’s payment of the tax assessed, that the Target Company had received the benefit, and there was a causal connection between the tax payment and the receipt by the Target Company of the benefit.

(5)     The value of the tax benefit to be received and to be accountable and reimbursed by the Defendants to the Plaintiffs was assessed and evaluated by the Tribunal in accordance with the provisions of the SPA, and on the Tribunal’s construction of the terms of the SPA and the indemnity clause thereunder.

(6)     The Tribunal determined the value of the tax benefit received by the Target Company, on the basis of PRC expert evidence on the value, and the Tribunal’s ruling was on the restitutionary compensation to be made to the 1^st Plaintiff under and in accordance with the SPA.

8.  The Defendants seek to argue that the uncontested expert evidence was that from a PRC law perspective, the parties are not permitted to re-allocate by contract the party entitled to a particular tax benefit, and that the purported reallocation under the SPA violated PRC law, to render it contrary to public policy to enforce the Awards.

9.  The Decision referred to the PRC expert evidence, at paragraph 10. It was in that context and the experts’ statement that it is the PRC tax authority which has the right to make adjustments or reductions of tax, and to adjudicate on whether the Target Company was entitled to the tax benefit, that the Court pointed out that the Tribunal had not deprived the tax authority of such right – including the right to charge, relieve or “allocate” a party’s tax liability. Nor had the Tribunal ever assumed such right, of reallocation or otherwise, as its decision was made on the basis of the tax authority’s determinations.

10.  It was on the above analysis and as explained in paragraphs 9 and 10 of the Decision, that the Court found that the Awards did not, by their nature, deal directly or indirectly with foreign revenue, nor with enforcement or evasion of foreign revenue law. The Awards were simply the Tribunal’s determination of the contractual rights between the parties under their commercial agreement in the form of the SPA - to render the commercial reservation ground inapplicable. Nor does the public policy ground apply when there was no question of the Tribunal seeking to enforce or evade any revenue law.

11.  The nature of the Awards was what the Court considered and characterized in the Decision.

The alleged error concerning lack of full disclosure on assets

12.  The Defendants seek to argue that the Court had erred in holding that they were not forthright in their disclosure of assets, as they had not adequately explained the monthly receipt of US$600,000 in the bank account of the 2^nd Defendant and the immediate transfer out of such account.

13.  In my view, it is disingenuous for the Defendants to suggest that they had not been given sufficient opportunity to address the Plaintiffs’ discovery of the monthly receipt, which they say was raised in the evidence filed by the Plaintiffs in reply to the Defendants’ affirmations in opposition to the application for security. The US$600,000 was received and then paid out by the 2^nd Defendant. It is the Defendants which allege that they should not be ordered to provide security, as they never had assets within Hong Kong. It is then incumbent on them to be forthright in asserting such a claim, and the authorities establish that if they have not made frank disclosure of their assets, this is a relevant factor which the Court will take into consideration to order security. The duty (and risk) is hence on the Defendants to make frank disclosure of their assets – and the monthly receipt formed part of the 2^nd Defendant’s assets. It should be within the 2^nd Defendant’s own knowledge what funds it receives in its account, in this case a periodic and continuous receipt of funds, what the funds were for, and how and why they were paid out. They did not need the Plaintiffs to disclose to them what assets they had themselves received. Whilst claiming that they had no assets, the Defendants did not disclose the 2^nd Defendant’s monthly receipts of US$600,000, and that they were transferred out upon receipt to Investments. The Decision sets out at paragraphs 17 to 20 the reasons why the Court found the Defendants’ partial account and selective disclosure of their assets to be totally inadequate, self‑serving and contradictory to the other assertions made in their affirmations.

Alleged error in considering the conduct of Y

14.  It was not disputed that the 2^nd Defendant was controlled by Y, its sole director.

15.  In assessing the risk of dissipation and whether it would be more difficult to enforce the Awards if enforcement should be delayed (the second factor for consideration in Soleh), the Court was of the view that the conduct and role of Y was relevant to the Court’s assessment of whether the 2^nd Defendant (under Y’s effective control) was likely to observe and comply with orders of the Court and of the Tribunal, or whether there was a risk that the 2^nd Defendant controlled by Y may dissipate the 2^nd Defendant’s assets or frustrate the Plaintiffs’ attempts to enforce the Awards in the interim before the disposal of the Defendants’ application to set aside the Enforcement Order.

16.  The Court’s impression of Y’s conduct is set out at paragraph 30 of the Decision and I am not persuaded that it is an irrelevant factor for consideration in the exercise of the Court’s discretion.

17.  Nor do I understand the Defendants’ claim of the “lack of a plea concerning attribution”, when there is no pleading filed in these proceedings. I cannot see how the decision in Kwong Yi Ling v Lau Kwun Leung [2021] HKCFI 2303 can assist the Defendants’ case. The task of the Court when dealing with the Plaintiffs’ application for security and the Defendants’ opposition thereto is to consider the matter on the entirety of the evidence filed.

Alleged error in finding absence of delay

18.  I am not satisfied that the arguments as to whether there was delay in the Plaintiffs’ application for enforcement are so compelling, that this Court’s assessment and finding that there was no delay can be said to be plainly wrong. The weight to be given to any alleged delay is a matter for the judge, and will not be lightly interfered with by the appellate court.

Conclusion and disposition

19.  Given the high threshold required to succeed in an appeal against the exercise of the Court’s discretion, I am not satisfied that the intended appeal has reasonable prospects of success. I am not persuaded that the Decision involved any misunderstanding of the law or any erroneous application of the relevant principles, or that the Court had taken into account irrelevant matters, or failed to take into account matters which ought to have been considered, such that the Decision is plainly wrong.

20.  The application for leave to appeal is dismissed with costs to the Plaintiffs, to be summarily assessed if not agreed. The order nisi shall be made absolute unless application for variation is made within 14 days. The Plaintiffs are at liberty to file and serve their Statement of Costs within 7 days and the Defendants are at liberty to file and serve their Statement of Objection within 7 days thereafter.