DAC CHINA SOS (BARBADOS) SRL v. PACIFIC HARBOR ADVISORS PTE LTD

HCCT 52/2019

[2020] HKCFI 365

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 52 OF 2019

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REASONS FOR DECISION

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Background

1.  On 16 October 2019, DHCJ William Wong SC granted an interlocutory injunction (“Injunction”) against the Defendant in aid of arbitration proceedings which had been commenced in Hong Kong between the Plaintiff as claimant and the Defendant as respondent (“Arbitration”). The Injunction comprises a proprietary injunction in respect of the sale proceeds of a Shenyang Hotel Project located on the Mainland (“Shenyang Property”) as are received by or paid to the Defendant (“Proceeds”), up to US $44,320,968.57, representing the total amount of the claims made by the Plaintiff against the Defendant in the Arbitration (“Limit”); a Mareva injunction against the Defendant’s general assets to the extent of any shortfall between the Limit and the Proceeds, and ancillary disclosure orders against the Defendant.

2.  The Plaintiff seeks the continuation of the Injunction, whereas the Defendant seeks the discharge and discontinuation of the proprietary injunction, together with an extension of time to comply with the disclosure orders. For the purposes of the hearing on 31 December 2019, the Defendant accepted that the Plaintiff has a good arguable case for breach of contract and damages under the agreement which is the subject of the dispute between the parties, and did not oppose the continuation of the Mareva injunction. The issue in dispute was whether the proprietary injunction should be discontinued and whether extension of time should be granted for compliance with the disclosure order. According to the Defendant, there is no serious question to be tried on the Plaintiff’s alleged proprietary claim, and there has been material non-disclosure on the Plaintiff’s part in its ex parte application for the Injunction. The Defendant claims that the Plaintiff had failed to disclose to the Court that valuable consideration was required to be established in support of the Plaintiff’s proprietary claim, that the Defendant was a foreign company and that leave was required to serve the Originating Summons on the Defendant.

3.  At the conclusion of the hearing on 31 December 2019, I continued the Injunction and extended time for compliance with the disclosure orders as sought by the Defendant. The following are the reasons for my decision.

The disputed agreements

4.  Both the Plaintiff and the Defendant were at the material time in the investment fund business. The Defendant was part of the Pacific Harbor Group of companies (“PH Group”). In 2007, the PH Group was introduced to an opportunity to invest in Ixion, a diesel oil wholesale venture in the Philippines which was in need of significant investment. On 3 December 2007, the Defendant made a loan of US $30.3 million to Ixion (“Loan”). Pursuant to discussions which took place, the Plaintiff agreed to invest in Ixion by participating in the Loan. A Participation Agreement was entered into between the Plaintiff and the Defendant on 31 December 2007, whereby the Plaintiff acquired a 50% interest in the Loan (“Participation Agreement”). As described by the Defendant, the Loan was subject to a high interest rate of 18% per annum, making it a risky investment.

5.  The Loan was extended on a yearly basis from 2007.

6.  The Plaintiff as a fund approached the end of its lifespan in 2011, and according to the Plaintiff, it began to exit from its investments such that by 2013, its interest in the Loan was one of the only investments left. Discussions ensued between the parties with regard to the Plaintiff’s decision to exit its interests in the Loan, and as a result of the agreement reached, the final extension of the Loan was made from 5 December 2013 to 31 December 2013 only. By an agreement made on 23 July 2014 (“SPA”), the Plaintiff agreed to sell and the Defendant agreed to re-purchase the Plaintiff’s 50% interest in the Loan for US $16,956,459.88. Under the SPA, the Defendant also agreed to assign to the Plaintiff, as collateral to secure the Defendant’s obligations under the SPA: (1) the Defendant’s interests in two loans it had made to Winson Federal Limited (“Winson Loans”); and (2) the security in favor of the Defendant in relation to the Winson Loans (“Winson Security”). The Winson Security included charges over shares in companies which indirectly held the Shenyang Hotel Project on the Mainland.

7.  In essence, the complaints made by the Plaintiff in the Arbitration are that the Defendant was in breach of the SPA, by failing to make payments which fell due on 30 June 2015, and in failing to deliver and provide to the Plaintiff the draft security assignment and related “Deliverables” in respect of the Winson Loans as defined in the SPA, which include share certificates and other instruments of title or transfer. The Plaintiff claims that a Trigger Event had consequently occurred under the SPA, as a result of which the Defendant was obliged to assign to the Plaintiff all its rights held in relation to the Winson Loans and to take all necessary steps to enable the Plaintiff to enforce the Winson Loans. In the Arbitration which was commenced on 7 December 2015, the Plaintiff seeks payment from the Defendant of US $16,956,459.88 with interest, and specific performance of the Defendant’s obligation to assign to the Plaintiff the Winson Loans and the related security, which security includes the shares in companies which indirectly controlled the Shenyang Hotel Project.

8.  On the Defendant’s part, it disputes the validity and enforceability of the SPA, claiming that it was made under duress and misrepresentation, and also that the Plaintiff had repudiated the SPA. By way of Defence in the Arbitration (para 7 of the Defence) and also in opposition to the continuation of the proprietary injunction, the Defendant claims that the Loan, and the Plaintiff’s interests therein which was agreed to be purchased by the Defendant under the SPA, was in fact worthless, such that the consideration provided by the Defendant was unconscionable and not at arm’s length.  On behalf of the Defendant, it was argued that the Plaintiff cannot show that it had provided valuable consideration under the SPA in order to assert any proprietary claim and to seek specific performance for such claim. In failing to draw this to the attention of the Court in its ex parte application, the Defendant argued that there was material non-disclosure on the Plaintiff’s part.

Serious question to be tried?

9.  On behalf of the Defendant, Mr Pow SC contended that in order to raise a specifically enforceable right which can be enforced in equity, the consideration given in support must be more than nominal, and to amount to “some value” (Master Universe Development Ltd v Mass Ocean International Ltd, unreported, HCA 1295/2015, 12 September 2016 and Ng Luk Mui v Shui Tsun Wai [2011] 5 HKLRD 707). It was emphasized by Counsel that this is to be distinguished from principles of consideration when applied to the different issue of the validity of a contract, when “nominal consideration” would be adequate. The rationale behind this, as pointed out by Counsel, is that “equity will not assist a volunteer”, such that for specific performance, equity requires value and valuable consideration as a matter of substance, and not form (Chitty on Contracts 33rd Ed at para 27.052).

10.  The Defendant claims that at all material times, the Plaintiff knew that the Loan was irrecoverable, and was worthless. It relies on various emails and documents to support this. The Defendant claims that Ixion’s business did not develop after the date of the Participation Agreement in 2007, and that its financial status had progressively worsened. It claims that by 2013, Ixion was hopelessly in debt and beyond any prospects of financial recovery, as is apparent from its audited accounts. From 2008 to 2012, Ixion had only been able to make one single interest payment on the Loan. According to the Defendant, it was only out of goodwill and due to the personal relationship between the management of the Plaintiff and that of the Defendant, that the Defendant had made several payments, out of the funds of the PH Group, to the Plaintiff when such payments fell due in 2008 to 2012.

11.  The Defendant further claims that the Plaintiff’s own auditors had recognized its investment in Ixion and in the Loan to be non-performing, relying on an email from the Plaintiff’s auditors dated 4 March 2012 (“4/3 Email”). It claims that the PH Group itself had fully written off the value of its investments in Ixion by October 2014, nearly 3 months from the date of the SPA.

12.  In reply, the Plaintiff claims that it had never been given copies of the audited accounts of Ixion. It claims that prior to 2014, the Plaintiff had always understood the Loan to be a performing investment, albeit from time to time expected payments may have been a little late which is not unusual. It had no knowledge of the fact that any payment it received had been made from the PH Group’s own funds, as the Defendant alleges.

13.  The contemporaneous documents do not support the assertions made by the Defendant.

14.  From 2008 to 2013, the Plaintiff had extended the Loan on a yearly basis, consistent with its belief that the Loan was a performing investment. In particular, the Plaintiff claims that when it was negotiating its exit from the Loan in December 2013 (due to the fact that the lifespan of the Plaintiff as a fund was expiring), it had requested the Defendant by an email dated 20 December 2013 to provide the Plaintiff with an “exit value (principal plus interest) for the Ixion position dated 31 December 2013”.  In reply, the Defendant had emailed the Plaintiff on 21 December 2013 to state the total value of the principal plus interest of the Loan to be US $16,956,459.87 as at 31 December 2013. The email enclosed a spreadsheet to confirm the position. This was inconsistent with the Defendant’s assertion that the Loan was of no value.

15.  During the time of the negotiation of the SPA (which was signed on 23 July 2014), which included negotiations on positions that would be collateral for the SPA, the Plaintiff pointed out that the Defendant had sent an email to the Plaintiff’s auditor on 3 April 2014, attaching “the most up-to-date valuation report” of the Winson Loans which would be the collateral for the SPA, and the Winson Loans had a value stated at US$ 40.25 million. It could also be seen from the correspondence in 2014 that the parties were negotiating the SPA on the basis that the Plaintiff was to be repaid in full. On 9 March 2014, the Plaintiff had sent an email to the Defendant, inquiring the “estimated date for full payment”, to provide evidence to the auditors that the Plaintiff would be repaid.

16.  On the Plaintiff’s case, it claims that it had throughout and repeatedly been provided with information on the outstanding amounts of the Loan and had received consistent confirmation that repayment was forthcoming. In a letter to the Plaintiff dated 5 March 2012, the Defendant’s Chief Financial Officer (“CFO”) confirmed details of recent interest payments and reductions in the Plaintiff’s participation, and stated that “further payments reducing (the Plaintiff’s) outstanding participation balance are expected” (“5/3 Letter”).

17.  As for the 4/3 Email relied upon by the Defendant, to show that the Plaintiff’s own auditors had treated the Loan as a non-performing loan, and that the Plaintiff’s investment had been written down, I agree with the Plaintiff, that the Defendant had painted a distorted and incomplete picture in this regard. The Plaintiff explained that when the Defendant failed to send an extension letter for the Loan at the end of 2011, the Plaintiff’s auditors had raised query by the 4/3 Email, asking whether the Loan ought to be treated “like other non-performing loans”. Mr Groves, the Plaintiff’s director, had in fact sent an immediate reply to the 4/3 Email and the proposal made by the auditor (to treat the Loan as a non-performing one and to discount it by adjustments), stating: “I disagree”. The 5/3 Letter followed, and in the end, the auditors had also sent an email on 5 March 2012, to state that the adjustment would not be proposed.

18.  On 13 March 2012, the CFO emailed the Plaintiff to confirm that the principal and interest value of the Plaintiff’s interest in the Loan were respectively US $13,596,725 and US $332,683.34. The accrued principal and interest of the Loan as at 31 December 2012 were also stated in the spreadsheet sent by the Defendant to the Plaintiff in late January 2013. The value of the principal and interest of the Loan was stated to be respectively US $13,104,336 and US $1,460,582.55.

19.  The Defendant claims that Ixion had only been able to make one interest payment on the Loan, and that it was only out of goodwill that the Defendant had made several payments to the Plaintiff out of the PH Group’s own funds. There is no evidence that this was actually disclosed to the Plaintiff, which had no access to the internal records of the Defendant. None of the documents which evidence the payments to the Plaintiff indicate that the payments made to and received by the Plaintiff were in any way other than in the ordinary course of Ixion complying with its obligations. The Defendant’s allegation, that it had made the payments out of its own funds, and that it had in fact entered into the SPA entirely out of goodwill and benevolence, to appease the Plaintiff’s auditors and investors, is unbelievable and defies commercial sense.

20.  Significantly, as the Plaintiff sought to highlight, the SPA was an agreement which had been negotiated between two sophisticated counterparts, each represented by experienced lawyers, in relation to the Plaintiff’s sale and the Defendant’s re-purchase of the Loan. The Defendant sought to argue that Ixion was in debt, that the business of the company was at a loss, and that the Loan was considered and known to the parties by 2013 to be non-performing, to demonstrate that no consideration had been furnished by the Plaintiff under the SPA, as the Loan was completely worthless with “absolutely 0 prospects of any repayment”.

21.  However, the Defendant itself acknowledged that Ixion and the Loan was a risky investment from the start, but had decided to proceed. The distressed debt market is a sophisticated and specialist one. There are funds and entities which choose to invest in and acquire insolvent companies and distressed debts, which are seen to retain some value and may even yield returns, with advanced models and formulae to spread out the risks and to realize whatever value the debts are considered to have.

22.  On the whole, I find it improbable, that the parties as sophisticated businessmen and dealers in a specialist market would have incurred the time and expense to instruct lawyers to structure a deal evidenced by the SPA, if the underlying asset and security are totally worthless, as the Defendant suggests.  I conclude that there is a serious question to be tried that that the Plaintiff has a proprietary claim under the SPA.

23.  As for the argument that the claim for specific performance was only introduced by a proposed amendment to the Notice of Arbitration, I accept that the essential facts of the SPA, the terms relied upon, and the breaches alleged have all been pleaded in the original Notice of Arbitration to support the Plaintiff’s claim to the remedies and relief to which it is entitled.

Material Non-disclosure?

24.  The allegations of material non-disclosure can be dealt with briefly.

25.  First, the issue of consideration had been ventilated before the ex parte judge. Leading Counsel’s Skeleton argument for the ex parte hearing expressly referred to the argument of the lack of consideration or consideration being grossly inadequate, and pointed out that under the SPA, which was executed as a deed, there was valid consideration as the parties had mutual obligations and the Plaintiff had assigned 50% interest in the Loan to the Defendant.

26.  I have rejected the Defendant’s argument that there is no serious question to be tried on the basis that the Loan was worthless.  Leading Counsel for the Defendant accepted, at the hearing on 31 December 2019, that if the Court should reject the arguments on the lack of valuable consideration, there was no material non-disclosure on this point.

27.  The second issue, as to the Defendant being a foreign company, and that leave to effect service out of the jurisdiction was required, had been brought to the attention of the ex parte judge. It is clear from the transcript of the hearing, that the Court was informed that the Defendant is a company incorporated in Singapore, and that the Court was alert to the fact that service outside Hong Kong was required. At the ex parte hearing, Counsel informed the Court that as the Defendant had agreed under the SPA to an address for service in Hong Kong, leave for service outside Hong Kong was not required.

28.  On behalf of the Defendant, it was argued that Order 10 rule 3 RHC and the provision for service in the SPA cannot be relied upon, when the SPA provides for arbitration by HKIAC and the Court does not have jurisdiction to determine the substantive dispute.

29.  I accept the submissions made by the Plaintiff, that the fact of the Defendant being a Singapore company and that there is an issue of leave for service out of Hong Kong, had both been raised and brought to the attention of the Court at the ex parte hearing. Whether the submissions made on the interpretation or effect of the contractual provision for service were right or wrong in law, whether they were rightly accepted by the Court, and the fact that there may be further arguments on the effect of the relevant clause, do not alter the fact that the issue had been disclosed.

30.  As for the argument on delay or lack of urgency to justify the ex parte application, I fully accept the submissions made for the Plaintiff. The proprietary injunction may be granted even if there was delay. However, I do not accept that there was any delay in the application. At all material times, the Plaintiff had been relying on the assurances given by the Defendant, through its managing director Mr Allderige who had been appointed as the receiver and manager in respect of the shares of companies which controlled the Shenyang Property (“Receiver”), that the Shenyang Property had not been sold. The Receiver had in fact given undertakings to the Court in separate proceedings, that the Receiver would notify the Plaintiff in this case in writing, within 3 days of the occurrence of any significant events - which covered any sale or potential sale of the Shenyang Property, and details thereof.

31.  In the Receiver’s 18^th report dated 6 September 2019, the Receiver had still referred to continuing efforts to locate a purchaser for the Shenyang Property, and it was only in the 19^th report of the Receiver dated 4 October 2019 that the Receiver disclosed to the Plaintiff, for the first time, that the Shenyang Property had already been sold, and that the proceeds received, amounting to US $20.5 million, had already been remitted to the Defendant and its associated company. It was only on 4 October 2019 that the Plaintiff came to realize that the sale had been effected, that the Defendant had failed to abide by its undertakings to the Court to give the Plaintiff 3 days’ notice, and that there was an urgent need to preserve the proceeds, leading to the ex parte application to the Court on 16 October 2019. There was no delay.

Disposition

32.  For all the foregoing reasons, the proprietary injunction was continued at the conclusion of the hearing on 31 December 2019.

33.  The Defendant sought, and was granted, 7 days to comply with the disclosure order.

34.  The costs of the application for continuation of the Injunction, and of the Defendant’s application for time to comply with the disclosure order, are to be paid by the Defendant to the Plaintiff, with Certificate for 2 Counsel.