SHANTOU XINYUAN TRADING CO LTD v. CHINA MEDICAL AND BIO SCIENCE LTD

HCCW 198/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 198 OF 2008

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D E C I S I O N

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1.  This is an application for security for costs in a creditor’s petition to wind up a company.  The issue I am primarily concerned with is whether I should exercise my discretion to refuse to order security on the basis there is a high probability of success in the petition.

2.  The background matters may be stated as follows.

3.  The petitioner is a Mainland company known as Shantou Xinyuan Trading Company Limited （汕頭市欣源貿易有限公司）.  It presented a petition to wind up China Medical and Bio Science Limited (“the Company”) on 13 May 2008.  The Company was incorporated in the Cayman Islands, and was registered under Part XI of the Companies Ordinance, Cap. 32.  The shares of the Company are listed on the board of the Growth Enterprise Market in Hong Kong.

4.  The winding-up petition is founded on an arbitration award obtained by the petitioner against the Company on 15 February 2008 in the sum of RMB4,425,882.50.  The award was made by a tribunal of the China International Economic and Trade Arbitration Commission (“CIETAC”) in Beijing.  The Company was the 2^nd respondent in the arbitration proceedings.  The 1^st respondent was a company known as Sichuan Shule (四川蜀樂藥業股份有限公司; “Shule”).  Shule was a subsidiary of the Company until 20 May 2005.

5.  The dispute between the petitioner and Shule arose out of certain agreements made between them in August 2002.  It was alleged by the petitioner that by a guarantee dated 8 December 2002 executed by the Company in favour of the petitioner, the Company agreed to guarantee the liability of Shule to the petitioner under the agreements.

6.  The Company denied it had executed the guarantee and claimed that the signature and chop appended on the guarantee were forged.  The dispute went to arbitration and an award was published in favour of the petitioner against Shule and the Company on 15 February 2008.

7.  The petitioner served a demand on the Company under Cap. 32 on 1 April 2008 demanding payment of the arbitration award.  On 11 April 2008, the Company applied to the Beijing Second Intermediate People’s Court to dismiss the arbitration award (“the Dismissal Application”).  On 14 April 2008, the Beijing Court confirmed it has jurisdiction to hear the Dismissal Application.  On 30 April 2008, the Beijing Court served notice on the petitioner informing it that the first inquisition hearing of the Dismissal Application would be heard on 3 June 2008.

8.  At the first inquisition hearing on 3 June 2008, the Beijing Court requested the parties to file further evidence to supplement their submissions but did not fix a date for another hearing.  It is not known when the next hearing will take place, no determination has been made by the Beijing Court in the Dismissal Application.

9.  On 13 May 2008, the petitioner presented this winding-up petition against the Company in Hong Kong.  Correspondence was exchanged between solicitors for the Company and solicitors for the petitioner in May and June 2008.  The Company demanded withdrawal of the winding-up petition in view of the Dismissal Application, an undertaking from the petitioner to refrain from advertising and publishing the petition, and provision of security for its costs if the petitioner should refuse to withdraw the petition.  The petitioner refused to withdraw the petition or give security for costs.  On 4 July 2008, the Company issued the present summons seeking security for its costs in the sum of $831,250.00 or such sum as determined by the court.  By consent the petition was adjourned to 12 November 2008, the petitioner agreed to refrain from publishing and advertising the petition until 7 days after the adjourned hearing or further order.

10.  There is no dispute that the petitioner is not a Hong Kong company and there is no evidence of any assets owned by the petitioner in Hong Kong.  The petitioner is not raising the argument that an order to provide security for its costs would stifle its petition to wind up the Company.  The only ground raised by the petitioner to resist this application is that it has high probability of success in the petition to wind up the Company.  If I am satisfied that is the case, this would be a good ground to exercise my discretion not to require the petitioner to provide security for costs.

11.  The petitioner’s counsel, Mr Lawrence Cheung, recognized the threshold of demonstrating the probability of success is high.  He submitted the threshold is met in the special circumstances of this case.

12.  First and foremost, he pointed out the arbitration award of the CIETAC tribunal was made with the full participation of the Company in the proceedings.  The Company had submitted to the jurisdiction of the tribunal.  It was legally represented in the proceedings.  Its defences were fully canvassed by the tribunal, and the tribunal was assisted by forensic expert to deal with the allegation of forgery of the signature on the guarantee raised by the Company.  The tribunal did not think it necessary to require forensic evidence to verify the authenticity of the chop on the guarantee, as it was obvious that the chop on the guarantee was different to that presented by the Company.  The award has not been satisfied.  The petitioner did not apply to enforce the award in the Mainland.

13.  Secondly, under section 40B(1) of the Arbitration Ordinance, Cap. 341, the award of a CIETAC tribunal is enforceable by action in the Court of First Instance in Hong Kong or in the same manner as the award of an arbitrator is enforceable by virtue of section 2GG.  Mr Cheung submitted the petitioner is entitled to enforce the arbitration award in Hong Kong.

14.  In answer to that, Mr Maurellet submitted on behalf of the Company that the petitioner is not entitled to enforce the award in Hong Kong, relying on section 40E(2)(f) of Cap. 341 which provides as follows:

“Enforcement of a Mainland award may be refused if the person against whom it is invoked proves – (f) that the award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the Mainland or under the law of the Mainland.”

15.  Mr Maurellet contended that by virtue of the Dismissal Application, which is pending, the award “has been suspended under the law of the Mainland.”  The law of the Mainland he referred to is Article 25 of the Supreme People’s Court’s Explanation to Certain Problems Applicable to the Arbitration Law of the People’s Republic of China (Legal Explanation [2006] No. 7).  The text in Chinese reads as follows:

“第二十五條   人民法院受理當事人撤銷仲裁裁決的申請後，另一方當事人申請執行同一仲裁裁決的，受理執行申請的人民法院應當在受理後裁定中止執行。”

16.  Mr Maurellet provided an English translation which has not been certified and this reads as follows:

“Article 25   After the People’s Court accepted the application by a party to an arbitration an application for the dismissal of the award, if the other party to the arbitration applies for the enforcement of the same award, then the People’s Court in which the application for enforcement is brought shall rule that such enforcement shall be stayed.”

17.  Mr Cheung took issue with the translation of the last part, contending that the correct translation for “應當在受理後裁定”is “should rule” instead of “shall rule” in that it is not mandatory for the People’s Court to rule that the enforcement ought to be stayed.  I do not think this difference matters very much, in view of the decision I have reached.

18.  Mr Maurellet submitted that by making the Dismissal Application, this has the effect of staying or suspending the arbitration award.

19.  No expert evidence on Chinese law was adduced.  I would interpret Article 25 according to my understanding of the Chinese language.  On the plain wording of Article 25, I do not agree with Mr Maurellet that the pending Dismissal Application would have the effect of staying the award.

20.  The wording in Article 25 is clear.  Firstly, there must be an application to the People’s Court for the dismissal of the arbitration award.  Secondly, the People’s Court must have accepted jurisdiction to entertain the application for dismissal of the award.  Thirdly, the other party to the arbitration must then apply to the People’s Court for enforcement of the same award.  In the event such an application is made, the People’s Court in which the application for enforcement is brought shall rule [or should rule as submitted by Mr Cheung] that such enforcement shall be stayed.

21.  In the present situation, we only have steps one and two.  As mentioned earlier, the petitioner did not make any application to the People’s Court for the enforcement of the award.  That being the case, the pre-condition for the People’s Court to rule that the enforcement of the award shall be stayed is not met.  At the first inquisition hearing before the Beijing Court on 3 June 2008, the court only requested the parties to file further evidence to supplement their submissions.  No ruling was made by that court or by any other People’s Court to stay enforcement of the award, as apparently there was no application by the petitioner to enforce the award.

22.  It was not suggested by the Company it is entitled to rely on any other provision in section 40E(2) by which the enforcement of a Mainland award may be refused.

23.  The wording in section 40E(2) is clear.  Unless the award has been set aside or suspended by a competent authority of the Mainland or under the law of the Mainland, there is no basis to contend that the award is unenforceable under Hong Kong law.

24.  I do not consider it necessary to go into the merits or otherwise of the Dismissal Application.  Mr Cheung contended that the Company would have monumental difficulty to mount a successful challenge against the award in the Dismissal Application.  Mr Maurellet submitted the Company is entitled to apply to dismiss the award on the ground that the award was based on faked evidence, citing Article 58(4), Chapter 5 of the Arbitration Law of the PRC.

25.  I regard the pending Dismissal Application as irrelevant.  There is no evidence before me to suggest that a pending Dismissal Application would have the effect of suspending the award.  If the Dismissal Application had been determined, with an outcome in the Company’s favour in that the award is set aside, the position would have been different, as the Company would then be able to rely on that part in section 40E(2)(f) that the award has been set aside.  But the fact there is a pending Dismissal Application is of no assistance to the Company, as it does not appear to have the effect of staying the award under PRC law.  If the winding-up petition is heard tomorrow, I do not think the court would grant an adjournment or stay the petition pending the outcome of the Dismissal Application, particularly as no hearing date has been fixed after the first inquisition hearing and there is no knowing when the Beijing Court will determine the matter.

26.  Under section 40B(1), the petitioner is entitled to enforce the award in Hong Kong by action in the Court of First Instance.  In an action on the award, the court is concerned only with the jurisdiction of the arbitral tribunal.  It is no defence to an action on the award that there has been an error of fact or law on the part of the arbitral tribunal.

27.  For these reasons, I am satisfied the petitioner has discharged the burden of satisfying the court there is high probability of success in the petition.

28.  I decline to exercise my discretion to order security for costs.

29.  I order the Company to pay the costs of the petitioner in this application in any event.