CHINA BAOLI TECHNOLOGIES HOLDINGS LTD (formerly known as REX GLOBAL ENTERTAINMENT HOLDINGS LTD) v. ORIENT EQUAL INTERNATIONAL GROUP LTD AND ANOTHER

HCA 1399/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1399 OF 2016

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D E C I S I O N

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1.  This is a multi-party piece of litigation involving parties and proceedings outside the jurisdiction. The introduction and chronology provide an overview and track events as they unfolded.

I.   INTRODUCTION

2.  There were 8 summonses before the court stemming from an injunction granted by Ng J on 27 May 2016 (“the injunction order”) on the ex parte application of the plaintiff restraining Orient Equal International Group Limited (“D1”), Huang Dongpo (“D2”) and Hong Kong Zhong Qing Development Co Limited (“D3”) (collectively “the defendants”) from breaching the lock-up undertaking dated 22 April 2016 between each of the defendants and the plaintiff.  By an order dated 3 June 2016, the injunction was continued until trial or further order.

3.  The shareholdings of the defendants in the plaintiff were held in accounts in HSBC and Merrill Lynch which accounts were identified (by reference to the account numbers only) in the injunction.  The injunction was also served on HSBC and Merrill Lynch and the defendants’ shares have remained frozen in those accounts since 27 May 2016.

4.  In outline, the events giving rise to the injunction were as follows.

5.  In the early part of 2016, the plaintiff (a listed company in Hong Kong) carried out a placement exercise to increase its issued capital by over 330%.  The gross proceeds would represent approximately 77% of its enlarged share capital after the placing.

6.  The defendants successfully subscribed for shares totalling in the aggregate 1.667 billion shares (“the shares”) under that placement exercise.  D1, D2 and D3 were allotted 417 million shares, 500 million shares and 750 million shares respectively.  As the subscription price was heavily discounted (by as much as 84%), each placee was required to execute a lock-up agreement that prohibited any sale or dealings with the shares for a period of 24 months from the date of the allotment.

7.  Shortly after being allotted the shares, on 6 May 2016, each of D1 and D2 obtained a loan from a BVI company, Lantau Holdings Limited (“Lantau”) (the 1^st third party) and D3 obtained a loan from a Bahamian company, Squadron Holdings SPV0164 HK Ltd (“Purported Squadron”) (the 2^nd third party). Lantau and Purported Squadron are collectively referred to as “the lenders”.  The transaction entailed each of the defendants executing not only a loan agreement but also a springing pledge agreement with the relevant lender and a control agreement in relation to the loan (“the transaction documents”).

8.  The brokerage SVK Capital Management (“SVK”) (the 3^rd third party) was also a party to the control agreements.  At the time the transaction documents were executed, the defendants had no information regarding the holder of the HSBC and Merrill Lynch accounts.  Under the relevant control agreement, SVK was to comply only with notifications originated by the lender under the relevant loan transaction.  Lantau, Purported Squadron and SVK collectively will hereafter be referred to as “the third parties”.

9.  The defendants maintain that they entered into the loan transactions on the basis that they would obtain loans from Lantau or Purported Squadron (as the case may be) by pledging their respective shareholdings in the plaintiff as collateral, akin to leaving them in the placing agent’s escrow account.  The intermediary, a Mr Wang (whom the defendants alleged to be the lenders’ agent and who was the sole channel of communication with the lenders) had represented that the shares so pledged would not be sold.

10.  On 23 May 2016, having noticed an unusual spike in trading volume of its shares coupled with a sharp fall (of about 13%) in share price, the plaintiff made enquiries of the major placees as a result of which the plaintiff came to learn of the defendants’ loan transactions and their respective breaches of the lock-up agreements by pledging the shares.

11.  The plaintiff was concerned that a severe fall in share price would cause serious and irreparable harm to its business.  On 26 May 2016 there was another large spike in trading volume coupled with another sharp fall in the share price.  On 2 trading days alone, 23 and 26 May (trading having been suspended for other reasons on 24 and 25 May), the share price had fallen by over 33%.  Trading records revealed that HSBC and Merrill Lynch had been trading in volumes several times larger than usual.  Those events precipitated the ex parte application made the following day.

12.  On 27 July 2016, the defendants obtained leave from L Chan J to serve third-party notices out of the jurisdiction on the third parties.

Chronology

13.  The summonses before this court in chronological order are:

(i) Purported Squadron’s summons dated 2 June 2016 for a declaration that they are beneficially entitled to Purported Squadron’s shareholding in the plaintiff (“Purported Squadron’s declaration summons”);

(ii) Purported Squadron’s summons dated 4 July 2016 for further fortification (“Purported Squadron’s further fortification summons”);

(iii) Lantau’s summons dated 5 July 2016 for a declaration similar to the one sought by Purported Squadron in (i) above (“Lantau’s declaration summons”);

(iv) Ds’ summons dated 18 July 2016, inter alia, to restrain the third parties from disposing of or dealing with Ds’ shares in the plaintiff held in the accounts of HSBC and Merrill Lynch and the proceeds thereof (“Ds’ injunction summons”);

(v) Lantau’s summons dated 11 August 2016 to set aside the defendants’ service out order (“Lantau’s set aside service out summons”);

(vi) Purported Squadron’s summons also dated 11 August 2016 to set aside the defendants’ service out order (“Purported Squadron’s set aside service out summons”);

(vii) Defendants’ summons dated 24 August 2016 for an order that Purported Squadron be struck out as the 2^nd third party and not be heard on any of Purported Squadron’s applications for want of authority (“Ds’ authority summons”); and

(viii) SVK’s summons dated 29 March 2017 to set aside the defendants’ service out order (“SVK’s set aside service out summons”).

14.  Summonses (i) to (iv) first came before DHCJ Pang (“the deputy judge”) on 4 August 2016.  (They were adjourned to 22 August 2016 to allow the lenders time to make application to set aside the respective third-party notices (ie summonses (v) and (vi)).)

15.  Approximately a week later, on 10 August 2016, Mr Nottage (a promoter of Purported Squadron) purported to commence arbitration proceedings against D3 based on an arbitration clause in D3’s loan agreement.

16.  Between 10 and 12 August 2016, when D3 attempted to serve the third party notice on Purported Squadron, it discovered that no company by that name could be found in the Bahamian Companies Registry nor did Purported Squadron have a presence either at its given address stated in its loan transaction or at the address provided by a Mr Holland (said to be the managing director of Purported Squadron) who had deposed to 6 affirmations on its behalf in these proceedings.

17.  At the adjourned August hearing, a certificate of incorporation of a company bearing the same name as that of the 2^nd third party named in these proceedings dated 17 August 2016 (ie 5 days prior to the adjourned August hearing and the day following D3’s discovery) was exhibited to an affirmation of Jan Borghardt, counsel and attorney-at-law in the Bahamas.  (To avoid confusion, the entity newly incorporated on 17 August 2016 will hereafter be referred to as “New Squadron”.)

18.  On the day of its incorporation, New Squadron purported to pass board resolutions “ratifying” Purported Squadron’s loan agreement with D3 and the retainer agreement of Purported Squadron with Oldham Li and Nie (“OLN”) solicitors on record for Purported Squadron.

19.  Mr Borghardt also deposed to Bahamian law, specifically relating to section 70 of the International Business Companies Act 2000 (“IBCA”) which provided that a company may, within 90 days of incorporation, adopt a pre-incorporation contract.  He opined that it was “as if the company were in existence on the date the contract was entered into”.

20.  The deputy judge concluded that (a) the proceedings regarding Purported Squadron should not be heard until the issue of its authority had been dealt with as a preliminary issue; and (b) he declined to deal separately with Lantau’s summonses because of the commonality of some issues.  In his view the summonses of Lantau and Purported Squadron (ie summonses (i) to (iii) and (v) to (vi)) should be heard together after the determination of the authority summons.  He gave leave to the defendants to file the authority summons (vii) which was adjourned to 10 and 11 November 2016.

21.  Meanwhile, on 1 September 2016, New Squadron obtained, ex parte, declarations by Hilton J of the Bahamian court (in proceedings commenced by originating summons issued on 26 August 2016 against the plaintiff, D2 and D3 (collectively “the OS defendants”) but who were never served) that New Squadron had adopted the underlying contracts and that it could adopt legal proceedings commenced in its name prior to its incorporation.

22.  That prompted D3 to issue a writ in the Bahamas on 6 September 2016 (“the Bahamas action”) naming Purported Squadron and Mr Nottage as defendants (collectively “the Bahamian defendants”), seeking inter alia declarations that Mr Nottage lacked the capacity to commence the arbitration[1] on behalf of Purported Squadron prior to its incorporation, challenging the arbitration clause in the loan agreements and the applicability of section 70 IBCA (as to which see §18 above).

23.  D3 applied to the Bahamian court for an injunction restraining the Bahamian defendants from taking any further action in the arbitration proceedings and on 16 September 2016 obtained an injunction enjoining the parties from taking any further steps in the arbitration (“the September injunction”).

24.  On 23 September 2016 Hilton J set aside his earlier order of 1 September 2016 (see §21) on the basis that the OS defendants should have the right to be heard and also stayed New Squadron’s proceedings pending determination of the Bahamas action.

25.  On 24 October 2016 New Squadron applied for leave to adopt these proceedings and for Mr Nottage or Squadron Holdings Limited (“SHL”) to have leave to be joined as an interested party and to adopt these proceedings in the name of Purported Squadron (“the joinder summons”).  As a result, the joinder summons was before the deputy judge when the authority summons came on for hearing on 10 November 2016.

26.  Meanwhile, on 7 November 2016, the Bahamian defendants applied to set aside the injunction.  The plaintiff raised preliminary issues contending that the Bahamian defendants’ application to set aside the injunction was moot.  That application (to set aside the September injunction) was heard by Madam Justice Indra H Charles on 14 March 2017 (as to which see §35 below).

27.  By an order dated 23 November 2016 (“the November order”), the deputy judge ordered, inter alia, that the authority summons be adjourned to 9 May 2017 (ie the present hearing).  The deputy judge’s reasons are set out in his ruling dated 24 November 2016 (“the November ruling”)[2].

28.  The deputy judge considered that there would be no benefit to striking out Purported Squadron’s prior steps (ie summonses (i) – (ii) and (vi)) in view of the incorporation of New Squadron who is potentially affected by the injunction order; the question of the application of section 70 of the IBCA is patently a question of Bahamian law and given the extant proceedings in the Bahamas to decide the very issue, he could not see how or why as a judge exercising jurisdiction under Hong Kong law he should make a decision on what the law in the Bahamas is when the very same parties will litigate the same issues in the Bahamas.  He went on to say this at §31:

“ Apart from judicial comity, there is the very real question of what would happen if I made a ruling one way and the Bahamian courts on the same facts and questions of law made a ruling the other way. The undesirability of having diverging rulings is particularly acute in the circumstances of this case.”

The deputy judge declined to make any ruling on the authority summons, more specifically, the question of section 70 and made the November order.

29.  It was against that background that, inter alia, the authority summons is before this court.

30.  The second part of the November order addressed the joinder summons[3] that appeared to have to the following effect:

(a) New Squadron have leave to appear and take part in the hearing of Purported Squadron’s declaration, further fortification and set aside summonses (“Purported Squadron’s summonses”) filed in the name of Purported Squadron for the purpose of seeking the same relief and that New Squadron have leave to rely on the evidence already filed by or on behalf of Purported Squadron; and

(b) Mr D Sean Nottage and New Squadron have leave to appear and to take part in the hearing of Purported Squadron’s summonses for the purpose of seeking the like relief alternative to the relief sought by Purported Squadron and that they each have leave to rely on the evidence already filed by or on behalf of Purported Squadron.

31.  The defendants sought leave to appeal the November order on the basis that section 70 did not justify the adoption of legal proceedings by New Squadron but their application was dismissed by the deputy judge on 29 March 2017.

32.  As regards the Bahamas action, it is in its early stages and has yet to be tried.

II.  THE AUTHORITY SUMMONS AND THE PURPORTED SQUADRON SUMMONSES

The authority summons

33.  At the hearing, the first matter that had to be decided was whether the court should hear the authority summons pursuant to §1 of the November order.  For the reasons set out below, I adjourned the authority summons pending the determination of the Bahamas action.

34.  Two matters should be mentioned.  First, prior to the judgment on the Bahamian defendants’ setting aside application becoming available literally on the eve of the hearing, there had been no change in circumstances since the matter was before the deputy judge in November 2016 to render it appropriate for the substantive hearing of the authority summons to take place now.  The reasons that had been given in the November ruling for declining to make any ruling on the authority summons and on section 70 remained valid.  Second, it is not entirely clear whether this court has jurisdiction to hear the authority summons because it could be said that the deputy judge having gone into the merits of certain aspects in the November ruling had, as it were, ‘heard’ the matter to render this court functus officio.

35.  Be that as it may, the Bahamian defendants’ application to set aside the September injunction was dismissed on 4 May 2017.  In her judgment of that date (“the Charles judgment”), Charles J held, inter alia, that (i) a company that does not exist cannot bring legal proceedings; (ii) Mr Nottage did not have the capacity to commence arbitration proceedings on behalf of Purported Squadron prior to the incorporation of New Squadron; (iii) the purported arbitration proceedings were a nullity; and (iv) section 70 of the IBCA has no application to the commencement of legal proceedings prior to a company’s incorporation.

36.  But irrespective of the Charles judgment, the scope and effect of section 70 remain matters that are very much alive that fall to be determined in the Bahamas action.  The Charles judgment went no further than that section 70 has no application in relation to arbitration and/or legal proceedings.  In those circumstances, I consider that it remains inappropriate and undesirable for the Hong Kong court to wade into the true interpretation of section 70 when its scope and effect are matters that arise in the Bahamas action and as to which the Bahamian court is to determine in due course.

37.  Mr Manzoni SC leading counsel for the defendants submitted that if this court were to hear the authority summons, it will have to decide whether section 70 is such as to entitle New Squadron to ratify the contract (purportedly) entered into by Purported Squadron and until the section 70 point has been resolved and decided, New Squadron has absolutely no interest and hence no entitlement to adopt or seek the relief prayed for in the Purported Squadron summonses.  Mr Manzoni sought to cast the issue as one of adoption/ratification rather than one of authority. 

38.  For his part, Mr Pow SC leading counsel for “Squadron”, the 2^nd named third party, submitted that the authority summons was rendered moot by the November order made by the deputy judge.  Pausing here, “Squadron” in that context is a compendious reference to Purported Squadron and New Squadron.  In that regard, it is clear that there is a distinction between Purported Squadron and New Squadron depending on the context.  For the sake of clarity, that distinction should be maintained whenever the context so permits. A compendious reference could easily cause confusion.  That is best avoided. 

39.  It would appear that in referencing the November order, Mr Pow had in mind the second part of the November order[4], which on one reading could be treated as if somehow it had implicitly decided that New Squadron had the requisite authority because of section 70.  But it is apparent from §17 of the deputy judge’s ruling of 29 March 2017 (when refusing to grant leave to the defendants to appeal) that the point of the second part of the November order was simply to ensure that the necessary parties were before the court at the substantive hearing to argue the authority summons.  In other words, the deputy judge was not determining any substantive issue.  Accordingly, I do not accept that the authority summons was rendered moot by the November order.

40.  Given the views expressed in §36 above, clearly the preferable course is to await the outcome of the Bahamas action before any determination is made on the authority summons.

Purported Squadron’s summonses

41.  The next question was whether the Purported Squadron summonses should also be adjourned pending the determination of the Bahamian action.  After hearing submissions made on behalf of the defendants and New Squadron, given my decision concerning the authority summons, I did not consider it appropriate to hear any of the Purported Squadron’s summonses and adjourned them pending determination of the Bahamas action and the authority summons.

42.  Prima facie, applying the Charles judgment and its reasoning, Purported Squadron’s summonses would be nullities and ought to be struck out.  Even if they should not be struck out because of the second part of the November order, as a matter of logic, the Purported Squadron’s summonses cannot be heard without first resolving and determining the authority summons because New Squadron’s interest hinges on the scope and effect of section 70.

43.  Mr Pow sought to submit that New Squadron should be allowed to be heard on the basis that it is an ‘interested’ party that should be joined in the action, citing a passage at Hong Kong Civil Procedure 15/6/7 to the effect that parties whose liability is contingent not only upon the outcome of the proceedings to which joinder is sought but also on the outcome of other proceedings may be said to be persons affected by para 2(b)(i) of Order 15 but the supporting authorities cited are insurance cases.  As is clear from the annotation at 15/6/8, an intervening party must have some interest directly related connected with the subject matter of the action.  Mere commercial interest in the outcome is not enough.  In New Squadron’s case its interest (if any) hinges entirely on section 70.

44.  The court was invited to approach the matter on a good arguable case basis.  But if New Squadron has a good arguable case on section 70, so do the defendants.  That is apparent from the expert evidence in the hearing bundles.  That approach would put the court in an impossible position when it comes to the question of relief.

45.  For those reasons, Purported Squadron’s summonses were adjourned pending resolution of the Bahamas action.

III.   LANTAU’S SUMMONSES

46.  Mr Dawes SC leading counsel for the plaintiff sought to persuade this court that it would not be desirable to proceed with Lantau’s summonses without also hearing Purported Squadron’s summonses, a view shared by the deputy judge in August 2016.  Apart from commonality of issues, it was said that the dealings between the defendants and the lenders were made via the same person and despite there being two different lenders, in reality, there was but one deal.

47.  I can see the force of the argument but given the special circumstances of this case currently prevailing, if it were later to transpire (upon resolution of the Bahamas action) that section 70 on its true construction does not assist New Squadron (a scenario that cannot be ruled out), it would be unfair to Lantau.  The lock-up period is for 24 months and virtually a year has already gone by.

48.  Lantau’s summonses concern D1 and D2 to whom Lantau had advanced funds under the relevant loan transactions.  For convenience, for the remaining part of this Decision, D1 and D2 will be referred to collectively as “the defendants” unless the context otherwise requires.  As earlier noted, the defendants were respectively allotted 417 million shares and 500 million shares in the plaintiff (“the disputed shares”) in late April/early May 2016.

Lantau’s declaration summons

49.  Lantau’s summons seeks a declaration that the injunction does not restrain Lantau from exercising or in any way affect its rights over any of the shares in the plaintiff that are beneficially owned by Lantau and held on behalf of Lantau in the HSBC and Merrill Lynch accounts.  Beneficial ownership of the disputed shares was the key issue in the declaration summons. As appears from the supporting affirmations and submissions before the deputy judge, at the earlier hearings, Lantau asserted proprietary rights in respect of the disputed shares.

50.  It is evident that relief in terms of Lantau’s declaration summons would necessarily involve the determination of the ownership issue in a summary manner.  But by the time of this hearing Lantau knew that it was not in a position to demonstrate its beneficial ownership as asserted in its summons.

51.  As a result, beneficial ownership did not form any part of Lantau’s argument in support of the declaration summons.  The material change to its declaration summons was ‘effected’ not by way of amendment but through attaching a draft order to Lantau’s written skeleton in which draft order the critical words “beneficially owned”, central to its declaration summons, are nowhere to be found. 

52.  On any view, Lantau’s approach was highly unorthodox.

(a)   The ownership issue

53.  There is extant a bona fide and serious dispute between the defendants and Lantau before the New York court as to whether the defendants are still the owners of the disputed shares (“the ownership dispute”).  That being the case, plainly Lantau was in no position to show that currently it is the beneficial owner of the disputed shares.  As the resolution of the ownership issue lies in another jurisdiction, it is inappropriate and unnecessary for this court to delve into the parties’ respective contentions in any detail.  What follows is an outline of the background giving rise to it and the rival contentions.

54.  Prior to the loan transactions, the defendants were the beneficial owners of the disputed shares, having successfully subscribed for them in the plaintiff’s placement exercise.  The precise date of allotment is not apparent from the ‘agreed’ chronology[5]. It was only clarified subsequently[6]. It now transpires that the allotments of the disputed shares took place on 27 April 2016, well before the defendants entered into the loan transactions that are dated 6 May 2016.

55.  Lantau’s business is mainly in securities ‘repo lending’.  It became aware of a potential loan transaction with the defendants through an intermediary, Mr Wang.  Lantau denies that Mr Wang was its agent.

56.  Lantau asserts that it is the victim of fraud practised by the defendants because the defendants had warranted that the shares were unrestricted and it was only subsequently that Lantau discovered that warranty to be false.  Lantau further contends (which the defendants dispute) that under the loan agreements, it was free to deal the disputed shares as it wished once the loan agreements had been executed by the defendants.

57.  Lantau’s assertion of beneficial ownership is strenuously resisted.  In brief, the defendants’ case is that Lantau (who was not known to them and with whom they have had no prior business dealings) had fraudulently misrepresented the nature of the transaction documents through its intermediary/agent Mr Wang.  The defendants are businessmen from a foreign jurisdiction unfamiliar with the type of financial transaction involved and have no proficiency in English.

58.  Pausing here, it is worth remarking that the transaction documents (which are in English) are not readily comprehensible: §9.1 of the loan agreement (concerning the repayment obligation) serves as an illustration.  The effect of the formula and how it operates in practice is a challenge to anyone not well versed in this type of financial transaction, much less persons who have no proficiency in the language used in the transaction documents.

59.  The defendants’ alternative case is that they entered into the loan transactions under a mistake of which Lantau was aware to render the loan agreements void. 

60.  The ownership issue between the defendants and Lantau is to be resolved in the New York courts.  The question whether the terms of the transaction documents ipso facto transferred ownership of the disputed shares to Lantau and whether Lantau ought to have control also arise and are matters that are also hotly disputed.

61.  Lantau first initiated proceedings in the State of New York in July 2016, based on an exclusive jurisdiction clause in the loan agreements.  In December 2016 Lantau obtained a preliminary restraining order against, inter alia, the defendants preventing them from contesting “any claims relating to ownership or beneficial ownership of the shares” in a venue other than the New York courts.  The defendants filed a defence in the New York proceedings in January 2017 alleging fraud and misrepresentation that vitiated the loan agreements with the consequence that the transaction documents should be set aside.

(b)   Whether the injunction affects the disputed shares

62.  Mr Sussex was at pains to emphasise that he was not (now) seeking a declaration of right, jettisoning any argument based on beneficial ownership in favour of one based purely on control.  Lantau’s challenge is now directed at the operation or application of the injunction order itself. 

63.  The relevant bank accounts into which the disputed shares were transferred/deposited pursuant to the loan agreements were identified in the injunction and the order was served on HSBC and Merrill Lynch. Other than the names of the banks and the respective account numbers into which the defendants had deposited the disputed shares, the plaintiff had no other information and did not know the identity of the holder(s) of the account.  It now transpires that the HSBC account is held in the name of SVK and Merrill Lynch account is held in the name of South Star Capital Partners, one of Lantau’s business associates.

64.  It is common ground that (1) as a matter of principle, injunctions in personam do not bind third parties; (2) Lantau is a third party and not a party to the lock-up agreements; (3) Lantau is not a party to the action; and (4) the injunction only restrains a breach of the undertakings by the defendants.  It also appears to be common ground that (5), as a matter of principle, the injunction does not affect assets that are beneficially owned by third parties as opposed to a defendant.

65.  As matters stand, having accepted that the ownership dispute subsists, Lantau cannot demonstrate that it (rather than the defendants) is currently the beneficial owner of the disputed shares.  But it is now said that the real issue is whether the injunction is competent to restrain and ‘bites’ on someone other than the defendants rather than merely imposing a constraint upon the defendants.  Lantau’s stance is that the injunction is a substantive injunction against the defendants only to restrain an apprehended breach of contract and does not restrain a person who was not a party to that contract or the action from pursuing its own commercial objectives.

66.  It was emphasised that at the time the plaintiff applied for the injunction, not only was it aware that the defendants had acted in breach of the lock-up undertakings by pledging the disputed shares, it was aware of the loan agreements and also knew that Lantau was selling the shares in the market, and that the purpose of the injunction evident from its terms was to stop further breaches of the lock-up agreement and not to preserve assets for execution by the plaintiff. It was contended that the defendants have given up de facto control of the shares.  They therefore have no power to do any of the acts enjoined.   

67.  Mr Sussex cited the case of World Wide Fund for Nature v THQ/Jakks Pacific LLC (World Wrestling Federation Entertainment Inc intervening) [2004] FSR 10, 161 as authority for the proposition that acts of a third party over whom the enjoined defendants do not have control cannot constitute a breach of the injunction, not on the part of the third party and not on the part of the defendants.

68.  Mr Dawes’ response is that the ownership dispute may well result in the loan agreements being set aside with the consequence that the beneficial ownership of the disputed shares remained throughout with the defendants.  In that scenario, as the injunction prohibits further breaches of the lock-up undertaking, its practical effect is that the defendants’ shares would remain frozen because any dealings/disposals would constitute a breach of the injunction.  In that sense, the injunction ‘bites’. 

69.  Mr Dawes invited the court to deal with it no differently from a typical Mareva case because the situation that has arisen is a dispute as to whether certain assets which on the face of it belongs to the defendants could belong to a third party.  The case of Hui Chi Ming v Koon Wing Yee & Ors [2010] 4 HKC 86 was cited as an example.  It concerned an application to extend the ambit of a Mareva injunction to cover assets held under a trust.  The expression—“the Chabra jurisdiction”—is sometimes used to refer to the exercise of a Mareva injunction against a third party. 

70.  The relevant principles derived from the various authorities cited may be summarised as follows:

(i) The Mareva injunction can be exercised against non-parties: Hui Chi Ming at §26;

(ii) Where the court is invited to include within the scope of the Mareva injunction assets which appear on their face to belong to a third party, the applicable principles are those enunciated by Lloyd LJ7[7] (at 884B–E) in SCF Finance Co v Masri [1985] 1 WLR 876; 

(iii) For the Masri principles to apply, the court must be satisfied that there is “good reason to suppose” (to be equated with a good arguable case: XY, LLC v Jesse Zhu, 5 December 2016, CACV 11/2016, §24(2)) that the assets are in truth: (a) assets belonging to the defendant; or (b) assets of which the defendant has control, or a right of access or some other rightwhere the Mareva injunction is sought to restrain the disposal/‌removal of assets held by third parties: Hui Chi Ming at §§27 – 30;

(iv) It is not necessary for the applicant to demonstrate, at the injunction stage, that the assets sought to be frozen belong to the defendant: what has to be shown is good reason to suppose as against a non-party that the assets held by the non-party would be susceptible to a procedure which would lead to satisfaction of a judgment in the defendant’s favour: Dadourian Group International Inc v Azuri Limited [2006] WTLR 239 at §26;

(v) It is unnecessary for the plaintiff to have a cause of action against the third-party: see TSB Private Bank International SA v Chabra [1992] 1 WLR 231 at 237B–D.

71.  Those principles are largely reflected in the statement of the Chabra jurisdiction of Popplewell J[8] conveniently reproduced in the judgment of Kwan JA in XY v Jesse Zhu (5 December 2016), CACV 11/2016 at §24.  As Popplewell J observed “… the jurisdiction will be exercised where it is just and convenient to do so.  The jurisdiction is exceptional and should be exercised with caution …”.  Further, substantial control is not the test for the existence and exercise of the Chabra jurisdiction. In his view, the ultimate test is always whether there is good reason to suppose that the assets would be amenable to execution of a judgment obtained against the defendant against whom there is a cause of action.

72.  It will be seen from the above that the Chabra jurisdiction enhances the effectiveness of a Mareva injunction.  Mr Sussex does not dispute that but his objection to the Chabra jurisdiction being applicable in the present case is that the injunction here is not a Mareva injunction but a substantive injunction and there is no reported case where it has been applied to fortify a substantive injunction.  For those reasons, Lantau submitted that it is irrelevant and inapplicable.

73.  The fact that there is no such reported instance of the Chabra jurisdiction being invoked of itself cannot constitute good reason for eschewing the jurisdiction altogether.  Short of its application being contrary to any established legal principle, it should not be ruled out in limine.

74.  Lantau further submitted that since the entire basis of the Mareva jurisdiction is to prevent the risk of dissipation, the Chabra jurisdiction is limited to the freezing of assets that are amenable or susceptible to the compulsory execution of the judgment against the defendant and contended that the defendants could not do so because the injunction granted only operated in personam.

75.  But it is relevant to note that in the XY case, Kwan JA also accepted that the Chabra-type jurisdiction extends to assets within the set of circumstances identified by the High Court of Australia in Paul Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 at §§57 – 58:

“ (i) the third party holds, is using, or has exercised or is exercising a power of disposition over, or is otherwise in possession of, assets, including ‘claims and expectancies’, of the judgment debtor or potential judgment debtor; or

…”

Plainly, the present case falls within the first limb.

76.  It is difficult to discern a legitimate reason that would bar or somehow render unsuitable the application of the considerations pertaining in a typical Chabra situation where there are rival claims to ownership of an asset to the injunction.  

77.  Lantau placed considerable reliance on the WWF case in support of the relief now sought in its draft order which, it would appear, was framed with the WWF case in mind.  Factually, the WWF case is far removed from the present case.  It concerned an injunction to enforce a demarcation agreement between WWF and the Federation relating to the use of “WWF” in any language.  The Federation had granted a licence to THQ for its use several years prior to the injunction.

78.  The court was concerned with the contractual obligations between WWF and the Federation as well as the contractual obligations between the Federation and its licensee.  The judge below held that the injunction imposed absolute liability on the Federation.

79.  Lantau attached a great deal of significance to its “control” over the disputed shares, contending that the defendants have lost control and have no relevant control over Lantau with the consequence that nothing that Lantau can do can amount to a breach by the defendants.  Nor, it was argued, could Lantau itself be in breach of the undertaking or aid and abet its breach, relying on the WWF case as an analogous case.

80.  Various provisions in the transaction documents were referred to in support of Lantau’s ability to use the collateral, including the right to lend / raise money on the security of the collateral, the right to use the collateral for the purposes of hedging through options or future contracts, trading and the fact that certain rights were exercisable pending an event of default.

81.  But Lantau’s rights under the transaction documents are contentious matters and, specifically, any alleged right to sell pending an event of default.  The defendants pointed to other provisions in the transaction documents in support of their rival contentions.  As those matters are to be resolved in New York, they are matters about which this court should not comment.

82.  In §42 of his judgment, Carnwath LJ observed that:

“ THQ is an independent party pursuing its own legitimate commercial interests under a licence granted to it well before the order was made.”

83.  To the extent that Lantau sought to derive assistance from those observations as well as other observations in the several passages Lantau cited (for example at §§16, 18 – 19 and 45), a critical distinction has to be borne in mind: the WWF case did not involve competing claims to beneficial ownership.

84.  In fact, those observations were made with reference to the particular set of facts before that court, against the backdrop, inter alia, of the finding that THQ had done their best to eliminate all references to the WWF scratch logo and recognising that the problem that gave rise to the proceedings was one of practicality: the cost and technical difficulty of reprogramming videogames made it impossible for practical purposes to reprogram the games.  In my view, the observations relied on were made in a particular context against a specific set of facts. They were not statements intended to be of general application in an entirely different context.

85.  ‘Control’ and ‘aiding and abetting’ are not abstract notions but are contextual in the sense that their meaning is governed by the context.  Given that beneficial ownership is a live issue, whether the defendants have ‘control’ in relation to the disputed shares would depend on whether they remain the beneficial owners.  The fact that Lantau has control in the sense of being in a position to direct SVK to act in accordance with its directions is neither here nor there.   

86.  In my view, the WWF case has little relevance in the context of the present case and certainly is not a proper basis for the draft order that Lantau now seeks.  In reality and in substance, Lantau is seeking a declaration of its beneficial ownership, as it were, through the back door because the effect of granting the declaration in the draft order is nothing short of indirectly confirming Lantau’s beneficial ownership of the disputed shares.

87.  The injunction granted to the plaintiff was to prevent further breaches of the lock-up undertakings designed to protect the plaintiff who was contractually entitled to the benefits conferred.  The disputed shares are the defendants’ shares albeit held by a third party if at the end of the day the defendants were to prevail.

88.  In practical effect, as the substantive injunction restrains further breaches, the defendants’ shares are to remain locked up (ie frozen) during the remaining lock-up period so long as the defendants remain beneficially entitled to them.  That was the point of the injunction.  Hence any dealings or disposals after the date of the injunction would constitute a breach by the defendants.

Lantau’s set aside service out summons

89.  As a result of the anti-suit injunction granted by the New York court, the defendants made an application to withdraw its third-party notice on Lantau by summons dated 27 February 2017.  The matter came before Master J Wong on 14 March 2017 who granted the defendants leave to withdraw the third-party notice against Lantau “without prejudice to any of the parties’ rights” and adjourned §§2 – 3 of the withdrawal summons (that no order be made on the set aside summonses and costs) to be determined at this hearing.

90.  Lantau was concerned that should this court make no order on its setting aside service out summons it would have the effect of Lantau being deemed to have submitted to jurisdiction by virtue of the provisions of Order 12, rule 8(6). 

91.  Lantau’s concerns can be addressed by stating expressly in the court’s order that there be no order on Lantau’s set aside service out summons but that Lantau “shall not be treated as having submitted to the jurisdiction by reason of its having given notice of intention to defend the proceedings pursuant to RHC Order 12, rule 8”.

92.  In view of the turn of events, it is unnecessary to consider the substantive merits of Lantau’s setting aside service out summons although it is noted that Lantau associates itself with and adopts the submissions of SVK in support of SVK’s set aside service out summons.

Orders on the Lantau summonses

93.  For the reasons set out above, Lantau’s declaration summons is dismissed.  There is to be an order nisi that the costs of the plaintiff and the defendants be borne by Lantau.

94.  The order in respect of Lantau’s set aside service out summons is to be in the form as set out in §91 above.  There is to be an order nisi that Lantau’s costs be paid by the defendants.

IV.   SVK’S SET ASIDE SERVICE OUT SUMMONS

95.  SVK sought to set aside the order dated 27 July 2016 granting the defendants leave to serve the third-party notice on SVK on the grounds that (a) there was material non-disclosure of law in their application for leave; and (b) alternatively, at the time of the ex parte application, the defendants (i) could not establish that the jurisdiction clause did not apply and (ii) could not demonstrate that there was a serious issue to be tried between them and SVK.

(a)   Material non-disclosure

96.  The defendants’ summons for leave for service out of the jurisdiction was supported by the 2^ndaffirmation of Lau Chun Ming dated 27 July 2016 (“Lau 2”). The substantive evidence before the court included the 1^st and 2^ndaffirmations of Li Wen Hao (respectively “Li 1” and “Li 2”) which set out the full background of the loan agreements and as well as events occurring since Li 1.

97.  It should be mentioned that in addressing the issue whether New York law is applicable and the relevant issues thereunder, Li 2 (at §22) exhibited an opinion from Jason M Halper, a New York attorney who opined that where there is a fraudulent misrepresentation of the contents of a contract and the party is thereby mistaken as to the nature or character of the document, it is possible that a court in New York, applying New York law, could find that the transaction documents are void.

98.  SVK’s case is that the defendants’ claims fall within various dispute resolution clauses and the third-party proceedings were brought in breach of those clauses. One of the matters that an applicant for leave to serve out of the jurisdiction has to establish is to show that Hong Kong is clearly the more appropriate forum. Where there is a jurisdiction clause, that is normally decisive and a strong case to the contrary has to be made out.

99.  Reference was made to Joseph on Jurisdiction and Arbitration Agreements and their Enforcement, 3^rd edition at §4.36 where it is stated that:

“ An arbitration agreement is a separate and distinct agreement from the substantive contract and is not ordinarily impeached or rendered void if the substantive contract is discharged, frustrated, repudiated, rescinded, avoided or found to be void.”

100.  SVK’s contention was that Mr Lau had misrepresented the law to the judge. It was submitted that even if the allegations of fraud and mistake were made out that would impeach the matrix or substantive contract, they do not necessarily impeach the dispute resolution clause because of the doctrine of separability.  The dispute resolution clause is a separate agreement and has to be itself under some specific attack: see Deutsche Bank AG & Ors v Asia Pacific Broadband Wireless Communications Inc [2008] EWCA Civ 1091 at §24.

101.  A relevant question in the present context is whether the issues raised directly impeach the separate agreement for dispute resolution.  The defendants’ attack is based on fraud and/or mistake and it is their case that there was simply no consensus ad idem between the parties and no contract ever arose — essentially, a plea of non est factum.

102.  While a contract that is void ab initio (whether on grounds of illegality or ultra vires) will not of itself carry the consequence that the dispute resolution clause is equally void and unenforceable, it is recognised that the nature of the alleged challenge needs to be considered in each case.  In Mackender v Feldia AG [1967] 2 QB 590 at 598, Lord Denning MR drew a distinction between a case where no contract ever came into being at all and one where the illegality did not affect the formation of the contract but the non-disclosure made it void and added that:

“ I can well see that if the issue was whether there ever had been any contract at all, as, for instance, if there was a plea of non est factum, then the foreign jurisdiction clause might not apply at all …”

103.  That distinction was highlighted by Hoffman LJ in Harbour Assurance Co (UK) Limited v Kansa General Insurance Co Limited [1993] QB 701 between cases of accepted repudiation or frustration and cases of initial invalidity who commented (at 725D–E) that:

“ this contrast was understandable because the most common examples of cases in which the ground of invalidity of the substantive obligations of the contract also necessarily entails the invalidity of the arbitration clause are cases of initial invalidity, such as the absence of consensus ad idem, non est factum, mistake as to the person and so forth.”

104.  In his speech in Fiona Trust & Holding Corp v Privalov [2007] 4 All ER 951 at §17, Lord Hoffmann accepted that there may be cases in which the ground upon which the main agreement is invalid is identical with the ground upon which the arbitration agreement is invalid.  See also Joseph at §4.40.

105.  The defendants’ case is that the allegations of fraud in the present case embrace the entire transaction between Lantau, the defendants and SVK including the dispute resolution clauses.  There was never any agreement reached because the transaction documents presented for signature were not what had been represented to the defendants by Mr Wang as to the nature of the transaction, affecting the entire bargain.

106.  Turning to the evidence presented to the court, in Lau 2, after outlining the nature of the application, Mr Lau went on to address the following matters: (i) good causes of action, (ii) the applicable gateways under Order 11 rule 1, (iii) where the third parties may be found, (iv) Hong Kong as the most appropriate forum and (v) full and frank disclosure.

107.  The focus of the challenge was §9(5) of Lau 2 which appears under heading (iv) above, namely the forum conveniens issue.  It read:

“ (5) Although there are exclusive jurisdiction clauses or arbitration clauses in the relevant loan agreements, springing pledge agreements and control agreements by virtue of which it could be argued that the Hong Kong court should have no jurisdiction to try matters relating to the agreements, given that the Defendants are alleging fraud/mistake, these clauses will be impeached (and the agreements avoided) if fraud/mistake can be established.

(6) Likewise, the governing law clauses in the various agreements would be impeached …” (emphasis added)

The complaint is that the statement made in §9(5) was a misrepresentation of the law. 

108.  However, having in §9(5) stated that the loan agreements contained exclusive jurisdiction clauses or arbitration clauses, Mr Lau went on to consider whether the Hong Kong court should assume jurisdiction, highlighting (in §§11 – 12) where the jurisdiction/dispute resolution provisions were to be found in the transaction documents, concluding at §13 as follows:

“ However, as noted above, these clauses could be impeached if fraud/mistake is established by the Defendants.”

(emphasis added)

109.  It is apparent that the phrase “as noted above” in §13 was a reference to §9(5), that being the only other passage in Lau 2 addressing that subject matter. In my view, those two statements need to be read together against the backdrop of the contents in particular of Li 1 and Li 2.  The juxtaposition of “will” and “could” and the change from “will” to “could” is not one that would not have escaped the court’s notice. It was acknowledging the possibility that the jurisdiction/dispute resolution clauses may not be impeached. 

110.  On the approach and analysis of the defendants’ case summarised in §105, having regard to §§102 – 104 above, there is a legal basis for their view and they are entitled to see their case in that light, whether or not the defendants prevail at trial. 

111.  This is not a case where the governing law/jurisdiction clauses were not highlighted for the court’s attention.  The court would not have been oblivious of the implications that flow from it.  The nub of SVK’s criticism appears to be the absence of any direct and specific reference to the separability doctrine and explaining why the defendants fall within an exception.

112.  Given the facts relied on by the defendants, I do not consider that there was a material misrepresentation of the law.  On the facts presented by the defendants, it was a permissible legal conclusion.  In so far as it was said that it amounted to a non-disclosure of law, it is unclear whether SVK is suggesting that in every case there is some obligation on an applicant in an ex parte application to ‘educate’ the court on the applicable legal principles.

113.  For my part, an allegation of misrepresentation is to be distinguished from some general and amorphous obligation to state the applicable law. Inevitably, in the latter case, questions are bound to arise as to the adequacy of any attempted disquisition on the applicable legal principles which I consider undesirable. 

(b)   SVK’s fall-back position

114.  I will turn to address the so-called merits point — whether at the time of the ex parte application a serious issue to be tried between the defendants and SVK could have been made out.

115.  SVK submitted that the defendants are under an obligation to show a case that is not liable to be struck out, established by an affidavit stating facts that, if proved, would be a sufficient foundation for the alleged cause of action. SVK’s case is that other than a bare assertion that SVK was involved in the fraud or wrongful conduct, no particulars were given as to SVK’s involvement in the alleged fraud, its limited role was as the custodian agent not involved in the negotiations for the loan.  In short, the submission was that there was no factual foundation for any of the allegations against SVK.

116.  For the purposes of Order 11, rule 1(1)(c), there is a three stage test as to whether leave should be granted, namely: (i) establishing that genuine proceedings are properly commenced within the jurisdiction and served on an anchor defendant, (ii) whether the proposed defendant is a “necessary” or “proper” party thereto; and (iii) whether it is appropriate to permit the claim against the defendants to proceed here in terms of forum non conveniens, bearing in mind the lis pendens here.  In the present case, by the time of the application for leave, proceedings had already been duly served on the defendants.

117.  On 5 July 2016, Lantau filed its declaration summons asserting beneficial ownership to the disputed shares.  So, approximately three weeks prior to the ex parte application, there was a clear issue raised by Lantau concerning beneficial ownership of the shares.  Admittedly, by the time of this hearing, Lantau chose not to pursue the beneficial ownership argument for the reasons explained above.  But at the time of the ex parte application, as stated in Lau 2, §7(1), “the common issue” raised by Lantau was whether the defendants were the true owners of the disputed shares and for the resolution of that issue.  Plainly both Lantau and SVK were necessary or proper parties to the resolution of that issue.

118.  It is also clear that there is no requirement that there be a cause of action as such against the party to be served out: see Hong Kong Civil Procedure 11/1/17C.  Under the provisions of §6.2 of the Control Agreement under which SVK need not be concerned about complaints by the borrowers, its obligations being to implement instructions of the lender unless it is injuncted from doing so.  This recognises that a court of competent jurisdiction can injunct SVK from dealing with the disputed shares deposited with it by the lender.

119.  I accept the defendants’ submissions on the merits issue.

120.  Since the first point taken under its fall-back position hinges on the merits issue, that point falls away.

121.  Accordingly, SVK’s setting aside service out summons is dismissed.  There is to be an order nisi of costs in favour of the defendants. 

V.   THE DEFENDANTS’ INJUNCTION SUMMONS

122.  On 18 July 2016, the defendants issued an injunction summons against the third parties.  Given events to date, the position of that summons in relation to each of the third parties is as follows:

(1) In relation to Purported Squadron

As all the Purported Squadron summonses have been adjourned pending resolution of the authority summons, the defendants’ injunction summons against Purported Squadron must similarly be adjourned.

(2) In relation to Lantau

In view of the anti-suit injunction granted in New York, the defendants concede that they are enjoined from pursuing their injunction summons against Lantau.

123.  In relation to SVK, it is more complicated:

(1) The defendants submitted that the injunction summons against SVK should also be adjourned but Ms Ismail submitted that there was no basis for the defendants to seek any injunction against SVK because

(a) if there is an injunction against Lantau and Purported Squadron, SVK could not deal with the disputed shares as it is obliged to act on the instructions of Lantau or Purported Squadron under the Control Agreements; and

(b) if no injunction is granted against Lantau or Purported Squadron, then there can be no basis for any injunction against SVK who should be allowed out of this with costs.

(2) While superficially attractive, as Mr Manzoni pointed out, the difficulty that arises is that there is Purported Squadron and New Squadron. Although SVK contracted with Purported Squadron, if and when New Squadron were to give it any instructions (having ratified that contract with Purported Squadron pursuant to section 70 of the IBCA) under the contract with Purported Squadron to dispose of the disputed shares, it is simply not known what SVK would do and unless SVK remains a party, the issue would not be enjoined as against SVK.

124.  In my view, unless and until that matter is clarified, the concern is real.  For that reason, I consider it appropriate that SVK should remain as the 3^rd third party.  Accordingly, the defendants’ injunction summons against SVK is adjourned pending resolution of the Bahamas action.

Orders

125.  Agreed draft orders in respect of the various applications should be submitted for approval by the party seeking the relevant order. To the extent that no order nisi for costs has been made, costs are reserved.