GOLONG CO., LTD v. SESDERMA, S.L.

HCMP 1646/2020

[2021] HKCFI 568

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1646 OF 2020

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D E C I S I O N

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1.  I have before me an application for an order enjoining the Defendant from presenting a petition for the winding-up of the Plaintiff (“Company”) on the grounds of insolvency. The background to the dispute is a little unusual.

2.  The Defendant is a Spanish company, which manufactures and distributes cosmetics.  In 2007 it entered into an agreement for the Company to distribute its products in the Mainland.  This was replaced by a new agreement on 1 October 2018, which extended the geographical area to include Korea and Japan and was to last until 31 December 2023.

3.  Differences arose between the parties and each commenced an arbitration against the other before China International Economic and Trade Arbitration Commission (“CIETAC”) Zhejiang.  The arbitrations were heard together by the same arbitrator, Mr Niu Lei.  The Arbitrator delivered his awards on 3 July 2020.  Both claimants were successful.

4.  In the Arbitration brought by the Defendant, the Company was ordered to pay over EUR2 million.  In the Arbitration brought by the Company, the following orders which are relevant to this application were made:

“1. Order that the Respondent is in breach of the ‘SESDERMA Cooperation Agreement’ numbered SW-20181009-JJ.

2. Order that the Respondent continue to perform its obligations under the ‘SESDERMA Cooperation Agreement’ numbered SW-20181009-JJ (i.e. the 2018 Agreement) and immediately terminate all authorizations granted to third parties and/or any business relationships with third parties within the authorised territories and channels that are in conflict with the exclusive distributorship granted to the Claimant under the 2018 Agreement;

3. Order that the Respondent bear part of the marketing costs incurred in the period of the cooperation in the sum of RMB1,181,664.95 and USD161,211.03;

4. Order that the Respondent provide the Claimant with EUR890,833.27 worth of sample products or pay the equal amount to the Claimant;

…”

5.  On 4 September 2020 an order was made granting leave for the award in the Defendant’s favour to be enforced in Hong Kong. On 23 September 2020 the Defendant served a statutory demand on the Company for EUR1,815,255.18 (“Debt”) being the net amount the Defendant contends is payable to it having netted off sums it accepts it has to pay to the Company pursuant to the award in the Company’s favour.

6.  The Company contends that it has a cross-claim, which extinguishes the Debt.  In summary it says this.  On 13 July 2020, 10 days after the award, which contained in [2] an order that the Distributorship Agreement be performed by the Defendant, the Defendant served a notice purporting to terminate the Distributorship Agreement on the grounds that the Company had breached the Distributorship Agreement.  I was told by Mr Payne that the Defendant had attempted to introduce the matters it relies on as justifying termination into the arbitration against it, but the Arbitrator declined to permit it on the grounds of lateness.  Unsurprisingly the Company contends that the Defendant has manifestly failed to comply with the Award and that as a consequence it has a claim for loss of profit.  On 10 September 2020 the Company commenced a new arbitration seeking initially to recover its loss allegedly suffered as a consequence of the Defendant interfering in its ability to sell the inventory it has obtained from the Defendant after the Defendant’s first attempt to terminate the Distributorship Agreement in January 2019.  The notice was revised on 21 September 2020 to include a claim for loss consequential on the Defendant’s failure to honour the Award and perform its obligations under the Distributorship Agreement.

7.  Before turning to consider the parties competing arguments I will set out the relevant principles, about which there is no material dispute.  In Re Sinom (Hong Kong) Ltd [1], Kwan J (as she then was) held at [9]–[16]:

“9. The principles governing applications for interim injunctions in American Cyanamid Co v Ethicon Ltd [1975] AC 396 do not apply to this situation as the granting of an injunction to restrain the presentation of a winding up petition would finally dispose of the issue in dispute in the present proceedings...

10. The court will grant a quia timet injunction to prevent the presentation of a winding up petition which it considers would be an abuse of process. Great circumspection must be exercised in doing so, as the right to petition for winding up in appropriate circumstances is a right conferred by statute, and a would-be petitioner would not be restrained from exercising it except on clear and persuasive grounds…

11. As with a petition where there is a bona fide dispute of the debt on substantial grounds (a disputed debt petition), where the company has a genuine and serious cross-claim against the petitioner greater than or equal to the petitioner's debt (a cross-claim petition), such a petition may be restrained from proceeding... It is an abuse of the process of the court to make a statutory demand or present a winding up petition based on a claim to which there is a triable defence...A cross-claim petition is regarded in the same way...

12. To successfully resist a cross-claim petition, the company has the onus of establishing that its cross-claim is genuine, serious and of substance. There must be supporting relevant details to demonstrate that the cross-claim is based on substantial ground. The test is very much the same as the test for a disputed debt petition for deciding whether a debt is disputed in good faith and on substantial ground...

…

16. The existence of an arbitration clause, or the commencement of arbitration, does not prevent the court from considering whether or not the company has established the existence of a bona fide dispute of substance in relation to the debt on which the petition is based...”

8.  I am not concerned to determine which of the competing arguments is to be preferred.  I am only concerned to determine whether or not the Company has a genuine and serious cross-claim.  It seems to me that it does.  Although the parties managed to file a significant amount of evidence, including evidence on Mainland law, which I declined to have regard to on the grounds that it purported to determine various issues that the parties considered were governed by Mainland law and was thus inadmissible, it seems to me that the matter is straightforward.

9.  The Company argues that there are two relevant consequences of the Defendant’s failure to comply with [2] of the Award.  The first is that the Defendant is clearly in breach of both the Award and the Distributorship Agreement.  It seems to me that this argument is genuine and substantial.  Secondly, as a consequence of the failure to comply with the order for specific performance [4] of the award, which required the Defendant to provide samples to the value of RMB890,833.27, was rendered meaningless and the Defendant was obliged to pay that sum instead.  In my view this argument is also genuine and substantial.  It follows that the Defendant is entitled only to the balance of RMB1,815,255.18 less (A) the monetary part of the award in the Company’s favour (RMB513,810.83), (B) RMB890,833.27 and (C) less the Company’s loss of profit claim.  The deduction of (A) and (B) reduces the amount payable under the Award in the Defendant’s favour to about EUR400,000, which the Company paid into court at the time of its initial application for an injunction, which was resolved by the Defendant’s undertaking not to present a petition pending the outcome of this application.  The principal issue for determination thus becomes whether or not the Company has demonstrated that it has a genuine cross-claim for at least EUR400,000, and that it would have been an abuse of process for the Defendant to present a petition at the expiry of the 21-day period commenced by service of the statutory demand, at which point of time it could have presented a petition relying on the presumption of insolvency.

10.  The Defendant argues that the Company has failed to demonstrate substantively that it has suffered loss.  Mr Payne took me through the way in which the Company has framed its evidence about the impact of the Defendant’s initial attempts to terminate the Distributorship Agreement in the arbitrations and the formulation of its claim in the initial notice of arbitration served on 10 September 2020 in which its claim was for breach of clause 7.5 of the Distributorship Agreement, which dealt with sale of inventory after termination, and loss resulting from the Defendant taking steps to inhibit the Company selling down inventory through platforms such Tmall, which is operated by Taobao.  It was only in the revised notice of arbitration that a claim for loss flowing from wrongful termination was included.

11.  The Defendant argues that the alleged cross-claim for loss of profit has not been sufficiently particularised and smacks of a last minute concoction formulated to justify non-payment of the outstanding sum owed to it.  I disagree.  As a matter of common sense if the Defendant’s purported termination of the Distributorship Agreement was wrongful, which in my is clearly arguable at this stage, it is likely that some loss, and it need not be much to equal the Debt, will have been caused.  It is also material that the Defendant gave notice of the termination following the delivery of the Awards in July of last year.  The matter has progressed quite quickly since then as is self-evident from the fact that this inter parties hearing has come on as early as 18 February 2021.  It is not particularly surprising that it has taken some time for the Company to put together an assessment of its likely loss caused by termination of what was a contract for supply of a significant volume of cosmetics over a number of years.  As it is I have been presented with a considerable quantity of evidence from the Company supporting its claim.  It is sufficient for present purposes in my view to focus on what the most recent audited financial statement tells the reader about the likely impact of termination of the Distributorship Agreement.

12.  The audited financial statement for the year ending 31 December 2018 records a turnover of US$61,036,049.  The cost of sales was US$36,482,869.  This was an increase from the previous financial period for which the comparable figures were US$24,568,017 and US$16,448,618 respectively.  The pre-tax profit for 2018 was US$8,533,316.  Unless the profit for this period was entirely attributable to the sale of products other than products sold by the Defendant, which is inherently unlikely, this tends strongly to suggest that the Plaintiff was able to sell the Defendant’s products at a profit and thus wrongful termination of the agreement would have caused loss.  Given the size of the Debt relied on by the Defendant that in my view is enough to suggest the Plaintiff has a genuine and series cross-claim that will exceed the Debt.

13.  The Defendant has taken a further point on the acceptance of what the Company says was the Defendant’s repudiation of the Distributorship Agreement.  In short it says that it made its election too late.  That is not an issue to be resolved in these proceedings.  I am only concerned to determine whether there is a serious and genuine defence or cross-claim.  In my view there is a serious dispute over the termination of the Distributorship Agreement and the claims that the Plaintiff has arising from it and that is a dispute to be resolved in accordance with the law governing the Distributorship Agreement.

14.  I will, therefore, grant the injunction sought by the Plaintiff and make a costs order nisi that the Defendant pays the Plaintiff’s costs with a certificate for two counsel.