SKILLSOFT ASIA PACIFIC PYT LTD v. AMBOW EDUCATION HOLDING LTD

HCCL 19/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 19 OF 2013

(Transferred from HCA 597 of 2012)

____________

____________

________________

J U D G M E N T

________________

1. There are 2 applications before the court, namely (1) an application for summary judgment or interim payment (in the alternative) by the plaintiff (“Summons”) and (2) an application by the defendant to stay these proceedings by invoking the inherent jurisdiction of the court on the ground that there is on foot insolvency proceedings against the defendant in the Cayman Islands (the defendant is a Cayman company).

Background

2. The material facts are not controversial and can be briefly stated as follows.  The plaintiff’s claims herein arise under a Reseller Course and Distribution Localization Agreement (“Agreement”).  The Agreement was originally entered into on 29 April 2008 between other related parties but subsequently novated so as to take effect between the plaintiff and the defendant as if each had always been a party to it. The various amendments and novations are not in dispute.  The key features of the Agreement are that:

(1)   under clause 14, the term of the Agreement is 5 years and 8 months which runs from an Initial Term from 20 April 2008 to 31 December 2009 together with “any Renewal Term(s)”;

(2)   the defendant was to act as distributor of the plaintiff’s products in the Mainland on an exclusive basis for the Initial Term, but thereafter on either exclusive or non-exclusive terms at the defendant’s option;

(3)   clause 7.1 requires the defendant to pay a licence fee to the plaintiff for each of plaintiff’s product sold;

(4)   clause 7.2 further requires the defendant to pay certain prepaid licence fees (“Prepayment”).

3. On 19 September 2011, the defendant gave a notice to the plaintiff that it intended to the sell the latter’s products on a non-exclusive basis commencing January 2012 (“Notice”).

4. On 22 September 2011, the plaintiff acknowledged receipt of the Notice and indicated its view that the defendant’s obligation to pay Prepayment remained in force.

5. On the next day, the defendant responded by (a) denying the correctness of the plaintiff’s contention regarding the Prepayment and (b) giving notice that it did not intend to renew the Agreement for 2012.

6. The defendant has failed to pay the Prepayment for the 4^th quarter of 2011 in the amount of US$625,000 (“1^st Payment”) which was due on 1 October 2012.  On 1 January 2012, the plaintiff issued an invoice for the Prepayment for Q1 2012 in the amount of US$825,000 (“2^nd Payment”) which was stated to be due for payment on 31 January 2012.

7. On 13 April 2012, P issued these proceedings.  The Defence was filed on 6 August 2012.  Apart from seeking particulars of the Defence and serving a Notice to Admit on the defendant, the plaintiff did nothing further to advance this action until issuing the Summons on 7 June 2013.  I have been told by Mr Smith SC, who appeared for the plaintiff, that the lack of action was attributable to the fact that the plaintiff was waiting for more Prepayments to fall due with the intention of dealing with them together.

8. Meanwhile, on 23 April 2013 a shareholder made an application in the Cayman Islands to wind up the defendant on the just and equitable ground and sought the appointment of provisional liquidators.  There is no suggestion that the plaintiff knew about this application.

9. On 7 June 2013 (the day when the Summons was issued), the Grand Court of the Cayman Islands made the following order:

(1)   Mr Edward Middleton (KPMG Hong Kong), Ms Tiffany Wong (KPMG Hong Kong) and Mr Kris Beighton (KPMG Cayman) be appointed Joint Provisional Liquidators (“JPLs”) of the defendant (§1); and

(2)   Pursuant to s 97 of the Companies Law (2012 Revision) (as amended) all proceedings against the defendant – save one shareholder action against the defendant in California – be stayed (§6).

10. In view of the defendant’s cashflow insolvency, on 22 August 2013 the Grand Court issued a Revised Order varying the JPLs’ powers and amending §6 of Order dated 7 June 2013 to remove the Californian action as an exception to the stay.  Mr Alder, who appeared for the defendant, submitted that the effect of §6 is a worldwide stay of proceedings against the defendant.

11. Two additional writs have been issued by the plaintiff against the defendant on respectively 6 June and 21 October 2013 – HCCL 20/2013 and HCCL 31/2013.  I am given to understand that those actions cover Prepayments which have fallen due after the issuance of the present action, and that there is a procedural dispute over the service (on the JPLs) of at least one of those actions.

12. The defendant’s stay application was taken out on 3 October 2013.  The current state of affairs in respect of the defendant is that the JPLs are working hard to secure fresh fundings and to restructure its debts.

Stay of proceedings

13. The dispute here is quite narrow. There is no issue that this court should generally do what it can to give effect or assistance to foreign insolvency proceedings.  However, this court is not bound by such proceedings.  In other words, the stay of proceedings ordered by the Grand Court is not binding on this court.  It remains a matter of discretion of this court as to how best to recognise and give effect to the foreign proceedings.

14. In In re HIH Casualty and General Insurance Ltd [2008] 1 WLR 852, para 30, Lord Hoffmann said:

“… The primary rule of private international law which seems to me applicable to this case is the principle of (modified) universalism, which has been the golden thread running through English cross-border insolvency law since the 18th century. That principle requires that English courts should, so far as is consistent with justice and UK public policy, co-operate with the courts in the country of the principal liquidation to ensure that all the company’s assets are distributed to its creditors under a single system of distribution. That is the purpose of the power to direct remittal.”

15. The argument here is whether this court should apply atwo-stage approach.  I have been referred to a useful summary of the relevant principles in The Conflict of Laws in Hong Kong by Graeme Johnston, 2^nd edn, at pp 533 to 539 where the following summary appears on p 536 at para 8.073 (3)(b):

“(a) The precise nature of the foreign insolvency proceedings … is not a critical factor;

(b) The proper approach when the court is faced with a summary judgment application or similar is in two stages:

(i) If the plaintiff is entitled to summary judgment on ordinary principles (ignoring, for this purpose, the foreign process), judgment should be entered;

(ii)   However, the court retains a discretion to have regard to the foreign process and order in deciding whether to allow judgment to be executed …”

16. On p 539 of the abovementioned textbook, it is said that where the plaintiff is not seeking summary judgment, but is instead seeking to proceed to trial, the court may impose a stay if it concludes that it would be a woeful misallocation of resources to allow the action to proceed to trial.

17. The application of the above principles, involving the two-stage process, can be seen in two Hong Kong cases.  Firstly, Modern Terminals v States Steamship Company [1979] HKLR 512 where Trainor J permitted summary judgment to be entered under Order 14 when Chapter XI proceedings were pending in the USA, but ordered a stay of execution of the judgment so that the plaintiff would not gain an advantage over other creditors.

18. Secondly, Hong Kong Institute of Education v Aoki Corp (No 2) [2004] 2 HKC 397, in which the two-stage approach was endorsed and adopted by Reyes J.  A debt restructuring scheme was before the Japanese court; the Hong Kong court nevertheless permitted judgment to be entered but did not permit enforcement of the same. One of the factors the learned judge took into account was that the judgment would allow the judgment creditor to enforce its rights under the debt restructuring scheme in Japan.

19. I believe that there are good reasons for adopting the two-stage approach in this case.  Firstly, the Agreement is governed by Hong Kong law and the parties have submitted, according to its terms (clause 15.2), to the non-exclusive jurisdiction of the Hong Kong court.  There are disputes in respect of both the 1^st and 2^nd Payments.  If the disputes can be resolved speedily, and by definition a summary judgment application should be so resolved, it ought to be in the interest of the parties to have them resolved by this court now.  Otherwise, there is the risk that they will have to come back to this court for determination at a later stage or that evidence of Hong Kong law will have to be adduced before the Cayman court to enable it to resolve the disputes.

20. Secondly, I accept that the plaintiff has a legitimate interest in obtaining a judgment from this court so that it may then advance its claim in the insolvency proceedings in the Cayman.  Presently, it is not recognised by the JPLs as a creditor of the defendant.

21. Thirdly, I am unable to see any disruption to the Cayman insolvency proceedings or unfairness to other creditors of the defendant by determining the Summons.  On the contrary, I can see some advantage in having the disputes over the Payments decided.

22. I am unable to see any distinction between this case and Modern Terminals.  If there is no triable issue in respect of the Payments, judgment should be entered with a stay of execution (which is not resisted by Mr Smith).

Summary judgment

23. I should clarify that a summary judgment is sought in respect of the 1^st Payment.  As regards the 2^nd Payment, a summary judgment or alternatively interim payment is being sought.  However, Mr Smith accepted that there is no practical difference in respect of the test which he has to meet to make good his application under either limbs.

24. With respect, I am unable to see any triable issue over the 1^st Payment.  The only argument advanced by Mr Alder is one based upon the termination clause 14.5 of the Agreement, which provides that “Upon termination of this Agreement, all obligations of each party hereunder shall terminate. …”.

25. It is accepted by Mr Smith that the appointment of the JPLs constituted an event which led to the immediate termination of the Agreement pursuant to clause 14.4.

26. However, I agree with Mr Smith that the argument is completely contrary to the established principle of law that the termination of an agreement would not affect any right or liability which has been crystallised prior to termination.  In the absence of clear wording, I do not begin to see how the court can construe the Agreement as one which undermines such established principle.

27. Further, I agree with Mr Smith that if the argument were to prevail it would produce a bizarre effect in that the defendant would be able to erase its own debts by the simple expedient of filing for bankruptcy (which is another termination event under clause 14.4).

28. Turning to the 2^nd Payment, I believe that the issue is equally straightforward.  Putting aside the argument whether the defendant was entitled to terminate the Agreement prior to the expiration of the 5 years and 8 months period, ie, taking the plaintiff’s case at the highest, I am unable to see any contractual provision which entitles the plaintiff to any Prepayment after the defendant has elected to operate on a non-exclusive basis.

29. Insofar as the express provisions are concerns, clause 7.2 and Exhibit A of the Agreement provide for Prepayments over the Initial Term.  It is not clearly stated whether any Prepayment is to be paid over the Renewal Term(s) if the option (to deal on non-exclusive basis) under clause 2.3 is exercised.  It is certainly arguable that no Prepayment is to be made when the Agreement becomes a non-exclusive one, ie, the plaintiff’s entitlement will be confined to the licence fee payable under clause 7.1.  Such a construction is consistent with commercial sense – the non-exclusive agent will have to pay for what it managed to sell but not a guaranteed minimum payment (which is the nature of the Prepayment).

30. In the premises, I have no hesitation in coming to the view that unconditional leave to defend should, if necessary, be granted in respect of the 2^nd Payment.  By the same token, no interim payment order should be made.

Procedural irregularity

31. I must point out that the evidence filed by the plaintiff contains a good deal of inadmissible material in the nature of submissions.  It is trite that submissions have no place in affidavits.  Regrettably, such infringement is widespread.  Equally regrettable, where one party has advanced submissions in his affidavit, it would be rare for his opponent to be able to resist doing likewise.  The result is that the court will be presented with a series of affidavits containing much inadmissible material.  Such infringement increases the costs of litigation and adds to the burden of the court.

32. It is the duty of the court to uphold the proper practice.  A party who fails to observe the same is at risk of an adverse costs order.

Conclusions

33. I give judgment in favour of the plaintiff in respect of the 1^st Payment with a stay of execution.

34. In light of the plaintiff’s concession over the stay of execution, it must follow that I should order a stay of proceedings in this action until further order, and I so order.  I also grant liberty to apply.  It may not be necessary to formally grant an unconditional leave to defend in respect of the 2^nd Payment in light of the stay.  On the other hand, it is probably desirable to have such an order so that the Summons is properly dealt with.  I make the order accordingly.

35. In respect of costs, the parties are to file and serve a written submission on the appropriate costs order to be made, which is limited to 2 pages, within 3 working days from the date of this judgment (unless agreement has been reached between them on the same).  The court will then decide the matter on papers.

36. Last but not least, I am grateful to both counsel for their assistance.