SHENZHEN HINA NEW ECONOMY EQUITY INVESTMENT FUND PARTNERSHIP (LTD PARTNERSHIP) v. UNIPAX PROPERTIES, LLC

HCMP 298/2021

[2021] HKCFI 2912

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 298 OF 2021

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D E C I S I O N

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Background

1.  On 8 March 2021, the Plaintiff applied ex parte for a proprietary injunction against the Defendant, to restrain it from selling, encumbering, diminishing the value of or otherwise dealing with the Defendant’s 100% shareholding in a Hong Kong company known as HK Bao Cheng Ka Yip Trading Co Ltd (“BC”).  This was in aid of the arbitration commenced by the Plaintiff against the Defendant before CIETAC on the Mainland, on 23 February 2021 (“Arbitration”). The application was made ex parte without notice, but was converted into an ex parte on notice hearing by DHCJ Paul Lam SC.  At the hearing of the application on 10 March 2021, the Defendant gave an undertaking in terms of the injunction sought, and the application was adjourned for argument inter partes.

2.  The substantive argument on the inter partes summons for the injunction took place on 16 June 2021.  The Defendant opposed the Plaintiff’s application and at the same time applied for the discharge of the ex parte undertaking it had given.  The Defendant seeks in any event fortification of the Plaintiff’s undertaking to pay damages.

3.  The Plaintiff is a limited partnership incorporated under the laws of the People’s Republic of China, and carries on the business of private equity investment.  The Defendant is a limited company incorporated in the United States, its sole shareholder and director being a Mainland citizen, one Mr Yan Jiangbo (“YJ”).  The Defendant was registered to carry on a property rental business in the United States.

4.  The Defendant is the sole shareholder of BC, which is an investment vehicle incorporated in Hong Kong for the purpose of subscribing for and holding interests in and investments of the Eastar Fund (“Fund”).  BC is a limited partner of the Fund, which has a general partner known as Eastar Capital Management Limited (“GP”).  The Fund is a Cayman Islands exempted limited partnership, and a vehicle for its limited partners to invest in Jingdong Express Group Corporation (“JD”) on the Mainland.  BC at all material times held a 2.78 % interest in the Fund, and the Fund in turn held a 2.62% interest in JD.

5.  On 17 July 2020, the Plaintiff and the Defendant entered into a Share Transfer Agreement (“STA”) for the Plaintiff’s purchase and the Defendant’s sale of the Defendant’s 100% shareholding in BC (“Subject Shares”), for the agreed consideration of US$11.715 million (“Consideration”).  Under the STA, the Plaintiff was to establish an overseas direct investment special purposes vehicle (“SPV”) on the Mainland as the transferee of the Subject Shares.  The Consideration was to be paid within 7 business days of compliance with the conditions precedent set out in clause 4 (a) to (g) of the STA, including the obtaining of all the necessary approvals to the transfer from the regulatory authorities and third parties including the Fund and the GP. The parties were to establish a jointly managed bank account (“Account”) in Hong Kong, and failing that, on the Mainland, and prior to completion, the Defendant was to transfer the Consideration into the said Account as security for payment.  Clause 3.3 of the STA provides that the Defendant shall inform the Plaintiff of the details of a bank account for the purpose of receiving the Consideration, which must be compliant with the relevant requirements for an overseas direct investment (“ODI”).  The STA contains, in the definition section in clause 1.1, a definition for a “long stop date”: of 30 September 2020, or any other date agreed by the parties in writing; and for when the long stop date may be extended, but nowhere in the body of the STA refers to the operation or effect of the long stop date.

6.  The STA is governed by PRC law.

7.  Pursuant to the STA, the Defendant incorporated an SPV transferee for the Subject Shares.  The necessary approval documents were issued in September and November 2020, whereby the SPV was permitted to invest the Consideration for acquiring the Subject Shares.  However, disputes then arose as to whether the Consideration could be transferred to the Defendant.  The Defendant claims that it became impossible for it to have a bank account under its name for the receipt of the Consideration under the STA.  It alleges that it had informed the Plaintiff since October 2020 of the difficulties in opening a jointly controlled account in Hong Kong, and that it had offered alternative solutions for using its accounts in the United States, but all were to no avail.  There were communications and emails exchanged between the parties in November and December 2020, and on 21 December 2020, the Defendant purported to terminate the STA by its email of the same date (“Termination Email”). 

8.  In the Termination Email, the Defendant asserted that it was unable to arrange for visas and bank accounts for receiving funds by reason of the COVID-19 situation and by reason of the “deteriorating Sino-US relations”, and claimed that the transaction under the STA could not be performed “due to force majeure events”.  On the Defendant’s case, its inability to receive the Consideration through an ODI-compliant account in its name meant that a condition precedent in clause 3.3 was not satisfied, with the consequence that the STA was discharged by the time of the Long Stop Date which had been extended to 18 December 2020.

9.  On the Plaintiff’s case, the parties had continued their negotiations after the Termination Email, with a view to bringing about completion under the STA.  The Plaintiff claims that it was in the course of such negotiations that the Defendant informed the Plaintiff that it had been approached by other willing buyers in respect of the Subject Shares, and these potential buyers considered the JE shares to be valued at over US$30 million.  The negotiations did not succeed in bringing about the completion and on 23 February 2021, the Plaintiff commenced the Arbitration pursuant to the STA, claiming that the Defendant was in breach of the STA in failing to inform the Plaintiff of the account for receiving the Consideration, and for failing to transfer the Subject Shares to the Plaintiff in accordance with the STA.  By way of relief in the Arbitration, the Plaintiff seeks (inter alia) the transfer of the Subject Shares by way of specific performance.

10.  The Defendant’s case is that there were in fact no further negotiations between the Plaintiff and the Defendant after December 2020, and it was under the impression that the Plaintiff had accepted its position, that the STA had been discharged.  The Defendant claims that it was only after JD made an announcement on 16 February 2021, of its application for listing in Hong Kong, that the Plaintiff suddenly became interested again in the acquisition and commenced the Arbitration on 23 February 2021, followed by its ex parte application in March 2021 for the injunction, allegedly on the basis that there was a need for secrecy.

11.  According to the Plaintiff, as early as and immediately upon news breaking out on 24 November 2020 that JD was preparing for a listing with a valuation of US$400 billion, the Defendant had asked for a halt of the transaction under the STA, and its representatives failed to attend a meeting set up for the parties to set up the Account.  The Plaintiff claims that it had proposed to transfer the Consideration directly to the Defendant without depositing the funds into a jointly managed bank account, but the Defendant had not acceded to that.  The Plaintiff highlights the fact it had all along been ready, willing and able to pay the Consideration to the Defendant, and further, that the Defendant had never claimed, prior to these proceedings, that any condition precedent for the completion of the STA had not been complied with.  Non-compliance with conditions precedent was not suggested in the Termination Email itself.

12.  The Plaintiff claims that it has a proprietary claim to the Subject Shares in respect of the Defendant’s breach of the STA, that the Defendant is in clear breach of the STA by its failure to make the arrangements for setting up the Account for receipt of the Consideration and in failing to complete the transfer, and that the Plaintiff is entitled to an injunction to restrain the Defendant from disposing of and dealing with the Subject Shares pending the resolution and in aid of the Arbitration.

13.  Having considered the submissions of the parties, I am prepared to grant the injunction sought by the Plaintiff, for the following reasons.

Serious question to be tried

14.  The parties’ dispute on facts is not for resolution by the Court at this stage.  No enquiry into the merits of the respective merits of rival claims is necessary.  Suffices it to say that I am satisfied that the Plaintiff has established that there is a serious question to be tried, that the Defendant is in breach of the STA, and that the Plaintiff has a proprietary claim to the Subject Shares. The claim of “deterioration of Sino‑US relationship” is vague to the extreme and cannot form the basis of any plea of force majeure, to render the establishment of the Account and completion under the STA impossible. As the Plaintiff sought to highlight, COVID-19 had been prevalent around the world well before the STA was entered into by the parties, in July 2020.  Whether the Account could be opened, and whether the Consideration could be paid to the Defendant in spite of the alleged Covid-19 restrictions, and whether they were simply excuses put forward by the Defendant to avoid its obligations under the STA, depend on facts and evidence to be established in the Arbitration, for argument and resolution in the Arbitration.

15.  Having considered the expert evidence on PRC law, and in particular that of Ms Shi which is more comprehensive than that of Mr Chen and is preferred, I am satisfied that there is a serious question to be tried that the Plaintiff would be entitled under PRC law to an order of specific performance of the STA. According to Ms Shi, the Mainland Court or the tribunal applying PRC law would not be likely to find that the STA would automatically terminate or expire on the long stop date, the Defendant would not be able to rely on its own breach of the STA in relation to the Account, and impossibility of performance would have to be established before any specific performance would be declined.  In Ms Shi’s opinion, the force majeure defence of the Defendant was extremely unlikely to succeed.

16.  I am satisfied that there is a good arguable case that the Arbitration is capable of giving rise to an award that may be enforced in Hong Kong.

Damages an inadequate remedy

17.  The Defendant argued that the Plaintiff is not entitled under Hong Kong law to a proprietary injunction over the Subject Shares, and specific performance of the STA cannot be ordered since damages are an adequate remedy for the Plaintiff.  The Plaintiff relies on Sun Jiyou v L & A International Holdings Ltd [2017] 3 HKC 507, and DBS Bank (Hong Kong) Ltd v Tian Wen Quan HCA 3228/2016, 12 October 2017, and pointed out that the Plaintiff had all along intended to acquire an interest in JD, albeit an indirect interest through its acquisition of the Subject Shares in BC.  Since the date of the STA, JD has been publicly listed, and the Plaintiff is now able to acquire the JD shares in the market.  Any damage which the Plaintiff may have sustained by reason of the Defendant’s breach of the STA can be adequately compensated by an award of damages represented by the difference in value, if any, between the cost of the JD shares the Plaintiff has to pay for the acquisition from the market and the Consideration payable under the STA, together with any increase in value of the JD shares, if any can be established.

18.  It is plainly arguable in this case that what the Plaintiff agreed to purchase under the STA was the unique asset of BC’s interests as a limited partner of the Fund, which itself holds a 2.62% interest in JD.  The unique asset was the shareholding in the Hong Kong private company which holds the interests in the Fund, which in turn holds the shares in JD.  It may be that the Fund holds shares which are now listed and can be purchased from the market, but the bargain made under the STA was the sale and purchase of the Subject Shares in BC.  The agreed subject matter of the purchase was BC - which offered the convenience and attraction of holding the shares of JD through the Fund, and not in its own name nor in the name of the purchaser under the STA.

19.  A personal claim against the Defendant for damages under the STA is recognized as being not as satisfactory as a proprietary claim to the trust assets.  The fact that the Plaintiff can now directly purchase the listed shares of JD cannot adequately compensate the Plaintiff for the loss of holding the Subject Shares in BC and through such shareholding, the interests in the Fund and the indirect claims to the assets of the Fund.

20.  Under the STA, the liquidated damages (referred to in clause 11.6) were expressly stated to be in addition, and without prejudice to, the Plaintiff’s other rights to relief.

Defendant’s ability to pay damages

21.  Even if damages were to be an adequate remedy for the Plaintiff, the Plaintiff contended, and I accept, that the Defendant in this case is not in a position to pay any damages that may be awarded to the Plaintiff.  There is no dispute that the Defendant had been suspended, remained so at the time of the hearing in June 2021, and had not carried on any business, and certainly not in Hong Kong.  At all material times, it had merely acted as an investment holding company and held the shares in the Fund.  There is no evidence from the Defendant that it had any other assets, in Hong Kong or elsewhere.  Its only claim is that if it was to be permitted to sell the Shares, the sale proceeds could be used to pay any damages to the Plaintiff.  As the Plaintiff pointed out, the Defendant’s only alleged ability to pay damages is dependent on the dissipation of the Subject Shares restrained by the injunction.

22.  I accept the Defendant’s submission that there is no real evidence of the risk of the Defendant dissipating its assets, as demonstrated by the fact that it had not taken any steps to dispose of the Subject Shares during the period from when negotiations fell through in December 2020, or even from January 2021, to the ex parte application in March 2021.  Nor did the Plaintiffs see the need to seek an injunction in such interim, suggesting that it did not see any real or imminent risk.  However, as Counsel for the Plaintiff pointed out, it is not necessary to establish risk of dissipation to support the Plaintiff’s application for a proprietary injunction (citing Liao Chen Toh v Loyal International Enterprise Co Ltd HCA 2302/2014, 30 March 2016).

Balance of convenience/risks of injustice

23.  The parties having agreed under the STA to sell and purchase the Subject Shares, and the Plaintiff having submitted their disputes to arbitration in accordance with the parties’ agreement, I consider that there is lower risk of injustice in granting the injunction sought in order to preserve the status quo under the STA prior to the breach complained of.  At the time of the STA, the JD shares had not yet been listed and the parties had contemplated the transfer of the shares in BC.  (GP only withdrew its consent to the transfer of BC’s interests in the Fund after commencement of the Arbitration and the dispute between the parties).  Under section 45, and Article 17 of the Model Law given effect by section 35 (1) of the Ordinance, the interim measures which may be granted by the court include an order to maintain or restore the status quo pending determination of the dispute in the Arbitration, and to provide a means of preserving the assets out of which a subsequent award may be satisfied.  On the evidence available (including the evidence on PRC law as to the availability of specific performance and as to the force majeure defence), there is a serious question to be tried and a likelihood that the Plaintiff would be able to obtain in the Arbitration an order of specific performance of the STA, such that the Subject Shares should be preserved.

24.  The injunction to be granted by the Court is of course subject to any further order of the tribunal, and I am satisfied that there is no reason to decline the interim measure on the basis that it would be more appropriate for the tribunal to deal with the same.

Fortification of Plaintiff’s undertaking

25.  The Plaintiff relies on Pacific Bulk Investments Ltd v Chu Kong [2020] HKCFI 2825 to claim that there is no strict requirement for a party seeking a proprietary injunction to give an undertaking as to damages, but as a private fund under a substantial group of leading Chinese financial advisers and managers, it claims that it is in a position to honour any undertaking which made be required.  The Plaintiff produced evidence that the account balance in one of its bank accounts as at 11 May 2021 amounted to over RMB 22.6 million, and claims that even if the Defendant should suffer any loss as a result of an injunction being granted over the Subject Shares, it is able to compensate its loss.

26.  I accept the submissions made on behalf of the Defendant, that the Plaintiff is incorporated on the Mainland, and there is in fact no evidence to establish that it has enforceable assets in Hong Kong.  The Defendant points to the fact that the deposit slip dated 20 April 2021 and exhibited to support the Plaintiff’s assertion as to its assets, states that the expiry date of the deposit was 20 May 2021, and it was not clear whether the deposit was still retained by the Plaintiff at the time of the hearing.  Further, the bank balance exhibited and relied upon by the Plaintiff showed a balance of RMB 22.6 million, but the Defendant claims that this is inadequate in the event that the shares of JD should increase in value, as the loss of profits which may be sustained by the Defendant for being unable to dispose of the Subject Shares or its indirect interest in JD may well exceed RMB 22 million.  The Defendant also pointed out that the assets relied upon by the Plaintiff are not in Hong Kong, and the Defendant would have difficulty in enforcing the relevant undertaking from the Plaintiff in Hong Kong.

27.  I accept that a cross-undertaking in damages is a necessary part of the mechanism for the Court to grant any interim injunction, as it is a safeguard for a defendant against which the injunction is granted on an interim basis and without the merits of the case having been canvassed in full (see para 32 of the judgment of the Court of Appeal in Wah Nam Holdings Co Ltd v Excel Noble Development Ltd [2000] 3 HKC 118).

28.  The Plaintiff seeks specific performance of the STA, and this entails the Plaintiff’s payment of the Consideration.  I accept the Defendant’s submissions, that it is only just to require the Plaintiff to either make payment into Court of the Consideration, or provide fortification. It is the Plaintiff which seeks an interim injunction to preserve the Subject Shares, and it had always maintained that it was ready, willing and able to pay the Consideration.  Currently, the Plaintiff is still holding the Consideration, which must in any event be set-off against any damages which it may seek in the Arbitration in respect of the Defendant’s breach, and must be paid if the Subject Shares are to be ordered to be transferred. I agree that the Defendant should be secured that upon an award being made in the Arbitration for the Subject Shares to be transferred from the Defendant to the Plaintiff, the Consideration would be available for payment to the Defendant.

29.  I will order that the Plaintiff is to make payment of the Consideration into court, or otherwise provide a guarantee issued by a bank acceptable to the Defendant for the sum of US$11,715,000, or its equivalent in Hong Kong dollars, by way of fortification of the Plaintiff’s cross-undertaking as to damages.  This is to be provided within 21 days, or within such extended time as the parties may agree.  In default of such fortification being provided, the injunction granted by the Court is to be discharged and for the avoidance of any doubt, the Defendant is to be released from its undertaking given.

Alleged material non-disclosure

30.  I do not accept that there was material non-disclosure on the part of the Plaintiff in its application for the ex parte injunction.  The matters said to be withheld by the Plaintiff go to arguments and submissions as to whether damages were an adequate remedy for the Plaintiff, whether there was evidence as to dissipation of assets, and whether the Plaintiff was entitled to proceed ex parte.  These are all matters of legal submissions to be made on the basis of the disputed facts.  The Plaintiff had disclosed the dealings between the parties after the STA was concluded, including the negotiations, the matters disputed, what the Plaintiff relies upon as facts showing the Defendant’s proclaimed entitlement to deal in and sell the Subject Shares and hence its propensity to do so, and why it did not wish to alert the Defendant of its application for the injunction, and its submissions were made on such facts disclosed.  The Defendant obviously does not agree with the submissions made by the Plaintiff on the facts but I am not satisfied that there had been any non‑disclosure of material facts, on which the arguments were made, of alleged urgency/secrecy and whether the Plaintiff is in law entitled to the relief claimed, to justify the setting aside of the Defendant’s undertaking given in lieu of the injunction sought by the Plaintiff.

Disposition

31.  The injunction sought by the Plaintiff is granted in terms of the summons, but until further order of the Court or of the tribunal in the Arbitration.  The order nisi is that the costs of the application (including all costs reserved) are to be in the cause, with certificate for counsel.